Great Southern Bancorp, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Great Southern is a bank holding company whose principal business is Great Southern Bank, operating primarily in six Midwestern and Southern states. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net income | $11.5; diluted EPS $0.81 | $9.8; diluted EPS $0.70 in Q1 2016 |
| Interest income | $45.4 | $45.7 in Q1 2016 |
| Net interest income | $38.7; net interest margin 3.78% | $41.1; margin 4.26% in Q1 2016 |
| Provision for loan losses | $2.3 | $2.1 in Q1 2016 |
| Non-interest income / expense | $7.7 / $28.6 | $5.0 / $30.9 in Q1 2016 |
| Total assets | $4,432.6 | $4,550.7 at December 31, 2016 |
| Net loans / allowance for loan losses | $3,727.6 / $37.0 | $3,760.0 / $37.4 at December 31, 2016 |
| Deposits | $3,688.7 | $3,677.2 at December 31, 2016 |
| Stockholders’ equity | $439.9; 9.9% of assets | $429.8; 9.4% of assets at December 31, 2016 |
Q1 operating cash flow was $13.0, investing cash flow was $64.4, and financing cash flow was negative $129.1. Cash and cash equivalents declined $51.7 to $228.1, principally reflecting repayment of short-term borrowings. The company reported $708.1 of available Federal Home Loan Bank capacity, $584.0 of Federal Reserve Bank capacity, and $51.9 of unpledged securities.
At March 31, borrowings included $31.4 of FHLBank advances, $144.3 of customer reverse repurchase agreements, $1.4 of short-term borrowings, $25.8 of subordinated debentures, and $73.6 of subordinated notes. The notes have $75.0 principal, a 5.25% fixed rate through August 2021, then a floating rate, and mature in 2026. The Bank and holding company were reported as well capitalized; Bank total risk-based capital was 12.9%, and company total risk-based capital was 13.8%.
Credit indicators: non-performing assets excluding FDIC-assisted acquired assets were $41.0, or 0.92% of assets, versus $39.3, or 0.86%, at year-end. Non-performing loans were $16.1; troubled debt restructurings were $21.2. Net charge-offs were $2.7, including $1.8 in consumer auto loans. The allowance was 1.03% of loans excluding covered and formerly covered acquired loans.
Material changes versus the prior comparable period
- Net income increased 17.6% year over year. Higher non-interest income and lower operating expense more than offset lower net interest income, higher taxes, and a higher loan-loss provision.
- Net interest income fell 5.9% and net interest margin declined 48 basis points. The filing attributes pressure to lower loan yields and higher funding costs, including interest on the subordinated notes issued in 2016. Excluding acquired-loan accretion, margin declined 12 basis points.
- Non-interest income rose 54.8%, largely because acquisition-related amortization expense was substantially lower than in Q1 2016. Non-interest expense fell 7.6%, partly reflecting prior-year acquisition and other one-time expenses.
- Compared with year-end, total assets declined 2.6% and net loans declined 0.9%. Excluding acquired loans and loans held for sale, gross loans increased $38.3, with growth primarily in commercial real estate, construction, and multifamily residential lending.
- Short-term borrowings fell from $172.3 to $1.4; customer reverse repos increased from $113.7 to $144.3. Deposits rose $11.4, while cash and cash equivalents fell $51.7.
Outlook, management commentary, risks, and unusual items
- No specific full-year earnings or revenue guidance is provided. Management expects an effective tax rate typically of 26%–28%, subject to tax-credit use, tax-exempt income, and pretax earnings.
- Management expects further declines in automobile loan balances through the rest of 2017 after tightening auto underwriting in response to a more challenging consumer credit environment. Auto delinquencies and repossessions, especially in indirect used-auto lending, had increased.
- Management expects to recognize approximately $2.5 of acquired-loan accretable yield in interest income and approximately $1.0 of related negative non-interest income during the remainder of 2017. These estimates depend on continuing assessments of acquired-loan cash flows.
- Interest-rate exposure is significant: $1.10 billion of loans were tied to one-month LIBOR and $365 million to prime at quarter-end. Management’s models indicate rising rates generally benefit net interest income and falling rates generally hurt it, while modeled effects over the first 12 months are not expected to be material.
- FDIC loss-sharing agreements for TeamBank, Vantus Bank, and Sun Security Bank were terminated in April 2016. Great Southern now bears subsequent losses and receives subsequent recoveries on those assets. The InterBank loss-sharing agreement remains, subject to limits and servicing requirements; its associated clawback liability was $6.6.
- A customer class action alleges that fees under the Bank’s automated overdraft program violate Missouri usury laws. The case remains stayed pending related litigation; after an appellate ruling for another bank in April 2017, the stay remained in place. Management cannot determine the probability of a material adverse outcome or estimate a potential loss.
- Other disclosed risks include loan and collateral deterioration, real-estate conditions, deposit competition and funding access, interest-rate changes, regulatory actions, cybersecurity and technology disruption, litigation, and execution of acquisitions and banking-center consolidations. Management reported no material change to the risk factors in its 2016 Form 10-K.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing notes that controls provide reasonable, not absolute, assurance.
Most important facts for investors to verify
- Whether net interest margin stabilizes after the 48-basis-point year-over-year decline, and how deposit repricing and further rate changes affect funding costs.
- Whether consumer-auto delinquencies, repossessions, charge-offs, and loan balances improve following tighter underwriting.
- Trends in non-performing and potential problem loans, foreclosed assets, and the adequacy of the $37.0 allowance, including exposure in construction and commercial lending.
- Actual realization and timing of acquired-loan accretion, InterBank FDIC reimbursements, and any related clawback or credit adjustments.
- Liquidity and funding mix as deposits, reverse repos, brokered deposits, and borrowings change; confirm availability and terms of stated borrowing lines.
- Developments in the Missouri overdraft-fee class action and any resulting estimate or disclosure of potential loss.
- Whether the reported capital ratios and dividend remain appropriate as the capital-conservation buffer phases in and business conditions evolve.