Great Southern Bancorp, Inc. — Q1 2014 Form 10-Q
Business context and period: Great Southern is a one-bank holding company operating primarily through Great Southern Bank, serving markets across Missouri and several neighboring states. This unaudited filing covers the three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. Unless noted, dollar amounts below are in millions.
Financial and operating results
| Metric | Q1 2014 / March 31, 2014 | Comparable period / December 31, 2013 |
|---|---|---|
| Total assets | $3,772.7 | $3,560.3 |
| Net loans | $2,514.0 | $2,439.5 |
| Deposits | $3,016.0 | $2,808.6 |
| Net interest income | $38.0 | $42.1 in Q1 2013 |
| Net income | $8.8 | $8.4 in Q1 2013 |
| Net income available to common stockholders | $8.7 | $8.2 in Q1 2013 |
| Diluted earnings per common share | $0.63 | $0.60 in Q1 2013 |
| Net interest margin | 4.66% | 4.76% in Q1 2013 |
| Efficiency ratio | 66.58% | 57.53% in Q1 2013 |
- Interest income fell 10.7% to $42.3 million, while interest expense declined 17.2% to $4.3 million. Lower loan yields and lower average investment balances weighed on interest income; lower deposit costs helped offset the decline.
- Provision for loan losses fell to $1.7 million from $8.2 million. Net charge-offs were $3.5 million, compared with $8.3 million in Q1 2013. The allowance for loan losses was $38.3 million, down from $40.1 million at year-end.
- Non-interest income was $0.9 million versus $2.9 million. It included a $6.4 million net expense from acquisition-related accretion and indemnification adjustments, partly offset by $1.0 million of non-recurring debit-card-related income. Non-interest expense was essentially flat at $25.9 million.
- Operating cash flow was $24.5 million, investing cash flow was positive $38.1 million, and financing cash flow was positive $107.8 million. Cash and cash equivalents rose $170.5 million to $398.4 million, reflecting deposit growth, the Boulevard Bank transaction and securities cash flows.
- Other funding and debt at quarter-end included $126.3 million of FHLB advances, $128.2 million of customer reverse-repurchase agreements, $1.2 million of short-term borrowings, $50.0 million of structured repurchase agreements and $30.9 million of subordinated debentures.
- Total stockholders’ equity was $389.8 million. The Bank’s Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 13.8%, 15.1% and 10.0%, respectively; the filing states the Bank was well capitalized.
Material changes and notable items
- Assets increased 6.0% during the quarter; net loans grew 3.1%. Excluding FDIC-covered loans and loans held for sale, management reported loan growth of $83.7 million.
- Deposits increased $207.4 million, including approximately $92 million acquired from Boulevard Bank. Transaction accounts grew, while time deposits were broadly stable on the balance sheet.
- On March 21, Great Southern acquired certain Boulevard Bank loans, deposit accounts and two Neosho branches, plus accounts in St. Louis. Preliminary purchase accounting recorded $792,000 of goodwill and an $854,000 core deposit intangible. Management reported approximately 95% deposit retention at March 31.
- Available-for-sale securities declined $23.2 million to $532.1 million. Accumulated other comprehensive income rose $2.8 million, mainly from higher securities fair values. Management considered reported unrealized debt-security losses temporary and recorded no other-than-temporary impairment in Q1.
- Great Southern early adopted the proportional-amortization method for qualifying affordable-housing tax-credit investments. The change reclassified $1.0 million of Q1 2013 investment amortization from non-interest expense to income tax expense, with no effect on net income.
Outlook, risks and contingencies
- Outlook: No specific earnings or revenue guidance was provided. Management said 2014 provision expense and net charge-offs would likely be below 2013 levels or similar to the latter half of 2013, while cautioning that credit outcomes are difficult to predict. It generally expected an effective tax rate of 20%–25%, assuming continued use of investment tax credits.
- Acquired-loan estimates: Improved expected cash flows from FDIC-assisted loan pools generated $7.9 million of additional interest income and $6.3 million of non-interest expense in Q1, for a net pre-tax benefit of $1.6 million. Management expected remaining 2014 recognition of $15.5 million in interest income and $11.9 million of negative non-interest income/expense from these adjustments; future estimates may change.
- FDIC loss sharing: The five-year loss-sharing period for non-single-family TeamBank loans ended March 31, 2014. The remaining non-single-family TeamBank portfolio was $32.7 million and is no longer covered for future losses. Other FDIC agreements also have defined coverage limits and expiration dates.
- Credit and real estate: Non-performing assets excluding FDIC-covered assets were $55.9 million, or 1.48% of assets, down from $62.3 million, or 1.75%, at year-end. Troubled debt restructurings were $53.5 million. Management cited uncertainty in collateral values, borrower performance and the adequacy of loan-loss estimates.
- Liquidity and interest rates: Available resources included $398.4 million of cash, $71.1 million of unpledged securities, a $524.2 million FHLB line and a $455.6 million Federal Reserve line. Management noted deposit competition, reliance on deposits and wholesale funding for growth, and the risk that asset yields could decline more than funding costs in a low-rate environment. Interest-rate models indicated rising rates would generally benefit net interest income, but effects could be more pronounced over 12–36 months.
- Other risks: The filing identifies economic, lending, securities valuation, funding, regulatory, acquisition-integration and competition risks. A Missouri class-action suit challenges overdraft-program fees as unlawful interest; the Bank’s motion to dismiss was denied, and management said the possible outcome and loss could not yet be estimated. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- Reconcile common earnings per share disclosures: the income statement reports $8.673 million available to common stockholders after preferred dividends, while Note 5 appears to show $8.818 million as net income available to common stockholders, despite reporting the same $0.64 basic and $0.63 diluted EPS.
- Track the contribution and future runoff of FDIC-assisted loan accretion and indemnification adjustments, including changes in estimated cash flows and the TeamBank coverage expiration.
- Monitor loan quality, charge-offs, non-performing assets, troubled debt restructurings, foreclosed property values and allowance coverage, particularly in commercial real estate and construction portfolios.
- Assess whether deposit growth is sustained apart from the Boulevard Bank acquisition, and whether the high cash balance and disclosed credit commitments remain consistent with funding needs.
- Follow the overdraft-fee litigation, Boulevard Bank purchase-accounting estimates, and the timing and regulatory conditions for any SBLF preferred-stock redemption or common-share repurchases.