Great Southern Bancorp, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018. Amounts below are in millions unless stated otherwise. Great Southern operates a single banking segment, primarily through Great Southern Bank, serving customers in the Midwest and originating commercial loans in additional markets.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $44.9 | $41.2 | $89.5 | $80.7 |
| Net interest margin | 3.97% | 3.94% | 4.02% | 3.93% |
| Net income | $18.4 | $13.8 | $36.0 | $27.3 |
| Diluted EPS | $1.28 | $0.97 | $2.52 | $1.91 |
| Provision for loan losses | $1.6 | $2.0 | $3.6 | $3.9 |
| Non-interest income | $7.2 | $7.5 | $14.6 | $14.4 |
| Non-interest expense | $28.4 | $29.9 | $56.9 | $58.2 |
- Net income rose 32.8% year over year in Q2 and 31.8% for the first half. Higher net interest income and lower expenses and loan-loss provisions drove the gains; higher taxes partly offset them.
- At June 30, total assets were $4.87 billion, up 4.2% from year-end. Net loans were $4.11 billion, up 3.1%; deposits were $3.89 billion, up 4.4%. Available-for-sale securities increased 25.3% to $305.6 million.
- Cash and cash equivalents were $181.4 million, down $21.4 million from year-end. First-half cash flow was $39.2 million from operations, negative $180.3 million from investing, and positive $119.7 million from financing.
- Funding and debt at June 30 included $168.6 million in short-term borrowings and other interest-bearing liabilities, $98.6 million in customer repurchase agreements, $25.8 million in subordinated debentures, and $74.1 million in subordinated notes. Overnight FHLBank borrowings were $136.5 million; there were no term FHLBank advances.
- Stockholders’ equity was $572.3 million, or 11.7% of assets; tangible common equity to tangible assets was 11.6%. The Bank’s total risk-based capital ratio was 13.5%, and management reported the Bank and holding company as well capitalized.
- The allowance for loan losses was $39.3 million. Excluding FDIC-acquired loans, it was 0.97% of loans. Nonperforming assets excluding FDIC-assisted acquired assets rose to $15.9 million (0.33% of assets) from $11.8 million at year-end; nonperforming loans increased to $11.4 million from $6.3 million.
Material changes and management commentary
- Interest income increased substantially, reflecting higher average loan balances and yields, while deposit interest expense rose sharply as deposit rates and time-deposit balances increased. The overall average interest-rate spread narrowed year over year, despite modestly higher reported net interest margins.
- First-half loan growth was led by commercial real estate, construction, and residential lending; consumer auto loans declined. The company discontinued indirect auto originations in 2019.
- Lower foreclosed-asset write-downs and related expenses helped reduce non-interest expense. The company also cited higher staffing and compensation costs, including additions at Atlanta and Denver loan-production offices.
- A $400 million interest-rate swap hedges floating-rate loan exposure. Its fair value was a $30.7 million asset at June 30, and the company recorded $1.1 million of first-half loan interest income related to it. Changes in the swap’s fair value contributed to accumulated other comprehensive income.
- The company declared $1.39 per share in first-half dividends, including a $0.75-per-share special dividend and $0.64 in regular dividends. It repurchased 16,040 shares during the first half.
Outlook, risks and unusual items
- No specific earnings or growth guidance is provided. Management expected an effective tax rate of approximately 17.0%–18.5% for 2019 and future years.
- Management’s rate-risk models indicated that rising rates would generally benefit net interest income and falling rates would generally hurt it; modeled effects were not expected to be material in the first 12 months, with potentially greater effects over months 12–36. A large portion of loans reprices with LIBOR or prime, and deposit competition and repricing could pressure margins.
- Expected cash-flow improvements on acquired FDIC-assisted loan pools added $2.9 million to first-half interest income. A remaining $5.1 million accretable-yield adjustment was expected to add about $2.0 million of interest income in the remainder of 2019; future revisions to expected collections could affect earnings and credit costs.
- One borrower relationship of approximately $6.7 million contributed materially to the increase in nonperforming loans. In July 2019, the borrower deeded collateral properties to the Bank in lieu of foreclosure.
- The company expects to adopt the current expected credit loss standard in the quarter ending March 31, 2020. The exact transition adjustment was undetermined; current modeling indicated it would be less than 5% of stockholders’ equity.
- Management identified risks including economic and real-estate conditions, interest rates, loan and collateral quality, funding access, competition, regulatory changes, cybersecurity, and litigation. It reported no material change in the risk factors from the 2018 Form 10-K and no material control changes during the quarter.
- The company consolidated its Fayetteville, Arkansas branch in April and planned to consolidate its Ames, Iowa branch in September 2019.
Important facts for investors to verify
- Whether the $6.7 million borrower exposure and deed-in-lieu resolution result in additional losses, recoveries, or foreclosed assets.
- Whether deposit pricing, certificate maturities, brokered deposits, and short-term FHLBank funding continue to pressure funding costs and net interest margin.
- How much of earnings depends on acquired-loan accretion and whether expected cash flows from those pools change.
- The eventual CECL adoption impact, including the final allowance and retained-earnings adjustment.
- Whether loan growth, especially in commercial real estate and construction, remains consistent with management’s credit-risk standards and whether asset-quality trends stabilize.
- Whether the special dividend and ongoing capital returns remain supported by earnings, liquidity, and regulatory capital.