Great Southern Bancorp, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. The company is a one-bank holding company operating primarily through Great Southern Bank, serving customers across several Midwestern and Southern states.
Financial performance and position
Unless noted otherwise, amounts are in U.S. dollars; financial statement amounts are rounded to millions.
| Metric | Q1 2018 / March 31, 2018 | Prior comparison |
|---|---|---|
| Net income | $13.5 million; diluted EPS $0.95 | $11.5 million; diluted EPS $0.81 in Q1 2017 |
| Net interest income | $39.4 million | $38.7 million in Q1 2017 |
| Net interest margin | 3.93% | 3.78% in Q1 2017 |
| Provision for loan losses | $2.0 million | $2.3 million in Q1 2017 |
| Non-interest income / expense | $6.9 million / $28.3 million | $7.7 million / $28.6 million in Q1 2017 |
| Effective tax rate | 16.4% | 26.1% in Q1 2017 |
| Total assets | $4.41 billion | $4.41 billion at December 31, 2017 |
| Net loans / deposits | $3.76 billion / $3.56 billion | Net loans up $35.4 million; deposits down $35.0 million from year-end |
| Cash and cash equivalents | $220.0 million | Down $22.3 million from year-end |
| Stockholders’ equity | $480.0 million; 10.9% of assets | $471.7 million; 10.7% of assets at year-end |
- Cash flow: Operating activities provided $29.9 million; investing activities used $37.0 million; financing activities used $15.2 million. Cash and cash equivalents decreased $22.3 million during the quarter.
- Funding and debt: Deposits were $3.56 billion; FHLB advances $134.0 million; reverse repurchase agreements $110.1 million; short-term borrowings $1.4 million; subordinated debentures and notes totaled $99.5 million. Deposits declined, including a $63.1 million decrease in brokered deposits.
- Credit quality: Allowance for loan losses was $36.3 million. Nonperforming assets, excluding FDIC-assisted acquired assets, were $27.4 million, or 0.62% of assets; nonperforming loans were $9.3 million. Net charge-offs were $2.1 million, including $1.3 million in consumer auto loans.
- Liquidity and capital: Management said liquidity was sufficient. Available resources included $220.0 million in cash, $44.9 million in unpledged securities, and secured FHLB and Federal Reserve lines of $563.5 million and $510.9 million. The Bank and holding company were reported as well capitalized; the Bank’s total capital ratio was 13.2%. The company’s tangible common equity to tangible assets ratio was 10.67%.
Material changes versus prior period
- Net income rose 16.9% year over year, principally reflecting a $1.4 million reduction in income tax expense, higher net interest income, a lower loan-loss provision, and slightly lower non-interest expense. Lower non-interest income partly offset those gains.
- Net interest margin improved 15 basis points year over year. Excluding the benefit from acquired-loan accretion, management reported a 22-basis-point increase.
- Net loans increased 1.0% from year-end, driven mainly by commercial construction and commercial real estate lending; consumer and one- to four-family residential balances partly offset growth. Management cited $138 million of loan paydowns exceeding $1 million each during the quarter.
- Non-interest income fell 9.9% year over year, including lower loan-sale gains and fewer loan payoff fees. Non-interest expense decreased 0.9%; foreclosed-asset costs and professional fees rose while salaries and certain operating costs declined.
- Unrealized losses on available-for-sale securities increased, contributing to a $1.6 million decline in accumulated other comprehensive income during the quarter.
Outlook, management commentary, risks and unusual items
- Omaha branch sale: The company agreed to sell deposits of approximately $58 million and substantially all branch-related assets at its four Omaha branches to West Gate Bank. Closing was expected in July 2018, subject to regulatory approval and customary conditions. Management estimated a pretax gain of $7.0–$7.3 million, or $0.38–$0.40 per diluted share after tax, and projected annual non-interest expense reductions of $1.1–$1.2 million, partly offset by lower non-interest income and higher funding costs. These are estimates, not completed results.
- Tax outlook: Management expected a 2018 effective tax rate of approximately 15.5%–17.5%, mainly reflecting the federal corporate tax-rate reduction. Actual rates may vary with income mix and tax-credit utilization.
- Acquired-loan accretion: Improved expected cash flows from FDIC-assisted loan pools added $1.2 million to Q1 2018 interest income. The company expected to recognize $2.0 million of the remaining $3.2 million accretable-yield adjustment during the rest of 2018; future estimates may change.
- Rates and funding: Management’s models indicated rising rates would generally benefit net interest income and falling rates would generally hurt it, while modeled effects in the first 12 months were not expected to be material. Competition for deposits could require higher rates and pressure margins; access to brokered deposits and FHLB advances is also a funding risk.
- Credit and real estate risks: Management highlighted consumer auto delinquencies and repossessions, commercial real estate and construction exposure, and the potential for economic deterioration or lower collateral values to increase provisions or foreclosed-asset losses. Auto loan balances were expected to continue declining in 2018 following tighter underwriting.
- Other items: The company early-adopted an accounting update and reclassified $272,000 of stranded tax effects from accumulated other comprehensive income to retained earnings. It expected the forthcoming credit-loss standard to require a one-time allowance adjustment but could not estimate its size. The filing says Q1 results are not necessarily indicative of full-year results.
- The filing identifies regulatory, litigation, cybersecurity, competition, economic, interest-rate, liquidity, and accounting risks. Management reported no material changes to the risk factors in its 2017 Form 10-K and no material adverse effect expected from pending legal proceedings, subject to the stated uncertainty.
Most important facts for investors to verify
- Whether the West Gate Bank transaction received approval and closed, and whether its final gain, deposit balance, and recurring expense and funding effects matched estimates.
- Whether deposit outflows, brokered-funding levels, and deposit pricing affect liquidity and net interest margin in subsequent quarters.
- Whether loan growth remains concentrated in commercial construction and commercial real estate, and how consumer auto delinquencies, charge-offs, and foreclosed assets develop.
- Whether acquired-loan cash-flow assumptions support expected accretion, and how much of the projected $2.0 million was recognized in the remainder of 2018.
- Whether the expected tax-rate range and the eventual credit-loss accounting adjustment are consistent with subsequent filings.