GREAT SOUTHERN BANCORP, INC. annual report, FY2015

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Great Southern Bancorp, Inc. — FY 2015 Form 10-K

Business context and reporting period

Annual report for the fiscal year ended December 31, 2015. Great Southern Bancorp is a bank holding company whose principal business is Great Southern Bank, a regional lender operating 110 banking centers in six states. The Bank focuses on real estate, construction, commercial, and consumer lending. Financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.

Financial performance and condition

  • Scale and funding: Assets were $4.10 billion, up 3.9% year over year. Net loans were $3.34 billion, up 9.9%; deposits were $3.27 billion, up 9.3%. Loans-to-deposits were 102.6%.
  • Earnings: Net interest income was $168.4 million, up 0.5%; noninterest income was $13.6 million, down 7.8%; and net income was $46.5 million, up 6.8%. Diluted EPS rose to $3.28 from $3.10. Return on average assets was 1.14%, and return on average equity was 12.13%.
  • Margins and expenses: Net interest margin declined 31 basis points to 4.53%; excluding acquired-loan yield accretion, it fell 7 basis points. The efficiency ratio improved to 62.85% from 66.30%, as noninterest expense decreased 5.4% to $114.4 million.
  • Credit quality: Provision for loan losses rose to $5.5 million from $4.2 million; net charge-offs were $5.8 million, or 0.20% of average loans, approximately unchanged from 2014. The allowance was $38.1 million. Reported nonperforming loans increased to $16.6 million from $8.1 million, while nonperforming assets were $44.0 million, or 1.07% of average assets. Certain acquired-loan pools are excluded from reported nonperforming totals.
  • Liquidity and debt: Cash and cash equivalents were $199.2 million; available-for-sale securities were $262.9 million. Total borrowings were $406.8 million, including $263.5 million of FHLBank advances, $116.2 million of reverse-repurchase borrowings, and $25.8 million of subordinated debentures. The Bank also reported available secured lines of $505.5 million at the FHLBank and $633.7 million at the Federal Reserve; neither line balance represents cash on hand.
  • Capital and cash flow: Stockholders’ equity was $398.2 million, down from $419.7 million, primarily following redemption of $57.9 million of SBLF preferred stock. The Bank remained well capitalized, with a 11.0% common equity Tier 1 ratio and 9.8% leverage ratio. Operating cash flow was $71.4 million; investing activities used $196.2 million and financing activities provided $105.3 million.

Material changes versus 2014

  • Loan growth was led by commercial construction, consumer auto, commercial real estate, and multifamily lending. Consumer loans increased to $598.7 million from $467.7 million; construction balances also grew substantially.
  • Lower loan yields and higher time-deposit costs pressured the margin. Acquired-loan cash-flow adjustments increased interest income by $28.5 million and reduced noninterest income by $19.5 million, a net pretax contribution of approximately $9.0 million. The filing expects further 2016 effects of about $9.1 million in interest income and negative $6.0 million in noninterest income or expense.
  • Noninterest income included no acquisition gain in 2015, compared with a $10.8 million Valley Bank acquisition gain in 2014. Expense fell partly because 2014 included $7.4 million of borrowing prepayment penalties. In 2015, the Bank recorded a $1.2 million valuation allowance tied to planned branch consolidations.
  • Available-for-sale securities declined 28.1% to $262.9 million as repayments and sales were redirected toward loan growth. Other real estate owned fell 30.4% to $31.9 million.

Outlook, commentary, risks, and unusual items

  • Management anticipated continued commercial real estate and construction lending growth if economic conditions remained favorable, while stating it expected to limit land-development lending. No specific earnings or revenue guidance was provided.
  • Management expected a 24%–26% effective tax rate and significant use of tax credits in 2016. The filing’s forward-looking estimates and acquisition benefits are subject to uncertainty.
  • After year-end, the Bank completed its acquisition of 12 Fifth Third branches in St. Louis, assuming approximately $228 million of deposits and acquiring approximately $159 million of loans. It also consolidated 14 banking centers in January 2016 and planned sales of two additional centers.
  • Key risks include concentrations in commercial real estate and construction lending, rapid growth in consumer and auto loans, regional economic and property-value changes, interest-rate and deposit-cost sensitivity, and reliance on brokered deposits and FHLBank advances. Brokered deposits increased to $271.5 million from $149.8 million.
  • Reported nonperforming loans rose notably, including $13.5 million of commercial real estate loans; two large relationships involved healthcare facilities and a Branson-area resort borrower that entered bankruptcy. The Bank also faces a certified class-action suit alleging overdraft fees violated Missouri usury law; management said the possible loss could not be estimated.
  • Acquired-loan accounting and FDIC loss-sharing estimates materially affect reported interest and noninterest income. Loss-sharing coverage has limits, and some acquired commercial-loan coverage had already expired. The filing also reports partnership tax examinations and a Kansas tax appeal, with no significant financial-statement adjustments currently expected.

Most important facts for investors to verify

  • Whether loan growth—especially construction, commercial real estate, and indirect auto—continues without deterioration in delinquencies, charge-offs, or collateral values.
  • How much of earnings and margin depends on acquired-loan accretion, FDIC reimbursement estimates, and the remaining loss-sharing periods.
  • Whether deposit growth and funding mix remain sustainable as brokered deposits rise and loans exceed deposits.
  • The effect of the Fifth Third branch integration and branch consolidations on costs, deposits, customers, and earnings.
  • Developments in the overdraft-fee class action and any changes in regulatory capital, liquidity, or tax-credit assumptions.