Great Southern Bancorp, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. Great Southern is a bank holding company operating Great Southern Bank across six states.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total assets | $4.55 billion | $4.10 billion | +10.9% |
| Net loans | $3.76 billion | $3.34 billion | +12.6% |
| Deposits | $3.68 billion | $3.27 billion | +12.5% |
| Net interest income | $163.1 million | $168.4 million | -3.1% |
| Net interest margin | 4.05% | 4.53% | -48 basis points |
| Net income | $45.3 million | $46.5 million | -2.5% |
| Diluted EPS | $3.21 | $3.28 | -2.1% |
| Net charge-offs | $10.0 million | $5.8 million | Increased |
| Cash and cash equivalents | $279.8 million | $199.2 million | +$80.6 million |
| Total borrowings | $416.8 million | $406.8 million | +2.5% |
| Stockholders’ equity | $429.8 million | $398.2 million | +7.9% |
Net interest income plus noninterest income was $191.6 million, up from $181.9 million. Noninterest income rose to $28.5 million from $13.6 million, substantially reflecting lower acquisition-related amortization expense and a $2.7 million gain on sale of an investment. Provision for loan losses increased to $9.3 million from $5.5 million. The efficiency ratio was 62.86%, essentially unchanged from 62.85%; return on average assets was 1.04%, versus 1.14%.
Cash provided by operations was $80.1 million; investing activities used $198.1 million and financing activities provided $198.7 million. The year-end loan-to-deposit ratio was 102.7%. Available liquidity included $279.8 million in cash, approximately $551 million of remaining FHLBank borrowing capacity and $602 million under a Federal Reserve line; these are stated availability figures, not cash on hand. The Bank and holding company were reported well-capitalized. Bank ratios were 11.8% CET1, 11.8% Tier 1, 12.7% total capital and 10.8% leverage.
For Q4 2016, net income was $11.8 million and diluted EPS was $0.83, compared with $11.7 million and $0.81 in Q4 2015.
Material changes and business developments
- The January 2016 acquisition of 12 Fifth Third branches in St. Louis added approximately $228 million of deposits and $159 million of loans. The company also consolidated 16 centers and sold two branches; its network fell from 110 to 104 offices.
- Loan growth was broad-based, including commercial construction, commercial real estate, multifamily, residential and consumer lending. Multi-family balances rose 58.1%; commercial construction rose 29.9% and commercial real estate rose 13.7%.
- In April, the FDIC paid $4.4 million to settle and terminate loss-sharing agreements for TeamBank, Vantus and Sun Security. The remaining InterBank agreement is the principal continuing loss-sharing arrangement; Valley Bank loans have no loss sharing.
- The company issued $75 million of subordinated notes in August, with net proceeds of approximately $73.5 million. The notes pay 5.25% fixed interest through August 2021, then three-month LIBOR plus 4.087%, and mature in 2026.
Outlook, risks and contingencies
No specific earnings or revenue guidance is provided. Management said it expects a 26%–28% effective tax rate, subject to tax-credit use and other factors. It expected commercial real estate and construction lending to increase if economic conditions improved, while continuing to limit land-development lending. A Chicago commercial loan office was expected to open in early 2017.
Management attributed the lower margin to reduced loan yields and higher deposit and borrowing costs. Acquired-loan cash-flow revisions increased 2016 interest income by $16.4 million and reduced noninterest income by $7.0 million, for a net pretax benefit of $9.4 million; management expected further 2017 recognition of $4.3 million in interest income and $1.7 million in noninterest expense from remaining adjustments.
Key risks include concentrations in commercial real estate, construction and growing consumer-auto lending; changes in credit quality, collateral values and interest rates; reliance at times on brokered deposits and FHLBank funding; acquisition integration and branch-consolidation execution; competition, regulatory costs and cybersecurity. Net charge-offs rose, particularly in consumer auto loans, and fraud losses increased to $1.9 million from $619,000, largely tied to a national retailer data breach; management did not expect significant further exposure from that breach.
A certified class-action suit challenges overdraft fees under Missouri usury law. The case is stayed pending an appeal in similar litigation; management could not determine the probability of a material adverse outcome or reasonably estimate a loss. The independent auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether ongoing loan growth and credit performance offset the margin decline; review the higher 2016 provision, net charge-offs and auto-loan delinquencies.
- The quality and concentration of commercial real estate and construction exposures, including regional concentrations and loans excluded from reported nonperforming totals because they are acquired pools.
- Funding mix and liquidity sensitivity: brokered deposits, $171 million of overnight FHLBank borrowings at year-end, and the 102.7% loan-to-deposit ratio.
- The timing and sustainability of acquired-loan accretion and the remaining InterBank FDIC indemnification and clawback estimates.
- The outcome and potential exposure of the overdraft-fee class action, and whether branch-acquisition benefits and consolidation savings are realized.