Great Southern Bancorp, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. The unaudited consolidated results cover the company’s single reportable segment, banking. The company cautions that quarterly results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2015 | Comparable period / change |
|---|---|---|
| Net interest income | $44.1 million | Up 16.2% from $38.0 million |
| Net interest margin | 4.82% | 4.66% in Q1 2014 |
| Provision for loan losses | $1.3 million | Down $391,000 from Q1 2014 |
| Non-interest income | $(56,000) | $924,000 in Q1 2014 |
| Non-interest expense | $27.2 million | Up 5.2% from $25.9 million |
| Net income | $11.7 million | Up 32.2% from $8.8 million |
| Net income available to common stockholders | $11.5 million; diluted EPS $0.83 | $8.7 million; diluted EPS $0.63 in Q1 2014 |
| Common dividend declared | $0.20 per share | $0.20 per share in Q1 2014 |
Balance sheet at March 31, 2015: Total assets were $4.07 billion, up 2.9% since year-end; net loans were $3.12 billion, up 2.7%; deposits were $3.26 billion, up 9.0%; and stockholders’ equity was $428.9 million, up $9.1 million. Cash and cash equivalents were $278.1 million, compared with $218.6 million at year-end.
Cash flow: Operating activities provided $14.5 million, investing activities used $51.7 million, and financing activities provided $96.6 million. Cash and cash equivalents increased $59.4 million to $278.1 million. The company reported $165.0 million of loan-origination commitments, $505.1 million of unused credit lines and unadvanced loans, and $27.6 million of letters of credit.
Funding and capital: FHLB advances fell to $92.6 million from $271.6 million; securities sold under reverse repurchase agreements with customers rose to $218.2 million. Brokered deposits, including CDARS, increased to $248.8 million from $149.8 million. The Bank’s capital ratios exceeded the then-applicable “well-capitalized” thresholds: common equity Tier 1 11.5%, Tier 1 risk-based 11.5%, total risk-based 12.7%, and Tier 1 leverage 9.3%. Company tangible common equity to total assets was 8.9%, versus 9.0% at year-end.
Material changes and operating drivers
- Loan growth, including growth in commercial real estate, construction and consumer lending, drove higher loan interest income. Excluding acquired loans and loans held for sale, loans increased $102.9 million from year-end.
- Lower interest expense on FHLB advances and short-term borrowings helped lift net interest income and margin. Average loan yield fell to 5.94% from 6.32% a year earlier, reflecting lower rates, partly offset by acquired-loan accretion.
- Non-interest income turned slightly negative, principally reflecting $6.9 million of net acquisition-related amortization, including reductions in expected FDIC reimbursements. The prior-year quarter included $1.0 million of non-recurring debit-card-related income.
- Non-interest expense rose $1.3 million, including approximately $1.3 million of costs from the former Valley Bank operations. Lower foreclosed-asset expense and professional fees partly offset the increase. The efficiency ratio improved to 61.82% from 66.58%.
- Net charge-offs were $664,000, compared with $3.5 million in Q1 2014. The allowance for loan losses was $39.1 million. Non-performing assets excluding FDIC-covered and other acquired assets were $42.4 million, or 1.04% of assets, versus $43.7 million, or 1.11%, at year-end. Other real estate owned was $46.2 million.
Outlook, risks and unusual items
- Acquired-loan estimates: Improved expected cash flows from acquired portfolios contributed $9.0 million to interest income and $6.7 million of offsetting non-interest expense in Q1; the net pre-tax contribution was $2.3 million. The company expected to recognize a further $16.3 million of interest income and $(12.6) million of non-interest income/expense from remaining adjustments during the rest of 2015. Estimates may change with future collections and credit expectations.
- Valley Bank accretion: Q1 included $1.1 million of interest-income accretion on Valley Bank loans; the company anticipated a further $1.7 million in the remainder of 2015 based on then-current estimates.
- Rates and funding: Management said the low-rate environment may pressure asset yields while limiting further reductions in funding costs. Most identified prime-based loans with floors were at those floors, which may delay benefit from rising rates and may expose the company to refinancing risk. Management described modeled near-term net interest income sensitivity as not likely to be material, while noting greater potential effects over 12–36 months.
- FDIC-related exposure: Loss-sharing arrangements have limits and servicing requirements; some acquired-asset coverage for non-single-family loans had expired. The InterBank agreement includes a clawback provision, and the company recorded a $6.5 million related liability. Valley Bank loans have no FDIC loss-sharing coverage.
- Capital and dividends: Management anticipated redeeming the $57.9 million Small Business Lending Fund preferred stock before its dividend rate was due to rise to 9% in 2016, subject to regulatory approval. It said holding-company cash was sufficient for repayment. Common dividends and repurchases remain subject to preferred-stock terms and capital conditions.
- Other outlook and risks: The company expected an effective tax rate typically around 22%–25%, subject to tax-credit utilization and income mix. Risks cited include loan and real-estate credit quality, interest-rate changes, funding access, regulation, integration and cost savings, competition, and litigation. Management reported no material change to annual-report risk factors.
- Legal contingency: A certified class action alleges overdraft fees on debit/ATM accounts violate Missouri usury law. The Bank intends to contest the case; management could not determine the probability of a material adverse outcome or reasonably estimate potential loss.
- Developments: A Columbia, Missouri banking center opened April 20, 2015; the company planned a Leawood, Kansas office and retail center opening in Q3 2015. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether loan growth and net interest margin persist after separating recurring banking performance from acquired-loan accretion and FDIC-related amortization.
- How acquired-loan cash-flow estimates, indemnification assets, and the InterBank clawback liability evolve, including the stated remaining 2015 income and expense effects.
- Credit quality trends, especially commercial real estate, construction, potential-problem loans, foreclosed assets, and loans no longer covered by FDIC loss-sharing agreements.
- Deposit mix and funding costs, including growth in brokered deposits, reverse repurchase agreements, and future reliance on FHLB advances or other wholesale funding.
- Regulatory approval, timing, and funding for the anticipated SBLF preferred-stock redemption before the dividend rate increase, and the effect on capital and common dividends.
- Developments and potential financial exposure in the Missouri overdraft-fee class action; the filing provides no clear estimate of loss.