Great Southern Bancorp, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Great Southern is a bank holding company whose sole reportable segment is banking, serving customers primarily in Missouri, Iowa, Kansas, Minnesota, Nebraska and Arkansas, with commercial loan offices in Dallas and Tulsa. Unless noted, dollar figures below are in millions.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $41.5 | $44.1 | $127.7 | $122.0 |
| Provision for loan losses | $1.7 | $0.9 | $4.3 | $4.1 |
| Non-interest income | $5.1 | $1.8 | $8.5 | $13.3 |
| Non-interest expense | $30.0 | $29.4 | $85.2 | $89.7 |
| Net income | $11.2 | $11.6 | $34.9 | $31.5 |
| Diluted EPS | $0.79 | $0.83 | $2.46 | $2.25 |
| Net interest margin | 4.43% | 4.91% | 4.59% | 4.75% |
- Q3 net income declined 3.4%, as lower net interest income and a higher loan-loss provision outweighed higher non-interest income. Nine-month net income rose 10.8%, supported by net interest income growth and lower expenses.
- At September 30, total assets were $4.07 billion, up 3.0% from year-end 2014. Net loans were $3.27 billion, up 7.6%; organic loan growth excluding acquired portfolios and loans held for sale was $304.4 million.
- Deposits were $3.25 billion, up $255.9 million (8.6%) from December 2014. Brokered deposits, including CDARS funds, increased $128.6 million to $278.4 million.
- Cash and cash equivalents were $232.6 million. Available-for-sale securities fell $92.3 million to $273.2 million, primarily from sales and repayments as securities were no longer needed for pledging.
- Key funding balances: FHLB advances $164.6 million; customer reverse-repurchase agreements $148.1 million; short-term borrowings $1.3 million; subordinated debentures $25.8 million. FHLB advances declined $107.0 million from year-end.
- Stockholders’ equity was $447.6 million, or 11.0% of assets; common equity was $389.7 million. Book value per common share was $28.11. The Bank and holding company were reported well capitalized; the Bank’s common equity Tier 1 ratio was 11.4%.
- Nine-month cash flows: operating activities provided $65.0 million, investing activities used $131.2 million, and financing activities provided $80.3 million. Cash increased $14.0 million to $232.6 million.
- Allowance for loan losses was $39.9 million, up $1.4 million from year-end. Excluding FDIC-covered loans, the allowance was 1.29% of loans. Non-performing assets excluding specified acquired portfolios were $36.5 million, or 0.90% of assets, versus $43.7 million and 1.11% at year-end.
Material changes and unusual items
- Q3 net interest margin contracted 48 basis points year over year; excluding acquired-loan yield accretion, management said it declined 21 basis points, mainly from lower loan yields and higher deposit costs. For nine months, reported margin fell 16 basis points, while management said it rose 3 basis points excluding that accretion.
- Changes in estimated cash flows on acquired loan pools contributed $6.7 million to Q3 net interest income and reduced non-interest income by $4.1 million, a net $2.5 million pretax benefit. For the nine months, the corresponding net pretax benefit was $6.7 million. Management expected, for the remainder of 2015, $4.9 million of related interest income and $3.1 million of related non-interest expense. These estimates may change.
- Q3 non-interest income included a $1.1 million pretax gain from buying and redeeming $5.0 million of trust preferred securities at a discount. The transaction reduced related debentures to zero; total subordinated debentures remained $25.8 million.
- Q3 2014 and nine-month 2014 results included a $10.8 million one-time gain on the Valley Bank acquisition, making reported nine-month non-interest income lower in 2015. Nine-month 2014 expenses also included $7.4 million of prepayment penalties on borrowings.
- The company plans to consolidate 16 banking centers. It expects $3.2–$3.5 million of annual pretax savings beginning in 2016 and estimated one-time costs of $0.5–$0.75 million, primarily in the second half of 2015. Q3 included $220,000 of identified costs; the filing also reports a $1.0 million premises valuation allowance in one note and a $1.2 million allowance related to premises, equipment and leases in MD&A.
Outlook, risks and contingencies
- Pending regulatory approval, Great Southern expected to acquire 12 Fifth Third branches in the St. Louis area in early 2016, with approximately $261 million of deposits and $155 million of loans. Management projected annual earnings accretion of $0.9–$1.3 million, or $0.07–$0.09 per common share, beginning in 2016.
- Two of the 16 consolidating branches, with about $22 million of deposits, were expected to be sold subject to regulatory approval; the remaining 14 were scheduled to close or transfer operations in January 2016.
- Management anticipated repaying the $57.9 million Small Business Lending Fund preferred investment before its dividend rate increased to 9% in February 2016, subject to regulatory approval. The preferred shares carry dividend and common-stock distribution restrictions.
- Management described the low-rate environment as challenging: loan floors support current yields but may limit benefit from rate increases and may encourage refinancing; deposit competition and funding costs could pressure margins. Interest-rate models indicated limited impact in the first 12 months of rate changes, with greater potential effects over 12–36 months.
- Key risks include credit deterioration, collateral and real-estate values, allowance estimates, reliance on brokered deposits and FHLB funding, interest-rate changes, regulatory requirements, execution and integration of branch transactions, and economic conditions. Management said the risk factors were not materially changed from the 2014 Form 10-K.
- A certified customer class action alleges that automated overdraft fees violate Missouri usury law. The Bank intends to contest the case; management said it could not determine the likelihood of a material adverse outcome or reasonably estimate any loss. Other pending litigation was not expected to have a material adverse effect.
- Management reported effective disclosure controls as of September 30, 2015, and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track net interest margin and earnings dependence on acquired-loan accretion; verify the timing and amount of expected future accretion and related FDIC indemnification expense.
- Monitor deposit mix, brokered funding, deposit pricing and liquidity availability, alongside loan growth and concentrations in commercial real estate, construction, commercial business and consumer lending.
- Review delinquency, non-performing and potential-problem loan trends, charge-offs, acquired-loan performance, FDIC loss-sharing limits and the adequacy of the allowance.
- Confirm regulatory approvals, completion, costs and realized savings from the Fifth Third branch acquisition and banking-center consolidations; reconcile the filing’s $1.0 million versus $1.2 million valuation-allowance descriptions.
- Verify repayment plans and regulatory conditions for the SBLF preferred shares before the stated dividend-rate increase, and follow the overdraft-fee class action for any change in estimated exposure.