Great Southern Bancorp, Inc. — Q2 2013 Form 10-Q
Business context and reporting period
Great Southern is a one-bank holding company operating Great Southern Bank, with banking operations in Missouri, Iowa, Kansas, Minnesota, Nebraska and Arkansas. This unaudited filing covers the quarter and six months ended June 30, 2013; balance-sheet comparisons are to December 31, 2012. Amounts below are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $38.5 | $40.5 | $80.6 | $77.2 |
| Provision for loan losses | $3.7 | $17.6 | $11.9 | $27.7 |
| Non-interest income | $2.3 | $35.8 | $5.3 | $41.9 |
| Non-interest expense | $27.6 | $28.2 | $54.6 | $53.1 |
| Net income | $8.2 | $21.7 | $16.6 | $29.2 |
| Diluted EPS | $0.59 | $1.58 | $1.19 | $2.12 |
| Net interest margin | 4.39% | 4.36% | 4.57% | 4.33% |
At June 30, 2013, total assets were $3.83 billion, down 3.2% from year-end; net loans were $2.33 billion, up $6.2 million. Deposits were $3.01 billion, down $139.3 million, including a $114.3 million decline in retail certificates of deposit. Cash and cash equivalents were $373.3 million, down $30.8 million. Available-for-sale securities were $744.4 million, down $62.6 million.
Total liabilities were $3.45 billion and stockholders’ equity was $374.4 million. Key borrowings included $128.1 million of FHLB advances, $53.0 million of structured repurchase agreements, $30.9 million of subordinated debentures, and $196.3 million of securities sold under reverse repurchase agreements with customers. The Bank and the Company were described as well capitalized; the Bank’s Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 15.1%, 16.3% and 9.4%, respectively.
For the six months, operating cash flow was $51.2 million, investing cash flow was $38.0 million and financing cash flow was negative $120.1 million. Cash and cash equivalents decreased $30.8 million to $373.3 million. Available liquidity included $373.3 million cash, $66.0 million in unpledged securities, and secured lines of $411.6 million at the FHLB and $439.0 million at the Federal Reserve.
Material changes versus comparable periods
- Net income fell 62.0% in Q2 and 43.0% for the half year. The primary comparison effect was the $31.3 million pre-tax gain on the InterBank FDIC-assisted acquisition recognized in Q2 2012; no similar gain was recorded in 2013.
- Provision expense was substantially lower than in 2012: down 79.1% for Q2 and 57.0% for the half year. Net charge-offs were $4.0 million in Q2 2013 versus $18.4 million a year earlier, and $12.4 million for the half year versus $28.2 million.
- Six-month net interest income increased 4.4%, supported by lower funding costs and higher average loan balances, while Q2 net interest income declined 4.9%. Lower asset yields and reduced investment balances weighed on interest income.
- Acquisition-related cash-flow estimate adjustments contributed $1.0 million to pre-tax income in Q2 and $3.1 million for the half year. These reflected higher acquired-loan interest accretion, partly offset by lower FDIC indemnification income.
- Non-performing assets excluding FDIC-covered assets were $70.9 million, or 1.85% of assets, versus $72.6 million and 1.84% at year-end. Non-performing loans increased to $24.7 million; foreclosed assets declined to $46.2 million. The allowance for loan losses was $40.2 million.
Outlook, commentary, risks and unusual items
- Management expected 2013 provision expense and net charge-offs to be below 2012 levels, with the larger reductions anticipated in the second half. It did not expect significant overall loan-portfolio growth at that time.
- Management expected an effective tax rate of approximately 12%–18%, assuming continued use of investment tax credits. It noted that tax-credit timing and pre-tax income could cause variation.
- The Bank planned to consolidate 11 Missouri banking centers in early Q4 2013. Management estimated annual pre-tax expense savings of $1.2–$1.5 million and one-time costs of $0.3–$0.6 million in Q3 and Q4; affected properties with a carrying value of about $1.5 million were to be marketed for sale.
- Acquired-loan accounting remains a significant earnings variable. Management expected the remaining adjustments to contribute $8.6 million of interest income and reduce non-interest income by $7.5 million during the rest of 2013; further revisions to acquired-loan cash-flow estimates could affect future results.
- Risks include credit deterioration, real-estate values, interest-rate and funding conditions, FDIC loss-sharing limitations and servicing requirements, regulatory changes and integration of acquired businesses. Most prime-based loans subject to floors were at those floors, creating potential refinancing risk as rates change. The filing also notes that Basel III capital rules were scheduled to begin taking effect in 2015.
- An InterBank loss-sharing clawback liability of $1.9 million was recorded because the Bank expected credit performance to exceed the FDIC threshold. A pending Missouri class action challenges overdraft fees; management could not estimate the probability or amount of a potential loss.
- The company reported no securities impairment considered other-than-temporary in the first half of 2013. It identified $215.8 million of debt securities in unrealized loss positions and assessed the declines as temporary; available-for-sale valuation changes reduced accumulated other comprehensive gain by $7.5 million in the first half.
Most important facts for investors to verify
- How much of earnings and margin depends on FDIC-acquired loan accretion, indemnification-asset amortization and future cash-flow estimate changes.
- Whether non-performing loans, potential problem loans and foreclosed-property exposure improve, particularly in commercial real estate, commercial business and development lending.
- Whether deposit outflows continue and whether the company can maintain funding costs, liquidity and loan growth without greater reliance on brokered deposits or borrowings.
- Actual savings, one-time costs and property-sale outcomes from the 11-branch consolidation.
- Developments in the overdraft-fee class action and the InterBank clawback estimate, as well as the effect of market-rate changes on securities values and loan refinancing.