Great Southern Bancorp, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are primarily with 2010. The company is a bank holding company whose principal subsidiary, Great Southern Bank, operates across five states. The 2011 results include the October acquisition of Sun Security Bank.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Total assets, year-end | $3.79 billion | $3.41 billion |
| Net income | $30.3 million | $23.9 million |
| Net income available to common shareholders | $26.3 million | $20.5 million |
| Diluted earnings per share | $1.93 | $1.46 |
| Net interest income | $163.5 million | $125.3 million |
| Net interest margin | 5.17% | 3.93% |
| Provision for loan losses | $35.3 million | $35.6 million |
| Operating cash flow | $108.0 million | $85.0 million |
- Revenue and earnings drivers: Interest income rose 14.7% to $198.7 million, while interest expense declined 26.5% to $35.1 million. Noninterest income fell 61.6% to $12.3 million, reflecting $37.8 million of net acquisition-related amortization expense and lower securities-sale gains; it included a preliminary $16.5 million Sun Security acquisition gain. Noninterest expense increased 17.7% to $104.7 million.
- Margin quality: The reported margin improvement was substantially driven by acquired-loan yield accretion. Management reported a $5.4 million net pre-tax benefit in 2011 from related accretable-yield and FDIC-indemnification adjustments. Excluding the additional yield accretion, margin improved 29 basis points, principally due to lower funding costs and a shift toward checking deposits.
- Loans and credit: Net loans receivable were $2.124 billion, up from $1.877 billion. Growth included $144.6 million of Sun Security loans; legacy commercial real estate, commercial business, and multifamily balances also grew. The allowance was $41.2 million, 2.33% of loans excluding FDIC-covered loans. Net charge-offs were $35.6 million, or 2.09% of average loans.
- Asset quality: Nonperforming assets, excluding FDIC-covered assets, decreased to $74.4 million from $78.3 million; the ratio to year-end assets declined to 1.96% from 2.30%. Foreclosed assets excluding covered assets were $46.9 million. Troubled debt restructurings increased to $58.1 million from $20.4 million. The book value of FDIC-covered nonperforming assets was separately reported at $96.3 million, net of discounts.
- Deposits and liquidity: Deposits increased 14.2% to $2.964 billion, chiefly from $280.9 million of deposits assumed in the Sun Security transaction. Cash and cash equivalents were $380.2 million, down from $430.0 million. The year-end loan-to-deposit ratio was 72.65%. The company reported $90.9 million of unpledged securities and available secured lines of $262.1 million at the FHLBank and $353.6 million at the Federal Reserve.
- Borrowings and capital: Total borrowings were $485.9 million versus $495.6 million, including $184.4 million of FHLBank advances, $216.7 million of customer repurchase agreements, $53.1 million of structured repos, and $30.9 million of subordinated debentures. Company stockholders’ equity was $324.6 million. The Bank was well capitalized, with a 15.3% total risk-based capital ratio and an 8.6% Tier 1 leverage ratio.
- Cash flow: Investing activities used $154.4 million, mainly from net loan growth and securities purchases; financing activities used $3.3 million. Cash and cash equivalents decreased $49.7 million during the year.
Material changes and unusual items
- The October 2011 FDIC-assisted Sun Security acquisition added 27 Missouri banking centers and expanded the company to 104 full-service centers. The transaction included $248.9 million of assets at fair value and $345.8 million of liabilities, and generated a preliminary $16.5 million gain. Fair-value estimates remained subject to adjustment during the measurement period.
- In August, the company issued $57.9 million of SBLF preferred stock and used the proceeds to redeem $58.0 million of CPP preferred stock. It also repurchased the Treasury’s common-stock warrant for $6.4 million. The CPP redemption produced a $1.2 million noncash deemed preferred dividend reducing income available to common shareholders.
- Foreclosed-asset expense rose to $11.8 million, including a substantial write-down as the company reduced asking prices on certain properties. Management said the write-downs primarily affected speculative subdivision and land-development assets.
- Quarterly net income available to common shareholders was $11.7 million in the fourth quarter, compared with $5.5 million in fourth-quarter 2010. Fourth-quarter 2011 results included the acquisition gain and unusually high noninterest expense; quarterly comparisons therefore warrant review of the detailed income statement.
Outlook, risks, and contingencies
- Management did not provide a numerical earnings forecast. It said it did not expect significant overall loan-portfolio growth in 2012 under current lending and economic conditions, planned to continue limiting commercial construction lending, and generally aimed to maintain the current commercial real estate share, subject to market and regulatory conditions.
- Management expected an effective tax rate of approximately 17%–25%, depending on tax-credit utilization and tax-exempt income. It anticipated opening two to three banking centers annually as conditions warrant; new Missouri and Kansas centers were planned for 2012.
- Management described loan demand and residential real estate conditions as weak, and identified risks from real estate values, commercial-property vacancies, credit losses, interest-rate movements, funding costs, and competition. Most prime-based loans with rate floors were at their floors at year-end, which supports current yields but may limit the benefit from future rate increases.
- The FDIC loss-sharing agreements cover at least 80% of eligible losses, subject to terms, time limits, and servicing requirements. Estimates for acquired-loan cash flows and related indemnification assets are judgmental; the Sun Security acquisition accounting was preliminary.
- A customer class-action suit alleges that debit-card and ATM overdraft fees violate Missouri usury laws. The court denied the Bank’s motion to dismiss; management said it could not estimate the probability or amount of any loss.
- The company cited potential effects of Dodd-Frank implementation and evolving capital requirements. SBLF preferred-stock dividends depend on qualifying small-business lending and may rise to 9% after four and one-half years; redemption requires regulatory approval.
Most important facts for investors to verify
- Reconcile reported margin and earnings improvement to the acquired-loan accretion and related FDIC-indemnification amortization; assess how much is repeatable.
- Track the final Sun Security purchase-accounting adjustments, acquired-loan performance, FDIC reimbursements, and compliance with loss-sharing requirements.
- Review growth in troubled debt restructurings, charge-offs, foreclosed assets, commercial real estate exposures, and the adequacy of the allowance.
- Confirm liquidity and funding trends, including brokered deposits, CDARS balances, FHLBank advances, and the maturity profile of certificates and borrowings.
- Monitor the overdraft-fee litigation, SBLF dividend rate and redemption terms, and the potential effects of regulatory changes on capital and operating costs.
The filing reports an unqualified audit opinion and an unqualified opinion on internal control over financial reporting as of December 31, 2011.