Business Context and Reporting Period
Company: Great Southern Bancorp, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: The Company operates primarily through its subsidiary, Great Southern Bank, engaging in originating residential and commercial real estate loans, construction loans, and consumer loans. Funding is sourced through deposits, brokered certificates of deposit, and borrowings from the Federal Home Loan Bank (FHLBank). The Company also operates travel, insurance, and investment service divisions.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Dec 31, 2007 (Balance Sheet) |
|---|---|---|---|
| Net Interest Income | $18,367 | $54,341 | N/A |
| Provision for Loan Losses | $4,500 | $47,200 | N/A |
| Net Income (Loss) | $824 | $(7,997) | N/A |
| Earnings Per Share (Diluted) | $0.06 | $(0.60) | N/A |
| Total Assets | N/A | N/A | $2,527,912 |
| Total Loans Receivable (Net) | N/A | N/A | $1,766,583 |
| Total Deposits | N/A | N/A | $1,854,474 |
| Cash and Cash Equivalents | N/A | N/A | $123,028 |
| Stockholders' Equity | N/A | N/A | $168,784 |
| Net Interest Margin (9 Months) | N/A | 3.09% | N/A |
Material Changes vs. Prior Period
- Profitability Decline: Net income for the nine months ended September 30, 2008, turned to a loss of $8.0 million, compared to a net income of $22.9 million in the same period in 2007. This represents a decrease of approximately 135%.
- Provision for Loan Losses: The provision for loan losses surged to $47.2 million for the nine months ended September 30, 2008, compared to $4.1 million in 2007. This increase was driven by a $35 million charge-off related to loans to an Arkansas-based bank holding company and general market deterioration.
- Non-Interest Income: Non-interest income decreased significantly due to a $5.3 million other-than-temporary impairment charge on Fannie Mae and Freddie Mac perpetual preferred stock. Excluding this charge, non-interest income increased.
- Asset Quality: Non-performing assets increased to $66.0 million (2.61% of total assets) from $55.9 million at year-end 2007. Foreclosed assets rose to $32.8 million from $20.4 million.
- Loan Portfolio: Net loans decreased by $46.8 million (2.6%) year-over-year, primarily due to a reduction in construction loans and commercial business loans, partially offset by growth in commercial real estate and consumer loans.
- Deposit Mix: Total deposits increased by $91.3 million, but the mix shifted significantly toward brokered certificates of deposit ($898.2 million) and away from non-interest-bearing checking accounts.
Guidance, Outlook, and Risks
- Outlook: Management does not expect significant loan portfolio growth in the near term due to the current lending environment. The Company expects loan loss provisions, non-performing assets, and foreclosed assets to remain elevated.
- Interest Rate Risk: The Company maintains a negative one-year interest rate sensitivity gap. While loan rate floors mitigate some impact from falling rates, the Company expects net interest margin compression to continue due to elevated funding costs (LIBOR and brokered deposits) relative to the Federal Funds rate.
- Lehman Brothers Exposure: The Company held six interest rate swaps with Lehman Brothers Special Financing, Inc. Following Lehman's bankruptcy on September 15, 2008, hedge accounting was terminated. The Company recorded a valuation allowance of $235,000 on the net asset position, citing uncertainty regarding collectability.
- Regulatory Environment: The Company is assessing participation in the Troubled Asset Relief Program (TARP) and the FDIC's Temporary Liquidity Guarantee Program. Regulatory examinations are ongoing, and the Company anticipates potential increases in FDIC insurance premiums.
- Capital Position: As of September 30, 2008, the Bank and the Company were classified as "well capitalized" with Tier 1 risk-based capital ratios exceeding 10%.
Investor Verification Checklist
- Impairment Charges: Verify the valuation methodology and future outlook for the $5.3 million impairment on Fannie Mae/Freddie Mac securities and the $235,000 valuation allowance on Lehman Brothers swaps.
- Loan Loss Reserve Adequacy: Assess the sufficiency of the $29.4 million allowance for loan losses given the $47.2 million provision and the specific details of the $35 million charge-off related to the Arkansas bank holding company.
- Funding Costs: Monitor the cost of brokered deposits and LIBOR-indexed borrowings, which are currently elevated and compressing net interest margins.
- Foreclosed Assets: Review the $32.8 million in foreclosed assets and the associated expenses ($2.5 million for the nine months) to gauge the timeline and cost of liquidation.
- Dividend Sustainability: Note that dividends declared ($0.54 per share for the nine months) exceeded net income per share, resulting in a payout ratio over 100% for the period.