Great Southern Bancorp, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Great Southern is a bank holding company whose single reportable segment is Great Southern Bank, serving markets primarily in Missouri, Iowa, Kansas, Minnesota, Nebraska and Arkansas, with commercial loan offices in Texas and Oklahoma. Amounts below are in millions unless stated otherwise; prior-year income comparisons were retrospectively adjusted for an accounting presentation change that did not affect net income.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Interest income | $44.4 | $43.5 | $86.7 | $90.8 |
| Net interest income | $40.0 | $38.5 | $77.9 | $80.6 |
| Provision for loan losses | $1.5 | $3.7 | $3.2 | $11.9 |
| Non-interest income | $10.6 | $2.3 | $11.6 | $5.3 |
| Non-interest expense | $34.4 | $26.7 | $60.3 | $52.6 |
| Net income | $11.1 | $8.2 | $19.9 | $16.6 |
| Diluted EPS | $0.79 | $0.59 | $1.42 | $1.19 |
| Net interest margin | 4.69% | 4.39% | 4.68% | 4.57% |
- Q2 net income increased 34.4%; six-month net income increased 19.6%. Earnings included a preliminary $10.8 million pre-tax bargain-purchase gain from the Valley Bank acquisition.
- At June 30, total assets were $3.91 billion, up 9.9% from year-end 2013. Net loans were $2.79 billion, up 14.4%, and deposits were $3.20 billion, up 14.0%; acquisitions contributed substantially to these increases.
- Cash and cash equivalents were $223.2 million, versus $227.9 million at year-end. Six-month cash from operating activities was $24.5 million, investing activities provided $99.5 million, and financing activities used $128.7 million.
- Allowance for loan losses was $38.1 million, down from $40.1 million at year-end. Six-month net charge-offs were $5.2 million versus $12.4 million in the prior-year period. Non-performing assets, excluding specified FDIC-covered and acquired assets, were $51.8 million, or 1.32% of assets, compared with $62.3 million, or 1.75%, at year-end.
- Total liabilities were $3.51 billion and stockholders’ equity was $399.6 million. FHLB advances were $91.7 million; subordinated debentures were $30.9 million; structured repurchase agreements had been repaid. The Bank and holding company met the filing’s then-current “well capitalized” thresholds.
- Available liquidity included $223.2 million cash, $71.3 million unpledged securities and secured lines of $587.3 million at the FHLB and $508.5 million at the Federal Reserve. Commitments included $161.6 million to fund loan originations, $400.6 million of unused lines and unadvanced loans, and $23.9 million of letters of credit.
Material changes and unusual items
- The June 20 Valley Bank FDIC-assisted acquisition added assets with provisional fair value of $378.7 million and liabilities of $367.9 million. It included $165.1 million of loans, $88.5 million of securities and $366.0 million of deposits. The transaction had no FDIC loss-sharing agreement; the preliminary $10.8 million gain remains subject to purchase-accounting measurement-period adjustments.
- Q2 non-interest expense included $7.4 million in one-time prepayment penalties after the Company repaid $80 million of FHLB advances and $50 million of structured repurchase borrowings. Management said the action used available liquidity to improve net interest margin; avoided interest costs were estimated at $4.7 million over the next year.
- Valley-related expenses were approximately $605,000 in the first half. Efficiency ratio rose to 67.98% for Q2 and 67.37% for the first half, from 65.43% and 61.28%, respectively, with acquisition costs, prepayment penalties and foreclosed-asset write-downs contributing.
- Acquired-loan cash-flow estimate changes increased first-half interest income by $17.0 million and reduced non-interest income by $13.8 million, for a net pre-tax benefit of $3.2 million. Management expected $13.6 million of further interest income and $11.4 million of offsetting non-interest expense in the remainder of 2014 from remaining adjustments.
- Common dividends declared were $0.20 per share for Q2 and $0.40 for the first half. The Company repurchased 17,000 shares during the first half.
Outlook, management commentary and risks
- Management expected 2014 loan-loss provisions and net charge-offs to remain below 2013 levels or approximate the latter half of 2013, while noting they are difficult to predict. It considered the allowance adequate at June 30.
- Management expected an effective tax rate generally of 20%–25%, assuming continued use of investment tax credits. No earnings or revenue guidance range was provided.
- Management planned Valley systems conversion for October 24, 2014, anticipated consolidating back-office operations, and expected certain branch closures. It projected $11–15 million total cost for real estate and personal property associated with the transaction, including $10.9 million already paid.
- Key exposures include credit quality and real-estate values, interest-rate changes, funding and deposit competition, integration and customer retention, FDIC loss-sharing terms and cash-flow estimates, regulatory requirements, and litigation. The filing notes that Valley’s bargain-purchase gain is preliminary and acquired-asset estimates may change.
- Loss-sharing protection on non-single-family TeamBank loans had ended, and the Vantus non-single-family coverage was nearing expiration. The filing cautions that retained acquired loans may require higher allowances after coverage ends.
- A pending class-action suit alleges overdraft fees violate Missouri usury laws. Management could not determine the probability of a material adverse outcome or reasonably estimate potential loss.
Investor facts to verify
- Whether the preliminary Valley acquisition gain and acquired asset/liability fair values changed during the purchase-accounting measurement period.
- Whether Valley integration, deposit retention, branch consolidation and expected synergies proceeded on schedule and within estimated costs.
- How core earnings perform excluding the bargain-purchase gain, prepayment penalties, acquisition effects and acquired-loan accretion/amortization.
- Whether loan delinquencies, non-performing assets, troubled debt restructurings, charge-offs and allowance coverage continued to improve, including in acquired portfolios.
- How liquidity, deposit composition and funding costs evolved as acquired Internet deposits ran off and FDIC loss-sharing coverage expired or approached expiration.