Great Southern Bancorp, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 6, 2015. This is an annual report, not a standalone fourth-quarter filing. Great Southern is a bank holding company operating primarily through Great Southern Bank across six states.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Total assets | $3.95 billion | $3.56 billion |
| Net loans | $3.04 billion | $2.44 billion |
| Deposits | $2.99 billion | $2.81 billion |
| Net interest income | $167.6 million | $159.6 million |
| Net income | $43.5 million | $33.7 million |
| Net income available to common shareholders | $43.0 million | $33.2 million |
| Diluted EPS | $3.10 | $2.42 |
| Net interest margin | 4.84% | 4.70% |
| Efficiency ratio | 66.3% | 64.1% |
| Stockholders’ equity | $419.7 million | $380.7 million |
- Profitability: Net income rose 29.1%. Net interest income increased 5.0%; provision for loan losses fell 76.1% to $4.2 million. Noninterest income increased to $14.7 million, including a $10.8 million Valley Bank acquisition gain. Noninterest expense rose 14.4% to $120.9 million.
- Cash flow: Operating activities provided $67.4 million and investing activities provided $35.9 million; financing activities used $112.6 million. Cash and cash equivalents declined $9.3 million to $218.6 million.
- Debt and funding: Total borrowings were $514.0 million, up from $343.8 million. These included $271.6 million of Federal Home Loan Bank advances, $169.0 million of reverse-repurchase borrowings, $42.5 million of short-term borrowings and $30.9 million of subordinated debentures. The company repaid $130 million of higher-cost advances and structured repo borrowings during the year.
- Liquidity: Reported available resources included $218.6 million of cash and equivalents, $63.7 million of unpledged securities, and borrowing capacity of $395.3 million at the FHLB and $563.2 million at the Federal Reserve, subject to collateral and applicable terms. The year-end loans-to-deposits ratio was 102.1%.
- Credit quality: Net charge-offs fell to $5.8 million from $17.9 million; the allowance for loan losses was $38.4 million. Nonperforming assets were $43.7 million, or 1.11% of assets, and nonperforming loans were $8.1 million. These reported nonperforming-asset totals exclude acquired loan pools, including Valley Bank pools.
Material changes versus the prior year
- Net loans grew 24.6%, with substantial increases in commercial real estate, commercial construction and consumer auto lending. Loan growth reflected organic production and the June 2014 Valley Bank acquisition.
- Valley Bank added 11 net banking locations and expanded the company into eastern and central Iowa. The transaction added approximately $378.7 million of assets and $367.9 million of liabilities at acquisition, generated a $10.8 million gain, and had no FDIC loss-sharing agreement. Boulevard Bank transactions also added deposits and locations.
- Deposits increased 6.5%, including acquired deposits. Traditional brokered deposits rose to approximately $149.8 million from $50.0 million; FHLB advances also increased to support loan growth.
- Available-for-sale securities fell 34.2% to $365.5 million as securities were sold or allowed to run off to fund lending and other needs.
- Net interest margin improved 14 basis points, while the efficiency ratio worsened. Lower credit costs and higher lending income supported results, but expenses rose with acquisition integration and debt-prepayment costs.
- Fourth-quarter diluted EPS was $0.86 versus $0.62 in the fourth quarter of 2013; quarterly net income was $12.1 million versus $8.7 million.
Outlook, management commentary, risks and unusual items
- Outlook: No quantified earnings or revenue guidance is provided. Management expected to continue limiting land-development lending while anticipating growth in commercial construction and commercial real estate if economic conditions improved. Management cautioned that 2014 loan growth may not be sustained.
- Rate and margin sensitivity: Management described the one-year interest-rate earnings sensitivity position as fairly neutral. Most of the $484 million of prime-based loans with floors were at their floors at year-end, which supports current yields but can limit the benefit of rising rates and may encourage refinancing. Management noted that deposit and asset repricing could pressure margins.
- Acquisition and accounting items: The Valley acquisition gain was nonrecurring. The company also incurred $7.4 million of prepayment penalties and approximately $5.6 million of Valley-related expenses; approximately $2.6 million of Valley expenses were not expected to recur. Acquired-loan accounting added $35.0 million to interest income and reduced noninterest income by $28.7 million, for a net $6.2 million pretax benefit in 2014. Management expected $20.4 million of this interest income and $16.5 million of related noninterest expense in 2015; further estimates may change.
- Credit and concentration risks: The filing identifies significant exposure to commercial real estate, construction, multifamily and other commercial lending. These categories represented approximately 71.3% of the total loan portfolio under the company’s stated measure. A downturn in property markets or local economies could increase losses. The allowance is based on estimates and is inherently uncertain.
- FDIC coverage: The company reported that acquired portfolios covered by older loss-sharing agreements had performed better than expected. However, non-single-family loss-sharing coverage for TeamBank and Vantus had expired in 2014, leaving respective remaining balances of about $28.3 million and $23.2 million without that protection. Valley loans were never covered by loss sharing.
- Capital and preferred stock: The company and bank were well capitalized under rules in effect at year-end; new Basel III capital rules took effect January 1, 2015. The $57.9 million SBLF preferred stock carried a 1% dividend rate, scheduled to rise to 9% from March 2016 if not redeemed. Management anticipated redemption before the first quarter of 2016, subject to regulatory approval.
- Contingency: A certified class action alleges that automated overdraft fees violate Missouri usury laws. Management could not determine the probability of a material adverse outcome or reasonably estimate a potential loss.
- Audit and controls: The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- How much of 2014 earnings growth is sustainable after excluding the acquisition gain, debt-prepayment penalties, integration costs and acquired-loan accretion effects.
- Whether rapid loan growth—particularly commercial construction, commercial real estate and indirect auto lending—maintains credit quality, and how the allowance responds to new portfolio seasoning.
- Actual performance and valuation of Valley’s acquired loans, which lack FDIC loss sharing, and remaining TeamBank and Vantus loans after coverage expired.
- Funding mix, deposit retention, brokered-deposit reliance and borrowing capacity as loans exceed deposits; verify the collateral, availability and terms behind stated liquidity lines.
- Whether the SBLF preferred stock is redeemed before its dividend rate rises, and whether capital ratios meet the new requirements and future conservation buffer.
- Developments in the overdraft-fee class action and any resulting financial exposure.