Great Southern Bancorp, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2012. Great Southern is a regional banking company headquartered in Springfield, Missouri; banking is its primary reportable segment. The filing was signed November 9, 2012.
Key financial metrics
Amounts are in millions except per-share data, percentages, and where noted.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $43.3 | $41.6 | $120.5 | $121.3 |
| Provision for loan losses | $8.4 | $8.5 | $36.1 | $25.1 |
| Non-interest income | $3.9 | $(1.2) | $50.3 | $(5.1) |
| Non-interest expense | $30.9 | $23.0 | $87.7 | $66.8 |
| Net income | $7.1 | $6.5 | $36.3 | $18.2 |
| Net income available to common shareholders | $7.0 | $4.4 | $35.8 | $14.6 |
| Diluted EPS | $0.51 | $0.33 | $2.62 | $1.08 |
| Net interest margin | 4.75% | 5.37% | 4.47% | 5.21% |
- Balance sheet at September 30: assets $4.06 billion; net loans $2.33 billion; deposits $3.25 billion; cash and cash equivalents $485.2 million; available-for-sale securities $787.1 million; stockholders’ equity $361.8 million.
- Borrowings and liquidity: FHLB advances were $126.3 million, structured repurchase agreements $53.1 million, and subordinated debentures $30.9 million. The filing also reports $374.9 million of available FHLB line capacity, $378.5 million of Federal Reserve line capacity, and $68.0 million of unpledged securities.
- Cash flow, nine months: operating activities provided $137.9 million, investing activities provided $209.0 million, and financing activities used $242.0 million. Cash increased $104.9 million to $485.2 million. Investing cash included $75.3 million received in the InterBank acquisition.
- Credit and capital: allowance for loan losses was $40.3 million; non-performing assets excluding FDIC-covered assets were $76.9 million, or 1.89% of assets. Bank Tier 1 and total risk-based capital ratios were 13.9% and 15.2%; the Bank was classified as well capitalized.
- Shareholder returns: common dividend declared was $0.18 per share for the quarter and $0.54 per share year to date. No common shares were repurchased during the quarter.
Material changes versus comparable periods
- Q3 net income rose 10.1%, while net income available to common shareholders increased to $7.0 million from $4.4 million. Lower income taxes and higher non-interest income and net interest income were partly offset by substantially higher operating expenses.
- Nine-month net income nearly doubled, but results included a $31.3 million preliminary pre-tax bargain-purchase gain from the April 2012 InterBank FDIC-assisted acquisition. Net interest income was down 0.7%; loan-loss provision rose 43.6% and non-interest expense rose 31.4%.
- Assets increased 7.0% from year-end 2011, largely due to InterBank. Net loans rose 9.8%, including $269.9 million of InterBank covered loans; excluding covered loans and mortgage loans held for sale, loans increased $38.8 million. Deposits increased $287.3 million, mainly from InterBank.
- Net interest margin declined 62 basis points in Q3 and 74 basis points year to date. Management attributed pressure to lower asset yields and reduced accretion income on acquired loans; lower deposit costs provided some offset.
- Year-to-date net charge-offs were $37.0 million versus $26.2 million in 2011. Non-performing loans excluding FDIC-covered loans declined $2.1 million from year-end, but foreclosed assets increased $4.6 million to $51.5 million.
Outlook, commentary, risks, and unusual items
- Outlook: Management did not provide formal earnings guidance. It said it did not expect significant overall loan growth in the prevailing environment, anticipated the low-rate environment’s effect on future net interest margin to be fairly neutral, and expected a 10%–18% effective tax rate if investment tax-credit use continued.
- Acquisition accounting: Acquired-loan cash flow revisions contributed $4.8 million to pre-tax income in the first nine months ($24.1 million of additional interest income partly offset by $19.3 million of reduced non-interest income). Management expected remaining 2012 impacts of about $3.5 million additional interest income and $2.9 million lower non-interest income; further revisions remain possible.
- Planned divestitures: Subsequent to quarter-end, the company agreed to sell Great Southern Travel and Great Southern Insurance, with transfers planned for December 2012. Combined pre-tax transaction gains of approximately $6.8 million were expected in Q4; the businesses’ future revenue and expense contributions will cease after sale.
- Credit and FDIC exposure: Troubled debt restructurings totaled $61.3 million, or 2.6% of loans. FDIC loss-sharing coverage generally reimburses 80% of eligible losses, subject to contract terms, time limits, servicing requirements, and exclusions. Acquired-loan and indemnification-asset valuations depend on management’s estimates of collections and losses.
- Other risks: Management cited uncertain economic and real estate conditions, interest-rate and funding risks, competition, regulation, and potential additional loan-loss provisions. It expects non-performing loans, foreclosed assets, and credit-resolution expenses to remain elevated and fluctuate.
- Unusual contingency: A pending Missouri class-action suit alleges overdraft fees violate state usury laws. Management said it could not determine the probability of a material adverse outcome or reasonably estimate potential loss.
- Tax and operating items: Tax credits lowered the effective tax rate but also increased amortization expense. The Q3 efficiency ratio rose to 65.45% from 56.93%; the nine-month ratio improved to 51.36% from 57.48%, primarily reflecting the InterBank gain.
Important facts for investors to verify
- How much future earnings depend on InterBank’s one-time gain, FDIC-assisted acquisition accounting, and revised acquired-loan cash flow estimates.
- Whether loan quality stabilizes: monitor charge-offs, non-performing assets, troubled debt restructurings, potential problem loans, and foreclosed-asset valuations.
- Whether margin pressure continues as acquired-loan accretion runs off, cash balances earn low yields, and loan and securities yields reset.
- The terms, completion, and realized gain from the Travel and Insurance sales, and the resulting reduction in recurring income and expenses.
- FDIC reimbursement collectability, contractual coverage limits and servicing obligations, alongside the company’s capital, liquidity, and deposit-funding position.
- Developments in the overdraft-fee class action and any regulatory or examination actions affecting credit reserves or capital.