Great Southern Bancorp, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Great Southern is a one-bank holding company; Great Southern Bank operates primarily across Missouri, Iowa, Kansas, Minnesota, Nebraska and Arkansas, with commercial loan offices in Dallas, Tulsa and Chicago. Interim statements are unaudited.
Key financial metrics
Amounts below are in millions, except per-share data and ratios.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $37.9 | $40.7 | $76.6 | $81.8 |
| Provision for loan losses | $2.0 | $2.3 | $4.2 | $4.4 |
| Non-interest income | $15.8 | $8.9 | $23.5 | $13.9 |
| Non-interest expense | $28.4 | $29.8 | $56.9 | $60.7 |
| Net income | $16.2 | $12.5 | $27.7 | $22.3 |
| Diluted EPS | $1.14 | $0.89 | $1.95 | $1.59 |
| Net interest margin | 3.68% | 4.10% | 3.73% | 4.18% |
| Efficiency ratio | 52.83% | 60.12% | 56.89% | 63.47% |
- Balance sheet at June 30: Total assets were $4.45 billion, down 2.3% from December 31, 2016. Net loans were $3.77 billion, up $12.9 million; excluding acquired FDIC-assisted loans and loans held for sale, gross loans rose $126.9 million. Growth was concentrated in construction, commercial real estate and multifamily loans.
- Funding and liquidity: Deposits declined $104.6 million to $3.57 billion; brokered deposits, including CDARS deposits, fell $78.7 million to $231.6 million. Cash and cash equivalents were $212.5 million, down $67.3 million. The company reported $52.2 million of unpledged securities and secured lines of $575.0 million at the FHLB and $584.2 million at the Federal Reserve. It also had $178.3 million in loan-origination commitments, $909.9 million of unused lines and unadvanced loans, and $20.7 million of letters of credit.
- Debt: FHLB advances were repaid in June; the repayment generated a $340,000 prepayment charge. At quarter-end, short-term borrowings were $185.4 million, reverse-repurchase liabilities $112.0 million, subordinated debentures $25.8 million and subordinated notes, net, $73.6 million. The $75 million subordinated notes issued in 2016 carry a 5.25% fixed rate through August 2021, then float at three-month LIBOR plus 4.087%.
- Credit and capital: The allowance for loan losses was $36.5 million, down from $37.4 million at year-end; six-month net charge-offs were $5.1 million, including $3.0 million in consumer auto loans. Excluding FDIC-assisted acquired assets, nonperforming assets were $35.0 million, or 0.79% of assets, down from $39.3 million and 0.86%. Stockholders’ equity was $453.6 million, or 10.2% of assets; tangible common equity to tangible assets was 10.0%. The Bank and holding company reported regulatory capital ratios above applicable well-capitalized thresholds.
- Cash flow, first six months: Operating activities provided $21.8 million, investing activities provided $36.7 million and financing activities used $125.7 million. Cash and cash equivalents decreased $67.3 million to $212.5 million.
Material changes versus comparable periods
- Net income increased 29.1% in Q2 and 24.0% in the first half. The principal unusual contributor was a $7.7 million pretax gain from terminating the InterBank FDIC loss-sharing agreement; the FDIC paid $15.0 million to settle outstanding items.
- Net interest income and margin declined year over year. Management attributed margin pressure, excluding acquired-loan yield accretion, mainly to the 2016 subordinated-note issuance and higher deposit and borrowing costs. Deposit interest expense rose 21.4% in Q2 and 23.7% in the first half.
- Non-interest expense fell 4.8% in Q2 and 6.2% in the first half, partly reflecting lower staffing, occupancy, FDIC insurance and prior-year Fifth Third acquisition costs. The reported efficiency-ratio improvement was also significantly affected by the InterBank termination gain.
- FDIC loss-sharing agreements for TeamBank, Vantus and Sun Security had ended in 2016; the InterBank agreement ended in June 2017. The FDIC indemnification asset consequently fell from $13.1 million at year-end to zero. Great Southern now bears all subsequent gains, losses and expenses on those formerly covered assets.
- Consumer auto loans declined about $70 million in the first half after tighter underwriting; management expected further declines through year-end 2017. Troubled debt restructurings decreased to $13.6 million from $21.1 million at year-end.
Outlook, commentary and risks
- No formal earnings or revenue guidance is provided. Management expected to recognize about $1.2 million of remaining acquired-loan accretable yield as interest income during the rest of 2017; further adjustments may occur as expected cash flows are reassessed. Reported first-half earnings included $2.6 million of pretax net impact from acquired-loan cash-flow adjustments.
- Management stated that its interest-rate models indicate rising rates would generally benefit net interest income and declining rates would generally hurt it; modeled effects over the first 12 months were not expected to be material. The filing notes that repricing behavior and funding costs may differ from model assumptions.
- Management expected a typical effective tax rate of 26%–28%, subject to tax-credit use, tax-exempt income and pretax earnings. The reported first-half rate was 28.9%.
- Key risks include loan-credit deterioration and the judgment involved in loss reserves and foreclosed-asset valuations; consumer-auto delinquencies and charge-offs; interest-rate and deposit-funding competition; real estate and economic conditions; reliance on brokered deposits and FHLB funding; regulatory, cybersecurity, technology and litigation risks. Management cautioned that actual results may differ materially from forward-looking statements.
- A Missouri class action alleges that overdraft-program fees violate state usury law. The case remains stayed pending an appeal decision in similar litigation; a Missouri appellate court affirmed a judgment for another bank in April 2017. Management said it cannot yet determine the probability or amount of any material loss.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2016 Form 10-K.
Important facts for investors to verify
- How much of earnings growth and the improved efficiency ratio reflects the nonrecurring $7.7 million FDIC termination gain, versus ongoing operating performance.
- Whether net interest margin stabilizes as deposit costs reprice and acquired-loan accretion declines; verify the timing and remaining $3.2 million accretable-yield balance.
- Whether consumer-auto credit trends, charge-offs and the allowance remain consistent with management’s estimates, and how the uninsured-by-FDIC-sharing acquired assets perform.
- Whether deposit outflows continue and what funding costs or availability result from greater use of short-term borrowings, brokered deposits or secured facilities.
- The eventual outcome and potential exposure in the stayed overdraft-fee class action, which the filing does not quantify.