Great Southern Bancorp, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company operates as a one-bank holding company, serving markets primarily across Missouri, Iowa, Kansas, Minnesota, Nebraska and Arkansas. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $41.0 | $41.5 | $122.8 | $127.7 |
| Provision for loan losses | $2.5 | $1.7 | $6.9 | $4.3 |
| Non-interest income | $7.1 | $5.1 | $21.0 | $8.5 |
| Non-interest expense | $30.7 | $30.0 | $91.4 | $85.2 |
| Net income | $11.2 | $11.2 | $33.5 | $34.9 |
| Diluted EPS | $0.80 | $0.79 | $2.39 | $2.46 |
| Net interest margin | 3.98% | 4.43% | 4.11% | 4.59% |
| Efficiency ratio | 63.71% | 64.35% | 63.55% | 62.57% |
Q3 net income was essentially unchanged year over year. Higher non-interest income was offset by lower net interest income, increased loan-loss provision and higher operating expense. Nine-month net income declined 3.7%; diluted EPS fell from $2.46 to $2.39. Non-interest income increased substantially year over year, including a $2.7 million gain on the sale of a managed equity fund, while net interest income fell and provision and expenses rose.
Net interest margin contracted 45 basis points in Q3 and 48 basis points for the nine-month period. Management attributed the pressure mainly to lower loan yields and higher deposit and borrowing costs. Acquired-loan cash-flow accretion supported reported margin: it added 38 basis points in Q3 and 44 basis points year to date in 2016. Excluding that accretion, management said margin declined 12 basis points in Q3 and 10 basis points year to date versus the prior year.
Cash flow: Operating activities provided $65.8 million in the first nine months, compared with $65.0 million a year earlier. Investing activities used $106.1 million; financing activities provided $95.6 million. Cash and cash equivalents ended the period at $254.6 million, up $55.4 million from year-end 2015.
Financial condition, funding and asset quality
- Growth: Total assets rose 8.2% from December 31, 2015, to $4.44 billion. Net loans increased 10.4% to $3.69 billion; deposits rose 9.0% to $3.56 billion. Management reported $403.4 million of loan growth excluding acquired loan pools and loans held for sale, including loans from the Fifth Third branch transaction.
- Liquidity and funding: The filing reports $254.6 million of cash, $52.5 million of unpledged securities, a $577.4 million FHLBank line and a $601.3 million Federal Reserve line. These are stated available sources, not necessarily cash on hand. FHLBank advances declined to $31.5 million from $263.5 million at year-end; short-term borrowings increased to $153.1 million, reflecting substitution toward overnight FHLBank funding. Reverse-repurchase liabilities were $139.0 million.
- Debt: In August, the company issued $75 million of subordinated notes due 2026, with a 5.25% fixed rate through August 2021 and a floating rate thereafter. Net proceeds were approximately $73.5 million. The company said proceeds were for general corporate purposes.
- Capital: Stockholders’ equity was $422.1 million, or 9.5% of assets. The Bank was well capitalized: CET1 11.8%, Tier 1 risk-based 11.8%, total risk-based 12.7% and Tier 1 leverage 10.7%. The company also reported it was well capitalized under applicable holding-company measures.
- Credit quality: Allowance for loan losses was $37.0 million, down from $38.1 million at year-end; provision was $6.9 million year to date, versus $4.3 million. Net charge-offs were $8.0 million year to date, versus $2.9 million. Non-performing assets excluding specified FDIC-assisted acquired assets were $36.6 million, or 0.82% of assets, down from $44.0 million and 1.07%. Troubled debt restructurings declined to $25.0 million from $45.0 million.
- Concentrations and foreclosed assets: Commercial real estate loans were $1.17 billion and commercial construction loans $700.2 million. Other real estate owned was $31.2 million, including branch properties held for sale; $4.8 million related to properties not acquired through foreclosure.
Material changes, outlook and risks
- Fifth Third branches: The company completed its acquisition of 12 St. Louis-area branches in January 2016, assuming about $229 million in deposits and acquiring about $158 million in loans. Preliminary purchase accounting recorded $4.2 million of goodwill. Management expected the transaction to be accretive over time, but cautioned that anticipated benefits and integration outcomes are uncertain.
- FDIC loss-sharing agreements: In April 2016, the company and FDIC terminated the TeamBank, Vantus and Sun Security agreements for a $4.4 million settlement. Future gains, losses and expenses on those formerly covered assets now accrue fully to the bank. InterBank loss sharing remains in place, with approximately seven months remaining for non-single-family loans and five and a half years for single-family loans as of quarter-end. Acquired-loan cash-flow estimates remain a source of future income and expense variability.
- Unusual items and operating costs: Year-to-date non-interest income benefited from the $2.7 million managed-fund sale gain, required following Federal Reserve rule changes. Q3 operating expenses included higher foreclosed-asset costs, a roughly $300,000 Olympics-related advertising campaign, chip-card stocking costs and elevated fraud losses. Debit-card and check fraud losses were $1.4 million year to date versus $510,000; management linked much of the increase to a national retailer data breach and said further exposure from that incident was not expected to be significant.
- Management outlook: No specific earnings or loan-growth guidance was provided. Management said future loan growth is not assured, anticipated an effective tax rate typically of 26%–28% subject to tax-credit use and other factors, and described the low-rate environment as challenging. Its rate-risk models indicated limited expected net-interest-income impact in the first 12 months after a rate change, with greater potential effects over months 12–36.
- Key risks: Interest-rate and margin pressure; deposit competition and the cost or availability of brokered deposits and wholesale funding; loan and real-estate credit deterioration; estimates for acquired-loan cash flows and the allowance; integration and retention risks from acquisitions; cyber incidents and fraud; regulatory or accounting changes; and litigation. The filing notes a certified customer class action alleging overdraft fees violated Missouri usury law; management could not determine the probability or estimate a potential loss. Management reported no material change to the 2015 Form 10-K risk factors.
- Other: The company consolidated banking centers and planned further location changes. It filed a $250 million universal shelf registration in July 2016, allowing possible future securities offerings. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether loan growth can continue without further deterioration in credit quality, charge-offs or foreclosed-asset costs.
- How reported earnings and margin evolve as acquired-loan accretion and FDIC-related adjustments run down, and after the loss-sharing agreements terminated in April.
- Funding mix, deposit pricing and reliance on overnight borrowings, brokered deposits and available credit lines.
- Integration results and realized earnings contribution from the Fifth Third branches, including final purchase-accounting adjustments.
- Potential financial exposure from the overdraft-fee class action, fraud incidents and remaining FDIC clawback or indemnification estimates.
- Whether capital, liquidity and dividends remain resilient under changing rates and regulatory requirements; the filing’s reported ratios and available lines should be read alongside current regulatory disclosures.