Great Southern Bancorp, Inc. — FY2012 Form 10-K
Business and period. This is an annual report for the year ended December 31, 2012, not a standalone fourth-quarter filing. Great Southern is a bank holding company whose principal business is community banking through Great Southern Bank, operating 107 banking centers in six states. The year included the FDIC-assisted acquisition of InterBank, which expanded the company into Minnesota, and the November sale of its travel and insurance businesses.
Financial performance and condition
| Metric | FY2012 / Dec. 31, 2012 | Comparable 2011 |
|---|---|---|
| Total assets | $3.96 billion | $3.79 billion |
| Net loans | $2.32 billion | $2.12 billion |
| Deposits | $3.15 billion | $2.96 billion |
| Total stockholders’ equity | $369.9 million | $324.6 million |
| Net interest income | $165.1 million | $163.5 million |
| Net income | $48.7 million | $30.3 million |
| Net income from continuing operations | $44.1 million | $29.7 million |
| Diluted EPS | $3.54 | $1.93 |
| Net interest margin | 4.61% | 5.17% |
| Provision for loan losses | $43.9 million | $35.3 million |
FY2012 diluted EPS from continuing operations was $3.20. Fourth-quarter net income was $12.4 million and diluted EPS was $0.90, versus $12.0 million and $0.85 in fourth-quarter 2011.
- Cash flow: Operating activities provided $146.9 million; investing activities provided $241.4 million; financing activities used $364.4 million. Cash and cash equivalents ended the year at $404.1 million, up from $380.2 million.
- Funding and liquidity: Year-end borrowings totaled approximately $391.1 million, including $126.7 million of FHLB advances, $179.6 million of customer repurchase agreements, $53.0 million of structured repurchase agreements and $30.9 million of subordinated debentures. The Bank reported $426.5 million of available FHLB capacity, $446.6 million of available Federal Reserve capacity and $72.0 million of unpledged securities.
- Capital: The Bank’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 15.9%, 14.7% and 8.9%, respectively; the company’s were 16.9%, 15.7% and 9.5%. Both were classified as well capitalized.
- Credit quality: Reported nonperforming assets were $72.6 million, or 1.84% of year-end assets, down from $74.4 million and 1.96%. Nonperforming loans were $22.5 million; foreclosed assets were $50.1 million excluding FDIC-covered assets. Net charge-offs rose to $44.4 million from $35.6 million, equal to 2.43% of average loans versus 2.09%. The allowance for loan losses was $40.6 million, or 2.21% of loans excluding FDIC-supported loans.
Changes and notable items
- Net income rose 60.9%, but the increase included a $31.3 million pretax bargain-purchase gain from the InterBank acquisition and $6.1 million of gains on the travel and insurance sales. These are not ordinary recurring banking earnings.
- InterBank added $259.2 million of loans and $456.3 million of deposits at year-end. The acquisition also generated an $84.0 million initial FDIC indemnification asset; the year-end balance of the total indemnification asset for all acquisitions was $117.3 million.
- Net interest income increased slightly, but net interest margin declined 56 basis points. Lower asset yields and reduced accretion from acquired loans weighed on the margin; lower funding costs provided a partial offset.
- Loan-loss provision increased 24.1%, while net charge-offs increased. Management cited losses concentrated in a limited number of relationships and continuing real estate and borrower-specific pressures.
- Deposits increased 6.4%, substantially due to InterBank. Brokered deposits excluding CDARS customer accounts declined to $10.0 million from $48.3 million; CDARS customer balances also fell, to $109.1 million from $216.3 million.
- Available-for-sale securities decreased to $807.0 million from $875.4 million. The portfolio included $596.1 million of mortgage-backed securities, principally hybrid adjustable-rate securities.
Outlook, risks and contingencies
- Management did not expect significant overall loan growth in 2013 under prevailing conditions, while anticipating modest increases in commercial real estate and construction lending if the economy improved. It planned to continue limiting land-development lending.
- Management expected a 2013 effective tax rate of approximately 12%–18%, assuming continued use of investment tax credits. Results remain sensitive to the timing and amount of tax-credit utilization.
- Management described economic activity in its markets as improving but modest, with loan demand generally sluggish. It warned that low interest rates could pressure asset yields and net interest margin, and that rate changes, deposit competition and refinancing could affect earnings.
- Credit exposure is concentrated in commercial real estate, construction, multifamily and other commercial lending. Branson, Springfield and St. Louis are material markets; management also highlighted the acquired Minneapolis-area portfolio. Regional real estate weakness, collateral values, borrower cash flows and foreclosed-property sales remain risks.
- FDIC loss-sharing agreements cover at least 80% of eligible losses, subject to agreement terms and servicing requirements. Commercial-loan coverage periods begin expiring in 2014 for the 2009 acquisitions; losses on covered loans retained after coverage ends may be borne fully by the Bank. InterBank also has a loss-sharing clawback; the company recorded a $1.0 million liability based on expected credit performance.
- The SBLF preferred stock can become more costly: the filing describes a potential 7% rate if qualifying small-business lending does not increase from baseline by the specified measurement date, and a 9% rate after the applicable period. Preferred dividends and regulatory conditions can constrain common dividends and share repurchases.
- A customer class-action suit alleges that debit-card and ATM overdraft fees violate Missouri usury law. The court denied a motion to dismiss; management said the probability and amount of any loss could not yet be estimated.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting. It also identifies significant estimation uncertainty around loan-loss allowances, foreclosed assets, acquired-loan cash flows and FDIC indemnification assets.
Important facts for investors to verify
- How much of FY2012 earnings and EPS came from the InterBank gain, business-sale gains, FDIC-related accretion and other nonrecurring items?
- Whether elevated net charge-offs, provision expense, foreclosed assets and problem loans stabilize, particularly in commercial real estate and construction portfolios.
- The sensitivity of net interest margin and funding costs to changing rates, deposit mix, loan floors and repayment or repricing of securities.
- Whether FDIC loss-sharing estimates, the InterBank clawback liability and acquired-loan accretion assumptions remain supportable, and the effect of upcoming coverage expirations.
- Any developments in the overdraft-fee litigation, SBLF preferred dividend terms, regulatory capital rules or restrictions on shareholder distributions.