Great Southern Bancorp, Inc. — Q2 2011 Form 10-Q
Business and period: Regional banking company headquartered in Springfield, Missouri. This unaudited report covers the quarter and six months ended June 30, 2011; comparisons are with the same 2010 periods unless stated otherwise. Banking is the only reportable segment.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $40.3 million | $27.1 million | $79.7 million | $53.7 million |
| Provision for loan losses | $8.4 million | $12.0 million | $16.6 million | $17.5 million |
| Non-interest income | $(2.2) million | $14.1 million | $(3.9) million | $23.1 million |
| Non-interest expense | $22.1 million | $20.8 million | $43.7 million | $43.0 million |
| Net income | $5.9 million | $5.8 million | $11.8 million | $11.4 million |
| Net income available to common shareholders | $5.1 million | $5.0 million | $10.2 million | $9.7 million |
| Diluted EPS | $0.37 | $0.35 | $0.73 | $0.69 |
| Net interest margin | 5.21% | 3.57% | 5.13% | 3.52% |
Net income increased 1.1% in Q2 and 3.7% year to date. Higher net interest income and lower loan-loss provisions were substantially offset by sharply lower non-interest income. The reported margin expansion was driven chiefly by increased accretion of income on acquired FDIC-assisted loan pools; excluding that effect, management said Q2 margin declined 2 basis points year over year. The efficiency ratio rose to 58.05% in Q2 from 50.43%, and to 57.77% for the first half from 55.90%.
Financial condition, liquidity and capital
- At June 30, total assets were $3.42 billion, loans net of allowance were $1.91 billion, deposits were $2.62 billion, and stockholders’ equity was $314.4 million. Compared with December 31, 2010, loans rose $34.0 million, deposits rose $26.9 million, and assets rose $6.7 million.
- Cash and cash equivalents were $355.4 million, down from $430.0 million at year-end. Management attributed the decline to loan funding, securities purchases, and redemption of brokered deposits. Available-for-sale securities increased to $831.1 million.
- Funding included $151.9 million of FHLBank advances, $229.7 million of customer reverse-repurchase agreements, $53.1 million of structured repurchase agreements, and $30.9 million of subordinated debentures. Total deposits increased 1.0%; non-CDARS brokered deposits declined to $65.7 million from $144.5 million.
- Six-month cash flows were $60.2 million provided by operating activities, $128.0 million used in investing activities, and $6.7 million used in financing activities. Cash and cash equivalents decreased $74.5 million.
- The Bank was well capitalized: Tier 1 risk-based capital 14.4%, total risk-based capital 15.6%, and Tier 1 leverage 8.6%. Company ratios were 16.5%, 17.7%, and 9.6%, respectively. Tangible common equity to total assets was 7.4%. Common dividends were $0.18 per share for Q2; $0.36 per share was declared for the first half.
Material changes and credit quality
- Non-performing assets excluding FDIC-covered assets increased to $83.5 million, or 2.44% of total assets, from $78.3 million, or 2.30%, at year-end. Non-performing loans declined to $25.3 million from $29.4 million, while foreclosed assets excluding FDIC-covered assets increased to $58.2 million from $48.9 million.
- Potential problem loans fell to $25.1 million from $55.6 million. The allowance for loan losses was $40.5 million, down $1.0 million since year-end. First-half net charge-offs were $17.6 million versus $17.0 million a year earlier; ten relationships accounted for $14.9 million of 2011 net charge-offs.
- Net loans grew mainly in commercial real estate and multifamily residential lending, partly offset by reductions in acquired FDIC-assisted loans and certain construction-related categories.
Outlook, risks and unusual items
- Management did not expect significant overall loan growth in the near term and said the portfolio could shrink through net repayments. It expected non-performing loans, foreclosed assets, loan-loss provisions, and credit-resolution expenses to remain elevated and fluctuate.
- The Treasury had preliminarily approved the Company’s application to exchange its $58.0 million CPP preferred investment for $57.9 million of SBLF preferred stock; closing and CPP repayment were expected in Q3 2011. The SBLF dividend rate could fall to 1% through April 2016 depending on small-business lending, then rise to 9% thereafter.
- Management expected a 22%–24% effective tax rate in future periods. It also expected to maintain higher-than-normal liquidity, which could suppress net interest margin. Interest-rate risk, deposit competition and costs, real-estate conditions, credit losses, FDIC-assisted asset estimates, and regulatory changes remain key risks.
- FDIC-acquired loan cash-flow estimate changes produced $12.8 million of additional Q2 interest income and $11.5 million of offsetting non-interest expense, a net $1.3 million pretax benefit. Management expected the remaining related adjustments to contribute $15.2 million of interest income and $(13.5) million of non-interest income/expense during the second half of 2011; further revisions were possible.
- A $0.4 million pretax impairment charge was recorded on a non-agency collateralized mortgage obligation. The filing also disclosed a pending customer class-action suit alleging overdraft fees violated Missouri usury laws; management could not assess the likelihood or amount of loss at this early stage.
Important facts for investors to verify
- Whether the anticipated SBLF closing and CPP repayment occurred, and the final preferred-stock terms and any warrant repurchase outcome.
- How much of future earnings and margin depends on acquired-loan accretion and related FDIC indemnification-asset amortization, and whether cash-flow estimates change.
- Subsequent trends in non-performing assets, foreclosed property balances, charge-offs, and allowance adequacy—especially in construction, land-development, and commercial real estate portfolios.
- Liquidity and funding developments, including deposit mix, brokered funding access, and the effect of interest-rate changes on asset yields and funding costs.
- Developments in the overdraft-fee litigation and any resulting financial exposure.