Great Southern Bancorp, Inc. — Q3 2011 Form 10-Q
Business and period: Regional banking company, principally originating real estate, commercial business and consumer loans funded by deposits and borrowings. This unaudited filing covers the quarter and nine months ended September 30, 2011; balance-sheet comparisons are with December 31, 2010. Amounts below are in millions unless noted.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $41.6 | $30.2 | $121.3 | $83.9 |
| Provision for loan losses | $8.5 | $10.8 | $25.1 | $28.3 |
| Non-interest income | $(1.2) | $12.2 | $(5.1) | $35.4 |
| Non-interest expense | $23.0 | $22.6 | $66.8 | $65.6 |
| Net income | $6.5 | $6.2 | $18.2 | $17.5 |
| Net income available to common shareholders | $4.4 | $5.3 | $14.6 | $15.0 |
| Basic / diluted EPS | $0.33 / $0.33 | $0.39 / $0.38 | $1.08 / $1.08 | $1.12 / $1.07 |
| Net interest margin | 5.37% | 4.03% | 5.21% | 3.69% |
Quarterly net income rose 4.7%; nine-month net income rose 4.1%. Common earnings were lower in both comparisons, reflecting preferred-stock costs and a $1.2 million non-cash deemed preferred dividend in 2011. Common dividends declared were $0.18 per share for Q3 and $0.54 year to date, unchanged from the comparable 2010 periods.
Financial position, liquidity and credit
- At September 30, assets were $3.431 billion, net loans $1.959 billion, deposits $2.619 billion and stockholders’ equity $314.4 million. Net loans rose $82.0 million (4.4%) and deposits rose $22.9 million (0.9%) from year-end 2010.
- Cash and cash equivalents were $345.3 million, down $84.7 million. Nine-month operating cash flow was $63.0 million; investing activities used $144.2 million and financing activities used $3.4 million. Cash decreased $84.7 million overall.
- Reported funding included $151.5 million of FHLB advances, $245.7 million of customer reverse repurchase agreements, $53.1 million of structured repurchase agreements and $30.9 million of subordinated debentures. The filing also reports $660,000 of short-term borrowings.
- Available liquidity sources included $345.3 million of cash and deposits, $77.9 million of unpledged securities, a $276.3 million FHLB line and a $280.6 million Federal Reserve line. Commitments included $429.9 million to fund loan originations, $74.4 million of unused lines and unadvanced loans, and $22.0 million of letters of credit.
- The allowance for loan losses was $40.5 million, down from $41.5 million at year-end; nine-month net charge-offs were $26.2 million versus $28.3 million. Non-performing assets excluding FDIC-covered assets were $81.8 million, or 2.39% of assets; non-performing loans were $29.9 million and foreclosed assets outside the covered portfolio were $52.0 million.
- Troubled debt restructurings increased to $48.8 million from $20.4 million at year-end. Management said loan-loss provision, non-performing assets and foreclosed assets would generally remain elevated and fluctuate.
- The Bank was reported “well capitalized”: Tier 1 risk-based capital 14.7%, total risk-based capital 15.9% and Tier 1 leverage 9.0%. At the holding company, the respective ratios were 15.6%, 16.9% and 9.6%. Tangible common equity was 7.3% of assets.
Material changes and unusual items
- Net interest income growth was substantially influenced by revised expected cash flows on acquired TeamBank and Vantus loan pools. These adjustments added $14.2 million to Q3 interest income and $39.7 million year to date, while corresponding reductions in expected FDIC reimbursements reduced non-interest income by $12.7 million and $35.5 million. The resulting pre-tax benefit was $1.5 million for Q3 and $4.2 million year to date. Management expected further recognition in coming periods; it estimated $8.8 million of interest income and $(7.8) million of non-interest income/expense for the remainder of 2011 from remaining adjustments.
- Non-interest income was also lower because securities gains declined: $0.5 million in Q3 2011 versus $5.4 million in Q3 2010, and $0.5 million year to date versus $8.9 million. A $0.4 million pre-tax other-than-temporary impairment charge was recorded on a non-agency collateralized mortgage obligation during the first nine months; management considered other identified debt-security declines temporary.
- Loan growth was concentrated in commercial real estate, commercial business and multifamily residential lending, partly offset by reductions in construction and acquired FDIC-assisted loans. Deposit growth reflected higher transaction accounts, while brokered deposits excluding CDARS fell to $55.8 million from $144.5 million at year-end.
- In August, the company issued $57.9 million of Treasury SBLF preferred stock and used the proceeds to redeem $58.0 million of CPP preferred stock. It repurchased the Treasury’s common-stock warrant for $6.4 million in September. SBLF dividend rates vary with qualifying small-business lending; the filing estimated rates of approximately 2.6% for Q4 2011 and 1.0% for Q1 2012, subject to Treasury confirmation.
Outlook, risks and contingencies
- No formal overall earnings guidance is provided. Management did not expect significant organic loan growth at that time, although it expected loan growth from the subsequent Sun Security Bank acquisition. It expected the low-rate environment to have a broadly neutral effect on future net interest margin, with deposit-cost reductions potentially offset by lower asset yields. Management expected an effective tax rate of approximately 22%–26%.
- On October 7, 2011, the Bank agreed to acquire substantially all assets and assume substantially all deposits and other liabilities of Sun Security Bank. The transaction included approximately $280 million of deposits, $241 million of loans and $30 million of foreclosed assets acquired at a $55 million discount, plus approximately $55 million of FHLB advances. The FDIC agreed to cover 80% of losses on covered loans and foreclosed assets, subject to terms and exclusions. Management anticipated the transaction would be accretive to Q4 2011 income and equity; purchase accounting was expected in that quarter, with system conversion anticipated in January 2012.
- Key risks cited include economic and real-estate weakness, borrower delinquencies and collateral values, loan-loss estimates, interest-rate movements, deposit competition and access to wholesale funding, securities impairment, regulatory changes, acquisition integration and litigation. Management noted that acquired-loan and FDIC indemnification valuations depend on estimates and that realized values could differ. The filing also identifies a customer class-action suit alleging overdraft fees violate Missouri usury laws; the potential loss could not then be estimated.
- Management reported effective disclosure controls at September 30, 2011 and no material change in internal control over financial reporting during the quarter. A new overdraft class-action risk was described; other risk factors were reported as not materially changed from the 2010 annual filing.
Investor verification priorities
- Track acquired-loan cash-flow estimates, accretion, FDIC indemnification-asset amortization and the extent to which these items support reported margin and earnings.
- Verify Sun Security purchase accounting, realized asset values, integration costs, loss-sharing terms and whether the anticipated accretion is achieved.
- Monitor troubled restructurings, non-performing assets, foreclosed-property balances, charge-offs and allowance adequacy, particularly amid continued real-estate weakness.
- Assess liquidity and funding resilience, including deposit mix, brokered-deposit access, borrowing capacity, loan commitments and the sensitivity of margin to low rates.
- Confirm SBLF dividend rates, capital and dividend restrictions, and any future preferred-stock redemption plans; follow the overdraft-fee litigation and any material regulatory developments.