Great Southern Bancorp, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. The unaudited consolidated results primarily reflect Great Southern Bank, operating across six Midwestern states. Amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $4,037; up 2.1% from year-end | $3,955 at December 31, 2012 |
| Net loans | $2,335; up 0.7% from year-end | $2,320 at December 31, 2012 |
| Deposits | $3,220; up 2.1% from year-end | $3,153 at December 31, 2012 |
| Total interest income | $47.4 | $44.7 in Q1 2012 |
| Net interest income | $42.1 | $36.8 in Q1 2012 |
| Net interest margin | 4.76% | 4.29% in Q1 2012 |
| Net income | $8.4; diluted EPS $0.60 | $7.5; diluted EPS $0.54 in Q1 2012 |
| Net income available to common shareholders | $8.2 | $7.4 in Q1 2012 |
| Operating cash flow | $21.3 | $44.4 in Q1 2012 |
| Cash and cash equivalents | $481.3 | $404.1 at December 31, 2012 |
| Stockholders’ equity | $375.9; 9.3% of assets | $369.9; 9.4% of assets at December 31, 2012 |
- Net interest income after loan-loss provision was $33.9, versus $26.7 in Q1 2012. The provision was $8.2, down from $10.1.
- Non-interest income was $2.9, down from $6.1; non-interest expense was $26.9, up from $25.0. The efficiency ratio increased to 59.80% from 59.26%.
- Allowance for loan losses was $40.5. Net charge-offs were $8.3, including $2.2 on FDIC-covered loans; excluding covered loans, net charge-offs were $6.1. The allowance was 2.15% of loans excluding FDIC-covered loans.
- Non-performing assets excluding FDIC-covered assets were $73.0, or 1.81% of total assets, compared with $72.6, or 1.84%, at year-end. Non-performing loans rose to $25.2; foreclosed assets declined to $47.8.
- Borrowings and subordinated debt included $126.4 of FHLB advances, $191.7 of securities sold under reverse repurchase agreements with customers, $53.0 of structured repurchase agreements, $0.7 of short-term borrowings and $30.9 of subordinated debentures.
- The Bank reported Tier 1 risk-based capital of 14.8%, total risk-based capital of 16.0% and Tier 1 leverage of 9.0%; management reported the Bank was well capitalized. Company ratios were 15.7%, 17.0% and 9.0%, respectively.
Changes versus comparable periods
- Net income rose 12.0% year over year, primarily on higher net interest income and a lower loan-loss provision. Q1 2012 included $0.4 of income from discontinued operations; continuing-operations income was $8.4 versus $7.1.
- Net interest income increased $5.4, while interest expense fell $2.7 as deposit and other funding costs declined. Average loan balances and FDIC-acquired loan yield accretion also supported interest income. Investment income declined $2.2.
- Non-interest income fell $3.2, chiefly because acquisition-related FDIC indemnification asset amortization reduced income by $8.3, compared with $4.5 in Q1 2012. Non-interest expense increased $2.0, including costs from the 2012 InterBank acquisition and higher foreclosed-asset expenses.
- Cash from operations fell to $21.3 from $44.4, while financing cash flow increased to $80.6 from $63.4. Cash and cash equivalents increased $77.1 during the quarter, mainly reflecting deposit inflows, including seasonal customer balances.
- Transaction deposits grew while retail certificates of deposit declined. Excluding CDARS balances, brokered deposits were $10.0 and unchanged from year-end.
Outlook, commentary and risks
- Management did not expect significant overall loan-portfolio growth at the time of the filing, citing the lending environment, economic conditions, pricing discipline and credit-quality priorities.
- Management expected 2013 provision expense and net charge-offs to be below 2012 levels, with decreases more pronounced in the second half; it cautioned that credit outcomes are difficult to predict. The filing also estimates a 12%–18% effective tax rate if tax-credit utilization is maintained or increased.
- FDIC-assisted loan-pool cash-flow estimates materially affect reported results. In Q1, revisions contributed $10.4 of interest income and reduced non-interest income by $8.3, for a net pre-tax benefit of $2.1. The filing expected the remaining 2013 impact from existing adjustments to be $12.3 of interest income and $(10.8) of non-interest income; further revisions may occur.
- FDIC loss-sharing reimbursements are subject to coverage limits, agreement terms and servicing requirements. For InterBank, the Company recorded a $1.6 clawback liability because estimated credit performance was better than the agreement’s threshold.
- Management described interest-rate risk in a persistently low-rate environment: most of the $511 of prime-based loans with floors were at those floors, limiting potential benefit from rate increases and exposing the Company to refinancing risk. The one-year modeled interest-rate gap was neutral; management expected near-term margin effects to be relatively neutral.
- Liquidity resources included $481.3 of cash, $73.1 of unpledged securities, and secured lines of $401.6 at the FHLB and $401.0 at the Federal Reserve. Commitments included $80.9 to fund loan originations, $278.3 of unused lines and unadvanced loans, and $25.5 of letters of credit.
- Risks cited include borrower defaults and collateral values, economic and real-estate conditions, interest rates, funding access and competition, regulatory changes, FDIC acquisition estimates, litigation and regulatory examinations. A Missouri class-action suit challenging overdraft fees remained ongoing; management could not estimate the likelihood of a material adverse outcome or potential loss.
- The filing reported no material change to previously disclosed risk factors, no material change in internal control over financial reporting, and effective disclosure controls. A new Springfield banking center opened; additional centers were planned for 2013.
Important facts for investors to verify
- How much of reported earnings and net interest margin depends on acquired-loan accretion and related FDIC indemnification amortization, and whether updated cash-flow assumptions change those amounts.
- Whether credit quality continues to improve: monitor non-performing loans, troubled debt restructurings ($45.7), foreclosed property balances, charge-offs and the allowance.
- Whether deposit growth is sustained and funding costs remain low, including the mix of transaction deposits, time deposits, CDARS and wholesale funding.
- Whether the $1.6 InterBank clawback estimate, FDIC reimbursement assumptions and agreement servicing requirements change.
- The progress and potential exposure in the overdraft-fee class action, and any material developments in regulatory capital requirements or the SBLF preferred-stock terms.