Great Southern Bancorp, Inc. — Q1 2012 Form 10-Q
Business context and period. The regional banking company reported for the three months ended March 31, 2012, compared with Q1 2011 for operating results and December 31, 2011 for balance-sheet changes. Its principal business is banking; insurance, travel and investment services are smaller operations. Amounts below are in millions unless otherwise noted.
Financial results and condition
| Metric | Q1 2012 / March 31, 2012 | Comparable period / change |
|---|---|---|
| Interest income | $44.7 | Down 8.9% from $49.0 in Q1 2011 |
| Net interest income | $36.8; net interest margin 4.29% | $39.4; 5.05% in Q1 2011 |
| Provision for loan losses | $10.1 | $8.2 in Q1 2011 |
| Non-interest income | $8.5 | $(1.8) in Q1 2011 |
| Non-interest expense | $26.8 | $21.6 in Q1 2011 |
| Net income | $7.5; $0.54 diluted EPS | $5.9; $0.36 diluted EPS in Q1 2011 |
| Total assets | $3,858.4 | Up $68.4 from year-end 2011 |
| Net loans | $2,119.1 | Down $5.1 from year-end 2011 |
| Deposits | $3,078.1 | Up $114.5 from year-end 2011 |
| Cash and cash equivalents | $460.4 | Up $80.2 from year-end 2011 |
| Stockholders’ equity | $331.6 | Up $7.0 from year-end 2011 |
Earnings and margins. Net income rose 27.2% year over year, while net income available to common shareholders increased to $7.4 million from $5.0 million. The improvement reflected a $10.2 million increase in non-interest income and lower income-tax expense, partly offset by lower net interest income, higher operating expense and a larger loan-loss provision. Non-interest income benefited in part from less amortization expense on FDIC indemnification assets than in the prior-year quarter; it also included an $885,000 gain from state tax credits and $300,000 of swap fees. The efficiency ratio was 59.26%, versus 57.49% a year earlier.
Cash flow and liquidity. Operating activities provided $44.4 million, investing activities used $27.6 million, and financing activities provided $63.4 million. Cash and cash equivalents increased $80.2 million during the quarter. Available liquidity included $460.4 million of cash and deposits, $302.7 million of FHLB borrowing capacity, $364.4 million of Federal Reserve capacity and $92.0 million of unpledged securities. The company reported $302.2 million of loan-origination commitments, $64.5 million of unused credit lines and unadvanced loans, and $22.3 million of letters of credit.
Debt and capital. At quarter-end, reported funding obligations included $147.1 million of FHLB advances, $199.6 million of customer reverse repurchase agreements, $53.1 million of structured repurchase agreements, $0.5 million of short-term borrowings and $30.9 million of subordinated debentures. The Bank was classified as well capitalized: Tier 1 risk-based capital 14.2%, total risk-based capital 15.5% and Tier 1 leverage 8.3%. The company’s respective ratios were 15.0%, 16.3% and 8.9%. Common dividends declared were $0.18 per share.
Material changes versus comparable periods
- Net interest margin fell 76 basis points year over year, mainly because FDIC-acquired loan-pool yield accretion was lower. Excluding that accretion, management said margin increased 14 basis points, primarily due to lower deposit funding costs.
- Average loan yield declined to 6.96% from 8.86%, reflecting reduced acquired-loan accretion and lower market rates; average loan balances increased, partly due to the Sun Security acquisition.
- Provision expense increased 22.9%, and net charge-offs rose to $9.8 million from $7.9 million. Three credit relationships accounted for $7.0 million of Q1 2012 net charge-offs.
- Non-performing assets excluding FDIC-covered assets declined to $69.9 million from $74.4 million at year-end; non-performing loans were approximately $24.4 million. Troubled debt restructurings increased to $62.2 million from $58.1 million, while potential problem loans rose to $61.1 million from $54.3 million.
- Deposits grew, principally in transaction accounts, while net loans were slightly lower. Management attributed higher cash to deposit growth and slower loan demand; it noted that excess low-yielding cash can suppress net interest margin.
Outlook, commentary, risks and unusual items
- Management did not expect significant overall loan-portfolio growth under then-current lending and economic conditions. It expected elevated and fluctuating provisions, non-performing assets, foreclosed assets and credit-resolution expenses.
- Management expected the effective tax rate to be approximately 12%–18%, subject to variation from the timing and use of tax credits. Q1’s effective rate was 10.2%.
- Interest-rate risk remains significant. The company described its one-year repricing gap as neutral to slightly negative and said an immediate rate increase could negatively affect net interest income. Most of its prime-based loans with floors were at their floors, limiting the immediate benefit of higher rates.
- FDIC-assisted acquisitions are subject to loss-sharing terms, servicing requirements and finite coverage periods. Future results depend on loan collections, loss estimates, FDIC reimbursements and accretion/amortization assumptions. Management estimated $7.9 million of remaining 2012 interest-income accretion and $6.7 million of related non-interest expense from existing adjustments; further estimate changes could occur.
- Subsequent event: On April 27, 2012, the Bank agreed to acquire substantially all assets and assume substantially all deposits and other liabilities of Inter Savings Bank. It assumed approximately $467 million of deposits and acquired approximately $403 million of loans and $11 million of foreclosed assets at a $60 million discount. Management anticipated a bargain purchase gain, accretion to income and equity in Q2, and systems conversion in Q3; final accounting and integration outcomes were uncertain.
- Risks cited include economic and real-estate conditions, credit losses, interest-rate and funding pressures, regulation, competition, acquisition integration and the accuracy of FDIC-covered asset estimates. An overdraft-fee class-action suit remained ongoing; management could not estimate the probability or amount of a potential loss.
Important facts for investors to verify
- Whether asset quality continues to improve: track charge-offs, non-performing and potential problem loans, troubled debt restructurings, foreclosed assets and allowance adequacy.
- How sustainable earnings are after separating recurring operating results from FDIC-related accretion/amortization, tax-credit effects and other unusual income items.
- InterBank’s final purchase-accounting gain, integration costs, deposit retention, acquired-asset performance and realization of expected benefits.
- Whether deposit growth and funding costs support margins, and how excess cash, loan demand and interest-rate changes affect net interest income.
- FDIC reimbursement collections and compliance with loss-sharing conditions, along with developments in the overdraft-fee litigation and regulatory requirements.