Great Southern Bancorp, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2015; balance-sheet comparisons are against December 31, 2014. The company operates one reportable segment through Great Southern Bank, serving markets in Missouri, Iowa, Kansas, Minnesota, Nebraska and Arkansas, with commercial loan offices in Dallas and Tulsa. Amounts below are in millions unless stated otherwise.
Financial performance and condition
- Q2 earnings: Net income was $12.0 million, up 8.6% year over year; net income available to common shareholders was $11.9 million. Diluted EPS was $0.85 versus $0.79; declared common dividends were $0.22 per share versus $0.20.
- First-half earnings: Net income was $23.7 million, up 19.0%; common income was $23.4 million. Diluted EPS was $1.67 versus $1.42; declared dividends were $0.42 per share versus $0.40.
- Interest income and margin: Q2 total interest income was $45.7 million, up 3.0%, and net interest income was $42.0 million, up 5.1%. Q2 net interest margin was 4.53%, down from 4.69%. First-half net interest income rose 10.5% to $86.1 million; margin was 4.67% versus 4.68%.
- Credit costs and operating results: Provision for loan losses was $1.3 million in Q2 and $2.6 million for the first half, down 11.1% and 17.6%, respectively. Non-interest income was $3.5 million in Q2 and $3.4 million for the first half; non-interest expense was $27.9 million and $55.2 million, respectively. Efficiency ratios improved to 61.47% for Q2 and 61.64% for the first half.
- Balance sheet: Total assets were $4.11 billion, up 4.1% since year-end. Net loans were $3.20 billion, up $163.5 million; excluding acquired loans and loans held for sale, loan growth was $207.3 million. Deposits were $3.20 billion, up $205.5 million. Stockholders’ equity was $437.6 million; common book value was $27.51 per share.
- Credit quality: Allowance for loan losses was $39.7 million. Non-performing assets excluding FDIC-covered and other FDIC-assisted acquired assets were $39.0 million, or 0.95% of assets, versus $43.7 million, or 1.11%, at year-end. Non-performing loans were $5.1 million; troubled debt restructurings were $45.4 million, down from $47.6 million.
- Cash flow and liquidity: First-half operating cash flow was $38.3 million; investing activities used $119.1 million and financing activities provided $131.4 million. Cash and cash equivalents ended at $269.2 million. Reported available funding included FHLBank and Federal Reserve lines of $563.7 million and $627.3 million, respectively, plus $59.7 million of unpledged securities.
- Funding and capital: FHLBank advances were $193.6 million, down from $271.6 million at year-end; customer reverse-repurchase agreements were $216.1 million. The Bank’s common equity Tier 1, total risk-based capital and leverage ratios were 11.5%, 12.7% and 9.6%; the company’s corresponding ratios were 11.0%, 14.8% and 11.3%. Both were reported well capitalized.
Material changes, outlook and risks
- Loan growth and deposit growth expanded the balance sheet, while investment securities declined $39.1 million and FDIC indemnification assets declined $12.2 million. Management attributed loan growth to the existing branch network and the Dallas and Tulsa offices; it cautioned that future growth is not assured.
- Year-over-year earnings comparisons were affected by the 2014 Valley Bank acquisition: the prior-year period included a preliminary $10.8 million acquisition gain. The Q2 2015 comparison also benefited from lower expenses, partly reflecting the absence of $7.4 million in 2014 prepayment penalties. Valley Bank operating expenses continued to weigh on 2015 results.
- Acquired-loan cash-flow estimates and related accretion materially affect reported earnings. First-half 2015 acquisition-related adjustments increased interest income by $16.2 million and reduced non-interest income by $12.1 million, for a net pre-tax benefit of $4.2 million. Management expected $9.7 million of further interest income and $7.3 million of non-interest expense from remaining adjustments during the second half of 2015. It also anticipated $1.3 million of additional Valley Bank loan accretion during that period. These are estimates, not general earnings guidance.
- Management described regional economic conditions as improving but highlighted sensitivity to interest rates, loan demand, real-estate values, credit losses, funding access, competition, regulation and acquisition integration. Most prime-based loans with floors were at their floors, potentially limiting immediate benefit from rising rates; deposit competition could require higher funding costs.
- The company said it anticipated repaying its $57.9 million Small Business Lending Fund preferred investment before the dividend rate rises from 1% to 9% in 2016, subject to regulatory approval. On July 29, 2015, it purchased the remaining $5.0 million liquidation amount of a trust preferred issue at a discount, expecting an approximately $1.0 million pre-tax gain; the related debentures were reduced to zero.
- Other items include a certified class-action case alleging overdraft fees violated Missouri usury laws; management could not estimate the probability or amount of a potential loss. IRS examinations of two partnerships for 2006–2007 remained ongoing; the company said it believed the credit allocation position was supportable and no uncertain-tax-position reserve was required. Management reported disclosure controls were effective and no material change in internal control occurred during the quarter.
Most important facts for investors to verify
- How much of current and future earnings depends on acquired-loan accretion and changes in expected cash flows, and whether the disclosed second-half estimates are realized.
- Whether ongoing loan growth—particularly in commercial real estate, construction and consumer lending—preserves credit quality; monitor charge-offs, non-performing assets, troubled restructurings and foreclosed properties.
- Whether deposit growth and brokered funding remain available at acceptable costs, and how liquidity and margins respond to rate changes.
- Whether the company redeems the SBLF preferred investment before its dividend rate increases, and any effects on capital, dividends or repurchases.
- Developments in the overdraft-fee litigation, partnership tax examinations and the trust-preferred purchase and expected gain.