Great Southern Bancorp, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Great Southern is a bank holding company whose principal business is community banking, supplemented by insurance, travel and investment services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $40.5 | $40.3 | $77.2 | $79.7 |
| Provision for loan losses | $17.6 | $8.4 | $27.7 | $16.6 |
| Net income | $21.7 | $5.9 | $29.2 | $11.8 |
| Net income available to common shareholders | $21.5 | $5.1 | $28.9 | $10.2 |
| Diluted EPS | $1.58 | $0.37 | $2.12 | $0.73 |
| Net interest margin | 4.36% | 5.21% | 4.33% | 5.13% |
Q2 non-interest income was $38.0 million, including a preliminary $31.3 million pre-tax bargain purchase gain from the InterBank acquisition. Six-month non-interest income was $46.4 million. Non-interest expense was $30.1 million in Q2 and $56.9 million year to date. The reported earnings increase therefore includes a substantial nonrecurring acquisition gain; the filing does not present a normalized earnings measure.
At June 30, total assets were $4.216 billion, up $425.7 million from year-end 2011; net loans were $2.309 billion, up $184.5 million, largely from InterBank. Deposits were $3.393 billion, up $429.4 million. Stockholders’ equity was $352.8 million, or 8.4% of assets. Common book value was $21.83 per share. The company declared common dividends of $0.18 per share for Q2.
Cash and cash equivalents were $624.8 million, compared with $380.2 million at December 31, 2011. For the first six months, operating activities provided $107.1 million, investing activities provided $211.0 million, and financing activities used $73.5 million; cash increased $244.6 million. Available liquidity included $624.8 million cash, $81.8 million of unpledged securities, a $320.3 million FHLB line and a $344.1 million Federal Reserve line.
Interest-bearing and other reported funding included $146.7 million of FHLB advances, $206.0 million of securities sold under reverse repurchase agreements with customers, $53.1 million of structured repurchase agreements, $0.5 million of short-term borrowings and $30.9 million of subordinated debentures. The Bank and holding company each met the filing’s stated “well capitalized” thresholds; the Bank’s Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 14.1%, 15.3% and 8.2%, respectively.
Material changes and operating trends
- InterBank was acquired on April 27, 2012. Great Southern assumed $456.3 million of deposits and acquired assets with a reported fair value of $490.1 million, including $285.5 million of loans. The preliminary bargain purchase gain was $31.3 million and remains subject to acquisition measurement-period adjustments.
- Net interest margin fell 85 basis points year over year in Q2 and 80 basis points for the six-month period. Lower loan and investment yields were only partly offset by lower deposit and borrowing costs. The six-month net interest income decline was 3.0%.
- Credit costs increased: Q2 loan-loss provision rose to $17.6 million from $8.4 million; six-month net charge-offs were $28.2 million versus $17.6 million a year earlier. The allowance was $40.7 million at quarter-end.
- Non-performing assets excluding FDIC-covered assets were $73.5 million, or 1.74% of assets, down from $74.4 million and 1.96% at year-end. Non-performing loans declined to $22.6 million, while foreclosed assets rose to $50.9 million. Potential problem loans increased to $56.5 million from $54.3 million.
- The FDIC indemnification asset was $148.6 million, up $40.6 million from year-end, principally reflecting InterBank. The acquired loan portfolios and associated reimbursement assets rely on management estimates of cash flows and FDIC recoveries.
Outlook, commentary and risks
- Management said it did not expect significant overall loan growth under current lending and economic conditions, and may retain elevated cash balances. Excess liquidity may suppress net interest income and margin.
- Management expected the low-rate environment to have a fairly neutral net-interest-margin effect in the near term, while warning that asset yields could decline and funding costs may have limited room to fall. Most of the company’s prime-based loans with floors were at their floor rates, which can constrain benefit from rising rates and may create refinancing risk.
- The company expected an effective tax rate of approximately 12%–18% in future periods if it maintained or increased investment tax credit use; the rate may fluctuate with credit utilization and tax-exempt income.
- Management expected non-performing loans, foreclosed assets, loan-loss provisions and credit-resolution expenses to remain elevated and fluctuate. It considered the allowance adequate at June 30, but said weaker conditions could require additional provisions.
- InterBank integration, retention, acquisition accounting and realization of expected synergies remain risks. The company planned to convert InterBank systems on August 10, 2012, and expected to spend approximately $3.0 million to purchase most of the branch real estate and equipment from the FDIC.
- Other disclosed risks include economic and real estate conditions, interest rates, funding access, regulatory changes and examinations, securities impairment, litigation and competition. A customer class-action suit alleges overdraft fees violate Missouri usury laws; management could not estimate the probability or amount of a potential loss.
- Management reported effective disclosure controls as of June 30, 2012, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the preliminary $31.3 million InterBank gain changes, if at all, as acquisition fair values are finalized, and what integration costs or benefits follow.
- Whether loan-loss provisions, net charge-offs, potential problem loans and foreclosed-property balances stabilize or worsen, particularly in construction, land development and commercial real estate.
- Whether FDIC-covered loan cash-flow estimates and indemnification assets produce the anticipated accretion and reimbursements, subject to agreement limits and servicing requirements.
- Whether margins and funding costs hold up as loans and securities reprice in a prolonged low-rate environment, and whether deposit competition or changing loan demand affects liquidity.
- The outcome and potential financial exposure of the overdraft-fee class-action litigation, which the filing says cannot yet be reasonably estimated.