Great Southern Bancorp, Inc. Reports Preliminary First Quarter Earnings of $0.63 Per Diluted Common Share

NET INTEREST INCOME

Net interest income for the first quarter of 2014 decreased $4.1 million to $38.0 million compared to $42.1 million for the first quarter of 2013. Net interest margin was 4.66% in the first quarter of 2014, compared to 4.76% in the same period of 2013, a decrease of ten basis points.  The average interest rate spread was 4.55% for the three months ended March 31, 2014, compared to 4.69% for the three months ended March 31, 2013. For the three months ended March 31, 2014, the average interest rate spread decreased 35 basis points compared to the average interest rate spread of 4.90% in the three months ended December 31, 2013.  This decrease was primarily due to a decrease in average yield on loans receivable and investment securities, the reasons for which are described below. 

The Company's net interest margin has been significantly impacted by additional yield accretion recognized in conjunction with updated estimates of the fair value of the loan pools acquired in the 2009, 2011 and 2012 FDIC-assisted transactions. On an on-going basis, the Company estimates the cash flows expected to be collected from the acquired loan pools. For each of the loan portfolios acquired, the cash flow estimates have increased, based on payment histories and reduced loss expectations of the loan pools. This resulted in increased income that was spread on a level-yield basis over the remaining expected lives of the loan pools. The increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements with the FDIC, which are recorded as indemnification assets. Therefore, the expected indemnification assets have also been reduced each quarter since the fourth quarter of 2010, resulting in adjustments to be amortized on a comparable basis over the remainder of the loss sharing agreements or the remaining expected lives of the loan pools, whichever is shorter. The positive impact to net interest income and net interest margin was less in the quarter ended March 31, 2014 compared to the quarter ended December 31, 2013.  Additional estimated cash flows, primarily related to the Sun Security Bank and InterBank loan portfolios, were recorded in the quarter ended March 31, 2014.  The impact of these adjustments on the Company's financial results for the reporting periods presented is shown below:

Because these adjustments will be recognized over the remaining lives of the loan pools and the remainder of the loss sharing agreements, respectively, they will impact future periods as well. The remaining accretable yield adjustment that will affect interest income is $29.2 million and the remaining adjustment to the indemnification assets, including the effects of the clawback liability related to InterBank, that will affect non-interest income (expense) is $(24.7) million. Of the remaining adjustments, we expect to recognize $15.5 million of interest income and $(11.9) million of non-interest income (expense) during the remainder of 2014.  Additional adjustments may be recorded in future periods from the FDIC-assisted transactions, as the Company continues to estimate expected cash flows from the acquired loan pools.

Excluding the impact of the additional yield accretion, net interest margin increased 11 basis points when compared to the year-ago quarter, and decreased 25 basis points when compared to the fourth quarter of 2013.  The decrease from the quarter ended December 31, 2013 is primarily attributed to a recovery of previously charged off interest in the amount of $1.2 million in the quarter ended December 31, 2013.  This interest recovery positively impacted net interest margin by approximately 15 basis points.  The Company generally continues to experience slightly decreasing yields on loans and investments, excluding the yield accretion income discussed above.  In many cases, new loans originated are at rates which are lower than the rates on existing loans and loans being paid down or paid off.  Deposit costs have decreased slightly as some time deposits continue to mature and renew at lower rates, but the positive impact of this has diminished as market rates for such deposits are no longer declining.

For additional information on net interest income components, see the "Average Balances, Interest Rates and Yields" tables in this release.

NON-INTEREST INCOME

For the quarter ended March 31, 2014, non-interest income decreased $2.0 million to $924,000 when compared to the quarter ended March 31, 2013, primarily as a result of the following items:

• Gains on sales of single-family loans: Gains on sales of single-family loans decreased $880,000 compared to the prior year quarter. This was due to a decrease in originations of fixed-rate loans due to higher fixed rates on these loans in the 2014 period which resulted in fewer loans being originated to refinance existing debt. Loans originated are subsequently sold in the secondary market.
• Amortization of income related to business acquisitions: The net amortization expense related to business acquisitions was $6.4 million for the quarter ended March 31, 2014, compared to $5.9 million for the quarter ended March 31, 2013. The amortization expense for the quarter ended March 31, 2014 was made up of the following items: $6.3 million of amortization expense related to the changes in cash flows expected to be collected from the FDIC-covered loan portfolios, $319,000 of amortization of the clawback liability and $909,000 of other loss share items. Offsetting the expense was income from the accretion of the discount related to the indemnification assets for all of the acquisitions of $1.0 million.
• Service charges and ATM fees: Service charges and ATM fees decreased $259,000 compared to the prior year quarter, primarily due to a reduction in NSF fee income resulting from reduced activity.

NON-INTEREST EXPENSE

For the quarter ended March 31, 2014, non-interest expense decreased $26,000 to $25.9 million, when compared to the quarter ended March 31, 2013.  The decrease was primarily due to the following items:  A decrease in salaries and employee benefits of $205,000; a decrease in insurance expense (primarily FDIC deposit insurance) of $239,000; a decrease in expense on foreclosed assets of $205,000; and a decrease in other operating expenses of $155,000.  These decreases were primarily offset by an increase in net occupancy expense of $268,000, an increase in advertising expense of $256,000 and an increase in legal, audit and other professional fees of $132,000.

The Company's efficiency ratio for the quarter ended March 31, 2014, was 66.58% compared to 57.53% for the same quarter in 2013.  The increase in the ratio in the 2014 three-month period was primarily due to decreases in net interest income and decreases in non-interest income resulting from decreased gains on sales of single-family loans and increased amortization expense related to business acquisitions.  The Company's ratio of non-interest expense to average assets increased from 2.59% for the three months ended March 31, 2013 to 2.83% for the three months ended March 31, 2014.  The increase in the current period ratio was due to a significant decrease in average assets in the 2014 period compared to the 2013 period.  Average assets for the quarter ended March 31, 2014 decreased $336 million, or 8.4%, from the quarter ended March 31, 2013, primarily due to a decrease in investment securities and other interest-earning assets. 

INCOME TAXES

The Company has elected to early-adopt FASB ASU No. 2014-01, which amends FASB ASC Topic 323, Investments – Equity Method and Joint Ventures. This Update impacts the Company's accounting for investments in flow-through limited liability entities which manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments in the Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The Company has significant investments in such qualified affordable housing projects that meet the required conditions.  The Company's adoption of this Update did not result in any material impact on the Company's financial position or results of operations, except that the investment amortization expense, which previously was included in Other Non-interest Expense in the Consolidated Statements of Income, is now included in Provision for Income Taxes in the Consolidated Statements of Income presented. As a result, there was no change in Net Income for the periods covered in this release.  In addition, there was no cumulative effect adjustment to Retained Earnings.

For the three months ended March 31, 2014, the Company's effective tax rate was 22.0%, which was lower than the statutory federal tax rate of 35%, due primarily to the effects of the tax credits utilized and to tax-exempt investments and tax-exempt loans which reduced the Company's effective tax rate.  In future periods, the Company expects its effective tax rate typically will be 20-25% of pre-tax net income, assuming it continues to maintain or increase its use of investment tax credits. The Company's effective tax rate may fluctuate as it is impacted by the level and timing of the Company's utilization of tax credits and the level of tax-exempt investments and loans and the overall level of pretax income.  At this time, the Company expects to utilize a larger amount of tax credits in 2014 than it did in 2013.

CAPITAL

As of March 31, 2014, total stockholders' equity was $389.8 million (10.3% of total assets). As of March 31, 2014, common stockholders' equity was $331.9 million (8.8% of total assets), equivalent to a book value of $24.24 per common share. Total stockholders' equity at December 31, 2013, was $380.7 million (10.7% of total assets). As of December 31, 2013, common stockholders' equity was $322.8 million (9.1% of total assets), equivalent to a book value of $23.60 per common share.  At March 31, 2014, the Company's tangible common equity to total assets ratio was 8.6%, compared to 8.9% at December 31, 2013. The tangible common equity to total risk-weighted assets ratio was 12.3% at both March 31, 2014 and December 31, 2013.

As of March 31, 2014, the Company's and the Bank's regulatory capital levels were categorized as "well capitalized" as defined by the Federal banking agencies' capital-related regulations. On a preliminary basis, as of March 31, 2014, the Company's Tier 1 leverage ratio was 11.2%, Tier 1 risk-based capital ratio was 15.5%, and total risk-based capital ratio was 16.7%. On March 31, 2014, and on a preliminary basis, the Bank's Tier 1 leverage ratio was 10.0%, Tier 1 risk-based capital ratio was 13.8%, and total risk-based capital ratio was 15.1%.

Great Southern Bancorp, Inc. is a participant in the U.S. Treasury's Small Business Lending Fund (SBLF).  Through the SBLF, in August 2011, the Company issued a new series of preferred stock totaling $57.9 million to the Treasury.  The dividend rate on the SBLF preferred stock for the first quarter of 2014 was 1.0% and the dividend rate will remain at 1.0% until the first quarter of 2016.

PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES

Management records a provision for loan losses in an amount it believes sufficient to result in an allowance for loan losses that will cover risks believed to be inherent in the loan portfolio of the Bank. The amount of provision charged against current income is based on several factors, including, but not limited to, past loss experience, current portfolio mix, actual and potential losses identified in the loan portfolio, economic conditions, and internal as well as external reviews.  Based on the Company's current assessment of these factors and their expected impact on the loan portfolio, management believes that provision expenses and net charge-offs for 2014 will likely continue to be less than those for 2013, or similar to the latter half of 2013.  However, the levels of non-performing assets, potential problem loans, loan loss provisions and net charge-offs fluctuate from period to period and are difficult to predict.

Weak economic conditions, higher inflation or interest rates, or other factors may lead to increased losses in the portfolio and/or requirements for an increase in loan loss provision expense. Management maintains various controls in an attempt to limit future losses, including a watch list of possible problem loans, documented loan administration policies and a loan review staff to review the quality and anticipated collectability of the portfolio. Additional procedures provide for frequent management review of the loan portfolio based on loan size, loan type, delinquencies, on-going correspondence with borrowers and problem loan work-outs. Management determines which loans are potentially uncollectible, or represent a greater risk of loss, and makes additional provisions to expense, if necessary, to maintain the allowance at a satisfactory level.

The provision for loan losses for the quarter ended March 31, 2014, decreased $6.5 million to $1.7 million when compared with the quarter ended March 31, 2013.  At March 31, 2014, the allowance for loan losses was $38.3 million, a decrease of $1.8 million from December 31, 2013.  Total net charge-offs were $3.5 million and $8.3 million for the quarters ended March 31, 2014 and 2013, respectively.  Two relationships made up $2.3 million of the net charge-off total for the quarter ended March 31, 2014.  The decrease in net charge-offs and provision for loan losses in the three months ended March 31, 2014, were consistent with our expectations, as indicated in previous filings.  General market conditions, and more specifically, real estate absorption rates and unique circumstances related to individual borrowers and projects also contributed to the level of provisions and charge-offs.  As properties were categorized as potential problem loans, non-performing loans or foreclosed assets, evaluations were made of the values of these assets with corresponding charge-offs as appropriate.

The Bank's allowance for loan losses as a percentage of total loans, excluding loans covered by the FDIC loss sharing agreements, was 1.76%, 1.92% and 2.15% at March 31, 2014, December 31, 2013, and March 31, 2013, respectively. Management considers the allowance for loan losses adequate to cover losses inherent in the Company's loan portfolio at March 31, 2014, based on recent reviews of the Company's loan portfolio and current economic conditions. If economic conditions were to deteriorate or management's assessment of the loan portfolio were to change, it is possible that additional loan loss provisions would be required, thereby adversely affecting future results of operations and financial condition.

ASSET QUALITY

Former TeamBank, Vantus Bank, Sun Security Bank and InterBank non-performing assets, including foreclosed assets, are not included in the totals or in the discussion of non-performing loans, potential problem loans and foreclosed assets below due to the respective loss sharing agreements with the FDIC, which cover at least 80% of principal losses that may be incurred in these portfolios for the applicable terms under the agreements.  In addition, FDIC-supported TeamBank, Vantus Bank, Sun Security Bank and InterBank assets were initially recorded at their estimated fair values as of their acquisition dates of March 20, 2009, September 4, 2009, October 7, 2011, and April 27, 2012, respectively.  The overall performance of the FDIC-covered loan pools has been better than original expectations as of the acquisition dates.

The loss sharing agreement for the non single-family portion of the loans acquired in the TeamBank transaction ended on March 31, 2014.  Going forward, any additional losses in that non single-family portfolio will not be eligible for loss sharing coverage. At this time, the Company does not expect any material losses in this non single-family loan portfolio, which totaled $32.7 million at March 31, 2014. 

As a result of changes in balances and composition of the loan portfolio, changes in economic and market conditions that occur from time to time, and other factors specific to a borrower's circumstances, the level of non-performing assets will fluctuate. 

Non-performing assets, excluding FDIC-covered non-performing assets, at March 31, 2014, were $55.9 million, a decrease of $6.4 million from $62.3 million at December 31, 2013.  Non-performing assets, excluding FDIC-covered non-performing assets, as a percentage of total assets were 1.48% at March 31, 2014, compared to 1.75% at December 31, 2013. 

Compared to December 31, 2013, non-performing loans decreased $4.1 million to $15.8 million and foreclosed assets decreased $2.3 million to $40.1 million.  Commercial real estate loans comprised $6.6 million, or 41.9%, of the total $15.8 million of non-performing loans at March 31, 2014, an increase of $402,000 from December 31, 2013.  Non-performing one-to four-family residential loans comprised $3.8 million, or 24.3%, of total non-performing loans at March 31, 2014, a decrease of $527,000 from December 31, 2013.  Non-performing other commercial loans decreased $4.1 million in the three months ended March 31, 2014, and were $3.1 million, or 19.7%, of total non-performing loans at March 31, 2014. 

Compared to December 31, 2013, potential problem loans decreased $4.5 million, or 16.8%. This decrease was due to $2.2 million in loans being removed from potential problem loans due to improvements in the credits, $1.8 million in loans transferred to the non-performing category, $881,000 in charge-offs and $417,000 in loans transferred to foreclosed assets, partially offset by the addition of $784,000 of loans to potential problem loans. 

Activity in the non-performing loans category during the quarter ended March 31, 2014, was as follows:

Beginning  Balance, January 1

Additions to Non-Performing

Removed from Non-Performing

Transfers to Potential Problem Loans

Transfers to Foreclosed Assets

Charge-Offs

Payments

Ending Balance, March 31

(In thousands)

One- to four-family construction

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