Great Southern Bancorp, Inc. Reports Preliminary First Quarter Earnings of $0.70 Per Diluted Common Share

NET INTEREST INCOME

Net interest income for the first quarter of 2016 decreased $3.0 million to $41.1 million compared to $44.1 million for the first quarter of 2015.  Net interest margin was 4.26% in the first quarter of 2016, compared to 4.82% in the same period of 2015, a decrease of 56 basis points.  For the three months ended March 31, 2016, the net interest margin decreased eight basis points compared to the net interest margin of 4.34% in the three months ended December 31, 2015.  The average interest rate spread was 4.16% for the three months ended March 31, 2016, compared to 4.73% for the three months ended March 31, 2015.  For the three months ended March 31, 2016, the average interest rate spread decreased eight basis points compared to the average interest rate spread of 4.24% in the three months ended December 31, 2015. 

In the prior year first quarter, the Company collected $891,000 on certain acquired loans from customers with loans which had previously not been expected to be collectible.  These collections were recorded as interest income in the March 31, 2015 quarter and had a positive impact on the net interest margin in the prior year quarter of approximately 10 basis points (annualized).  As the loans were subject to loss sharing agreements, 80% of the amounts collected, or $713,000, was recorded as expense in the prior year quarter and included in non-interest income under "accretion (amortization) of income related to business acquisitions." 

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.  Additional estimated cash flows totaling approximately $750,000 were recorded in the quarter ended March 31, 2016, related to these loan pools, with a corresponding reduction in expected reimbursement from the FDIC.   The effects of the 2014 FDIC-assisted transaction are discussed below. 

In addition, the Company's net interest margin has been impacted by additional yield accretion recognized in conjunction with updated estimates of the fair value of the loan pools acquired in the June 2014 Valley Bank FDIC-assisted transaction.  Beginning with the quarter ended December 31, 2014, the cash flow estimates have increased for certain of the Valley Bank loan pools based on significant loan repayments and also due to collection of certain loans, thereby reducing loss expectations on certain of the loan pools. This resulted in increased income that was spread on a level-yield basis over the remaining expected lives of these loan pools.  The Valley Bank transaction did not include a loss sharing agreement with the FDIC.  Therefore, there is no related indemnification asset. The entire amount of the discount adjustment has been and will be accreted to interest income over time with no offsetting impact to non-interest income.  Additional estimated cash flows totaling approximately $800,000 were recorded in the quarter ended March 31, 2016, related to the Valley Bank loan pools.  The amount of the Valley Bank discount adjustment accreted to interest income for the three months ended March 31, 2016 was $2.1 million, and is included in the impact on net interest income/net interest margin amount in the table below.  Based on current estimates, we anticipate recording additional interest income accretion of $3.6 million during the remainder of 2016 related to these Valley Bank loan pools.

The impact of these adjustments on the Company's financial results for the reporting periods presented is shown below:

Because these adjustments will continue to 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 $11.4 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 $(7.5) million. Of the remaining adjustment to non-interest income (expense) of $(7.5) million, $(1.9) million relates to Team Bank, Vantus Bank and Sun Security Bank, and $(5.6) million relates to InterBank.  Of the remaining adjustments, we expect to recognize $7.5 million of interest income and $(4.9) million of non-interest income (expense) during the remainder of 2016.  Of the remaining $(4.9) million of non-interest income (expense) that we expect to recognize during the remainder of 2016, $(823,000) relates to Team Bank, Vantus Bank and Sun Security Bank and $(4.1) million relates to InterBank.  Additional adjustments may be recorded in future periods from the FDIC-assisted transactions, as the Company continues to evaluate its estimate of expected cash flows from the acquired loan pools.  The remaining adjustment to the indemnification assets will be impacted by the anticipated termination of certain loss share agreements, if completed. 

Excluding the impact of the additional yield accretion, net interest margin for the three months ended March 31, 2016 decreased 14 basis points when compared to the year-ago quarter.  The decrease in net interest margin is primarily due to the prior year quarter interest recovery discussed above, as well as a decrease in the average interest rate on loans (primarily due to decreased interest income on loans acquired in FDIC-assisted transactions) and an increase in the average interest rate on deposits and other borrowings. 

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, 2016, non-interest income increased $5.0 million to $5.0 million when compared to the quarter ended March 31, 2015, primarily as a result of the following increases and decreases:

• Amortization of income related to business acquisitions:  The net amortization expense related to business acquisitions was $3.3 million for the quarter ended March 31, 2016, compared to $6.9 million for the quarter ended March 31, 2015.  The amortization expense for the quarter ended March 31, 2016, consisted of the following items:  $2.3 million of amortization expense related to the changes in cash flows expected to be collected from the FDIC-covered loan portfolios, $584,000 of impairment to certain indemnification assets and $344,000 of amortization of the clawback liability.  The impairment of the indemnification asset was recorded due to the expected loss on the FDIC loss share termination agreements discussed on page one above.  Partially offsetting the expense was income from the accretion of the discount related to the indemnification assets for the Sun Security Bank and InterBank acquisitions of $231,000. 
• Other income:  Other income increased $718,000 compared to the prior year quarter.  The increase was primarily due to a $257,000 gain recognized on the sale of the Thayer, Mo., branch and deposits during the 2016 quarter and a $110,000 gain recognized on the sale of the Buffalo, Mo., branch and deposits during the 2016 quarter.  In addition, a gain of $238,000 was recognized on sales of fixed assets unrelated to the branch sales.     
• Service charges and ATM fees:  Service charges and ATM fees increased $635,000 compared to the prior year quarter, primarily due to the additional accounts acquired in the Fifth Third Bank transaction in January 2016, which had high levels of debit card activity. 
• Late charges and fees on loans:  Late charges and fees on loans increased $228,000 compared to the prior year quarter.  The increase was primarily due to increased fees on loan payoffs compared to the prior year quarter.    
• Gains on sales of single-family loans: Gains on sales of single-family loans decreased $108,000 compared to the prior year quarter.  This decrease was due to a decrease in originations of fixed-rate loans in the 2016 period compared to the 2015 period.  Fixed rate single-family loans originated are generally subsequently sold in the secondary market. 

NON-INTEREST EXPENSE

For the quarter ended March 31, 2016, non-interest expense increased $3.7 million to $30.9 million when compared to the quarter ended March 31, 2015, primarily as a result of the following items:

• Fifth Third Bank branch acquisition expenses:  The Company incurred approximately $1.3 million of additional expenses during the quarter related to the acquisition of certain branches of Fifth Third Bank.  Those expenses included approximately $119,000 of compensation expense, approximately $319,000 of legal, audit and other professional fees expense, approximately $279,000 of computer license and support expense, approximately $436,000 in charges to replace former Fifth Third Bank customer checks with Great Southern Bank checks, and approximately $76,000 of travel, meals and other expenses related to the transaction and similar costs incurred during the quarter.
• Salaries and employee benefits:  Salaries and employee benefits increased $786,000 over the prior year quarter.  $119,000 of the increase was net salary and retention bonus and other compensation expenses paid as part of the Fifth Third branch acquisition.  In addition, salaries increased due to the additional employee costs related to the acquired branches, which is partially offset by the previously announced closure or sale of 16 banking centers.  The remaining increase is due to increased staffing due to growth in lending and other operational areas. 
• Net occupancy expense:  Net occupancy expense increased $788,000 in the quarter ended March 31, 2016 compared to the same quarter in 2015.  Expenses as part of the Fifth Third banking centers accounted for $279,000 of the increase.  In addition, the Company had increased computer license and support costs of $247,000 in the current year quarter.  The remainder of the increase was approximately $175,000 of additional repair and maintenance expenses and increased depreciation expense.     
• Expense on foreclosed assets:  Expense on foreclosed assets increased $526,000 compared to the prior year quarter primarily due to valuation write-downs of foreclosed assets during the 2016 quarter totaling approximately $407,000 primarily on two properties, and other expenses related to the maintenance and resolution of foreclosed properties.   

The Company's efficiency ratio for the quarter ended March 31, 2016, was 67.08% compared to 61.82% for the same quarter in 2015.  The increase in the ratio in the 2016 three month period was primarily due to the increase in non-interest expense and the decrease in net interest income, partially offset by the increase in non-interest income.  The Company's ratio of non-interest expense to average assets increased from 2.67% for the three months ended March 31, 2015, to 2.93% for the three months ended March 31, 2016.  The increase in the current three month period ratio was due to the increase in non-interest expense, partially offset by the increase in average assets in the 2016 period compared to the 2015 period.  Average assets for the quarter ended March 31, 2016, increased $151.7 million, or 3.7%, from the quarter ended March 31, 2015, primarily due to assets acquired in the Fifth Third Bank transaction and organic loan growth, partially offset by decreases in investment securities and other interest-earning assets. 

INCOME TAXES

For the three months ended March 31, 2016 and 2015, the Company's effective tax rate was 25.1% and 25.0%, respectively, which was lower than the statutory federal tax rate of 35%, due primarily to the utilization of certain investment tax credits 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 24-26% 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. 

CAPITAL

As of March 31, 2016, total stockholders' equity and common stockholders' equity were $405.2 million (9.4% of total assets), equivalent to a book value of $29.17 per common share.  Total stockholders' equity and common stockholders' equity at December 31, 2015, were $398.2 million (9.7% of total assets), equivalent to a book value of $28.67 per common share.  At March 31, 2016, the Company's tangible common equity to total assets ratio was 9.1%, compared to 9.6% at December 31, 2015.  The tangible common equity to total risk-weighted assets ratio was 10.3% and 10.9% at March 31, 2016, and December 31, 2015, respectively.

On a preliminary basis, as of March 31, 2016, the Company's Tier 1 Leverage Ratio was 9.9%, Common Equity Tier 1 Capital Ratio was 10.4%, Tier 1 Capital Ratio was 11.0%, and Total Capital Ratio was 12.0%.  On March 31, 2016, and on a preliminary basis, the Bank's Tier 1 Leverage Ratio was 9.5%, Common Equity Tier 1 Capital Ratio was 10.5%, Tier 1 Capital Ratio was 10.5%, and Total Capital Ratio was 11.5%. 

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 current net charge-offs as well as 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.  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, such as 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, 2016, increased $801,000 to $2.1 million when compared with the quarter ended March 31, 2015.  At March 31, 2016, the allowance for loan losses was $37.0 million, a decrease of $1.1 million from December 31, 2015.  Total net charge-offs were $3.2 million and $664,000 for the quarters ended March 31, 2016 and 2015, respectively.  Four relationships make up $2.2 million of the net charge-off total for the quarter ended March 31, 2016, and such amount was substantially provided for in the allowance for loan losses at December 31, 2015.  General market conditions and unique circumstances related to individual borrowers and projects 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 1.10% and 1.20% at March 31, 2016 and December 31, 2015, respectively. Management considers the allowance for loan losses adequate to cover losses inherent in the Company's loan portfolio at March 31, 2016, 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, and potential problem loans are not included in the totals or in the discussion of non-performing loans, potential problem loans and foreclosed assets below as they are, or were, subject to 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.  At March 31, 2016, there were no material non-performing assets or potential problem loans that were previously covered, and are now not covered, under the TeamBank or Vantus Bank non-single-family loss sharing 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 acquired in 2009, 2011 and 2012 has been better than original expectations as of the acquisition dates.  Former Valley Bank loans are also excluded from the totals and the discussion of non-performing loans, potential problem loans and foreclosed assets below, although they are not covered by a loss sharing agreement.  Former Valley Bank loans are accounted for in pools and were recorded at their fair value at the time of the acquisition as of June 20, 2014; therefore, these loan pools are analyzed rather than the individual loans. 

The loss sharing agreement for the non-single-family portion of the loans acquired in the TeamBank transaction ended on March 31, 2014.  Any additional losses in that non-single-family portfolio are not 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 $15.3 million, net of discounts, at March 31, 2016.

The loss sharing agreement for the non-single-family portion of the loans acquired in the Vantus Bank transaction ended on September 30, 2014.  Any additional losses in that non-single-family portfolio are not 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 $16.4 million, net of discounts, at March 31, 2016. 

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 and other FDIC-assisted acquired assets, at March 31, 2016, were $43.0 million, a decrease of $963,000 from $44.0 million at December 31, 2015.  Non-performing assets, excluding FDIC-covered non-performing assets and other FDIC-assisted acquired assets, as a percentage of total assets were 1.00% at March 31, 2016, compared to 1.07% at December 31, 2015. 

Compared to December 31, 2015, non-performing loans decreased $3.3 million to $13.3 million at March 31, 2016, and foreclosed assets increased $2.2 million to $29.6 million at March 31, 2016.  Non-performing commercial real estate loans comprised $9.8 million, or 73.3%, of the total of $13.3 million of non-performing loans at March 31, 2016, a decrease of $ 3.7 million from December 31, 2015.  The majority of the decrease in the commercial real estate category was due to relationships which were transferred to foreclosed assets and relationships which were charged down.  These relationships are discussed below.  Non-performing one-to four-family residential loans comprised $1.6 million, or 11.7%, of the total non-performing loans at March 31, 2016, an increase of $208,000 from December 31, 2015.  Non-performing consumer loans increased $277,000 in the three months ended March 31, 2016, and were $1.6 million, or 11.8%, of total non-performing loans at March 31, 2016. 

Compared to December 31, 2015, potential problem loans increased $2.0 million to $14.8 million at March 31, 2016.  This increase was due to the addition of $3.7 million of loans to potential problem loans, partially offset by $1.2 million in loans transferred to non-performing loans, $382,000 in charge-offs, $80,000 in loans removed from potential problem loans and $48,000 in payments.

Activity in the non-performing loans category during the quarter ended March 31, 2016, 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)
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