Great Southern Bancorp, Inc. Reports Preliminary Second Quarter Earnings of $1.14 Per Diluted Common Share

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PR Newswire

SPRINGFIELD, Mo., July 19, 2017

SPRINGFIELD, Mo., July 19, 2017 /PRNewswire/ --

Great Southern Bancorp logo. (PRNewsFoto/Great Southern Bancorp, Inc.)

Preliminary Financial Results and Other Matters for the Second Quarter and First Half of 2017:

Significant Unusual Income or Expense Items: During the three months ended June 30, 2017, the Company recorded the following unusual items. In June 2017, the Company finalized an agreement with the FDIC to terminate the loss sharing agreements for Inter Savings Bank. The Company recorded a pre-tax gain on the termination (net of associated costs) of $7.5 million, which is included in the Consolidated Statements of Income under "Noninterest Income – Accretion (amortization) of income related to business acquisitions." For further discussion of the loss sharing agreement termination, see "Loss Sharing Agreements." FHLB advances totaling $31.4 million were repaid prior to maturity resulting in prepayment penalties of $340,000, which is included in the Consolidated Statements of Income under "Noninterest Expense – Other operating expenses." The Company sold and otherwise disposed of fixed assets at a net loss of $136,000, which is included in the Consolidated Statements of Income under "Noninterest Income – Other income."
Total Loans: Total gross loans (including the undisbursed portion of loans), excluding FDIC-assisted acquired loans and mortgage loans held for sale, increased $126.9 million, or 3.1%, from December 31, 2016, to June 30, 2017. This increase was primarily in construction loans, commercial real estate loans and other residential (multi-family) real estate loans. These increases were partially offset by decreases in consumer loans and one- to four-family residential loans. The FDIC-acquired loan portfolios had net decreases totaling $40.0 million during the six months ended June 30, 2017. Outstanding loans receivable balances increased $12.9 million, from $3.76 billion at December 31, 2016 to $3.77 billion at June 30, 2017, and increased $45.2 million, from $3.73 billion at March 31, 2017.
Asset Quality: Non-performing assets and potential problem loans, excluding those previously covered by FDIC loss sharing agreements and those acquired in the FDIC-assisted transaction with Valley Bank, which are accounted for and analyzed as loan pools rather than individual loans, totaled $37.2 million at June 30, 2017, a decrease of $9.1 million from $46.3 million at December 31, 2016 and a decrease of $8.8 million from $46.0 million at March 31, 2017. Non-performing assets at June 30, 2017 were $35.0 million (0.79% of total assets), down $4.3 million from $39.3 million (0.86% of total assets) at December 31, 2016 and down $6.0 million from $41.0 million (0.92% of total assets) at March 31, 2017.
Capital: The capital position of the Company continues to be strong, significantly exceeding the thresholds established by regulators. On a preliminary basis, as of June 30, 2017, the Company's Tier 1 Leverage Ratio was 10.5%, Common Equity Tier 1 Capital Ratio was 10.4%, Tier 1 Capital Ratio was 10.9%, and Total Capital Ratio was 13.6%.
Net Interest Income: Net interest income for the second quarter of 2017 decreased $2.8 million to $37.9 million compared to $40.7 million for the second quarter of 2016. Net interest income was $38.7 million for the first quarter of 2017. Net interest margin was 3.68% for the quarter ended June 30, 2017, compared to 4.10% for the second quarter of 2016 and 3.78% for the quarter ended March 31, 2017. The decrease in the margin from the prior year second quarter was primarily the result of a reduction in the additional yield accretion recognized in conjunction with updated estimates of the fair value of the acquired loan pools compared to the prior periods, partially offset by increased total average loans. Increased average interest rates on deposits and other borrowings also contributed to lower net interest margin. The positive impact on net interest margin from the additional yield accretion on acquired loan pools that was recorded during the period was 12, 39 and 18 basis points for the quarters ended June 30, 2017, June 30, 2016, and March 31, 2017, respectively. For further discussion of the additional yield accretion of the discount on acquired loan pools, see "Net Interest Income."

Great Southern Bancorp, Inc. (NASDAQ:GSBC), the holding company for Great Southern Bank, today reported that preliminary earnings for the three months ended June 30, 2017, were $1.14 per diluted common share ($16.2 million available to common shareholders) compared to $0.89 per diluted common share ($12.5 million available to common shareholders) for the three months ended June 30, 2016.

Preliminary earnings for the six months ended June 30, 2017, were $1.95 per diluted common share ($27.7 million available to common shareholders) compared to $1.59 per diluted common share ($22.3 million available to common shareholders) for the six months ended June 30, 2016.

For the quarter ended June 30, 2017, annualized return on average common equity was 14.37%, annualized return on average assets was 1.45%, and annualized net interest margin was 3.68%, compared to 12.15%, 1.16% and 4.10%, respectively, for the quarter ended June 30, 2016. For the six months ended June 30, 2017, annualized return on average common equity was 12.46%; annualized return on average assets was 1.24%; and net interest margin was 3.73% compared to 10.92%, 1.04% and 4.18%, respectively, for the six months ended June 30, 2016.

President and CEO Joseph W. Turner commented, "During the quarter, we were pleased to successfully complete an agreement with the FDIC to terminate the loss sharing agreements associated with the Bank's 2012 FDIC-assisted acquisition of Inter Savings Bank. Under the terms of this agreement, the FDIC paid $15.0 million to the Bank to settle all outstanding items related to the Inter Savings Bank loss sharing agreements, which resulted in a one-time pre-tax gain of $7.5 million (inclusive of some professional fees incurred related to the transaction). With this agreement, all outstanding loss sharing agreements related to the Bank's four FDIC-assisted acquisitions from 2009 through 2012 have been terminated.

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Great Southern Bancorp

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"Good loan production occurred in the second quarter, resulting in an increase in net outstanding loan balances of approximately $45 million from the end of the first quarter 2017. Loan production occurred in all of our major markets with increases primarily in commercial real estate, multi-family and construction loans. As expected, consumer lending, mainly in the indirect auto segment, declined in light of tightened underwriting standards implemented in the latter half of 2016. Outstanding consumer loan balances have declined $70 million (12.5%) in 2017."

Turner continued, "Our level of non-performing assets improved from the end of the first quarter of 2017. Two large problem credit relationships were resolved during the quarter, which reduced non-performing assets by nearly $6 million.

"Expense control continues to be a major focus for the Company. Total non-interest expenses were $28.4 million in the 2017 second quarter, despite non-recurring expense items (as described above)."

Selected Financial Data:

(In thousands, except per share data)	Three Months Ended June 30,		Six Months Ended June 30,
	2017	2016	2017	2016
Net interest income	$ 37,901	$ 40,662	$ 76,602	$ 81,780
Provision for loan losses	1,950	2,300	4,200	4,401
Non-interest income	15,800	8,916	23,496	13,890
Non-interest expense	28,371	29,807	56,941	60,726
Provision for income taxes	7,204	4,937	11,262	8,216
Net income and net income available to common shareholders	$ 16,176	$ 12,534	$ 27,695	$ 22,327

Earnings per diluted common share	$ 1.14	$ 0.89	$ 1.95	$ 1.59

NET INTEREST INCOME

Net interest income for the second quarter of 2017 decreased $2.8 million to $37.9 million compared to $40.7 million for the second quarter of 2016. Net interest margin was 3.68% in the second quarter of 2017, compared to 4.10% in the same period of 2016, a decrease of 42 basis points. For the three months ended June 30, 2017, the net interest margin decreased 10 basis points compared to the net interest margin of 3.78% in the three months ended March 31, 2017. The average interest rate spread was 3.53% for the three months ended June 30, 2017, compared to 3.99% for the three months ended June 30, 2016 and 3.63% for the three months ended March 31, 2017.

Net interest income for the six months ended June 30, 2017 decreased $5.2 million to $76.6 million compared to $81.8 million for the six months ended June 30, 2016. Net interest margin was 3.73% in the six months ended June 30, 2017, compared to 4.18% in the same period of 2016, a decrease of 45 basis points. The average interest rate spread was 3.58% for the six months ended June 30, 2017, compared to 4.08% for the six months ended June 30, 2016.

The Company's net interest margin has been positively impacted by significant additional yield accretion recognized in conjunction with updated estimates of the fair value of the loan pools acquired in the 2009, 2011, 2012 and 2014 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 increased during the current and prior periods presented below, based on payment histories and reduced credit loss expectations. This resulted in increased income that has been spread, on a level-yield basis, over the remaining expected lives of the loan pools (and, therefore, has decreased over time). In the prior period, the increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements with the FDIC (to the extent such agreements were in place), which were recorded as indemnification assets, with such reductions amortized on a comparable basis over the remainder of the loss sharing agreements or the remaining expected lives of the loan pools, whichever was shorter. Additional estimated cash flows totaling approximately $-0- and $155,000 were recorded in the three and six months ended June 30, 2017, respectively, related to all of these loan pools.

The impact of adjustments on all portfolios acquired in FDIC-assisted transactions for the reporting periods presented is shown below:

	Three Months Ended
	June 30, 2017		June 30, 2016
	(In thousands, except basis points data)
Impact on net interest income/net interest margin (in basis points)	$ 1,282	12 bps	$ 3,858	39 bps
Non-interest income	—		(1,774)
Net impact to pre-tax income	$ 1,282		$ 2,084

	Six Months Ended
	June 30, 2017		June 30, 2016
	(In thousands, except basis points data)
Impact on net interest income/net interest margin (in basis points)	$ 3,262	16 bps	$ 9,240	47 bps
Non-interest income	(634)		(4,708)
Net impact to pre-tax income	$ 2,628		$ 4,532

Because these adjustments will be recognized generally over the remaining lives of the loan pools, they will impact future periods as well. The remaining accretable yield adjustment that will affect interest income is $3.2 million. As there is no longer, nor will there be in the future, indemnification asset amortization related to Team Bank, Vantus Bank, Sun Security Bank or InterBank due to the termination or expiration of the related loss sharing agreements for those transactions, there is no remaining indemnification asset or related adjustments that will affect non-interest income (expense). Of the remaining adjustments affecting interest income, we expect to recognize $1.2 million of interest income during the remainder of 2017. 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 for the three and six months ended June 30, 2017, decreased 15 and 14 basis points, respectively, when compared to the year-ago periods. The decrease in net interest margin is primarily due to the interest expense associated with the issuance of $75.0 million of subordinated notes in the third quarter of 2016 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 June 30, 2017, non-interest income increased $6.9 million to $15.8 million when compared to the quarter ended June 30, 2016, primarily as a result of the following items:

Gain on early termination of FDIC loss sharing agreement for Inter Savings Bank: As discussed above, and as previously disclosed in the Company's news release dated June 9, 2017, the Company's loss sharing agreement with the FDIC related to Inter Savings Bank was terminated early and the Company received a payment of $15.0 million to settle all outstanding items related to the terminated agreement. The Company recognized a one-time gross gain of $7.7 million related to the termination, which was recorded in the accretion of income related to business acquisitions line item of the consolidated statements of income during the three months ended June 30, 2017.
Amortization of income related to business acquisitions: Because of the termination of the loss sharing agreements, the net amortization expense related to business acquisitions was $-0- for the quarter ended June 30, 2017, compared to $1.6 million for the quarter ended June 30, 2016.
Late charges and fees on loans: Late charges and fees on loans increased $306,000 compared to the prior year quarter. The increase was primarily due to fees on loan payoffs totaling $130,000 received on two loan relationships.
Net realized gains on sales of available-for-sale securities: During the 2016 quarter the Company sold an investment held by Bancorp for a gain of $2.7 million. There were no gains on sales of investments in the current quarter.

For the six months ended June 30, 2017, non-interest income increased $9.6 million to $23.5 million when compared to the six months ended June 30, 2016, primarily as a result of the following items:

Gain on early termination of FDIC loss sharing agreement for Inter Savings Bank: As discussed above, and as previously disclosed in the Company's news release dated June 9, 2017, the Company's loss sharing agreement with the FDIC related to Inter Savings Bank was terminated early and the Company received a payment of $15.0 million to settle all outstanding items related to the terminated agreement. The Company recognized a one-time gross gain of $7.7 million related to the termination, which was recorded in the accretion of income related to business acquisitions line item of the consolidated statements of income during the six months ended June 30, 2017.
Amortization of income related to business acquisitions: The net amortization expense related to business acquisitions was $489,000 for the six months ended June 30, 2017, compared to $4.9 million for the six months ended June 30, 2016. The amortization expense for the six months ended June 30, 2017, consisted of the following items: $507,000 of amortization expense related to the changes in cash flows expected to be collected from the FDIC-covered loan portfolios acquired from InterBank and $140,000 of amortization of the clawback liability. Partially offsetting the expense was income from the accretion of the discount related to the indemnification asset for the InterBank acquisition of $158,000.
Late charges and fees on loans: Late charges and fees on loans increased $607,000 compared to the prior year period. The increase was primarily due to fees on loan payoffs totaling $632,000 received on four loan relationships.
Other income: Other income decreased $420,000 compared to the prior year period. During the 2016 period, the Company recognized a $257,000 gain on the sale of the Thayer, Mo., branch and deposits and a $110,000 gain on the sale of the Buffalo, Mo., branch and deposits. In addition, a gain of $238,000 was recognized on sales of fixed assets unrelated to the branch sales during the 2016 period. There were no similar transactions during the 2017 period.
Net realized gains on sales of available-for-sale securities: During the 2016 period the Company sold an investment held by Bancorp for a gain of $2.7 million. There were no gains on sales of investments in the current year period.

NON-INTEREST EXPENSE

For the quarter ended June 30, 2017, non-interest expense decreased $1.4 million to $28.4 million when compared to the quarter ended June 30, 2016, primarily as a result of the following items:

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