ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
When used in this Quarterly Report on Form 10-Q and other documents filed or furnished by Great Southern Bancorp, Inc. (the
“Company”) with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or stockholder communications, and in oral statements made with the approval of an authorized executive officer, the words or
phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "intends" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, (i) expected revenues, cost savings, earnings accretion, synergies and other benefits from the Company's merger and
acquisition activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected;
(ii) changes in economic conditions, either nationally or in the Company's market areas; (iii) fluctuations in interest rates; (iv) the risks of lending and investing activities, including changes in the level and direction of loan delinquencies
and write-offs and changes in estimates of the adequacy of the allowance for loan losses; (v) the possibility of other-than-temporary impairments of securities held in the Company's securities portfolio; (vi) the Company's ability to access
cost-effective funding; (vii) fluctuations in real estate values and both residential and commercial real estate market conditions; (viii) demand for loans and deposits in the Company's market areas; (ix) the ability to adapt successfully to
technological changes to meet customers' needs and developments in the marketplace; (x) the possibility that security measures implemented might not be sufficient to mitigate the risk of a cyber attack or cyber theft, and that such security
measures might not protect against systems failures or interruptions; (xi) legislative or regulatory changes that adversely affect the Company's business, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 and its implementing regulations, the overdraft protection regulations and customers' responses thereto and the Tax Reform Legislation; (xii) changes in accounting principles, policies or guidelines; (xiii) monetary and fiscal
policies of the Federal Reserve Board and the U.S. Government and other governmental initiatives affecting the financial services industry; (xiv) results of examinations of the Company and Great Southern Bank by their regulators, including the
possibility that the regulators may, among other things, require the Company to limit its business activities, changes its business mix, increase its allowance for loan losses, write-down assets or increase its capital levels, or affect its
ability to borrow funds or maintain or increase deposits, which could adversely affect its liquidity and earnings; (xv) costs and effects of litigation, including settlements and judgments; and (xvi) competition. The Company wishes to advise
readers that the factors listed above and other risks described from time to time in documents filed or furnished by the Company with the SEC could affect the Company's financial performance and could cause the Company's actual results for future
periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
The Company does not undertake -and specifically declines any obligation- to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States
and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
Allowance for
Loan Losses and Valuation of Foreclosed Assets
The Company believes that the determination of the allowance for loan losses involves a higher degree of judgment and complexity
than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining an allowance level believed by management to be sufficient to absorb estimated loan losses. Management's determination of
the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates of, among other things, expected default
probabilities, loss once loans default, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses, and general amounts for historical loss experience.
The process also considers economic conditions, uncertainties in estimating losses and inherent risks in the loan portfolio. All
of these factors may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required, which would adversely impact earnings.
In
addition, the Bank’s regulators could require additional provisions for loan losses as part of their examination process.
See Note 6 “Loans and Allowance for Loan Losses” included in Item 1 for additional information regarding the allowance for loan
losses.
Inherent in this process is the evaluation of individual significant credit relationships. From time to time certain credit relationships may deteriorate due to payment performance, cash flow of the borrower, value of
collateral, or other factors. In these instances, management may revise its loss estimates and assumptions for these specific credits due to changing circumstances. In some cases, additional losses may be realized; in other instances, the factors
that led to the deterioration may improve or the credit may be refinanced elsewhere and allocated allowances may be released from the particular credit. No significant changes were made to management's overall methodology for evaluating the
allowance for loan losses during the periods presented in the financial statements of this report.
In the three months ending March 31, 2020, the Company will adopt ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326)
, which requires an entity to reflect its current estimate of all expected future credit losses. The Company previously formed a cross-functional
committee to oversee the system, data, reporting and other considerations for purposes of meeting the requirements of this standard. Data and system needs were assessed. As a result, third-party software was acquired and implemented to manage the
data. We have completed the upload of the necessary historical loan data to the software that will be used in meeting certain requirements of this standard. Our loss data covers multiple credit cycles back to 2003. Parallel testing of the new
methodology compared to the current methodology commenced in 2019 and the Company continues to evaluate the impact of adopting the new guidance. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan
losses upon adoption, but cannot yet determine the magnitude of any such one-time adjustment, or the overall impact of the new guidance on the Company’s consolidated financial statements.
In addition, the Company considers that the determination of the valuations of foreclosed assets held for sale involves a high
degree of judgment and complexity. The carrying value of foreclosed assets reflects management’s best estimate of the amount to be realized from the sales of the assets. While the estimate is generally based on a valuation by an independent
appraiser or recent sales of similar properties, the amount that the Company realizes from the sales of the assets could differ materially from the carrying value reflected in the financial statements, resulting in losses that could adversely
impact earnings in future periods.
Carrying Value of Loans Acquired in
FDIC-assisted Transactions
The Company considers that the determination of the carrying value of loans acquired in the FDIC-assisted transactions involves a
high degree of judgment and complexity. The carrying value of the acquired loans reflects management’s best ongoing estimates of the amounts to be realized on each of these assets. The Company has now terminated all loss sharing agreements with the
FDIC and, accordingly, no longer has an indemnification asset. The Company determined initial fair value accounting estimates of the acquired assets and assumed liabilities in accordance with FASB ASC 805,
Business Combinations
. However, the amount that the Company realizes on its acquired loan assets could differ materially from the carrying value reflected in its financial statements,
based upon the timing of collections on the acquired loans in future periods. Subsequent to the initial valuation, the Company
continues to monitor identified loan pools for changes in estimated cash flows projected for the loan pools, anticipated credit
losses and changes in the accretable yield. Analysis of these variables requires significant estimates and a high degree of judgment. See Note 7 “FDIC-Acquired Loans” included in Item 1 for additional information regarding the TeamBank, Vantus
Bank, Sun Security Bank, InterBank and Valley Bank FDIC-assisted transactions.
Goodwill and Intangible Assets
Goodwill and intangible assets that have indefinite useful lives are subject to an impairment test at least annually and more
frequently if circumstances indicate their value may not be recoverable. Goodwill is tested for impairment using a process that estimates the fair value of each of the Company’s reporting units compared with its carrying value. The Company defines
reporting units as a level below each of its operating segments for which there is discrete financial information that is regularly reviewed. As of March 31, 2019, the Company had one reporting
unit to which goodwill has
been allocated – the Bank. If the fair value of a reporting unit exceeds its carrying value, then no impairment is recorded. If the carrying value amount exceeds the fair value of a reporting unit, further testing is completed comparing the
implied fair value of the reporting unit’s goodwill to its carrying value to measure the amount of impairment. Intangible assets that are not amortized will be tested for impairment at least annually by comparing the fair values of those assets to
their carrying values. At March 31, 2019, goodwill consisted of $5.4 million at the Bank reporting unit, which included goodwill of $4.2 million that was recorded during 2016 related to the acquisition of 12 branches from Fifth Third Bank. Other
identifiable intangible assets that are subject to amortization are amortized on a straight-line basis over a period of seven years. At March 31, 2019, the amortizable intangible assets consisted of core deposit intangibles of $3.6 million, which
are reflected in the table below. These amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable based on a comparison of fair value.
While the Company believes no impairment of its goodwill or other intangible assets existed at March 31, 2019, different
conditions or assumptions used to measure fair value of reporting units, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company’s impairment evaluation
in the future.
A summary of goodwill and intangible assets is as follows:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
Goodwill – Branch acquisitions
|
|
$
|
5,396
|
|
|
$
|
5,396
|
|
Deposit intangibles
|
|
|
|
|
|
|
|
|
InterBank
|
|
|
—
|
|
|
|
36
|
|
Boulevard Bank
|
|
|
244
|
|
|
|
275
|
|
Valley Bank
|
|
|
900
|
|
|
|
1,000
|
|
Fifth Third Bank
|
|
|
2,423
|
|
|
|
2,581
|
|
|
|
|
3,567
|
|
|
|
3,892
|
|
|
|
$
|
8,963
|
|
|
$
|
9,288
|
|
Current Economic Conditions
Changes in economic conditions could cause the values of assets and liabilities recorded in the financial statements to change
rapidly, resulting in material future adjustments in asset values, the allowance for loan losses, or capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.
Following the housing and mortgage crisis and correction beginning in mid-2007, the United States entered a prolonged economic
downturn. Unemployment rose from 4.7% in November 2007 to peak at 10.0% in October 2009. The elevated unemployment levels negatively impacted consumer confidence, which had a detrimental impact on industry-wide performance nationally as well as
in the Company's Midwest market area. Economic conditions have significantly improved since then, as indicated by consumer confidence levels, increased economic activity and low unemployment levels.
The national unemployment rate remained steady at 3.8% in March 2019. The rate compares to a 4.1% rate in March 2018. After a
lackluster performance in February 2019, the job market rebounded with 196,000 new jobs created in March 2019. Sectors seeing employment increases included health care, professional services and technical services. In March 2019, the U.S. labor
force participation rate (the share of working-age Americans who are either employed or are actively looking for a job) was 63.0% and the employment population ratio was 60.7%, with both ratios changing little over the past few months. The
unemployment rate for the Midwest, where most of the Company’s business is conducted, remained stable at 3.7% in March 2019. Unemployment rates for March 2019 were: Missouri at 3.3%, Arkansas at 3.7%, Kansas at 3.5%, Iowa at 2.4%, Minnesota at
3.2%, Illinois at 4.4%, Oklahoma at 3.3%, Texas at 3.8%, Georgia at 3.9% and Colorado at 3.5%. Of the metropolitan areas in which the Company does business, the Chicago area had the highest unemployment rate at 4.3% as of February 2019. This rate
had improved significantly since the 4.9% rate reported as of December 2017. The unemployment rates for the Springfield and St. Louis market areas at 3.1% and 3.7%, respectively, were comparable to the national average. Metropolitan areas in
Iowa, Missouri, Arkansas and Minnesota continued to boast unemployment levels amongst the lowest in the nation.
Sales of newly built single-family homes for March 2019 were at a seasonally adjusted annual rate of 692,000 according to U.S.
Census Bureau and the Department of Housing and Urban Development estimates. This is 4.5% above the revised February 2019 seasonally adjusted annual rate of 662,000, and is 3% above the March 2018 seasonally adjusted annual rate of 672,000. The
median sales price of new houses sold in March 2019 was $302,700, down from $335,400 a year earlier. The March 2019 average sales price of $376,000 was up slightly from $369,200 a year ago. The inventory of new homes for sale at the end of March
2019 would support 6.0 months’ supply at the current sales pace, up from 5.3 months in March 2018.
After a large jump in February 2019, existing home sales declined in March 2019, according to the National Association of Realtors
(NAR). Total existing home sales decreased 5% to a seasonally adjusted rate of 5.21 million in March 2019. Total existing home inventory at the end of March 2019 increased to 1.68 million units, up slightly from 1.63 million existing homes
available for sale in February 2019. Unsold inventory is at a 3.9 months’ supply at the current sales pace, up from 3.6 months a year ago.
The national median existing home price for all housing types in March 2019 was $259,400, up 3.8% from March 2018. March’s price
increase marks the 85th straight month of year-over-year gains. The Midwest region existing home median sale price for March 2019 was $200,500, which is up 4.6% from last year. First-time buyers accounted for 33% of sales in March 2019, up
slightly from 32% in February 2019 and 30% a year ago.
The multi-family sector rebounded in 2017 and 2018, with demand approaching the highest level on record. National vacancy rates
were 5.9% at the end of March 2019, while our market areas reflected the following vacancy levels: Springfield at 5.7%, St. Louis at 8.9%, Kansas City at 7.0%, Minneapolis at 4.4%, Tulsa at 9.3%, Dallas-Fort Worth at 8.0% and Chicago at 6.2%. Rent
growth picked up in recent months and demand has increased at a steady rate supported by the strong economy. Vacancy rates have increased in Tulsa, St. Louis and Dallas due to an increased number of units coming on-line. Developers continue to
favor more expensive submarkets. Transaction volume has slowed, but pricing has remained on an upward trajectory. Cap rates are still at low levels. A continued increase in the homeownership rate is the largest risk to the apartment sector.
Despite the decline in affordability and rigid mortgage origination standards, about two-thirds of consumers still believe now is a good time to buy a home, according to a recent University of Michigan consumer survey. The homeownership rate has
risen by more than a percentage point since 2016, to 64.2% in March 2019. All of the Company’s market areas within the multi-family sector are in expansion phase with the exception of Denver and Atlanta, which are both currently in a hyper-supply
phase.
Nationally, approximately 45% of the suburban office markets are in an expansion market cycle -- characterized by decreasing
vacancy rates, moderate/high new construction, high absorption, moderate/high employment growth and medium/high rental rate growth. Signs of late-cycle conditions are currently spreading. Both central business district and suburban markets are
being categorized as either in recession or in hyper-supply by about one in 10 market respondents. So while most markets are in recovery or expansion, they tilt toward risk in the coming years. The Company’s larger market areas in the suburban
office expansion market cycle include Minneapolis, Dallas-Ft. Worth, and St. Louis. Tulsa, Okla. and Kansas City are currently in the recovery/expansion market cycle -- typified by decreasing vacancy rates, low new construction, moderate
absorption, low/moderate employment growth and negative/low rental rate growth. Chicago is currently in a recession market cycle typified by increasing vacancies, low absorption and low new construction while Denver is in hyper-supply.
Approximately 70% of the retail sector is in the expansion phase of the market cycle, with another 20% in recovery mode and the
remaining 10% in hyper-supply or recession. The Company’s larger market areas included in the retail expansion market segment are Chicago, Denver, Minneapolis, Kansas City, Dallas-Ft. Worth, and St. Louis, with Chicago and Minneapolis nearing
hyper-supply. The Atlanta and Tulsa markets are each in recovery phase.
The industrial segment, once concentrated in manufacturing, is now epitomized by a dense network of warehousing, distribution,
logistics, and R&D/Flex properties which is the conduit of the current global e-commerce revolution. All of the Company’s larger industrial market areas are categorized as being in the expansion cycle with prospects of continuing good economic
growth. Two market areas, Chicago and Kansas City, are in the latter stages of the expansion cycle.
Occupancy, absorption and rental income levels of commercial real estate properties located throughout the Company’s market areas
remain stable according to information provided by real estate services firm CoStar Group. Moderate real estate sales and financing activity is continuing to support loan growth.
While current economic indicators show stability nationally in employment, housing starts and prices, commercial real estate
occupancy, absorption and rental rates, our management will continue to closely monitor regional, national and global economic conditions, as these could significantly impact our market areas.
The profitability of the Company and, more specifically, the profitability of its principal subsidiary, the Bank, depends
primarily on its net interest income, as well as provisions for loan losses and the level of non-interest income and non-interest expense. Net interest income is the difference between the interest income the Bank earns on its loan and investment
portfolios, and the interest it pays on interest-bearing liabilities, which consists mainly of interest paid on deposits and borrowings. Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rates earned or paid on these balances. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.
Great Southern's total assets increased $102.0 million, or 2.2%, from $4.68 billion at December 31, 2018, to $4.78 billion at
March 31, 2019. Full details of the current period changes in total assets are provided in the “Comparison of Financial Condition at March 31, 2019 and December 31, 2018” section of this Quarterly Report on Form 10-Q.
Loans.
Net outstanding loans
increased $61.3 million, or 1.5%, from $3.99 billion at December 31, 2018, to $4.05 billion at March 31, 2019. Included in the net increase in loans were reductions of $6.5 million in the FDIC-acquired loan portfolios. Increases primarily
occurred in commercial construction loans, commercial real estate loans, one-to four-family residential mortgage loans and other residential (multi-family) loans. These increases were partially offset by decreases in consumer auto loans. The
increases were primarily due to loan growth in our existing banking center network and our commercial loan production offices. Excluding FDIC-assisted acquired loans and mortgage loans held for sale, total gross loans decreased $11.4 million from
December 31, 2018 to March 31, 2019. As loan demand is affected by a variety of factors, including general economic conditions,
and because of the competition we face and our focus on pricing discipline and credit quality,
no assurances can be made regarding our future loan growth. The Company's strategy continues to be focused on maintaining credit risk and interest rate risk at appropriate levels.
Recent loan growth has occurred in several loan types, primarily commercial construction loans, commercial real estate loans,
other residential (multi-family) loans and one- to four-family residential mortgage loans and in most of Great Southern’s primary lending locations, including Springfield, St. Louis, Kansas City, Des Moines and Minneapolis, as well as the loan
production offices in Chicago, Dallas, Omaha and Tulsa, and offices added recently in Atlanta and Denver. Certain minimum underwriting standards and monitoring help assure the Company’s portfolio quality. Great Southern’s loan committee reviews
and approves all new loan originations in excess of lender approval authorities. Generally, the Company considers commercial construction, consumer, and commercial real estate loans to involve a higher degree of risk compared to some other types
of loans, such as first mortgage loans on one- to four-family, owner-occupied residential properties. For commercial real estate, commercial
business and construction loans, the credits are subject to an analysis of the borrower’s and guarantor’s financial condition,
credit history, verification of liquid assets, collateral, market analysis and repayment ability. It has been, and continues to be, Great Southern’s practice to verify information from potential borrowers regarding assets, income or payment
ability and credit ratings as applicable and as required by the authority approving the loan. To minimize construction risk, projects are monitored as construction draws are requested by comparison to budget and with progress verified through
property inspections. The geographic and product diversity of collateral, equity requirements and limitations on speculative construction projects help to mitigate overall risk in these loans. Underwriting standards for all loans also include
loan-to-value ratio limitations, which vary depending on collateral type, debt service coverage ratios or debt payment to income ratio guidelines, where applicable, credit histories, use of guaranties and other recommended terms relating to equity
requirements, amortization, and maturity. Consumer loans are primarily secured by new and used motor vehicles and these loans are also subject to certain minimum underwriting standards to assure portfolio quality. While Great Southern’s consumer
underwriting and pricing standards have been fairly consistent since 2016, the Company tightened its underwriting guidelines on automobile lending beginning in the latter part of 2016. Management took this step in an effort to improve credit
quality in the portfolio and reduce delinquencies and charge-offs. The underwriting standards employed by Great Southern for consumer loans include a determination of the applicant's payment history on other debts, credit scores, employment
history and an assessment of ability to meet existing obligations and payments on the proposed loan. In 2019, the Company discontinued indirect auto loan originations. See “Item 1. Business – Lending Activities – General, – Commercial Real Estate
and Construction Lending, and – Consumer Lending” in the Company’s December 31, 2018 Annual Report on Form 10-K.
While our policy allows us to lend up to 95% of the appraised value on one-to four-family residential properties, originations of
loans with loan-to-value ratios at that level are minimal. Private mortgage insurance is typically required for loan amounts above the 80% level. Few exceptions occur and would be based on analyses which determined minimal transactional risk to
be involved. We consider these lending practices to be consistent with or more conservative than what we believe to be the norm for banks our size. At each of March 31, 2019 and December 31, 2018, an estimated 0.1% of total owner occupied one- to
four-family residential loans had loan-to-value ratios above 100% at origination. At each of March 31, 2019 and December 31, 2018, an estimated 0.9% of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above
100% at origination.
At March 31, 2019, troubled debt restructurings totaled $5.3 million, or 0.1% of total loans, down $1.6 million from $6.9 million,
or 0.2% of total loans, at December 31, 2018. Concessions granted to borrowers experiencing financial difficulties may include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions
intended to maximize collection. For troubled debt restructurings occurring during the three months ended March 31, 2019, no loans were restructured into multiple new loans. For troubled debt restructurings occurring during the year ended
December 31, 2018, five loans totaling $31,000 were restructured into multiple new loans. For further information on troubled debt restructurings, see Note 6 of the Notes to Consolidated Financial Statements contained in this report.
Loans that were acquired through FDIC-assisted transactions, which are accounted for in pools, are currently included in the
analysis and estimation of the allowance for loan losses. If expected cash flows to be received on any given pool of loans decreases from previous estimates, then a determination is made as to whether the loan pool
should
be charged down or the allowance for loan losses should be increased (through a provision for loan losses). Acquired loans are described in Note 7 of the Notes to Consolidated Financial Statements contained in this report. For acquired loan
pools, the Company may allocate, and at March 31, 2019, has allocated, a portion of its allowance for loan losses related to these loan pools in a manner similar to how it allocates its allowance for loan losses to those loans which are
collectively evaluated for impairment.
The level of non-performing loans and foreclosed assets affects our net interest income and net income. We generally do not accrue
interest income on these loans and do not recognize interest income until the loans are repaid or interest payments have been made for a period of time sufficient to provide evidence of performance on the loans. Generally, the higher the level of
non-performing assets, the greater the negative impact on interest income and net income.
Available-for-sale Securities.
In the three months ended
March 31, 2019,
available-for-sale securities increased $33.8 million, or 13.8%, from $244.0 million at December 31, 2018, to $277.8 million at March 31, 2019. The increase was primarily due to the purchase of FNMA and GNMA fixed-rate multi-family mortgage-backed
securities, partially offset by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities. The Company used increased deposits to fund this increase in investment securities.
Deposits.
The Company attracts deposit accounts through its retail branch network, correspondent banking and corporate services areas, and brokered deposits. The Company then utilizes these
deposit funds, along with FHLBank advances and other borrowings, to meet loan demand or otherwise fund its activities. In the three months ended
March 31, 2019
, total
deposit balances increased $231.1 million, or 6.2%. T
ransaction account balances increased $67.6 million to $2.20 billion at
March
31, 2019
, while retail certificates of deposit increased $89.6 million, to $1.35 billion at
March 31, 2019
. The increases in transaction accounts were primarily a result of increases in money market and NOW deposit accounts. Retail certificates of deposit increased due to an increase
in certificates opened through the Company’s internet deposit acquisition channels. In addition, at
March 31, 2019
and December 31, 2018,
customer deposits totaling $27.9 million and $27.9 million, respectively, were part of the CDARS program, which allows customers to maintain balances in an insured manner that would otherwise exceed the FDIC deposit insurance limit. Brokered
deposits, including CDARS program purchased funds, were $400.8 million at
March 31, 2019
, an increase of $73.9 million from $326.9 million at
December 31, 2018.
Our deposit balances may fluctuate depending on customer preferences and our relative need for funding. We do not consider our
retail certificates of deposit to be guaranteed long-term funding because customers can withdraw their funds at any time with minimal interest penalty. When loan demand trends upward, we can increase rates paid on deposits to increase deposit
balances and utilize brokered deposits to provide additional funding.
The level of competition for deposits in our markets is high. It is our goal to gain deposit market share,
particularly checking accounts, in our branch footprint. To accomplish this goal, increasing rates to attract deposits may be necessary, which could negatively impact the Company’s net interest margin.
Our ability to fund growth in future periods may also depend on our ability to continue to access brokered deposits and FHLBank
advances. In times when our loan demand has outpaced our generation of new deposits, we have utilized brokered deposits and FHLBank advances to fund these loans. These funding sources have been attractive to us because we can create either fixed or
variable rate funding, as desired, which more closely matches the interest rate nature of much of our loan portfolio. While we do not currently anticipate that our ability to access these sources will be reduced or eliminated in future periods, if
this should happen, the limitation on our ability to fund additional loans could have a material adverse effect on our business, financial condition and results of operations.
Federal Home Loan Bank Advances and
Short Term Borrowings.
The Company’s Federal Home Loan Bank advances totaled $-0- at both March 31, 2019 and December 31, 2018. At March
31, 2019, there were no borrowings or overnight advances from the FHLBank. At December 31, 2018, there were no borrowings from the FHLBank, other than overnight advances, which are included in the short term borrowings category.
Short term borrowings and other
interest-bearing liabilities decreased $170.5 million from $192.7 million at December 31, 2018 to $22.2 million at March 31, 2019. The short term borrowings included overnight FHLBank borrowings of $178.0 million at December 31, 2018. The
Company utilizes both overnight borrowings and short-term FHLBank advances depending on relative interest rates.
Net Interest Income and Interest Rate
Risk Management.
Our net interest income may be affected positively or negatively by changes in market interest rates. A large portion of our loan portfolio is tied to
one-month LIBOR, three-month LIBOR or the "prime rate" and adjusts immediately or shortly after the index rate adjusts (subject to the effect of contractual interest rate floors on some of the loans). We monitor our sensitivity to interest rate
changes on an ongoing basis (see "Item 3. Quantitative and Qualitative Disclosures About Market Risk"). In addition, our net interest income may be impacted by changes in the cash flows expected to be received from acquired loan pools. As
described in Note 7 of the Notes to the Consolidated Financial
Statements contained in this report
, the Company’s evaluation of cash flows expected to be received from
acquired loan pools is on-going and increases in cash flow expectations are recognized as increases in accretable yield through interest income. Decreases in cash flow expectations are recognized as impairments through the allowance for loan
losses.
The current level and shape of the interest rate yield curve
poses challenges for interest rate risk management. Prior to its increase of 0.25% on December 16, 2015, the FRB had last changed interest rates on December 16, 2008. This was the first rate increase since September 29, 2006.
The FRB has
now also implemented rate increases of 0.25% on eight different occasions beginning December 14, 2016, with the Federal Funds rate now at 2.50%.
A substantial portion of Great
Southern’s loan portfolio ($1.54 billion at
March 31, 2019
) is
tied to the one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days after
March 31, 2019
. Of these loans, $1.46 billion had interest rate floors. Great Southern also has a significant portfolio of loans ($242 million at
March 31, 2019
) tied to a "prime rate" of interest and will adjust immediately with changes to the “prime rate”
of interest. But for the interest rate floors, a rate cut by the FRB generally would have an anticipated immediate negative impact on the Company’s net interest income due to the large total balance of loans which generally adjust immediately as
the Federal Funds rate adjusts. Loans at their floor rates are, however, subject to the risk that borrowers will seek to refinance elsewhere at the lower market rate. Because the Federal Funds rate is still generally low, there may also be a
negative impact on the Company's net interest income due to the Company's inability to significantly lower its funding costs in the current competitive rate environment, although interest rates on assets may decline further. Conversely, interest
rate increases would normally result in increased interest rates on our LIBOR-based and prime-based loans. As of
March 31, 2019
, Great Southern's interest rate risk models indicate that, generally, rising interest rates are expected to have a positive impact on the Company's net interest income, while
declining interest rates are expected to have a negative impact on net interest income. We model various interest rate scenarios for rising and falling rates, including both parallel and non-parallel shifts in rates. The results of our modeling
indicate that net interest income is not likely to be materially affected either positively or negatively in the first twelve months following a rate change, regardless of any changes in interest rates, because our portfolios are relatively well
matched in a twelve-month horizon. The effects of interest rate changes, if any, on net interest income are expected to be greater in the 12 to 36 months following a rate change. For further discussion of the processes used to manage our
exposure to interest rate risk,
see “Item 3. Quantitative and Qualitative Disclosures About Market Risk – How We Measure the Risks to Us Associated with Interest Rate Changes.”
Non-Interest Income and Non-Interest
(Operating) Expenses.
The Company's profitability is also affected by the level of its non-interest income and operating expenses. Non-interest income consists
primarily of service charges and ATM fees, late charges and prepayment fees on loans, gains on sales of loans and available-for-sale investments and other general operating income. Non-interest income may also be affected by the Company's
interest rate derivative activities, if the Company chooses to implement derivatives.
See Note 16 “Derivatives and Hedging Activities” in the Notes to Consolidated Financial Statements included in this report.
Operating expenses consist primarily of salaries and employee benefits, occupancy-related expenses, expenses related to foreclosed
assets, postage, FDIC deposit insurance, advertising and public relations, telephone, professional fees, office expenses and other general operating expenses. Details of the current period changes in non-interest income and non-interest expense
are provided in the “Results of Operations and Comparison for the Three Months Ended March 31, 2019 and 20187” section of this report.
Effect of Federal Laws and Regulations
General.
Federal legislation and
regulation significantly affect the operations of the Company and the Bank, and have increased competition among commercial banks, savings institutions, mortgage banking enterprises and other financial institutions. In particular, the capital
requirements and operations of regulated banking organizations such as the Company and the Bank have been and will be subject to changes in applicable statutes and regulations from time to time, which changes could, under certain circumstances,
adversely affect the Company or the Bank.
Dodd-Frank Act.
On July 21, 2010, sweeping financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer
Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things, centralize responsibility for consumer
financial protection by creating a new agency, the Consumer Financial Protection Bureau, with broad rulemaking authority for a wide range of consumer protection laws that apply to all banks, require new capital rules (discussed below), change the
assessment base for federal deposit insurance, repeal the federal prohibitions on the payment of interest on demand deposits, amend the account balance limit for federal deposit insurance protection, and increase the authority of the FRB to examine
the Company and its non-bank subsidiaries.
Certain aspects of the Dodd-Frank Act remain subject to rulemaking and take effect over a number of years. Provisions in the legislation that affect deposit insurance assessments and payment of interest on demand deposits could increase the
costs associated with deposits. Provisions in the legislation that require revisions to the capital requirements of the Company and the Bank could require the Company and the Bank to seek additional sources of capital in the future.
A provision of the Dodd-Frank Act, commonly referred to as the “Durbin Amendment,” directed the FRB to analyze the debit card payments system and fix the interchange rates based upon their estimate of actual costs. The FRB has established
the interchange rate for all debit transactions for issuers with over $10 billion in assets at $0.21 per transaction. An additional five basis points of the transaction amount and an additional $0.01 may be collected by the issuer for fraud
prevention and recovery, provided the issuer performs certain actions. The Bank is currently exempt from the rule on the basis of asset size.
Certain aspects of the Dodd-Frank Act have been affected by the EGRRCP Act, as defined and discussed below under “-EGRRCP Act.”
Capital Rules.
The federal banking agencies have adopted regulatory capital rules that substantially amend the risk-based capital rules
applicable to the Bank and the Company. The rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to various documents released by the Basel Committee on Banking Supervision. For
the Company and the Bank, the general effective date of the new rules was January 1, 2015, and, for certain provisions, various phase-in periods and later effective dates apply. The chief features of the new rules are summarized below.
The rules refine the definitions of what constitutes regulatory capital and add a new regulatory capital element, common equity Tier 1 capital. The minimum capital ratios are (i) a common equity Tier 1 (“CET1”) risk-based capital ratio of
4.5%; (ii) a Tier 1 risk-based capital ratio of 6%; (iii) a total risk-based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. In addition to the minimum capital ratios, the new rules include a capital conservation buffer, under which a
banking organization must have CET1 more than 2.5% above each of its minimum risk-based capital ratios in order to avoid restrictions on paying dividends, repurchasing shares, and paying certain discretionary bonuses.
The capital conservation buffer requirement began phasing in on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which amount increased an equal amount each year
until the buffer requirement of greater than 2.5% of risk-weighted assets became fully implemented on January 1, 2019.
Effective January 1, 2015, these rules also revised the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels show signs of weakness. Under the prompt
corrective action requirements, insured depository institutions are required to meet the following in order to qualify as “well capitalized:” (i) a common equity Tier 1 risk-based capital ratio of at least 6.5%, (ii) a Tier 1 risk-based capital
ratio of at least 8%, (iii) a total risk-based capital ratio of at least 10% and (iv) a Tier 1 leverage ratio of 5%, and must not be subject to an order, agreement or directive mandating a specific capital level.
EGRRCP Act.
In May 2018 the Economic Growth, Regulatory Relief and
Consumer Protection Act (the “EGRRCCP Act”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the EGRRCP Act maintains most of the regulatory
structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for depository institutions with assets of less than $10 billion and for banks with assets of more than $50 billion. Many of these changes could
result in meaningful regulatory relief for community banks such as Great Southern.
The EGRRCP Act, among other matters, expands the definition of qualified mortgages that may be held by a financial institution and simplifies the regulatory capital rules
for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8 and 10 percent. Any
qualifying depository institution or its holding company that exceeds the “community bank leverage ratio” will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository
institution that exceeds the new ratio will be considered to be “well capitalized” under the prompt corrective action rules. In addition, the EGRRCP Act includes regulatory relief for community banks regarding regulatory examination cycles, call
reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
It is difficult at this time to predict when or how any new
standards under the EGRRCP Act will ultimately be applied to the Company and the Bank or what specific impact the EGRRCP Act and the yet-to-be-written implementing rules and regulations will have on community banks.
Business Initiatives
During the first quarter of 2019, the Company upgraded its online account opening platform to provide a faster and easier customer
experience. The online platform, available on GreatSouthernBank.com, allows customers within and beyond the Company’s geographic footprint to conveniently open certain depository accounts.
As part of the Company’s ongoing performance evaluation, the Company determined that it would cease operating its indirect
automobile financing unit, effective March 31, 2019. Market forces, including strong rate competition for well-qualified borrowers, made indirect lending through automobile dealerships a significant challenge to efficient and profitable operations
over the long term. Indirect loan balances have significantly declined in the last two years since tightened underwriting guidelines were implemented in the latter part of 2016, in response to more challenging consumer credit conditions. The
Company will continue servicing indirect automobile loans made before March 31, 2019, until each loan agreement is satisfied. The portfolio of indirect loans totaled approximately $180 million at March 31, 2019. The Company continues to offer
direct consumer loans as normal through its extensive banking center network.
The Company’s retail banking center network continues to evolve. In April 2019, the Company consolidated its Fayetteville, Ark.,
location into its Rogers, Ark., banking center, approximately 20 miles away. The Fayetteville office opened in 2014 and did not meet performance expectations. The Company now operates one banking center in Arkansas.
Comparison of Financial Condition at March 31, 2019 and December 31, 2018
During the three months ended
March 31, 2019
, the Company’s total assets increased by $102.0 million to $4.78 billion. The increase was primarily attributable to an increase in loans receivable and available-for-sale
investment securities.
Cash and cash equivalents were $206.1 million at
March
31, 2019
, an increase of $3.4 million, or 1.7%, from $202.7 million at December 31, 2018.
The Company's available-for-sale securities increased $33.8
million, or 13.8%, compared to December 31, 2018. The increase was primarily due to the purchase of FNMA and GNMA fixed-rate multi-family mortgage-backed securities,
partially offset by
calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities.
The
available-for-sale securities portfolio was 5.8% and 5.2%
of total assets at March 31, 2019 and December 31, 2018, respectively.
Net loans increased $61.3 million from December 31, 2018, to
$4.05 billion at March 31, 2019.
Excluding FDIC-assisted acquired loans and mortgage loans held for sale, total gross loans (including the undisbursed portion of loans) decreased $11.4 million, or 0.2%, from December 31, 2018 to
March 31, 2019
. Increases in outstanding loan totals primarily occurred in commercial construction loans, commercial real estate loans, other residential (multi-family) loans
and one- to four-family residential mortgage loans.
Partially offsetting the increases in these loans were reductions of $24 million in consumer auto loans and $7
million in the FDIC-acquired loan portfolios.
Other real estate owned and repossessions were $8.8 million at
March 31, 2019
, an increase of $332,000, or 3.9%, from $8.4 million at December 31, 2018. Activity in other real estate owned and repossessions during the period is discussed in more detail in the
Non-performing Assets
section below.
Premises and equipment totaled $141.8 million at
March 31,
2019
, an increase of $9.4 million, or 7.0%, from $132.4 million at December 31, 2018. This increase is primarily related to the recording of a right-of-use asset for leased premises and assets under the new lease accounting standard
adopted January 1, 2019. The right-of-use asset totaled $9.3 million at
March 31, 2019.
Total liabilities increased $90.4
million, from $4.14 billion at December 31, 2018 to $4.23 billion at
March 31, 2019
. The increase was primarily attributable to an increase
in deposits and securities sold under reverse repurchase agreements with customers, partially offset by a decrease in short-term borrowings.
Total
deposits increased $231.1 million, or 6.2%, to $3.96 billion at March 31, 2019. T
ransaction account balances increased $67.6 million to $2.20 billion at
March 31, 2019
, while retail certificates of deposit increased
$89.6 million compared to December 31, 2018, to $1.35 billion at
March 31, 2019
. The increase in transaction accounts was primarily a result
of increases in money market and NOW deposit accounts. Retail certificates of deposit increased due to an increase in certificates opened through the Company’s internet deposit acquisition channels. In addition, at
March 31, 2019
and December 31, 2018, customer deposits totaling $27.9 million and $27.9 million, respectively, were part of the CDARS program, which allows customers to
maintain balances in an insured manner that would otherwise exceed the FDIC deposit insurance limit. Brokered deposits, including CDARS program purchased funds, were $400.8 million at
March 31, 2019
, an increase of $73.9 million from $326.9 million at December 31, 2018.
The Company’s FHLBank advances
totaled $-0- at both March 31, 2019 and December 31, 2018. At March 31, 2019, there were no borrowings or overnight advances from the FHLBank. At December 31, 2018, there were no borrowings from the FHLBank, other than overnight advances, which
are included in the short term borrowings category.
Short term borrowings and other
interest-bearing liabilities decreased $170.5 million from $192.7 million at December 31, 2018 to $22.2 million at March 31, 2019. Short term borrowings at December 31, 2018, included overnight FHLBank borrowings of $178.0 million. The Company
utilizes both overnight borrowings and short-term FHLBank advances depending on relative interest rates.
Securities sold under reverse
repurchase agreements with customers increased $13.3 million from $105.3 million at December 31, 2018 to $118.6 million at
March 31, 2019
.
These balances fluctuate over time based on customer demand for this product.
Total stockholders' equity increased $11.6 million from
$532.0 million at December 31, 2018 to $543.6 million at
March 31, 2019
. The Company recorded net income of $17.6 million for the three months ended
March 31,
2019
, and dividends declared on common stock were $15.1 million. Accumulated other comprehensive income increased $8.8 million due to
increases in the fair value of
available-for-sale investment securities and the fair value of cash flow hedges.
In addition, total stockholders’ equity increased $1.3 million due to stock option exercises.
These
increases were partially offset by repurchases of the Company’s common stock totaling $849,000.
Results of Operations and Comparison for the Three Months Ended March 31, 2019 and 2018
General
Net income was $17.6 million for the three months ended March 31, 2019
compared to $13.5 million for the three months ended March 31, 2018. This increase of $4.1 million, or 30.8%, was primarily due to an increase in net interest income of $5.2 million, or 13.1%, and an
increase in non-interest income of $515,000, or 7.4%, partially offset by an increase in income tax expense of $1.4 million, or 51.2%, and an increase in non-interest expense of $183,000, or 0.6%.
Total Interest Income
Total interest income increased $10.5 million, or 22.3%, during the three months ended March 31, 2019
compared to the three months ended March 31, 2018. The increase was due to a $9.4 million increase in interest income on loans and a $1.1 million increase in interest income on investments and other interest-earning assets. Interest income on
loans increased for the three months ended March 31, 2019 compared to the same period in 2018, due to higher average rates of interest on loans and higher average balances. Interest income from investment securities and other interest-earning
assets increased during the three months ended March 31, 2019 compared to the same period in 2018 due to higher average rates of interest and higher average balances of investment securities.
Interest Income – Loans
During the three months ended March 31, 2019 compared to the three months ended March 31, 2018, interest income on loans increased
$5.7 million as a result of higher average interest rates on loans. The average yield on loans increased from 4.84% during the three months ended March 31, 2018, to 5.42% during the three months ended March 31, 2019. This increase was primarily
due to increased yields in most loan categories as a result of increased LIBOR and Federal Funds interest rates. Interest income on loans increased $3.7 million as the result of higher average loan balances, which increased from $3.78 billion
during the three months ended March 31, 2018, to $4.08 billion during the three months ended March 31, 2019. The higher average balances were primarily due to organic loan growth in commercial construction loans, commercial real estate loans and
other residential (multi-family) loans, partially offset by decreases in consumer loans.
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 the payment histories and the collection of certain loans, thereby reducing loss expectations of certain loan pools, resulting in adjustments to be spread on a level-yield
basis over the remaining expected lives of the loan pools. For the three months ended March 31, 2019 and 2018, the adjustments increased interest income by $1.5 million and $1.2 million, respectively.
As of March 31, 2019, the remaining accretable yield
adjustment that will affect interest income is $2.8 million
. Of the remaining adjustments affecting interest income, we expect to recognize $1.7 million of interest income during the remainder of 2019. 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.
Apart from the yield
accretion, the average yield on loans was 5.27% during the
three months ended March 31, 2019
,
compared to 4.72% during the
three months ended March 31, 2018
, as a result of higher current market rates on adjustable rate loans and new loans originated during the year.
In October 2018, the Company entered into an interest rate swap transaction as part of its ongoing interest rate management
strategies to hedge the risk of its floating rate loans. The notional amount of the swap is $400 million with a termination date in October 2025. Under the terms of the swap, the Company receives a fixed rate of interest of 3.018% and pays a
floating rate of interest equal to one-month USD-LIBOR. The floating rate resets monthly and net settlements of interest due to/from the counterparty also occur monthly. To the extent that the fixed rate continues to exceed one-month USD-LIBOR,
the Company will receive net interest settlements, which will be recorded as loan interest income. If one-month USD-LIBOR exceeds the fixed rate of interest in future periods, the Company will be required to pay net settlements to the counterparty
and will record those net payments as a reduction of interest income on loans. The Company recorded loan interest income related to this swap transaction of $513,000 in the three months ended March 31, 2019.
Interest Income – Investments and Other Interest-earning Assets
Interest income on investments increased in the three months
ended
March 31, 2019
compared to the three months ended
March 31, 2018
. Interest income
increased $716,000 as a result of an increase in average balances from $187.0 million during the three months ended
March 31, 2019
, to $278.5 million during the three
months ended
March 31, 2019
. Average balances of securities increased primarily due to purchases of agency multi-family mortgage-backed securities which have a fixed
rate of interest with expected lives of six to ten years. These purchased securities fit with the Company’s current asset/liability management strategies. Interest income increased $226,000 due to an increase in average interest rates from 2.84%
during the three months ended
March 31, 2018
, to 3.28% during the three months ended
March 31, 2019
, primarily due to higher market rates of interest on investment securities and a decrease in the volume of prepayments on mortgage-backed securities.
Interest income on other interest-earning assets increased
in the three months ended
March 31, 2019
compared to the three months ended
March 31, 2018
.
Interest income increased $161,000 due to an increase in average interest rates from 1.67% during the three months ended
March 31, 2018
, to 2.37% during the three
months ended
March 31, 2019
, primarily due to higher market rates of interest on other interest-bearing deposits in financial institutions. Partially offsetting that
increase, interest income decreased $18,000 as a result of a decrease in average balances from $99.1 million during the three months ended
March 31, 2019
, to $94.4
million during the three months ended
March 31, 2018
.
Total Interest Expense
Total interest expense increased $5.3 million, or 71.3%,
during the three months ended
March 31, 2019
, when compared with the three months ended
March 31, 2018
, due to an increase in interest expense on deposits of $4.9 million, or 87.5%, an increase in interest expense on short-term borrowing and repurchase agreements of $894,000, or 3,192.9%, an increase in interest expense on
subordinated debentures issued to capital trust of $65,000, or 32.2%, and an increase in interest expense on subordinated notes of $69,000, or 6.7%, partially offset by a decrease in interest expense on FHLBank advances of $605,000, or 100.0%.
Interest Expense – Deposits
Interest expense on demand deposits increased $525,000 due
to average rates of interest that increased from 0.34% in the three months ended
March 31, 2018
to 0.49% in the three months ended
March 31, 2019
. Partially offsetting that increase, interest expense on demand deposits decreased $72,000, due to a decrease in average balances from $1.56 billion during the three months ended
March
31, 2018
to $1.47 billion during the three months ended
March 31, 2019
.
Interest expense on time deposits increased $3.1 million as
a result of an increase in average rates of interest from 1.30% during the three months ended
March 31, 2018
, to 2.11% during the three months ended
March 31,
2019
. Interest expense on time deposits increased $1.3 million due to an increase in average balances of time deposits from $1.33 billion during the three months ended
March
31, 2018
, to $1.67 billion during the three months ended
March 31, 2019
. A large portion of the
Company’s certificate of deposit portfolio matures within six to eighteen months and therefore reprices fairly quickly; this is consistent with the portfolio over the past several years.
Older certificates of deposit that renewed or were
replaced with new deposits generally resulted in the Company paying a higher rate of interest due to market interest rate increases during 2018 and 2019.
The increase in
average balances of time deposits was a result of increases in both retail customer time deposits and in
brokered deposits added through the
CDARS program purchased funds
.
Interest Expense – FHLBank Advances, Short-term Borrowings and Repurchase Agreements, Subordinated Debentures
Issued to Capital Trusts and Subordinated Notes
During the three months ended
March 31, 2019
compared to the three months ended
March 31, 2018
, interest expense on FHLBank advances decreased
$605,000 due to a decrease in average balances from $145.5 million during the three months ended
March 31, 2018
to $-0- during the three months ended
March 31,
2019
. This decrease was primarily due to an overall decrease in term borrowings from the FHLBank. Instead, the Company utilized overnight borrowings from the FHLBank, primarily
due to slightly lower rates compared to term borrowings. These overnight FHLBank borrowings are included in short-term borrowings and repurchase agreements.
Interest expense on short-term borrowings and repurchase
agreements increased $787,000 due to an increase in average rates from 0.11% in the three months ended
March 31, 2018
to 1.45% in the three months ended
March
31, 2019
. The increase was due to an increase in market interest rates during the period and the higher interest rate charged on overnight FHLBank borrowings as compared to
customer repurchase agreements. Interest expense on short-term borrowings and repurchase agreements increased $107,000 due to an increase in average balances from $99.5 million during the three months ended
March 31, 2018
to $258.2 million during the three months ended
March 31, 2019
, which was primarily due to changes in
the Company’s funding needs and the mix of funding, which can fluctuate. In the three months ended March 31, 2019, more overnight FHLBank borrowings were utilized.
During the three months ended
March 31, 2019
, compared to the three months ended
March 31, 2018
, interest expense on subordinated debentures issued
to capital trusts increased $65,000 due to higher average interest rates. The average interest rate was 3.18% in the three months ended
March 31, 2018
compared to
4.20% in the three months ended
March 31, 2019
. The subordinated debentures are variable-rate debentures which bear interest at an average rate of three-month LIBOR
plus 1.60%, adjusting quarterly, which was 4.34% at
March 31, 2019
. There was no change in the average balance of the subordinated debentures between the 2019 and the
2018 periods.
In August 2016, the Company issued $75 million of 5.25%
fixed-to-floating rate subordinated notes due August 15, 2026. The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions and other issuance costs, of approximately $73.5 million. Interest expense on the
subordinated notes for the three months ended
March 31, 2019
increased $66,000 due to deferred issuance cost amortization.
Net Interest Income
Net interest income for the three months ended
March
31, 2019
increased $5.2 million to $44.6 million compared to $39.4 million for the three months ended
March 31, 2018
. Net interest margin was 4.06% in the three months ended
March 31, 2019
, compared to 3.93% in the three months ended
March 31, 2018
, an increase of 13 basis points, or 3.3%. In both three month periods, t
he Company’s net interest income and margin were positively impacted by
the increases in expected cash flows from the FDIC-acquired loan pools and the resulting increase to accretable yield, which were previously discussed in Note 7
of the Notes to Consolidated
Financial Statements
.
The positive impact of these changes in the three months ended March 31, 2019 and 2018 were increases in interest income of $1.5 million and $1.2
million, respectively, and increases in net
interest margin of 13 basis points and 12 basis points, respectively. Excluding the positive impact of the additional yield accretion, net interest margin increased 12 basis
points when compared to the year-ago three month period. The increase was primarily due to increased yields in most loan categories and higher overall yields on investments and interest-earning deposits at the Federal Reserve Bank, partially
offset by an increase in the average interest rate on deposits and borrowings.
The Company's overall average interest rate spread increased
one basis point, or 0.3%, from 3.74% during the three months ended
March 31, 2018
to 3.75% during the three months ended
March 31, 2019
. The increase was due to a 55 basis point increase in the weighted average yield on interest-earning assets, partially offset by a 54 basis point increase in the weighted average
rate paid on interest-bearing liabilities. In comparing the two periods, the yield on loans increased 58 basis points, the yield on investment securities increased 44 basis points and the yield on other interest-earning assets increased 70 basis
points. The rate paid on deposits increased 57 basis points, the rate paid on short-term borrowings and repurchase agreements increased 134 basis points, the rate paid on subordinated debentures issued to capital trusts increased 102 basis
points, the rate paid on subordinated notes increased 36 basis points and the rate paid on FHLBank advances decreased 169 basis points.
For additional information on net interest income components, refer to the "Average Balances, Interest Rates and Yields" tables in
this Quarterly Report on Form 10-Q.
Provision for Loan Losses and Allowance for Loan Losses
Management records a provision for loan losses in an amount it believes is 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. 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 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, financial analysis, 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 three months ended March 31, 2019, was unchanged at $2.0 million compared with $2.0 million
for the three months ended March 31, 2018. At March 31, 2019 and December 31, 2018, the allowance for loan losses was $38.7 million and $38.4 million, respectively. Total net charge-offs were $1.7 million and $2.1 million for the three months
ended March 31, 2019 and 2018, respectively. During the three months ended March 31, 2019, $934,000 of the $1.7 million of net charge-offs were in the consumer auto category. In addition, one commercial loan relationship amounted to $371,000 of
the total charge-offs during the 2019 first three months. In response to a more challenging consumer credit environment, the Company tightened its underwriting guidelines on automobile lending in the latter part of 2016. Management took this step
in an effort to improve credit quality in the portfolio and lower delinquencies and charge-offs. This action also resulted in a lower level of origination volume and, as such, the outstanding balance of the Company's automobile loans continued to
decline in the three months ended March 31, 2019. We expect to see more rapid reductions in the automobile loan outstanding balance as we determined in February 2019 to cease providing indirect lending services to automobile dealerships. At March
31, 2019, indirect automobile loans totaled approximately $184 million. We expect this total balance will be largely paid off in the next two to four years. General market conditions and unique circumstances related to individual borrowers and
projects contributed to the level of provisions and charge-offs. As assets 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.
All acquired loans were grouped into pools based on common characteristics and were recorded at their estimated fair values, which
incorporated estimated credit losses at the acquisition date. These loan pools are systematically reviewed by Management to determine the risk of losses that may exceed those identified at the time of the acquisition. Techniques used in
determining risk of loss are similar to those used to determine the risk of loss for the legacy Great Southern Bank portfolio, with most focus being placed on those loan pools which include the larger loan relationships and those loan pools which
exhibit higher risk characteristics. Review of the acquired loan portfolio also includes monitoring of payment performance, review of financial information and credit scores, collateral valuations and customer interaction to determine if any
additional reserves are warranted.
The Bank’s allowance for loan losses as a percentage of total loans, excluding FDIC-acquired loans, was 0.97% and 0.98% at March
31, 2019 and December 31, 2018, respectively. Management considers the allowance for loan losses adequate to cover losses inherent in the Bank’s loan portfolio at March 31, 2019, based on recent reviews of the Bank’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.
Non-performing Assets
Non-performing assets acquired through FDIC-assisted transactions, 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. These assets were initially recorded at their estimated fair values as of their acquisition dates and are accounted for
in pools; therefore, these loan pools are analyzed rather than the individual loans. The overall performance of the loan pools acquired in each of the five FDIC-assisted transactions has been better than original expectations as of the acquisition
dates.
As a result of changes in balances and composition of the loan portfolio, changes in economic and market
conditions and other factors specific to a borrower’s circumstances, the level of non-performing assets will fluctuate.
Non-performing assets, excluding all FDIC-assisted acquired assets, at
March 31, 2019
were $10.3 million, a decrease of $1.5 million from $11.8 million at December 31, 2018. Non-performing assets, excluding all FDIC-assisted acquired assets, as a percentage of total assets were 0.22% at
March 31, 2019
, compared to 0.25% at December 31, 2018.
Compared to December 31, 2018, non-performing loans decreased $1.7 million to $4.6 million at
March 31, 2019
, and foreclosed assets increased $214,000 to $5.7 million at March 31, 2019. Non-performing commercial business loans comprised $1.4 million, or 30.3%, of the total $4.6 million of
non-performing loans at March 31, 2019, a decrease of $32,000 from December 31, 2018. Non-performing consumer loans comprised $1.3 million, or 27.0%, of the total non-performing loans at March 31, 2019, a decrease of $562,000 from December 31,
2018. Non-performing one- to four-family residential loans comprised $1.1 million, or 24.0%, of the total non-performing loans at March 31, 2019, a decrease of $1.6 million from December 31, 2018. The decrease in this category was primarily due
to the transfer to foreclosed assets and related charge-downs of one relationship consisting of multiple properties previously in this category of non-performing loans. Non-performing commercial real estate loans comprised $847,000, or 18.2%, of
the total non-performing loans at March 31, 2019, an increase of $513,000 from December 31, 2018. Non-performing construction and land development loans comprised $18,000, or 0.4%, of the total non-performing loans at March 31, 2019, a decrease of
$31,000 from December 31, 2018.
Non-performing
Loans.
Activity in the non-performing loans category during the three months ended
March 31, 2019
was as follows:
|
|
Beginning
Balance,
January 1
|
|
|
Additions
to Non-
Performing
|
|
|
Removed
from Non-
Performing
|
|
|
Transfers to
Potential
Problem
Loans
|
|
|
Transfers to
Foreclosed
Assets and Repossessions
|
|
|
Charge-
Offs
|
|
|
Payments
|
|
|
Ending
Balance,
March 31
|
|
|
|
(In Thousands)
|
|
One- to four-family construction
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Subdivision construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Land development
|
|
|
49
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
18
|
|
Commercial construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
One- to four-family residential
|
|
|
2,664
|
|
|
|
334
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,250
|
)
|
|
|
(454
|
)
|
|
|
(181
|
)
|
|
|
1,113
|
|
Other residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
334
|
|
|
|
621
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(108
|
)
|
|
|
847
|
|
Commercial business
|
|
|
1,437
|
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(24
|
)
|
|
|
(58
|
)
|
|
|
1,405
|
|
Consumer
|
|
|
1,816
|
|
|
|
604
|
|
|
|
—
|
|
|
|
(84
|
)
|
|
|
(117
|
)
|
|
|
(705
|
)
|
|
|
(260
|
)
|
|
|
1,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,300
|
|
|
$
|
1,609
|
|
|
$
|
—
|
|
|
$
|
(84
|
)
|
|
$
|
(1,367
|
)
|
|
$
|
(1,214
|
)
|
|
$
|
(607
|
)
|
|
$
|
4,637
|
|
At March 31, 2019, the non-performing commercial business category included six loans, one of which was added during the current
quarter. The largest relationship in this category, which was added during 2018, totaled $1.1 million, or 78.7% of the total category. This relationship is collateralized by an assignment of an interest in a real estate project. The
non-performing one- to four-family residential category included 17 loans, three of which were added during the current quarter. One relationship in this category, which included nine loans which were collateralized by residential rental homes in
the Springfield, Mo. area, was charged down $371,000 during the current quarter and the remaining balance of $793,000 was transferred to foreclosed assets. The non-performing consumer category included 129 loans, 39 of which were added during the
current quarter, and the majority of which are indirect used automobile loans.
Potential Problem
Loans.
Compared to December 31, 2018, potential problem loans increased $1.8 million, or 54.7%, to $5.1 million. This increase was due to the addition of $2.0 million of loans to potential problem loans, partially offset by $154,000 in
payments and $69,000 in loans transferred to non-performing loans. Potential problem loans are loans which management has identified through routine internal review procedures as having possible credit problems that may cause the borrowers
difficulty in complying with the current repayment terms. These loans are not reflected in non-performing assets, but are considered in determining the adequacy of the allowance for loan losses.
Activity in the potential problem loans category during the three months ended March 31, 2019, was as follows:
|
|
Beginning
Balance,
January 1
|
|
|
Additions
to
Potential
Problem
|
|
|
Removed
from
Potential
Problem
|
|
|
Transfers to
Non-
Performing
|
|
|
Transfers to
Foreclosed
Assets and Repossessions
|
|
|
Charge-
Offs
|
|
|
Payments
|
|
|
Ending
Balance,
March 31
|
|
|
|
(In Thousands)
|
|
One- to four-family construction
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Subdivision construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
One- to four-family residential
|
|
|
1,044
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(67
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(128
|
)
|
|
|
849
|
|
Other residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
2,053
|
|
|
|
1,931
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
3,972
|
|
Commercial business
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
206
|
|
|
|
98
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(14
|
)
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,303
|
|
|
$
|
2,029
|
|
|
$
|
—
|
|
|
$
|
(69
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(154
|
)
|
|
$
|
5,109
|
|
At March 31, 2019, the commercial real estate category of potential problem loans included three loans, one of which was added
during the current quarter. The largest relationship in the category (added during the current quarter), which totaled $1.9 million, or 48.6% of the total category, is collateralized by a commercial retail building. Payments became past due
during the three months ended March 31, 2019, but were current in April 2019. The second largest relationship in this category, which totaled $1.9 million, or 48.3% of the total category, is collateralized by a mixed use commercial retail
building. The one- to four-family residential category of potential problem loans included 16 loans, all of which were added in prior periods. The consumer category of potential problem loans included 29 loans, 12 of which were added during the
current quarter.
Other Real Estate Owned and Repossessions.
Of the total $8.8 million of other real estate owned and repossessions at
March 31, 2019
,
$1.6 million represents the fair value of foreclosed and repossessed assets related to loans acquired in FDIC-assisted transactions and $1.5 million represents properties
which were not acquired through foreclosure. The foreclosed and other assets acquired in the FDIC-assisted transactions and the properties not acquired through foreclosure are not included in the following table and discussion of other real estate
owned and repossessions.
Activity in other real estate owned and repossessions during the three months ended March 31, 2019, was as follows:
|
|
Beginning
Balance,
January 1
|
|
|
Additions
|
|
|
Sales
|
|
|
Capitalized
Costs
|
|
|
Write-
Downs
|
|
|
Ending
Balance,
March 31
|
|
|
|
(In Thousands)
|
|
One- to four-family construction
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Subdivision construction
|
|
|
1,092
|
|
|
|
—
|
|
|
|
(68
|
)
|
|
|
—
|
|
|
|
(53
|
)
|
|
|
971
|
|
Land development
|
|
|
3,191
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(150
|
)
|
|
|
3,041
|
|
Commercial construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
One- to four-family residential
|
|
|
269
|
|
|
|
1,286
|
|
|
|
(570
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
985
|
|
Other residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial business
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
928
|
|
|
|
1,181
|
|
|
|
(1,412
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,480
|
|
|
$
|
2,467
|
|
|
$
|
(2,050
|
)
|
|
$
|
—
|
|
|
$
|
(203
|
)
|
|
$
|
5,694
|
|
At March 31, 2019, the land development category of foreclosed assets included seven properties, the largest of which was located
in the Branson, Mo. area and had a balance of $913,000, or 30.0% of the total category. Of the total dollar amount in the land development category of foreclosed assets, 65.1% was located in the Branson, Mo. area, including the largest property
previously mentioned. The subdivision construction category of foreclosed assets included six properties, the largest of which was located in the Branson, Mo. area and had a balance of $350,000, or 36.0% of the total category. Of the total dollar
amount in the subdivision construction category of foreclosed assets, 65.1% is located in Branson, Mo., including the largest property previously mentioned. The one- to four-family category of foreclosed assets included 14 properties. Thirteen
properties were added in the three months ended March 31, 2019, with 10 of those being related to each other and remaining at March 31, 2019. The largest relationship in this category, this newly added relationship, consisted of 10 properties in
the Springfield, Mo., area and had a balance of $675,000, or 65.8% of the total category. The amount of additions and sales under consumer loans are due to a higher volume of repossessions of automobiles, which generally are subject to a shorter
repossession process. The Company experienced increased levels of delinquencies and repossessions in indirect and used automobile loans throughout 2016 and 2017. The level of delinquencies and repossessions in indirect and used automobile loans
decreased in 2018 and to date in 2019.
Non-interest Income
For the three months ended March 31, 2019, non-interest income increased $515,000 to $7.5 million when compared to the three
months ended March 31, 2018
, primarily as a result of the following items:
Other income
: Other income increased $1.0
million compared to the prior year period. This increase was primarily due to gains totaling $677,000 from the sale of, or recovery of, receivables and assets that were acquired several years ago in FDIC-assisted transactions. In addition, the
Company recognized approximately $293,000 more in income from new debit card contracts than was recognized in the prior year period.
Service charges and ATM fees
: Service charges
and ATM fees decreased $286,000 compared to the prior year period. This decrease was primarily due to a decrease in overdraft and insufficient funds fees on customer accounts.
Net gains on loan sales
: Net gains on loan
sales decreased $214,000 compared to the prior year period. The decrease was due to a decrease in originations of fixed-rate loans during the 2019 period compared to the 2018 period. Fixed rate single-family mortgage loans originated are
generally subsequently sold in the secondary market. In 2019, the Company has originated more hybrid ARM single-family mortgage loans, which have been retained in the Company’s portfolio.
Non-interest Expense
For the three months ended March 31, 2019, non-interest expense increased $183,000 to $28.5 million when compared to the three
months ended March 31, 2018, primarily as a result of the following items:
Salaries and employee benefits
: Salaries and
employee benefits increased $1.0 million from the prior year
period
. The increase was due to staffing additions in the new loan production offices opened in Atlanta and
Denver in late 2018, and due to annual employee compensation increases.
Expense on other real estate and repossessions
:
Expense on other real estate and repossessions decreased $521,000 compared to the prior year period primarily due to higher valuation write-downs of certain foreclosed assets during the prior year period and higher levels of expense related to
consumer repossessions in the prior year period. During the 2018
period
, valuation write-downs of certain foreclosed assets totaled approximately $617,000, while
valuation write-downs in the 2019
period
totaled approximately $247,000.
Partnership tax credit investment amortization
:
Partnership tax credit expense decreased $211,000 in the three months ended March 31, 2019 compared to the prior year
period
. The Company periodically invests in certain
tax credits and amortizes those investments over the period that the tax credits are used. The tax credit period for certain of these credits ended in 2018; therefore, the final amortization of the investment in those credits also ended in 2018.
The Company’s efficiency ratio for the three months ended March 31, 2019, was 54.74% compared to 61.05% for the same period in
2018. The improvement in the ratio in the 2019 three month period was primarily due to an increase in net interest income. The Company’s ratio of non-interest expense to average assets decreased from 2.59% for the three months ended March 31,
2018, to 2.41% for the three months ended March 31, 2019. The decrease in the current three month period ratio was due to an increase in average assets in the 2019 period compared to the 2018 period. Average assets for the three months ended
March 31, 2019, increased $354.1 million, or 8.1%, from the three months ended March 31, 2018, primarily due to increases in loans receivable and investment securities.
Provision for Income Taxes
On December 22, 2017, H.R.1, originally known as the Tax Cuts and Jobs Act (the “TJC Act”), was signed into law. Among other
things, the TJC Act permanently lowered the corporate federal income tax rate to 21% from the prior maximum rate of 35%, effective for tax years including or commencing January 1, 2018. The Company currently expects its effective tax rate
(combined federal and state) to be approximately 17.5% to 19.0% in future years, mainly as a result of the TJC Act.
For the three months ended
March 31, 2019 and 2018
,
the Company's effective tax rate was 18.5% and 16.4%, respectively. These effective rates were lower than the statutory federal tax rates of 21%, 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. The Company’s effective tax rate may fluctuate in future periods 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 pre-tax income. The Company's effective income tax rate is currently expected to continue to be less than the statutory rate due primarily to the factors noted above.
Average Balances, Interest Rates and Yields
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning
assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Average balances of loans receivable include the average balances of
non-accrual loans for each period. Interest income on loans includes interest received on non-accrual loans on a cash basis. Interest income on loans includes the amortization of net loan fees which were deferred in accordance with accounting
standards. Net fees included in interest income were $1.0 million and $813,000 for the three months ended March 31, 2019 and 2018, respectively. Tax-exempt income was not calculated on a tax equivalent basis. The table does not reflect any effect
of income taxes.
|
|
March 31,
2019
(2)
|
|
|
Three Months Ended
March 31, 2019
|
|
|
Three Months Ended
March 31, 2018
|
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
4.26
|
%
|
|
$
|
497,129
|
|
|
$
|
6,388
|
|
|
|
5.21
|
%
|
|
$
|
431,121
|
|
|
$
|
5,183
|
|
|
|
4.88
|
%
|
Other residential
|
|
|
5.15
|
|
|
|
811,084
|
|
|
|
10,990
|
|
|
|
5.50
|
|
|
|
738,722
|
|
|
|
8,839
|
|
|
|
4.85
|
|
Commercial real estate
|
|
|
4.97
|
|
|
|
1,387,423
|
|
|
|
17,696
|
|
|
|
5.17
|
|
|
|
1,245,462
|
|
|
|
14,358
|
|
|
|
4.68
|
|
Construction
|
|
|
5.49
|
|
|
|
667,625
|
|
|
|
10,173
|
|
|
|
6.18
|
|
|
|
518,976
|
|
|
|
6,488
|
|
|
|
5.07
|
|
Commercial business
|
|
|
5.26
|
|
|
|
264,179
|
|
|
|
3,392
|
|
|
|
5.21
|
|
|
|
284,736
|
|
|
|
3,343
|
|
|
|
4.76
|
|
Other loans
|
|
|
5.99
|
|
|
|
436,979
|
|
|
|
5,704
|
|
|
|
5.29
|
|
|
|
541,449
|
|
|
|
6,597
|
|
|
|
4.94
|
|
Industrial revenue bonds
(1)
|
|
|
4.92
|
|
|
|
15,205
|
|
|
|
213
|
|
|
|
5.68
|
|
|
|
23,715
|
|
|
|
357
|
|
|
|
6.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable
|
|
|
5.23
|
|
|
|
4,079,624
|
|
|
|
54,556
|
|
|
|
5.42
|
|
|
|
3,784,181
|
|
|
|
45,165
|
|
|
|
4.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
(1)
|
|
|
3.41
|
|
|
|
278,536
|
|
|
|
2,251
|
|
|
|
3.28
|
|
|
|
187,007
|
|
|
|
1,309
|
|
|
|
2.84
|
|
Other interest-earning assets
|
|
|
2.49
|
|
|
|
94,374
|
|
|
|
551
|
|
|
|
2.37
|
|
|
|
99,080
|
|
|
|
408
|
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
5.04
|
|
|
|
4,452,534
|
|
|
|
57,358
|
|
|
|
5.22
|
|
|
|
4,070,268
|
|
|
|
46,882
|
|
|
|
4.67
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
90,804
|
|
|
|
|
|
|
|
|
|
|
|
102,368
|
|
|
|
|
|
|
|
|
|
Other non-earning assets
|
|
|
|
|
|
|
180,876
|
|
|
|
|
|
|
|
|
|
|
|
197,441
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
$
|
4,724,214
|
|
|
|
|
|
|
|
|
|
|
$
|
4,370,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand and savings
|
|
|
0.50
|
|
|
$
|
1,472,959
|
|
|
|
1,763
|
|
|
|
0.49
|
|
|
$
|
1,564,610
|
|
|
|
1,310
|
|
|
|
0.34
|
|
Time deposits
|
|
|
2.18
|
|
|
|
1,672,677
|
|
|
|
8,707
|
|
|
|
2.11
|
|
|
|
1,331,474
|
|
|
|
4,274
|
|
|
|
1.30
|
|
Total deposits
|
|
|
1.40
|
|
|
|
3,145,636
|
|
|
|
10,470
|
|
|
|
1.35
|
|
|
|
2,896,084
|
|
|
|
5,584
|
|
|
|
0.78
|
|
Short-term borrowings, repurchase agreements and other interest-bearing liabilities
|
|
|
0.37
|
|
|
|
258,183
|
|
|
|
922
|
|
|
|
1.45
|
|
|
|
99,489
|
|
|
|
28
|
|
|
|
0.11
|
|
Subordinated debentures issued to
capital trusts
|
|
|
4.34
|
|
|
|
25,774
|
|
|
|
267
|
|
|
|
4.20
|
|
|
|
25,774
|
|
|
|
202
|
|
|
|
3.18
|
|
Subordinated notes
|
|
|
5.92
|
|
|
|
73,900
|
|
|
|
1,094
|
|
|
|
6.00
|
|
|
|
73,713
|
|
|
|
1,025
|
|
|
|
5.64
|
|
FHLBank advances
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
145,517
|
|
|
|
605
|
|
|
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1.47
|
|
|
|
3,503,493
|
|
|
|
12,753
|
|
|
|
1.47
|
|
|
|
3,240,577
|
|
|
|
7,444
|
|
|
|
0.93
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
|
|
|
|
658,409
|
|
|
|
|
|
|
|
|
|
|
|
630,530
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
25,467
|
|
|
|
|
|
|
|
|
|
|
|
18,820
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
4,187,369
|
|
|
|
|
|
|
|
|
|
|
|
3,889,927
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
536,845
|
|
|
|
|
|
|
|
|
|
|
|
480,150
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
|
|
|
|
$
|
4,724,214
|
|
|
|
|
|
|
|
|
|
|
$
|
4,370,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
3.57
|
%
|
|
|
|
|
|
$
|
44,605
|
|
|
|
3.75
|
%
|
|
|
|
|
|
$
|
39,438
|
|
|
|
3.74
|
%
|
Net interest margin*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.06
|
%
|
|
|
|
|
|
|
|
|
|
|
3.93
|
%
|
Average interest-earning assets to
average interest-bearing liabilities
|
|
|
|
|
|
|
127.1
|
%
|
|
|
|
|
|
|
|
|
|
|
125.6
|
%
|
|
|
|
|
|
|
|
|
_______________________
|
*
|
Defined as the Company’s net interest income divided by total average interest-earning assets.
|
(1)
|
Of the total average balances of investment securities, average tax-exempt investment securities were $47.9 million and
$55.6 million for the three months ended March 31, 2019 and 2018, respectively. In addition, average tax-exempt loans and industrial revenue bonds were $21.7 million and $27.1 million for the three months ended March 31, 2019 and 2018,
respectively. Interest income on tax-exempt assets included in this table was $636,000 and $873,000 for the three months ended March 31, 2019 and 2018, respectively. Interest income net of disallowed interest expense related to tax-exempt
assets was $575,000 and $830,000 for the three months ended March 31, 2019 and 2018, respectively.
|
(2)
|
The yield on loans at March 31, 2019 does not include the impact of the accretable yield (income) on loans acquired in the
FDIC-assisted transactions. See “Net Interest Income” for a discussion of the effect on results of operations for the three months ended March 31, 2019.
|
The following tables present the dollar amounts of changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities for the periods shown. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in rate (i.e., changes in
rate multiplied by old volume) and (ii) changes in volume (i.e., changes in volume multiplied by old rate). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to
volume and rate. Tax-exempt income was not calculated on a tax equivalent basis.
|
|
Three Months Ended March 31,
|
|
|
|
2019 vs. 2018
|
|
|
|
Increase
|
|
|
|
|
|
|
(Decrease)
|
|
|
Total
|
|
|
|
Due to
|
|
|
Increase
|
|
|
|
Rate
|
|
|
Volume
|
|
|
(Decrease)
|
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
5,698
|
|
|
$
|
3,693
|
|
|
$
|
9,391
|
|
Investment securities
|
|
|
226
|
|
|
|
716
|
|
|
|
942
|
|
Other interest-earning assets
|
|
|
161
|
|
|
|
(18
|
)
|
|
|
143
|
|
Total interest-earning assets
|
|
|
6,085
|
|
|
|
4,391
|
|
|
|
10,476
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
525
|
|
|
|
(72
|
)
|
|
|
453
|
|
Time deposits
|
|
|
3,139
|
|
|
|
1,294
|
|
|
|
4,433
|
|
Total deposits
|
|
|
3,664
|
|
|
|
1,222
|
|
|
|
4,886
|
|
Short-term borrowings
|
|
|
787
|
|
|
|
107
|
|
|
|
894
|
|
Subordinated debentures issued to capital trust
|
|
|
65
|
|
|
|
—
|
|
|
|
65
|
|
Subordinated notes
|
|
|
66
|
|
|
|
3
|
|
|
|
69
|
|
FHLBank advances
|
|
|
—
|
|
|
|
(605
|
)
|
|
|
(605
|
)
|
Total interest-bearing liabilities
|
|
|
4,582
|
|
|
|
727
|
|
|
|
5,309
|
|
Net interest income
|
|
$
|
1,503
|
|
|
$
|
3,664
|
|
|
$
|
5,167
|
|
Liquidity is a measure of the Company's ability to generate sufficient cash to meet present and future financial obligations in a
timely manner through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. These obligations include the credit needs of customers, funding deposit withdrawals, and the day-to-day
operations of the Company. Liquid assets include cash, interest-bearing deposits with financial institutions and certain investment securities and loans. As a result of the Company’s management of the ability to generate liquidity primarily through
liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers’ credit needs. At March 31, 2019, the Company had commitments of approximately $171.6
million to fund loan originations, $1.16 billion of unused lines of credit and unadvanced loans, and $28.8 million of outstanding letters of credit.
Loan commitments and the unfunded portion of loans at the dates indicated were as follows (in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Closed loans with unused available lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate (one- to four-family)
|
|
$
|
154,400
|
|
|
$
|
150,948
|
|
|
$
|
133,587
|
|
|
$
|
123,433
|
|
|
$
|
105,390
|
|
Secured by real estate (not one- to four-family)
|
|
|
10,450
|
|
|
|
11,063
|
|
|
|
10,836
|
|
|
|
26,062
|
|
|
|
21,857
|
|
Not secured by real estate - commercial business
|
|
|
83,520
|
|
|
|
87,480
|
|
|
|
113,317
|
|
|
|
79,937
|
|
|
|
63,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed construction loans with unused
available lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate (one-to four-family)
|
|
|
33,818
|
|
|
|
37,162
|
|
|
|
20,919
|
|
|
|
10,047
|
|
|
|
14,242
|
|
Secured by real estate (not one-to four-family)
|
|
|
831,155
|
|
|
|
906,006
|
|
|
|
718,277
|
|
|
|
542,326
|
|
|
|
385,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Commitments not closed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate (one-to four-family)
|
|
|
36,945
|
|
|
|
24,253
|
|
|
|
23,340
|
|
|
|
15,884
|
|
|
|
13,411
|
|
Secured by real estate (not one-to four-family)
|
|
|
134,607
|
|
|
|
104,871
|
|
|
|
156,658
|
|
|
|
119,126
|
|
|
|
120,817
|
|
Not secured by real estate - commercial business
|
|
|
—
|
|
|
|
405
|
|
|
|
4,870
|
|
|
|
7,022
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,284,895
|
|
|
$
|
1,322,188
|
|
|
$
|
1,181,804
|
|
|
$
|
923,837
|
|
|
$
|
725,551
|
|
The Company's primary sources of funds are customer deposits, FHLBank advances, other borrowings, loan repayments, unpledged
securities, proceeds from sales of loans and available-for-sale securities and funds provided from operations. The Company utilizes particular sources of funds based on the comparative costs and availability at the time. The Company has from time
to time chosen not to pay rates on deposits as high as the rates paid by certain of its competitors and, when believed to be appropriate, supplements deposits with less expensive alternative sources of funds.
At March 31, 2019, the Company had these available secured lines and on-balance sheet liquidity:
Federal Home Loan Bank line
|
$981.9 million
|
|
Federal Reserve Bank line
|
$428.5 million
|
|
Cash and cash equivalents
|
$206.1 million
|
|
Unpledged securities
|
$114.8 million
|
|
Statements of Cash Flows.
During
both the three months ended March 31, 2019 and 2018, the Company had positive cash flows from operating activities. The Company experienced negative cash flows from investing activities during both the three months ended March 31, 2019 and 2018.
The Company experienced positive cash flows from financing activities during the three months ended March 31, 2019 and negative cash flows from financing activities during the three months ended March 31, 2018.
Cash flows from operating activities for the periods covered by the Statements of Cash Flows have been
primarily related to changes in accrued and deferred assets, credits and other liabilities, the provision for loan losses, depreciation and amortization, realized gains on sales of loans and the amortization of deferred loan origination fees and
discounts (premiums) on loans and investments, all of which are non-cash or non-operating adjustments to operating cash flows. Net income adjusted for non-cash and non-operating items and the origination and sale of loans held for sale were the
primary source of cash flows from operating activities. Operating activities provided cash flows of $29.8 million and $29.9 million during the three months ended March 31, 2019 and 2018, respectively.
During the three months ended March 31, 2019, investing activities used cash of $88.2 million, primarily due to the purchase of
loans and the net origination of loans, the purchase of investment securities and the purchase of equipment, partially offset by the sale of other real estate owned, the sale of investment securities and payments received on investment securities.
Investing activities in the 2018 period used cash of $37.0 million, primarily due to the net increase in loans and the purchase of equipment, partially offset by the sale of other real estate owned and payments received on investment securities.
Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows are due to changes in
deposits after interest credited, changes in FHLBank advances and changes in short-term borrowings, as well as dividend payments to stockholders, purchases of the Company’s common stock and the exercise of common stock options. Financing
activities provided cash of $61.8 million and used cash of $15.2 million during the three months ended March 31, 2019 and 2018, respectively. In the 2019 three-month period, financing activities provided cash primarily as a result of net increases
in checking account balances and certificates of deposit, partially offset by decreases in short-term borrowings. Net cash used during the 2018 three-month period was due primarily to the decrease in certificates of deposit. Financing activities
in the future are expected to primarily include changes in deposits, changes in FHLBank advances, changes in short-term borrowings and dividend payments to stockholders.
Capital Resources
Management continuously reviews the capital position of the Company and the Bank to ensure compliance with minimum regulatory
requirements, as well as to explore ways to increase capital either by retained earnings or other means.
At March 31, 2019, the Company's total stockholders' equity and common stockholders’ equity were each $543.6 million, or 11.4% of
total assets, equivalent to a book value of $38.36 per common share. At December 31, 2018, total stockholders' equity and common stockholders’ equity were each $532.0 million, or 11.4% of total assets, equivalent to a book value of $37.59 per
common share. At both March 31, 2019 and December 31, 2018, the Company’s tangible common equity to tangible assets ratio was 11.2%. (See Non-GAAP Financial Measures below).
Banks are required to maintain minimum risk-based capital ratios. These ratios compare capital, as defined by the risk-based
regulations, to assets adjusted for their relative risk as defined by the regulations. Under current guidelines banks must have a minimum common equity Tier 1 capital ratio of 4.50%, a minimum Tier 1 risk-based capital ratio of 6.00%, a minimum
total risk-based capital ratio of 8.00%, and a minimum Tier 1 leverage ratio of 4.00%. To be considered "well capitalized," banks must have a minimum common equity Tier 1 capital ratio of 6.50%, a minimum Tier 1 risk-based capital ratio of 8.00%, a
minimum total risk-based capital ratio of 10.00%, and a minimum Tier 1 leverage ratio of 5.00%. On March 31, 2019, the Bank's common equity Tier 1 capital ratio was 12.5%, its Tier 1 capital ratio was 12.5%, its total capital ratio was 13.4% and
its Tier 1 leverage ratio was 12.1%. As a result, as of March 31, 2019, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such. On December 31, 2018, the Bank's common equity Tier 1 capital ratio was
12.4%, its Tier 1 capital ratio was 12.4%, its total capital ratio was 13.3% and its Tier 1 leverage ratio was 12.2%. As a result, as of December 31, 2018, the Bank was well capitalized, with capital ratios in excess of those required to qualify as
such.
The FRB has established capital regulations for bank holding companies that generally parallel the capital regulations for banks.
On March 31, 2019, the Company's common equity Tier 1 capital ratio was 11.3%, its
Tier 1 capital ratio was 11.8%, its total capital ratio was 14.3% and its Tier 1 leverage ratio was 11.5%. To be considered well
capitalized, a bank holding company must have a Tier 1 risk-based capital ratio of at least 6.00% and a total risk-based capital ratio of at least 10.00%. As of March 31, 2019, the Company was considered well capitalized, with capital ratios in
excess of those required to qualify as such. On December 31, 2018, the Company's common equity Tier 1 capital ratio was 11.4%, its Tier 1 capital ratio was 11.9%, its total capital ratio was 14.4% and its Tier 1 leverage ratio was 11.7%. As of
December 31, 2018, the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such.
In addition to the minimum common equity Tier 1 capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio,
the Company and the Bank have to maintain a capital conservation buffer consisting of additional common equity Tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying
dividends, repurchasing shares, and paying discretionary bonuses. This capital conservation buffer requirement began phasing in beginning on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which amount
increased by an additional 0.625% each year until the buffer requirement of greater than 2.5% of risk-weighted assets was fully implemented on January 1, 2019.
For additional information, see “Item 1. Business--Government Supervision and Regulation-Capital” in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2018.
Dividends
. During the three
months ended March 31, 2019, the Company declared common stock cash dividends of $1.07 per share, or 87% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.32 per share (which was
declared in December 2018). The total dividends declared consisted of a regular cash dividend of $0.32 per share and a special cash dividend of $0.75 per share. During the three months ended March 31, 2018, the Company declared a common stock
cash dividend of $0.28 per share, or 29% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.24 per share (which was declared in December 2017). The Board of Directors meets regularly to
consider the level and the timing of dividend payments. The $0.32 per share dividend declared but unpaid as of March 31, 2019, was paid to stockholders in April 2019.
Common Stock Repurchases and Issuances
.
The Company has been in various buy-back programs since May 1990. During the three months ended March 31, 2019, the Company issued 35,600 shares of stock at an average price of $29.56 per share to cover stock option exercises and repurchased 16,040
shares of its common stock at an average price of $52.93 per share. During the three months ended March 31, 2018, the Company did not repurchase any shares of its common stock. During the three months ended March 31, 2018, the Company issued
23,609 shares of stock at an average price of $23.17 per share to cover stock option exercises.
On April 18, 2018, the Company's Board of Directors authorized management to repurchase up to 500,000 shares of the Company's
outstanding common stock, under a program of open market purchases or privately negotiated transactions. The plan does not have an expiration date. Management has historically utilized stock buy-back programs from time to time as long as
management believed that repurchasing the stock would contribute to the overall growth of shareholder value. The number of shares of stock that will be repurchased at any particular time and the prices that will be paid are subject to many factors,
several of which are outside of the control of the Company. The primary factors, however, are the number of shares available in the market from sellers at any given time, the price of the stock within the market as determined by the market and the
projected impact on the Company’s earnings per share and capital.
Non-GAAP Financial Measures
This document contains certain financial information determined by methods other than in accordance with accounting principles
generally accepted in the United States (“GAAP”), consisting of the tangible common equity to tangible assets ratio.
In calculating the ratio of tangible common equity to tangible assets, we subtract period-end intangible assets from common
equity and from total assets. Management believes that the presentation of this measure excluding the impact of intangible assets provides useful supplemental information that is helpful in understanding our financial condition and results of
operations, as it provides a method to assess management’s success in utilizing our tangible capital as well as our capital strength. Management also believes that providing a measure that excludes balances of intangible assets, which are
subjective components of valuation, facilitates the comparison of our performance with the performance of our peers. In addition, management believes that this is a standard financial measure used in the banking industry to evaluate performance.
This non-GAAP financial measure is supplemental and is not a substitute for any analysis based on GAAP financial measures.
Because not all companies use the same calculation of non-GAAP measures, this presentation may not be comparable to other similarly titled measures as calculated by other companies.
Non-GAAP Reconciliation: Ratio of Tangible Common Equity to Tangible Assets
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
Common equity at period end
|
|
$
|
543,635
|
|
|
$
|
531,977
|
|
Less: Intangible assets at period end
|
|
|
8,963
|
|
|
|
9,288
|
|
Tangible common equity at period end (a)
|
|
$
|
534,672
|
|
|
$
|
522,689
|
|
|
|
|
|
|
|
|
|
|
Total assets at period end
|
|
$
|
4,778,220
|
|
|
$
|
4,676,200
|
|
Less: Intangible assets at period end
|
|
|
8,963
|
|
|
|
9,288
|
|
Tangible assets at period end (b)
|
|
$
|
4,769,257
|
|
|
$
|
4,666,912
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible assets (a) / (b)
|
|
|
11.21
|
%
|
|
|
11.20
|
%
|