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 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) the possibility that the amounts of any pre-tax gain and the changes in non-interest income, non-interest expense and interest expense actually resulting from the Bank's recently completed transaction with West Gate Bank might be materially different from estimated amounts; (ii) the possibility that the actual reduction in the Company's effective tax rate expected to result from H. R. 1, formerly known as the "Tax Cuts and Jobs Act" (the "Tax Reform Legislation") might be different from the reduction estimated by the Company; (iii) 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; (iv) changes in economic conditions, either nationally or in the Company's market areas; (v) fluctuations in interest rates; (vi) 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; (vii) the possibility of other-than-temporary impairments of securities held in the Company's securities portfolio; (viii) the Company's ability to access cost-effective funding; (ix) fluctuations in real estate values and both residential and commercial real estate market conditions; (x) demand for loans and deposits in the Company's market areas; (xi) the ability to adapt successfully to technological changes to meet customers' needs and developments in the marketplace; (xii) 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; (xiii) 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; (xiv) changes in accounting principles, policies or guidelines; (xv) monetary and fiscal policies of the Federal Reserve Board and the U.S. Government and other governmental initiatives affecting the financial services industry; (xvi) results of examinations of the Company and the 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; (xvii) costs and effects of litigation, including settlements and judgments; and (xviii) 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 future periods.
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 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 reflect 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 these 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 June 30, 2018, 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 June 30, 2018, 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 June 30, 2018, the amortizable intangible assets consisted of core deposit intangibles of $4.6 million, which are described 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 existed at June 30, 2018, 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:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
Goodwill – Branch acquisitions
|
|
$
|
5,396
|
|
|
$
|
5,396
|
|
Deposit intangibles
|
|
|
|
|
|
|
|
|
Sun Security Bank
|
|
|
87
|
|
|
|
263
|
|
InterBank
|
|
|
109
|
|
|
|
181
|
|
Boulevard Bank
|
|
|
336
|
|
|
|
397
|
|
Valley Bank
|
|
|
1,200
|
|
|
|
1,400
|
|
Fifth Third Bank
|
|
|
2,897
|
|
|
|
3,213
|
|
|
|
|
4,629
|
|
|
|
5,454
|
|
|
|
$
|
10,025
|
|
|
$
|
10,850
|
|
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 into a significant 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 improved since as indicated by consumer confidence levels, increased economic activity and low unemployment levels.
The national unemployment rate at June 2018 remained steady at 4.0% and is 0.3% lower compared to June 2017. Total nonfarm payroll employment edged up by 213,000 in June with employment increases in professional and business services, manufacturing, and health care. The U.S. labor force participation rate (the share of working-age Americans who are either employed or are actively looking for a job) remained unchanged since March at 62.9%. The unemployment rate for the Midwest, where most of the Company's business is conducted, was at 3.7% which is favorable in comparison to the National unemployment rate of 4.0%. Unemployment rates at June 30, 2018, were: Missouri at 3.5%, Arkansas at 3.8%, Kansas at 3.4%, Iowa at 2.7%, Nebraska at 2.9%, Minnesota at 3.1%, Illinois at 4.3%, Oklahoma at 3.9% and Texas at 4.0%. Of the metropolitan areas in which Great Southern Bank does business, the Tulsa area had the highest unemployment level at 3.9% as of May 2018. This rate had
improved significantly since the 5% rate reported as of June 2017. The unemployment rates for the Springfield and
St. Louis market areas at 3.4% and 3.3% respectively; were well below the national average. Metropolitan areas in Arkansas, Iowa, Nebraska and Minnesota boasted unemployment levels among the lowest in the nation
.
Sales of newly built, single-family homes in June 2018 were at a seasonally adjusted annual rate of 631,000 according to U.S. Census Bureau and the Department of Housing and Urban Development estimates. This is 5.3% below the revised May rate of 666,000, but is 2.4% above the June 2017 estimate of 616,000. The median sales price of new houses sold in June 2018 was $302,100, down from $315,200 a year earlier. The average sales price was $363,300, down slightly from $370,600 as of June 2017. For the first six months of this year, new-home sales have risen 6.9% as a solid job market and shortage of existing homes on the market have boosted demand. The inventory of new homes for sale was 301,000 at the end of June, which is a 5.7 months' supply at the current sales pace. In the Midwest, new home sales climbed 14.4% year-to-date.
Existing home sales decreased for the third straight month in June with declines occurring in the South and West exceeding sales gains in the Northeast and Midwest. In June 2018, existing home sales decreased 0.6% to a seasonally adjusted annual rate of 5.38 million, which is 2.2% below a year ago. The ongoing supply and demand imbalance helped push June's median sales price to an all-time high. This marks the 76th consecutive month of year over year gains as prices reached an all-time high. The national median existing home price for all housing types in June was $276,900, up 5.2% from June 2017. The Midwest region existing home median sale price was $218,800, up 3.5% from a year ago. Total housing inventory at the end of June climbed 4.3% to 1.95 million; 0.5% above a year ago. Unsold inventory is a 4.3 month supply at the current sales pace compared to a 4.2 month supply a year ago.
The multi-family sector rebounded in 2017, with demand approaching the highest level on record. National vacancy rates were 5.8% at the end of June while our market areas reflected the following vacancy levels; Springfield, Mo. at 5.3%, St. Louis at 8.9%, Kansas City at 6.7%, Minneapolis at 4.6%, Tulsa, Okla. at 9.8%, Dallas-Fort Worth at 7.7% and Chicago at 6.0%. Despite supply-side pressure, rent growth in 2018 had not slowed materially from the previous year's pace. Sales transaction value continued to be strong, and cap rates appeared to have leveled off. Supply is expected to outpace demand in 2018, putting upward pressure on vacancies and slowing rent growth. All of the Company's market areas within the multi-family sector are in expansion phase.
Nationally, approximately one-half 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. 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 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.
Approximately 70% of the retail sector is in the expansion phase of the market cycle, with the rest in recovery mode. Included in the retail expansion market segment are the Company's larger market areas -- Chicago, Minneapolis, Kansas City, Dallas-Ft. Worth, and St. Louis, with Chicago and Minneapolis in the latter stages of expansion.
All of the Company's larger industrial market areas are categorized as being in the expansion cycle with prospects of continuing good economic growth.
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.
On April 26, 2016, Great Southern Bank executed an agreement with the FDIC to terminate the loss sharing agreements for Team Bank, Vantus Bank and Sun Security Bank, effective immediately. The agreement required the FDIC to pay $4.4 million to settle all outstanding items related to the terminated loss sharing agreements.
On June 9, 2017, Great Southern Bank executed an agreement with the FDIC to terminate the loss sharing agreements for InterBank, effective immediately. Pursuant to the termination agreement, the FDIC paid $15.0 million to the Bank to settle all outstanding items related to the terminated loss sharing agreements. The Company recorded a pre-tax gain on the termination of $7.7 million.
The termination of the loss sharing agreements for the TeamBank, Vantus Bank, Sun Security Bank and InterBank transactions have no impact on the yields for the loans that were previously covered under these agreements, as the remaining accretable yield adjustments that affect interest income have not been changed and will continue to be recognized for all FDIC-assisted transactions in the same manner as they have been previously. All post-termination recoveries, gains, losses and expenses related to these previously covered assets are recognized entirely by Great Southern Bank since the FDIC no longer shares in such gains or losses. Accordingly, the Company's earnings are positively impacted to the extent the Company recognizes gains on any sales or recoveries in excess of the carrying value of such assets. Similarly, the Company's future earnings will be negatively impacted to the extent the Company recognizes expenses, losses or charge-offs related to such assets. There will be no future effects on non-interest income (expense) related to adjustments or amortization of the indemnification assets for Team Bank, Vantus Bank, Sun Security Bank or InterBank. All rights and obligations of the Bank and the FDIC under the terminated loss sharing agreements, including the settlement of all existing loss sharing and expense reimbursement claims, have been resolved and terminated.
General
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 $154.3 million, or 3.5%, from $4.41 billion at December 31, 2017, to $4.57 billion at June 30, 2018. Full details of the current period changes in total assets are provided in the "Comparison of Financial Condition at June 30, 2018 and December 31, 2017" section of this Quarterly Report on Form 10-Q.
Loans.
Net loans increased $133.5 million, or 3.6%, from $3.73 billion at December 31, 2017, to $3.86 billion at June 30, 2018. Included in the net increase in loans were reductions of $25.5 million in the FDIC-acquired loan portfolios. In addition, there were higher than usual unscheduled significant paydowns on loans during the six months ended June 30, 2018. Loan paydowns in excess of $1.0 million totaled $298 million for the six months ended June 30, 2018. Excluding FDIC-assisted acquired loans and mortgage loans held for sale, total gross loans increased $274.5 million from December 31, 2017 to June 30, 2018. Increases primarily occurred in commercial construction loans, commercial real estate loans, other residential (multi-family) loans and one-to four-family residential mortgage 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. 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 and Tulsa. 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. Great Southern's consumer underwriting and pricing standards have been fairly consistent over the past several years, since the first half of 2016. In response to a more challenging consumer credit environment, 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 lower 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. See "Item 1. Business – Lending Activities – General, – Commercial Real Estate and Construction Lending, and – Consumer Lending" in the Company's December 31, 2017 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 June 30, 2018 and December 31, 2017, an estimated 0.1% and 0.1%, respectively, of total owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination. At June 30, 2018 and December 31, 2017, an estimated 1.1% and 1.5%, respectively, of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.
At June 30, 2018, troubled debt restructurings totaled $13.4 million, or 0.3% of total loans, down $1.6 million from $15.0 million, or 0.4% of total loans, at December 31, 2017. 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 six months ended June 30, 2018, four loans totaling $20,000 were restructured into multiple new loans. For troubled debt restructurings occurring during the year ended December 31, 2017, no loans 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 cash flows expected 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 detail in Note 7 of the Notes to Consolidated Financial Statements contained in this report. For acquired loan pools, the Company may allocate, and at June 30, 2018, 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.
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 six months ended June 30, 2018, total deposit balances decreased $87,000.
Transaction account balances decreased $13.7 million to $2.21 billion at June 30, 2018, while retail certificates of deposit increased $30.6 million compared to December 31, 2017, to $1.14 billion at June 30, 2018. The decreases in transaction accounts were primarily a result of decreases in money market deposit accounts, partially offset by increases in NOW account deposit accounts. Retail certificates of deposit increased due to an increase in retail certificates generated through our banking centers, partially offset by a decrease in certificates opened through the Company's internet deposit acquisition channels. In addition, at June 30, 2018 and December 31, 2017, customer deposits totaling $28.9 million and $34.5 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 $214.0 million at June 30, 2018, a decrease of $11.5 million from $225.5 million at December 31, 2017.
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.
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 Federal Reserve Board 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 six different occasions beginning December 14, 2016, with the Federal Funds rate now at 2.00%.
Great Southern has a substantial portion of its loan portfolio ($1.34 billion at
June 30
, 2018) which is tied to the one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days after
June 30
, 2018. Of these loans, $1.07 billion had interest rate floors. Great Southern also has a significant portfolio of loans ($294 million at
June 30
, 2018) which are 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 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. The interest rate floors in effect may limit the immediate increase in interest rates on certain of these loans, until such time as rates rise above the floors. However, the Company may have to increase rates paid on deposits to maintain deposit balances and pay higher rates on borrowings, which could negatively impact net interest margin. The impact of the low rate environment on our net interest margin in future periods is expected to be fairly neutral. Any margin gained by rate increases on loans may be somewhat offset by reduced yields from our investment securities (to the extent investment securities are purchased) and our existing loan portfolio as payments are made and the proceeds are potentially reinvested at lower rates on new loans originated. Interest rates on certain adjustable rate loans may reset lower according to their contractual terms and index rate to which they are tied and new loans may be originated at lower market rates than the overall portfolio rate. 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. The Company recorded a gain in non-interest income in June 2017 related to the termination of the InterBank loss sharing agreements. Non-interest income may also be affected by the Company's interest rate derivative activities, if the Company chooses to implement derivatives.
See Note 15 "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 and Six Months Ended June 30, 2018 and 2017" 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 Federal Reserve Board 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 recently enacted 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 new 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 new 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 new 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 will increase an equal amount each year until the buffer requirement of greater than 2.5% of risk-weighted assets is fully implemented on January 1, 2019.
Effective January 1, 2015, the new 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 new 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
In June 2018, the Company consolidated operations of a banking center into a nearby office in Paola, Kan. The banking center, located at 1 S. Pearl Street, was closed and all accounts were automatically transferred to the banking center at 1515 Baptiste Drive, less than a mile away. A deposit-taking ATM and interactive teller machine are available for customers at the S. Pearl Street building.
On July 20, 2018, the Company closed on the sale of four banking centers in the Omaha, Neb., metropolitan market to Lincoln, Neb.-based West Gate Bank. Pursuant to the purchase and assumption agreement, the Bank sold branch deposits of approximately $56 million and sold substantially all branch-related real estate, fixed assets and ATMs. Based upon deposit balances at the time of closing, the Company recorded a pre-tax gain (excluding expenses related to the sale) of approximately $7.4 million on the sale based on the contractual deposit premium and the sales price of the branch assets. The Company estimates that the gain will increase earnings approximately $0.38 (after tax) per diluted share, in the three months ending September 30, 2018. As a result of this transaction, the Company expects that non-interest income will decrease $300,000–$350,000 annually, non-interest expense will decrease by $1.1– $1.2 million annually, and interest expense will increase by $400,000-$500,000 annually (based on current interest rates for non-deposit funds). Great Southern is maintaining a commercial loan production office in the Omaha market and moved that office into a new location in July.
During the third quarter of 2018, the Company expects to open commercial loan production offices in Atlanta, Ga., and Denver, Colo., pending regulatory approvals. Local and highly-experienced commercial lenders have been
hired to manage each office. The Company also operates commercial loan production offices in Chicago, Dallas, and Tulsa, Okla.
In June 2018, an experienced lender was hired to serve as Small Business Administration (SBA) Manager, a new role in the Company. Based in the Dallas commercial loan production office, the Manager and his staff will exclusively focus on sourcing and servicing SBA 7a, SBA 504 and other commercial real estate loan opportunities throughout Great Southern's market areas.
Comparison of Financial Condition at June 30, 2018 and December 31, 2017
During the six months ended June 30, 2018, the Company's total assets increased by $154.3 million to $4.57 billion. The increase was primarily attributable to an increase in loans receivable and cash and cash equivalents, partially offset by a decrease in available-for-sale investment securities and prepaid expenses and other assets.
Cash and cash equivalents were $280.5 million at June 30, 2018, an increase of $38.2 million, or 15.8%, from $242.3 million at December 31, 2017.
During the six months ended June 30, 2018, cash and cash equivalents increased primarily due to an increase in Federal Home Loan Bank advances and significant loan repayments during the last week of June 2018.
The Company's available-for-sale securities decreased $9.2 million, or 5.1%, compared to December 31, 2017. The decrease was primarily due to calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities.
Net loans increased $133.5 million from December 31, 2017, to $3.86 billion at June 30, 2018.
Increases 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 $58 million in consumer auto loans and $25.5 million in the FDIC-acquired loan portfolios. Excluding FDIC-assisted acquired loans and mortgage loans held for sale, total gross loans (including the undisbursed portion of loans) increased $274.5 million from December 31, 2017 to June 30, 2018.
Total liabilities increased $135.7 million, from $3.94 billion at December 31, 2017 to $4.08 billion at June 30, 2018. The increase was primarily attributable to an increase in FHLB advances and securities sold under reverse repurchase agreements with customers, partially offset by a decrease in short-term borrowings.
Total deposits decreased $87,000 from December 31, 2017. Deposits decreased due to decreases in brokered funds, including CDARS program purchased funds, transaction accounts and internet-acquired certificates of deposit. These decreases were partially offset by increases in retail certificates of deposit. Transaction account balances decreased $13.7 million to $2.21 billion at June 30, 2018, while retail certificates of deposit increased $30.6 million compared to December 31, 2017, to $1.14 billion at June 30, 2018. Customer retail certificates increased by $34.1 million during the six months ended June 30, 2018, partially offset by
decreases of $3.5 million in c
ertificates of deposit
opened through the Company's internet deposit acquisition channels.
Brokered deposits, including CDARS program purchased funds, were $214.0 million at June 30, 2018, a decrease of $11.5 million from $225.5 million at December 31, 2017.
The Company's Federal Home Loan Bank Advances
totaled $259.0 million at June 30, 2018, an increase of $131.5 million, or 103.1%, compared to $127.5 million at December 31, 2017.
The increase was due to repayment of overnight FHLB borrowings during the period which were replaced with short-term advances, funding of loans and temporary funding of decreases in brokered deposits.
Securities sold under reverse repurchase agreements with customers increased $15.0 million from $80.5 million at December 31, 2017 to $95.5 million at June 30, 2018. These balances fluctuate over time based on customer demand for this product.
Short term borrowings decreased $15.2 million from $16.6 million at December 31, 2017 to $1.4 million at June 30, 2018. The decrease was primarily due to repayment of overnight FHLB borrowings during the period.
Total stockholders' equity increased $18.6 million from $471.7 million at December 31, 2017 to $490.3 million at June 30, 2018. The Company recorded net income of $27.3 million for the six months ended June 30, 2018, and dividends declared on common stock were $7.9 million. Accumulated other comprehensive income decreased $2.0 million due to the changes in the fair value of available-for-sale investment securities. In addition, total stockholders' equity increased $1.2 million due to stock option exercises.
Results of Operations and Comparison for the Three and Six Months Ended June 30, 2018 and 2017
General
Net income was $13.8 million for the three months ended June 30, 2018 compared to $16.2 million for the three months ended June 30, 2017. This decrease of $2.4 million, or 14.4%, was primarily due to a decrease in non-interest income of $8.3 million, or 52.8% and an increase in non-interest expense of $1.5 million, or 5.4%, partially offset by a decrease in income tax expense of $4.2 million, or 58.8% and an increase in net interest income of $3.3 million, or 8.7%.
Net income was $27.3 million for the six months ended June 30, 2018 compared to $27.7 million for the six months ended June 30, 2017. This decrease of $390,000, or 1.4%, was primarily due to a decrease in non-interest income of $9.1 million, or 38.7% and an increase in non-interest expense of $1.3 million, or 2.3%, partially offset by a decrease in income tax expense of $5.7 million, or 50.2%, an increase in net interest income of $4.1 million, or 5.3%, and a decrease in provision for loan losses of $300,000, or 7.1%.
Total Interest Income
Total interest income increased $5.2 million, or 11.6%, during the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The increase was due to a $5.1 million increase in interest income on loans and a $146,000 increase in interest income on investments and other interest-earning assets. Interest income on loans increased for the three months ended June 30, 2018 compared to the same period in 2017, due to higher average balances on loans and higher average rates of interest. Interest income from investment securities and other interest-earning assets increased during the three months ended June 30, 2018 compared to the same period in 2017 due to higher average rates of interest, partially offset by lower average balances of investment securities.
Total interest income increased $6.7 million, or 7.4%, during the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increase was due to a $6.5 million increase in interest income on loans and a $195,000 increase in interest income on investments and other interest-earning assets. Interest income on loans increased for the six months ended June 30, 2018 compared to the same period in 2017, due to higher average balances on loans and higher average rates of interest. Interest income from investment securities and other interest-earning assets increased during the six months ended June 30, 2018, due to higher average rates of interest, partially offset by lower average balances of investment securities and interest-bearing deposits at the Federal Reserve Bank.
Interest Income – Loans
During the three months ended June 30, 2018 compared to the three months ended June 30, 2017, interest income on loans increased $3.9 million as a result of higher average interest rates on loans. The average yield on loans increased from 4.56% during the three months ended June 30, 2017, to 4.97% during the three months ended June 30, 2018. 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 $1.1 million as the result of higher average loan balances, which increased from $3.79 billion during the three months ended June 30, 2017, to $3.89 billion during the three months ended June 30, 2018. The higher average balances were primarily due to organic loan growth in commercial construction loans, commercial real estate loans and certain other loan categories, partially offset by decreases in consumer loans.
During the six months ended June 30, 2018 compared to the six months ended June 30, 2017, interest income on loans increased $5.5 million as a result of higher average interest rates on loans. The average yield on loans increased from 4.62% during the six months ended June 30, 2017, to 4.91% during the six months ended June 30, 2018. 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 $1.0 million as the result of higher average loan balances, which increased from $3.79 billion during the six months ended June 30, 2017, to $3.84 billion during the six months ended June 30, 2018. The higher average balances were primarily due to organic loan growth, partially offset by a lower amount of accretion income in the current year period compared to the prior year period resulting from the increases in expected cash flows to be received from the FDIC-acquired loan pools as previously discussed in Note 7 of the Notes to Consolidated Financial Statements.
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 June 30, 2018 and 2017, the adjustments increased interest income by $1.1 million and $1.3 million, respectively, and decreased non-interest income by $-0- and $-0-, respectively. The net impact to pre-tax income was $1.1 million and $1.3 million, respectively, for the three months ended June 30, 2018 and 2017. For the six months ended June 30, 2018 and 2017, the adjustments increased interest income by $2.2 million and $3.3 million, respectively, and decreased non-interest income by $-0- and $634,000, respectively. The net impact to pre-tax income was $2.2 million and $2.6 million, respectively, for the six months ended June 30, 2018 and 2017.
As of June 30, 2018, the remaining accretable yield adjustment that will affect interest income is $2.9 million
. Of the remaining adjustments affecting interest income, we expect to recognize $1.4 million of interest income during the remainder of 2018. 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 4.86% during the
three months ended June 30, 2018
, compared to 4.43% during the
three months ended June 30, 2017
, as a result of higher current market rates on adjustable rate loans and new loans originated during the year. Apart from the yield accretion, the average yield on loans was 4.79% during the
six months ended June 30, 2018
, compared to 4.45% during the
six months ended June 30, 2017.
Interest Income – Investments and Other Interest-earning Assets
Interest income on investments decreased in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. Interest income decreased $154,000 as a result of a decrease in average balances from $211.9 million during the three months ended June 30, 2017, to $188.6 million during the three months ended June 30, 2018. Average balances of securities decreased primarily due to certain municipal securities being called and the normal monthly payments received on the portfolio of mortgage-backed securities. Partially offsetting that decrease, interest income increased $118,000 due to an increase in average interest rates from 2.51% during the three months ended June 30, 2017, to 2.75% during the three months ended June 30, 2018, primarily due to higher market rates of interest on investment securities and a decrease in the volume of prepayments on the mortgage-backed securities.
Interest income on investments decreased in the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Interest income decreased $379,000 as a result of a decrease in average balances from $216.1 million during the six months ended June 30, 2017, to $187.8 million during the six months ended June 30, 2018. Average balances of securities decreased primarily due to certain municipal securities being called and the normal monthly payments received on the portfolio of mortgage-backed securities. Partially offsetting that decrease, interest income increased $238,000 due to an increase in average interest rates from 2.56% during the six months ended June 30, 2017, to 2.79% during the six months ended June 30, 2018, primarily due to higher market rates of interest on investment securities and a decrease in the volume of prepayments on the mortgage-backed securities.
Interest income on other interest-earning assets increased in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. Interest income increased $181,000 due to an increase in average interest rates from 0.84% during the three months ended June 30, 2017, to 1.44% during the three months ended June 30, 2018, primarily due to higher market rates of interest on other interest-bearing deposits in financial institutions. Interest income increased $1,000 as a result of an increase in average balances from $120.1 million during the three months ended June 30, 2017, to $120.7 million during the three months ended June 30, 2018.
Interest income on other interest-earning assets increased in the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Interest income increased $424,000 due to an increase in average interest rates from 0.78% during the six months ended June 30, 2017, to 1.54% during the six months ended June 30, 2018, primarily due to higher market rates of interest on other interest-bearing deposits in financial institutions. Interest income decreased $88,000 as a result of a decrease in average balances from $129.8 million during the six months ended June 30, 2017, to $109.9 million during the six months ended June 30, 2018.
Total Interest Expense
Total interest expense increased $1.9 million, or 27.6%, during the three months ended June 30, 2018, when compared with the three months ended June 30, 2017, due to an increase in interest expense on deposits of $1.1 million, or 22.4%, and an increase in interest expense on FHLBank advances of $922,000, or 377.9%, partially offset by a decrease in interest expense on short-term borrowing and repurchase agreements of $138,000, or 43.4%, and a decrease in interest expense on subordinated debentures issued to capital trust of $14,000, or 5.6%.
Total interest expense increased $2.6 million, or 19.3%, during the six months ended June 30, 2018, when compared with the six months ended June 30, 2017, due to an increase in interest expense on deposits of $1.7 million, or 17.4%, and an increase in interest expense on FHLBank advances of $1.3 million, or 255.1%, partially offset by a decrease in interest expense on short-term borrowing and repurchase agreements of $336,000, or 61.8%, and a decrease in interest expense on subordinated debentures issued to capital trust of $53,000, or 10.8%.
Interest Expense – Deposits
Interest expense on demand deposits increased $294,000 due to average rates of interest that increased from 0.29% in the three months ended June 30, 2017 to 0.37% in the three months ended June 30, 2018. Interest expense on demand deposits increased $4,000, with average balances of $1.57 billion during each of the three months ended June 30, 2017 and 2018.
Interest expense on time deposits increased $1.2 million as a result of an increase in average rates of interest from 1.09% during the three months ended June 30, 2017, to 1.46% during the three months ended June 30, 2018. Interest expense on time deposits decreased $397,000 due to a decrease in average balances of time deposits from $1.42 billion during the three months ended June 30, 2017, to $1.28 billion during the three months ended June 30, 2018. The decrease in average balances of time deposits was primarily a result of decreases in
brokered deposits, including CDARS program purchased funds
. 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 in 2017 and 2018.
Interest expense on demand deposits increased $503,000 due to average rates of interest that increased from 0.29% in the six months ended June 30, 2017 to 0.35% in the six months ended June 30, 2018. Interest expense on demand deposits increased $10,000 due to a small increase in average balances from $1.56 billion during the six months ended June 30, 2017, to $1.57 billion during the six months ended June 30, 2018.
Interest expense on time deposits increased $2.1 million as a result of an increase in average rates of interest from 1.07% during the six months ended June 30, 2017, to 1.38% during the six months ended June 30, 2018. Interest expense on time deposits decreased $836,000 due to a decrease in average balances of time deposits from $1.45 billion during the six months ended June 30, 2017, to $1.31 billion during the six months ended June 30, 2018. The decrease in average balances of time deposits was primarily a result of decreases in
brokered deposits, including CDARS program purchased funds
. 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 in 2017 and 2018.
Interest Expense – FHLBank Advances, Short-term Borrowings and Repurchase Agreements, Subordinated Debentures Issued to Capital Trusts and Subordinated Notes
During the three months ended June 30, 2018 compared to the three months ended June 30, 2017, interest expense on FHLBank advances increased due to higher average balances, partially offset by lower average rates of interest. Interest expense on FHLBank advances increased $1.0 million due to an increase in average balances from $30.4 million during the three months ended June 30, 2017 to $233.4 million during the three months ended June 30, 2018. This increase was primarily due to an increase in borrowings to fund loan growth, as well as the replacement of overnight borrowings with FHLBank advances with a three week maturity due to their more favorable interest rate. The $31.4 million of the Company's long-term higher fixed-rate FHLBank advances were repaid in June 2017. Interest expense on FHLBank advances decreased $125,000 due to a decrease in average interest rates from 3.22% in the three months ended June 30, 2017 to 2.00% in the three months ended June 30, 2018. The decrease in the average rate was due to the repayment of the fixed-rate term FHLBank advances in June 2017 and the borrowing of shorter term FHLBank advances which carried a lower rate.
During the six months ended June 30, 2018 compared to the six months ended June 30, 2017, interest expense on FHLBank advances increased due to higher average balances, partially offset by lower average rates of interest. Interest expense on FHLBank advances increased $1.6 million due to an increase in average balances from $30.9 million during the six months ended June 30, 2017 to $189.7 million during the six months ended June 30, 2018. This increase was due to the same reasons as noted above in the three month period. Interest expense on FHLBank advances decreased $292,000 due to a decrease in average interest rates from 3.26% in the six months ended June 30, 2017 to 1.88% in the six months ended June 30, 2018. The decrease in the average rate was due to the repayment of the $31.4 million of the Company's long-term higher rate fixed-rate FHLBank advances in June 2017 and the borrowing of shorter term FHLBank advances which carried a lower rate.
Interest expense on short-term borrowings and repurchase agreements decreased $120,000 due to a decrease in average balances from $234.7 million during the three months ended June 30, 2017 to $141.3 million during the three months ended June 30, 2018, which is primarily due to changes in the Company's funding needs and the mix of funding, which can fluctuate. The Company had a much higher amount of overnight borrowings from the FHLBank in the 2017 period. Interest expense on short-term borrowings and repurchase agreements decreased $18,000 due to a decrease in average rates from 0.54% in the three months ended June 30, 2017 to 0.51% in the three months ended June 30, 2018. The decrease was due to a change in the mix of funding during the period, with less short-term borrowings and a higher percentage of the total made up of repurchase agreements, which have a lower interest rate.
Interest expense on short-term borrowings and repurchase agreements decreased $222,000 due to a decrease in average balances from $236.1 million during the six months ended June 30, 2017 to $120.5 million during the six months ended June 30, 2018, which is primarily due to changes in the Company's funding needs and the mix of funding, which can fluctuate. The Company had a much higher amount of overnight borrowings from the FHLBank in the 2017 period. Interest expense on short-term borrowings and repurchase agreements decreased $114,000 due to a decrease in average rates from 0.46% in the six months ended June 30, 2017 to 0.35% in the six months ended June 30, 2018. The decrease was due to a change in the mix of funding during the period, with less short-term borrowings and a higher percentage of the total made up of repurchase agreements, which have a lower interest rate.
During the three months ended June 30, 2018, compared to the three months ended June 30, 2017, interest expense on subordinated debentures issued to capital trusts decreased $14,000 due to lower average interest rates. The average interest rate was 3.92% in the three months ended June 30, 2017 compared to 3.70% in the three months ended June 30, 2018. During the 2017 period, the amortization of the cost of the interest rate caps the Company purchased in 2013 to limit the interest rate risk from rising LIBOR rates related to the Company's subordinated debentures issued to capital trusts effectively increased the effective interest rate. The average interest rate was affected until the third quarter of 2017, when the interest rate cap terminated based on its contractual terms. There was no change in the average balance of the subordinated debentures between the 2018 and the 2017 periods. 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 3.96% at June 30, 2018.
During the six months ended June 30, 2018, compared to the six months ended June 30, 2017, interest expense on subordinated debentures issued to capital trusts decreased $53,000 due to lower average interest rates. The average interest rate was 3.86% in the six months ended June 30, 2017 compared to 3.44% in the six months ended June 30, 2018. The reasons for the decrease were the same as those discussed above for the three month period. There was no change in the average balance of the subordinated debentures between the 2018 and 2017 six month periods.
Net Interest Income
Net interest income for the three months ended June 30, 2018 increased $3.3 million to $41.2 million compared to $37.9 million for the three months ended June 30, 2017. Net interest margin was 3.94% in the three months ended June 30, 2018, compared to 3.68% in the three months ended June 30, 2017, an increase of 26 basis points, or 7.1%. In both three month periods, t
he Company's net interest income and margin were positively impacted by
the increases in expected cash flows to be received 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
June 30, 2018
and 2017 were increases in interest income of $1.1 million and $1.3 million, respectively, and increases in net interest margin of 10 basis points and 12 basis points, respectively. Excluding the positive impact of the additional yield accretion, net interest margin increased 28 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.
Net interest income for the six months ended June 30, 2018 increased $4.1 million to $80.7 million compared to $76.6 million for the six months ended June 30, 2017. Net interest margin was 3.93% in the six months ended June 30, 2018, compared to 3.73% in the same period of 2017, an increase of 20 basis points, or 5.4%. In both six month periods, the Company's net interest income and margin were positively impacted by the increases in expected cash flows to be received 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 six months ended June 30, 2018 and 2017 were increases in interest income of $2.2 million and $3.3 million, respectively, and increases in net interest margin of 11 basis points and 16 basis points, respectively. Excluding the positive impact of the additional yield accretion, net interest margin increased 25 basis points when compared to the year-ago 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.
The Company's overall average interest rate spread increased 19 basis points, or 5.4%, from 3.53% during the three months ended June 30, 2017 to 3.72% during the three months ended June 30, 2018. The increase was due to a 42 basis point increase in the weighted average yield on interest-earning assets, partially offset by a 23 basis point increase in the weighted average rate paid on interest-bearing liabilities. In comparing the two periods, the yield on loans increased 41 basis points, the yield on investment securities increased 24 basis points and the yield on other interest-earning assets increased 60 basis points. The rate paid on deposits increased 19 basis points, the rate paid on short-term borrowings and repurchase agreements decreased three basis points, the rate paid on subordinated debentures issued to capital trusts decreased 22 basis points, the rate paid on subordinated notes decreased two basis points, and the rate paid on FHLBank advances decreased 122 basis points.
The Company's overall average interest rate spread increased 15 basis points, or 4.1%, from 3.58% during the six months ended June 30, 2017 to 3.73% during the six months ended June 30, 2018. The increase was due to a 33 basis point increase in the weighted average yield on interest-earning assets, partially offset by an 18 basis point increase in the weighted average rate paid on interest-bearing liabilities. In comparing the two periods, the yield on loans increased 29 basis points, the yield on investment securities increased 23 basis points and the yield on other interest-earning assets increased 76 basis points. The rate paid on deposits increased 15 basis points, the rate paid on short-term borrowings and repurchase agreements decreased 11 basis points, the rate paid on subordinated debentures issued to capital trusts decreased 42 basis points, the rate paid on subordinated notes decreased two basis points, and the rate paid on FHLBank advances decreased 138 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 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 June 30, 2018, was $2.0 million, unchanged from the three months ended June 30, 2017. The provision for loan losses for the six months ended June 30, 2018, was $3.9 million, a decrease of $300,000 from $4.2 million for the six months ended June 30, 2017. At June 30, 2018 and December 31, 2017, the allowance for loan losses was $37.6 million and $36.5 million, respectively. Total net charge-offs were $704,000 and $2.4 million for the three months ended June 30, 2018 and 2017, respectively. During the three months ended June 30, 2018, $748,000 of net charge-offs were in the consumer auto category. Total net charge-offs were $2.8 million and $5.1 million for the six months ended June 30, 2018 and 2017, respectively. During the six months ended June 30, 2018, $2.0 million of the $2.8 million of net charge-offs were in the consumer auto category. 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 reduce delinquencies and charge-offs. The level of delinquencies and repossessions in indirect and used automobile loans has decreased in 2018. This action also resulted in a lower level of origination volume and, as such, the outstanding balance of the Company's automobile loans declined approximately $58 million in the six months ended June 30, 2018. We expect to see further declines in the automobile loan totals through the remainder of 2018. In addition, one commercial loan relationship amounted to $245,000 of the total net charge-offs during the three months ended June 30, 2018. Charge-offs were partially offset by recoveries on multiple loans during the three month period. Four commercial loan relationships amounted to $505,000 of the total charge-offs during the six months ended June 30, 2018. 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 or reserve allocations 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 meetings with customers, review of financial information, 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 1.02%, 1.01% and 1.02% at June 30, 2018, December 31, 2017 and March 31, 2018, respectively. Management considers the allowance for loan losses adequate to cover losses inherent in the Bank's loan portfolio at June 30, 2018, 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 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 that occur from time to time and other factors specific to a borrower's circumstances, the level of non-performing assets will fluctuate.
Non-performing assets, excluding all FDIC-assisted acquired assets, at
June 30, 2018
were $21.5 million, a decrease of $6.3 million from $27.8 million at December 31, 2017. Non-performing assets, excluding all FDIC-assisted acquired assets, as a percentage of total assets were 0.47% at
June 30, 2018
, compared to 0.63% at December 31, 2017.
Compared to December 31, 2017, non-performing loans decreased $3.1 million to $8.1 million at
June 30, 2018
, and foreclosed assets decreased $3.2 million to $13.4 million at
June 30, 2018
. Non-performing commercial business loans comprised $2.9 million, or 35.1%, of the total $8.1 million of non-performing loans at June 30, 2018, an increase of $789,000 from December 31, 2017. Non-performing one- to four-family residential loans comprised $2.6 million, or 31.9%, of the total non-performing loans at June 30, 2018, a decrease of $137,000 from December 31, 2017. Non-performing consumer loans comprised $2.2 million, or 27.6%, of the total non-performing loans at June 30, 2018, a decrease of $1.0 million from December 31, 2017. Non-performing commercial real estate loans comprised $352,000, or 4.3%, of the total non-performing loans at June 30, 2018, a decrease of $874,000 from December 31, 2017. Non-performing construction and land development loans comprised $91,000, or 1.1%, of the total non-performing loans at June 30, 2018, a decrease of $7,000 from December 31, 2017. Non-performing other residential loans were $-0- at June 30, 2018, a decrease of $1.9 million from December 31, 2017, due to the transfer to foreclosed assets and related charge-down of the one property previously in this category of non-performing loans.
Non-performing Loans.
Activity in the non-performing loans category during the six months ended June 30, 2018 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,
June 30
|
|
|
|
(In Thousands)
|
|
One- to four-family construction
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Subdivision construction
|
|
|
98
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
91
|
|
Land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
One- to four-family residential
|
|
|
2,728
|
|
|
|
426
|
|
|
|
—
|
|
|
|
(67
|
)
|
|
|
(236
|
)
|
|
|
(27
|
)
|
|
|
(233
|
)
|
|
|
2,591
|
|
Other residential
|
|
|
1,877
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,601
|
)
|
|
|
(279
|
)
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
1,226
|
|
|
|
157
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(894
|
)
|
|
|
(101
|
)
|
|
|
(36
|
)
|
|
|
352
|
|
Commercial business
|
|
|
2,063
|
|
|
|
2,158
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(778
|
)
|
|
|
(591
|
)
|
|
|
2,852
|
|
Consumer
|
|
|
3,263
|
|
|
|
1,554
|
|
|
|
—
|
|
|
|
(331
|
)
|
|
|
(583
|
)
|
|
|
(1,055
|
)
|
|
|
(609
|
)
|
|
|
2,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,255
|
|
|
$
|
4,298
|
|
|
$
|
—
|
|
|
$
|
(398
|
)
|
|
$
|
(3,314
|
)
|
|
$
|
(2,240
|
)
|
|
$
|
(1,476
|
)
|
|
$
|
8,125
|
|
At June 30, 2018, the non-performing commercial business category included 10 loans, eight of which were added during 2018. The largest relationship in this category, which was added during the current period, totaled $1.2 million, or 41.6% of the total category. This relationship is collateralized by an assignment of an interest in a real
estate project. The second largest relationship in the commercial business category included two loans and totaled $900,000, or 31.6% of the total category. This relationship was previously collateralized by commercial real estate which has been foreclosed upon and subsequently sold. Collection efforts are currently being pursued against the guarantors of the credit relationship. The non-performing one- to four-family residential category included 27 loans, six of which were added during the current period. The largest relationship in this category, which was added during 2017, included nine loans totaling $1.3 million, or 51.1% of the total category, which are collateralized by residential rental homes in the Springfield, Mo. area. The non-performing consumer category included 183 loans, 83 of which were added during the current period, and the majority of which are indirect used automobile loans. The non-performing commercial real estate category included five loans, two of which were added during the current period and were part of the same customer relationship. Three loans in the category were transferred to foreclosed assets during the current period, the largest of which totaled $652,000 and was collateralized by commercial property in the St. Louis, Mo., area. The non-performing other residential category had a balance of $-0- at June 30, 2018. The one loan previously in this category, which was collateralized by an apartment project in the central Missouri area, had charge-offs of $279,000 during the six months ended June 30, 2018 and the remaining balance of $1.6 million was transferred to foreclosed assets.
Potential Problem Loans.
Compared to December 31, 2017, potential problem loans increased $738,000, or 9.3%, to $8.7 million. This increase was due to the addition of $2.5 million of loans to potential problem loans, partially offset by $1.3 million in payments, $443,000 in loans transferred to non-performing loans, $29,000 in charge-offs and $9,000 in loans removed from potential problem 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 six months ended June 30, 2018, 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,
June 30
|
|
|
|
(In Thousands)
|
|
One- to four-family construction
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Subdivision construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Land development
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
Commercial construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
One- to four-family residential
|
|
|
1,122
|
|
|
|
120
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(24
|
)
|
|
|
1,218
|
|
Other residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate
|
|
|
5,759
|
|
|
|
2,056
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,145
|
)
|
|
|
6,670
|
|
Commercial business
|
|
|
503
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(407
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(28
|
)
|
|
|
68
|
|
Consumer
|
|
|
549
|
|
|
|
325
|
|
|
|
(9
|
)
|
|
|
(36
|
)
|
|
|
—
|
|
|
|
(29
|
)
|
|
|
(85
|
)
|
|
|
715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,937
|
|
|
$
|
2,501
|
|
|
$
|
(9
|
)
|
|
$
|
(443
|
)
|
|
$
|
—
|
|
|
$
|
(29
|
)
|
|
$
|
(1,282
|
)
|
|
$
|
8,675
|
|
At June 30, 2018, the commercial real estate category of potential problem loans included four loans, one of which was added during the current period. The largest relationship in this category, which is made up of three loans totaling $4.7 million, or 70.6% of the total category, is collateralized by theatre and retail property in Branson, Mo. This is a long-term customer of the Bank and these loans were all originated prior to 2008. The borrower experienced cash flow issues due to vacancies and the loans were added to potential problem loans during the three months ended September 30, 2017. Payments of $1.1 million were received on these loans during the six months ended June 30, 2018. The remaining loan in the commercial real estate category, which was added during the current period, totaled $2.0 million, or 29.4% of the total category, and is collateralized by a mixed use commercial retail building. The one- to four-family residential category of potential problem loans included 21 loans, five of which were added during the current period. The consumer category of potential problem loans included 59 loans, 26 of which were added during the current period. The commercial business category of potential problem loans included three loans, with the largest previous loan in this category, totaling $407,000, being transferred to non-performing loans during the current period.
Other Real Estate Owned and Repossessions.
Of the total $18.3 million of other real estate owned and repossessions at June 30, 2018,
$3.3 million represents the fair value of foreclosed and repossessed assets related to loans acquired in FDIC-assisted transactions and $1.6 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 foreclosed assets and repossessions during the six months ended June 30, 2018, was as follows:
|
|
Beginning
Balance,
January 1
|
|
|
Additions
|
|
|
Sales
|
|
|
Capitalized
Costs
|
|
|
Write-
Downs
|
|
|
Ending
Balance,
June 30
|
|
|
|
(In Thousands)
|
|
One- to four-family construction
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Subdivision construction
|
|
|
5,413
|
|
|
|
—
|
|
|
|
(1,077
|
)
|
|
|
—
|
|
|
|
(1,621
|
)
|
|
|
2,715
|
|
Land development
|
|
|
7,729
|
|
|
|
—
|
|
|
|
(986
|
)
|
|
|
—
|
|
|
|
(1,675
|
)
|
|
|
5,068
|
|
Commercial construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
One- to four-family residential
|
|
|
112
|
|
|
|
608
|
|
|
|
(98
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
622
|
|
Other residential
|
|
|
140
|
|
|
|
1,601
|
|
|
|
(140
|
)
|
|
|
143
|
|
|
|
—
|
|
|
|
1,744
|
|
Commercial real estate
|
|
|
1,194
|
|
|
|
894
|
|
|
|
(343
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,745
|
|
Commercial business
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
1,987
|
|
|
|
4,477
|
|
|
|
(4,994
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,575
|
|
|
$
|
7,580
|
|
|
$
|
(7,638
|
)
|
|
$
|
143
|
|
|
$
|
(3,296
|
)
|
|
$
|
13,364
|
|
At June 30, 2018, the land development category of foreclosed assets included 17 properties, the largest of which was located in the northwest Arkansas area and had a balance of $1.1 million, or 20.8% of the total category. Of the total dollar amount in the land development category of foreclosed assets, 42.7% and 20.8% was located in the Branson, Mo. and the northwest Arkansas areas, respectively, including the largest property previously mentioned. The subdivision construction category of foreclosed assets included 11 properties, the largest of which was located in the Springfield, Mo. metropolitan area and had a balance of $1.0 million, or 36.5% of the total category. Of the total dollar amount in the subdivision construction category of foreclosed assets, 46.3% and 36.5% is located in Branson, Mo. and Springfield, Mo., respectively, including the largest property previously mentioned. The write-downs in the land development and subdivision construction categories resulted from management's decision, after marketing these assets for an extended period, to reduce the asking price for several parcels of land.
The commercial real estate category of foreclosed assets included five properties, three of which were added during the current period. The largest property in the commercial real estate category, which was recreational property in the St. Louis area and was added during the six months ended June 30, 2018, had a balance of $646,000, or 37.0% of the total category. The other residential category of foreclosed assets included one property, which was added during the current period totaling $1.7 million, and is an apartment building in central Missouri. The amount of additions and sales under consumer loans are due to the 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 has decreased in 2018.
Non-interest Income
For the three months ended June 30, 2018, non-interest income decreased $8.3 million to $7.5 million when compared to the three months ended June 30, 2017
, primarily as a result of the following items:
2017 gain on early termination of FDIC loss sharing agreement for Inter Savings Bank
: In the three months ended June 30, 2017, the Company recognized a one-time gross gain of $7.7 million from the termination of the loss sharing agreement for Inter Savings Bank, which was recorded in the accretion of income related to business acquisitions line item of the consolidated statements of income for the three months ended June 30, 2017.
Other income
: Other income decreased $348,000 compared to the prior year period. This decrease was primarily due to fee income totaling approximately $275,000 related to interest rate swaps entered into in the prior year period, which was not repeated in the current year period.
Late charges and fees on loans
: Late charges and fees on loans decreased $223,000 compared to the prior year three month period. The decrease was primarily due to fees totaling $130,000 on loan payoffs received on two commercial loan relationships during the 2017 period, with no similar large fees in the current year period.
For the six months ended June 30, 2018, non-interest income decreased $9.1 million to $14.4 million when compared to the six months ended June 30, 2017, primarily as a result of the following items:
2017 gain on early termination of FDIC loss sharing agreement for Inter Savings Bank
: In 2017, the Company recognized a one-time gross gain of $7.7 million from the termination of the loss sharing agreement for Inter Savings Bank, which was recorded in the accretion of income related to business acquisitions line item of the consolidated statements of income for the six months ended June 30, 2017.
Amortization of income related to business acquisitions
: Because of the termination of the loss sharing agreements in previous years, the net amortization expense related to business acquisitions was $-0- for the six months ended June 30, 2018, compared to $485,000 for the six months ended June 30, 2017, which reduced non-interest income by that amount in the previous year period.
Late charges and fees on loans
: Late charges and fees on loans decreased $712,000 compared to the prior year period. The decrease was primarily due to fees totaling $632,000 on loan payoffs received on four loan relationships in the 2017 period which were not repeated in the 2018 period.
Other income
: Other income decreased $687,000 compared to the prior year period. The decrease was primarily due to the interest rate swap income in 2017 noted above and the receipt of approximately $212,000 related to the exit of certain tax credit partnerships in 2017.
Net gains on loan sales
: Net gains on loan sales decreased $603,000 compared to the prior year period. The decrease was due to a decrease in originations of fixed-rate loans during the 2018 period compared to the 2017 period. Fixed rate single-family mortgage loans originated are generally subsequently sold in the secondary market. In 2018, the Company has originated more variable-rate single-family mortgage loans, which have been retained in the Company's portfolio.
Non-interest Expense
For the three months ended June 30, 2018, non-interest expense increased $1.5 million to $29.9 million when compared to the three months ended June 30, 2017, primarily as a result of the following items:
Expense on foreclosed assets and repossessions
: Expense on foreclosed assets increased $2.1 million compared to the prior year period primarily due to net write-downs of certain foreclosed assets during the current period, totaling approximately $2.1 million. These write-downs resulted from management's decision to reduce the asking price for several parcels of land (subdivision ground, residential lots and commercial lots and undeveloped ground).
Salaries and employee benefits
: Salaries and employee benefits increased $449,000 from the prior year period. This increase is approximately 3% over the prior year expense total and is primarily attributable to normal annual raises for employees and increases in costs for health insurance and retirement benefits.
Legal, audit and other professional fees
: Legal, audit and other professional fees decreased $372,000 in the three months ended June 30, 2018 compared to the same period in 2017. The decrease was primarily due to the recovery of previously expensed legal fees and lower collection costs for problem loans and foreclosed assets.
Other operating expenses:
Other operating expenses decreased $650,000 in the three months ended June 30, 2018 compared to the same period in 2017. During the 2017 period, the Company incurred a $340,000 prepayment
penalty when FHLB advances totaling $31.4 million were repaid prior to maturity, which was not repeated in the 2018 period.
For the six months ended June 30, 2018, non-interest expense increased $1.3 million to $58.2 million when compared to the six months ended June 30, 2017, primarily as a result of the following items:
Expense on foreclosed assets and repossessions:
Expense on foreclosed assets increased $2.6 million compared to the prior year period primarily due to the write-down of certain foreclosed assets during the current period, totaling approximately $2.1 million, as discussed above.
Office supplies and printing expense:
Office supplies and printing expense decreased $396,000 in the six months ended June 30, 2018 compared to the same period in 2017. During the 2017 period the Bank incurred printing and other costs totaling $373,000 related to the replacement of a portion of customer debit cards with chip-enabled cards, which was not repeated in the current year period.
Other operating expenses:
Other operating expenses decreased $855,000 in the six months ended June 30, 2018 compared to the same period in 2017. During the 2017 period, the Company incurred a $340,000 prepayment penalty when FHLB advances totaling $31.4 million were repaid prior to maturity, which was not repeated in the 2018 period. In addition, the Company experienced significantly lower debit card and check fraud losses in the 2018 period compared to the 2017 period.
The Company's efficiency ratio for the three months ended June 30, 2018, was 61.46% compared to 52.83% for the same period in 2017. The efficiency ratio for the six months ended June 30, 2018, was 61.26% compared to 56.89% for the same period in 2017. The increase in the ratio in both the 2018 three and six month periods was primarily due to a decrease in non-interest income and an increase in non-interest expense, partially offset by an increase in net interest income. In the 2017 periods, the Company's efficiency ratio was positively impacted by the significant gain recorded related to the termination of the InterSavings Bank loss sharing agreements. In the 2018 periods, the Company's efficiency ratio was negatively impacted by the significant write-down of foreclosed assets. Excluding these items, the Company's efficiency ratio would have improved in the 2018 periods compared to the 2017 periods. The Company's ratio of non-interest expense to average assets was 2.66% and 2.63% for the three and six months ended June 30, 2018, respectively, compared to 2.55% and 2.55% for the three and six months ended June 30, 2017, respectively. The increase in the current period ratios was due to an increase in non-interest expense in the 2018 periods compared to the 2017 periods, primarily related to the previously discussed write-down of foreclosed assets in 2018. Average assets for the three months ended June 30, 2018, increased $43.6 million, or 1.0%, from the three months ended June 30, 2017, primarily due to an increase in loans receivable, partially offset by a decrease in investment securities. Average assets for the six months ended June 30, 2018, decreased $35.4 million, or 0.8%, from the six months ended June 30, 2017, primarily due to decreases in investment securities and other interest-earning assets, partially offset by organic loan growth.
Provision for Income Taxes
On December 22, 2017, H.R.1, originally known as the Tax Cuts and Jobs Act (the "Act"), was signed into law. Among other things, the Act permanently lowers 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 decrease from approximately 26.7% in 2017 to approximately 16.5% to 18.5% in 2018, mainly as a result of the Act.
For the three months ended June 30, 2018 and 2017, the Company's effective tax rate was 17.6% and 30.8%, respectively. For the six months ended June 30, 2018 and 2017, the Company's effective tax rate was 17.0% and 28.9%, respectively. These effective rates were lower than the statutory federal tax rates of 21% (2018) and 35% (2017), 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 $0.8 million and $0.5 million for the three months ended June 30, 2018 and 2017, respectively. Net fees included in interest income were $1.6 million and $1.7 million for the six months ended June 20, 2018 and 2017, respectively. Tax-exempt income was not calculated on a tax equivalent basis. The table does not reflect any effect of income taxes.
|
|
June 30,
2018
(2)
|
|
|
Three Months Ended
June 30, 2018
|
|
|
Three Months Ended
June 30, 2017
|
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
4.15
|
%
|
|
$
|
437,856
|
|
|
$
|
5,422
|
|
|
|
4.97
|
%
|
|
$
|
461,321
|
|
|
$
|
5,528
|
|
|
|
4.81
|
%
|
Other residential
|
|
|
4.88
|
|
|
|
744,809
|
|
|
|
9,347
|
|
|
|
5.03
|
|
|
|
690,405
|
|
|
|
7,717
|
|
|
|
4.48
|
|
Commercial real estate
|
|
|
4.67
|
|
|
|
1,332,339
|
|
|
|
15,968
|
|
|
|
4.81
|
|
|
|
1,247,830
|
|
|
|
13,556
|
|
|
|
4.36
|
|
Construction
|
|
|
4.94
|
|
|
|
553,787
|
|
|
|
7,246
|
|
|
|
5.25
|
|
|
|
422,683
|
|
|
|
4,756
|
|
|
|
4.51
|
|
Commercial business
|
|
|
4.95
|
|
|
|
289,895
|
|
|
|
3,560
|
|
|
|
4.93
|
|
|
|
293,411
|
|
|
|
3,566
|
|
|
|
4.87
|
|
Other loans
|
|
|
6.00
|
|
|
|
508,722
|
|
|
|
6,291
|
|
|
|
4.96
|
|
|
|
652,293
|
|
|
|
7,630
|
|
|
|
4.69
|
|
Industrial revenue bonds
|
|
|
5.39
|
|
|
|
22,667
|
|
|
|
385
|
|
|
|
6.81
|
|
|
|
26,144
|
|
|
|
413
|
|
|
|
6.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable
|
|
|
4.96
|
|
|
|
3,890,075
|
|
|
|
48,219
|
|
|
|
4.97
|
|
|
|
3,794,087
|
|
|
|
43,166
|
|
|
|
4.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
(1)
|
|
|
3.18
|
|
|
|
188,589
|
|
|
|
1,291
|
|
|
|
2.75
|
|
|
|
211,944
|
|
|
|
1,327
|
|
|
|
2.51
|
|
Other interest-earning assets
|
|
|
1.90
|
|
|
|
120,688
|
|
|
|
433
|
|
|
|
1.44
|
|
|
|
120,125
|
|
|
|
251
|
|
|
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
4.76
|
|
|
|
4,199,352
|
|
|
|
49,943
|
|
|
|
4.77
|
|
|
|
4,126,156
|
|
|
|
44,744
|
|
|
|
4.35
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
97,295
|
|
|
|
|
|
|
|
|
|
|
|
108,131
|
|
|
|
|
|
|
|
|
|
Other non-earning assets
|
|
|
|
|
|
|
199,003
|
|
|
|
|
|
|
|
|
|
|
|
217,764
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
$
|
4,495,650
|
|
|
|
|
|
|
|
|
|
|
$
|
4,452,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand and savings
|
|
|
0.37
|
|
|
$
|
1,573,936
|
|
|
|
1,435
|
|
|
|
0.37
|
|
|
$
|
1,569,069
|
|
|
|
1,137
|
|
|
|
0.29
|
|
Time deposits
|
|
|
1.61
|
|
|
|
1,284,414
|
|
|
|
4,688
|
|
|
|
1.46
|
|
|
|
1,419,996
|
|
|
|
3,867
|
|
|
|
1.09
|
|
Total deposits
|
|
|
0.95
|
|
|
|
2,858,350
|
|
|
|
6,123
|
|
|
|
0.86
|
|
|
|
2,989,065
|
|
|
|
5,004
|
|
|
|
0.67
|
|
Short-term borrowings and structured
repurchase agreements
|
|
|
0.04
|
|
|
|
141,268
|
|
|
|
180
|
|
|
|
0.51
|
|
|
|
234,655
|
|
|
|
318
|
|
|
|
0.54
|
|
Subordinated debentures issued to
capital trusts
|
|
|
3.96
|
|
|
|
25,774
|
|
|
|
238
|
|
|
|
3.70
|
|
|
|
25,774
|
|
|
|
252
|
|
|
|
3.92
|
|
Subordinated notes
|
|
|
5.56
|
|
|
|
73,752
|
|
|
|
1,024
|
|
|
|
5.57
|
|
|
|
73,594
|
|
|
|
1,025
|
|
|
|
5.59
|
|
FHLBank advances
|
|
|
2.06
|
|
|
|
233,363
|
|
|
|
1,166
|
|
|
|
2.00
|
|
|
|
30,378
|
|
|
|
244
|
|
|
|
3.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1.14
|
|
|
|
3,332,507
|
|
|
|
8,731
|
|
|
|
1.05
|
|
|
|
3,353,466
|
|
|
|
6,843
|
|
|
|
0.82
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
|
|
|
|
653,281
|
|
|
|
|
|
|
|
|
|
|
|
621,429
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
20,744
|
|
|
|
|
|
|
|
|
|
|
|
26,984
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
4,006,532
|
|
|
|
|
|
|
|
|
|
|
|
4,001,879
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
489,118
|
|
|
|
|
|
|
|
|
|
|
|
450,172
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
|
|
|
|
$
|
4,495,650
|
|
|
|
|
|
|
|
|
|
|
$
|
4,452,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
3.62
|
%
|
|
|
|
|
|
$
|
41,212
|
|
|
|
3.72
|
%
|
|
|
|
|
|
$
|
37,901
|
|
|
|
3.53
|
%
|
Net interest margin*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.94
|
%
|
|
|
|
|
|
|
|
|
|
|
3.68
|
%
|
Average interest-earning assets to
average interest-bearing liabilities
|
|
|
|
|
|
|
126.0
|
%
|
|
|
|
|
|
|
|
|
|
|
123.0
|
%
|
|
|
|
|
|
|
|
|
_______________________
|
*
|
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 $53.7 million and $62.5 million for the three months ended June 30, 2018 and 2017, respectively. In addition, average tax-exempt loans and industrial revenue bonds were $25.2 million and $28.3 million for the three months ended June 30, 2018 and 2017, respectively. Interest income on tax-exempt assets included in this table was $693,000 and $857,000 for the three months ended June 30, 2018 and 2017, respectively. Interest income net of disallowed interest expense related to tax-exempt assets was $656,000 and $821,000 for the three months ended June 30, 2018 and 2017, respectively.
|
(2)
|
The yield on loans at June 30, 2018 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 June 30, 2018.
|
|
|
June 30,
2018
(2)
|
|
|
Six Months Ended
June 30, 2018
|
|
|
Six Months Ended
June 30, 2017
|
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
4.15
|
%
|
|
$
|
434,507
|
|
|
$
|
10,605
|
|
|
|
4.92
|
%
|
|
$
|
472,667
|
|
|
$
|
11,624
|
|
|
|
4.96
|
%
|
Other residential
|
|
|
4.88
|
|
|
|
741,782
|
|
|
|
18,186
|
|
|
|
4.94
|
|
|
|
684,965
|
|
|
|
15,243
|
|
|
|
4.49
|
|
Commercial real estate
|
|
|
4.67
|
|
|
|
1,289,141
|
|
|
|
30,326
|
|
|
|
4.74
|
|
|
|
1,232,317
|
|
|
|
27,085
|
|
|
|
4.43
|
|
Construction
|
|
|
4.94
|
|
|
|
536,478
|
|
|
|
13,734
|
|
|
|
5.16
|
|
|
|
412,200
|
|
|
|
9,132
|
|
|
|
4.47
|
|
Commercial business
|
|
|
4.95
|
|
|
|
287,329
|
|
|
|
6,904
|
|
|
|
4.85
|
|
|
|
293,984
|
|
|
|
7,380
|
|
|
|
5.06
|
|
Other loans
|
|
|
6.00
|
|
|
|
524,995
|
|
|
|
12,887
|
|
|
|
4.95
|
|
|
|
670,642
|
|
|
|
15,660
|
|
|
|
4.71
|
|
Industrial revenue bonds
|
|
|
5.39
|
|
|
|
23,188
|
|
|
|
742
|
|
|
|
6.45
|
|
|
|
26,752
|
|
|
|
786
|
|
|
|
5.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable
|
|
|
4.96
|
|
|
|
3,837,420
|
|
|
|
93,384
|
|
|
|
4.91
|
|
|
|
3,793,527
|
|
|
|
86,910
|
|
|
|
4.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
(1)
|
|
|
3.18
|
|
|
|
187,803
|
|
|
|
2,601
|
|
|
|
2.79
|
|
|
|
216,130
|
|
|
|
2,742
|
|
|
|
2.56
|
|
Other interest-earning assets
|
|
|
1.90
|
|
|
|
109,944
|
|
|
|
841
|
|
|
|
1.54
|
|
|
|
129,826
|
|
|
|
505
|
|
|
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
4.76
|
|
|
|
4,135,167
|
|
|
|
96,826
|
|
|
|
4.72
|
|
|
|
4,139,483
|
|
|
|
90,157
|
|
|
|
4.39
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
99,818
|
|
|
|
|
|
|
|
|
|
|
|
107,974
|
|
|
|
|
|
|
|
|
|
Other non-earning assets
|
|
|
|
|
|
|
198,226
|
|
|
|
|
|
|
|
|
|
|
|
221,130
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
$
|
4,433,211
|
|
|
|
|
|
|
|
|
|
|
$
|
4,468,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand and savings
|
|
|
0.37
|
|
|
$
|
1,569,299
|
|
|
|
2,745
|
|
|
|
0.35
|
|
|
$
|
1,562,247
|
|
|
|
2,232
|
|
|
|
0.29
|
|
Time deposits
|
|
|
1.61
|
|
|
|
1,307,814
|
|
|
|
8,961
|
|
|
|
1.38
|
|
|
|
1,453,943
|
|
|
|
7,737
|
|
|
|
1.07
|
|
Total deposits
|
|
|
0.95
|
|
|
|
2,877,113
|
|
|
|
11,706
|
|
|
|
0.82
|
|
|
|
3,016,190
|
|
|
|
9,969
|
|
|
|
0.67
|
|
Short-term borrowings and structured
repurchase agreements
|
|
|
0.04
|
|
|
|
120,494
|
|
|
|
208
|
|
|
|
0.35
|
|
|
|
236,076
|
|
|
|
544
|
|
|
|
0.46
|
|
Subordinated debentures issued to
capital trusts
|
|
|
3.96
|
|
|
|
25,774
|
|
|
|
440
|
|
|
|
3.44
|
|
|
|
25,774
|
|
|
|
493
|
|
|
|
3.86
|
|
Subordinated notes
|
|
|
5.56
|
|
|
|
73,733
|
|
|
|
2,049
|
|
|
|
5.60
|
|
|
|
73,573
|
|
|
|
2,050
|
|
|
|
5.62
|
|
FHLBank advances
|
|
|
2.06
|
|
|
|
189,682
|
|
|
|
1,772
|
|
|
|
1.88
|
|
|
|
30,905
|
|
|
|
499
|
|
|
|
3.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1.14
|
|
|
|
3,286,796
|
|
|
|
16,175
|
|
|
|
0.99
|
|
|
|
3,382,518
|
|
|
|
13,555
|
|
|
|
0.81
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
|
|
|
|
641,969
|
|
|
|
|
|
|
|
|
|
|
|
614,827
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
19,788
|
|
|
|
|
|
|
|
|
|
|
|
26,710
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
3,948,553
|
|
|
|
|
|
|
|
|
|
|
|
4,024,055
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
484,658
|
|
|
|
|
|
|
|
|
|
|
|
444,532
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
|
|
|
|
$
|
4,433,211
|
|
|
|
|
|
|
|
|
|
|
$
|
4,468,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
3.62
|
%
|
|
|
|
|
|
$
|
80,651
|
|
|
|
3.73
|
%
|
|
|
|
|
|
$
|
76,602
|
|
|
|
3.58
|
%
|
Net interest margin*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.93
|
%
|
|
|
|
|
|
|
|
|
|
|
3.73
|
%
|
Average interest-earning assets to
average interest-bearing liabilities
|
|
|
|
|
|
|
125.8
|
%
|
|
|
|
|
|
|
|
|
|
|
122.4
|
%
|
|
|
|
|
|
|
|
|
_______________________
|
*
|
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 $54.6 million and $64.4 million for the six months ended June 30, 2018 and 2017, respectively. In addition, average tax-exempt loans and industrial revenue bonds were $26.2 million and $29.4 million for the six months ended June 30, 2018 and 2017, respectively. Interest income on tax-exempt assets included in this table was $1.6 million and $1.7 million for the six months ended June 30, 2018 and 2017, respectively. Interest income net of disallowed interest expense related to tax-exempt assets was $1.5 million and $1.6 million for the six months ended June 30, 2018 and 2017, respectively.
|
(2)
|
The yield on loans at June 30, 2018 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 six months ended June 30, 2018.
|
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 June 30,
|
|
|
|
2018 vs. 2017
|
|
|
|
Increase
|
|
|
|
|
|
|
(Decrease)
|
|
|
Total
|
|
|
|
Due to
|
|
|
Increase
|
|
|
|
Rate
|
|
|
Volume
|
|
|
(Decrease)
|
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
3,939
|
|
|
$
|
1,114
|
|
|
$
|
5,053
|
|
Investment securities
|
|
|
118
|
|
|
|
(154
|
)
|
|
|
(36
|
)
|
Other interest-earning assets
|
|
|
181
|
|
|
|
1
|
|
|
|
182
|
|
Total interest-earning assets
|
|
|
4,238
|
|
|
|
961
|
|
|
|
5,199
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
294
|
|
|
|
4
|
|
|
|
298
|
|
Time deposits
|
|
|
1,218
|
|
|
|
(397
|
)
|
|
|
821
|
|
Total deposits
|
|
|
1,512
|
|
|
|
(393
|
)
|
|
|
1,119
|
|
Short-term borrowings
|
|
|
(18
|
)
|
|
|
(120
|
)
|
|
|
(138
|
)
|
Subordinated debentures issued to capital trust
|
|
|
(14
|
)
|
|
|
—
|
|
|
|
(14
|
)
|
Subordinated notes
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
(1
|
)
|
FHLBank advances
|
|
|
(125
|
)
|
|
|
1,047
|
|
|
|
922
|
|
Total interest-bearing liabilities
|
|
|
1,352
|
|
|
|
536
|
|
|
|
1,888
|
|
Net interest income
|
|
$
|
2,886
|
|
|
$
|
425
|
|
|
$
|
3,311
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018 vs. 2017
|
|
|
|
Increase
|
|
|
|
|
|
|
(Decrease)
|
|
|
Total
|
|
|
|
Due to
|
|
|
Increase
|
|
|
|
Rate
|
|
|
Volume
|
|
|
(Decrease)
|
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
5,459
|
|
|
$
|
1,015
|
|
|
$
|
6,474
|
|
Investment securities
|
|
|
238
|
|
|
|
(379
|
)
|
|
|
(141
|
)
|
Other interest-earning assets
|
|
|
424
|
|
|
|
(88
|
)
|
|
|
336
|
|
Total interest-earning assets
|
|
|
6,121
|
|
|
|
548
|
|
|
|
6,669
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
503
|
|
|
|
10
|
|
|
|
513
|
|
Time deposits
|
|
|
2,060
|
|
|
|
(836
|
)
|
|
|
1,224
|
|
Total deposits
|
|
|
2,563
|
|
|
|
(826
|
)
|
|
|
1,737
|
|
Short-term borrowings
|
|
|
(114
|
)
|
|
|
(222
|
)
|
|
|
(336
|
)
|
Subordinated debentures issued to capital trust
|
|
|
(53
|
)
|
|
|
—
|
|
|
|
(53
|
)
|
Subordinated notes
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
FHLBank advances
|
|
|
(292
|
)
|
|
|
1,565
|
|
|
|
1,273
|
|
Total interest-bearing liabilities
|
|
|
2,103
|
|
|
|
517
|
|
|
|
2,620
|
|
Net interest income
|
|
$
|
4,018
|
|
|
$
|
31
|
|
|
$
|
4,049
|
|
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 June 30, 2018, the Company had commitments of approximately $175.2 million to fund loan originations, $1.13 billion of unused lines of credit and unadvanced loans, and $26.0 million of outstanding letters of credit.
Loan commitments and the unfunded portion of loans at the dates indicated were as follows (in thousands):
|
|
June 30, 2018
|
|
|
March 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)
|
|
$
|
144,994
|
|
|
$
|
138,375
|
|
|
$
|
133,587
|
|
|
$
|
123,433
|
|
|
$
|
105,390
|
|
Secured by real estate (not one- to four-family)
|
|
|
15,306
|
|
|
|
12,382
|
|
|
|
10,836
|
|
|
|
26,062
|
|
|
|
21,857
|
|
Not secured by real estate - commercial business
|
|
|
104,749
|
|
|
|
108,262
|
|
|
|
113,317
|
|
|
|
79,937
|
|
|
|
63,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed construction loans with unused
available lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate (one-to four-family)
|
|
|
31,221
|
|
|
|
29,757
|
|
|
|
20,919
|
|
|
|
10,047
|
|
|
|
14,242
|
|
Secured by real estate (not one-to four-family)
|
|
|
830,592
|
|
|
|
749,926
|
|
|
|
718,277
|
|
|
|
542,326
|
|
|
|
385,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Commitments not closed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate (one-to four-family)
|
|
|
47,040
|
|
|
|
37,144
|
|
|
|
23,340
|
|
|
|
15,884
|
|
|
|
13,411
|
|
Secured by real estate (not one-to four-family)
|
|
|
128,200
|
|
|
|
200,192
|
|
|
|
156,658
|
|
|
|
119,126
|
|
|
|
120,817
|
|
Not secured by real estate - commercial business
|
|
|
—
|
|
|
|
12,995
|
|
|
|
4,870
|
|
|
|
7,022
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—
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$
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1,302,102
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$
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1,289,033
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$
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1,181,804
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$
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923,837
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$
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725,551
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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 June 30, 2018, the Company had these available secured lines and on-balance sheet liquidity:
Federal Home Loan Bank line
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$463.5 million
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Federal Reserve Bank line
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$486.3 million
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Cash and cash equivalents
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$280.5 million
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Unpledged securities
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$45.9 million
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Statements of Cash Flows.
During both the six months ended June 30, 2018 and 2017, the Company had positive cash flows from operating activities. The Company experienced negative cash flows from investing activities during the six months ended June 30, 2018 and positive cash flows from investing activities during the six months ended June 30, 2017. The Company experienced positive cash flows from financing activities during the six months ended June 30, 2018 and negative cash flows from financing activities during the six months ended June 30, 2017.
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 $50.4 million and $21.9 million during the six months ended June 30, 2018 and 2017, respectively.
During the six months ended June 30, 2018, investing activities used cash of $139.9 million, primarily due to the purchase of loans and the net origination of loans and the purchase of equipment, partially offset by the sale of other real estate owned and payments received on investment securities. Investing activities in the 2017 period provided cash of $36.6 million, primarily due to the net decrease in loans offset by the purchase of loans, the sale of other real estate owned, payments received on investment securities and payment received from the FDIC for early termination of certain loss sharing agreements.
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 and the exercise of common stock options. Financing activities provided cash of $127.7 million and used cash of $125.7 million during the six months ended June 30, 2018 and 2017, respectively. Net cash used in during the 2017 period was due primarily to the decrease in certificates of deposit and repayment of FHLBank advances. In the 2018 period, financing activities provided cash primarily as a result of net increases in FHLBank advances. 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 June 30, 2018, the Company's total stockholders' equity and common stockholders' equity were $490.3 million, or 10.7% of total assets, equivalent to a book value of $34.69 per share. At December 31, 2017, total stockholders' equity and common stockholders' equity were $471.7 million, or 10.7% of total assets, equivalent to a book value of $33.48 per share. At June 30, 2018, the Company's tangible common equity to tangible assets ratio was 10.5%, compared to 10.5% at December 31, 2017. (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 June 30, 2018, the Bank's common equity Tier 1 capital ratio was 12.3%, its Tier 1 capital ratio was 12.3%, its total capital ratio was 13.2% and its Tier 1 leverage ratio was 12.1%. As a result, as of June 30, 2018, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such. On December 31, 2017, the Bank's common equity Tier 1 capital ratio was 12.3%, its Tier 1 capital ratio was 12.3%, its total capital ratio was 13.2% and its Tier 1 leverage ratio was 11.7%. As a result, as of December 31, 2017, 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 June 30, 2018, the Company's common equity Tier 1 capital ratio was 10.9%, its Tier 1 capital ratio was 11.5%, its total capital ratio was 14.1% and its Tier 1 leverage ratio was 11.3%. 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 June 30, 2018, the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such. On December 31, 2017, the Company's common equity
Tier 1 capital ratio was 10.9%, its Tier 1 capital ratio was 11.4%, its total capital ratio was 14.1% and its Tier 1 leverage ratio was 10.9%. As of December 31, 2017, 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% as of January 1, 2017 and 2018, and will continue to increase an equal amount each year until the buffer requirement of greater than 2.5% of risk-weighted assets is 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, 2017.
Dividends
. During the three months ended June 30, 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 $0.28 per share (which was declared in March 2018). During the three months ended June 30, 2017, the Company declared a common stock cash dividend of $0.24 per share, or 21% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.22 per share (which was declared in March 2017). During the six months ended June 30, 2018, the Company declared a common stock cash dividend of $0.56 per share, or 29% of net income per diluted common share for that six month period, and paid a common stock cash dividend of $0.52 per share. During the six months ended June 30, 2017, the Company declared a common stock cash dividend of $0.46 per share, or 24% of net income per diluted common share for that six month period, and paid a common stock cash dividend of $0.44 per share. The Board of Directors meets regularly to consider the level and the timing of dividend payments. The $0.28 per share dividend declared but unpaid as of June 30, 2018, was paid to stockholders in July 2018.
Common Stock Repurchases and Issuances
. The Company has been in various buy-back programs since May 1990. During the three and six month periods ended June 30, 2018 and 2017, respectively, the Company did not repurchase any shares of its common stock. During the three months ended June 30, 2018, the Company issued 22,681 shares of stock at an average price of $27.75 per share to cover stock option exercises. During the three months ended June 30, 2017, the Company issued 25,328 shares of stock at an average price of $30.07 per share to cover stock option exercises. During the six months ended June 30, 2018, the Company issued 46,290 shares of stock at an average price of $25.38 per share to cover stock option exercises. During the six months ended June 30, 2017, the Company issued 66,267 shares of stock at an average price of $26.84 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. The authorization of this new plan also terminated the previous repurchase plan which was approved in November 2006, with an authorization to repurchase up to 700,000 shares of the Company's outstanding common stock.
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"). These non-GAAP financial measures include 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
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June 30,
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December 31,
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2018
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2017
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(Dollars in Thousands)
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Common equity at period end
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$
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490,271
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$
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471,662
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Less: Intangible assets at period end
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10,025
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10,850
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Tangible common equity at period end (a)
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$
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480,246
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$
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460,812
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Total assets at period end
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$
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4,568,863
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$
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4,414,521
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Less: Intangible assets at period end
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10,025
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10,850
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Tangible assets at period end (b)
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$
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4,558,838
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$
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4,403,671
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Tangible common equity to tangible assets (a) / (b)
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10.53
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%
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10.46
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%
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