The following table sets forth certain information as to the Company's subordinated debentures issued to capital trusts at the dates indicated.
The banking industry in the Company's market areas is highly competitive. In addition to competing with other commercial and savings banks, and savings and loan associations, the Company competes with credit unions, finance companies, leasing companies, mortgage companies, insurance companies, brokerage and investment banking firms and many other financial service firms. Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, price, reputation, interest rates on loans and deposits, lending limits and customer convenience. Our ability to continue to compete effectively also depends in large part on our ability to attract new employees and retain and motivate our existing employees, while managing compensation and other costs.
A substantial number of the commercial banks operating in most of the Company's market areas are branches or subsidiaries of large organizations affiliated with statewide, regional or national banking companies and as a result they may have greater resources with
which to compete. Additionally, the Company faces competition from a large number of community banks, many of which have senior management who were previously with other local banks or investor groups with strong local business and community ties.
Our most direct competition for deposits has historically come from other commercial banks, savings institutions and credit unions located in our market areas. The Bank competes for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours, and convenient branch, ATMonline, mobile and mobileATM services. In addition, some competitors located outside of our market areas conduct business primarily over the Internet, which may enable them to realize certain savings and offer certain deposit products and services at lower rates and with greater convenience to certain customers. Our ability to attract and retain customer deposits depends on our ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities.
Competition in originating real estate loans comes primarily from other commercial banks, savings institutions and mortgage bankers making loans secured by real estate located in the Bank's market area. The specific institutions are similar to those discussed above in regards to deposit market share. Commercial banks and finance companies provide vigorous competition in commercial and consumer lending. The Bank competes for real estate and other loans principally on the basis of the interest rates and loan fees it charges, the types of loans it originates, the quality of services it provides to borrowers and the locations of our branch office network.network and loan production offices.
Many of our competitors have substantially greater resources, name recognition and market presence, which benefit them in attracting business. In addition, larger competitors (including nationwide banks that have a significant presence in our market areas) may be able to price loans and deposits more aggressively than we do because of their greater economies of scale. Smaller and newer competitors may also be more aggressive than we are in terms of pricing loan and deposit products in order to obtain a larger share of the market. In addition, some competitors located outside of our market areas conduct business primarily over the Internet, which may enable them to realize certain savings and offer products and services at more favorable rates and with greater convenience to certain customers.
We also depend, from time to time, on outside funding sources, including brokered deposits, where we experience nationwide competition, and Federal Home Loan Bank advances. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on insured depositary institutions and their holding companies. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services.
Despite the highly competitive environment and the challenges it presents to us, management believes the Company will continue to be competitive because of its strong commitment to quality customer service, competitive products and pricing, convenient local branches, online and mobile capabilities, and active community involvement.
The Company and its subsidiaries are subject to supervision and examination by applicable federal and state banking agencies. The earnings of the Company'sCompany’s subsidiaries, and therefore the earnings of the Company, are affected by general economic conditions, management policies, federal and state legislation, and actions of various regulatory authorities, including the Board of Governors of the Federal Reserve BankSystem, often referred to as the Federal Reserve Board (the "FRB"“FRB”), the Federal Deposit Insurance Corporation (the "FDIC") and the Missouri Division of Finance (the "MDF"“MDF”). The
following is a brief summary of certain aspects of the regulation of the Company and the Bank and does not purport to fully discuss such regulation. Such regulation is intended primarily for the protection of depositors and the Deposit Insurance Fund (the “DIF”), and not for the protection of stockholders.
The Company is a bank holding company that has elected to be treated as a financial holding company by the FRB. Financial holding companies are subject to comprehensive regulation by the FRB under the Bank Holding Company Act and the regulations of the FRB. The Company is required to file reports with the FRB and such additional information as the FRB may require, and is subject to regular examinations by the FRB. The FRB also has extensive enforcement authority over financial holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.
Under FRB policy and the Dodd-Frank Act, a bank holding company must serve as a source of strength for its subsidiary banks. Accordingly, the FRB may require, and has required in the past, that a bank holding company contribute additional capital to an undercapitalized subsidiary bank.
Under the Bank Holding Company Act, a financial holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company that is not a subsidiary if, after such acquisition, it would own or control more than 5% of such shares; (ii) acquiring all or substantially all of the assets of another bank or bank or financial holding company; or (iii) merging or consolidating with another bank or financial holding company.
The Bank Holding Company Act also prohibits a financial holding company generally from engaging directly or indirectly in activities other than those involving banking, activities closely related to banking that are permitted for a bank holding company, and certain securities, insurance and merchant banking.
The federal banking agencies have adopted regulations to implement the provisions of the Dodd-Frank Act known as the Volcker Rule. Under the regulations, FDIC-insured depository institutions, their holding companies, subsidiaries and affiliates (collectively, "banking entities"), are generally prohibited, subject to certain exemptions, from proprietary trading of securities and other financial instruments and from acquiring or retaining an ownership interest in a "covered“covered fund."”
Trading in certain government obligations is not prohibited. These include, among others, obligations of or guaranteed by the United States or an agency or government-sponsored entity of the United States, obligations of a Statestate of the United States or a political subdivision thereof, and municipal securities. Proprietary trading generally does not include transactions under repurchase and reverse repurchase agreements, securities lending transactions and purchases and sales for the purpose of liquidity management if the liquidity management plan meets specified criteria; nor does it generally include transactions undertaken in a fiduciary capacity.
Activities eligible for exemptions include, among others, certain brokerage, underwriting and marketing activities, and risk-mitigating hedging activities with respect to specific risks and subject to specified conditions.
Federal law allows the FRB to approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than such holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The FRB may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. Federal law also prohibits the FRB from approving such an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or if the applicant would control 30% or more of the deposits in any state in which the target bank maintains a branch and in which the applicant or any of its depository institution affiliates controls a depository institution or branch immediately prior to the acquisition of the target bank. Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit. Missouri law prohibits a bank holding company from acquiring a depository institution if total deposits would exceed 13% of statewide deposits excluding bank certificates of deposit of $100,000 or more.
The federal banking agencies are generally authorized to approve interstate bank merger transactions and de novo branching without regard to whether such transactions are prohibited by the law of any state. Interstate acquisitions of branches are generally permitted only if the law of the state in which the branch is located permits such acquisitions.
As required by federal law, federal regulations prohibit any out-of-state bank from using the interstate branching authority primarily for the purpose of deposit production, including guidelines to ensure that interstate branches operated by an out-of-state bank in a host state reasonably help to meet the credit needs of the communities which they serve.
Transactions involving the Bank and its affiliates are subject to sections 23A and 23B of the Federal Reserve Act, and regulations thereunder, which impose certain quantitative limits and collateral requirements on such transactions, and require all such transactions to be on terms at least as favorable to the Bank as are available in transactions with non-affiliates.
All loans by the Bank to the principal stockholders, directors and executive officers of the Bank or any affiliate are subject to regulations restricting loans and other transactions with insiders of the Bank and its affiliates. Transactions involving such persons must be on terms and conditions comparableas favorable to the bank as those forthat apply in similar transactions with non-insiders. A bank may allow favorable rate loans to insiders pursuant to an employee benefit program available to bank employees generally. The Bank has such a program.
The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB's view that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, a bank holding company may be prohibited from paying any dividends if the holding company's bank subsidiary is not adequately capitalized.capitalized, and dividends payable by a bank holding company and its depository institutions subsidiaries can be restricted if the capital conservation buffer requirement is not met. See “Capital” below.
A bank holding company is required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company's consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB. This notification requirement does not apply to any company that meets the well-capitalized standard for bank holding companies, is well-managed, and is not subject to any unresolved supervisory issues. Under Missouri law, the Bank may pay dividends from certain undivided profits and may not pay dividends if its capital is impaired. Dividends of the Company and the Bank may also be restricted under the capital conservation buffer rules, which became effective January 1, 2016, as discussed below under "—“—Capital."”
For purposes of determining risk-based capital, assets and certain off-balance sheet items are risk-weighted from 0% to 1,250%, depending on the risk characteristics of the asset or item. The new regulations make certain changes in the risk-weighting of assets to better reflect credit risk and other risk exposure compared to the earlier capital rules. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%);cancellable; and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital.
In addition to the minimum CET1, Tier 1 and total capital ratios, the Company and the Bank must maintain a capital conservation buffer consisting of additional CET1 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. The new capital conservation buffer requirement isbegan to be phased in beginning on January 1, 2016, when a buffer greater than 0.625% of risk-weighted assets will bewas required, which amount will increaseincreased each year until the buffer requirement iswas fully implemented on January 1, 2019.
written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. In order to be considered adequately capitalized, an institution must have the minimum capital ratios described above. As of December 15, 2015,31, 2018, the Bank was "well-capitalized."“well-capitalized.” An institution that is not well-capitalized is subject to certain restrictions on brokered deposits and interest rates on deposits.
The federal banking regulators are required to take prompt corrective action if an institution fails to satisfy the requirements to qualify as adequately capitalized. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to fail to satisfy the requirements to qualify as adequately capitalized. An institution that is not at least adequately capitalized is: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan (including certain guarantees by any company controlling the institution) within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of business. Additional restrictions and appointment of a receiver or conservator, can apply, depending on the institution's capital level. The FDIC has jurisdiction over the Bank for purposes of prompt corrective action. When the FDIC as receiver liquidates an institution, the claims of depositors and the FDIC as their successor (for deposits covered by FDIC insurance) have priority over other unsecured claims against the institution, including claims of stockholders.
Great Southern is a member of the DIF, which is administered by the FDIC. Deposits are insured up to the applicable limits by the FDIC, backed by the full faith and credit of the United States Government. The general deposit insurance limit is $250,000.
The FDIC assesses deposit insurance premiums on all FDIC-insured institutions quarterly based on annualized rates for four risk categories. Each institution is assigned to one of four risk categories based on its capital, supervisory ratings and other factors. Well capitalized institutions thatrates. These premiums are financially sound with only a few minor weaknesses are assigned to Risk Category I. Risk Categories II, III and IV present progressively greater risks to the DIF.
The FDIC is authorized to conduct examinations of and to require reporting by FDIC-insured institutions, and is the primary federal banking regulator of state banks that are not members of the Federal Reserve, such as the Bank. The FDIC examines the Bank regularly. The FDIC may prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF. The FDIC also has the authority to take enforcement actions against banks and savings associations.
The FRB requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. At December 31, 2015,2018, the Bank was in compliance with these reserve requirements.
Banks are authorized to borrow from the FRB "discount window," but FRB regulations only allow this borrowing for short periods of time and generally require banks to exhaust other reasonable alternative sources of funds where practical, including FHLBank advances, before borrowing from the FRB. See "Sources of Funds Borrowings" above.
The Bank is a member of the FHLBank of Des Moines, which is one of 11 regional FHLBanks.
As a member, Great Southern is required to purchase and maintain stock in the FHLBank of Des Moines in an amount equal to the greater of 1% of its outstanding home loans or 5% of its outstanding FHLBank advances. At December 31, 2015,2018, Great Southern had $15.3
Any changes in the extensive regulatory scheme to which the Company or the Bank is and will be subject, whether by any of the federal banking agencies or Congress, or the Missouri legislature or MDF, could have a material effect on the Company or the Bank, and the Company and the Bank cannot predict what, if any, future actions may be taken by legislative or regulatory authorities or what impact such actions may have.
The following discussion contains a summary of certain federal and state income tax provisions applicable to the Company and the Bank. It is not a comprehensive description of the federal or state income tax laws that may affect the Company and the Bank. The following discussion is based upon current provisions of the Internal Revenue Code of 1986 (the "Code") and Treasury and judicial interpretations thereof.
The Company and its subsidiaries file a consolidated federal income tax return using the accrual method of accounting, with the exception of GSB Two which files a separate return as a REIT. All corporations joining in the consolidated federal income tax return are jointly and severally liable for taxes due and payable by the consolidated group. The following discussion primarily focuses upon the taxation of the Bank, since the federal income tax law contains certain special provisions with respect to banks.
Financial institutions, such as the Bank, are subject, with certain exceptions, to the provisions of the Code generally applicable to corporations.
The Bank is required to follow the specific charge-off method which only allows a bad debt deduction equal to actual charge-offs, net of recoveries, experienced during the fiscal year of the deduction. In a year where recoveries exceed charge-offs, the Bank would be required to include the net recoveries in taxable income.
In the case of a financial institution, such as the Bank, no deduction is allowed for the pro rata portion of its interest expense which is allocable to tax-exempt interest on obligations acquired after August 7, 1986. A limited class of tax-exempt obligations acquired after August 7, 1986 will not be subject to this complete disallowance rule. For certain tax exempt obligations issued in 2009 and 2010, an amount of tax-exempt obligations that are not generally considered part of the "limited“limited class of tax-exempt obligations"obligations” noted above may be treated as part of the "limited“limited class of tax-exempt obligationsobligations” to the extent of two percent of a financial institutions total assets. For tax-exempt obligations acquired after December 31, 1982 and before August 8, 1986 and for obligations acquired after August 7, 1986 that are not subject to the complete disallowance rule, 80% of interest incurred to purchase or carry such obligations will be deductible. No portion of the interest expense allocable to tax-exempt obligations acquired by a financial institution before January 1, 1983, which is otherwise deductible, will be disallowed. There are two significant changes for bonds issued in 2009 and 2010 which include (1) the annual limit for bonds that may be designated as bank qualified is increased from $10 million to $30 million and (2) the annual limitation is considered at the organization level rather than the issuer level. The interest expense disallowance rules cited above have not significantly impacted the Bank.
During 2009, 2011 and 2012, the Bank acquired assets and liabilities of four unrelated failed institutions in transactions with the FDIC. As part of these transactions, the Bank and the FDIC entered into loss sharing agreements whereby the FDIC agreed to share losses
incurred associated with the assets purchased by the Bank. In 2014, the Bank acquired assets and liabilities of an unrelated failed institution in a transaction with the FDIC. The Bank and the FDIC did not enter into a loss sharing agreement on this transaction.
The Bank recognized financial statement gains associated with these transactions. The ultimate tax treatment of these transactions is similar to the financial statement treatment; however, the approaches to valuing the acquired assets and liabilities is different, and results in carrying value differences in the underlying assets and liabilities, for tax purposes. In addition, any gain recognized on the transactions for tax purposes is recognized over a six year period.
Missouri-based banks, such as the Bank, are subject to a franchise tax which is imposed on the bank's taxable income at the rate of 7% of the taxable income (determined without regard for any net operating losses) - income-based calculation. Missouri-based banks are entitled to a credit against the income-based franchise tax for all other state or local taxes on banks, except taxes on real estate, unemployment taxes, bank tax, and taxes on tangible personal property owned by the Bank and held for lease or rental to others.
The Company and all subsidiaries are subject to a Missouri income tax that is imposed on the corporation's taxable income at the rate of 6.25%. The return is filed on a consolidated basis by all members of the consolidated group including the Bank, but excluding GSB Two. As a REIT, GSB Two files a separate Missouri income tax return.
The Bank also has full service offices in Kansas, Iowa, Minnesota, Nebraska and Arkansas, and has commercial loan production offices in Texas, Oklahoma, Nebraska, Illinois, Colorado and Oklahoma.Georgia. As a result, the Bank is subject to franchise and income taxes that are imposed on the corporation's taxable income attributable to those states.
As a Maryland corporation, the Company is required to file an annual report with and pay an annual fee to the State of Maryland.
The Company and its consolidated subsidiaries have not been audited recently by the Internal Revenue Service (IRS) or the State of Missouri with respect to income or franchise tax returns, and, as such, tax years through December 31, 2005, have been closed without audit. The Company, through one of its subsidiaries, is a partner in two partnerships currentlywhich have been under Internal Revenue Service examination for 2006 and 2007. As a result, the Company'sCompany’s 2006 and subsequent tax years remain open for examination. The examinations of thethese partnerships have been advanced during 2015.2017 and 2018. One of the partnerships has advanced to Tax Court becauseand has entered a settlement was not reached at the IRS appeals level. The Company believes the partnership has a strong case and intends to defend its existing positions in Tax Court.Motion for Entry of Decision with an agreed upon settlement. The other partnership is atexamination was recently completed by the IRS appeals level.with no change impacting the Company’s tax position. The Company does not currently expect significant adjustments to its financial statements from thesethe partnership examinations.matter settled at the Tax Court.
An investment in the common stock of the Company is speculative in nature and is subject to certain risks inherent in the business of the Company and the Bank. The material risks and uncertainties that management believes affect the Company and the Bank are described below. You should carefully consider the risks described below, as well as the other information included in this Annual Report on Form 10-K, before making an investment in the Company'sCompany’s common stock. The risks described below are not the only ones we face in our business. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition or operating results could be materially harmed. In such an event, our common stock could decline in value.
Difficult market conditions and economic trends have adversely affected our industry and our business.
The United States experienced a severe economic recession in 2008 and 2009. While economic growth has resumed, the rate of this growth generally has been slow.slower than previous periods of economic recovery. Many lending institutions, including us, experienced declines in the performance of their loans, including construction loans and commercial real estate loans, induring the past several years.economic recession and for a few years after. In addition, the values of real estate collateral supporting many loans declined. The values of real estate collateral may increase or decrease over time and are subject to many factors. At times in the past, bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital and borrow in the debt markets. Conditions such as these may have a material adverse effect on our financial condition and results of operations. In addition, as a result of the foregoing factors, there is a potential for new laws and regulations regarding lending and funding practices and capital and liquidity standards (some of which have already been proposed or implemented), and bank regulatory agencies have been and are expected to continue to be very aggressive in responding to concerns and trends identified in examinations.
Adverse developments in the financial services industry and the impact of new legislation and regulations in response to those developments could restrict our business operations, including our ability to originate loans, and adversely impact our results of operations and financial condition. Overall, during some of the past fewseveral years, the general business environment had an adverse effect on our business. The past two to threefew years have seen some areas of improvement in the general business environment; however, our
business, financial condition and results of operations could be adversely affected by negative circumstances in the general business environment.
Since our business is primarily concentrated in Missouri, Iowa, Kansas and Minnesota, a significant downturn in these state or local economies, particularly in St. Louis and the Springfield, area,Mo. areas, may adversely affect our business. We also have originated a significant dollar amount of loans in Texas and Oklahoma from our commercial loan offices in Dallas and Tulsa. A significant downturn in these state economies may adversely affect our business.
Our lending and deposit gathering activities historically were concentrated primarily in the Springfield and southwest Missouri areas. Our success continues to depend heavily on general economic conditions in Springfield and the surrounding areas. Although we
believe the economy in these areas has recently been favorable relative to other areas, we do not know whether these conditions will continue. OurUntil the past few years, our greatest concentration of loans and deposits has traditionally been in the Greater Springfield area. With a population of approximately 420,000,462,000, the Greater Springfield area is the third largest metropolitan area in Missouri. At December 31, 2015,2018, approximately $446.9$364.4 million of our loan portfolio (excluding those loans acquired in FDIC-assisted transactions) consisted of loans to borrowers in or secured by properties in the Springfield, Missouri metropolitan area.
With the FDIC-assisted transactions that were completed in 2009, we now have additional concentrations of loans in Western and Central Iowa and in Eastern Kansas. The FDIC-assisted transaction completed in 2011 added to our concentrations in Missouri, particularly in St. Louis. As a result of the FDIC-assisted transaction completed in 2012, we have additional concentrations of loans in the Minneapolis, Minnesota metropolitan area. The loans acquired in these FDIC-assisted transactions are, or were, subject to loss sharing agreements with the FDIC. With the FDIC-assisted transaction that was completed in 2014, we now have additional loans in Eastern and Central Iowa.
Adverse changes in regional and general economic conditions could reduce our growth rate, impair our ability to collect loans, increase loan delinquencies, increase problem assets and foreclosures, increase claims and lawsuits, decrease demand for our products and services, and decrease the value of collateral for loans, especially real estate, thereby having a material adverse effect on our financial condition and results of operations. Real estate values can also be affected by governmental rules or policies and natural disasters.
Our loan portfolio possesses increased risk due to our relatively high concentration of commercial and residential construction, commercial real estate, multi-family and other commercial loans.
Our commercial and residential construction, commercial real estate, multi-family and other commercial loans accounted for approximately 71.0%81.1% of our total loan portfolio as of December 31, 2015.2018. Generally, we consider these types of loans to involve a higher degree of risk compared to first mortgage loans on one- to four-family, owner-occupied residential properties. At December 31, 2015,2018, we had $556.7$1.15 billion of loans secured by apartments, $479.0 million of loans secured by apartments, $103.9retail-related projects, $384.7 million of loans secured by motels, $164.8office/warehouse facilities, $313.6 million of loans secured by healthcare facilities, $424.2and $163.4 million of loans secured by retail-related projects, and $336.2 million of loans secured by office/warehouse facilities,motels/hotels, which are particularly sensitive to certain risks, including the following:
57large loan balances owed by a single borrower;
payments that are dependent on the successful operation of the project; and
loans that are more directly impacted by adverse conditions in the real estate market or the economy generally.
The risks associated with construction lending include the borrower'sborrower’s inability to complete the construction process on time and within budget, the sale of the project within projected absorption periods, the economic risks associated with real estate collateral, and the potential of a rising interest rate environment. These loans may include financing the development and/or construction of residential subdivisions. This activity may involve financing land purchases, infrastructure development (e.g., roads, utilities, etc.), as well as construction of residences or multi-family dwellings for subsequent sale by the developer/builder. Because the sale of developed properties is critical to the success of the developer'sdeveloper’s business, loan repayment may be especially subject to the volatility of real estate market values. Management has established underwriting and monitoring criteria to help minimize the inherent risks of commercial real estate construction lending. However, there is no guarantee that these controls and procedures will reduce losses on this type of lending.
Commercial and multi-family real estate lending typically involves higher loan principal amounts and the repayment of these loans generally is dependent, in large part, on the successful operation of the property securing the loan or the business conducted on the
property securing the loan. Other commercial loans are typically made on the basis of the borrower'sborrower’s ability to make repayment from the cash flow of the borrower'sborrower’s business or investment. These loans may therefore be more adversely affected by conditions in the real estate markets or in the economy generally. For example, if the cash flow from the borrower'sborrower’s project is reduced due to leases not being obtained or renewed, the borrower'sborrower’s ability to repay the loan may be impaired. In addition, many commercial and multi-family real estate loans are not fully amortized over the loan period, but have balloon payments due at maturity. A borrower'sborrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or complete a timely sale of the underlying property.
We plan to continue to originate commercial real estate and construction loans based on economic and market conditions. In the years prior to 2013, there was not significant demand for these types of loans. In the current economic situation, demand for these types of loans has increased and we expect to continue to originate these types of loans. Because of the increased risks related to these types of loans, we may determine it necessary to increase the level of our provision for loan losses. Increased provisions for loan losses would adversely impact our operating results. See "Item“Item 1. Business-The Company-Lending Activities-Commercial Real Estate and Construction Lending," "-Other” “-Other Commercial Lending," "-Residential” “-Residential Real Estate Lending"Lending” and "-Allowance“-Allowance for Losses on Loans and Foreclosed Assets"Assets” and "Item“Item 7. Management'sManagement’s Discussion of Financial Condition and Results of Operations – Non-performing Assets"Assets” in this Report.
A slowdown in the residential or commercial real estate markets may adversely affect our earnings and liquidity position.
The overall credit quality of our construction loan portfolio is impacted by trends in real estate values. We continually monitor changes in key regional and national economic factors because changes in these factors can impact our residential and commercial construction loan portfolio and the ability of our borrowers to repay their loans. Across the United States for several years, the residential real estate market experienced significant adverse trends, including accelerated price depreciation and rising delinquency and default rates, and weaknesses arose in the commercial real estate market as well. The conditions in the residential real estate market led to significant increases in loan delinquencies and credit losses as well as higher provisioning for loan losses, which in turn had a negative effect on earnings for many banks across the country. Likewise, we also experienced delinquencies in our construction loan portfolio, almost entirely related to loans originated prior to 2009. Many of these older construction projects were "build“build to sell"sell” types of projects where repayment of the loans was reliant on the borrower completing the project and then selling it. Conditions of both the residential and the commercial real estate markets could negatively impact real estate values and the ability of our borrowers to liquidate properties. A lack of liquidity in the real estate market or tightening of credit standards within the banking industry could diminish sales, further reducing our borrowers'borrowers’ cash flows and weakening their ability to repay their debt obligations to us, which could lead to material adverse impacts on our financial condition and results of operations.
Our loan portfolio also possesses increased risk due to our growing concentration in consumer loans.
Consumer
Our consumer loan portfolio grew significantly between 2010 and 2016. More recently, consumer loans have grown from approximately $184.0$467.7 million, or 9.7%13.7% of our total loan portfolio as of December 31, 2011,2014, to $598.7a peak of $673.0 million, or 17.3%15.3% of our total loan portfolio at December 31, 2016. Since 2016, consumer loans have decreased to $432.2 million (this total includes $121.4 million of home equity loans), or 8.7% of our total loan portfolio as of December 31, 2015. The vast majority of these loans are secured by automobiles and, to a lesser extent, boats, recreational vehicles and manufactured homes. 2018. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial strength, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state consumer bankruptcy and insolvency laws, may limit the amount which can be recovered on these loans. These loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of these loans such as the Bank, and a borrower may be able to assert against the assignee claims and defenses which it has against the seller of the underlying collateral.
The majority of our consumer loans are secured by automobiles and, to a lesser extent, boats, recreational vehicles and manufactured homes, most of which are made by us indirectly through dealers in these products. Through these dealer relationships, the dealer completes the application with the consumer and then submits it to us for credit approval. As a result, we have limited personal contact with the borrower, which creates an additional risk element for us.
Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.
Lending money is a substantial part of our business. However, every loan we make carries a certain risk of non-payment. This risk is affected by, among other things:
· | cash flows of the borrower and/or the project being financed; |
· | in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral; |
cash flows of the borrower and/or the project being financed;
· | the credit history of a particular borrower; |
in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
· | changes in economic and industry conditions; and |
the credit history of a particular borrower;
· | the duration of the loan. |
changes in economic and industry conditions; and
the duration of the loan.
We maintain an allowance for loan losses that we believe reflects a reasonable estimate of known and inherent losses within the loan portfolio. We make various assumptions and judgments about the collectability of our loan portfolio. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers relative to their financial obligations with us. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. Growing loan portfolios are, by their nature, unseasoned. As a result, estimating loan loss allowances for growing portfolios is more difficult, and may be more susceptible to changes in estimates, and to losses exceeding estimates, than more seasoned portfolios. We cannot fully predict the amount or timing of losses or whether the loss allowance will be adequate in the future. Excessive loan losses and significant additions to our allowance for loan losses could have a material adverse impact on our financial condition and results of operations.
In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.
We may be adversely affected by interest rate changes.
Our earnings are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, in particular, the FRB. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but these changes could also affect our ability to originate loans and obtain deposits, the fair values of our financial assets and liabilities and the average duration of our loan and mortgage-backed securities portfolios. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. In addition, a substantial portion of our loans (approximately 43.1%45.0% of our total loan portfolio as of December 31, 2015)2018) have adjustable rates of interest. While the higher payment amounts we would receive on these loans in a rising interest rate environment may increase our interest income, some borrowers may be unable to afford the higher payment amounts, which may result in a higher rate of default. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
We generally seek to maintain a neutral position in terms of the volume of assets and liabilities that mature or re-price during any period. As such, we have adopted asset and liability management strategies to attempt to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of fixed-rate and variable-rate loans, investments and funding sources, including interest rate derivatives, so that we may reasonably maintain the Company'sCompany’s net interest income and net interest margin. However, interest rate fluctuations, the level and shape of the interest rate yield curve, maintaining excess liquidity levels, loan prepayments, loan production and deposit flows are constantly changing and influence the ability to maintain a neutral position. Accordingly, we may not be successful in maintaining a neutral position and, as a result, our net interest margin may be adversely impacted.
The fair value of our investment securities can fluctuate due to market conditions outside of our control.
Factors beyond our control can significantly influence the fair value of securities in our investment securities portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or with respect to the underlying securities, changes in market rates of interest and instability in the credit markets. Any of these mentioned factors could cause an other-than-temporary impairment or permanent impairment of these assets, which would lead to accounting charges which could have a material negative effect on our financial condition and/or results of operations.
Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.
Liquidity is essential to our business, as we must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets could have a substantial adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could negatively affect our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole.
Our operations may depend upon our continued ability to access brokered deposits and Federal Home Loan Bank advances.
Due to the high level of competition for deposits in our markets, we have from time to time utilized a sizable amount of certificates of deposit obtained through deposit brokers and advances from the Federal Home Loan Bank of Des Moines to help fund our asset base. Brokered deposits are marketed through national brokerage firms that solicit funds from their customers for deposit in banks, including our bank. Brokered deposits and Federal Home Loan Bank advances may generally be more sensitive to changes in interest rates and volatility in the capital markets than retail deposits attracted through our branch network, and our reliance on these sources of funds increases the sensitivity of our portfolio to these external factors. Our brokered deposits and Federal Home Loan Bank advances totaled $271.5$326.9 million and $263.5$-0- at December 31, 2018, compared with $225.5 million and $127.5 million at December 31, 2015, compared with $149.82017. In addition to the Federal Home Loan Bank advances, we had overnight borrowings from the Federal Home Loan Bank totaling $178.0 million and $271.6$15.0 million at December 31, 2014.2018 and 2017, respectively. These overnight borrowings are included in short-term borrowings in the Company’s consolidated financial statements. We expect to continue to utilize brokered deposits from time to time as a supplemental funding source. In addition to these brokered deposit totals at December 31, 2015 and 2014, were Great Southern Bank customer deposits totaling $12.2 million and $23.7 million, respectively, which were part of the CDARS program which allows bank customers to maintain balances in an insured manner that would otherwise exceed the FDIC deposit insurance limit. The FDIC considers these customer accounts to be brokered deposits due to the fees paid in the CDARS program.
Bank regulators can restrict our access to these sources of funds in certain circumstances. For example, if the Bank'sBank’s regulatory capital ratios declined below the "well-capitalized"“well-capitalized” status, banking regulators would require the Bank to obtain their approval prior to obtaining or renewing brokered deposits. The regulators might not approve our acceptance of brokered deposits in amounts that we desire or at all. In addition, the availability of brokered deposits and the rates paid on these brokered deposits may be volatile as the balance of the supply of and the demand for brokered deposits changes. Market credit and liquidity concerns may also impact the availability and cost of brokered deposits. Similarly, Federal Home Loan Bank advances are only available to borrowers that meet certain conditions. If Great Southern were to cease meeting these conditions, our access to Federal Home Loan Bank advances could be significantly reduced or eliminated.
Certain Federal Home Loan Banks, including the Federal Home Loan Bank of Des Moines, have experienced lower earnings from time to time and paid out lower dividends to their members. Future problems at the Federal Home Loan Banks may impact the collateral necessary to secure borrowings and limit the borrowings extended to its member banks, as well as require additional capital contributions by its member banks. Should this occur, our short term liquidity needs could be negatively impacted. Should Great Southern be restricted from using FHLBank advances due to weakness in the system or with the FHLBank of Des Moines, Great Southern may be forced to find alternative funding sources. These alternative funding sources may include the utilization of existing lines of credit with third party banks or the Federal Reserve Bank along with seeking other lines of credit, borrowing under repurchase agreement lines, increasing deposit rates to attract additional funds, accessing additional brokered deposits, or selling loans or investment securities in order to maintain adequate levels of liquidity. At December 31, 2015,2018, the Bank owned $15.3$12.4 million of stock in the FHLBank of Des Moines, which declared and paid an annualized dividend approximating 3.50%5.75% during the fourth quarter of 2015.2018. The FHLBank of Des Moines may eliminate or reduce dividend payments at any time in the future in order for it to maintain or restore its retained earnings.
Our strategy of pursuing acquisitions exposes us to financial, execution and operational risks that could adversely affect us.
We pursue a strategy of supplementing internal growth by acquiring other financial institutions or branches that we believe will help us fulfill our strategic objectives and enhance our earnings. There are risks associated with this strategy, however, including the following:
· | We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks or businesses we acquire. If these issues or liabilities exceed our estimates, our earnings and financial condition may be adversely affected; |
· | Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices our management considered acceptable and expect that we will experience this condition in the future in one or more markets; |
· | The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity in order to make the transaction economically feasible. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful; |
60We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks or businesses we acquire. If these issues or liabilities exceed our estimates, our earnings and financial condition may be adversely affected;
Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices our management considered acceptable and expect that we will experience this condition in the future in one or more markets;
The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity in order to make the transaction economically feasible. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful;
To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing stockholders; and
· | Great Southern Bank entered into loss sharing agreements with the FDIC as part of the TeamBank, N.A., Vantus Bank, Sun Security Bank and Inter Savings Bank, FSB transactions. These loss sharing agreements require that Great Southern Bank follow certain servicing procedures as specified in the agreement. A failure to follow these procedures or any other breach of the agreement by Great Southern Bank could result in the loss of FDIC reimbursement of losses on covered loans and other real estate owned, which could have a material negative effect on our financial condition and results of operations. In addition, the loss-share agreements protect Great Southern Bank against losses for limited periods of time (generally ten years for single family residential real estate loans and five years for most loans other than single family residential real estate loans). To the extent Great Southern Bank continues to hold any of the covered loans following the expiration of the applicable loss-share period, it will absorb 100% of any losses. The loss-share agreements expire, or have expired, with respect to commercial loans as follows: TeamBank, N.A. in 2014; Vantus Bank in 2014; Sun Security Bank in 2016 and InterBank in 2017; |
· | To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing stockholders; and |
· | We may not be able to continue to sustain our past rate of growth or to grow at all in the future. We completed two acquisitions in 2009, one acquisition in 2011, one acquisition in 2012, one acquisition in 2014 and have opened additional banking offices and commercial loan production offices in recent years that enhanced our rate of growth. Also in 2014, we agreed to acquire certain loans, deposits and branches from Boulevard Bank. In addition in 2016, we completed our acquisition of certain loans, deposits and branches in St. Louis from Fifth Third Bank (as discussed in Note 30 of Item 8. "Financial Statements and Supplementary Information"). |
We may not be able to continue to sustain our past rate of growth or to grow at all in the future. We completed two acquisitions in 2009, one acquisition in 2011, one acquisition in 2012, one acquisition in 2014 and opened additional banking offices and commercial loan production offices in recent years that enhanced our rate of growth. Also in 2014, we acquired certain loans, deposits and branches from Boulevard Bank. In 2016, we completed an acquisition of certain loans, deposits and branches in St. Louis from Fifth Third Bank.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed orneeded. If available, the cost of that capital may also be very high.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support the growth of our business or to finance acquisitions, if any, or we may elect to raise additional capital for other reasons. Should we be required by regulatory authorities or otherwise elect to raise additional capital, we may seek to do so through the issuance of, among other things, our common stock or securities convertible into our common stock, which could dilute your ownership interest in the Company.
Our ability to raise additional capital, if needed or desired, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances of our ability to raise additional capital if needed or desired, or if the terms will be acceptable to us. If we cannot raise additional capital when needed or desired, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our financial condition and liquidity could be materially adversely affected.
Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
We face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. To date, we have grown our business successfully by focusing on our geographic market, expanding into complementary markets and emphasizing the high level of service and responsiveness desired by our customers. We compete for loans, deposits and other financial services with other commercial banks, thrifts, credit unions, consumer finance companies, insurance companies and brokerage firms. Many of our competitors offer products and services that we do not offer, and many have substantially greater resources, name recognition and market presence that benefit them in attracting business. In addition, larger competitors (including certain nationwide banks that have a significant presence in our market areas) may be able to price loans and deposits more aggressively than we do, and smaller and newer competitors may also be more aggressive in terms of pricing loan and deposit products than us in order to obtain a larger share of the market. As we have grown, we have become dependent from time to time on outside funding sources, including funds borrowed from the FHLBank of Des Moines and brokered deposits, where we face nationwide competition. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on insured depositary institutions and their holding companies. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services.
We also experience competition from a variety of institutions outside of our market areas. Some of these institutions conduct business primarily over the Internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer.
Our business may be adversely affected by the highly regulated environment in which we operate, including the various capital adequacy guidelines we are required to meet.
We are subject to extensive federal and state legislation, regulation, examination and supervision. Recently enacted, proposed and future legislation and regulations have had, will continue to have, or may have an adverse effect on our business and operations. For example, a federal rule which took effect on July 1, 2010 prohibits a financial institution from automatically enrolling customers in overdraft protection programs, on ATM and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service. This rule has adversely affected, and is likely to continue to adversely affect, the results of our operations by reducing the amount of our non-interest income.
Our success depends on our continued ability to maintain compliance with the various regulations to which we are subject. Some of these regulations may increase our costs and thus place other financial institutions in stronger, more favorable competitive positions. We cannot predict what restrictions may be imposed upon us with future legislation. See "Item“Item 1.-The Company -Government Supervision and Regulation"Regulation” in this Report.
The Company and the Bank are required to meet certain regulatory capital adequacy guidelines and other regulatory requirements imposed by the FRB, the FDIC and the Missouri Division of Finance. If the Company or the Bank fails to meet these minimum capital guidelines and other regulatory requirements, our financial condition and results of operations could be materially and adversely affected and could compromise the status of the Company as a financial holding company. See "Item“Item 1.-The Company -Government Supervision and Regulation"Regulation” in this Report.
Financial reform legislation has, among other things, tightened capital standards, created a new Consumer Financial Protection Bureau and resulted in new regulations that have increased, and are expected to continue to increase, our costs of operations.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"“Dodd-Frank Act”) was signed into law. This law has significantly changed the bank regulatory structure and affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
Among the many requirements in the Dodd-Frank Act is a requirement for new capital regulations. Generally, trust preferred securities are no longer eligible as Tier 1 capital, but the Company'sCompany’s currently outstanding trust preferred securities were grandfathered and will continue to qualify as Tier 1 capital. See "Item“Item 1. Business—Government Supervision and Regulation-Capital"Regulation-Capital” and "Item“Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations-Effect of Laws and Regulations-New Capital Rules."”
The Dodd-Frank Act created the Consumer Financial Protection Bureau (the "Bureau"“Bureau”), with broad powers to supervise and enforce consumer protection laws. The Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit "unfair,“unfair, deceptive or abusive acts and practices."” The Bureau has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, their service providers and certain non-depository entities such as debt collectors and consumer reporting agencies. In the case of banks, such as the Bank, with total assets of less than $10 billion, this examination and enforcement authority is held by the institution'sinstitution’s primary federal banking regulator (the FDIC, in the case of the Bank).
The Bureau has finalized a number of significant rules that could have a significant impact on our business and the financial services industry more generally. In particular, the Bureau has adopted rules impacting nearly every aspect of the lifecycle of a residential mortgage loan. The Bureau has also issued guidance which could significantly affect the automotive financing industry by subjecting indirect auto lenders, such as the Bank, to regulation as creditors under the Equal Credit Opportunity Act, which would make indirect auto lenders monitor and control certain credit policies and procedures undertaken by auto dealers.
Additional provisions of the Dodd-Frank Act are described in this report under "Item“Item 1. Business—Government Supervision and Regulation-Significant Legislation Impacting the Financial Services Industry"Industry” and "Item“Item 7. - Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations—Effect of Federal Laws and Regulations-Significant Legislation Impacting the Financial Services Industry."”
Many
Certain aspects of the Dodd-Frank Act areremain subject to rulemaking and have taken and will continue to take effect over several years, making it difficult to anticipate the overall financial impact on the Company. However, complianceyears. Compliance with this law and its implementing regulations have resulted in and will continue to result in additional operating costs that could have a material adverse effect on our financial condition and results of operations.
The recently enacted tax reform legislation is expected to have a significant impact on us, and our financial condition and results of operations could be adversely affected by the broader implications of the legislation.
H.R. 1, which was originally known as the "Tax Cuts and Jobs Act" and was signed into law in December 2017, is expected to have a significant impact on our financial statements and customers. It will take some time for us to analyze all of the implications of this legislation. Although we generally benefit from the legislation’s reduction in the Federal corporate income tax rate, a tax rate reduction potentially has broader implications for our operations, as the new rate could cause positive or negative effects on loan demand and on our pricing models, municipal bonds, tax credits and other investments. The interest deduction limitation implemented by the legislation could make some businesses and industries less inclined to borrow, potentially reducing demand for our commercial loan products. Further, the legislation’s limitation on the mortgage interest deduction and state and local tax deduction for individual taxpayers could increase the after-tax cost of owning a home for some of our potential and existing customers and potentially reduce demand for, or the individual size of, the residential mortgage loans we originate.
Our exposure to operational risks may adversely affect us.
Similar to other financial institutions, we are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, the risk that sensitive customer or Company data is compromised, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors. If any of these risks occur, it could result in material adverse consequences for us.
We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. Our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our clients.
We are also subject to security-related risks in connection with our use of technology, and our security measures may not be sufficient to mitigate the risk of a cyber attack or to protect us from systems failures or interruptions.
Communications and information systems are essential to the conduct of our business, as we use such systems to manage our client relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our clients'clients’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our clients or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.
As a service to our clients, we currently offer an Internet PC banking product and a smartphone application for iPhone and Android users. Use of these services involves the transmission of confidential information over public networks. We cannot be sure that advances in computer capabilities, new discoveries in the field of cryptography or other developments will not result in a compromise or breach in the commercially available encryption and authentication technology that we use to protect our clients' transaction data. If we were to experience such a breach or compromise, we could suffer losses and reputational damage and our results of operations could be materially adversely affected.
While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of client information through various other vendors and their personnel.
The occurrence of any systems failure or interruption could damage our reputation and result in a loss of clients and business, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our results of operations.
Our accounting policies and methods impact how we report our financial condition and results of operations. Application of these policies and methods may require management to make estimates about matters that are uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management'smanagement’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in our reporting materially different amounts than would have been reported under a different alternative. Our significant accounting policies are described in Note 1 to our Consolidated Financial Statements containedof the accompanying audited financial statements included in Item 8 of this Report. These accounting policies are critical to presenting our financial condition and results of operations. They may require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions.
Changes in accounting standards could materially impact our consolidated financial statements.
The accounting standard setters, including the Financial Accounting Standards Board, Securities and Exchange Commission and other regulatory bodies, from time to time may change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings.
63New accounting standards may result in a significant change to our recognition of credit losses and may materially impact our financial condition or results of operations.
In June 2016, the Financial Accounting Standards Board issued new authoritative accounting guidance under ASC Topic 326 "Financial Instruments - Credit Losses" amending the incurred loss impairment methodology in current accounting principles generally accepted in the United States of America ("GAAP") with a methodology that reflects expected credit losses (referred to as the "CECL model") and requires consideration of a broader range of reasonable and supportable information for credit loss estimates,
which goes into effect for us on January 1, 2020. Under the incurred loss model, we delay recognition of losses until it is probable that a loss has been incurred. The CECL model represents a dramatic departure from the incurred loss model. The CECL model requires a financial asset (or a group of financial assets) measured at amortized cost basis, such as loans held for investment and held-to-maturity debt securities, to be presented at the net amount expected to be collected (net of the allowance for credit losses). Similarly, the credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than a write-down. In addition, the measurement of expected credit losses will take place at the time the financial asset is first added to the balance sheet (with periodic updates thereafter) and will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.
As such, the CECL model will materially impact how we determine our allowance for loan losses and may require us to significantly increase our allowance for loan losses. Furthermore, we may experience more fluctuations in our allowance for loan losses, which may be significant. If we were required to materially increase our allowance for loan losses, it may negatively impact our financial condition and results of operations. We are currently evaluating the new guidance and expect it to have an impact on our statements of income and financial condition, the significance of which is not yet known. We expect the CECL model will require us to recognize a one-time cumulative adjustment to our allowance for loan losses in order to fully transition from the incurred loss model to the CECL model, which could negatively impact our financial condition and results of operations.
Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR may adversely affect us.
On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, debentures, or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments and borrowings. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have a material adverse effect on our results of operations and financial condition.
Our controls and procedures may be ineffective.
We regularly review and update our internal controls, disclosure controls and procedures and corporate governance policies and procedures. As a result, we may incur increased costs to maintain and improve our controls and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls or procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations or financial condition.
Risks Relating to our Common Stock
The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell our common stock when you want or at prices you find attractive.
We cannot predict how our common stock will trade in the future. The market value of our common stock will likely continue to fluctuate in response to a number of factors including the following, most of which are beyond our control, as well as the other factors described in this "Risk Factors"“Risk Factors” section:
· | actual or anticipated quarterly fluctuations in our operating and financial results; |
· | developments related to investigations, proceedings or litigation that involve us; |
actual or anticipated quarterly fluctuations in our operating and financial results;
· | changes in financial estimates and recommendations by financial analysts; |
developments related to investigations, proceedings or litigation that involve us;
· | dispositions, acquisitions and financings; |
changes in financial estimates and recommendations by financial analysts;
· | actions of our current stockholders, including sales of common stock by existing stockholders and our directors and executive officers; |
dispositions, acquisitions and financings;
· | fluctuations in the stock price and operating results of our competitors; |
actions of our current stockholders, including sales of common stock by existing stockholders and our directors and executive officers;
· | regulatory developments; and |
fluctuations in the stock price and operating results of our competitors;
· | other developments related to the financial services industry. |
regulatory developments; and
other developments related to the financial services industry.
The market value of our common stock may also be affected by conditions affecting the financial markets in general, including price and trading fluctuations. These conditions may result in (i) volatility in the level of, and fluctuations in, the market prices of stocks generally and, in turn, our common stock and (ii) sales of substantial amounts of our common stock in the market, in each case that could be unrelated or disproportionate to changes in our operating performance. These broad market fluctuations may adversely affect the market value of our common stock. Our common stock also has a low average daily trading volume relative to many other stocks, which may limit an investor'sinvestor’s ability to quickly accumulate or divest themselves of large blocks of our stock. This can lead to significant price swings even when a relatively small number of shares are being traded.
There may be future sales of additional common stock or other dilution of our equity, which may adversely affect the market price of our common stock.
We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.
Our board of directors is authorized to cause us to issue additional common stock, as well as classes or series of preferred stock, generally without any action on the part of the stockholders. In addition, the board has the power, generally without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over the common stock with respect to dividends or upon the liquidation, dissolution or winding-up of our business and other terms. If we issue preferred stock in the future that has a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market value of the common stock could be adversely affected.
Regulatory and contractual restrictions may limit or prevent us from paying dividends on and repurchasing our common stock.
Great Southern Bancorp, Inc. is an entity separate and distinct from its principal subsidiary, Great Southern Bank, and derives substantially all of its revenue in the form of dividends from that subsidiary. Accordingly, Great Southern Bancorp, Inc. is and will be dependent upon dividends from the Bank to pay the principal of and interest on its indebtedness, to satisfy its other cash needs and to pay dividends on its common and preferred stock. The Bank'sBank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event the Bank is unable to pay dividends to Great Southern Bancorp, Inc., Great Southern Bancorp, Inc. may not be able to pay dividends on its common or preferred stock. Also, Great Southern Bancorp, Inc.'s’s right to participate in a distribution of assets upon a subsidiary'ssubsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary'ssubsidiary’s creditors. This includes claims under the liquidation account maintained for the benefit of certain eligible deposit account holders of the Bank established in connection with the Bank'sBank’s conversion from the mutual to the stock form of ownership.
As described below in the next risk factor, the terms of our outstanding junior subordinated debt securities prohibit us from paying dividends on or repurchasing our common stock at any time when we have elected to defer the payment of interest on such debt securities or certain events of default under the terms of those debt securities have occurred and are continuing. These restrictions could have a negative effect on the value of our common stock. Moreover, holders of our common stock are entitled to receive dividends only when, as and if declared by our board of directors. Although we have historically paid cash dividends on our common stock, we are not required to do so and our board of directors could reduce, suspend or eliminate our common stock cash dividend in the future.
If we defer payments of interest on our outstanding junior subordinated debt securities or if certain defaults relating to those debt securities occur, we will be prohibited from declaring or paying dividends or distributions on, and from making liquidation payments with respect to, our common stock.
As of December 31, 2015,2018, we had outstanding $25.8 million aggregate principal amount of junior subordinated debt securities issued in connection with the sale of trust preferred securities by one of our subsidiaries that is a statutory business trust. We have also guaranteed those trust preferred securities. The indenture governing the junior subordinated debt securities, together with the related guarantee, prohibits us, subject to limited exceptions, from declaring or paying any dividends or distributions on, or redeeming, repurchasing, acquiring or making any liquidation payments with respect to, any of our capital stock (including any preferred stock and our common stock) at any time when (i) there shall have occurred and be continuing an event of default under the indenture or any event, act or condition that with notice or lapse of time or both would constitute an event of default under the indenture; or (ii) we are in default with respect to payment of any obligations under the related guarantee; or (iii) we have deferred payment of interest on the junior subordinated debt securities. In that regard, we are entitled, at our option but subject to certain conditions, to defer payments of interest on the junior subordinated debt securities from time to time for up to five years.
Events of default under the indenture generally consist of our failure to pay interest on the junior subordinated debt securities under certain circumstances, our failure to pay any principal of or premium on the junior subordinated debt securities when due, our failure to comply with certain covenants under the indenture, and certain events of bankruptcy, insolvency or liquidation relating to us or Great Southern Bank.
As a result of these provisions, if we were to elect to defer payments of interest on the junior subordinated debt securities, or if any of the other events described in clause (i) or (ii) of the first paragraph of this risk factor were to occur, we would be prohibited from declaring or paying any dividends on our stock, from redeeming, repurchasing or otherwise acquiring any of our stock, and from making any payments to holders of our stock in the event of our liquidation, which would likely have a material adverse effect on the market value of our common stock. Moreover, without notice to or consent from our stockholders, we may issue additional series of junior subordinated debt securities in the future with terms similar to those of our existing junior subordinated debt securities or enter into other financing agreements that limit our ability to purchase or to pay dividends or distributions on our capital stock, including our common stock.
The voting limitation provision in our charter could limit your voting rights as a holder of our common stock.
Our charter provides that any person or group who acquires beneficial ownership of our common stock in excess of 10.0% of the outstanding shares may not vote the excess shares. Accordingly, if you acquire beneficial ownership of more than 10.0% of the outstanding shares of our common stock, your voting rights with respect to the common stock will not be commensurate with your economic interest in our company.
Anti-takeover provisions could adversely impact our stockholders.
Provisions in our charter and bylaws, the corporate law of the state of Maryland and federal regulations could delay or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the market price of any class of our equity securities, including our common stock. These provisions include: a prohibition on voting shares of common stock beneficially owned in excess of 10% of total shares outstanding, supermajority voting requirements for certain business combinations with any person who beneficially owns 10% or more of our outstanding common stock; the election of directors to staggered terms of
three years; advance notice requirements for nominations for election to our board of directors and for proposing matters that stockholders may act on at stockholder meetings, a requirement that only directors may fill a vacancy in our board of directors, and supermajority voting requirements to remove any of our directors. Our charter also authorizes our board of directors to issue preferred stock, and preferred stock could be issued as a defensive measure in response to a takeover proposal. In addition, because we are a bank holding company, purchasers of 10% or more of our common stock may be required to obtain approvals under the Change in Bank Control Act of 1978, as amended, or the Bank Holding Company Act of 1956, as amended (and in certain cases such approvals may be required at a lesser percentage of ownership). Specifically, under regulations adopted by the Federal Reserve Board, (a) any other bank holding company may be required to obtain the approval of the Federal Reserve Board to acquire or retain 5% or more of our common stock and (b) any person other than a bank holding company may be required to obtain the approval of the Federal Reserve Board to acquire or retain 10% or more of our common stock.
These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions also could discourage proxy contests and make it more difficult for holders of our common stock to elect directors other than the candidates nominated by our board of directors.
Three members of the Turner family may exert substantial influence over the Company through their board and management positions and their ownership of the Company'sCompany’s stock.
The Company'sCompany’s Chairman of the Board, William V. Turner, and the Company'sCompany’s Director, President and Chief Executive Officer, Joseph W. Turner, are father and son, respectively. Julie Turner Brown, a director of the Company, is the sister of Joseph Turner and the daughter of William Turner. These three Turner family members hold three of the Company'sCompany’s nine Board positions. As of December 31, 2015,2018, they collectively beneficially owned approximately 2,119,0102,120,574 shares of the Company'sCompany’s common stock (excluding 47,20057,000 shares underlying stock options exercisable as of or within 60 days after that date), representing approximately 15.3%15.0% of total shares outstanding, though they are subject to the voting limitation provision in our charter which precludes any person or group with beneficial ownership in excess of 10% of total shares outstanding from voting shares in excess of that threshold. Through their board and management positions and their ownership of the Company'sCompany’s stock, these three members of the Turner family may exert substantial influence over the direction of the Company and the outcome of Board and stockholder votes.
In addition to the Turner family members, we are aware of one other beneficial ownerowners of more than five percent of the outstanding shares of our common stock. ThisOne of these beneficial ownerowners is also a director of the Company.
As of December 31, 2015,2018, one of the Company'sCompany’s directors, Earl A. Steinert, beneficially owned 933,596936,096 shares of our common stock, representing approximately 6.7%6.6% of total shares outstanding. The shares that can be voted by the Turner family members (1,388,793(1,415,120 shares, per the ten percent voting limitation in our charter) and the shares beneficially owned by Mr. Steinert (933,596)(936,096) total 2,322,389,2,351,216, representing approximately 16.7%16.6% of total shares outstanding. While they have no agreement to do so, to the extent they vote in the same manner, these stockholders may be able to exercise influence over the management and business affairs of our Company. For example, using their collective voting power, these stockholders may be able to affect the outcome of director elections or block significant transactions, such as a merger or acquisition, or any other matter that might otherwise be favored by other stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES.
The Company'sCompany’s corporate offices and operations center are located in Springfield, Missouri. At December 31, 2015,2018, the Company operated 11099 retail banking centers and over 200 automated teller machines ("ATMs") in Missouri, Iowa, Minnesota, Kansas, Nebraska Kansas and Arkansas. Of the 11099 banking centers, the Company owns 9689 of its locations and 1410 were leased for various terms. The majority of our banking center locations are in southwest and central Missouri, including the Springfield, Mo. metropolitan area, with additional concentrations in the Sioux City, Iowa, Des Moines, Iowa, Quad Cities, Iowa, Minneapolis, Minn., St. Louis Mo. and Kansas City, Mo. metropolitan areas. The ATMs are located at various banking centers and primarily convenience stores and retail centers located throughout southwest and central Missouri. At December 31, 2015,2018, the Company also operated threesix commercial and one mortgage loan production offices. The Company owns one of its loan production office locations and twofive locations are leased. All buildings which are owned are owned free of encumbrances or mortgages. In the opinion of management, the facilities are adequate and suitable for the needs of the Company. The aggregate net book value of the Company's premises and equipment was $129.7$132.4 million and $124.8$138.0 million at December 31, 20152018 and 2014,2017, respectively. See also Note 6 and Note 16 of the accompanying audited financial statements, which are included in Item 8 of this Report.
In January 2016, the Company closed 14 banking center locations. One additional banking center location was sold to a separate acquirer in February 2016 and a second additional banking center location is expected to be sold to a separate acquirer in March 2016.
Also in January 2016, 12 banking center locations in the St. Louis, Mo., area were acquired from Fifth Third Bank. See Note 29 and Note 30 of the accompanying audited financial statements for further information on the consolidation of banking centers and the branch acquisitions.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, the Company and its subsidiaries are subject to pending and threatened legal actions, some of which seek substantial relief or damages. While the ultimate outcome of such legal proceedings cannot be predicted with certainty, after reviewing pending and threatened litigation with counsel, management believes at this time that, except as noted below, the outcome of such litigation will not have a material adverse effect on the Company'sCompany’s business, financial condition or results of operations.
On November 22, 2010, a suit was filed against the Bank in the Circuit Court of Greene County, Missouri by a customer alleging that the fees associated with the Bank's automated overdraft program in connection with its debit cards and ATM cards constitute unlawful interest in violation of Missouri's usury laws. The Court has certified a class of Bank customers who have paid overdraft fees on their checking accounts pursuant to the Bank's automated overdraft program. The Bank intends to contest this case vigorously. At this stage of the litigation, it is not possible for management of the Bank to determine the probability of a material adverse outcome or reasonably estimate the amount of any potential loss.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction G(3) of Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, the following list is included as an unnumbered item in Part I of this Form 10-K in lieu of being included in the Registrant's Definitive Proxy Statement.
The following information as to the business experience during the past five years is supplied with respect to executive officers of the Company and its subsidiaries who are not directors of the Company and its subsidiaries. There are no arrangements or understandings between the persons named and any other person pursuant to which such officers were selected. The executive officers are elected annually and serve at the discretion of the respective Boards of Directors of the Company and its subsidiaries.
Steven G. Mitchem.Kevin L Baker. Mr. Mitchem,Baker, age 64,51, is SeniorVice President and Chief Credit Officer of the Bank. He joined the bank in 2005 and is responsible for the overall credit approval process, commercial and consumer loan collection process and the loan documentation and servicing processes. Prior to joining the Bank, Mr. Baker was a lending officer at a commercial bank.
John M. Bugh. Mr. Bugh, age 51, is Vice President and Chief Lending Officer of the Bank. He joined the Bank in 19902011 and is responsiblein charge of all loan production for all lending activities of the Bank.Bank, including commercial, residential and consumer loans. Prior to joining the Bank, Mr. MitchemBugh was a Senior Bank Examinerlending officer at other commercial banks and was an examiner for the Federal Deposit Insurance Corporation.FDIC.
Rex A. Copeland. Mr. Copeland, age 51,54, is Treasurer of the Company and Senior Vice President and Chief Financial Officer of the Bank. He joined the Bank in 2000 and is responsible for the financial functions of the Company, including the internal and external financial reporting of the Company and its subsidiaries. Mr. Copeland is a Certified Public Accountant. Prior to joining the Bank, Mr. Copeland served other financial services companies in the areas of corporate accounting, internal audit and independent public accounting.
Douglas W. Marrs. Mr. Marrs, age 58,61, is Secretary of the Company and Secretary, Vice President - Operations of the Bank. He joined the Bank in 1996 and is responsible for all operations functions of the Bank. Prior to joining the Bank, Mr. Marrs was a bank officer in the areas of operations and data processing at a commercial bank.
Linton J. Thomason. Mr. Thomason, age 60,63, is Vice President - Information Services of the Bank. He joined the Bank in 1997 and is responsible for information services for the Company and all of its subsidiaries and all treasury management sales/operations of the Bank. Prior to joining the Bank, Mr. Thomason was a bank officer in the areas of technology and data processing, operations and treasury management at a commercial bank.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY
SECURITIES.
Market Information
The Company's Common Stock is listed on The NASDAQ Global Select Market under the symbol "GSBC."
As of December 31, 20152018 there were 13,887,93214,151,198 total shares of common stock outstanding and approximately 2,000 stockholders of record.
High/Low Stock Price
| | | 2015 | | | 2014 | | | 2013 | |
| | | High | | | Low | | | High | | | Low | | | High | | | Low | |
| | | | | | | | | | | | | | | | | | | |
| First Quarter | | $ | 40.44 | | | $ | 35.10 | | | $ | 31.00 | | | $ | 26.95 | | | $ | 27.34 | | | $ | 23.31 | |
| Second Quarter | | | 42.95 | | | | 37.44 | | | | 32.25 | | | | 28.00 | | | | 28.00 | | | | 22.60 | |
| Third Quarter | | | 43.42 | | | | 37.54 | | | | 33.77 | | | | 29.53 | | | | 31.00 | | | | 25.71 | |
| Fourth Quarter | | | 52.94 | | | | 42.11 | | | | 40.28 | | | | 29.80 | | | | 31.23 | | | | 25.87 | |
The last sale price of the Company's Common Stock on December 31, 2015 was $45.26.
Dividend Declarations
| | | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | | |
| First Quarter | | $ | .20 | | | $ | .20 | | | $ | .18 | |
| Second Quarter | | | .22 | | | | .20 | | | | .18 | |
| Third Quarter | | | .22 | | | | .20 | | | | .18 | |
| Fourth Quarter | | | .22 | | | | .20 | | | | .18 | |
The Company's ability to pay dividends is substantially dependent on the dividend payments it receives from the Bank. For a description of the regulatory restrictions on the ability of the Bank to pay dividends to the Company, and the ability of the Company to pay dividends to its stockholders, see "Item 1. Business - Government Supervision and Regulation - Dividends."
Stock Repurchases
On November 15, 2006,April 18, 2018, the Company's Board of Directors authorized management to repurchase up to 700,000500,000 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. FromThe authorization of this new plan terminated the date we issued our Capital Purchase Program "CPP" Preferred Stock (December 5, 2008) until the date we redeemed itprevious repurchase plan which was approved in connectionNovember 2006, with our issuance of the SBLF Preferred Stock (August 18, 2011), we were generally precluded from purchasingan authorization to repurchase up to 700,000 shares of the Company's stock without the Treasury's consent. Our participation in the SBLF program did not preclude us from purchasing shares of the Company's stock, provided that after giving effect to such purchase, (i) the dollar amount of the Company's Tier 1 capital would be at least equal to the "Tier 1 Dividend Threshold" under the terms of the SBLF Preferred Stock and (ii) full dividends on all outstanding shares of SBLF Preferred Stock for the most recently completed dividend period have been or are contemporaneously declared and paid, as described under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources." The SBLF Preferred Stock was redeemed on December 15, 2015. Any restrictions related to the SBLF Preferred Stock are no longer applicable.common stock.
On April 21, 2014, Great Southern reiterated that it will consider repurchasing its shares of common stock, from time to time in the open market or through privately negotiated transactions, pursuant to its existing repurchase plan.
As indicated below, nothe Company repurchased the following shares were repurchasedof its common stock during the three months ended December 31, 2015.
2018.
| | Total Number
of Shares
Purchased
| | | Average
Price
Per Share
| | | Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plan
| | | Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plan (1)
| |
| | | | | | | | | | | | |
October 1, 2015 - October 31, 2015 | | | — | | | $ | — | | | | — | | | | 378,562 | |
November 1, 2015- November 30, 2015 | | | — | | | | — | | | | — | | | | 378,562 | |
December 1, 2015- December 31, 2015 | | | —
| | | | — | | | | —
| | | | 378,562 | |
| | | | | | | | | | | | | | | | |
| | | — | | | $ | — | | | | — | | | | | |
| | | Total Number of Shares Purchased | | | Average Price Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plan | | | Maximum Number of Shares that May Yet Be Purchased Under the Plan (1) | |
| | | | | | | | | | | | | |
| October 1, 2018 - October 31, 2018 | | | 2,500 | | | $ | 52.05 | | | | 2,500 | | | | 497,500 | |
| November 1, 2018- November 30, 2018 | | | — | | | | — | | | | — | | | | 497,500 | |
| December 1, 2018- December 31, 2018 | | | 15,042 | | | | 51.43 | | | | 15,042 | | | | 482,458 | |
| | | | | | | | | | | | | | | | | |
| | | | 17,542 | | | $ | 51.52 | | | | 17,542 | | | | | |
| __________________ |
| (1) | Amount represents the number of shares available to be repurchased under the November 2006April 2018 plan as of the last calendar day of the month shown. |
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial information and other financial data of the Company. The selected balance sheetsummary statement of financial condition information and statement of operations data, insofar as they relate to the years ended December 31, 2015, 2014, 2013, 2012 and 2011,income information are derived from our Consolidated Financial Statements,consolidated financial statements, which have been audited by BKD, LLP. See Item 7. "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations,"” and Item 8. "Financial“Financial Statements and Supplementary Information."” Results for past periods are not necessarily indicative of results that may be expected for any future period.
| | | December 31, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | (Dollars In Thousands) | |
| | | | | | | | | | | | | | | | |
| Summary Statement of Financial Condition Information: | | | | | | | | | | | | | | | |
| Assets | | $ | 4,676,200 | | | $ | 4,414,521 | | | $ | 4,550,663 | | | $ | 4,104,189 | | | $ | 3,951,334 | |
| Loans receivable, net | | | 3,990,651 | | | | 3,734,505 | | | | 3,776,411 | | | | 3,352,797 | | | | 3,053,427 | |
| Allowance for loan losses | | | 38,409 | | | | 36,492 | | | | 37,400 | | | | 38,149 | | | | 38,435 | |
| Available-for-sale securities | | | 243,968 | | | | 179,179 | | | | 213,872 | | | | 262,856 | | | | 365,506 | |
| Other real estate and repossessions, net | | | 8,440 | | | | 22,002 | | | | 32,658 | | | | 31,893 | | | | 45,838 | |
| Deposits | | | 3,725,007 | | | | 3,597,144 | | | | 3,677,230 | | | | 3,268,626 | | | | 2,990,840 | |
| Total borrowings and other interest-bearing liabilities | | | 397,594 | | | | 324,097 | | | | 416,786 | | | | 406,797 | | | | 514,014 | |
| Stockholders' equity (retained | | | | | | | | | | | | | | | | | | | | |
| earnings substantially restricted) | | | 531,977 | | | | 471,662 | | | | 429,806 | | | | 398,227 | | | | 419,745 | |
| Common stockholders' equity | | | 531,977 | | | | 471,662 | | | | 429,806 | | | | 398,227 | | | | 361,802 | |
| Average loans receivable | | | 3,910,819 | | | | 3,814,560 | | | | 3,659,360 | | | | 3,235,787 | | | | 2,784,106 | |
| Average total assets | | | 4,503,326 | | | | 4,460,196 | | | | 4,370,793 | | | | 4,067,399 | | | | 3,824,493 | |
| Average deposits | | | 3,556,240 | | | | 3,598,579 | | | | 3,475,887 | | | | 3,203,262 | | | | 3,007,588 | |
| Average stockholders' equity | | | 498,508 | | | | 455,704 | | | | 414,799 | | | | 438,683 | | | | 402,670 | |
| Number of deposit accounts | | | 227,240 | | | | 230,456 | | | | 231,272 | | | | 217,139 | | | | 217,877 | |
| Number of full-service offices | | | 99 | | | | 104 | | | | 104 | | | | 110 | | | | 108 | |
| | | December 31, | |
| | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
| | | (Dollars In Thousands) | |
| | | | | | | | | | | | | | | | |
| Summary Statement of Condition Information: | | | | | | | | | | | | | | | |
| Assets | | $ | 4,104,189 | | | $ | 3,951,334 | | | $ | 3,560,250 | | | $ | 3,955,182 | | | $ | 3,790,012 | |
| Loans receivable, net | | | 3,352,797 | | | | 3,053,427 | | | | 2,446,769 | | | | 2,346,467 | | | | 2,153,081 | |
| Allowance for loan losses | | | 38,149 | | | | 38,435 | | | | 40,116 | | | | 40,649 | | | | 41,232 | |
| Available-for-sale securities | | | 262,856 | | | | 365,506 | | | | 555,281 | | | | 807,010 | | | | 875,411 | |
| Other real estate owned, net | | | 31,893 | | | | 45,838 | | | | 53,514 | | | | 68,874 | | | | 67,621 | |
| Deposits | | | 3,268,626 | | | | 2,990,840 | | | | 2,808,626 | | | | 3,153,193 | | | | 2,963,539 | |
| Total borrowings | | | 406,797 | | | | 514,014 | | | | 343,795 | | | | 391,114 | | | | 485,853 | |
| Stockholders' equity (retained | | | | | | | | | | | | | | | | | | | | |
| earnings substantially restricted) | | | 398,227 | | | | 419,745 | | | | 380,698 | | | | 369,874 | | | | 324,587 | |
| Common stockholders' equity | | | 398,227 | | | | 361,802 | | | | 322,755 | | | | 311,931 | | | | 266,644 | |
| Average loans receivable | | | 3,235,787 | | | | 2,784,106 | | | | 2,403,544 | | | | 2,326,273 | | | | 2,007,914 | |
| Average total assets | | | 4,067,399 | | | | 3,824,493 | | | | 3,789,876 | | | | 4,005,613 | | | | 3,496,860 | |
| Average deposits | | | 3,203,262 | | | | 3,007,588 | | | | 2,996,941 | | | | 3,199,683 | | | | 2,671,710 | |
| Average stockholders' equity | | | 438,683 | | | | 402,670 | | | | 378,650 | | | | 352,282 | | | | 316,486 | |
| Number of deposit accounts | | | 217,139 | | | | 217,877 | | | | 192,323 | | | | 197,733 | | | | 189,288 | |
| Number of full-service offices | | | 110 | | | | 108 | | | | 96 | | | | 107 | | | | 104 | |
| | | For the Year Ended December 31, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | (In Thousands) | |
Summary Statement of Income Information: | | | |
| Interest income: | | | | | | | | | | | | | | | |
| Loans | | $ | 198,226 | | | $ | 176,654 | | | $ | 178,883 | | | $ | 177,240 | | | $ | 172,569 | |
| Investment securities and other | | | 7,723 | | | | 6,407 | | | | 6,292 | | | | 7,111 | | | | 10,793 | |
| | | | 205,949 | | | | 183,061 | | | | 185,175 | | | | 184,351 | | | | 183,362 | |
| Interest expense: | | | |
| Deposits | | | 27,957 | | | | 20,595 | | | | 17,387 | | | | 13,511 | | | | 11,225 | |
| Federal Home Loan Bank advances | | | 3,985 | | | | 1,516 | | | | 1,214 | | | | 1,707 | | | | 2,910 | |
| Short-term borrowings and repurchase agreements | | | 765 | | | | 747 | | | | 1,137 | | | | 65 | | | | 1,099 | |
| Subordinated debentures issued to capital trust | | | 953 | | | | 949 | | | | 803 | | | | 714 | | | | 567 | |
| Subordinated notes | | | 4,097 | | | | 4,098 | | | | 1,578 | | | | — | | | | — | |
| | | | 37,757 | | | | 27,905 | | | | 22,119 | | | | 15,997 | | | | 15,801 | |
| Net interest income | | | 168,192 | | | | 155,156 | | | | 163,056 | | | | 168,354 | | | | 167,561 | |
| Provision for loan losses | | | 7,150 | | | | 9,100 | | | | 9,281 | | | | 5,519 | | | | 4,151 | |
| Net interest income after provision for loan losses | | | 161,042 | | | | 146,056 | | | | 153,775 | | | | 162,835 | | | | 163,410 | |
| Noninterest income: | | | | | | | | | | | | | | | | | | | | |
| Commissions | | | 1,137 | | | | 1,041 | | | | 1,097 | | | | 1,136 | | | | 1,163 | |
| Service charges and ATM fees | | | 21,695 | | | | 21,628 | | | | 21,666 | | | | 19,841 | | | | 19,075 | |
| Net realized gains on sales of loans | | | 1,788 | | | | 3,150 | | | | 3,941 | | | | 3,888 | | | | 4,133 | |
| Net realized gains on sales of | | | | | | | | | | | | | | | | | | | | |
| available-for-sale securities | | | 2 | | | | — | | | | 2,873 | | | | 2 | | | | 2,139 | |
| Late charges and fees on loans | | | 1,622 | | | | 2,231 | | �� | | 1,747 | | | | 2,129 | | | | 1,400 | |
| Gain (loss) on derivative interest rate products | | | 25 | | | | 28 | | | | 66 | | | | (43 | ) | | | (345 | )
|
| Gain recognized on sale of business units | | | 7,414 | | | | — | | | | — | | | | — | | | | — | |
| Gain recognized on business acquisitions | | | — | | | | — | | | | — | | | | — | | | | 10,805 | |
| Gain (loss) on termination of loss sharing agreements | | | — | | | | 7,705 | | | | (584 | ) | | | — | | | | — | |
| Amortization of income/expense related to business acquisition | | | — | | | | (486 | ) | | | (6,351 | ) | | | (18,345 | ) | | | (27,868 | ) |
| Other income | | | 2,535 | | | | 3,230 | | | | 4,055 | | | | 4,973 | | | | 4,229 | |
| | | | 36,218 | | | | 38,527 | | | | 28,510 | | | | 13,581 | | | | 14,731 | |
| Noninterest expense: | | | | | | | | | | | | | | | | | | | | |
| Salaries and employee benefits | | | 60,215 | | | | 60,034 | | | | 60,377 | | | | 58,682 | | | | 56,032 | |
| Net occupancy expense | | | 25,628 | | | | 24,613 | | | | 26,077 | | | | 25,985 | | | | 23,541 | |
| Postage | | | 3,348 | | | | 3,461 | | | | 3,791 | | | | 3,787 | | | | 3,578 | |
| Insurance | | | 2,674 | | | | 2,959 | | | | 3,482 | | | | 3,566 | | | | 3,837 | |
| Advertising | | | 2,460 | | | | 2,311 | | | | 2,228 | | | | 2,317 | | | | 2,404 | |
| Office supplies and printing | | | 1,047 | | | | 1,446 | | | | 1,708 | | | | 1,333 | | | | 1,464 | |
| Telephone | | | 3,272 | | | | 3,188 | | | | 3,483 | | | | 3,235 | | | | 2,866 | |
| Legal, audit and other professional fees | | | 3,423 | | | | 2,862 | | | | 3,191 | | | | 2,713 | | | | 3,957 | |
| Expense on other real estate and repossessions | | | 4,919 | | | | 3,929 | | | | 4,111 | | | | 2,526 | | | | 5,636 | |
| Partnership tax credit investment amortization | | | 575 | | | | 930 | | | | 1,681 | | | | 1,680 | | | | 1,720 | |
| Acquired deposit intangible asset amortization | | | 1,562 | | | | 1,650 | | | | 1,910 | | | | 1,750 | | | | 1,519 | |
| Other operating expenses | | | 6,187 | | | | 6,878 | | | | 8,388 | | | | 6,776 | | | | 14,305 | |
| | | | 115,310 | | | | 114,261 | | | | 120,427 | | | | 114,350 | | | | 120,859 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income before income taxes | | | 81,950 | | | | 70,322 | | | | 61,858 | | | | 62,066 | | | | 57,282 | |
| Provision for income taxes | | | 14,841 | | | | 18,758 | | | | 16,516 | | | | 15,564 | | | | 13,753 | |
| Net income | | | 67,109 | | | | 51,564 | | | | 45,342 | | | | 46,502 | | | | 43,529 | |
| Preferred stock dividends and discount accretion | | | — | | | | — | | | | — | | | | 554 | | | | 579 | |
| Net income available to common shareholders | | $ | 67,109 | | | $ | 51,564 | | | $ | 45,342 | | | $ | 45,948 | | | $ | 42,950 | |
| | | For the Year Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
| | | (In Thousands) | |
Summary Statement of Operations Information: | | | |
| Interest income: | | | | | | | | | | | | | | | |
| Loans | | $ | 177,240 | | | $ | 172,569 | | | $ | 163,903 | | | $ | 170,163 | | | $ | 171,201 | |
| Investment securities and other | | | 7,111 | | | | 10,793 | | | | 14,892 | | | | 23,345 | | | | 27,466 | |
| | | | 184,351 | | | | 183,362 | | | | 178,795 | | | | 193,508 | | | | 198,667 | |
| Interest expense: | | | |
| Deposits | | | 13,511 | | | | 11,225 | | | | 12,346 | | | | 20,720 | | | | 26,370 | |
| Federal Home Loan Bank advances | | | 1,707 | | | | 2,910 | | | | 3,972 | | | | 4,430 | | | | 5,242 | |
| Short-term borrowings and repurchase agreements | | | 65 | | | | 1,099 | | | | 2,324 | | | | 2,610 | | | | 2,965 | |
| Subordinated debentures issued to capital trust | | | 714 | | | | 567 | | | | 561 | | | | 617 | | | | 569 | |
| | | | 15,997 | | | | 15,801 | | | | 19,203 | | | | 28,377 | | | | 35,146 | |
| Net interest income | | | 168,354 | | | | 167,561 | | | | 159,592 | | | | 165,131 | | | | 163,521 | |
| Provision for loan losses | | | 5,519 | | | | 4,151 | | | | 17,386 | | | | 43,863 | | | | 35,336 | |
| Net interest income after provision for loan losses | | | 162,835 | | | | 163,410 | | | | 142,206 | | | | 121,268 | | | | 128,185 | |
| Noninterest income: | | | | | | | | | | | | | | | | | | | | |
| Commissions | | | 1,136 | | | | 1,163 | | | | 1,065 | | | | 1,036 | | | | 896 | |
| Service charges and ATM fees | | | 19,841 | | | | 19,075 | | | | 18,227 | | | | 19,087 | | | | 18,063 | |
| Net realized gains on sales of loans | | | 3,888 | | | | 4,133 | | | | 4,915 | | | | 5,505 | | | | 3,524 | |
| Net realized gains on sales of | | | | | | | | | | | | | | | | | | | | |
| available-for-sale securities | | | 2 | | | | 2,139 | | | | 243 | | | | 2,666 | | | | 483 | |
| Recognized impairment of available-for-sale securities | | | — | | | | — | | | | — | | | | (680 | ) | | | (615 | ) |
| Late charges and fees on loans | | | 2,129 | | | | 1,400 | | | | 1,264 | | | | 1,028 | | | | 651 | |
| Gain (loss) on derivative interest rate products | | | (43 | ) | | | (345 | ) | | | 295 | | | | (38 | ) | | | (10 | ) |
| Gain recognized on business acquisitions | | | — | | | | 10,805 | | | | — | | | | 31,312 | | | | 16,486 | |
| Accretion (amortization) of income/expense related to business acquisition | | | (18,345 | ) | | | (27,868 | ) | | | (25,260 | ) | | | (18,693 | ) | | | (37,797 | ) |
| Other income | | | 4,973 | | | | 4,229 | | | | 4,566 | | | | 4,779 | | | | 2,450 | |
| | | | 13,581 | | | | 14,731 | | | | 5,315 | | | | 46,002 | | | | 4,131 | |
| Noninterest expense: | | | | | | | | | | | | | | | | | | | | |
| Salaries and employee benefits | | | 58,682 | | | | 56,032 | | | | 52,468 | | | | 51,262 | | | | 43,606 | |
| Net occupancy expense | | | 25,985 | | | | 23,541 | | | | 20,658 | | | | 20,179 | | | | 15,220 | |
| Postage | | | 3,787 | | | | 3,578 | | | | 3,315 | | | | 3,301 | | | | 3,096 | |
| Insurance | | | 3,566 | | | | 3,837 | | | | 4,189 | | | | 4,476 | | | | 4,840 | |
| Advertising | | | 2,317 | | | | 2,404 | | | | 2,165 | | | | 1,572 | | | | 1,316 | |
| Office supplies and printing | | | 1,333 | | | | 1,464 | | | | 1,303 | | | | 1,389 | | | | 1,268 | |
| Telephone | | | 3,235 | | | | 2,866 | | | | 2,868 | | | | 2,768 | | | | 2,270 | |
| Legal, audit and other professional fees | | | 2,713 | | | | 3,957 | | | | 4,348 | | | | 4,323 | | | | 3,803 | |
| Expense on other real estate owned | | | 2,526 | | | | 5,636 | | | | 4,068 | | | | 8,748 | | | | 11,846 | |
| Partnership tax credit | | | 1,680 | | | | 1,720 | | | | 2,108 | | | | 1,825 | | | | 2,035 | |
| Other operating expenses | | | 8,526 | | | | 15,824 | | | | 8,128 | | | | 8,760 | | | | 6,226 | |
| | | | 114,350 | | | | 120,859 | | | | 105,618 | | | | 108,603 | | | | 95,526 | |
| Income from continuing operations | | | | | | | | | | | | | | | | | | | | |
| before income taxes | | | 62,006 | | | | 57,282 | | | | 41,903 | | | | 58,667 | | | | 36,790 | |
| Provision for income taxes | | | 15,564 | | | | 13,753 | | | | 8,174 | | | | 14,580 | | | | 7,133 | |
| Net income from continuing operations | | | 46,502 | | | | 43,529 | | | | 33,729 | | | | 44,087 | | | | 29,657 | |
| Discontinued Operations | | | | | | | | | | | | | | | | | | | | |
| Income from discontinued operations, net of income taxes | | | — | | | | — | | | | — | | | | 4,619 | | | | 612 | |
| Net income | | | 46,502 | | | | 43,529 | | | | 33,729 | | | | 48,706 | | | | 30,269 | |
| Preferred stock dividends and discount accretion | | | 554 | | | | 579 | | | | 579 | | | | 608 | | | | 2,798 | |
| Non-cash deemed preferred stock dividend | | | — | | | | — | | | | — | | | | — | | | | 1,212 | |
| Net income available to common shareholders | | $ | 45,948 | | | $ | 42,950 | | | $ | 33,150 | | | $ | 48,098 | | | $ | 26,259 | |
| | | At or For the Year Ended December 31, | |
| | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
| | | (Number of shares in thousands) | |
| Per Common Share Data: | | | | | | | | | | | | | | | |
| Basic earnings per common share | | $ | 3.33 | | | $ | 3.14 | | | $ | 2.43 | | | $ | 3.55 | | | $ | 1.95 | |
| Diluted earnings per common share | | | 3.28 | | | | 3.10 | | | | 2.42 | | | | 3.54 | | | | 1.93 | |
Diluted earnings from continuing operations per common share | | | 3.28 | | | | 3.10 | | | | 2.42 | | | | 3.20 | | | | 1.89 | |
| Cash dividends declared | | | 0.86 | | | | 0.80 | | | | 0.72 | | | | 0.72 | | | | 0.72 | |
| Book value per common share | | | 28.67 | | | | 26.30 | | | | 23.60 | | | | 22.94 | | | | 19.78 | |
| | | | | | | | | | | | | | | | | | | | | |
| Average shares outstanding | | | 13,818 | | | | 13,700 | | | | 13,635 | | | | 13,534 | | | | 13,462 | |
| Year-end actual shares outstanding | | | 13,888 | | | | 13,755 | | | | 13,674 | | | | 13,596 | | | | 13,480 | |
| Average fully diluted shares outstanding | | | 14,000 | | | | 13,876 | | | | 13,715 | | | | 13,592 | | | | 13,626 | |
| | | | |
| Earnings Performance Ratios: | | | |
| Return on average assets(1) | | | 1.14 | % | | | 1.14 | % | | | 0.89 | % | | | 1.22 | % | | | 0.87 | % |
| Return on average stockholders' equity(2) | | | 12.13 | | | | 12.63 | | | | 10.52 | | | | 16.55 | | | | 11.67 | |
| Non-interest income to average total assets | | | 0.33 | | | | 0.39 | | | | 0.14 | | | | 1.49 | | | | 0.35 | |
| Non-interest expense to average total assets | | | 2.81 | | | | 3.16 | | | | 2.79 | | | | 2.71 | | | | 2.73 | |
| Average interest rate spread(3) | | | 4.44 | | | | 4.74 | | | | 4.60 | | | | 4.53 | | | | 5.06 | |
| Year-end interest rate spread | | | 3.80 | | | | 3.86 | | | | 3.88 | | | | 3.57 | | | | 3.68 | |
| Net interest margin(4) | | | 4.53 | | | | 4.84 | | | | 4.70 | | | | 4.61 | | | | 5.17 | |
| Efficiency ratio(5) | | | 62.85 | | | | 66.30 | | | | 64.05 | | | | 51.44 | | | | 56.98 | |
| Net overhead ratio(6) | | | 2.48 | | | | 2.77 | | | | 2.66 | | | | 1.56 | | | | 2.61 | |
| Common dividend pay-out ratio(7) | | | 26.22 | | | | 25.81 | | | | 29.75 | | | | 20.34 | | | | 37.31 | |
| | | | | | | | | | | | | | | | | | | | | |
Asset Quality Ratios (8): | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses/year-end loans | | | 1.20 | % | | | 1.34 | % | | | 1.92 | % | | | 2.21 | % | | | 2.33 | % |
| Non-performing assets/year-end loans and foreclosed assets | | | 1.28 | | | | 1.39 | | | | 2.46 | | | | 2.98 | | | | 3.31 | |
| ��Allowance for loan losses/non-performing loans | | | 230.24 | | | | 471.77 | | | | 201.53 | | | | 180.84 | | | | 149.95 | |
| Net charge-offs/average loans | | | 0.20 | | | | 0.24 | | | | 0.91 | | | | 2.43 | | | | 2.09 | |
| Gross non-performing assets/year end assets | | | 1.07 | | | | 1.11 | | | | 1.74 | | | | 1.84 | | | | 1.96 | |
| Non-performing loans/year-end loans | | | 0.49 | | | | 0.26 | | | | 0.80 | | | | 0.94 | | | | 1.25 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Ratios: | | | | | | | | | | | | | | | | | | | | |
| Loans to deposits | | | 102.58 | % | | | 102.09 | % | | | 87.12 | % | | | 74.42 | % | | | 72.65 | % |
Average interest-earning assets as a percentage of average interest-bearing liabilities | | | 121.60 | | | | 120.95 | | | | 116.03 | | | | 110.12 | | | | 110.55 | |
| | | | | | | | | | | | | | | | | | | | | |
| Capital Ratios: | | | | | | | | | | | | | | | | | | | | |
| Average common stockholders' equity to average assets | | | 9.4 | % | | | 9.0 | % | | | 8.5 | % | | | 7.4 | % | | | 7.4 | % |
| Year-end tangible common stockholders' equity to assets | | | 9.6 | | | | 9.0 | | | | 8.9 | | | | 7.7 | | | | 6.9 | |
| Great Southern Bancorp, Inc.: | | | | | | | | | | | | | | | | | | | | |
| Tier 1 capital ratio | | | 11.5 | | | | 13.3 | | | | 15.6 | | | | 15.7 | | | | 14.8 | |
| Total capital ratio | | | 12.6 | | | | 14.5 | | | | 16.9 | | | | 16.9 | | | | 16.1 | |
| Tier 1 leverage ratio | | | 10.2 | | | | 11.1 | | | | 11.3 | | | | 9.5 | | | | 9.2 | |
| Common equity Tier 1 ratio | | | 10.8 | | | | — | | | | — | | | | — | | | | — | |
| Great Southern Bank: | | | | | | | | | | | | | | | | | | | | |
| Tier 1 capital ratio | | | 11.0 | | | | 11.4 | | | | 14.2 | | | | 14.7 | | | | 14.1 | |
| Total capital ratio | | | 12.1 | | | | 12.6 | | | | 15.4 | | | | 15.9 | | | | 15.3 | |
| Tier 1 leverage ratio | | | 9.8 | | | | 9.5 | | | | 10.2 | | | | 8.9 | | | | 8.6 | |
| Common equity Tier 1 ratio | | | 11.0 | | | | — | | | | — | | | | — | | | | — | |
Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirement (9): | | | | | | | | | | | | | | | | | | | | |
| Including deposit interest | | | 4.66 | x | | | 4.41 | x | | | 3.07 | x | | | 3.22 | x | | | 1.82 | x |
| Excluding deposit interest | | | 20.01 | x | | | 11.59 | x | | | 6.44 | x | | | 8.66 | x | | | 3.38 | x |
| | | At or For the Year Ended December 31, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | (Number of shares in thousands) | |
| Per Common Share Data: | | | | | | | | | | | | | | | |
| Basic earnings per common share | | $ | 4.75 | | | $ | 3.67 | | | $ | 3.26 | | | $ | 3.33 | | | $ | 3.14 | |
| Diluted earnings per common share | | | 4.71 | | | | 3.64 | | | | 3.21 | | | | 3.28 | | | | 3.10 | |
| Cash dividends declared | | | 1.20 | | | | 0.94 | | | | 0.88 | | | | 0.86 | | | | 0.80 | |
| Book value per common share | | | 37.59 | | | | 33.48 | | | | 30.77 | | | | 28.67 | | | | 26.30 | |
| | | | | | | | | | | | | | | | | | | | | |
| Average shares outstanding | | | 14,132 | | | | 14,032 | | | | 13,912 | | | | 13,818 | | | | 13,700 | |
| Year-end actual shares outstanding | | | 14,151 | | | | 14,088 | | | | 13,968 | | | | 13,888 | | | | 13,755 | |
| Average fully diluted shares outstanding | | | 14,260 | | | | 14,180 | | | | 14,141 | | | | 14,000 | | | | 13,876 | |
| | | | |
| Earnings Performance Ratios: | | | |
| Return on average assets(1) | | | 1.49 | % | | | 1.16 | % | | | 1.04 | % | | | 1.14 | % | | | 1.14 | % |
| Return on average stockholders' equity(2) | | | 13.46 | | | | 11.32 | | | | 10.93 | | | | 12.13 | | | | 12.63 | |
| Non-interest income to average total assets | | | 0.80 | | | | 0.86 | | | | 0.65 | | | | 0.33 | | | | 0.39 | |
| Non-interest expense to average total assets | | | 2.56 | | | | 2.56 | | | | 2.76 | | | | 2.81 | | | | 3.16 | |
| Average interest rate spread(3) | | | 3.75 | | | | 3.59 | | | | 3.93 | | | | 4.44 | | | | 4.74 | |
| Year-end interest rate spread | | | 3.60 | | | | 3.67 | | | | 3.60 | | | | 3.80 | | | | 3.86 | |
| Net interest margin(4) | | | 3.99 | | | | 3.74 | | | | 4.05 | | | | 4.53 | | | | 4.84 | |
| Efficiency ratio(5) | | | 56.41 | | | | 58.99 | | | | 62.86 | | | | 62.85 | | | | 66.30 | |
| Net overhead ratio(6) | | | 1.76 | | | | 1.70 | | | | 2.10 | | | | 2.48 | | | | 2.77 | |
| Common dividend pay-out ratio(7) | | | 25.48 | | | | 25.82 | | | | 27.41 | | | | 26.22 | | | | 25.81 | |
| | | | | | | | | | | | | | | | | | | | | |
Asset Quality Ratios (8): | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses/year-end loans | | | 0.98 | % | | | 1.01 | % | | | 1.04 | % | | | 1.20 | % | | | 1.34 | % |
| Non-performing assets/year-end loans and foreclosed assets | | | 0.29 | | | | 0.73 | | | | 1.02 | | | | 1.28 | | | | 1.39 | |
| Allowance for loan losses/non-performing loans | | | 609.67 | | | | 324.23 | | | | 265.60 | | | | 230.24 | | | | 471.77 | |
| Net charge-offs/average loans | | | 0.13 | | | | 0.26 | | | | 0.29 | | | | 0.20 | | | | 0.24 | |
| Gross non-performing assets/year end assets | | | 0.25 | | | | 0.63 | | | | 0.86 | | | | 1.07 | | | | 1.11 | |
| Non-performing loans/year-end loans | | | 0.16 | | | | 0.30 | | | | 0.37 | | | | 0.49 | | | | 0.26 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Ratios: | | | | | | | | | | | | | | | | | | | | |
| Loans to deposits | | | 106.76 | % | | | 103.82 | % | | | 102.70 | % | | | 102.58 | % | | | 102.09 | % |
Average interest-earning assets as a percentage of average interest-bearing liabilities | | | 126.47 | | | | 123.74 | | | | 121.33 | | | | 121.60 | | | | 120.95 | |
| | | | | | | | | | | | | | | | | | | | | |
| Capital Ratios: | | | | | | | | | | | | | | | | | | | | |
| Average common stockholders' equity to average assets | | | 11.1 | % | | | 10.2 | % | | | 9.5 | % | | | 9.4 | % | | | 9.0 | % |
| Year-end tangible common stockholders' equity to tangible assets(9) | | | 11.2 | | | | 10.5 | | | | 9.2 | | | | 9.6 | | | | 9.0 | |
| Great Southern Bancorp, Inc.: | | | | | | | | | | | | | | | | | | | | |
| Tier 1 capital ratio | | | 11.9 | | | | 11.4 | | | | 10.8 | | | | 11.5 | | | | 13.3 | |
| Total capital ratio | | | 14.4 | | | | 14.1 | | | | 13.6 | | | | 12.6 | | | | 14.5 | |
| Tier 1 leverage ratio | | | 11.7 | | | | 10.9 | | | | 9.9 | | | | 10.2 | | | | 11.1 | |
| Common equity Tier 1 ratio | | | 11.4 | | | | 10.9 | | | | 10.2 | | | | 10.8 | | | | — | |
| Great Southern Bank: | | | | | | | | | | | | | | | | | | | | |
| Tier 1 capital ratio | | | 12.4 | | | | 12.3 | | | | 11.8 | | | | 11.0 | | | | 11.4 | |
| Total capital ratio | | | 13.3 | | | | 13.2 | | | | 12.7 | | | | 12.1 | | | | 12.6 | |
| Tier 1 leverage ratio | | | 12.2 | | | | 11.7 | | | | 10.8 | | | | 9.8 | | | | 9.5 | |
| Common equity Tier 1 ratio | | | 12.4 | | | | 12.3 | | | | 11.8 | | | | 11.0 | | | | — | |
| ____________________ | |
| (1) | Net income divided by average total assets. | |
| (2) | Net income divided by average stockholders' equity. | |
| (3) | Yield on average interest-earning assets less rate on average interest-bearing liabilities. | |
| (4) | Net interest income divided by average interest-earning assets. | |
| (5) | Non-interest expense divided by the sum of net interest income plus non-interest income. | |
| (6) | Non-interest expense less non-interest income divided by average total assets. | |
(7) (8)
(9)
| Cash dividends per common share divided by earnings per common share. | |
| (8) | Excludes assets covered by FDIC loss sharing agreements.In computing the ratioFDIC-acquired assets.
| |
| (9) | Non-GAAP Financial Measure. For additional information, including a reconciliation to GAAP, see “Item 7. Management’s Discussion and Analysis of earnings to fixed chargesFinancial Condition and preferred stock dividend requirement: (a) earnings have been based on income before income taxes and fixed charges, and (b) fixed charges consistResults of interest and amortization of debt discount and expense including amounts capitalized and the estimated interest portion of rents.Operations – Non-GAAP Financial Measures.” | |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONOPERATIONS
Forward-looking Statements
When used in this Annual Report and in other documents filed or furnished by the CompanyGreat Southern Bancorp, Inc. (the “Company”) with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or shareholderstockholder 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 changes in non-interest income, non-interest expense reductionsand interest expense actually resulting from Great Southern's banking center consolidationsSouthern Bank's recently completed transaction with West Gate Bank might be less than anticipatedmaterially 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 the costs of the consolidation and impairment of the value of the affected premisesJobs Act” (the “Tax Reform Legislation”) might be greater than expected; (ii)different from the reduction estimated by the Company; (iii) expected revenues, cost savings, earnings accretion, synergies and other benefits from the Fifth Third Bank branch acquisition and the Company's other 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; (iii)(iv) changes in economic conditions, either nationally or in the Company's market areas; (iv)(v) fluctuations in interest rates; (v)(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; (vi)(vii) the possibility of other-than-temporary impairments of securities held in the Company's securities portfolio; (vii)(viii) the Company's ability to access cost-effective funding; (viii)(ix) fluctuations in real estate values and both residential and commercial real estate market conditions; (ix)(x) demand for loans and deposits in the Company's market areas; (x)(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, and the overdraft protection regulations and customers' responses thereto; (xi)thereto and the Tax Reform Legislation; (xiv) changes in accounting principles, policies or guidelines; (xv) monetary and fiscal policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board or the FRB") and the U.S. Government and other governmental initiatives affecting the financial services industry; (xii)(xvi) results of examinations of the Company and Great Southern Bank by their regulators, including the possibility that the regulators may, among other things, require the Company to limit its business activities, changes its business mix, increase its allowance for loan losses, write-down assets or increase its capital levels, or affect its ability to write-down assets; (xiii)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 (xiv)(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-andundertake -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'sBank’s regulators could require additional provisions for loan losses as part of their examination process.
Additional discussion of the allowance for loan losses is included in "Item 1. Business - Allowances for Losses on Loans and Foreclosed Assets." 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 have to 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. In the fourth quarter of 2014, the Company began using a three-year average of historical losses for the general component of the allowance for loan loss calculation. The Company had previously used a five-year average. The Company believes that the three-year average provides a better representation of the current risks in the loan portfolio. This change was made after consultation with our regulators and third-party consultants, as well as a review of the practices used by the Company'sCompany’s peers. No other 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'smanagement’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 and Indemnification Asset
The Company considers that the determination of the carrying value of loans acquired in the FDIC-assisted transactions and the carrying value of the related FDIC indemnification assets involveasset involves a high degree of judgment and complexity. The carrying value of the acquired loans and, prior to June 30, 2017, the FDIC indemnification assetsasset reflect management'smanagement’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 assumedacquired assets and assumed liabilities in accordance with FASB ASC 805, Business Combinations. However, the amount that the Company realizes on theseits acquired loan assets could differ materially from the carrying value reflected in its financial statements, based upon the timing of collections on the acquired loans in future periods. Because of the loss sharing agreements with the FDIC on certain of these assets, the Company shoulddid not expect to incur any significant losses related to these assets. To the extent the actual values realized for the acquired loans are different from the estimates, the indemnification asset willwas generally be impacted in an offsetting manner due to the loss sharing support from the FDIC. Subsequent to the initial valuation, the Company continues to monitor identified loan pools and related loss sharing assets 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 4 of the accompanying audited financial statements 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'sCompany’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 December 31, 2015,2018, the Company has 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'sunit’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 December 31, 2015,2018, goodwill consisted of $1.2$5.4 million at the Bank reporting unit. Goodwill increased $790,000unit, which included goodwill of $4.2 million that was recorded during 2014, due2016 related to the acquisition of certain loans, deposits and other assets of Boulevard12 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 December 31, 2015,2018, the amortizable intangible assets consisted of core deposit intangibles of $4.6$3.9 million, including $2.2$2.6 million related to the Fifth Third Bank transaction in January 2016, $1.0 million related to the Valley Bank transaction in June 2014 and $641,000$275,000 related to the Boulevard Bank transaction in March 2014. These amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable based on a comparison of fair value. See Note 1 of the accompanying audited financial statements for additional information.
For purposes of testing goodwill for impairment, the Company used a market approach to value its reporting unit. The market approach applies a market multiple, based on observed purchase transactions for each reporting unit, to the metrics appropriate for the valuation of the operating unit. Significant judgment is applied when goodwill is assessed for impairment. This judgment may include developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables and incorporating general economic and market conditions.
Based on the Company'sCompany’s goodwill impairment testing, management does not believe any of its goodwill or other intangible assets are impaired as of December 31, 2015.2018. While the Company believes no impairment existed at December 31, 2015,2018, different conditions or assumptions used to measure fair value of the reporting unit, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company'sCompany’s impairment evaluation in the future.
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'sCompany’s ability to meet regulatory capital requirements and maintain sufficient liquidity.
Following the bursting of the housing bubbleand mortgage crisis and correction beginning in mid-2007, the United States entered into ana prolonged economic recession. The economic downturn of 2008 was caused by a housing market correction and a subprime mortgage crisis.downturn. Unemployment rose from 4.7% in November 2007 to peak at 10%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. Current economicEconomic conditions have significantly improved considerably over the past three yearssince then, as indicated by increasing consumer confidence levels, increased economic activity and a continued decline inlow unemployment levels.
The national unemployment rate declined from 5.6% as of December 2014rose to 5.0% as of December 2015. The economy added 292,000 jobs3.9% in December 2015. Employment gains occurred2018 from a 49-year low of 3.7% the previous month. The rate compares to an employment rate of 4.1% at December 2017. Total nonfarm payroll employment increased by 312,000 in several industries, led by professional and business services, construction,December 2018 with employment increases in health care, and food services and drinking establishments. Energyplaces, construction, manufacturing and retail trade. In December 2018, the U.S. labor force participation rate (the share of working-age Americans who are either employed or are actively looking for a job) was 63.1% and the only significant industry suffering job losses. Unemployment levelsemployment population ratio was 60.6%, with both ratios changing little since November 2018. The unemployment rate for the Midwest, where most of the Company’s business is conducted, was at 3.7% in our market areas have decreased or remained level overDecember 2018, which is slightly better than the past year in all states in which the Company has offices.national unemployment rate of 3.9%. Unemployment rates atfor December 31, 20152018 were: Missouri at 4.4%3.1%, Arkansas at 4.8%3.6%, Kansas at 3.9%3.3%, Iowa at 3.4%, Nebraska at 2.9%2.4%, Minnesota at 3.5%2.8%, Illinois at 4.3%, Oklahoma at 4.1% and3.2%, Texas at 4.7%3.7%, Georgia at 3.6% and Colorado at 3.5%. Five of these eight states had unemployment rates amongst the top performers in the country. Of the metropolitan areas in which Great Southern Bankthe Company does business, the St. Louis marketChicago area continues to carryhad the highest unemployment level at 4.0% as of unemployment at 4.3%.December 2018. This rate compares favorably tohad improved significantly since the 5.6%4.7% rate reported as of December 2014.2017. The unemployment rate at 3.4%rates for the Springfield and St. Louis market area wasareas at 2.6% and 3.4%, respectively, were well below the national and state average for December 2015.average. Metropolitan areas in Iowa, NebraskaMissouri, Arkansas and Minnesota boastedcontinued to boast unemployment levels amongamongst the lowest in the nation.
Sales of newly built single-family homes for November 2018 were at a seasonally adjusted annual rate of 544,000 units in December 2015,657,000 according to U.S. Census Bureau and the U.S. Department of Housing and Urban Development andestimates. This is 16.9% above the U.S. Census Bureau.revised October 2018 seasonally adjusted annual rate of 562,000, but is 7.7% below the November 2017 seasonally adjusted annual rate of 712,000. The median sales price of new houses sold in December 2015November 2018 was $288,900 with an$302,400, down from $343,300 a year earlier. The average sales price
was $362,400, down from $402,900 as of $346,400.December 2017. The seasonally adjusted estimateinventory of new houseshomes for sale at the end of December 2015 was 237,000, which represented aNovember would support 6 months’ supply of 5.2 months at the current sales rate. Accordingpace, down from 7.1 months in September, and similar to Realty Trac,5.7 months a year ago.
After two consecutive months of increases, existing home sales declined in the nation's foreclosuremonth of December, according to the National Association of Realtors (NAR). Total existing home sales decreased 6.4% from November 2018 to a seasonally adjusted rate of 4.99 million in December 2018. Sales are now down 10.3% from a year ago. Total housing inventory at the end of December decreased to 1.55 million, down from 1.74 million existing homes available for sale in November. Unsold inventory is at a 3.7 month supply at the current sales pace, up from 3.2 months a year ago.
The national median existing home price for all housing types in December was 10% lower than$253,600, up 2.9% from December 2017. December’s price increase marks the 82nd straight month of year-over-year gains. The Midwest region existing home median sale price, after some fluctuations, landed at $191,300 for December 2018, the same timeas a year ago. First-time buyers accounted for 32% of sales in December, down slightly from 33% last year. Building permit activity continues to fluctuate by market area with residential builders constrained by tighter credit conditions for home buyers andmonth but the same as a limited number of buildable lots.year ago.
The performancemulti-family sector rebounded in 2017 and 2018, with demand approaching the highest level on record. National vacancy rates were 6% at the end of December 2018 while our market areas reflected the following vacancy levels: Springfield, Mo. at 5.4%, St. Louis at 9.0%, Kansas City at 7.1%, Minneapolis at 4.7%, Tulsa, Okla. at 9.5%, Dallas-Fort Worth at 8.1% and Chicago at 6.4%. Rent growth picked up in recent months and demand has increased at a steady rate supported by the strong economy. Vacancy rates have increased in Tulsa, St. Louis and Dallas due to an increased number of units coming on-line. Developers continue to favor more-expensive submarkets. Transaction volume has slowed, but pricing has remained on an upward trajectory. Cap rates are still at very low levels. Continued increase in the homeownership rate is the single largest risk to the apartment sector. Despite the decline in affordability and rigid mortgage origination standards, about two-thirds of consumers still believe now is a good time to buy a home, according to a recent University of Michigan consumer survey. The homeownership rate has risen by more than a percentage point since 2016, to 64.4% in the third quarter of 2018. All of the Company’s market areas within the multi-family sector are in expansion phase with the exception of Denver and Atlanta which are both currently in a hyper-supply phase.
Nationally, approximately 45% of the suburban office markets are in an expansion market cycle -- characterized by decreasing vacancy rates, moderate/high new construction, high absorption, moderate/high employment growth and medium/high rental rate growth. Signs of late-cycle conditions are spreading as we begin 2019. Both CBD and suburban markets are being categorized as either in recession or in hyper-supply by about one in 10 market respondents. So while most markets are in recovery or expansion, they tilt toward risk in the coming years. The Company’s larger market areas in the suburban office expansion market cycle include Minneapolis, Dallas-Ft. Worth, and St. Louis. Tulsa, Okla. and Kansas City are currently in the recovery/expansion market cycle -- typified by decreasing vacancy rates, low new construction, moderate absorption, low/moderate employment growth and negative/low rental rate growth. Chicago is currently in a recession market cycle typified by increasing vacancies, low absorption and low new construction while Denver is in hyper-supply.
Approximately 70% of the retail sector is in the expansion phase of the market cycle, with another 20% in recovery mode and the remaining 10% in hyper-supply and recession. The Company’s larger market areas included in the retail expansion market segment are Chicago, Denver, Minneapolis, Kansas City, Dallas-Ft. Worth, and St. Louis, with Chicago and Minneapolis nearing hyper-supply. The Atlanta and Tulsa markets are each in recovery phase.
The industrial segment, once concentrated in manufacturing, is now epitomized by a dense network of warehousing, distribution, logistics, and R&D/Flex properties which is the conduit of the current global e-commerce revolution. All of the Company’s larger industrial market areas are categorized as being in the expansion cycle with prospects of continuing good economic growth. Two market areas; Chicago and Kansas City are in the latter stages of the expansion cycle.
Occupancy, absorption and rental income levels of commercial real estate markets has improvedproperties located throughout the Company'sCompany’s market areas as shownremain stable according to information provided by increased real estate sales activity and financing of those activities. According to real estate services firm CoStar Group, retail, office and industrial types of commercialGroup. Moderate real estate properties continuesales and financing activity is continuing to improve in occupancy, absorption and rental income, both nationally and in our market areas.support loan growth.
While current economic indicators show improvementstability nationally in employment, housing starts and prices, commercial real estate occupancy, absorption and rental income,rates, our management will continue to closely monitor regional, national and global economic conditions, as these could significantly impact our market areas.
Loss Sharing Agreements
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 earnings are 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 primary subsidiary, the Bank, dependsdepend 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 loans and investment portfolio,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.
In the year ended December 31, 2015,2018, Great Southern's total assets increased $152.9$261.7 million, or 3.9%5.9%, from $3.95$4.41 billion at December 31, 2014,2017, to $4.10$4.68 billion at December 31, 2015.2018. Full details of the current year changes in total assets are provided in the "Comparison“Comparison of Financial Condition at December 31, 20152018 and December 31, 2014"2017” section.
Loans. In the year ended December 31, 2015,2018, Great Southern's net loans increased $301.7$262.7 million, or 9.9%7.0%, from $3.04$3.73 billion at December 31, 2014,2017, to $3.34$3.99 billion at December 31, 2015. 2018. EPartially offsetting the increase in loans was a decrease of $95.6 million in the FDIC-covered loan portfolios. Excludingxcluding FDIC-assisted acquired covered loans, acquired non-covered loans and mortgage loans held for sale, total gross loans increased $397.3$472.3 million, or 10.8%, from December 31, 20142017 to December 31, 2015, with increases2018. This increase was primarily in the areas of commercial construction loans, consumer loans, commercial real estate loans, one- to four-family residential mortgage loans and other residential (multi-family) real estate loans. The increase was primarilyThese increases were offset by a decrease in consumer auto loans of $103.6 million and decrease in the FDIC-acquired loan portfolios of $42.0 million. In addition, there were higher than usual unscheduled significant paydowns on loans during 2018 due to borrowers selling projects or refinancing debt. Total loan growthpaydowns in our existing banking center network.excess of $1.0 million exceeded $668 million during 2018. 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, we cannot be assured that our loan growth will match or exceed the level of increases achieved in 20152018 or prior years. The Company's strategy continues to be focused on maintaining credit risk and interest rate risk at appropriate levels.
LoanRecent loan growth has occurred in mostseveral loan types, primarily construction loans, other residential (multi-family) real estate loans and has come fromcommercial real estate loans and in most of Great Southern's primary lending locations, including Springfield, St. Louis, Kansas City, Des Moines Omaha and Minneapolis, as well as the loan production offices in Chicago, Dallas, Omaha and Tulsa. NetCertain minimum underwriting standards and monitoring help assure the Company's portfolio quality. Great Southern's loan balances have increased primarilycommittee reviews and approves all new loan originations in excess of lender approval authorities. Generally, the areas ofCompany considers commercial construction, consumer, and commercial real estate. Generally, the Company considers these types ofestate 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, and has established certain minimum underwriting standards to help assure portfolio quality.properties. For commercial real estate, commercial business and construction loans, these standards and procedures include, butthe credits are not limitedsubject to an analysis of the borrower's and guarantor's financial condition, collateral, repayment ability,credit history, verification of liquid assets, collateral, market analysis and credit history as required by loan type. In addition, geographic diversity of collateral, lower loan-to-value ratios and limitations on speculative construction projects help to mitigate overall risk in these loans.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 ratiosratio limitations which vary depending on collateral type, debt service coverage ratios or debt payment to income ratios,ratio guidelines, where applicable, credit histories, use of guaranties and other recommended terms relating to equity requirements, amortization, and maturity. Great Southern's loan committee reviews and approves all new loan originations in excess of lender approval authorities. 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 beenwere fairly consistent over the past several years.years through the first half of 2016. In response to a more challenging consumer credit environment, the Company tightened its underwriting guidelines on
automobile lending in the latter part of 2016. Management took this step in an effort to improve credit quality in the portfolio and lower delinquencies and charge-offs. 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. Although creditworthiness ofIn 2019, the applicant is of primary consideration,Company made the underwriting process also includes a comparison of the value of the security, if any, in relationdecision to the proposeddiscontinue indirect auto loan amount.originations.
Of the total loan portfolio at December 31, 20152018 and 2014, 73.5%2017, 84.4% and 74.1%79.9%, respectively, was secured by real estate, as this is the Bank'sBank’s primary focus in its lending efforts. At December 31, 20152018 and 2014,2017, commercial real estate and commercial construction loans were 42.8%49.7% and 40.7%48.0% of the Bank'sBank’s total loan portfolio (excluding loans acquired through FDIC-assisted transactions), respectively. Commercial real estate and commercial construction loans generally afford the Bank an opportunity to increase the yield on, and the proportion of interest rate sensitive loans in, its portfolio. They do, however, present somewhat greater risk to the Bank because they may be more adversely affected by conditions in the real estate markets or in the economy generally. At December 31, 20152018 and 2014,2017, loans made in the Springfield, Mo. metropolitan statistical area (Springfield MSA) were 15%9% and 17%11% of the Bank'sBank’s total loan portfolio (excluding loans acquired through FDIC-assisted transactions), respectively. The Company'sCompany’s headquarters are located in Springfield and we have operated in this market since 1923. Because of our large presence and experience in the Springfield MSA, many lending opportunities exist. However, if the economic conditions of the Springfield MSA were worse than those of other market areas in which we operate or the national economy overall, the performance of these loans could decline comparatively. At December 31, 20152018 and 2014,2017, loans made in the St. Louis, Mo. metropolitan statistical area (St. Louis MSA) were 18%19% and 20%19% of the Bank'sBank’s total loan portfolio (excluding loans acquired through FDIC-assisted transactions), respectively. The Company'sCompany’s expansion into the St. Louis MSA beginning in May 2009 has provided an opportunity to not only expand its markets and
provide diversification from the Springfield MSA, but also has provided access to a larger economy with increased lending opportunities despite higher levels of competition. Loans made in the St. Louis MSA are primarily commercial real estate, commercial business and multi-family residential loans which are less likely to be impacted by the higher levels of unemployment rates, as mentioned above under "Current“Current Economic Conditions,"” than if the focus were on one- to four-family residential and consumer loans. For further discussions of the Bank'sBank’s loan portfolio, and specifically, commercial real estate and commercial construction loans, see "Item“Item 1. Business – Lending Activities."”
The percentage of fixed-rate loans in our loan portfolio has increased from 44%46% as of December 31, 2010 to 57%55% as of December 31, 20152018 due to customer preference for fixed rate loans during this period of low and, more recently, increasing interest rates. The majority of the increase in fixed rate loans was in commercial construction and consumer loans,commercial real estate, both of which typically have loans with short durations.durations within our portfolio. Of the total amount of fixed rate loans in our portfolio as of December 31, 2015,2018, approximately 78%81% mature within one to five years and therefore are not considered to create significant long-term interest rate risk for the Company. Fixed rate loans make up only a portion of our balance sheet and our overall interest rate risk strategy. As of December 31, 2015,2018, our interest rate risk models indicated a one-year interest rate earnings sensitivity position that is fairly neutral.modestly positive in an increasing rate environment. For further discussion of our interest rate sensitivity gap and the processes used to manage our exposure to interest rate risk, see "Quantitative“Quantitative and Qualitative Disclosures About Market Risk – How We Measure the Risks to Us Associated with Interest Rate Changes."” For discussion of the risk factors associated with interest rate changes, see "Risk“Risk Factors – We may be adversely affected by interest rate changes."”
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. When they are made at those levels, privatePrivate mortgage insurance is typically required for loan amounts above the 80% level unless ourlevel. Few exceptions occur and would be based on analyses which determined minimal transactional risk to be involved, and therefore these loans are not considered to have more risk to us than other residential loans.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 December 31, 20152018 and December 31, 2014,2017, an estimated 0.2%0.1% and 0.3%0.1%, respectively, of total owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination. At December 31, 20152018 and December 31, 2014,2017, an estimated 2.1%0.9% and 1.8%1.5%, respectively, of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.
At December 31, 2015,2018, troubled debt restructurings totaled $45.0$6.9 million, or 1.3%0.2% of total loans, down $2.6$8.1 million from $47.6$15.0 million, or 1.5%0.4% of total loans, at December 31, 2014. The amount of troubled debt restructurings has remained relatively stable since 2011.2017. 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. DuringFor troubled debt restructurings occurring during the year ended December 31, 2015, no2018, five loans totaling $31,000 were restructured into multiple new loans. DuringFor troubled debt restructurings occurring during the year ended December 31, 2014, five2017, no loans totaling $1.7 million were each restructured into multiple new loans. For further information on troubled debt restructurings, see Note 3 of the accompanying audited financial statements.statements, which are included in Item 8 of this report.
The loss sharing agreements with the FDIC are subject to limitations on the types of losses covered and the length of time losses are covered, and are conditioned upon the Bank complying with its requirements in the agreements with the FDIC, including requirements regarding servicing and other loan administration matters. The loss sharing agreements extend for ten years for single family real estate loans and for five years for other loans. At December 31, 2015, approximately three years remained on the loss sharing agreement for single family real estate loans acquired from TeamBank and the remaining loans had an estimated average life of two to ten years. At December 31, 2015, approximately three and one half years remained on the loss sharing agreement for single family real estate loans acquired from Vantus Bank and the remaining loans had an estimated average life of three to twelve years. At December 31, 2015, approximately six years remained on the loss sharing agreement for single family real estate loans acquired from Sun Security Bank and the remaining loans had an estimated average life of five to twelve years. At December 31, 2015, approximately six and one half years remained on the loss sharing agreement for single family real estate loans acquired from InterBank and the remaining loans had an estimated average life of six to thirteen years. The loss sharing agreement for non-single-family loans acquired from TeamBank ended on March 31, 2014. Any additional losses in the non-single-family TeamBank portfolio are not eligible for loss sharing coverage. The remaining loans in the portfolio had an estimated average life of one to six years and had a carrying value of $16.2 million at December 31, 2015. The loss sharing agreement for non-single-family loans acquired from Vantus Bank ended on September 30, 2014. Any additional losses in the non-single-family Vantus Bank portfolio are not eligible for loss sharing coverage. The remaining loans in the portfolio had an estimated average life of two to seven years and had a carrying value of $17.1 million at December 31, 2015. At December 31, 2015, approximately one year remained on the loss sharing agreement for non-single-family loans acquired from Sun Security Bank and the remaining loans had an estimated average life of one to two years. At December 31, 2015, approximately one and one half years remained on the loss sharing agreement for non-single-family loans acquired from InterBank and the remaining loans had an estimated average life of one year. While the expected repayments for certain of the acquired loans extend beyond the terms of the loss sharing agreements, the Bank has identified and will continue to identify problem loans and will make every effort to resolve them within the time limits of the agreements. The Company may sell any loans remaining at the end of the loss sharing agreement subject to the approval of the FDIC. Loans that were acquired through FDIC-assisted transactions, which are accounted for in pools, are currently included in the analysis and estimation of the allowance for loan losses. If expected cash flows to be received on any given pool of loans decreases from previous estimates, then a determination is made as to whether the loan pool should be charged down or the allowance for loan losses should be increased (through a provision
for loan losses). This is true of all acquired loan pools regardless of whether or not they are covered by loss sharing agreements. If a charge down occurs to a loan pool that is covered by a loss sharing agreement,As noted above, the full amount of the charge down will be reflected in the allowance for loan losses and a separate asset will be recorded for the amount to be recovered from the FDIC. The loss sharing agreements for Team Bank, Vantus Bank and their related limitationsSun Security Bank were terminated on April 26, 2016 and the loss sharing agreements for InterBank were terminated on June 9, 2017. Acquired loans are described in detail in Note 4 of the accompanying audited financial statements, included in Item 8 of this
Report. For acquired loan pools, that currently are not covered by loss sharing agreements, the Company may allocate, and at December 31, 2015,2018, 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.
Available-for-sale Securities. In the year ended December 31, 2015,2018, available-for-sale securities decreased $102.7increased $64.8 million, or 28.1%36.2%, from $365.5$179.2 million at December 31, 2014,2017, to $262.9$244.0 million at December 31, 2015.2018. The decrease increase was primarily due to the purchase of FNMA and GNMA fixed-rate multi-family mortgage-backed securities, partially offset by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities and calls and maturities of municipal securities. The investment securities were reduced because they were no longer needed for pledging and the cash flows from investment securities were redeployed to fund loan originations.
Other Real Estate Owned. Other real estate owned totaled $31.9 million at December 31, 2015, a decrease of $13.9 million, or 30.4%, from $45.8 million at December 31, 2014. Of the total at December 31, 2015, $30.7 million was foreclosed assets and $1.2 million was other real estate owned not acquired through foreclosure, which is made up nine properties. Eight of these properties were branch locations that have been closed and are held for sale and one of these is land which was acquired for a potential branch location. Foreclosed assets, excluding those related to assets that are part of FDIC-assisted transactions, decreased from $35.5 million, or 0.9% of total assets, at December 31, 2014 to $27.4 million, or 0.7% of total assets, at December 31, 2015. The Company's foreclosed assets increased as the United States economy slowed due to a severe economic recession in 2008 and 2009, and continued to increase through 2012. Since 2012, the Company's other real estate owned has decreased. During 2015, the Company's foreclosed assets decreased primarily in the areas of subdivision construction, land development, one- to four-family residential and multi-family residential, partially offset by increases in commercial real estate and consumer. See "Non-performing Assets – Foreclosed Assets" for additional information on the Company's foreclosed assets.
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 year ended December 31, 2015,2018, total deposit balances increased $277.8$127.9 million, or 9.3%3.6%. Transaction account balances decreased $93.7 million and retail certificates of deposit increased $87.1$120.1 million compared to December 31, 2017. A large portion of the decrease in transaction accounts was due to the sale of the Company’s branches and deposits in Omaha, Neb. during 2018, which resulted in a decrease in transaction account balances of $39.7 million and a decrease in retail certificates of deposit of $16.1 million. Excluding the Omaha branch deposits sold, transaction account balances decreased $54.0 million to $2.13 billion at December 31, 2018, while retail certificates of deposit increased $80.4 million. Great Southern Bank customer deposits totaling $12.2$136.2 million and $23.7 million,compared to December 31, 2017, to $1.26 billion at December 31, 2015 and December 31, 2014, respectively,2018. The decreases in transaction accounts were partprimarily a result of decreases in money market deposit accounts, with a smaller portion of the CDARS program which allows bank customersdecreases coming from NOW account deposit accounts. Retail certificates of deposit increased due to maintain balancesan increase of approximately $56 million in retail certificates generated through our banking centers and an insured manner that would otherwise exceedincrease of approximately $70 million in certificates of deposit opened through the FDICCompany’s internet deposit insurance limit. The FDIC countsacquisition channels during 2018. Some of these deposits were generated as brokered, but these are deposit accounts that we generate with customersa result of our rates intentionally being in the top tier compared to our local markets.competitors in the internet channels during the last few months of 2018. Brokered deposits, including CDARS program purchased funds, were $271.5$326.9 million at December 31, 2015,2018, an increase of $121.7$101.4 million from $149.8$225.5 million at December 31, 2014. The Company elected to increase brokered deposits to fund a portion of its loan growth and reduce short-term borrowings during the period.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'sCompany’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. It also gives us greater flexibility in increasing or decreasing the duration of our funding. While we do not currently anticipate that our ability to access these sources will be reduced or eliminated in future periods, if this should happen, the limitation on our ability to fund additional loans could have a material adverse effect on our business, financial condition and results of operations.
Federal Home Loan Bank Advances and Short Term Borrowings.The Company’s Federal Home Loan Bank advances totaled $-0- at December 31, 2018, compared to $127.5 million at December 31, 2017. The balance of $127.5 million at December 31, 2017, consisted of short-term advances. At December 31, 2018, there were no borrowings from the FHLBank, other than overnight advances, which are included in the short term borrowings category.
Short term borrowings and other interest-bearing liabilities increased $176.1 million from $16.6 million at December 31, 2017 to $192.7 million at December 31, 2018. The short term borrowings included overnight FHLBank borrowings of $178.0 million at December 31, 2018 and $15.0 million at December 31, 2017. The Company utilizes both overnight borrowings and short-term FHLBank advances depending on relative interest rates.
Net Interest Income and Interest Rate Risk Management. Our net interest income may be affected positively or negatively by changes in market interest rates. A large portion of our loan portfolio is tied to one-month LIBOR, three-month LIBOR or the "prime rate" and adjusts immediately when thisor shortly after the index rate adjusts (subject to the effect of loancontractual interest rate floors on some of
the loans, which are discussed below). We monitor our sensitivity to interest rate
changes on an ongoing basis (see "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 4 of the accompanying audited financial statements, included in Item 8 of this report, the Company'sCompany’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 FRBFederal Reserve Board had last changed interest rates on December 16, 2008. This was the first rate increase since June 29, 2006. The FRB has now also implemented rate increases of 0.25% on eight different occasions beginning December 14, 2016, with the Federal Funds rate now at 2.50%. Great Southern has a significantsubstantial portion of its loan portfolio ($1.46 billion at December 31, 2018) which is tied to the one-month or three-month LIBOR index and will be subject to adjust at least once within 90 days after December 31, 2018. Of these loans, $1.34 billion as of December 31, 2018 had interest rate floors. Great Southern also has a portfolio of loans ($257 million at December 31, 2018) which are tied to a "prime rate" of interest. Most of these loans are tiedinterest and will adjust immediately with changes to some national index ofthe "prime" while some are indexed to "Great Southern prime." The Company had elected to leave its "Great Southern prime rate" of interest at 5.00%, and has now increased this rate to 5.25%. This does not affect a large number of customers, as a majority of the loans indexed to "Great Southern prime" are already at interest rate floors which are provided for in individual loan documents.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, however.rate. Because the Federal Funds rate is already verystill 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 and competitive 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. TheAs of December 31, 2018, Great Southern's interest rate floorsrisk models indicate that, generally, rising interest rates are expected to have a positive impact on the Company's net interest income, while declining interest rates would have a negative impact on net interest income. We model various interest rate scenarios for rising and falling rates, including both parallel and non-parallel shifts in effect may limitrates. The results of our modeling indicate that net interest income is not likely to be materially affected either positively or negatively in the immediate increasefirst twelve months following a rate change, regardless of any changes in interest rates, on certainbecause our portfolios are relatively well matched in a twelve-month horizon. The effects 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. The impact of the lowinterest rate environment on our net interest margin in future periods ischanges, if any, are expected to be fairly neutral. Any margin gained by thesemore impacting to net interest income in the 12 to 36 months following a rate increases on loans may be somewhat offset by reduced yields from our investment securities and our existing loan portfolio as payments are made and the proceeds are potentially reinvested at lower rates. 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. change. For further discussion of the processes used to manage our exposure to interest rate risk, see "Quantitative“Quantitative and Qualitative Disclosures About Market Risk – How We Measure the Risks to Us Associated with Interest Rate Changes."”
The negative impact of declining loan interest rates has been mitigated by the positive effects of the Company's loans which have interest rate floors. At December 31, 2015, the Company had a portfolio (excluding the loans acquired in the FDIC-assisted transactions) of prime-based loans totaling approximately $457 million with rates that change immediately with changes to the prime rate of interest. Of those loans, $424 million also had interest rate floors. These floors were at varying rates, with $15 million of these loans having floor rates of 7.0% or greater and another $76 million of these loans having floor rates between 5.0% and 7.0%. In addition, $333 million of these loans have floor rates between 2.75% and 5.0%. At December 31, 2015, $197 million of these loans were at their floor rates. Also included in these prime-based loans at December 31, 2015, the Company had a portfolio (excluding the loans acquired in the FDIC-assisted transactions) of GSB prime-based loans totaling approximately $114 million with rates that change immediately with changes to the GSB prime rate of interest. Of those loans, $96 million also had interest rate floors. At December 31, 2015, $26 million of these loans were at their floor rates. The loan yield for the total loan portfolio was approximately 106 basis points, 141 basis points and 185 basis points higher than the national "prime rate of interest" at December 31, 2015, 2014 and 2013, respectively, partly because of these interest rate floors. While interest rate floors have had an overall positive effect on the Company's results during this period, they do subject the Company to the risk that borrowers will elect to refinance their loans with other lenders. To the extent economic conditions improve, the risk that borrowers will seek to refinance their loans increases.
Non-Interest Income and 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, accretion income (net of amortization) related to the FDIC-assisted acquisitions, late charges and prepayment fees on loans, gains on sales of loans and available-for-sale investments and other general operating income. In 2014, 2012, 2011 and 2009, non-interest income was also affected by the gains recognized on the FDIC-assisted transactions. Since 2010,2016, increases in the cash flows expected to be collected from the FDIC-covered loan portfolios resulted in amortization (expense) recorded relating to reductions of expected reimbursements under the loss sharing agreements with the FDIC, which arewere recorded as indemnification assets. This is no longer the case for the TeamBank, Vantus Bank and Sun Security Bank transactions, subsequent to April 26, 2016 (due to the termination of the related loss sharing agreements effective as of that date) and for the InterBank transaction subsequent to June 2017 (due to the termination of the related loss sharing agreements effective as of that date). Therefore, no further amortization (expense) will be recorded relating to the reductions of expected reimbursements under the loss sharing agreements with the FDIC as all indemnification assets and other balances due to/from the FDIC have been settled. The Company recorded a gain in non-interest income during 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.
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 under "Results“Results of Operations and Comparison for the Years Ended December 31, 20152018 and 2014."2017.”
Business Initiatives
TheThe Company completedimplemented several business and operational initiatives in 2018.
The Company continually evaluates the performance of its banking center network and other customer access channels. As a result, several activities were initiated in 2018. In the second quarter of 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 expandthe banking center at 1515 Baptiste Drive, less than a mile away. A deposit-taking ATM and enhanceinteractive teller machine remain available for customers at the franchise in 2015.
S. Pearl Street building.
In April 2015,the third quarter of 2018, the Company openedcompleted its firstsale of four banking center in Columbia, Mo. The full-service banking center is located at 3200 S. Providence Road. Columbia, the home of the University of Missouri, is a growing market and is a regional medical hub and home to several large corporations.
The Company's Kansas City commercial and retail loan headquarters and new retail banking center opened in September 2015 at 11050 Roe Avenue in Overland Park, Kan. The Kansas City Commercial Banking Group moved from its former location in a nearby office complex in Overland Park. Additional spacecenters in the purchased and renovated 20,000-square-foot former bank office building is leasedOmaha, Neb., metropolitan market to tenants unrelateda Nebraska-based bank. Pursuant to the Company.
On September 30, 2015, Great Southern entered into a purchase and assumption agreement, to acquire 12 branchesGreat Southern sold branch deposits of approximately $56
million and related depositssold substantially all branch-related real estate, fixed assets and loansATMs. The Company recorded pre-tax income, net of expenses, of $7.25 million, or $0.39 (after tax) per diluted common share. A commercial loan production office is all that remains in the St. Louis area from Cincinnati-based Fifth Third Bank. Completed at the close of business on January 29, 2016, the acquisition at that time represented approximately $228 million in deposits and $159 million in loans. It increased Great Southern's St. Louis-area banking center total from eight to 20 offices, with approximately $556 million in loans and approximately $489 million in deposit accounts.Omaha market.
On September 24, 2015,In the fourth quarter of 2018, the Company announced plansthat in April 2019 it expects to consolidate operations of 16 banking centers into other nearby Great Southernits Fayetteville, Ark., banking center locations. As part of an ongoinginto its Rogers, Ark., office, approximately 20 miles away. The Fayetteville office opened in 2014 and has not met performance review of its entireexpectations. After this consolidation, the Company will operate one Arkansas banking center, network, Great Southern evaluated each locationin Rogers.
The online account opening platform on the Company’s website was upgraded and available to customers in January 2019. The new platform provides a faster and more streamlined experience for a number of criteria, including access and availability of servicesopening deposit accounts. It is expected that online account opening will continue to affected customers, the proximity of other Great Southern banking centers, profitability and transaction volumes, and market dynamics. This review culminatedincrease in the approval of the consolidation of thesefuture as customer preferences evolve. The Company’s online banking centers by the Great Southern Board of Directors. Subsequent to this announcement, the Bank entered into separate definitive agreements to sell two of the 16 banking centers, including all of the associated deposits (totaling approximately $20 million), to separate bank purchasers. The sale of one of the banking centers was completed on February 19, 2016 and the sale of the other banking centerbill payment platform is also being significantly upgraded and is expected to be completed on or around March 18, 2016. The closing of the remaining 14 facilities, which resultedready for customers beginning in mid-2019.
Commercial loan production offices opened in Atlanta, Ga., and Denver, Colo. in the transferfourth quarter of approximately $127 million in deposits2018. Each office is managed by a local and banking center operations to other Great Southern locations, occurred at the close of business on January 8, 2016. Of these 14 consolidated banking centers, nine were in Missouri, four were in Iowa and one was in Kansas. Nine of these banking centers were acquired as part of various FDIC-assisted acquisitions. Great Southern ATMs remained operational at each of the affected banking center sites.
Customers began using a new electronic service called Debit On/Off in October 2015. Available in the Mobile Banking app for smartphones, this service enables customers to remotely activate and deactivate their debit cards. This functionality allows customers to respond quickly to a potentially lost or stolen card, significantly reducing the possibility of fraudulent transactions and other inconveniences.
On December 15, 2015, the Company exited the U.S. Treasury's Small Business Lending Fund (SBLF) program.highly-experienced commercial lender. The Company began participationalso operates commercial loan production offices in the SBLF in August 2011 when it issued a new series of preferred stock with an aggregate liquidation amount totaling $57.9 million to the Treasury. The Company redeemed all 57,943 shares of this preferred stock at their liquidation amount plus accrued but unpaid dividends. The redemption was completed using internally available fundsChicago, Dallas, Omaha, Neb., and the Company continues to have capital in excess of the levels necessary to be deemed well-capitalized under applicable regulatory standards. Tulsa, Okla.
In 2015, early-stage testing of live teller machines (ITMs)2018, an experienced lender was started. ITMs offer customershired to serve as Small Business Administration (SBA) Manager, a new role in the benefit of utilizing either self-service solutions or personal interactions to fulfill their banking needs. It combines video collaborationCompany. Based in the Dallas commercial loan production office, the Manager and remote transaction processing technology embedded within the ATM to give customers the choice of self-service or connecting with a remote teller in a highly personalized, two-way audio/video interaction. In-branchhis staff will exclusively focus on sourcing and off-premise ITMs are being considered.servicing SBA 7a, SBA 504 and other commercial real estate loan opportunities throughout Great Southern’s market areas.
In February 2019, the Company determined that it would cease providing indirect lending services to automobile dealerships, effective March 31, 2019. Market and financial forces, including strong rate competition for well-qualified borrowers, have made indirect automobile lending less profitable over the long term. The Company will continue servicing indirect automobile loans made before March 31, 2019, until each loan agreement is satisfied. Direct consumer lending through the Company’s banking center network is expected to continue as normal.
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.
Significant Legislation Impacting the Financial Services Industry.Dodd-Frank Act. On July 21, 2010, sweeping financial regulatory reform legislation entitled the "Dodd-Frank“Dodd-Frank Wall Street Reform and Consumer Protection Act"Act” (the "Dodd-Frank Act"“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 BoardFRB to examine the Company and its non-bank subsidiaries.
ManyCertain aspects of the Dodd-Frank Act areremain subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company and the financial services industry more generally.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“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. Although theThe Bank is currently exempt from the provisions of the rule on the basis of asset size, there is some uncertainty aboutsize.
Certain aspects of the long-term impact there will be onDodd-Frank Act have been affected by the interchange rates for issuersrecently EGRRCP Act, as defined and discussed below the $10 billion level of assets.under “-EGRRCP Act.”
New Capital Rules. The federal banking agencies have adopted new 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"“Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. "Basel III"“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"(“CET1”) risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6%; (iii) a total risk-based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. In addition to the minimum capital ratios, the new rules include a capital conservation buffer, under which a banking organization must have CET1 more than 2.5% above each of its minimum risk-based capital ratios in order to avoid restrictions on paying dividends, repurchasing shares, and paying certain discretionary bonuses.The capital conservation buffer requirement began phasing in on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which amount increased an equal amount each year until the buffer requirement of greater than 2.5% of risk-weighted assets became fully implemented on January 1, 2019.
Effective January 1, 2015, the newthese 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“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.
Recent Accounting Pronouncements
See Note 1 to the accompanying audited financial statements, which are included in Item 8 of this Report, for a description of recent accounting pronouncements including the respective dates of adoption and expected effects on the Company'sCompany’s financial position and results of operations.
Comparison of Financial Condition at December 31, 20152018 and December 31, 20142017
During the year ended December 31, 2015,2018, total assets increased by $152.9$261.7 million to $4.10$4.68 billion. The increase was primarily attributable to an increaseincreases in loans. These increases were due to growth of the Company's loan portfolio through significant loan originationsloans receivable and available-for-sale investment securities, partially offset by decreases in 2015. Partially offsetting these increases were declines in the balances of available-for-sale-securities, cash and cash equivalents, the FDIC indemnification asset and other real estate owned. The Company chose to sell certain mortgage-backed securities during 2015owned and also elected to not reinvest the monthly repayments received on mortgage-backed securities in new investment securities. The majority of the proceeds from these salesrepossessions and repayments were used to fund loan growth.current and deferred income taxes.
Net loans increased $301.7 million to $3.34 billion at December 31, 2015. Outstanding balances of construction loans (primarily commercial construction) increased $87.8 million, or 30.3%, consumer auto loans increased $113.4 million, or 28.3%, commercial real estate loans increased $105.9 million, or 11.5%,Cash and multi-family residential loans increased $50.5 million, or 13.9%. Partially offsetting these increases was a decrease in net loans acquired through the FDIC-assisted transactions of $95.6 million, or 20.9%, primarily because of loan repayments.
Related to the loans purchased in the 2012, 2011 and 2009 FDIC-assisted transactions, the Company recorded indemnification assets which represent payments expected to be received from the FDIC through loss sharing agreements. The total balance of the FDIC indemnification asset decreased $20.3 million to $24.1cash equivalents were $202.7 million at December 31, 2015. 2018, a decrease of $39.6 million, or 16.3%, from $242.3 million at December 31, 2017. During 2018, cash and cash equivalents decreased primarily in order to fund the origination of loans and purchase of available for sale securities. This decrease in cash and cash equivalents was partially offset by an increase in deposits.
The decreaseCompany’s available for sale securities increased $64.8 million, or 36.2%, compared to December 31, 2017. The increase was primarily due to estimated improved cash flows to be collected from the loan obligors, resulting in reductions in payments expected to be received from the FDIC, as well as the billingpurchase of FNMA and collection of realized losses from the FDIC. The expected improved cash flows are further discussed in the
"Interest Income – Loans" section below. The 2014 Valley Bank acquisition did not include a loss sharing agreement with the FDIC; therefore, no indemnification asset was recorded as part of the transaction.
Securities available for sale decreased $102.7 million, or 28.1%, as compared to December 31, 2014. The decrease was due to sales of certainGNMA fixed-rate multi-family mortgage-backed securities, partially offset by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities, and calls and maturities of municipal securities. The investment securities were reduced because they were no longer needed for pledging. The available-for-sale securities portfolio was 6.4%5.2% and 9.3% 4.1% of total assets at December 31, 20152018 and 2014,2017, respectively.
Net loans increased $262.7 million from December 31, 2017, to $3.99 billion at December 31, 2018. Excluding FDIC-assisted acquired loans and mortgage loans held for sale, total gross loans (including the undisbursed portion of loans) increased $472.3 million, or 10.8%, from December 31, 2017 to December 31, 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. Outstanding and undisbursed balances of commercial construction loans increased $350.5 million, or 30.4%, commercial real estate loans increased $136.1 million, or 11.0%, one- to four-family residential loans increased $89.3 million, or 28.8%, and other residential (multi-family) loans increased $39.2 million, or 5.3%. Partially offsetting the increases in these loans were reductions of $103.6 million, or 29.0%, in consumer auto loans and $42.0 million, or 20.0%, in the FDIC-acquired loan portfolios.
Other real estate owned and repossessions were $8.4 million at December 31, 2018, a decrease of $13.6 million, or 61.6%, from $22.0 million at December 31, 2017. The decrease was primarily due to sales of other real estate properties during the period, and is discussed in more detail in the Non-performing Assets section below.
Total liabilities increased $174.4$201.4 million from $3.53$3.94 billion at December 31, 20142017 to $3.71$4.14 billion at December 31, 2015. 2018. The increase was primarily attributable to increasesan increase in deposits and short-term borrowings, partially offset by decreasesa decrease in securitiesFHLB advances.
Total deposits increased $127.9 million, or 3.6%, from $3.60 billion at December 31, 2017 to $3.73 billion at December 31, 2018. Partially offsetting the increase in deposits was a decrease due to the sale of the Company’s branches and deposits in Omaha, Neb. during 2018, which resulted in a decrease in transaction account balances of $39.7 million and a decrease in retail certificates of deposit of $16.1 million. Excluding the Omaha branch deposits sold, under reverse repurchase agreements with customers, short-term borrowings, Federal Home Loan Bank advances and subordinated debentures issuedtransaction account balances decreased $54.0 million to capital trusts. In$2.13 billion at December 31, 2018, while retail certificates of deposit increased $136.2 million compared to December 31, 2017, to $1.26 billion at December 31, 2018. Customer retail certificates increased by $72.3 million during the year ended December 31, 2015, total deposit balances increased $277.8 million, or 9.3%. Non-interest-bearing checking2018 and savingsc accounts increased $53.4 million and retail certificatesertificates of deposit opened through the Company's internet deposit acquisition channels increased $80.4by $70.5 million. At December 31, 2015 and December 31, 2014, Great Southern Bank customer deposits totaling $12.2 million and $23.7 million, respectively, were part of the CDARS program which allows bank customers to maintain balances in an insured manner that would otherwise exceed the FDIC deposit insurance limit. The FDIC counts these deposits as brokered, but these are deposit accounts that we generate with customers in our local markets. Brokered deposits, including CDARS program purchased funds, increased from $149.8were $326.9 million at December 31, 2014, to $271.52018, an increase of $101.4 million from $225.5 million at December 31, 2015. The Company elected to increase brokered deposits to fund its loan growth and reduce short-term borrowings and FHLBank advances during the period. 2017.
Short-term borrowings decreased $41.2 million, or 97.0%, fromThe Company’s Federal Home Loan Bank advances totaled $-0- at December 31, 2014. 2018, compared to $127.5 million at December 31, 2017. The decrease was due tobalance of $127.5 million at December 31, 2017, consisted of short-term advances. At December 31, 2018, there were no borrowings from the repayment ofFHLBank, other than overnight borrowings, duringwhich are included in the period.short term borrowings category. The Company utilizes both overnight borrowings and short-term FHLBank advances depending on relative interest rates.
Short term borrowings and other interest-bearing liabilities increased $176.1 million from $16.6 million at December 31, 2017 to $192.7 million at December 31, 2018. The short term borrowings included overnight FHLBank borrowings of $178.0 million at December 31, 2018 and $15.0 million at December 31, 2017.
Securities sold under reverse repurchase agreements with customers decreased $52.8increased $24.7 million, or 31.3%30.7%, from December 31, 20142017 to December 31, 2018 as these balances fluctuate over time based on customer demand for this product.
FHLBank advances decreased $8.1 million, or 3.0%, from December 31, 2014 to December 31, 2015, due to net decreases in short-term advances.
Subordinated debentures issued to capital trusts decreased $5.2 million, or 16.7%, from December 31, 2014 to December 31, 2015. In July 2015, the Company was the successful bidder in an auction of the $5.0 million aggregate liquidation amount of floating rate cumulative trust preferred securities issued in 2007 by Great Southern Capital Trust III. The Company purchased the trust preferred securities at a discount, which resulted in a pre-tax gain of approximately $1.1 million. Subsequent to the purchase, which resulted in the Company's ownership of all of the outstanding common and preferred securities of Great Southern Capital Trust III, such securities were canceled and the principal amount of the Company's related debentures, which had equaled the aggregate liquidation amount of the outstanding common and preferred securities of Great Southern Capital Trust III, was reduced to zero.
Total stockholders' equity decreased $21.5increased $60.3 million from $419.7$471.7 million at December 31, 20142017 to $398.2$532.0 million at December 31, 2015. The decrease was due to the redemption, in December 2015, of all of the Company's SBLF Preferred Stock, totaling $57.9 million.2018. The Company recorded net income of $46.5$67.1 million for the year ended December 31, 2015, common2018, and dividends declared on common stock were $11.9 million, preferred dividends paid were $553,000, and accumulated$17.0 million. Accumulated other comprehensive income decreased $1.4 million. The decrease in accumulated other comprehensive income resulted from decreasesincreased $8.4 million due to increases in the fair value of the Company's available-for-sale investment securities.securities and the fair value of cash flow hedges. In addition, total stockholders'stockholders’ equity increased $3.7$3.0 million due to stock option exercises. Total stockholders’ equity decreased $903,000 due to the repurchase of the Company’s common stock.
Results of Operations and Comparison for the Years Ended December 31, 20152018 and 20142017
General
Net income increased $3.0$15.5 million, or 6.8%30.1%, during the year ended December 31, 2015,2018, compared to the year ended December 31, 2014.2017. Net income was $46.5$67.1 million for the year ended December 31, 20152018 compared to $43.5$51.6 million for the year ended December 31, 2014.2017. This increase was due to an increase in net interest income of $793,000, or 0.5% and a decrease in non-interest expense of $6.5$13.0 million, or 5.4%8.4%, partially offset by an increasea decrease in provision for income taxes of $1.8$3.9 million, or 13.2%20.9%, an increaseand a decrease in the provision for loan losses of $1.4$2.0 million, or 33.0% and21.4%, partially offset by a decrease in non-interest income of $1.2$2.3 million, or 7.8%. Non-interest income for the year ended December 31, 2014 included a gain recognized on business acquisition6.0%, and an increase in non-interest expense of $10.8 million.$1.0 million, or 0.9%. Net income available to common shareholders was $45.9$67.1 million for the year ended December 31, 20152018 compared to $43.0$51.6 million for the year ended December 31, 2014.
2017.
Total Interest Income
Total interest income increased $989,000,$22.9 million, or 0.5%12.5%, during the year ended December 31, 20152018 compared to the year ended December 31, 2014.2017. The increase was due to a $4.7$21.6 million, or 2.7%12.2%, increase in interest income on loans partially offset byand a $3.7$1.3 million, or 34.1%
20.5%, decreaseincrease in interest income on investmentsinvestment securities and other interest-earning assets. Interest income on loans increased in 20152018 due to higher average balances on loans, partially offset by lower average rates of interest.interest and higher average balances of loans. Interest income from investment securities and other interest-earning assets decreasedincreased during 20152018 compared to 20142017 primarily due to higher average rates of interest, partially offset by lower average balances. The lower average balances of investments were primarily due to the sale of certain mortgage-backed securities, and as a result of management's decision to not reinvest mortgage-backed securities' monthly cash flows and proceeds of sales back into investments, but to utilize the proceeds to fund a portion of our loan growth. Prepayments on the mortgages underlying these securities resulted in amortization of premiums which also reduced yields. Interest income on loans is affected by variations in the adjustments to accretable yield due to increases in expected cash flows to be received from the FDIC-acquired loan pools as discussed below in "Interest Income – Loans" and in Note 4 of the accompanying audited financial statements, which are included in Item 8 of this Report. In 2015, many higher yielding loans matured or were repaid. These loans were replaced with new loans that were generally at rates lower than those that repaid during the year, resulting in lower overall yields in the loan portfolio. Higher average balances of loans more than offset the lower interest yield on loans.
Interest Income -– Loans
During the year ended December 31, 20152018 compared to the year ended December 31, 2014,2017, interest income on loans increased due to higher average balances, partially offset by lowerinterest rates and higher average interest rates. balances. Interest income increased $26.1 million as a result of higher average loan balances which increased from $2.78 billion during the year ended December 31, 2014 to $3.24 billion during the year ended December 31, 2015. The higher average balances were primarily due to increases in commercial construction loans, consumer loans, commercial real estate loans, other residential loans and owner occupied one- to four-family residential loan categories. A portion of this average balance increase resulted from the Company acquiring $165.1 million in loans (net of discounts) as part of the Valley Bank FDIC-assisted transaction on June 20, 2014, the aggregate balance of which was $93.4 million (net of discounts) at December 31, 2015.
Interest income decreased $21.4$17.0 million as the result of lowerhigher average interest rates on loans. The average yield on loans decreasedincreased from 6.20%4.63% during the year ended December 31, 20142017 to 5.48%5.07% during the year ended December 31, 2015. 2018. This decreaseincrease was primarily due to lower overallincreased yields in most loan rates,categories as a result of increased LIBOR and a lower amount of accretionFederal Funds interest rates. Interest income in the current year in conjunction with the fair value of the loan pools acquired in the FDIC-assisted transactions,increased $4.5 million as the additional yield accretion was lowerresult of higher average loan balances, which increased from $3.81 billion during the year ended December 31, 2017, to $3.91 billion during the year ended December 31, 2018. The higher average balances were primarily due to organic loan growth in 2015 compared to 2014. commercial construction loans, commercial real estate loans and other residential (multi-family) loans, partially offset by decreases in consumer loans.
On an on-going basis, the Company estimates the cash flows expected to be collected from the acquired loan pools. ThisFor each of the loan portfolios acquired, the cash flows estimate hasflow estimates have increased, based on the payment histories and reducedthe collection of certain loans, thereby reducing loss expectations of thecertain loan pools, resulting in adjustments to be spread on a level-yield basis over the remaining expected lives of the loan pools. For the loan pools acquired in the 2009, 2011 and 2012 FDIC-assisted transactions, the increases in expected cash flows also reduced the amount of expected reimbursements under theThe loss sharing agreements withfor the FDIC, which are recorded as indemnification assets. Therefore,Team Bank, Vantus Bank and Sun Security Bank transactions were terminated in April 2016, and the expectedrelated indemnification assets have also beenwere reduced resulting in adjustments to be amortized on a comparable basis over the remainder of the$-0- at that time. The loss sharing agreements orfor InterBank were terminated in June 2017, and the remaining expected liferelated indemnification asset was reduced to $-0- at that time. The Valley Bank transaction does not include a loss sharing agreement with the FDIC. The entire amount of the loan pools, whichever is shorter.discount adjustment has been and will be accreted to interest income over time with no further offsetting impact to non-interest income. For the years ended December 31, 20152018 and 2014,2017, the adjustments increased interest income by $28.5$5.1 million and $35.0$5.0 million, respectively, and decreased non-interest income by $19.5 million$-0- and $28.7 million,$634,000, respectively. The net impact to pre-tax income was $9.0$5.1 million and $6.2$4.4 million, respectively, for the years ended December 31, 20152018 and 2014. 2017.
As of December 31, 2015,2018, the remaining accretable yield adjustment that will affect interest income was $2.7 million. As there is $12.0 million andno longer, nor will there be in the remaining adjustmentfuture, indemnification asset amortization related to Team Bank, Vantus Bank, Sun Security Bank or InterBank due to the indemnification assets, including the effectstermination or expiration of the clawback liability related to InterBank,loss sharing agreements for those transactions, there is no remaining indemnification asset or related adjustments that will affect non-interest income (expense) is $(8.6) million.. Of the remaining adjustments affecting interest income, we expect to recognize $9.1$2.0 million of interest income and $(6.0) million of non-interest income (expense) during 2016.2019. Additional adjustments may be recorded in future periods from the FDIC-assisted transactions, as the Company continues to estimate expected cash flows from the acquired loan pools. Apart from the yield accretion, the average yield on loans was 4.60% for4.94% during the year ended December 31, 2015, down from 4.94% for2018, compared to 4.50% during the year ended December 31, 2014,2017, as a result of loan pay-offs and normal amortization of higher-ratehigher current market rates on adjustable rate loans and new loans that were made at current lower market rates.originated during the year.
In addition,October 2018, the Company's netCompany entered into an interest margin has been positively impacted by additional yield accretion recognized in conjunction with updated estimatesrate swap transaction as part of its ongoing interest rate management strategies to hedge the fair valuerisk of the loan pools acquired in the June 2014 Valley Bank FDIC-assisted transaction. Beginning with the three months ended December 31, 2014, the cash flow estimates have increased for certain of the Valley Bank loan pools primarily based on significant loan repayments and also due to collection of certain loans, thereby reducing loss expectations on certain of the loan pools. This resulted in increased income that was spread on a level-yield basis over the remaining expected lives of these loan pools.its floating rate loans. The Valley Bank transaction does not include a loss sharing agreement with the FDIC. Therefore, there is no related indemnification asset. The entirenotional amount of the discount adjustmentswap is $400 million with a termination date of October 6, 2025. Under the terms of the swap, the Company will receive a fixed rate of interest of 3.018% and will pay a floating rate of interest equal to one-month USD-LIBOR. The floating rate will be accreted toreset monthly and net settlements of interest due to/from the counterparty will also occur monthly. The floating rate of interest was 2.383% as of December 31, 2018. Therefore, in the near term, the Company will receive net interest settlements which will be recorded as loan interest income, over time with no offsetting impact to non-interest income. The amountthe extent that the fixed rate of interest continues to exceed one-month USD-LIBOR. If USD-LIBOR exceeds the Valley Bank discount adjustment accretedfixed rate of interest in future periods, the Company will be required to pay net settlements to the counterparty and will record those net payments as a reduction of interest income for the year ended December 31, 2015 was $5.7 million, and is included in the impact on net interest income/net interest margin amount discussed above. Based on current estimates, we anticipate recording additionalloans. The Company recorded loan interest income accretion of $3.0 million during 2016$673,000 in 2018 related to these Valley Bank loan pools.
In the year ended December 31, 2015, the Company collected $891,000 from customers on loans which had previously not been expected to be collectible. In accordance with the Company's accounting methodology, these collections were accounted for as increases in estimated cash flows and were recorded asthis interest income, thereby increasing net interest income and net interest margin. These collections related to acquired loans which were subject to loss sharing agreements with the FDIC; therefore, 80% of the amounts collected, or $713,000, was owed to the FDIC. This $713,000 of expense is included in non-interest income under "accretion (amortization) of income related to business acquisitions."rate swap.
Interest Income - Investments and Other Interest-earning Assets
Interest income on investments increased $640,000 in the year ended December 31, 2018 compared to the year ended December 31, 2017. Interest income increased $796,000 due to an increase in average interest rates from 2.50% during the year ended December 31, 2017 to 2.90% during the year ended December 31, 2018, due to higher market rates of interest on investment securities and a decrease in the volume of prepayments on mortgage-backed securities. Partially offsetting that increase in average interest rates, interest income decreased $3.4 million$156,000 as a result of a decrease in average balances from $495.2$207.8 million during the year ended December 31, 2014,2017, to $330.3$201.3 million during the year ended December 31, 2015.2018. Average balances of securities decreased primarily due to sales of certain mortgage-backedmunicipal securities being called and the normal monthly payments received related toon the portfolio of mortgage-backed securities, and calls and maturities of maturities of municipal securities. The investment securities were reduced because they were no longer needed for pledging.
Interest income on investmentsother interest-earning assets increased $676,000 in the year ended December 31, 2018 compared to the year ended December 31, 2017. Interest income increased $819,000 due to an increase in average interest rates from 1.00% during the year ended December 31, 2017, to 1.81% during the year ended December 31, 2018, primarily due to higher market rates of interest on other interest-bearing deposits in financial institutions. Partially offsetting that increase, interest income decreased $272,000$143,000 as a result of a decrease in average interest ratesbalances from 2.11%$121.6 million during the year ended December 31, 20142017, to 2.06%$104.2 million during the year ended December 31, 2015. The majority of the Company's securities in 2014 and 2015 were mortgage-backed securities which are backed by hybrid ARMs that have fixed rates of interest for a period of time (generally one to ten years) and then adjust annually. The actual amount of securities that reprice and the actual interest rate changes on these securities are subject to the level of prepayments on these securities and the changes that actually occur in market interest rates (primarily treasury rates and LIBOR rates)2018. Mortgage-backed securities are also subject to reduced yields due to more rapid prepayments in the underlying mortgages. As a result, premiums on these securities may be amortized against interest income more quickly, thereby reducing the yield recorded.
Interest income on other interest-earning assets decreased $62,000 mainly due to lower average balances from $185.1 million during the year ended December 31, 2014, to $152.7 million during the year ended December 31, 2015. Average balances of interest-earning deposits decreased primarily due to the use of excess liquidity to fund a portion of the Company's loan growth. The Company's interest-earning deposits and non-interest-earning cash equivalents currently earn very low or no yield and therefore negatively impact the Company's net interest margin. At December 31, 2015, the Company had cash and cash equivalents of $199.2 million compared to $218.6 million at December 31, 2014. See "Net Interest Income" for additional information on the impact of this interest activity.
Total Interest Expense
Total interest expense increased $196,000,$9.9 million, or 1.2%35.3%, during the year ended December 31, 2015,2018, when compared with the year ended December 31, 2014,2017, due to an increase in interest expense on deposits of $2.3$7.4 million, or 20.4%35.7%, an increase in interest expense on FHLBank advances of $2.5 million, or 162.9%, an increase in interest expense on short-term and repurchase agreement borrowings of $18,000, or 2.4%, and an increase in interest expense on subordinated debentures issued to capital trust of $147,000,$4,000, or 25.9%, partially offset by a decrease in interest expense on FHLBank advances of $1.2 million, or 41.3%, and a decrease in interest expense on short-term and structured repo borrowings of $1.0 million, or 94.1%0.4%.
Interest Expense - Deposits
Interest on demand deposits increased $1.4 million due to an increase in average rates from 0.30% during the year ended December 31, 2017, to 0.39% during the year ended December 31, 2018. Partially offsetting that increase, interest on demand deposits decreased $176,000$71,000 due to a decrease in average rates from 0.22% during the year ended December 31, 2014, to 0.20% during the year ended December 31, 2015. Interest on demand deposits decreased $54,000 due to a small decrease in average balances from $1.43$1.56 billion in the year ended December 31, 2014,2017, to $1.40$1.53 billion in the year ended December 31, 2015.2018. The decreaseincrease in average balancesinterest rates of interest-bearing demand deposits was primarily a result of a decrease in public funds deposits. Average noninterest-bearing demand balances increased from $535 million for the year endedmarket interest rates on these types of accounts since December 31, 2014, to $542 million for the year ended December 31, 2015.2016.
Interest expense on time deposits increased $1.8$6.5 million due to an increase in average balances of time deposits from $1.04 billion during the year ended December 31, 2014, to $1.26 billion during the year ended December 31, 2015. The increase in average balances of time deposits was primarily a result of increased balances of brokered deposits and time deposits opened through the Company's internet deposit acquisition channels. The increase in time deposit balances was also due to the deposits acquired in the Valley Bank transaction on June 20, 2014. Interest expense on time deposits increased $741,000 as a result of an increase in average rates of interest from 0.78%1.12% during the year ended December 31, 2014,2017, to 0.85%1.60% during the year ended December 31, 2015.2018. Partially offsetting that increase, interest expense on time deposits decreased $422,000 due to a decrease in average balances of time deposits from $1.41 billion during the year ended December 31, 2017, to $1.38 billion during the year ended December 31, 2018. A large portion of the Company'sCompany’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. The decrease in average balances of time deposits was primarily a result of decreases in CDARS program purchased funds brokered deposits.
Interest Expense - FHLBank Advances, Short-term Borrowings and Structured Repurchase Agreements, and Subordinated Debentures Issued to Capital Trust and Subordinated Notes
During the year ended December 31, 2015 compared to the year ended December 31, 2014, interest
Interest expense on FHLBank advances decreasedincreased due to lowerhigher average balances and higher average rates of interest, partially offset by slightly higher average balances.interest. Interest expense on FHLBank
advances decreased $1.3 million due to a decrease in average interest rates from 1.69% in the year ended December 31, 2014, to 0.97% in the year ended December 31, 2015. The significant decrease in the average rate was due to the repayment of $80 million of the Company's long-term higher-rate FHLBank advances in June 2014. As of December 31, 2015, $232 million of the Company's $264 million of total FHLBank advances are short-term advances with very low interest rates. Partially offsetting this decrease was an increase in interest expense on FHLBank advances of $64,000increased $1.9 million due to an increase in average balances from $172.0 million in the year ended December 31, 2014, to $175.9 million in the year ended December 31, 2015. This increase was primarily due to additional short-term FHLBank advances obtained by the Company during 2015 to fund loan growth and for other short term funding needs.
Interest expense on short-term and structured repo borrowings decreased $1.1 million due to a decrease in average rates on short-term borrowings from 0.58% in the year ended December 31, 2014, to 0.03% in the year ended December 31, 2015. The Company repaid $50 million of structured repurchase agreements in June 2014. As there were no higher-rate structured repurchase agreements during 2015, the average rate decreased significantly because the interest expense was all related to the lower-rate securities sold under repurchase agreements with customers. Partially offsetting that decrease, interest expense on short-term borrowings and structured repurchase agreements increased $18,000 due to an increase in average balances from $188.9$93.5 million during the year ended December 31, 2014,2017, to $192.1$190.2 million during the year ended December 31, 2015.2018. This increase was primarily due to an increase in borrowings to fund loan growth and the replacement of overnight borrowings with short-term three week FHLBank advances due to the short-term advances having a more favorable interest rate from time to time. The $31.5 million of the Company’s long-term higher fixed-rate FHLBank advances were repaid in June 2017. In addition, interest expense on FHLBank advances increased $544,000 due to an increase in average interest rates from 1.62% in the year ended December 31, 2017, to 2.09% in the year ended December 31, 2018. The increase in the average rate was due to market interest rate increases during 2018.
Interest expense on short-term borrowings and repurchase agreements increased $55,000 due to average rates that increased from 0.40% in the year ended December 31, 2017, to 0.56% in the year ended December 31, 2018. The increase was due to increases in market interest rates and a change in the mix of funding during the period, with a lower percentage of the total made up of customer repurchase agreements, which have a lower interest rate. Partially offsetting the increase, interest expense on short-term borrowings and repurchase agreements decreased $37,000 due to a decrease in average balances from $186.4 million during the year ended December 31, 2017, to $137.3 million during the year ended December 31, 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 higher amount of overnight borrowings from the FHLBank in 2017.
During the year ended December 31, 2015,2018, compared to the year ended December 31, 2014,2017, interest expense on subordinated debentures issued to capital trusts increased $189,000$4,000 due to slightly higher average interest rates. The average interest rate was 1.83%3.68% in 2014,2017, compared to 2.48%3.70% in 2015. The increase2018. There was no change in the interest rate resulted from the amortizationaverage balance of the cost of interest rate capssubordinated debentures between the 2018 and the 2017 years.
In August 2016, the Company purchasedissued $75 million of 5.25% fixed-to-floating rate subordinated notes due August 15, 2026. The notes were sold at par, resulting in 2013 to limit the interest rate risk from rising LIBOR rates related to the Company's subordinated debentures issued to capital trusts.net proceeds, after underwriting discounts and commissions and other issuance costs, of approximately $73.5 million. Interest expense on the subordinated debentures issued to capital trusts decreased $42,000 due to a decrease in average balances from $30.9 millionnotes for both of the yearyears ended December 31, 2014 to $28.8 million during the year ended December 31, 2015. The average balance decreased because the Company redeemed $5.0 million of its subordinated debentures issued to capital trust during 2015. Additional information regarding this transaction is provided in Note 13 of the accompanying audited financial statements, which are included in Item 8 of this Report. The remaining debentures are variable-rate debentures which bear interest at an average rate of three-month LIBOR plus 1.60%, adjusting quarterly. The average interest rate will continue to be higher than this until the third quarter of2018 and 2017, as a result of the amortization of the cost of the interest rate cap.was $4.1 million.
Net Interest Income
Net interest income for the year ended December 31, 20152018 increased $793,000$13.0 million, or 8.4%, to $168.4$168.2 million, compared to $167.6$155.2 million for the year ended December 31, 2014.2017. Net interest margin was 4.53%3.99% for the year ended December 31, 2015,2018, compared to 4.84%3.74% in 2014, a decrease2017, an increase of 3125 basis points. In both years, tThe Company'she Company’s net interest income and margin have been significantly impacted by additional yield accretion recognized in conjunction with updated estimates of the fair value of the loan pools acquired in the 2009, 2011 and 2012 FDIC-assisted transactions. The Company's margin waswere positively impacted in both years by the increases in expected cash flows to be received from the FDIC-acquired loan pools acquired in the FDIC-assisted transactions and the resulting increasesincrease to accretable yield, which was discussed previously in "Interest“Interest Income – Loans"Loans” and is discussed in Note 4 of the accompanying audited financial statements, which are included in Item 8 of this Report. The positive impact of these changes on the years ended December 31, 20152018 and 20142017 were increases in interest income of $28.5$5.1 million and $35.0$5.0 million, respectively, and increases in net interest margin of 7712 basis points and 10112 basis points, respectively. Excluding the positive impact of the additional yield accretion, net interest margin decreased 7increased 25 basis points during the year ended December 31, 2015.2018. The decreaseincrease in net interest margin wasis primarily due to a decreaseincreased yields in average interest ratemost loan categories and higher overall yields on loansinvestments and interest-earning deposits at the Federal Reserve Bank, partially offset by an increase in the average interest rate on time deposits.deposits and FHLBank advances and other borrowings.
The Company's overall interest rate spread decreased 30increased 16 basis points, or 6.3%4.4%, from 4.74%3.59% during the year ended December 31, 2014,2017, to 4.44%3.75% during the year ended December 31, 2015.2018. The decreaseincrease was due to a 3346 basis point decreaseincrease in the weighted average yield on interest-earning assets, partially offset by a three30 basis point decreaseincrease in the weighted average rate paid on interest-bearing liabilities. In comparing the two years, the yield on loans decreased 72increased 44 basis points, while the yield on investment securities increased 40 basis points and the yield on other interest-earning assets decreased 12increased 81 basis points. The rate paid on deposits increased six27 basis points, the rate paid on FHLBank advances decreased 72increased 47 basis points, the rate paid on short-term borrowings decreased 55 basis points and the rate paid on subordinated debentures issued to capital trust increased 65two basis points, the rate paid on short-term borrowings increased 16 basis points, and the rate paid on subordinated notes decreased two basis points.
For additional information on net interest income components, refer to the "Average Balances, Interest Rates and Yields" table in this Report.
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 a loan review staff to review the quality and anticipated collectability of the portfolio. Additional procedures provide for frequent management review of the loan portfolio based on loan size, loan type, delinquencies, 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 increased $1.4for the year ended December 31, 2018 decreased $1.9 million, to $5.5$7.2 million, compared with $9.1 million for the year ended December 31, 2017. At December 31, 2018 and December 31, 2017, the allowance for loan losses was $38.4 million and $36.5 million, respectively. Total net charge-offs were $5.2 million and $10.0 million for the years ended December 31, 2018 and 2017, respectively. During the year ended December 31, 2018, $3.9 million of the $5.2 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 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. This action also reduced origination volume and, as such, the outstanding balance of the Company's automobile loans declined approximately $104 million in the year ended December 31, 2018. We expect further declines in the automobile loan outstanding balance in 2019 as the Company determined in February 2019 that it will cease providing indirect lending services to automobile dealerships. In addition, six commercial loan relationships amounted to $1.3 million of the total net charge-offs during the year ended December 31, 2015, when compared with2018. Charge-offs were partially offset by recoveries on multiple loans during the year ended December 31, 2014. At December 31, 2015, the allowance for loan losses was $38.1 million, a decrease of $286,000 from December 31, 2014. Total net charge-offs were $5.8 million for each of the years ended December 31, 2015 and 2014, respectively. Excluding those related to loans covered by loss sharing agreements, five relationships made up $2.6 million of the total $5.8 million in net charge-offs for the year ended December 31, 2015.year. General market conditions and unique circumstances related to individual borrowers and projects also contributed to the level of provisions and charge-offs. As propertiesassets were categorized as potential problem loans, non-performing loans or foreclosed assets, evaluations were made of the values of these assets with corresponding charge-offs as appropriate.
Except for those loans acquired in the TeamBank and Vantus Bank transactions for which the loss sharing agreements have ended (i.e., non-single family real estate loans), loans acquired in the 2009, 2011 and 2012 FDIC-assisted transactions are covered by loss sharing agreements between the FDIC and Great Southern Bank which afford Great Southern Bank at least 80% protection from losses in the acquired portfolio of loans. The FDIC loss sharing agreements are subject to limitations on the types of losses covered and the length of time losses are covered and are conditioned upon the Bank complying with its requirements in the agreements with the FDIC. These limitations are described in detail in Note 4 of the accompanying audited financial statements, which are included in Item 8 of this Report. TheseAll 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 dates.date. These loan pools are systematically reviewed by the Companymanagement 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,monitoring of payment performance, review of financial information and credit scores, collateral valuations and customer interaction to determine if any additional lossesreserves are apparent. Former Valley Bank loans, which were also acquired in an FDIC-assisted transaction, are accounted for in pools and were recorded at their fair value at the time of the acquisition as of June 20, 2014; therefore, these loan pools are analyzed rather than the individual loans.warranted.
The Bank'sBank’s allowance for loan losses as a percentage of total loans, excluding FDIC-acquired loans, covered by the FDIC loss sharing agreements, was 1.20%0.98% and 1.34%1.01% atDecember 31, 2018 and December 31, 2015 and 2014,2017, respectively. Management considers the allowance for loan losses adequate to cover losses inherent in the Company'sBank’s loan portfolio at December 31, 2015,2018, based on recent reviews of the Company'sBank’s loan portfolio and current economic conditions. If economic conditions were to deteriorate or management'smanagement’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
Former TeamBank, Vantus Bank, Sun Security Bank and InterBank non-performingNon-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 as they are, or were, subject to loss sharing agreements with the FDIC, which cover at least 80% of principal losses that may be incurred in these portfolios for the applicable terms under the agreements. At December 31, 2015, there were no material non-performing assets that were previously covered, and are now not covered, under the TeamBank or Vantus Bank non-single-family loss sharing agreements. In addition, FDIC-supported TeamBank, Vantus Bank, Sun Security Bank and InterBankbelow. These assets were initially recorded at their estimated fair values as of their acquisition dates of March 20, 2009, September 4, 2009, October 7, 2011, and April 27, 2012, respectively.are accounted for in pools; therefore, these loan pools are analyzed rather than the individual loans. The overall performance of the FDIC-covered loan pools acquired in 2009, 2011 and 2012each of the five FDIC-assisted transactions has been better than original
expectations as of the acquisition dates. Former Valley Bank loans are also excluded from the totals and the discussion of non-performing loans, potential problem loans and foreclosed assets below, although they are not covered by a loss sharing agreement.
The loss sharing agreement for the non-single-family portion of the loans acquired in the TeamBank transaction ended on March 31, 2014. Any additional losses in that non-single-family portfolio will not be eligible for loss sharing coverage. At this time, the Company does not expect any material losses in this non-single-family loan portfolio, which totaled $16.2 million, net of discounts, at December 31, 2015.
The loss sharing agreement for the non-single-family portion of the loans acquired in the Vantus Bank transaction ended on September 30, 2014. Any additional losses in that non-single-family portfolio will not be eligible for loss sharing coverage. At this time, the Company does not expect any material losses in this non-single-family loan portfolio, which totaled $17.1 million, net of discounts, at December 31, 2015.
As a result of changes in balances and composition of the loan portfolio, changes in economic and market conditions that occur from time to time, and other factors specific to a borrower's circumstances, the level of non-performing assets will fluctuate.
Non-performing assets, excluding FDIC-covered non-performing assets and otherall FDIC-assisted acquired assets, at December 31, 2015,2018, were $44.0$11.8 million, an increasea decrease of $272,000$16.0 million from $43.7$27.8 million at December 31, 2014.2017. Non-performing assets, excluding FDIC-covered non-performing assets and otherall FDIC-assisted acquired assets, as a percentage of total assets were 1.07%0.25% at December 31, 2015,2018, compared to 1.11%0.63% at December 31, 2014.2017.
Compared to December 31, 2014,2017, non-performing loans increased $8.5decreased $5.0 million to $16.6$6.3 million at December 31, 2015,2018, and foreclosed assets decreased $8.1$11.1 million to $27.4$5.5 million at December 31, 2015.2018. Non-performing commercial real estateone-to four-family residential loans comprised $13.5$2.7 million, or 81.4%42.3%, of the total of $16.6$6.3 million of non-performing loans at December 31, 2015.2018. Non-performing one-to four-family residentialconsumer loans comprised $1.4$1.8 million, or 8.2%28.8%, of the total non-performing loans at December 31, 2015.2018. Non-performing consumercommercial business loans were $1.3comprised $1.4 million, or 7.8%22.8%, of total non-performing loans at December 31, 2015.2018. Non-performing commercial businessreal estate loans were $288,000,comprised $334,000, or 1.7%5.3%, of total non-performing loans at December 31, 2015.2018. The majority of the decrease in the non-performing commercial real estate category was due to one relationship totaling approximately $650,000 being transferred to foreclosed assets during 2018. Non-performing construction and land developmentother residential loans were $139,000, or 0.8%, of total non-performing loans$-0- at December 31, 2015.2018. The decrease in non-performing other residential loans was due to the one loan previously in this category being transferred to foreclosed assets during 2018.
Non-performing Loans. Activity in the non-performing loans category during the year ended December 31, 2015,2018, was as follows:
| | | Beginning
Balance,
January 1 | | | Additions | | | Removed
from Non-
Performing | | | Transfers to
Potential
Problem Loans | | | Transfers to
Foreclosed
Assets | | | Charge-Offs | | | Payments | | | Ending
Balance,
December 31 | | | 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,
December 31 | |
| | | (In Thousands) | | | (In Thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One- to four-family construction | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Subdivision construction | | | — | | | | 109 | | | | — | | | | — | | | | — | | | | (55 | ) | | | (54 | ) | | | — | | | | 98 | | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | (95 | ) | | | — | |
| Land development | | | 255 | | | | 144 | | | | — | | | | (50 | ) | | | — | | | | (197 | ) | | | (13 | ) | | | 139 | | | | — | | | | 49 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 49 | |
| Commercial construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| One- to four-family residential | | | 1,610 | | | | 1,361 | | | | (451 | ) | | | (340 | ) | | | (316 | ) | | | (66 | ) | | | (441 | ) | | | 1,357 | | | | 2,728 | | | | 975 | | | | (81 | ) | | | (67 | ) | | | (467 | ) | | | (30 | ) | | | (394 | ) | | | 2,664 | |
| Other residential | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,877 | | | | 3 | | | | — | | | | — | | | | (1,601 | ) | | | (279 | ) | | | — | | | | — | |
| Commercial real estate | | | 4,699 | | | | 13,391 | | | | (1,469 | ) | | | — | | | | (2,620 | ) | | | (22 | ) | | | (491 | ) | | | 13,488 | | | | 1,226 | | | | 157 | | | | — | | | | — | | | | (894 | ) | | | (101 | ) | | | (54 | ) | | | 334 | |
| Other commercial | | | 466 | | | | 415 | | | | (56 | ) | | | (35 | ) | | | — | | | | (384 | ) | | | (118 | ) | | | 288 | | | | 2,063 | | | | 2,321 | | | | — | | | | — | | | | — | | | | (1,024 | ) | | | (1,923 | ) | | | 1,437 | |
| Consumer | | | 1,117 | | | | 2,175 | | | | (198 | ) | | | (114 | ) | | | (188 | ) | | | (514 | ) | | | (981 | ) | | | 1,297 | | | | 3,263 | | | | 2,725 | | | | (7 | ) | | | (461 | ) | | | (790 | ) | | | (1,884 | ) | | | (1,030 | ) | | | 1,816 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 8,147 | | | $ | 17,595 | | | $ | (2,174 | ) | | $ | (539 | ) | | $ | (3,124 | ) | | $ | (1,238 | ) | | $ | (2,098 | ) | | $ | 16,569 | | | $ | 11,255 | | | $ | 6,230 | | | $ | (88 | ) | | $ | (528 | ) | | $ | (3,752 | ) | | $ | (3,321 | ) | | $ | (3,496 | ) | | $ | 6,300 | |
At December 31, 2015,2018, the non-performing commercial real estate category included nine loans, five of which were transferred from potential problem loans during the current year and related to three relationships. The largest relationship in this category, which was transferred from potential problem loans to non-performing loans during the three months ended December 31, 2015, totaled $6.5 million, or 48.1% of the total category, and is collateralized by three operating long-term health care facilities in Missouri. This relationship with the Bank began in 2000 and has performed adequately until recently. A receiver was recently appointed to manage and stabilize the facilities. The second largest relationship in this category, which was also transferred from potential problem loans
during the three months ended December 31, 2015, totaled $3.7 million, or 27.6%, of the total category, and is collateralized by property in the Branson, Mo., area, including a lakefront resort, marina and related amenities, condominiums and lots. This borrower has been in business for over 30 years and a bank customer since 1992. In 2015, the project experienced declining occupancy rates and entered bankruptcy in the latter part of 2015. Of the $1.5 million removed from non-performing commercial real estate loans during the year, $1.3 million was related to one loan, and was removed due to improvement in the credit and payment performance. The non-performing one- to four-family residential category included 2728 loans, 16eight of which were added during 2018. The largest relationship in this category was added in 2017 and included nine loans totaling $1.3 million, or 48.4% of the year.total category, which are collateralized by residential rental homes in the Springfield, Mo. area. The non-performing consumer category included 101176 loans, 84104 of which were added during 2018, and the year.majority of which are indirect used automobile loans. The
non-performing commercial business category included five loans, all of which were added during 2018. The largest relationship in this category totaled $1.1 million, or 78.6% of the total category. This relationship is collateralized by an assignment of an interest in a real estate project. A relationship in the commercial business category, which previously totaled $1.5 million, received payments during the year ended December 31, 2018, to satisfy the remaining recorded balance. The non-performing commercial real estate category included five loans, two of which were added during 2018 and were part of the same customer relationship. Three loans in the category were transferred to foreclosed assets during 2018, 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 December 31, 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 year ended December 31, 2018 and the remaining balance of $1.6 million was transferred to foreclosed assets.
Foreclosed AssetsOther Real Estate Owned and Repossessions. Of the total $31.9$8.4 million of other real estate owned and repossessions at December 31, 2015,2018, $1.81.4 million represents the fair value of foreclosed assets covered by FDIC loss sharing agreements, $460,000 represents the fair value of foreclosed assets previously covered by FDIC loss sharing agreements, $995,000 represents foreclosedand repossessed assets related to Valley Bankloans acquired in FDIC-assisted transactions and not covered by loss sharing agreements, $25,000 represents other assets related to acquired loans, and $1.2$1.6 million represents properties which were not acquired through foreclosure. The foreclosed assets and other assets related to acquired loansin the FDIC-assisted transactions and the properties not acquired through foreclosure are not included in the following table and discussion of foreclosed assets.other real estate owned and repossessions. Because sales and write-downs of foreclosed and repossessed properties exceeded additions, total foreclosed assets and repossessions decreased. Activity in foreclosed assets and repossessions during the year ended December 31, 2015,2018, was as follows:
| | | Beginning
Balance,
January 1 | | | Additions | | | ORE and
Repossession
Sales | | | Capitalized
Costs | | | ORE and
Repossession
Write-Downs | | | Ending
Balance,
December 31 | |
| | | (In Thousands) | |
| | | | | | | | | | | | | | | | | | | |
| One- to four-family construction | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Subdivision construction | | | 5,413 | | | | — | | | | (2,402 | ) | | | — | | | | (1,919 | ) | | | 1,092 | |
| Land development | | | 7,729 | | | | 20 | | | | (2,837 | ) | | | — | | | | (1,721 | ) | | | 3,191 | |
| Commercial construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| One- to four-family residential | | | 112 | | | | 820 | | | | (663 | ) | | | — | | | | — | | | | 269 | |
| Other residential | | | 140 | | | | 1,601 | | | | (1,884 | ) | | | 143 | | | | — | | | | — | |
| Commercial real estate | | | 1,194 | | | | 894 | | | | (1,932 | ) | | | 10 | | | | (166 | ) | | | — | |
| Commercial business | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Consumer | | | 1,987 | | | | 7,711 | | | | (8,770 | ) | | | — | | | | — | | | | 928 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 16,575 | | | $ | 11,046 | | | $ | (18,488 | ) | | $ | 153 | | | $ | (3,806 | ) | | $ | 5,480 | |
| | | Beginning
Balance,
January 1 | | | Additions | | | Proceeds
from Sales | | | Capitalized
Costs | | | ORE Expense
Write-Downs | | | Ending
Balance,
December 31 | |
| | | (In Thousands) | |
| | | | | | | | | | | | | | | | | | | |
| One- to four-family construction | | $ | 223 | | | $ | — | | | $ | (223 | ) | | $ | — | | | $ | — | | | $ | — | |
| Subdivision construction | | | 9,857 | | | | — | | | | (2,369 | ) | | | — | | | | (472 | ) | | | 7,016 | |
| Land development | | | 17,168 | | | | — | | | | (5,006 | ) | | | — | | | | (29 | ) | | | 12,133 | |
| Commercial construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| One- to four-family residential | | | 3,353 | | | | 473 | | | | (2,350 | ) | | | — | | | | (101 | ) | | | 1,375 | |
| Other residential | | | 2,625 | | | | — | | | | (488 | ) | | | 13 | | | | — | | | | 2,150 | |
| Commercial real estate | | | 1,632 | | | | 2,620 | | | | (614 | ) | | | — | | | | (30 | ) | | | 3,608 | |
| Commercial business | | | 59 | | | | — | | | | (59 | ) | | | — | | | | — | | | | — | |
| Consumer | | | 624 | | | | 5,110 | | | | (4,625 | ) | | | — | | | | — | | | | 1,109 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 35,541 | | | $ | 8,203 | | | $ | (15,734 | ) | | $ | 13 | | | $ | (632 | ) | | $ | 27,391 | |
Excluding the consumer category, during the year ended December 31, 2018, the Company reduced its foreclosed assets by $9.7 million through asset sales. At December 31, 2015,2018, the land development category of foreclosed assets included 26seven properties, the largest of which was located in northwest Arkansasthe Branson, Mo. area and had a balance of $1.4 million,$913,000, or 11.3%28.6% of the total category. Of the total dollar amount in the land development category of foreclosed assets, 35.4% and 36.2%66.8% was located in northwest Arkansas and in the Branson, Mo., area, respectively, including the $1.4 millionlargest property previously mentioned. Of the $5.0 million in proceeds from sales in the category, $3.9 million related to the sale of six properties, which included one property located in northwest Arkansas which was sold during the three months ended December 31, 2015, totaling $1.3 million. In addition, two properties totaling $1.6 million in the Branson, Mo., area were sold, two properties in northwest Arkansas totaling $1.3 million were sold and one property in southwest Missouri totaling $585,000 was sold. The subdivision construction category of foreclosed assets included 25seven properties, the largest of which was located in the Springfield,Branson, Mo. metropolitan area and had a balance of $1.2 million,$350,000, or 17.6%32.1% of the total category. Of the total dollar amount in the subdivision construction category of foreclosed assets, 32.2% and 16.4%65.0% is located in the Branson, Mo. and Springfield, Mo., respectively. Ofarea, including the $2.4 million in sales in this category, $2.3 million was from the sale of two properties. One subdivisionlargest property totaling $1.3 millionpreviously mentioned. The write-downs in the Kansas City, Mo. metropolitan area was soldland development and one subdivision propertyconstruction categories resulted from management’s decision during the three months ended June 30, 2018, after marketing these assets for an extended period, to reduce the asking price for several parcels of land. The Company experienced increased levels of delinquencies and repossessions in the St. Louis, Mo. metropolitan area totaling $931,000 was sold.indirect and used automobile loans throughout 2016 and 2017. The amount of additions and sales under consumer loans are due to a higher volume of repossessions of automobiles, which generally are subject to a shorter repossession process. The level of delinquencies and repossessions in indirect and used automobile loans decreased in 2018. The commercial real estate category of foreclosed assets included eighthad a zero balance at December 31, 2018. All of the previously remaining properties three of which were related to the same borrower. The largest property in the commercial real estate category, of foreclosed assets, which was located in southeast Missouri and was addedtotaling $1.9 million, were sold during the three months ended March 31, 2015, totaled $2.0 million, or 56.0% of the total category.2018. The other residential category of foreclosed assets included 11 properties, 10 of which were all part of the same condominium community, which was located in Branson, Mo. and had a zero balance of $1.8 million, or 83.7% of the total category.at December 31, 2018. The one-to four-family residential category of foreclosed assets included seven properties, of which the largest relationship, with two propertiespreviously remaining property in the southwestcategory, an apartment building in central Missouri area, had a balance of $554,000, or 40.3% of the total category. Of the total dollar amount in the one-to- four-family category of foreclosed assets, 38.2% is located in Branson, Mo.
87
totaling $1.7 million, was sold during 2018.
Potential Problem Loans. Potential problem loans decreased $12.2$4.6 million during the year ended December 31, 2015,2018, from $25.0$7.9 million at December 31, 20142017 to $12.8$3.3 million at December 31, 2015.2018. This decrease was primarily due to $11.2 million in loans transferred to the non-performing category, $8.6$5.3 million in loans removed from potential problem loans due to improvements in the credits, $2.0 million in charge-offs, $157,000 in loans transferred to foreclosed assets, and $2.6$1.6 million in payments on potential problem loans and $489,000 in loans transferred to the non-performing category, partially offset by the addition of $12.3$2.8 million of loans to 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 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 year ended December 31, 2015,2018, was as follows:
| | | Beginning
Balance,
January 1 | | | Additions | | | Removed
from Potential
Problem | | | Transfers to
Non-
Performing | | | Transfers to
Foreclosed
Assets | | | Charge-Offs | | | Payments | | | Ending
Balance,
December 31 | | | 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,
December 31 | |
| | | (In Thousands) | | | (In Thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One- to four-family construction | | $ | 1,312 | | | $ | 368 | | | $ | (683 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | (997 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Subdivision construction | | | 4,252 | | | | 863 | | | | (3,750 | ) | | | (139 | ) | | | — | | | | — | | | | (650 | ) | | | 576 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Land development | | | 5,857 | | | | — | | | | (2,012 | ) | | | — | | | | — | | | | — | | | | (3 | ) | | | 3,842 | | | | 4 | | | | — | | | | (3 | ) | | | — | | | | — | | | | — | | | | (1 | ) | | | — | |
| Commercial construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| One- to four-family residential | | | 1,906 | | | | 489 | | | | (796 | ) | | | (349 | ) | | | (157 | ) | | | (14 | ) | | | (235 | ) | | | 844 | | | | 1,122 | | | | 122 | | | | — | | | | — | | | | — | | | | — | | | | (200 | ) | | | 1,044 | |
| Other residential | | | 1,956 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,956 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Commercial real estate | | | 8,043 | | | | 10,254 | | | | (670 | ) | | | (10,687 | ) | | | — | | | | (1,433 | ) | | | (221 | ) | | | 5,286 | | | | 5,759 | | | | 2,180 | | | | (4,709 | ) | | | — | | | | — | | | | — | | | | (1,177 | ) | | | 2,053 | |
| Other commercial | | | 1,435 | | | | 131 | | | | (464 | ) | | | (21 | ) | | | — | | | | (527 | ) | | | (373 | ) | | | 181 | | | | 503 | | | | — | | | | (59 | ) | | | (407 | ) | | | — | | | | — | | | | (37 | ) | | | — | |
| Consumer | | | 214 | | | | 227 | | | | (199 | ) | | | (17 | ) | | | — | | | | (5 | ) | | | (86 | ) | | | 134 | | | | 549 | | | | 455 | | | | (497 | ) | | | (82 | ) | | | — | | | | (30 | ) | | | (189 | ) | | | 206 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 24,975 | | | $ | 12,332 | | | $ | (8,574 | ) | | $ | (11,213 | ) | | $ | (157 | ) | | $ | (1,979 | ) | | $ | (2,565 | ) | | $ | 12,819 | | | $ | 7,937 | | | $ | 2,757 | | | $ | (5,268 | ) | | $ | (489 | ) | | $ | — | | | $ | (30 | ) | | $ | (1,604 | ) | | $ | 3,303 | |
At December 31, 2015,2018, the commercial real estate category of potential problem loans included 10two loans, sevenboth of which were added during the current year.2018. The largest relationship in this category, which was made up of five new loans added during the three months ended December 31, 2015, had a balance of $2.9totaling $1.9 million, or 55.7%93.9% of the total category, and is collateralized by various propertiesa mixed use commercial retail building. One relationship previously in thethis category consists of three loans totaling $4.7 million collateralized by theatre and retail property in Branson, Mo., area., including commercial buildings, commercial land, residential lots and undeveloped land with clubhouse amenities and entertainment attractions. This The decision to remove this relationship has been with the Bank for over 30 years. Of the $10.7 million of transfers to non-performing, $10.2 million were related to two relationships, which were discussed above in the non-performing loans section. All of the net charge-offs in the commercial real estate category related to these two relationships. The land development category offrom potential problem loans included one loan, whichduring the year was addeddue to an improvement in debt service coverage, and timely principal and interest payments on these loans, including over $1.0 million in payments during a previous year and is collateralized by property in the Branson, Mo., area. The other residential category of potential problem loans included one loan which was added in a previous year, and is collateralized by properties located in the Branson, Mo., area. This loan was also to the same borrower that was referenced above in the land development category. 2018.The one- to four-family residential category of potential problem loans included 1218 loans, twofour of which were added during the current year.2018. The subdivision constructionconsumer category of potential problem loans included three18 loans, two15 of which were added during the current year. Seven loans in this category were removed from potential problem loans during 2015, which included four loans to one borrower totaling $1.6 million. The loans were removed due to improvements in the credit and payment performance. The one-to four-family construction category of potential problem loans is zero at December 31, 2015, and three loans in this category, all of which were to the same borrower, were removed from potential problem loans during the year due to improvement in the borrower's financial performance. These loans were also to the same borrower that was referenced above in the loans which were removed from potential problem loans in the subdivision construction category.2018.
Non-Interest Income
Non-interest income for the year ended December 31, 20152018 was $13.6$36.2 million compared with $14.7$38.5 million for the year ended December 31, 2014.2017. The decrease of $1.1$2.3 million, or 7.8%6.0%, was primarily the result of the following increases and decreases:
Initial gain recognized on business acquisition: In 2014, the Company recognized a one-time gain of $10.8 million (pre-tax) on the FDIC-assisted acquisition of Valley Bank, which occurred on June 20, 2014.
Excluding the gain referenced above, non-interest income increased $9.7 million when compared to the year ended December 31, 2014, primarily as a result of the following items:
Amortization2017 gain on early termination of income related to business acquisitionsFDIC loss sharing agreements for Inter Savings Bank: The net amortization expense related to business acquisitionsIn 2017, the Company recognized a one-time gross gain of $7.7 million from the termination of the loss sharing agreements for Inter Savings Bank, which was $18.3 millionrecorded in the gain on termination of loss sharing agreements line item of the consolidated statements of income for the year ended December 31, 2015, compared to $27.9 million for the year ended December 31, 2014. The amortization expense for the year ended December 31, 2015, consisted of the following items: $17.9 million of amortization expense related to the changes in cash flows expected to be collected from the FDIC-covered loan portfolios and $1.6 million of amortization of the clawback liability. In addition, the Company collected amounts on various problem assets acquired from the FDIC totaling $891,000. Under the loss sharing agreements, 80% of these collected amounts must be remitted to the FDIC; therefore, the Company recorded a liability and related expense of $713,000. Partially offsetting the expense was income from the accretion of the discount related to the indemnification assets for the Sun Security Bank and InterBank acquisitions of $1.4 million. In addition, a charge-off on a loan pool which exceeded the remaining discount on the pool by $803,000 was recognized as a reduction to allowance for loan losses during the third quarter. The Bank expects to collect 80% of this amount as reimbursement from the FDIC, so income of $643,000 was recorded in non-interest income.2017.
Service charges and ATM feesNet gains on loan sales: Service charges and ATM fees increased $766,000 compared to the prior year, primarily due to an increase in fee income from the additional accounts acquired in the Valley Bank transaction in June 2014.
Other income: Other income increased $744,000Net gains on loan sales decreased $1.4 million compared to the prior year. The increasedecrease was primarily due to a $1.1 million gain recognized whendecrease in originations of fixed-rate loans during 2018 compared to 2017. Fixed rate single-family mortgage loans originated are generally subsequently sold in the secondary market. In 2018, the Company redeemed the trust preferred securities previously issued by Great Southern Capital Trust III at a discount, as discussed in previous filings. This increase was offset by non-recurring debit card-related incomeoriginated more variable-rate single-family mortgage loans, partially due to higher market rates of $1.0 million recognized during the 2014 periodinterest, which was not repeatedhave been retained in the 2015 period. Other income increased $300,000 compared to the prior year due to a $300,000 gain recognized on the sale of a non-marketable investment.Company’s portfolio.
Late charges and fees on loans: Late charges and fees on loans increased $729,000decreased $609,000 compared to the prior year. The decrease was primarily due to fees totaling $632,000 on loan payoffs received on four loan relationships in 2017 which were not repeated in 2018.
Other income: Other income decreased $695,000 compared to the prior year period. The increasedecrease was primarily due to yield maintenance penalty payments received on 12 commercial loan prepayments, totaling $547,000income from interest rate swaps entered into in 2015.2017, the receipt of approximately $260,000 more income related to the exit of certain tax credit partnerships in 2017 compared to 2018 and $250,000 less in merchant card services fees compared to 2017.
Net realized gains on salesSale of available-for-sale securitiesOmaha-area banking centers: GainsOn July 20, 2018, the Company closed on sales of available-for-sale securities decreased $2.1 million compared to the prior year. This was primarily due to the sale of securitiesfour banking centers in the priorOmaha, Neb., metropolitan market. The Bank sold branch deposits of approximately $56 million and sold substantially all branch-related real estate, fixed assets and ATMs. The Company recorded a pre-tax gain of $7.4 million on the sale during the year ended December 31, 2018.
Amortization of income related to business acquisitions: Because of the termination of the remaining loss sharing agreements in June 2017, the net amortization expense related to business acquisitions was $-0- for the year ended December 31, 2018, compared to $486,000 for the year ended December 31, 2017, which was not repeated in 2015. During 2014, the taxable municipal securities originally acquiredreduced non-interest income by that amount in the Sun Security Bank acquisition were sold resulting in a gain of $1.2 million. All of the Company's Small Business Administration securities were sold in 2014, which produced a gain of $569,000. In addition, all of the mortgage-backed securities and collateralized mortgage obligations acquired in the Valley Bank acquisition were sold in 2014, and several additional securities were sold later in 2014, producing a gain of $227,000, and one municipal bond was sold at a gain of $95,000.previous year.
Non-Interest Expense
Total non-interest expense decreased $6.5increased $1.0 million, or 5.4%0.9%, from $120.9$114.3 million in the year ended December 31, 2014,2017, to $114.4$115.3 million in the year ended December 31, 2015.2018. The Company'sCompany’s efficiency ratio for the year ended December 31, 20152018 was 62.85%56.41%, improvinga
decrease from 66.30% in 2014.58.99% for 2017. The 2015improvement in the ratio for 2018 was positively affected by the decrease in non-interest expense and theprimarily due to an increase in net interest income, partially offset by a decrease in non-interest income.income and an increase in non-interest expense. In the year ended December 31, 2018, the Company’s efficiency ratio was positively impacted by the significant gain recorded related to the sale of the Bank’s branches and deposits in Omaha, Neb. In the year ended December 31, 2017, the Company’s efficiency ratio was positively impacted by the significant gain recorded related to the termination of the Inter Savings Bank loss sharing agreements. The Company'sCompany’s ratio of non-interest expense to average assets decreased from 3.16%was 2.56% for each of the yearyears ended December 31, 2014, to 2.81% for the year ended December 31, 2015. The decrease in the current year ratio was primarily due to both the increase in average assets2018 and the decrease in non-interest expense in 2015 compared to 2014. 2017. Average assets for the year ended December 31, 2015,2018, increased $242.9$43.1 million, or 6.4%1.0%, from the year ended December 31, 2014. 2017, primarily due to organic loan growth, partially offset by decreases in investment securities and other interest-earning assets.
The following were key items related to the increase in non-interest expense for the year ended December 31, 20152018 as compared to the year ended December 31, 2014:2017:
Other Operating Expenses:Net occupancy and equipment expense Other operating expenses decreased $7.3 million, to $8.5: Net occupancy expense increased $1.0 million in the year ended December 31, 20152018 compared to the year ended December 31, 2017. This increase was primarily due to increased expenses related to hardware and software costs for loan loss accounting and commercial loan systems and data servers at the Company’s disaster recovery site, increased depreciation expense for upgraded ATM/ITM machines, deconversion expenses related to the sale of the Omaha-area banking centers and repairs and maintenance costs for various banking centers.
Expense on other real estate and repossessions: Expense on other real estate and repossessions increased $990,000 compared to the prior year primarily due to $7.4the valuation write-down of certain foreclosed assets during the second quarter 2018, totaling approximately $2.1 million, partially offset by gains on sales of foreclosed and repossessed assets in prepayment penalties2018 and lower repossession and collection expenses in 2018.
Legal, audit and other professional fees: Legal, audit and other professional fees increased $561,000 in the year ended December 31, 2018 compared to 2017. The increase was primarily due to fees for professional services related to process improvement initiatives, fees paid to advisors for the negotiation and implementation of derivative transactions, consulting fees related to the ongoing implementation of an accounting system which will be utilized for the new loan loss accounting standard and legal costs related to the sale of the Omaha-area banking centers.
Other operating expenses: Other operating expenses decreased $691,000 in 2014 asthe year ended December 31, 2018 compared to 2017. During 2017, the Company elected to repay $130 million of itsincurred a $340,000 prepayment penalty when FHLB advances and structured repo borrowingstotaling $31.4 million were repaid prior to their maturity, which was not repeated in 2015.
Expense on foreclosed assets: Expense on foreclosed assets decreased $3.1 million compared to the prior year primarily due to valuation write-downs of foreclosed assets during 2014 totaling $2.0 million. In addition, total foreclosed assets decreased from the prior year, further reducing the expenses.
Legal, audit and other professional fees: Legal, audit and other professional fees decreased $1.2 million when compared to the prior year, primarily due to additional expenses in the prior year related to the Valley Bank acquisition, significant collection costs of a few large loans and foreclosed assets, as well as the reduction of the total amount of foreclosed assets in the current year compared to the prior year.
Partially offsetting the decrease in non-interest expense was an increase in the following items:
Expenses related to operations of new banking centers in 2015: The Company incurred approximately $245,000 and $144,000 of additional non-interest expenses during the year ended December 31, 2015, in connection with the operations of new banking centers in Overland Park, Kansas and Columbia, Missouri, respectively. The majority of these expenses related to salary and benefits and occupancy expenses.
Salaries and employee benefits: Salaries and employee benefits increased $2.7 million over the prior year, primarily due to increased staffing due to growth in lending and other operational areas, as well as approximately $330,000 in retention payments and other acquisition-related salaries and benefits related to the Fifth Third Bank branch acquisition.2018 period. In addition, the Company opened banking centersexperienced significantly lower debit card and check fraud losses in 2015 in Overland Park, Kansas and Columbia, Missouri, and operated the acquired Valley Bank for a full year in 2015 versus one-half year of operations in 2014.2018 compared to 2017.
Net occupancy expense:Office supplies and printing expense Net occupancy: Office supplies and printing expense increased $2.4 milliondecreased $399,000 in the year ended December 31, 20152018 compared to 2014. In September 2015,2017. During 2017 the Company announced plansBank incurred printing and other costs totaling $373,000 related to consolidate operationsthe replacement of 16 banking centers into other nearby Great Southern banking center locations.a portion of customer debit cards with chip-enabled cards, which was not repeated in the current year.
Partnership tax credit: Partnership tax credit expense decreased $355,000 in the year ended December 31, 2018 compared to the 2017 year. The Company evaluatedperiodically invests in certain tax credits and amortizes those investments over the carrying valueperiod that the tax credits are used. The tax credit period for certain of these credits ended in 2017 and so the final amortization of the affected premises (totaling approximately $7.5 million) to determine if any impairment of the value of these premises is warranted and has recorded a valuation allowance of $1.2 million related to certain affected premises, furniture, fixtures and equipment and leasesinvestment in 2015. Occupancy expensethose credits also increasedended in 2015 as a result of the Valley Bank acquisition which occurred in June 2014, and due to the opening of the two branches in Overland Park and Columbia noted above.2017.
Provision for Income Taxes
In 2014, the Company elected to early-adopt FASB ASU No. 2014-01, which amends FASB ASC Topic 323, Investments – Equity Method and Joint Ventures. This Update impacted the Company's accounting for investments in flow-through limited liability entities which manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments in the Update permitted reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The Company has significant investments in such qualified affordable housing projects that meet the required conditions. The Company's adoption of this Update did not materially affect the Company's financial position or results of operations. There was no change in Net Income for the periods covered in this document and there was no cumulative effect adjustment to Retained Earnings.
Provision for income taxes as a percentage of pre-tax income was 25.1% and 24.0% forFor the years ended December 31, 20152018 and 2014, respectively, which2017, the Company's effective tax rate was 18.1% and 26.7%, respectively. These effective rates were lower than the statutory federal tax raterates of 21% (2018) and 35% (2017), due primarily to the effectsutilization of thecertain investment tax credits utilized and to tax-exempt investments and tax-exempt loans which reduced the Company'sCompany’s effective tax rate. In future periods, the Company expects its effective tax rate typically will be 24-26% of pre-tax net income, assuming it continues to maintain or increase its use of investment tax credits. The Company'sCompany’s effective tax rate may fluctuate in future periods as it is impacted by the level and timing of the Company'sCompany’s utilization of tax credits and the level of tax-exempt investments and loans and the overall level of pretaxpre-tax income. At this time,The Company’s effective income tax rate was slightly higher than its typical effective tax rate in the 2018 and 2017 years due to gains on the sale of the Omaha branches and related deposits (2018) and increased net income resulting from the gain on termination of the loss sharing agreements for the Inter Savings Bank FDIC-assisted transaction (2017). The Company currently expects its effective tax rate (combined federal and state) to be approximately 17.0% to 18.5% in future periods, mainly as a result of the Act. The Company's effective income tax rate is expected to continue to utilizebe less than the statutory rate due primarily to investments in low-income housing tax credit projects and tax-exempt obligations. The Company’s effective tax rate could change in future periods based on changes in the level of investments in tax credit projects and tax-exempt obligations, as well as changes in the level of overall pre-tax earnings.
On December 22, 2017, H.R.1, originally known as the Tax Cuts and Jobs Act (the “TCJ Act”) was signed into law. Among other things, the TCJ 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. As a significant amountresult of the reduction of the corporate federal income tax creditsrate to 21%, U.S. generally accepted accounting principles require companies to perform a revaluation of their deferred tax assets and liabilities as of the date of enactment, with the resulting tax effects accounted for in 2016.the reporting period of enactment (the year ended December 31, 2017). Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense.
In 2017, based upon current accounting guidance and the utilization and recognition of the timing differences referred to above, the Company recorded a net decrease in income tax expense of approximately $250,000. This net decrease in income tax expense was comprised of a $2.1 million decrease from the adjustment of net deferred tax liabilities resulting from enactment of the TCJ Act, partially offset by the impacts of other tax planning strategies implemented. This impact on the Company’s net deferred tax liabilities, which included, among other things, the timing of recognition of various revenues and expenses, was based upon a review and analysis of the Company’s net deferred tax liabilities at December 31, 2017, as well as expected adjustments to various deferred tax assets and deferred tax liabilities in the year ended December 31, 2017, including those accounted for in accumulated other comprehensive income.
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. FeesNet fees included in interest income were $4.4$3.5 million, $3.2$2.9 million and $3.4$5.0 million for 2015, 20142018, 2017 and 2013,2016, respectively. Tax-exempt income was not calculated on a tax equivalent basis. The table does not reflect any effect of income taxes.
| | | Dec. 31, 2015(2) | | | Year Ended
December 31, 2015 | | | Year Ended
December 31, 2014 | | | Year Ended
December 31, 2013 | |
| | | Yield/ Rate | | | Average Balance | | | Interest | | | Yield/ Rate | | | Average Balance | | | Interest | | | Yield/ Rate | | | Average Balance | | | Interest | | | Yield/ Rate | |
| | | | | | (Dollars In Thousands) | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans receivable: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One- to four-family residential | | | 4.38 | % | | $ | 459,378 | | | $ | 34,653 | | | | 7.54 | % | | $ | 480,827 | | | $ | 41,343 | | | | 8.60 | % | | $ | 472,127 | | | $ | 35,072 | | | | 7.43 | % |
| Other residential | | | 4.27 | | | | 423,476 | | | | 21,236 | | | | 5.01 | | | | 375,754 | | | | 21,268 | | | | 5.66 | | | | 312,362 | | | | 23,963 | | | | 7.67 | |
| Commercial real estate | | | 4.29 | | | | 1,071,765 | | | | 50,952 | | | | 4.75 | | | | 920,340 | | | | 47,724 | | | | 5.19 | | | | 813,147 | | | | 51,175 | | | | 6.29 | |
| Construction | | | 3.65 | | | | 340,666 | | | | 15,538 | | | | 4.56 | | | | 259,993 | | | | 13,330 | | | | 5.13 | | | | 208,254 | | | | 14,413 | | | | 6.92 | |
| Commercial business | | | 4.44 | | | | 328,319 | | | | 19,137 | | | | 5.83 | | | | 296,318 | | | | 17,722 | | | | 5.98 | | | | 249,647 | | | | 14,505 | | | �� | 5.81 | |
| Other loans | | | 5.24 | | | | 569,873 | | | | 33,377 | | | | 5.86 | | | | 404,375 | | | | 28,593 | | | | 7.07 | | | | 297,852 | | | | 21,947 | | | | 7.37 | |
| Industrial revenue bonds (1) | | | 5.25 | | | | 42,310 | | | | 2,347 | | | | 5.55 | | | | 46,499 | | | | 2,589 | | | | 5.57 | | | | 50,155 | | | | 2,828 | | | | 5.64 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total loans receivable | | | 4.56 | | | | 3,235,787 | | | | 177,240 | | | | 5.48 | | | | 2,784,106 | | | | 172,569 | | | | 6.20 | | | | 2,403,544 | | | | 163,903 | | | | 6.82 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment securities (1) | | | 3.09 | | | | 330,328 | | | | 6,797 | | | | 2.06 | | | | 495,155 | | | | 10,467 | | | | 2.11 | | | | 717,806 | | | | 14,459 | | | | 2.01 | |
| Other interest-earning assets | | | 0.25 | | | | 152,720 | | | | 314 | | | | 0.21 | | | | 185,072 | | | | 326 | | | | 0.18 | | | | 276,394 | | | | 433 | | | | 0.16 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest-earning assets | | | 4.34 | | | | 3,718,835 | | | | 184,351 | | | | 4.96 | | | | 3,464,333 | | | | 183,362 | | | | 5.29 | | | | 3,397,744 | | | | 178,795 | | | | 5.26 | |
| Non-interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | | | | | 106,326 | | | | | | | | | | | | 96,665 | | | | | | | | | | | | 88,678 | | | | | | | | | |
| Other non-earning assets | | | | | | | 242,238 | | | | | | | | | | | | 263,495 | | | | | | | | | | | | 303,454 | | | | | | | | | |
| Total assets | | | | | | $ | 4,067,399 | | | | | | | | | | | $ | 3,824,493 | | | | | | | | | | | $ | 3,789,876 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing demand and savings | | | 0.24 | | | $ | 1,404,489 | | | | 2,858 | | | | 0.20 | | | $ | 1,429,893 | | | | 3,088 | | | | 0.22 | | | $ | 1,464,029 | | | | 3,551 | | | | 0.24 | |
| Time deposits | | | 0.85 | | | | 1,257,059 | | | | 10,653 | | | | 0.85 | | | | 1,042,563 | | | | 8,137 | | | | 0.78 | | | | 1,073,110 | | | | 8,795 | | | | 0.82 | |
| Total deposits | | | 0.53 | | | | 2,661,548 | | | | 13,511 | | | | 0.51 | | | | 2,472,456 | | | | 11,225 | | | | 0.45 | | | | 2,537,139 | | | | 12,346 | | | | 0.49 | |
Short-term borrowings and
repurchase agreements | | | 0.04 | | | | 192,055 | | | | 65 | | | | 0.03 | | | | 188,906 | | | | 1,099 | | | | 0.58 | | | | 232,598 | | | | 2,324 | | | | 1.00 | |
Subordinated debentures issued to capital trust | | | 1.93 | | | | 28,754 | | | | 714 | | | | 2.48 | | | | 30,929 | | | | 567 | | | | 1.83 | | | | 30,929 | | | | 561 | | | | 1.81 | |
| FHLB advances | | | 0.76 | | | | 175,873 | | | | 1,707 | | | | 0.97 | | | | 171,997 | | | | 2,910 | | | | 1.69 | | | | 127,561 | | | | 3,972 | | | | 3.11 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | | 0.54 | | | | 3,058,230 | | | | 15,997 | | | | 0.52 | | | | 2,864,288 | | | | 15,801 | | | | 0.55 | | | | 2,928,227 | | | | 19,203 | | | | 0.66 | |
| Non-interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | | | | | 541,714 | | | | | | | | | | | | 535,132 | | | | | | | | | | | | 459,802 | | | | | | | | | |
| Other liabilities | | | | | | | 28,772 | | | | | | | | | | | | 22,403 | | | | | | | | | | | | 23,197 | | | | | | | | | |
| Total liabilities | | | | | | | 3,628,716 | | | | | | | | | | | | 3,421,823 | | | | | | | | | | | | 3,411,226 | | | | | | | | | |
| Stockholders' equity | | | | | | | 438,683 | | | | | | | | | | | | 402,670 | | | | | | | | | | | | 378,650 | | | | | | | | | |
Total liabilities and stockholders' equity | | | | | | $ | 4,067,399 | | | | | | | | | | | $ | 3,824,493 | | | | | | | | | | | $ | 3,789,876 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate spread | | | 3.80 | % | | | | | | $ | 168,354 | | | | 4.44 | % | | | | | | $ | 167,561 | | | | 4.74 | % | | | | | | $ | 159,592 | | | | 4.60 | % |
| Net interest margin* | | | | | | | | | | | | | | | 4.53 | % | | | | | | | | | | | 4.84 | % | | | | | | | | | | | 4.70 | % |
Average interest-earning assets to average interest- bearing liabilities | | | | | | | 121.6 | % | | | | | | | | | | | 120.9 | % | | | | | | | | | | | 116.0 | % | | | | | | | | |
| | | Dec. 31, 2018(2) | | | Year Ended
December 31, 2018 | | | Year Ended
December 31, 2017 | | | Year Ended
December 31, 2016 | |
| | | Yield/ Rate | | | Average Balance | | | Interest | | | Yield/ Rate | | | Average Balance | | | Interest | | | Yield/ Rate | | | Average Balance | | | Interest | | | Yield/ Rate | |
| | | | | | (Dollars In Thousands) | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans receivable: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One- to four-family residential | | | 4.23 | % | | $ | 449,917 | | | $ | 22,924 | | | | 5.10 | % | | $ | 459,227 | | | $ | 22,102 | | | | 4.81 | % | | $ | 538,776 | | | $ | 28,674 | | | | 5.32 | % |
| Other residential | | | 5.13 | | | | 761,115 | | | | 38,863 | | | | 5.11 | | | | 706,217 | | | | 31,970 | | | | 4.53 | | | | 535,793 | | | | 25,052 | | | | 4.68 | |
| Commercial real estate | | | 4.91 | | | | 1,325,398 | | | | 64,605 | | | | 4.87 | | | | 1,240,017 | | | | 54,911 | | | | 4.43 | | | | 1,146,983 | | | | 53,516 | | | | 4.67 | |
| Construction | | | 5.35 | | | | 569,570 | | | | 31,198 | | | | 5.48 | | | | 454,907 | | | | 21,099 | | | | 4.64 | | | | 394,051 | | | | 18,059 | | | | 4.58 | |
| Commercial business | | | 5.22 | | | | 285,125 | | | | 14,104 | | | | 4.95 | | | | 295,379 | | | | 14,666 | | | | 4.97 | | | | 316,526 | | | | 17,389 | | | | 5.49 | |
| Other loans | | | 6.01 | | | | 499,131 | | | | 25,250 | | | | 5.06 | | | | 632,968 | | | | 30,356 | | | | 4.80 | | | | 693,550 | | | | 34,176 | | | | 4.93 | |
| Industrial revenue bonds (1) | | | 4.82 | | | | 20,563 | | | | 1,282 | | | | 6.23 | | | | 25,845 | | | | 1,550 | | | | 6.00 | | | | 33,681 | | | | 2,017 | | | | 5.99 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total loans receivable | | | 5.16 | | | | 3,910,819 | | | | 198,226 | | | | 5.07 | | | | 3,814,560 | | | | 176,654 | | | | 4.63 | | | | 3,659,360 | | | | 178,883 | | | | 4.89 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment securities (1) | | | 3.36 | | | | 201,330 | | | | 5,835 | | | | 2.90 | | | | 207,803 | | | | 5,195 | | | | 2.50 | | | | 249,484 | | | | 5,741 | | | | 2.30 | |
| Other interest-earning assets | | | 2.50 | | | | 104,220 | | | | 1,888 | | | | 1.81 | | | | 121,604 | | | | 1,212 | | | | 1.00 | | | | 116,812 | | | | 551 | | | | 0.47 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest-earning assets | | | 5.00 | | | | 4,216,369 | | | | 205,949 | | | | 4.88 | | | | 4,143,967 | | | | 183,061 | | | | 4.42 | | | | 4,025,656 | | | | 185,175 | | | | 4.60 | |
| Non-interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | | | | | 97,796 | | | | | | | | | | | | 103,505 | | | | | | | | | | | | 108,593 | | | | | | | | | |
| Other non-earning assets | | | | | | | 189,161 | | | | | | | | | | | | 212,724 | | | | | | | | | | | | 236,544 | | | | | | | | | |
| Total assets | | | | | | $ | 4,503,326 | | | | | | | | | | | $ | 4,460,196 | | | | | | | | | | | $ | 4,370,793 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing demand and savings | | | 0.46 | | | $ | 1,531,375 | | | | 5,982 | | | | 0.39 | | | $ | 1,555,375 | | | | 4,698 | | | | 0.30 | | | $ | 1,496,837 | | | | 3,888 | | | | 0.26 | |
| Time deposits | | | 1.98 | | | | 1,375,508 | | | | 21,975 | | | | 1.60 | | | | 1,414,189 | | | | 15,897 | | | | 1.12 | | | | 1,370,935 | | | | 13,499 | | | | 0.98 | |
| Total deposits | | | 1.25 | | | | 2,906,883 | | | | 27,957 | | | | 0.96 | | | | 2,969,564 | | | | 20,595 | | | | 0.69 | | | | 2,867,772 | | | | 17,387 | | | | 0.61 | |
| Short-term borrowings, repurchase agreements and other interest-bearing liabilities | | | 1.68 | | | | 137,257 | | | | 765 | | | | 0.56 | | | | 186,364 | | | | 747 | | | | 0.40 | | | | 327,658 | | | | 1,137 | | | | 0.35 | |
| Subordinated debentures issued to capital trust | | | 4.14 | | | | 25,774 | | | | 953 | | | | 3.70 | | | | 25,774 | | | | 949 | | | | 3.68 | | | | 25,774 | | | | 803 | | | | 3.12 | |
| Subordinated notes | | | 5.55 | | | | 73,772 | | | | 4,097 | | | | 5.55 | | | | 73,613 | | | | 4,098 | | | | 5.57 | | | | 28,526 | | | | 1,578 | | | | 5.53 | |
| FHLB advances | | | 0.00 | | | | 190,245 | | | | 3,985 | | | | 2.09 | | | | 93,524 | | | | 1,516 | | | | 1.62 | | | | 68,325 | | | | 1,214 | | | | 1.78 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest-bearing liabilities | | | 1.40 | | | | 3,333,931 | | | | 37,757 | | | | 1.13 | | | | 3,348,839 | | | | 27,905 | | | | 0.83 | | | | 3,318,055 | | | | 22,119 | | | | 0.67 | |
| Non-interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | | | | | 649,357 | | | | | | | | | | | | 629,015 | | | | | | | | | | | | 608,115 | | | | | | | | | |
| Other liabilities | | | | | | | 21,530 | | | | | | | | | | | | 26,638 | | | | | | | | | | | | 29,824 | | | | | | | | | |
| Total liabilities | | | | | | | 4,004,818 | | | | | | | | | | | | 4,004,492 | | | | | | | | | | | | 3,955,994 | | | | | | | | | |
| Stockholders’ equity | | | | | | | 498,508 | | | | | | | | | | | | 455,704 | | | | | | | | | | | | 414,799 | | | | | | | | | |
| Total liabilities and stockholders’ equity | | | | | | $ | 4,503,326 | | | | | | | | | | | $ | 4,460,196 | | | | | | | | | | | $ | 4,370,793 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate spread | | | 3.60 | % | | | | | | $ | 168,192 | | | | 3.75 | % | | | | | | $ | 155,156 | | | | 3.59 | % | | | | | | $ | 163,056 | | | | 3.93 | % |
| Net interest margin* | | | | | | | | | | | | | | | 3.99 | % | | | | | | | | | | | 3.74 | % | | | | | | | | | | | 4.05 | % |
| Average interest-earning assets to average interest-bearing liabilities | | | | | | | 126.5 | % | | | | | | | | | | | 123.7 | % | | | | | | | | | | | 121.3 | % | | | | | | | | |
| * | Defined as the Company's net interest income divided by total interest-earning assets. | |
| (1) | Of the total average balances of investment securities, average tax-exempt investment securities were $79.9$53.6 million, $87.9$61.5 million and $80.9$72.0 million for 2015, 20142018, 2017 and 2013,2016, respectively. In addition, average tax-exempt industrial revenue bonds were $36.1$24.76 million, $38.5$28.6 million and $38.3$32.0 million in 2015, 20142018, 2017 and 2013,2016, respectively. Interest income on tax-exempt assets included in this table was $4.4$3.1 million, $5.2$3.3 million and $5.1$3.8 million for 2015, 20142018, 2017 and 2013,2016, respectively. Interest income net of disallowed interest expense related to tax-exempt assets was $4.2$2.9 million, $5.0$3.1 million and $4.9$3.7 million for 2015, 20142018, 2017 and 2013,2016, respectively. | |
| (2) | The yield/rate on loans at December 31, 20152018 does not include the impact of the accretable yield (income) on loans acquired in the FDIC-assisted transactions. See "Net“Net Interest Income"Income” for a discussion of the effect on 20142018 results of operations. | |
Rate/Volume Analysis
The following table presents the dollar amount 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.
| | | Year Ended
December 31, 2015 vs.
December 31, 2014 | | | Year Ended
December 31, 2014 vs.
December 31, 2013 | | | Year Ended
December 31, 2018 vs.
December 31, 2017 | | | Year Ended
December 31, 2017 vs.
December 31, 2016 | |
| | | Increase (Decrease)
Due to | | | Total Increase (Decrease) | | | Increase (Decrease)
Due to | | | Total Increase (Decrease) | | | Increase (Decrease)
Due to | | | Total Increase (Decrease) | | | Increase (Decrease)
Due to | | | Total Increase (Decrease) | |
| | | Rate | | | Volume | | | Rate | | | Volume | | | Rate | | | Volume | | | Rate | | | Volume | |
| | | (In Thousands) | | | (In Thousands) | |
| Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans receivable | | $ | (21,429 | ) | | $ | 26,100 | | | $ | 4,671 | | | $ | (15,785 | ) | | $ | 24,451 | | | $ | 8,666 | | | $ | 17,025 | | | $ | 4,547 | | | $ | 21,572 | | | $ | (9,638 | ) | | $ | 7,409 | | | $ | (2,229 | ) |
| Investment securities | | | (272 | ) | | | (3,398 | ) | | | (3,670 | ) | | | 684 | | | | (4,676 | ) | | | (3,992 | ) | | | 796 | | | | (156 | ) | | | 640 | | | | 468 | | | | (1,014 | ) | | | (546 | ) |
| Other interest-earning assets | | | 50 | | | | (62 | ) | | | (12 | ) | | | 49 | | | | (156 | ) | | | (107 | ) | | | 819 | | | | (143 | ) | | | 676 | | | | 638 | | | | 23 | | | | 661 | |
| Total interest-earning assets | | | (21,651 | ) | | | 22,640 | | | | 989 | | | | (15,052 | ) | | | 19,619 | | | | 4,567 | | | | 18,640 | | | | 4,248 | | | | 22,888 | | | | (8,532 | ) | | | 6,418 | | | | (2,114 | ) |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | (176 | ) | | | (54 | ) | | | (230 | ) | | | (382 | ) | | | (81 | ) | | | (463 | ) | | | 1,355 | | | | (71 | ) | | | 1,284 | | | | 653 | | | | 157 | | | | 810 | |
| Time deposits | | | 741 | | | | 1,775 | | | | 2,516 | | | | (412 | ) | | | (246 | ) | | | (658 | ) | | | 6,500 | | | | (422 | ) | | | 6,078 | | | | 1,961 | | | | 437 | | | | 2,398 | |
| Total deposits | | | 565 | | | | 1,721 | | | | 2,286 | | | | (794 | ) | | | (327 | ) | | | (1,121 | ) | | | 7,855 | | | | (493 | ) | | | 7,362 | | | | 2,614 | | | | 594 | | | | 3,208 | |
Short-term borrowings and structured repo | | | (1,052 | ) | | | 18 | | | | (1,034 | ) | | | (845 | ) | | | (380 | ) | | | (1,225 | ) | |
Short-term borrowings and repurchase agreements | | | | 55 | | | | (37 | ) | | | 18 | | | | 156 | | | | (546 | ) | | | (390 | ) |
Subordinated debentures issued to capital trust | | | 189 | | | | (42 | ) | | | 147 | | | | 6 | | | | — | | | | 6 | | | | 4 | | | | — | | | | 4 | | | | 146 | | | | — | | | | 146 | |
| Subordinated notes | | | | (1 | ) | | | — | | | | (1 | ) | | | 216 | | | | 2,304 | | | | 2,520 | |
| FHLBank advances | | | (1,267 | ) | | | 64 | | | | (1,203 | ) | | | (2,172 | ) | | | 1,110 | | | | (1,062 | ) | | | 544 | | | | 1,925 | | | | 2,469 | | | | (114 | ) | | | 416 | | | | 302 | |
| Total interest-bearing liabilities | | | (1,565 | ) | | | 1,761 | | | | 196 | | | | (3,805 | ) | | | 403 | | | | (3,402 | ) | | | 8,457 | | | | 1,395 | | | | 9,852 | | | | 3,018 | | | | 2,768 | | | | 5,786 | |
| Net interest income | | $ | (20,086 | ) | | $ | 20,879 | | | $ | 793 | | | $ | (11,247 | ) | | $ | 19,216 | | | $ | 7,969 | | | $ | 10,183 | | | $ | 2,853 | | | $ | 13,036 | | | $ | (11,550 | ) | | $ | 3,650 | | | $ | (7,900 | ) |
Results of Operations and Comparison for the Years Ended December 31, 20142017 and 20132016
General
Net income increased $9.8$6.3 million, or 29.1%13.7%, during the year ended December 31, 2014,2017, compared to the year ended December 31, 2013.2016. Net income was $43.5$51.6 million for the year ended December 31, 20142017 compared to $33.7$45.3 million for the year ended December 31, 2013.2016. This increase was due to an increase in net interest income of $8.0 million, or 5.0%, an increase in non-interest income of $9.4$10.0 million, or 177.2%35.1%, a decrease in non-interest expense of $6.2 million, or 5.1%, and a decrease in the provision for loan losses of $13.2 million,$181,000, or 76.1%2.0%, partially offset by an increasea decrease in non-interest expensenet interest income of $15.2$7.9 million, or 14.4%4.8%, and an increase in provision for income taxes of $5.6$2.2 million, or 68.3%13.6%. Non-interest income for the year ended December 31, 2014 included a gain recognized on business acquisition of $10.8 million. Net income available to common shareholders was $43.0$51.6 million for the year ended December 31, 20142017 compared to $33.2$45.3 million for the year ended December 31, 2013.2016.
Total Interest Income
Total interest income increased $4.6decreased $2.1 million, or 2.6%1.1%, during the year ended December 31, 20142017 compared to the year ended December 31, 2013.2016. The increasedecrease was due to an $8.7a $2.2 million, or 5.3%1.2%, increasedecrease in interest income on loans, partially offset by a $4.1 million,$115,000, or 27.5%1.8%, decreaseincrease in interest income on investmentsinvestment securities and other interest-earning assets. Interest income on loans increaseddecreased in 2014,2017 due to higher average balances on loans, partially offset by lower average rates of interest.interest, partially offset by higher average balances of loans. The decrease in average interest rates on loans was primarily the result of a reduction in the additional yield accretion recognized in conjunction with updated estimates of the fair value of the acquired loan pools compared to the prior year. Interest income from investment securities and other interest-earning assets decreasedincreased during 20142017 compared to 20132016 primarily due to higher average rates of interest, partially offset by lower average balances. The lower average balances of investments were primarily due to the sale of the Company's Small Business Administration loan pool securities and the sale of certain mortgage-backed securities, and as a result of management's decision to not reinvest mortgage-backed securities' monthly cash flows back into investments, but to utilize the proceeds to fund loan growth. Prepayments on the mortgages underlying these securities resulted in amortization of premiums which also reduced yields. Interest income on loans is affected by variations in the adjustments to accretable yield due to increases in expected cash flows to be received from the FDIC-
acquired loan pools as discussed below in "Interest Income – Loans" and in Note 4 of the accompanying audited financial statements, which are included in Item 8 of this Report. In 2014, many higher yielding loans matured or were repaid. These loans were replaced with new loans that were generally at rates lower than those that repaid during the year, resulting in lower overall yields in the loan portfolio. Higher average balances of loans more than offset the lower interest income on loans.
Interest Income -– Loans
During the year ended December 31, 20142017 compared to the year ended December 31, 2013,2016, interest income on loans increaseddecreased due to higherlower average balances,interest rates, partially offset by lower average interest rates. Interest income increased $24.5 million as a result of higher average loan balances which increased from $2.40 billion during the year ended December 31, 2013 to $2.78 billion during the year ended December 31, 2014. The higher average balances were primarily due to increases in commercial real estate loans, commercial business loans, construction loans, other residential loans and consumer loans categories. A portion of this loan growth resulted from the Company acquiring $165.1 million in loans as part of the Valley FDIC-assisted transaction in June 2014, the balance of which were $122.0 million at December 31, 2014.
In the three months ended December 31, 2014, the Company collected $1.9 million from customers with loans which had previously not been expected to be collectible. In accordance with the Company's accounting methodology, these collections were accounted for as increases in estimated cash flows and were recorded as interest income, thereby increasing net interest income and net interest margin. These collections related to acquired loans which were subject to loss sharing agreements with the FDIC; therefore, 80% of the amounts collected, or $1.5 million, is owed to the FDIC. This $1.5 million of expense is included in non-interest income under "accretion (amortization) of income related to business acquisitions."
balances. Interest income decreased $15.8$9.6 million as the result of lower average interest rates on loans. The average yield on loans decreased from 6.82%4.89% during the year ended December 31, 20132016 to 6.20%4.63% during the year ended December 31, 2014. 2017. This decrease was due to lower overall loan rates, and a slightly lower amount of accretion income in the current year in conjunction with the fair value of the loan pools acquired in the FDIC-assisted transactions, as the additional yield accretion was $35.0 million in 2014 and was $35.2 million in 2013. On an on-going basis the Company estimates the cash flows expected to be collectedresulting from the acquired loan pools. This cash flows estimate has increased, based on the payment histories and reduced loss expectations of the loan pools, resulting in a total of $201.0 million of adjustments to be spread on a level-yield basis over the remaining expected lives of the loan pools. The increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements with the FDIC, which are recorded as indemnification assets. Therefore, the expected indemnification assets have also been reduced, resulting in a total of $165.5 million of adjustments to be amortized on a comparable basis over the remainder of the loss sharing agreements or the remaining expected life of the loan pools, whichever is shorter. For the years ended December 31, 2014 and 2013, the adjustments increased interest income by $35.0 million and $35.2 million, respectively, and decreased non-interest income by $28.7 million and $29.5 million, respectively. The net impact to pre-tax income was $6.2 million and $5.8 million, respectively, for the years ended December 31, 2014 and 2013. Excluding the yield accretion, the average yield on loans was 4.94% for the year ended December 31, 2014, down from 5.35% for the year ended December 31, 2013, as a result of normal amortization of higher-rate loans and new loans that were made at current lower market rates.
Interest Income - Investments and Other Interest-earning Assets
Interest income on investments decreased $4.7 million as a result of a decrease in average balances from $717.8 million during the year ended December 31, 2013, to $495.2 million during the year ended December 31, 2014. Average balances of securities decreased due primarily to the normal monthly payments received on the portfolio of mortgage-backed securities and the sale of securities during 2014, with proceeds being used to fund new loan originations and deposit outflows. Interest income on other interest-earning assets decreased $156,000 mainly due to lower average balances from $276.4 million during the year ended December 31, 2013, to $185.1 million during the year ended December 31, 2014. Interest income on investments increased $684,000 as a result of an increase in average interest rates from 2.01% during the year ended December 31, 2013 to 2.11% during the year ended December 31, 2014. The majority of the Company's securities in 2013 and 2014 were mortgage-backed securities which are backed by hybrid ARMs that have fixed rates of interest for a period of time (generally one to ten years) and then adjust annually. The actual amount of securities that reprice and the actual interest rate changes on these securities are subject to the level of prepayments on these securities and the changes that actually occur in market interest rates (primarily treasury rates and LIBOR rates). Mortgage-backed securities are also subject to reduced yields due to more rapid prepayments in the underlying mortgages. As a result, premiums on these securities may be amortized against interest income more quickly, thereby reducing the yield recorded.
Average balances of interest-earning deposits decreased primarily due to decreases in the Bank's customer deposit balances. The Company's interest-earning deposits and non-interest-earning cash equivalents currently earn very low or no yield and therefore negatively impact the Company's net interest margin. At December 31, 2014, the Company had cash and cash equivalents of $218.6 million compared to $227.9 million at December 31, 2013. See "Net Interest Income" for additional information on the impact of this interest activity.
Total Interest Expense
Total interest expense decreased $3.4 million, or 17.7%, during the year ended December 31, 2014, when compared with the year ended December 31, 2013, due to a decrease in interest expense on deposits of $1.1 million, or 9.1%, a decrease in interest expense on FHLBank advances of $1.1 million, or 26.7%, and a decrease in interest expense on short-term and structured repo borrowings of $1.2 million, or 52.7%.
Interest Expense - Deposits
Interest on demand deposits decreased $382,000 due to a decrease in average rates from 0.24% during the year ended December 31, 2013, to 0.22% during the year ended December 31, 2014. The average interest rates decreased due to lower overall market rates of interest since 2012 and because the Company chose to pay lower rates during 2014 and 2013. Interest on demand deposits decreased $81,000 due to a small decrease in average balances from $1.46 billion in the year ended December 31, 2013, to $1.43 billion in the year ended December 31, 2014. Average noninterest-bearing demand balances increased from $460 million for the year ended December 31, 2013, to $535 million for the year ended December 31, 2014.
Interest expense on time deposits decreased $246,000 due to a decrease in average balances of time deposits from $1.07 billion during the year ended December 31, 2013, to $1.04 billion during the year ended December 31, 2014. The decrease in average balances of time deposits was primarily due to some customers choosing not to renew their deposits with us upon maturity. Also contributing to the decrease was the decrease in CDARS deposits from December 31, 2013 to December 31, 2014, partially offset by the increase in brokered deposits from December 31, 2013 to December 31, 2014. Interest expense on time deposits decreased $412,000 as a result of a decrease in average rates of interest from 0.82% during the year ended December 31, 2013, to 0.78% during the year ended December 31, 2014.
Interest Expense - FHLBank Advances, Short-term Borrowings and Structured Repurchase Agreements and Subordinated Debentures Issued to Capital Trust
During the year ended December 31, 2014 compared to the year ended December 31, 2013, interest expense on FHLBank advances decreased due to lower average rates of interest, partially offset by higher average balances. Interest expense on FHLBank advances decreased $2.2 million due to a decrease in average interest rates from 3.11% in the year ended December 31, 2013, to 1.69% in the year ended December 31, 2014. The significant decrease in the average rate was due to the repayment of $80 million of the Company's long-term higher-rate FHLBank advances in June 2014. As of December 31, 2014, $230 million of the Company's $272 million of total FHLBank advances are short-term advances with very low interest rates. Most of the remaining advances are fixed-rate and are subject to penalty if paid off prior to maturity. Partially offsetting this decrease was an increase in interest expense on FHLBank advances of $1.1 million due to an increase in average balances from $127.6 million in the year ended December 31, 2013, to $172.0 million in the year ended December 31, 2014. This increase was primarily due to additional short-term FHLBank advances obtained by the Company during 2014, to fund loan growth and for other short term funding needs.
Interest expense on short-term borrowings and structured repurchase agreements decreased $380,000 due to a decrease in average balances from $233 million during the year ended December 31, 2013, to $189 million during the year ended December 31, 2014. Interest expense on short-term and structured repo borrowings decreased $845,000 due to a decrease in average rates on short-term borrowings from 1.00% in the year ended December 31, 2013, to 0.58% in the year ended December 31, 2014. The decrease in balances of short-term borrowings in 2014 was primarily due to the repayment by the Company of $50 million of structured repurchase agreements in June 2014. As there were none of the higher-rate structured repurchase agreements during the latter half of 2014, the average rate went down because the interest expense was all related to the lower-rate securities sold under repurchase agreements with customers.
Interest expense on subordinated debentures issued to capital trusts increased $6,000 due to an increase in average rates from 1.81% in the year ended December 31, 2013, to 1.83% in the year ended December 31, 2014. These are variable-rate debentures which bear interest at an average rate of three-month LIBOR plus 1.57%, adjusting quarterly.
Net Interest Income
Net interest income for the year ended December 31, 2014 increased $8.0 million to $167.6 million compared to $159.6 million for the year ended December 31, 2013. Net interest margin was 4.84% for the year ended December 31, 2014, compared to 4.70% in 2013, an increase of 14 basis points. The Company's margin was positively impacted in both years by the increases in expected cash flows to be received from the FDIC-acquired loan pools, acquired in the FDIC-assisted transactions and the resulting increases to accretable yield which was discussed previously in "Interest Income – Loans" and is discussed in Note 4 of the accompanying audited financial statements which are included in Item 8 of this Report.report. The impactdecrease was partially offset by higher overall average loan balances. Interest income increased $7.4 million as the result of these changes on the years ended December 31, 2014 and 2013 were increases in interest income of $35.0 million and $35.2 million, respectively, and increases in net interest margin of 101 basis points and 104 basis points, respectively. Excluding the positive impact of the additional yield accretion, net interest marginhigher average loan balances, which increased 17 basis pointsfrom $3.66 billion during the year ended December 31, 2014. The increase in net interest margin was primarily due2016, to a decrease in interest expense on FHLB advances and short-term borrowings, due to the payoff of FHLB advances and structured repurchase agreements. In addition, the mix of assets continued to change through an increase in the average balance of loans and a decrease in the average balance of investment securities and other interest-earning assets. Our average yield on loans is higher than our average yield on investments. During 2013 and 2014, market rates on checking and savings deposits decreased slightly and retail time deposits renewed at somewhat lower rates of interest. The Company also experienced decreases in yields on loans and investments, excluding the yield accretion income discussed above, when compared to the previous year.
The Company's overall average interest rate spread increased 14 basis points, or 3.0%, from 4.60%$3.81 billion during the year ended December 31, 2013, to 4.74% during the year ended December 31, 2014.2017. The increase washigher average balances were primarily due to an 11 basis point decrease in the weighted average rate paid on interest-bearing liabilities and a three basis point increase in the weighted average yield on interest-earning assets. The Company's overall net interest margin increased 14 basis points, or 3.0%, from 4.70% for the year ended December 31, 2013, to 4.84% for the year ended December 31, 2014. In comparing the two years, the yield on loans decreased 62 basis points while the yield on investment securities and other interest-earning assets increased 10 basis points. The rate paid on deposits decreased four basis points, the rate paid on FHLBank advances decreased 142 basis points, the rate paid on short-term borrowings decreased 42 basis points and the rate paid on subordinated debentures issued to capital trust increased two basis points.
organic loan growth.
The Company's net interest income and margin has been significantly impacted by additional yield accretion recognized in conjunction with updated estimates of the fair value of the loan pools acquired in the 2009, 2011 and 2012 FDIC-assisted transactions. On an on-going basis, the Company estimates the cash flows expected to be collected from the acquired loan pools. For each of the loan portfolios acquired, the cash flow estimates have increased, based on the payment histories and reducedthe collection of certain loans, thereby reducing loss expectations of thecertain loan pools. This resultedpools, resulting in increased income that wasadjustments to be spread on a level-yield basis over the remaining expected lives of the loan pools. The increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements withfor the FDIC, which are recorded as indemnification assets. Therefore,Team Bank, Vantus Bank and Sun Security Bank transactions were terminated in April 2016, and the expectedrelated indemnification assets have also beenwere reduced each quarter since the fourth quarter of 2010, resulting in adjustments to be amortized on a comparable basis over the remainder of the$-0- at that time. The loss sharing agreements orfor InterBank were terminated in June 2017, and the remaining expected lives of the loan pools, whichever is shorter. Additional estimated cash flows, primarily related indemnification asset was reduced to the InterBank loan portfolios, were recorded in 2014.
In addition, beginning in the three months ended December 31, 2014, the Company's net interest income and margin has been impacted by additional yield accretion recognized in conjunction with updated estimates of the fair value of the loan pools acquired in the June 2014 Valley Bank FDIC-assisted transaction. Beginning with the three months ended December 31, 2014, the cash flow estimates have increased for certain of the Valley Bank loan pools primarily based on significant loan repayments and also due to collection of certain loans, thereby reducing loss expectations on certain of the loan pools. This resulted in increased income$-0- at that was spread on a level-yield basis over the remaining expected lives of these loan pools.time. The Valley Bank transaction does not include a loss sharing agreement with the FDIC. Therefore, there iswas no relatedremaining indemnification asset.asset for FDIC-assisted transactions as of December 31, 2017. The entire amount of the discount adjustment has been and will be accreted to interest income over time with no further offsetting impact to non-interest income. For the years ended December 31, 2017 and 2016, the adjustments increased interest income by $5.0 million and $16.4 million, respectively, and decreased non-interest income by $634,000 and $7.0 million, respectively. The net impact to pre-tax income was $4.4 million and $9.4 million, respectively, for the years ended December 31, 2017 and 2016.
Interest Income - Investments and Other Interest-earning Assets
Interest income on investments and other interest-earning assets increased $115,000 in the year ended December 31, 2017 compared to the year ended December 31, 2016. Interest income increased $1.1 million due to an increase in average interest rates from 1.72% during the year ended December 31, 2016 to 2.05% during the year ended December 31, 2017, due to higher market rates of interest on investment securities and other interest-bearing deposits in financial institutions. Interest income decreased $1.0 million as a result of a decrease in average balances from $366.3 million during the year ended December 31, 2016, to $329.4 million during the year ended December 31, 2017. Average balances of securities decreased due to certain U. S. government agency securities and municipal securities being called and the normal monthly payments received related to the portfolio of mortgage-backed securities.
The Company’s interest-earning deposits and non-interest-earning cash equivalents currently earn very low or no yield and therefore negatively impact the Company’s net interest margin. At December 31, 2017, the Company had cash and cash equivalents of $242.3 million compared to $279.8 million at December 31, 2016. See "Net Interest Income" for additional information on the impact of this interest activity.
Total Interest Expense
Total interest expense increased $5.8 million, or 26.2%, during the year ended December 31, 2017, when compared with the year ended December 31, 2016, due to an increase in interest expense on deposits of $3.2 million, or 18.5%, an increase in interest expense on the subordinated notes issued during 2016 of $2.5 million, or 159.7%, an increase in interest expense on FHLBank advances of $302,000, or 24.9%, and an increase in interest expense on subordinated debentures issued to capital trust of $146,000, or 18.2%, partially offset by a decrease in interest expense on short-term and repurchase agreement borrowings of $390,000, or 34.3%.Interest Expense - Deposits
Interest on demand deposits increased $653,000 due to an increase in average rates from 0.26% during the year ended December 31, 2016, to 0.30% during the year ended December 31, 2017. Interest on demand deposits increased $157,000 due to an increase in average balances from $1.50 billion in the year ended December 31, 2016, to $1.56 billion in the year ended December 31, 2017. The increase in average balances of interest-bearing demand deposits was primarily a result of increased balances in money market accounts. Market interest rates on these types of accounts have increased since December 2016.
Interest expense on time deposits increased $2.0 million as a result of an increase in average rates of interest from 0.98% during the year ended December 31, 2016, to 1.12% during the year ended December 31, 2017. Interest expense on time deposits increased $437,000 due to an increase in average balances of time deposits from $1.37 billion during the year ended December 31, 2016, to $1.41 billion during the year ended December 31, 2017. The increase in average balances of time deposits was primarily a result of organic growth of retail deposits. 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 had a higher rate of interest due to market interest rate increases since December 2016.
Interest Expense - FHLBank Advances, Short-term Borrowings and Structured Repurchase Agreements, Subordinated Debentures Issued to Capital Trust and Subordinated Notes
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 $416,000 due to an increase in average balances from $68.3 million during the year ended December 31, 2016, to $93.5 million during the year ended December 31, 2017. This increase was primarily due to the replacement of overnight borrowings with short-term three week FHLBank advances due to the short-term advances having a more favorable interest rate from time to time. The $31.5 million of the Company’s long-term higher fixed-rate FHLBank advances were repaid during June 2017. Partially offsetting the increase due to higher average balances was a decrease in interest expense of $114,000 due to a decrease in average interest rates from 1.78% in the year ended December 31, 2016, to 1.62% in the year ended December 31, 2017. The decrease in the average rate was due to the repayment of the fixed-rate term FHLBank advances during June 2017 and the borrowing of shorter term FHLBank advances at a lower rate.
Interest expense on short-term borrowings and repurchase agreements decreased $546,000 due to a decrease in average balances from $327.7 million during the year ended December 31, 2016, to $186.4 million during the year ended December 31, 2017, 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 Valley Bank discount adjustment accretedFHLBank in 2016. Partially offsetting that decrease was an increase in interest expense on short-term borrowings and repurchase agreements of $156,000 due to average rates that increased from 0.35% in the year ended December 31, 2016, to 0.40% in the year ended December 31, 2017. The increase was due to increases in market interest rates and a change in the mix of funding during the period, with a lower percentage of the total made up of customer repurchase agreements, which have a lower interest rate.
During the year ended December 31, 2017, compared to the year ended December 31, 2016, interest expense on subordinated debentures issued to capital trusts increased $146,000 due to higher average interest rates. The average interest rate was 3.12% in 2016, compared to 3.68% in 2017. The amortization of the cost of 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 rates for each year. The 2017 average interest rate was higher than 3.68% until the three months ended September 30, 2017, when the interest rate cap terminated based on its contractual terms, as a result of the amortization of the cost of the interest rate cap. There was no change in the average balance of the subordinated debentures between the 2017 and the 2016 years.
In August 2016, the Company issued $75 million of 5.25% fixed-to-floating rate subordinated notes due August 15, 2026. The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions and other issuance costs, of approximately $73.5 million. Interest expense on the subordinated notes for the year ended December 31, 2017, was $4.1 million, an increase of $2.5 million over the $1.6 million of interest expense for the year ended December 31, 2016. The increase was due to the fact that the notes were issued during the second half of 2016 and the Company did not incur interest expense for the entire year in 2016.
Net Interest Income
Net interest income for the year ended December 31, 2017 decreased $7.9 million, to $155.2 million, compared to $163.1 million for the year ended December 31, 2016. Net interest margin was 3.74% for the year ended December 31, 2017, compared to 4.05% in 20142016, a decrease of 31 basis points. In both years, the Company’s net interest income and margin were significantly impacted by increases in expected cash flows to be received from the FDIC-acquired loan pools and the resulting increase to accretable yield, which was $981,000.discussed previously in “Interest Income – Loans” and is discussed in Note 4 of the accompanying audited financial statements, which
are included in Item 8 of this Report. The positive impact of these changes on the years ended December 31, 2017 and 2016 were increases in interest income of $5.0 million and $16.4 million, respectively, and increases in net interest margin of 12 basis points and 41 basis points, respectively. Excluding the positive impact of the additional yield accretion, net interest margin decreased 2 basis points during the year ended December 31, 2017. The decrease in net interest margin was primarily due to the interest expense associated with the issuance of $75.0 million of subordinated notes in August 2016 and an increase in the average interest rate on deposits and other borrowings.
The Company's overall interest rate spread decreased 34 basis points, or 8.6%, from 3.93% during the year ended December 31, 2016, to 3.59% during the year ended December 31, 2017. The decrease was due to an 18 basis point decrease in the weighted average yield on interest-earning assets and a 16 basis point increase in the weighted average rate paid on interest-bearing liabilities. In comparing the two years, the yield on loans decreased 26 basis points while the yield on investment securities and other interest-earning assets increased 23 basis points. The rate paid on deposits increased 8 basis points, the rate paid on subordinated debentures issued to capital trust increased 56 basis points, the rate paid on short-term borrowings increased 5 basis points, the rate paid on subordinated notes increased 4 basis points and the rate paid on FHLBank advances decreased 16 basis points.
For additional information on net interest income components, refer to the "Average Balances, Interest Rates and Yields" table in this Report.
Provision for Loan Losses and Allowance for Loan Losses
The provision for loan losses decreased $13.2 million to $4.2 million duringfor the year ended December 31 2014 when, 2017 decreased $181,000, to $9.1 million, compared with $9.3 million for the year ended December 31, 2016. At December 31, 2017 and December 31, 2013. At December 31, 2014,2016, the allowance for loan losses was $38.4$36.5 million a decrease of $1.7and $37.4 million, from December 31, 2013.respectively. Total net charge-offs were $5.8$10.0 million and $17.9$10.0 million for the years ended December 31, 20142017 and 2013,2016, respectively. Nine relationships made up $5.1During the year ended December 31, 2017, $6.1 million of the gross$10.0 million of net charge-offs were in the consumer auto category. Five commercial loan relationships amounted to $2.9 million of the net charge-off total ($7.8 million excluding consumer loans and overdrafts) for the year ended December 31, 2014,2017. 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 one relationship made up $2.5 millionlower delinquencies and charge-offs. This action also resulted in a lower level of origination volume and, as such, the outstanding balance of the gross recoveries ($4.0Company's automobile loans declined approximately $137 million excluding consumer loans and overdrafts) forin the year which are included in the net charge-off total above. The decrease in net charge-offs and provision for loan losses in 2014 were consistent with our expectations, as indicated in previous filings.ended December 31, 2017. General
market conditions and more specifically, real estate absorption rates and unique circumstances related to individual borrowers and projects also contributed to the level of provisions and charge-offs. As propertiesassets were categorized as potential problem loans, non-performing loans or foreclosed assets, evaluations were made of the values of these assets with corresponding charge-offs as appropriate.
Except for those loans acquired in the TeamBank and Vantus Bank transactions for whichIn June 2017, the loss sharing agreements have ended (i.e., non-single family real estate loans), loans acquired infor Inter Savings Bank were terminated. In April 2016, the 2009, 2011 and 2012 FDIC-assisted transactions are covered by loss sharing agreements betweenfor Team Bank, Vantus Bank and Sun Security Bank were terminated. Loans acquired from the FDIC and Great Southernrelated to Valley Bank which afford Great Southern Bank at least 80% protection from losses in the acquired portfolio of loans. The FDICdid not have a loss sharing agreements are subject to limitations on the types of losses covered and the length of time losses are covered and are conditioned upon the Bank complying with its requirements in the agreements with the FDIC. These limitations are described in detail in Note 4 of the accompanying audited financial statements, which are included in Item 8 of this Report. Theagreement. 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 dates.date. These loan pools are systematically reviewed by the Company 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, and collateral valuations and customer interaction to determine if any additional lossesreserves are apparent. Former Valley Bank loans are accounted for in pools and were recorded at their fair value at the time of the acquisition as of June 20, 2014; therefore, these loan pools are analyzed rather than the individual loans.warranted.
The Bank'sBank’s allowance for loan losses as a percentage of total loans, excluding acquired loans that were previously covered by the FDIC loss sharing agreements, was 1.34%1.01% and 1.92%1.04% atDecember 31, 2017 and December 31, 2014 and 2013,2016, respectively. Management considered the allowance for loan losses adequate to cover losses inherent in the Company's loan portfolio at December 31, 2014, based on reviews of the Company's loan portfolio and current economic conditions.
Non-performing Assets
Former TeamBank, Vantus Bank, Sun Security Bank, InterBank and InterBankValley Bank non-performing assets, including foreclosed assets and potential problem loans, are not included in the totals or in the discussion of non-performing loans, potential problem loans and foreclosed assets below as they are, or were subject to loss sharing agreements with the FDIC, which cover at least 80% of principal losses that may be incurred in these portfolios for the applicable terms under the agreements. At December 31, 2014, there were no material non-performing assets that were previously covered, and are now not covered, under the TeamBank or Vantus Bank non-single-family loss sharing agreements. In addition, FDIC-supported TeamBank, Vantus Bank, Sun Security Bank and InterBankbelow. These assets were initially recorded at their estimated fair values as of their acquisition dates of March 20, 2009, September 4, 2009, October 7, 2011, and April 27, 2012, respectively.are accounted for in pools; therefore, these loan pools are analyzed rather than the individual loans. The overall performance of the FDIC-covered loan pools acquired in 2009, 2011 and 2012the five transactions has been better than original expectations as of the acquisition dates. Former Valley Bank loans are also excluded from the totals and the discussion of non-performing loans, potential problem loans and foreclosed assets below, although they are not covered by a loss sharing agreement. Former Valley Bank loans are accounted for in pools and were recorded at their fair value at the time of the acquisition as of June 20, 2014; therefore, these loan pools are analyzed rather than the individual loans.
The loss sharing agreement for the non-single-family portion of the loans acquired in the TeamBank transaction ended on March 31, 2014. Any additional losses in that non-single-family portfolio will not be eligible for loss sharing coverage. At this time, the Company does not expect any material losses in this non-single-family loan portfolio, which totaled $28.3 million at December 31, 2014.
The loss sharing agreement for the non-single-family portion of the loans acquired in the Vantus Bank transaction ended on September 30, 2014. Any additional losses in that non-single-family portfolio will not be eligible for loss sharing coverage. At this time, the Company does not expect any material losses in this non-single-family loan portfolio, which totaled $23.2 million, at December 31, 2014.
As a result of changes in balances and composition of the loan portfolio, changes in economic and market conditions that occur from time to time, and other factors specific to a borrower's circumstances, the level of non-performing assets will fluctuate.
Non-performing assets, excluding FDIC-covered non-performing assets and otherall FDIC-assisted acquired assets, at December 31, 20142017, were $43.7$27.8 million, a decrease of $18.4$11.5 million from $62.1$39.3 million at December 31, 2013.2016. Non-performing assets, excluding FDIC-covered non-performing assets and otherall FDIC-assisted acquired assets, as a percentage of total assets were 1.11%0.63% at December 31, 2014,2017, compared to 1.74%0.86% at December 31, 2013.2016.
Compared to December 31, 2013,2016, non-performing loans decreased $11.8$2.8 million to $8.1$11.3 million at December 31, 2017, and foreclosed assets decreased $6.6$8.7 million to $35.5 million. Commercial real estate$16.6 million at December 31, 2017. Non-performing consumer loans comprised $4.7$3.3 million, or 57.7%29.1%, of the total of $8.1$11.3 million of non-
performingnon-performing loans at December 31, 2014.2017. Non-performing one-to four-family residential loans comprised $1.7$2.7 million, or 20.4%24.2%, of the total non-performing loans at December 31, 2014.2017. Non-performing consumercommercial business loans were $1.1$2.1 million, or 13.7%18.3%, of total non-performing loans at December 31, 2014. Non-performing2017. The decrease in non-performing commercial business loans was primarily due to one relationship totaling $2.9 million which was transferred to foreclosed assets during 2017. Non-performing other residential loans were $411,000,$1.9 million, or 5.0%16.7%, of total non-performing loans at December 31, 2014.2017. The increase in non-performing other residential loans was primarily due to the additional of one loan initially totaling $2.4 million, which was charged down upon being added to Non-performing construction and land developmentLoans. Non-performing commercial real estate loans were $255,000,comprised $1.2 million, or 3.1%10.9%, of total non-performing loans at December 31, 2014.2017. The majority of the decrease in the commercial real estate category was due to one relationship incurring charge-offs of $1.2 million during 2017, and two separate relationship with transfers to foreclosed assets totaling approximately $500,000 each. Non-performing land development loans were $-0- at December 31, 2017. The decrease in non-performing land development loans was primarily due to the payoff of two significant relationships.
Non-performing Loans. Activity in the non-performing loans category during the year ended December 31, 2014,2017, was as follows:
| | | Beginning
Balance,
January 1 | | | Additions | | | Removed
from Non-
Performing | | | Transfers to
Potential
Problem Loans | | | Transfers to
Foreclosed
Assets | | | Charge-Offs | | | Payments | | | Ending
Balance,
December 31 | |
| | | (In Thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| One- to four-family construction | | $ | — | | | $ | 381 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (381 | ) | | $ | — | |
| Subdivision construction | | | 109 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (11 | ) | | | 98 | |
| Land development | | | 1,718 | | | | 4,060 | | | | — | | | | — | | | | (185 | ) | | | (125 | ) | | | (5,468 | ) | | | — | |
| Commercial construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| One- to four-family residential | | | 1,825 | | | | 2,487 | | | | (36 | ) | | | (840 | ) | | | (242 | ) | | | (37 | ) | | | (437 | ) | | | 2,720 | |
| Other residential | | | 162 | | | | 2,442 | | | | (77 | ) | | | — | | | | (161 | ) | | | (488 | ) | | | (1 | ) | | | 1,877 | |
| Commercial real estate | | | 2,727 | | | | 2,550 | | | | (394 | ) | | | (347 | ) | | | (1,060 | ) | | | (1,649 | ) | | | (601 | ) | | | 1,226 | |
| Other commercial | | | 4,765 | | | | 1,256 | | | | — | | | | — | | | | (2,883 | ) | | | (829 | ) | | | (246 | ) | | | 2,063 | |
| Consumer | | | 2,775 | | | | 5,923 | | | | (217 | ) | | | (329 | ) | | | (1,081 | ) | | | (2,075 | ) | | | (1,725 | ) | | | 3,271 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 14,081 | | | $ | 19,099 | | | $ | (724 | ) | | $ | (1,516 | ) | | $ | (5,612 | ) | | $ | (5,203 | ) | | $ | (8,870 | ) | | $ | 11,255 | |
| | | Beginning
Balance,
January 1 | | | Additions | | | Removed
from Non-
Performing | | | Transfers to
Potential
Problem Loans | | | Transfers to
Foreclosed
Assets | | | Charge-Offs | | | Payments | | | Ending
Balance,
December 31 | |
| | | (In Thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| One- to four-family construction | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Subdivision construction | | | 871 | | | | 3,231 | | | | — | | | | — | | | | (2,367 | ) | | | (1,136 | ) | | | (599 | ) | | | — | |
| Land development | | | 338 | | | | 102 | | | | — | | | | — | | | | (67 | ) | | | (80 | ) | | | (38 | ) | | | 255 | |
| Commercial construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| One- to four-family residential | | | 4,361 | | | | 5,378 | | | | (76 | ) | | | (1,088 | ) | | | (4,657 | ) | | | (1,073 | ) | | | (1,235 | ) | | | 1,610 | |
| Other residential | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Commercial real estate | | | 6,205 | | | | 5,884 | | | | (1,577 | ) | | | — | | | | — | | | | (1,363 | ) | | | (4,450 | ) | | | 4,699 | |
| Other commercial | | | 7,231 | | | | 454 | | | | (3,118 | ) | | | — | | | | — | | | | (2,473 | ) | | | (1,628 | ) | | | 466 | |
| Consumer | | | 900 | | | | 1,193 | | | | (273 | ) | | | (52 | ) | | | (42 | ) | | | (206 | ) | | | (403 | ) | | | 1,117 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 19,906 | | | $ | 16,242 | | | $ | (5,044 | ) | | $ | (1,140 | ) | | $ | (7,133 | ) | | $ | (6,331 | ) | | $ | (8,353 | ) | | $ | 8,147 | |
At December 31, 2014,2017, the non-performing one- to four-family residential category included 28 loans, 18 of which were added during 2017. The largest relationship in this category, which was added during 2017, included nine loans totaling $1.4 million, or 50.6% of the total category, which are collateralized by residential rental homes in the Springfield, Mo. area. The non-performing commercial business category included five loans. The largest relationship in this category totaled $1.5 million, or 73.2% of the total category. This relationship, discussed in the paragraph above, was previously collateralized by commercial real estate which was foreclosed upon and subsequently sold. One loan in this category, included eight loans, one of whichtotaling $2.9 million and secured by the borrower’s interest in a condo project in Branson, Mo, was transferred to foreclosed assets during 2017. One loan totaling $970,000 was transferred from potential problem loans during 2017. This loan was added to potential problem loans earlier in 2017 and was subsequently transferred to non-performing loans. The loan was charged down $470,000 and the currentremaining balance at December 31, 2017 was $500,000. The loan is collateralized by the business assets of an entity in the St. Louis, Mo. area. The non-performing other residential category included one loan, which was added during 2017. This loan is collateralized by an apartment project in the central Missouri area and was originated in 2004. The non-performing commercial real estate category included six loans, three of which were added during the year. The largest relationship in this category, which was added in the current year,during 2017, totaled $2.0 million,$667,000, or 43.3%54.4% of the total category, andcategory. This loan is collateralized by office buildingscommercial property in Southeast Missouri.the St. Louis, Mo., area. One relationship in this category, which included two loans, had $358,000 of charge-offs during 2017 and the remaining balance of $465,000 was transferred to foreclosed assets. The second largestrelationship was collateralized by commercial entertainment property and other property in Branson, Mo. One loan in this category with a balance of $498,000 was transferred to foreclosed assets during the period. One relationship in this category, which was added in a previous year, totaled $1.9 million, or 40.9%, of the total category, and is collateralized by a theatertheatre property in Branson, Mo., incurred charge-offs of $1.2 million and received payments of $480,000 during the year, which paid off the remaining balance of that
loan. The non-performing one- to four-family residentialconsumer category included 37255 loans, 20204 of which were added during 2017, and the year. There were 34 propertiesmajority of which are indirect used automobile loans. Compared to previous years, in 2016 and 2017 the one-to four-family category which were transferred to foreclosed assets during the year. Of those, 15 properties, totaling $2.1 million, related to two borrowers.Company experienced increased levels of delinquencies and repossessions in consumer loans, primarily indirect used automobile loans. The non-performing consumerland development category included 74 loans, 58 of which were added during the year. The non-performing commercial business category included eight loans, four of which were added during the year. The subdivision construction category of non-performing loans had a balance of $-0-was zero at December 31, 2014, and had $2.4 million transferred to foreclosed assets during2017. During the year. The total $2.4 million of transfers to foreclosed assets was related to two borrowers, and $688,000year, one loan, which is the same relationship as one of the total $1.1loans discussed in the commercial real estate category, and was collateralized by land in the Branson, Mo. area had charge-offs of $92,000 and received payments of $3.8 million, which paid off the remaining balance of charge-offs forthat loan. Also during 2017, one loan in this category received payments of $1.6 million, which paid off the subdivision construction category was related to those two borrowers.remaining balance of that loan.
Foreclosed Assets. Of the total $45.8$22.0 million of other real estate owned at December 31, 2014,2017, $5.72.1 million represents the fair value of foreclosed assets covered by FDIC loss sharing agreements, $879,000 represents the fair value of foreclosed assets previously covered by FDIC loss sharing agreements, $778,000$1.7 million represents foreclosed assets related to Valley Bank and not previously covered by loss sharing agreements, $87,000 represents other assets related to acquired loans, and $2.9$1.6 million represents properties which were not acquired through foreclosure.foreclosure, including former branch locations that were closed and held for sale and land which was acquired for a potential branch location. The acquired foreclosed assets and other assets related to acquired loansin the FDIC-assisted transactions and the properties not acquired through foreclosure are not included in the following table and discussion of foreclosed assets.other real estate owned. Because sales of foreclosed properties exceeded additions, total foreclosed assets decreased. Activity in foreclosed assets during the year ended December 31, 2014,2017, was as follows:
| | | Beginning
Balance,
January 1 | | | Additions | | | Proceeds
from Sales | | | Capitalized
Costs | | | ORE Expense
Write-Downs | | | Ending
Balance,
December 31 | |
| | | (In Thousands) | |
| | | | | | | | | | | | | | | | | | | |
| One- to four-family construction | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Subdivision construction | | | 6,360 | | | | 350 | | | | (1,297 | ) | | | — | | | | — | | | | 5,413 | |
| Land development | | | 10,886 | | | | — | | | | (2,431 | ) | | | — | | | | (1,226 | ) | | | 7,229 | |
| Commercial construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| One- to four-family residential | | | 1,217 | | | | 374 | | | | (1,470 | ) | | | — | | | | (9 | ) | | | 112 | |
| Other residential | | | 954 | | | | 161 | | | | (1,071 | ) | | | 117 | | | | (21 | ) | | | 140 | |
| Commercial real estate | | | 3,841 | | | | 896 | | | | (2,843 | ) | | | — | | | | (200 | ) | | | 1,694 | |
| Commercial business | | | — | | | | 2,876 | | | | (2,876 | ) | | | — | | | | — | | | | — | |
| Consumer | | | 1,991 | | | | 15,728 | | | | (15,732 | ) | | | — | | | | — | | | | 1,987 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 25,249 | | | $ | 20,385 | | | $ | (27,720 | ) | | $ | 117 | | | $ | (1,456 | ) | | $ | 16,575 | |
| | | Beginning
Balance,
January 1 | | | Additions | | | Proceeds
from Sales | | | Capitalized
Costs | | | ORE Expense
Write-Downs | | | Ending
Balance,
December 31 | |
| | | (In Thousands) | |
| | | | | | | | | | | | | | | | | | | |
| One- to four-family construction | | $ | — | | | $ | 223 | | | $ | — | | | $ | — | | | $ | — | | | $ | 223 | |
| Subdivision construction | | | 11,652 | | | | 2,144 | | | | (3,079 | ) | | | — | | | | (860 | ) | | | 9,857 | |
| Land development | | | 18,920 | | | | 76 | | | | (333 | ) | | | — | | | | (1,495 | ) | | | 17,168 | |
| Commercial construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| One- to four-family residential | | | 744 | | | | 4,800 | | | | (1,989 | ) | | | — | | | | (202 | ) | | | 3,353 | |
| Other residential | | | 5,900 | | | | — | | | | (3,060 | ) | | | 96 | | | | (311 | ) | | | 2,625 | |
| Commercial real estate | | | 4,135 | | | | 417 | | | | (2,773 | ) | | | — | | | | (147 | ) | | | 1,632 | |
| Commercial business | | | 79 | | | | — | | | | (3 | ) | | | — | | | | (17 | ) | | | 59 | |
| Consumer | | | 715 | | | | 3,051 | | | | (3,101 | ) | | | — | | | | (41 | ) | | | 624 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 42,145 | | | $ | 10,711 | | | $ | (14,338 | ) | | $ | 96 | | | $ | (3,073 | ) | | $ | 35,541 | |
At December 31, 2014,2017, the land development category of foreclosed assets included 3317 properties, the largest of which was located in northwest Arkansasthe Branson, Mo., area and had a balance of $2.3$1.2 million, or 13.3%17.2% of the total category. One property located in the northwest Arkansas area and totaling $1.4 million was sold during 2017. Of the total dollar amount in the land development category of foreclosed assets, 41.4%38.6% and 34.7%23.0% was located in northwest Arkansas and in the Branson, Mo., area, and the northwest Arkansas areas, respectively, including the largest property previously mentioned. The subdivision construction category of foreclosed assets included 3115 properties, the largest of which was located in the St. Louis,Springfield, Mo. metropolitan area and had a balance of $1.7$1.2 million, or 17.7%22.8% of the total category. One relationship, which was originated in 2006, made up $1.3 million of the $2.1 million of additions in the subdivision construction category, and is collateralized by property near the Kansas City, Mo. metropolitan area. Of the total dollar amount in the subdivision construction category of foreclosed assets, 18.2%38.2% and 15.5%22.8% was located in Branson, Mo. and Springfield, Mo., respectively.respectively, including the largest property previously mentioned. The one-to four-family residentialsubdivision construction category of foreclosed assets had 16 properties with total or partial sales during 2017, totaling $1.3 million. The largest sale was a property in northwest Arkansas totaling $775,000. The commercial real estate category of foreclosed assets included 24 properties, of which thefour properties. The largest relationship with ninein the commercial real estate category includes commercial properties in Springfield, Mo. and the southwest Missourisurrounding area totaling $500,000, or 29.5% of the total category. The assets of one relationship in the commercial real estate category, which included one retail property located in Georgia and one retail property located in Texas totaling $1.5 million, were sold during 2017. One property in the commercial real estate category, which is a hotel located in the western United States totaling $1.1 million, was sold during the year. The commercial business category of other real estate had a balance of $1.2 million, or 34.8%zero as of December 31, 2017, due to the sale of the total category. These properties were allone foreclosed property which was added in 2014. In addition, six properties securing loansto the category during the year totaling $936,000 to one borrower were added in 2014. These properties were$2.9 million, which was collateralized by propertythe borrower’s interest in the Branson, Mo., area. All of the properties discussed above which were added during 2014 in the one-to four-family category were originally financed by the Bank prior to 2008. Of the total dollar amount in the one-to- four-family category of foreclosed assets, 40.4% is locateda condominium project in Branson, Mo. The other residential category of foreclosed assets included 12one property which was added during 2017. All five properties 10 of which were allheld at the beginning of the year were sold, and included in those sales were four properties which were part of the same condominium community which was located in Branson, Mo. totaling $843,000. The larger amount of additions and hadsales under consumer loans are due to a balancehigher volume of $1.8 million, or 68.1%repossessions of the total category. Of the total dollar amountautomobiles, which generally are subject to a shorter repossession process. The Company experienced increased levels of delinquencies and repossessions in the other residential category of foreclosed assets, 86.7% was located in the Branson, Mo., area, including the largest properties previously mentioned.indirect used automobile loans throughout 2016 and 2017.
Potential Problem Loans. Potential problem loans decreased $2.0 millionincreased $975,000 during the year ended December 31, 20142017, from $27.0$7.0 million at December 31, 20132016 to $25.0$7.9 million at December 31, 2014.2017. This decreaseincrease was due to $7.9the addition of $9.7 million of loans to potential problem loans, partially offset by $5.9 million in loans transferred to the non-performing category, $7.2$1.0 million in loans removed from potential problem loans due to improvements in the credits, $907,000$72,000 in charge-offs, $419,000$89,000 in loans transferred to foreclosed assets,
and $835,000$1.7 million in payments on potential problem loans, partially offset by the addition of $15.3 million of loans to 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 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 year ended December 31, 2014,2017, was as follows:
| | | Beginning
Balance,
January 1 | | | Additions | | | Removed
from Potential
Problem | | | Transfers to
Non-
Performing | | | Transfers to
Foreclosed
Assets | | | Charge-Offs | | | Payments | | | Ending
Balance,
December 31 | |
| | | (In Thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| One- to four-family construction | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Subdivision construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Land development | | | 4,135 | | | | 139 | | | | — | | | | (3,980 | ) | | | — | | | | — | | | | (290 | ) | | | 4 | |
| Commercial construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| One- to four-family residential | | | 439 | | | | 1,102 | | | | — | | | | (131 | ) | | | (89 | ) | | | (72 | ) | | | (127 | ) | | | 1,122 | |
| Other residential | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Commercial real estate | | | 2,062 | | | | 6,569 | | | | (1,029 | ) | | | (803 | ) | | | — | | | | — | | | | (1,040 | ) | | | 5,759 | |
| Other commercial | | | 204 | | | | 1,387 | | | | — | | | | (970 | ) | | | — | | | | — | | | | (118 | ) | | | 503 | |
| Consumer | | | 122 | | | | 561 | | | | (10 | ) | | | (28 | ) | | | — | | | | — | | | | (96 | ) | | | 549 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 6,962 | | | $ | 9,758 | | | $ | (1,039 | ) | | $ | (5,912 | ) | | $ | (89 | ) | | $ | (72 | ) | | $ | (1,671 | ) | | $ | 7,937 | |
| | | Beginning
Balance,
January 1 | | | Additions | | | Removed
from Potential
Problem | | | Transfers to
Non-
Performing | | | Transfers to
Foreclosed
Assets | | | Charge-Offs | | | Payments | | | Ending
Balance,
December 31 | |
| | | (In Thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| One- to four-family construction | | $ | — | | | $ | 1,312 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,312 | |
| Subdivision construction | | | 2,201 | | | | 4,392 | | | | — | | | | (1,806 | ) | | | (2 | ) | | | (500 | ) | | | (33 | ) | | | 4,252 | |
| Land development | | | 10,857 | | | | — | | | | (5,000 | ) | | | — | | | | — | | | | — | | | | — | | | | 5,857 | |
| Commercial construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| One- to four-family residential | | | 2,193 | | | | 2,749 | | | | (250 | ) | | | (2,412 | ) | | | — | | | | — | | | | (374 | ) | | | 1,906 | |
| Other residential | | | 1,956 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,956 | |
| Commercial real estate | | | 8,737 | | | | 5,805 | | | | (1,905 | ) | | | (3,456 | ) | | | (417 | ) | | | (381 | ) | | | (340 | ) | | | 8,043 | |
| Other commercial | | | 860 | | | | 849 | | | | (43 | ) | | | (225 | ) | | | — | | | | — | | | | (6 | ) | | | 1,435 | |
| Consumer | | | 183 | | | | 145 | | | | — | | | | (6 | ) | | | — | | | | (26 | ) | | | (82 | ) | | | 214 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 26,987 | | | $ | 15,252 | | | $ | (7,198 | ) | | $ | (7,905 | ) | | $ | (419 | ) | | $ | (907 | ) | | $ | (835 | ) | | $ | 24,975 | |
At December 31, 2014,2017, the commercial real estate category of potential problem loans included eight loans, six of which were added during the current year. The largest relationship in this category, which was added during a previous year, had a balance of $4.9 million, or 60.2% of the total category. The relationship is collateralized by properties located near Branson, Mo. The land development category of potential problem loans included three loans, all of which were added during previous years. The largestpart of the same customer relationship. This relationship, in this category totaled $3.8totaling $5.8 million, or 65.6%100.0% of the total category, and is collateralized by theatre and retail property in the Branson, Mo., area. The subdivision construction category of potential problem loans included eight loans, six of which were added during the current year. The largest relationship in this category, which This is made up of four loans which were added during the current year, had a balance totaling $3.5 million, or 83.0%long-term customer of the total category,Bank and is collateralized by property in southwest Missouri. Thethese loans in this relationship which were added during the current year were all originated prior to 2008. The other residential categoryborrower had been experiencing cash flow issues due to vacancies in some of the properties and the loans were added to potential problem loans includedduring 2017. $963,000 of the payments in the category related to one loanrelationship, the remainder of which was added in a previous year, and is collateralized by properties located in the Branson, Mo., area.moved to non-performing loans during 2017. The one- to four-family residential category of potential problem loans included 2316 loans, nine10 of which were added during the current year. Of the total $2.7 million of loans added during the year in this category, $1.1 million were transfers from non-performing loans due to the improved condition of the borrower.2017. The commercial business category of potential problem loans included ninefive loans, sixone of which werewas added in the current year, of which three were part of the same relationship. The largest relationshipduring 2017. One loan in this category had a balance of $660,000, or 46.0% oftotaling $970,000 was added to potential problem loans during 2017 and then subsequently transferred to non-performing loans during the total category,year, and is collateralized primarily by automobiles.discussed above in non-performing loans. The one-to four-family constructionconsumer category of potential problem loans included three43 loans, all of which were to the same borrower, and all36 of which were added during 2017. The land development category of potential problem loans decreased from December 31, 2016 primarily due to the current year. Thesetransfer of one loan totaling $3.8 million to the non-performing loans were collateralized by propertycategory, which is discussed above in southwest Missouri and were all originated prior to 2008. These loans are part of the same borrower relationship as the $3.5 million relationship added in the subdivision construction category discussed above.non-performing loans.
Non-Interest Income
Non-interest income for the year ended December 31, 20142017 was $14.7$38.5 million compared with $5.3$28.5 million for the year ended December 31, 2013.2016. The increase of $9.4$10.0 million, or 177.2%35.1%, was primarily the result of the following increases and decreases:items:
Initial gain recognizedGain on business acquisition:early termination of FDIC loss sharing agreement for Inter Savings Bank: During 2017, the Company’s loss sharing agreement with the FDIC related to Inter Savings Bank was terminated early and the Company received a payment of $15.0 million to settle all outstanding items related to the terminated agreement. The Company recognized a one-time gross gain in 2017 of $10.8$7.7 million (pre-tax) onrelated to the FDIC-assisted acquisition of Valley Bank, which occurred on June 20, 2014.termination.
Net realized gains on sales of available-for-sale securities: Gains on sales of available-for-sale securities increased $1.9 million compared to the prior year. This was due to the sale of all of the Company's Small Business Administration securities in June 2014, which produced a gain of $569,000; the sale of the acquired Valley Bank securities in July 2014, which produced a gain of $121,000; and the sale of the taxable municipal securities acquired in the Sun Security Bank transaction in October 2014, resulting in a gain of $1.2 million.
Service charges and ATM fees: Service charges and ATM fees increased $848,000 compared to the prior year, primarily due to an increase in fee income from the additional accounts acquired in the Valley Bank transaction in June 2014.
Partially offsetting the increase in non-interest income were the following items:
Amortization of income related to business acquisitions: TheBecause of the termination of FDIC loss sharing agreements in previous periods, the net amortization expense related to business acquisitions was $27.9$486,000 for the year ended December 31, 2017, compared to $6.4 million for the year ended December 31, 2014, compared to $25.3 million for the year ended December 31, 2013.2016. The amortization expense for the year ended December 31, 2014, was made up2017, consisted of the following items: $27.5 million$504,000 of amortization expense related to the changes in cash flows expected to be collected from the FDIC-covered loan portfolios $1.7 millionacquired from InterBank and $140,000 of amortization of the clawback liability and $152,000 of impairment of the indemnification asset for Vantus Bank. The impairment was recorded because the Company did not expect, and did not receive, resolution of certain items related to commercial foreclosed assets prior to the expiration of the non-single-family loss sharing agreement for Vantus Bank. In addition, the Company collected amounts on various problem assets acquired from the FDIC totaling $1.9 million. Under the loss sharing agreements, 80% of these collected amounts must be remitted to the FDIC; therefore, the Company recorded a liability and related expense of $1.5 million. Offsettingliability. Partially offsetting the expense was income from the accretion of the discount related to the indemnification assetsasset for allthe InterBank acquisition of the acquisitions of $2.4 million and $600,000 of other loss share income items.$158,000.
GainsLate charges and fees on sales of single-family loans:loans Gains: Late charges and fees on sales of single-family loans decreased $782,000increased $484,000 in 2017 compared to the prior year. This2016. The increase was primarily due to fees totaling $632,000 on loan payoffs received on four loan relationships during 2017.
Net gains on loan sales: Net gains on loan sales decreased $791,000 in 2017 compared to 2016. The decrease was due to a decrease in originations of fixed-rate loans duein 2017 compared to higher fixed rates on these loans during most of 20142016, which resulted in fewer loans being originated to refinance existing debt.loan sales during 2017. Fixed rate single-family loans originated are generally subsequently sold in the secondary market. The decrease occurred
Other income: Other income decreased $825,000 in 2017 compared to 2016. During 2016, the first six monthsCompany recognized gains of $367,000 on the sale of the year andtwo branches in Southwest Missouri. In addition, a gain of $238,000 was partially offset by an increase in gainsrecognized on sales of single-family loansfixed assets unrelated to the branch sales during 2016. There were no similar transactions during 2017. There were net losses on the last six months of the year ended December 31, 2014, which included additional loan originations in the operations acquired in the Valley Bank transaction in June 2014.
Change in interest rate swap fair value:88 The Company recorded expense
disposal of $(345,000) during 2014 due to the decrease in the interest rate swap fair value related to its matched book interest rate derivatives program. This compares to income of $295,000 recordedcertain fixed assets, including ATMs, during the year ended December 31, 2013.2017 of approximately $114,000, with no significant losses on the disposal of fixed assets in 2016.
Net realized gains on sales of available-for-sale securities: During 2016, the Company sold an investment held by Bancorp for a gain of $2.7 million and sold other investment securities for a net gain of $144,000. There were no gains on sales of investments in 2017.
Non-Interest Expense
Total non-interest expense increased $15.3decreased $6.1 million, or 14.4%5.1%, from $105.6$120.4 million in the year ended December 31, 2013,2016, to $120.9$114.3 million in the year ended December 31, 2014.2017. The Company'sCompany’s efficiency ratio for the year ended December 31, 2014,2017 was 66.3%58.99%, upa decrease from 64.1%62.86% in 2013.2016. The 2014improvement in the ratio for 2017 was negatively affected byprimarily due to the early repayment of certain borrowingsdecrease in June 2014non-interest expense and the increase in non-interest expense related toincome (significantly impacted by the June 2014 Valley acquisition and other items as discussed above,gain on the termination of the loss sharing agreements for the Inter Savings Bank FDIC-assisted transaction), partially offset by increasesthe decrease in non-interest income resulting from the initial gain recognized on the Valley acquisition.net interest income. The Company'sCompany’s ratio of non-interest expense to average assets increaseddecreased from 2.79%2.76% for the year ended December 31, 2013,2016, to 3.16%2.56% for the year ended December 31, 2014.2017. The increasedecrease in the current year ratio for 2017 was primarily due to the decrease in non-interest expense and the increase in other operating expensesaverage assets in the 2014 year2017 compared to the 2013 year due to the penalties paid for prepayment of borrowings, write-downs related to certain foreclosed assets and other non-interest expenses related to the Valley acquisition.2016. Average assets for the year ended December 31, 2014,2017, increased $34.6$89.4 million, or 0.9%2.0%, from the year ended December 31, 2013. 2016, primarily due to organic loan growth, partially offset by decreases in investment securities.
The following were key items related to the increasedecrease in non-interest expense for the year ended December 31, 20142017 as compared to the year ended December 31, 2013:2016:
Other Operating Expenses: Other operating expenses increased $7.7 million, to $15.8 million for the year ended December 31, 2014 compared to the prior year period primarily due to $7.4 million in prepayment penalties paid as the Company elected in June 2014, to repay $130 million of its FHLBank advances and structured repo borrowings prior to their maturity.
ValleyFifth Third Bank branch acquisition expenses: TheDuring 2016, the Company incurred approximately $5.6$1.4 million of additional non-interestone-time expenses during the year ended December 31, 2014 related to the operationsacquisition of Valley Bank, which was acquired through the FDIC in June 2014.certain branches from Fifth Third Bank. Those expenses included approximately $2.3 million$124,000 of compensation expense, approximately $1.2 million of computer and equipment expense, approximately $718,000 of net occupancy expense, approximately $241,000$385,000 of legal, audit and other professional fees expense, approximately $333,000$294,000 of computer license and support expense, approximately $436,000 in charges to replace former Fifth Third Bank customer checks with Great Southern Bank checks, and approximately $79,000 of travel, meals and other expenses related to due diligence for the transaction and integration issues and various other expenses. Approximately $2.6 million of these expenses are not expected to recur in future periods.transaction.
ExpenseSalaries and employee benefits: Salaries and employee benefits decreased $343,000 from the prior year. In 2016, the Company incurred one-time acquisition related net salary and retention bonus and other compensation expenses paid as part of the Fifth Third branch transaction totaling $124,000. Subsequent to the transaction, some employees related to those operations left the Company and many were not replaced. Compensation expense also decreased due to a reduction in incentive compensation for loan originators and staff due to fewer residential loan originations in 2017 than in 2016. The Company also recently reorganized some staff functions in certain areas to operate more efficiently. In addition, there were budgeted but unfilled positions in various areas of the Company that resulted in lower compensation costs in these areas. These decreases were partially offset by the increase of $1.1 million related to the special employee bonuses paid to all employees who were employed by the Company on foreclosed assets:December 31, 2017. These bonuses were in response to the new federal tax reform legislation.
Net occupancy expense: Expense on foreclosed assets increased $1.6Net occupancy expense decreased $1.5 million forin the year ended December 31, 20142017 compared to the prior year2016. The decrease was primarily due to write-downs on foreclosed assetsfurniture, fixtures and equipment, and computer equipment which became fully depreciated, resulting in less depreciation expense during 2017. During 2016, the Company had one-time expenses as part of approximately $2.0the acquisition of the Fifth Third banking centers of $279,000 and increased computer license and support costs of $247,000 with no similar expenses in 2017.
Partnership tax credit: Partnership tax credit expense decreased $751,000 in the year ended December 31, 2017 compared to 2016. The decrease was primarily due to the end of the amortization period for some of the Company’s new market tax credits and the investment in those tax credits has been written off.
Insurance expense: Insurance expense decreased $523,000 in the year ended December 31, 2017 compared to 2016 primarily due to a reduction in FDIC insurance premiums resulting from a change in the FDIC insurance assessment rates, which went into effect during the fourth quarter of 2016.
Postage: Postage decreased $330,000 in 2017 from 2016. During 2016, the Company incurred significant postage costs due to branch acquisitions and sales and the mailing of chip-enabled debit cards.
Legal, audit and other professional fees: Legal, audit and other professional fees decreased $329,000 in 2017 from 2016 due to additional expenses in 2016 related to the Fifth Third transaction, as noted in the Fifth Third Bank branch acquisition expenses above.
Other operating expenses: Other operating expenses decreased $1.5 million in 2014.the year ended December 31, 2017 compared to 2016. The decrease in other operating expenses was primarily due to higher levels of debit card and check fraud losses in 2016. In 2016, the Company experienced debit card and check fraud losses totaling $1.9 million, a significant portion of which
resulted from a data security breach at a national retail merchant which operates stores in many of our markets, affecting some of our debit card customers who transacted business with the merchant. In 2017, the Company experienced debit card and check fraud losses totaling $1.0 million. Additionally, $436,000 of the decrease in operating expenses was the charge in 2016 to replace Fifth Third customer checks as discussed above.
Provision for Income Taxes
In 2014, the Company elected to early-adopt FASB ASU No. 2014-01, which amends FASB ASC Topic 323, Investments – Equity Method and Joint Ventures. This Update impacts the Company's accounting for investments in flow-through limited liability entities which manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments in the
Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The Company has significant investments in such qualified affordable housing projects that meet the required conditions. The Company's adoption of this Update did not materially affect the Company's financial position or results of operations, except that the investment amortization expense, which previously was included in Other Non-interest Expense in the Consolidated Statements of Income, is now included in Provision for Income Taxes in the Consolidated Statements of Income presented. As a result, there was no change in Net Income for the periods covered in this document. In addition, there was no cumulative effect adjustment to Retained Earnings.
Provision for income taxes as a percentage of pre-tax income was 24.0% and 19.5% forFor the years ended December 31, 20142017 and 2013, respectively, which2016, the Company's effective tax rate was 26.7% and 26.7%, respectively. These effective rates were lower than the statutory federal tax rate of 35%, due primarily to the effectsutilization of thecertain investment tax credits utilized and to tax-exempt investments and tax-exempt loans which reduced the Company'sCompany’s effective tax rate. In future periods, the Company expects its effective tax rate typically will be 20-25% of pre-tax net income, assuming it continues to maintain or increase its use of investment tax credits. The Company'sCompany’s effective tax rate may fluctuate as it is impacted by the level and timing of the Company'sCompany’s utilization of tax credits and the level of tax-exempt investments and loans and the overall level of pretaxpre-tax income. At this time,The Company’s effective tax rate was higher in 2016 and 2017 than it had typically been in prior years due to increased net income resulting from the gain on termination of the loss sharing agreements for the Inter Savings Bank FDIC-assisted transaction (2017) and gains on the sales of investments (2016).
Based upon current accounting guidance and the utilization and recognition of timing differences, the Company expectsrecorded a net decrease in income tax expense of approximately $250,000. This net decrease in income tax expense was comprised of a $2.1 million decrease from the adjustment of net deferred tax liabilities resulting from enactment of the TCJ Act, partially offset by the impacts of other tax planning strategies implemented. This impact on the Company’s net deferred tax liabilities, which includes, among other things, the timing of recognition of various revenues and expenses, was based upon a review and analysis of the Company’s net deferred tax liabilities at December 31, 2017, as well as expected adjustments to continue to utilize a significant amount ofvarious deferred tax creditsassets and deferred tax liabilities in 2015.
the three months and year ended December 31, 2017, including those accounted for in accumulated other comprehensive income.
Liquidity
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 December 31, 2015,2018, the Company had commitments of approximately $134.2$129.6 million to fund loan originations, $591.3 million$1.24 billion of unused lines of credit and unadvanced loans, and $32.1$28.9 million of outstanding letters of credit.
The following table summarizes the Company's fixed and determinable contractual obligations by payment date as of December 31, 2015.2018. Additional information regarding these contractual obligations is discussed further in Notes 8, 9, 10, 11, 12, 13, 16 and 19 of the accompanying audited financial statements, which are included in Item 8 of this Report.
| | | Payments Due In: | |
| | | One Year or Less | | | Over One to Five Years | | | Over Five Years | | | Total | |
| | | (In Thousands) | |
| | | | | | | | | | | | | |
| Deposits without a stated maturity | | $ | 2,133,596 | | | $ | — | | | $ | — | | | $ | 2,133,596 | |
| Time and brokered certificates of deposit | | | 1,215,822 | | | | 374,145 | | | | 1,444 | | | | 1,591,411 | |
| Federal Home Loan Bank advances | | | — | | | | — | | | | — | | | | — | |
| Short-term borrowings | | | 297,978 | | | | — | | | | — | | | | 297,978 | |
| Subordinated debentures | | | — | | | | — | | | | 25,774 | | | | 25,774 | |
| Subordinated notes | | | — | | | | — | | | | 73,842 | | | | 73,842 | |
| Operating leases | | | 958 | | | | 2,483 | | | | 837 | | | | 4,278 | |
| Dividends declared but not paid | | | 4,528 | | | | — | | | | — | | | | 4,528 | |
| | | | | | | | | | | | | | | | | |
| | | $ | 3,652,882 | | | $ | 376,628 | | | $ | 101,897 | | | $ | 4,131,407 | |
| | | Payments Due In: | |
| | | One Year or Less | | | Over One to Five Years | | | Over Five Years | | | Total | |
| | | (In Thousands) | |
| | | | | | | | | | | | | |
| Deposits without a stated maturity | | $ | 1,980,479 | | | $ | — | | | $ | — | | | $ | 1,980,479 | |
| Time and brokered certificates of deposit | | | 929,469 | | | | 353,940 | | | | 4,738 | | | | 1,288,147 | |
| Federal Home Loan Bank advances | | | 232,111 | | | | 30,935 | | | | 500 | | | | 263,546 | |
| Short-term borrowings | | | 117,477 | | | | — | | | | — | | | | 117,477 | |
| Subordinated debentures | | | — | | | | — | | | | 25,774 | | | | 25,774 | |
| Operating leases | | | 936 | | | | 2,100 | | | | 215 | | | | 3,251 | |
| Dividends declared but not paid | | | 3,055 | | | | — | | | | — | | | | 3,055 | |
| | | | | | | | | | | | | | | | | |
| | | $ | 3,263,527 | | | $ | 386,975 | | | $ | 31,227 | | | $ | 3,681,729 | |
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 December 31, 20152018 and 2014,2017, the Company had these available secured lines and on-balance sheet liquidity:
| | December 31, 20152018 | | December 31, 20142017 |
| Federal Home Loan Bank line | $505.5666.8 million | | $395.3570.5 million |
| Federal Reserve Bank line | 633.7460.7 million | | 563.2528.9 million |
Interest-Bearing and Non-Interest-Bearing Deposits | 199.2202.7 million | | 218.6242.3 million |
| Unpledged Securities | 59.887.1 million | | 63.746.4 million |
Statements of Cash Flows. During the years ended December 31, 2015, 20142018, 2017 and 2013,2016, the Company had positive cash flows from operating activities. The Company experienced negative cash flows from investing activities during the yearyears ended December 31, 2015,2018 and 2016 and positive cash flows from investing activities during the yearsyear ended December 31, 2014 and 2013.2017. The Company experienced positive cash flows from financing activities during the yearyears ended December 31, 2015,2018 and 2016 and negative cash flows from financing activities during the yearsyear ended December 31, 2014 and 2013.2017.
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, realized gains on the sale of investment securities and loans, depreciation and amortization, gains or losses on the purchasetermination of additional business unitsloss sharing agreements 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 sources of cash flows from operating activities. Operating activities provided cash flows of $71.4$94.2 million, $67.4$62.8 million and $93.9$80.6 million during the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively.
During the yearyears ended December 31, 2015,2018 and 2016, investing activities used cash of $196.2$381.3 million and $198.7 million, respectively, primarily due to the net increases and purchases of loans and investment securities and the cash paid for the sale of business units (deposits and branches in 2018), partially offset by the net repayment or sales of investment securities.securities (2016) and cash received from the purchase of business units (deposits and branches in 2016). During the yearsyear ended December 31, 2014 and 2013,2017, investing activities provided cash of $35.9 million and $124.7$81.4 million, primarily due to the cash received from the FDIC-assisted acquisitions (2014)FDIC loss sharing termination reimbursement, proceeds from the sale of other real estate owned and the net repayment or sales of investment securities, partially offset by increases in loans.securities.
Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows are primarily due to changes in deposits after interest credited, changes in FHLBank advances, changes in short-term borrowings, and structured repurchase agreements, dividend payments to stockholders and redemptionissuance of preferred stock (2015)subordinated notes (2016). Financing activities provided cash flows of $105.3$247.6 million and $198.7 million during the yearyears ended December 31, 2015,2018 and 2016, respectively, primarily due to increases in customer deposit balances, partially offset by net increases or decreases in various borrowings and issuance of subordinated notes (2016), partially offset by dividend payments to stockholders and redemption of preferred stock.stockholders. Financing activities used cash flows of $112.6 million and $394.8$181.7 million during the yearsyear ended December 31, 2014 and 2013, respectively,2017, primarily due to reduction of customer certificate of deposit balances, net increases or decreases in various 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.
As of December 31, 2015,2018, total stockholders'stockholders’ equity and common stockholders'stockholders’ equity were $398.2each $532.0 million, or 9.7%11.4% of total assets, equivalent to a book value of $28.67$37.59 per common share. AtAs of December 31, 2014, the Company's2017, total stockholders'stockholders’ equity was $419.7and common stockholders’ equity were each $471.7 million, or 10.6% of total assets. At December 31, 2014, common stockholders' equity was $361.8 million, or 9.2%10.7% of total assets, equivalent to a book value of $26.30$33.48 per common share.
At December 31, 2015,2018, the Company'sCompany’s tangible common equity to totaltangible assets ratio was 9.6%11.2% as compared to 9.0%10.5% at December 31, 2014. The Company's tangible common equity to total risk-weighted assets ratio was 10.9% at December 31, 2015, compared to 10.9% at December 31, 2014.2017.
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, which became effective January 1, 2015, banks must have a minimum common equity Tier 1 capital ratio of 4.50% (new requirement), a minimum Tier 1 risk-based capital ratio of 6.00% (increased from 4.00%), 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% (new requirement), a minimum Tier 1 risk-based capital ratio of 8.00% (increased from 6.00%), a minimum total risk-based
capital ratio of 10.00%, and a minimum Tier 1 leverage ratio of 5.00%. On December 31, 2015,2018, the Bank's common equity Tier 1 capital ratio was 11.0%12.4%, its Tier 1 capital ratio was 11.0%12.4%, its total capital ratio was 12.1%13.3% and its Tier 1 leverage ratio was 9.8%12.2%. As a result, as of December 31, 2015,2018, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such.
Through On December 31 2014, guidelines required banks to have a minimum Tier 1 risk-based capital ratio, as defined, of 4.00%, a minimum total risk-based capital ratio of 8.00%, and a minimum 4.00% Tier 1 leverage ratio. On December 31, 2014,2017, the Bank's common equity Tier 1 risk-based capital ratio was 11.4%12.3%, total risk-basedits Tier 1 capital ratio was 12.6%12.3%, its total capital ratio was 13.2% and theits Tier 1 leverage ratio was 9.5%11.7%. As a result, as of December 31 2014,, 2017, the Bank was "well capitalized"well capitalized, with capital ratios in excess of those required to qualify as defined by the Federal banking agencies' capital-related regulations then in effect.such.
The FRB has established capital regulations for bank holding companies that generally parallel the capital regulations for banks. On December 31, 2015,2018, the Company's common equity Tier 1 capital ratio was 10.8%11.4%, its Tier 1 capital ratio was 11.5%11.9%, its total capital ratio was 12.6%14.4% and its Tier 1 leverage ratio was 10.2%11.7%. 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 December 31, 2015,2018, 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.
On December 31, 2014,In addition to the Company'sminimum common equity Tier 1 capital ratio, Tier 1 risk-based capital ratio was 13.3%,and total risk-based capital ratio, was 14.5%the Company and the Bank have to maintain a capital conservation buffer consisting of additional common equity Tier 1 leverage ratiocapital 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 11.1%. Asrequired, which amount increased by an additional 0.625% as of December 31, 2014,January 1, 2017, and increased an equal amount each year until the Companybuffer requirement of greater than 2.5% of risk-weighted assets was "well capitalized" under the capital ratios described above.fully implemented on January 1, 2019.
On August 18, 2011, the Company entered into a Small Business Lending Fund-Securities Purchase Agreement ("(“Purchase Agreement"Agreement”) with the Secretary of the Treasury, pursuant to which the Company sold 57,943 shares of the Company'sCompany’s Senior Non-Cumulative Perpetual Preferred Stock, Series A (the "SBLF“SBLF Preferred Stock"Stock”) to the Secretary of the Treasury for a purchase price of $57.9 million. The SBLF Preferred Stock was issued pursuant to Treasury'sTreasury’s SBLF program, a $30 billion fund established under the Small Business Jobs Act of 2010 that was created to encourage lending to small businesses by providing Tier 1 capital to qualified community banks and holding companies with assets of less than $10 billion. As required by the SBLF Purchase Agreement, the proceeds from the sale of the SBLF Preferred Stock were used in connection with the redemption of all 58,000 shares of the Company'sCompany’s preferred stock, issued to Treasury in December 2008 pursuant to Treasury'sTreasury’s TARP Capital Purchase Program (the "CPP Preferred Stock"“CPP”). The shares of CPP Preferred Stock were redeemed at their liquidation amount of $1,000 per share plus the accrued but unpaid dividends to the redemption date.
The SBLF Preferred Stock qualified as Tier 1 capital. The holders of SBLF Preferred Stock were entitled to receive noncumulative dividends, payable quarterly, on each January 1, April 1, July 1 and October 1. The dividend rate, as a percentage of the liquidation amount, could fluctuate between one percent (1%) and five percent (5%) per annum on a quarterly basis during the first 10 quarters during which the SBLF Preferred Stock was outstanding, based upon changes in the level of "Qualified“Qualified Small Business Lending"Lending” or "QSBL"“QSBL” (as defined in the SBLF Purchase Agreement) by the Bank over the adjusted baseline level calculated under the terms of the SBLF Preferred Stock $(249.7 million). Based upon the increase in the Bank'sBank’s level of QSBL over the adjusted baseline level, the dividend rate had been 1.0%. For the tenth calendar quarter through four and one-half years after issuance, the dividend rate was fixed at between one percent (1%) and seven percent (7%) based upon the level of qualifying loans. The Company's dividend rate was 1.0% during 2015, and was expected to remain at 1% until four and one half years after the issuance, which is March 2016. After four and one half years from issuance, the dividend rate would have increased to 9% (including a quarterly lending incentive fee of 0.5%).
On December 15, 2015, the Company (with the approval of its federal banking regulator) redeemed all 57,943 shares of the SBLF Preferred Stock at their liquidation amount of $1,000 per share plus accrued but unpaid dividends to the redemption date. The redemption of the SBLF Preferred Stock was completed using internally available funds.
Dividends. During the year ended December 31, 2015,2018, the Company declared common stock cash dividends of $0.86$1.20 per share (26.2%(25.5% of net income per common share) and paid common stock cash dividends of $0.84$1.12 per share. During the year ended December 31, 2014,2017, the Company declared common stock cash dividends of $0.80$0.94 per share (25.8% of net income per common share) and paid common stock cash dividends of $0.78$0.92 per share. The Board of Directors meets regularly to consider the level and the timing of dividend payments. The $0.22$0.32 per share dividend declared but unpaid as of December 31, 2015,2018, was paid to stockholders onin January 11, 2016.2019. In addition, the Company paid preferred dividends as described below. below in years prior to 2016.
TheWhile the SBLF Preferred Stock was outstanding, the terms of the SBLF Preferred Stock limited the ability of the Company to pay dividends and repurchase shares of common stock. Under the terms of the SBLF Preferred Stock, no repurchases could be effected, and no dividends could be declared or paid on preferred shares ranking pari passu with the SBLF Preferred Stock, junior preferred shares, or other junior securities (including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the SBLF Preferred Stock, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.
Under the terms of the SBLF Preferred Stock, the Company could only declare and pay a dividend on the common stock or other stock junior to the SBLF Preferred Stock, or repurchase shares of any such class or series of stock, if, after payment of such dividend, or after giving effect to such repurchase, (i) the dollar amount of the Company'sCompany’s Tier 1 Capital would be at least equal to the "Tier“Tier 1
Dividend Threshold"Threshold” and (ii) full dividends on all outstanding shares of SBLF Preferred Stock for the most recently completed dividend period have been or are contemporaneously declared and paid. We satisfied this condition through the redemption date of the SBLF Preferred Stock.
Common Stock Repurchases and Issuances. The Company has been in various buy-back programs since May 1990. Our ability to repurchase common stock was limited, but allowed, under the terms of the SBLF preferred stockPreferred Stock as noted above, under "-Dividends"“-Dividends” and was previously generally precluded due to our participation in the CPP from December 2008 through August 2011. During the year ended December 31, 2015,2018, the Company repurchased 17,542 shares of its common stock at an average price of $51.52 per share. During the year ended December 31, 2017, the Company did not repurchase any shares of its common stock. During the year ended December 31, 2014, the Company repurchased 18,000 shares of its common stock at an average price of $28.45 per share. During the years ended December 31, 20152018 and 2014,2017, the Company issued 133,12681,207 shares of stock at an average price of $25.26$27.60 per share and 99,097119,147 shares of stock at an average price of $27.45$27.35 per share, respectively, to cover stock option exercises.
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'sCompany’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 these measures excluding the impact of intangible assets provides useful supplemental information that is helpful in understanding our financial condition and results of operations, as they provide a method to assess management's success in utilizing our tangible capital as well as our capital strength. Management also believes that providing measures that exclude 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 these are standard financial measures used in the banking industry to evaluate performance.
These non-GAAP financial measures are supplemental and are 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
| | | December 31, | | | December 31, | | | December 31, | | | December 31, | | | December 31, | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | (Dollars in thousands) | |
| | | | | | | | | | | | | | | | |
| Common equity at period end | | $ | 531,977 | | | $ | 471,662 | | | $ | 429,806 | | | $ | 398,227 | | | $ | 361,802 | |
| Less: Intangible assets at period end | | | 9,288 | | | | 10,850 | | | | 12,500 | | | | 5,758 | | | | 7,508 | |
| Tangible common equity at period end (a) | | $ | 522,689 | | | $ | 460,812 | | | $ | 417,306 | | | $ | 392,469 | | | $ | 354,294 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total assets at period end | | $ | 4,676,200 | | | $ | 4,414,521 | | | $ | 4,550,663 | | | $ | 4,104,189 | | | $ | 3,951,334 | |
| Less: Intangible assets at period end | | | 9,288 | | | | 10,850 | | | | 12,500 | | | | 5,758 | | | | 7,508 | |
| Tangible assets at period end (b) | | $ | 4,666,912 | | | $ | 4,403,671 | | | $ | 4,538,163 | | | $ | 4,098,431 | | | $ | 3,943,826 | |
| | | | | | | | | | | | | | | | | | | | | |
| Tangible common equity to tangible assets (a) / (b) | | | 11.20 | % | | | 10.46 | % | | | 9.20 | % | | | 9.58 | % | | | 8.98 | % |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and Liability Management and Market Risk
A principal operating objective of the Company is to produce stable earnings by achieving a favorable interest rate spread that can be sustained during fluctuations in prevailing interest rates. The Company has sought to reduce its exposure to adverse changes in interest rates by attempting to achieve a closer match between the periods in which its interest-bearing liabilities and interest-earning assets can be expected to reprice through the origination of adjustable-rate mortgages and loans with shorter terms to maturity and the purchase of other shorter term interest-earning assets.
Our Risk When Interest Rates Change
The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
How We Measure the Risk to Us Associated with Interest Rate Changes
In an attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor Great Southern's interest rate risk. In monitoring interest rate risk we regularly analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to actual or potential changes in market interest rates.
The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread that can be sustained despite fluctuations in prevailing interest rates. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference, or the interest rate repricing "gap," provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities repricing during the same period, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets during the same period. Generally, during a period of rising interest rates, a negative gap within shorter repricing periods would adversely affect net interest income, while a positive gap within shorter repricing periods would result in an increase in net interest income. During a period of falling interest rates, the opposite would be true. As of December 31, 2015,2018, Great Southern's internal interest rate risk models indicate that, generally, rising interest rates are expected to have a positive impact on the Company's net interest income, while declining interest rates would have a negative impact on net interest income. We model various interest rate scenarios for rising and falling rates, including both parallel and non-parallel shifts in rates. The results of our modeling indicate that net interest income is not likely to be materially affected either positively or negatively in the first twelve months following a rate change, regardless of any changes in interest rates, because our portfolios are relatively well matched in a twelve-month horizon. The effects of interest rate changes, if any, are expected to be more impacting to net interest income in the 12 to 36 months following a rate change. In
The current level and shape of the interest rate yield curve poses challenges for interest rate risk management. Prior to its increase of 0.25% on December 16, 2015, the FRB had last changed interest rates on December 16, 2008. This was the first rate increase since June 2014, $130 million29, 2006. The FRB has now also implemented rate increases of fixed rate borrowings were repaid. Excess liquidity and proceeds from the sale of certain investment securities were used to fund these repayments. The results of our net interest income modeling were not materially affected by these transactions. As0.25% on eight different occasions beginning December 14, 2016, with the Federal Funds rate is now very low, the Company's interest rate floors have been reached on mostat 2.50%. A substantial portion of its "prime rate" loans.
As discussed under "General-Net Interest Income and Interest Rate Risk Management,"Great Southern's loan portfolio ($1.46 billion at December 31, 2015 and 2014, there were $424 million and $484 million, respectively, of adjustable rate loans which were2018) is tied to a national prime ratethe one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days after December 31, 2018. Of these loans, $1.34 billion as of interest whichDecember 31, 2018 had interest rate floors. In addition, Great Southern had elected to leave its "Great Southern Prime Rate"also has a portfolio of loans ($257 million at 5.00% for those loans that are indexed to "Great Southern Prime" rather than a national prime rate of interest. This rate increased to 5.25% in December 2015. At December 31, 2015 and 2014, there were $114 million and $200 million, respectively, of loans indexed to "Great Southern Prime." While these interest rate floors and,2018) which are tied to a lesser extent, the utilization"prime rate" of the "Great Southern Prime" rate have helped keep the rate on our loan portfolio higher in this very low interest rate environment, theyand will also reduce the positive effectadjust immediately with changes to our loan rates when market interest rates, specifically the "prime rate," begin to increase. The interest rate on these loans will not increase until the loan floors are reached. Also, a significant portionrate" of our retail certificates of deposit mature in the next twelve months and we expect that they generally will be replaced with new certificates of deposit at similar or slightly higher interest rates to those that are maturing.interest.
Interest rate risk exposure estimates (the sensitivity gap) are not exact measures of an institution's actual interest rate risk. They are only indicators of interest rate risk exposure produced in a simplified modeling environment designed to allow management to gauge the Bank's sensitivity to changes in interest rates. They do not necessarily indicate the impact of general interest rate movements on the Bank's net interest income because the repricing of certain categories of assets and liabilities is subject to competitive and other factors beyond the Bank's control. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated
period may in fact mature or reprice at different times and in different amounts and cause a change, which potentially could be material, in the Bank's interest rate risk.
In order to minimize the potential for adverse effects of material and prolonged increases and decreases in interest rates on Great Southern's results of operations, Great Southern has adopted asset and liability management policies to better match the maturities and repricing terms of Great Southern's interest-earning assets and interest-bearing liabilities. Management recommends and the Board of
Directors sets the asset and liability policies of Great Southern which are implemented by the Asset and Liability Committee. The Asset and Liability Committee is chaired by the Chief Financial Officer and is comprised of members of Great Southern's senior management. The purpose of the Asset and Liability Committee is to communicate, coordinate and control asset/liability management consistent with Great Southern's business plan and board-approved policies. The Asset and Liability Committee establishes and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals. The Asset and Liability Committee meets on a monthly basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital positions and anticipated changes in the volume and mix of assets and liabilities. At each meeting, the Asset and Liability Committee recommends appropriate strategy changes based on this review. The Chief Financial Officer or his designee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Board of Directors at their monthly meetings.
In order to manage its assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability and capital targets, Great Southern has focused its strategies on originating adjustable rate loans or loans with fixed rates that mature in less than five years, and managing its deposits and borrowings to establish stable relationships with both retail customers and wholesale funding sources.
At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, we may determine to increase our interest rate risk position somewhat in order to maintain or increase our net interest margin.
The Asset and Liability Committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and market value of portfolio equity, which is defined as the net present value of an institution's existing assets, liabilities and off-balance sheet instruments, and evaluating such impacts against the maximum potential changes in net interest income and market value of portfolio equity that are authorized by the Board of Directors of Great Southern.
In the normal course of business, the Company may use derivative financial instruments (primarily interest rate swaps) from time to time to assist in its interest rate risk management. In the fourth quarter of 2011, the Company began executing interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. These interest rate derivatives result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company'sCompany’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.
In 2013, the Company entered into twoan interest rate cap agreementsagreement related to its floating rate debt associated with its trust preferred securities. The agreements provideagreement provided that the counterparty willwould reimburse the Company if interest rates rise above a certain threshold, thus creating a cap on the effective interest rate paid by the Company. These agreements areThis agreement was classified as a hedging instruments,instrument, and the effective portion of the gain or loss on the derivative was reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The interest rate cap related to the $25.0 million trust preferred security terminated per its contractual terms in the third quarter of 2017.
In October 2018, the Company entered into an interest rate swap transaction as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans. The notional amount of the swap is $400 million with a termination date of October 6, 2025. Under the terms of the swap, the Company will receive a fixed rate of interest of 3.018% and will pay a floating rate of interest equal to one-month USD-LIBOR. The floating rate will be reset monthly and net settlements of interest due to/from the counterparty will also occur monthly. The floating rate of interest was 2.383% as of December 31, 2018. Therefore, in the near term, the Company will receive net interest settlements which will be recorded as loan interest income, to the extent that the fixed rate of interest continues to exceed one-month USD-LIBOR. If USD-LIBOR exceeds the fixed rate of interest in future periods, the Company will be required to pay net settlements to the counterparty and will record those net payments as a reduction of interest income on loans. The effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affectsaffected earnings. During 2015,Gains and losses on the Company redeemed $5.0 millionderivative representing either hedge ineffectiveness or hedge components excluded from the assessment of the total $30.0 million of its trust preferred securities. The interest rate cap related to this $5.0 million trust preferred security was terminated and the remaining cost of this interest rate cap was amortized to interest expenseeffectiveness are recognized in 2015.current earnings.
The Company'sCompany’s interest rate derivatives and hedging activities are discussed further in Note 17 of the Notes to the Consolidated Financial Statements,accompanying audited financial statements, which are included in Item 8 of this Report.
The following tables illustrate the expected maturities and repricing, respectively, of the Bank's financial instruments at December 31, 2015.2018. These schedules do not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. The tables are based on information prepared in accordance with generally accepted accounting principles.
Maturities
| | | December 31, | | | | | | | | | | | | December 31, | | | | | | | | | December 31, | |
| | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | Thereafter | | | Total | | | 2015 Fair Value | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | Thereafter | | | Total | | | 2018 Fair Value | |
| | | (Dollars In Thousands) | | | (Dollars In Thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing deposits | | $ | 83,985 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 83,985 | | | $ | 83,985 | | | $ | 92,634 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 92,634 | | | $ | 92,634 | |
| Weighted average rate | | | 0.25 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.25 | % | | | | | | | 2.50 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2.50 | % | | | | |
| Available-for-sale other securities | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 3,830 | | | $ | 3,830 | | | $ | 3,830 | | |
| Weighted average rate | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | |
| Available-for-sale debt securities(1) | | $ | 28,005 | | | $ | 12,068 | | | $ | 5,342 | | | $ | 15,218 | | | $ | 18,645 | | | $ | 179,748 | | | $ | 259,026 | | | $ | 259,026 | | | $ | 15,847 | | | $ | 17,571 | | | $ | 6,012 | | | $ | 1,710 | | | $ | 13,227 | | | $ | 189,601 | | | $ | 243,968 | | | $ | 243,968 | |
| Weighted average rate | | | 3.19 | % | | | 6.26 | % | | | 5.39 | % | | | 5.68 | % | | | 5.95 | % | | | 2.37 | % | | | 3.13 | % | | | | | |
| Held-to-maturity securities | | | — | | | | — | | | $ | 353 | | | | — | | | | — | | | | — | | | $ | 353 | | | $ | 384 | | |
| Weighted average rate | | | — | | | | — | | | | 7.36 | % | | | — | | | | — | | | | — | | | | 7.36 | % | | | | | | | 4.96 | % | | | 5.12 | % | | | 4.86 | % | | | 5.50 | % | | | 3.09 | % | | | 2.94 | % | | | 3.29 | % | | | | |
| Adjustable rate loans | | $ | 346,940 | | | $ | 286,020 | | | $ | 256,450 | | | $ | 122,046 | | | $ | 137,212 | | | $ | 522,424 | | | $ | 1,671,092 | | | $ | 1,671,358 | | | $ | 443,238 | | | $ | 330,228 | | | $ | 467,422 | | | $ | 299,033 | | | $ | 218,671 | | | $ | 497,982 | | | $ | 2,256,574 | | | $ | 2,189,440 | |
| Weighted average rate | | | 4.28 | % | | | 3.76 | % | | | 4.03 | % | | | 4.19 | % | | | 4.25 | % | | | 4.22 | % | | | 3.85 | % | | | | | | | 5.44 | % | | | 5.52 | % | | | 5.29 | % | | | 5.37 | % | | | 5.31 | % | | | 4.15 | % | | | 5.12 | % | | | | |
| Fixed rate loans | | $ | 240,699 | | | $ | 231,031 | | | $ | 279,110 | | | $ | 331,689 | | | $ | 292,824 | | | $ | 393,416 | | | $ | 1,768,769 | | | $ | 1,783,891 | | | $ | 279,268 | | | $ | 307,867 | | | $ | 375,550 | | | $ | 251,209 | | | $ | 249,104 | | | $ | 333,688 | | | $ | 1,796,686 | | | $ | 1,766,346 | |
| Weighted average rate | | | 4.85 | % | | | 4.77 | % | | | 4.83 | % | | | 4.91 | % | | | 5.16 | % | | | 6.35 | % | | | 5.23 | % | | | | | | | 4.45 | % | | | 4.72 | % | | | 5.06 | % | | | 5.73 | % | | | 5.48 | % | | | 5.31 | % | | | 5.11 | % | | | | |
| Federal Home Loan Bank stock | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 15,303 | | | $ | 15,303 | | | $ | 15,303 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 12,438 | | | $ | 12,438 | | | $ | 12,438 | |
| Weighted average rate | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2.57 | % | | | 2.57 | % | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4.68 | % | | | 4.68 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total financial assets | | $ | 699,629 | | | $ | 529,119 | | | $ | 541,255 | | | $ | 468,953 | | | $ | 448,681 | | | $ | 1,114,721 | | | $ | 3,802,358 | | | | | | | $ | 830,987 | | | $ | 655,666 | | | $ | 848,984 | | | $ | 551,952 | | | $ | 481,002 | | | $ | 1,033,709 | | | $ | 4,402,300 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Time deposits | | $ | 929,469 | | | $ | 265,400 | | | $ | 60,360 | | | $ | 12,536 | | | $ | 15,644 | | | $ | 4,738 | | | $ | 1,288,147 | | | $ | 1,290,839 | | | $ | 1, 215,822 | | | $ | 259,704 | | | $ | 73,724 | | | $ | 26,012 | | | $ | 14,705 | | | $ | 1,444 | | | $ | 1,591,411 | | | $ | 1,584,303 | |
| Weighted average rate | | | 0.77 | % | | | 1.13 | % | | | 1.42 | % | | | 1.37 | % | | | 1.79 | % | | | 2.40 | % | | | 0.90 | % | | | | | | | 1.92 | % | | | 2.22 | % | | | 2.20 | % | | | 1.95 | % | | | 2.18 | % | | | 1.77 | % | | | 1.98 | % | | | | |
| Interest-bearing demand | | $ | 1,408,850 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 1,408,850 | | | $ | 1,408,850 | | | $ | 1,472,535 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 1,472,535 | | | $ | 1,472,535 | |
| Weighted average rate | | | 0.24 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.24 | % | | | | | | | 0.46 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.46 | % | | | | |
| Non-interest-bearing demand | | $ | 571,629 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 571,629 | | | $ | 571,629 | | | $ | 661,061 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 661,061 | | | $ | 661,061 | |
| Weighted average rate | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | |
| Federal Home Loan Bank | | $ | 232,111 | | | $ | 30,826 | | | $ | 81 | | | $ | 28 | | | | — | | | $ | 500 | | | $ | 263,546 | | | $ | 264,331 | | |
| Short-term borrowings | | | $ | 297,978 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 297,978 | | | $ | 297,978 | |
| Weighted average rate | | | 0.42 | % | | | 3.26 | % | | | 5.06 | % | | | 5.06 | % | | | — | | | | 5.54 | % | | | 0.75 | % | | | | | | | 1.68 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1.68 | % | | | | |
| Short-term borrowings | | $ | 117,477 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 117,477 | | | $ | 117,477 | | |
| Subordinated notes | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 75,000 | | | $ | 75,000 | | | $ | 75,188 | |
| Weighted average rate | | | 0.04 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.04 | % | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5.55 | % | | | 5.55 | % | | | | |
| Subordinated debentures | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 25,774 | | | $ | 25,774 | | | $ | 25,774 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 25,774 | | | $ | 25,774 | | | $ | 25,774 | |
| Weighted average rate | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1.93 | % | | | 1.93 | % | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4.14 | % | | | 4.14 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total financial liabilities | | $ | 3,259,536 | | | $ | 296,226 | | | $ | 60,441 | | | $ | 12,564 | | | $ | 15,644 | | | $ | 31,012 | | | $ | 3,675,423 | | | | | | | $ | 3,647,396 | | | $ | 259,704 | | | $ | 73,724 | | | $ | 26,012 | | | $ | 14,705 | | | $ | 102,218 | | | $ | 4,123,759 | | | | | |
| _______________ |
| (1) | Available-for-sale debt securities include approximately $161.2$192.5 million of mortgage-backed securities which pay interest and principal monthly to the Company. Of this total, $143.1$84.0 million represents securities that have variable rates of interest after a fixed interest period. These securities will experience rate changes at varying times over the next ten years. This table does not show the effect of these monthly repayments of principal or rate changes. |
Repricing
| | | December 31, | | | | | | | | | | | | December 31, | | | | | | | | | December 31, | |
| | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | Thereafter | | | Total | | | 2015 Fair Value | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | Thereafter | | | Total | | | 2018 Fair Value | |
| | | (Dollars In Thousands) | | | (Dollars In Thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing deposits | | $ | 83,985 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 83,985 | | | $ | 83,985 | | | $ | 92,634 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 92,634 | | | $ | 92,634 | |
| Weighted average rate | | | 0.25 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.25 | % | | | | | | | 2.50 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2.50 | % | | | | |
| Available-for-sale other securities | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 3,830 | | | $ | 3,830 | | | $ | 3,830 | | |
| Weighted average rate | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | |
| Available-for-sale debt securities(1) | | $ | 121,062 | | | $ | 20,274 | | | $ | 10,351 | | | $ | 33,055 | | | $ | 18,645 | | | $ | 55,639 | | | $ | 259,026 | | | $ | 259,026 | | | $ | 43,202 | | | $ | 17,571 | | | $ | 12,757 | | | $ | 24,406 | | | $ | 36,022 | | | $ | 110,010 | | | $ | 243,968 | | | $ | 243,968 | |
| Weighted average rate | | | 2.13 | % | | | 4.45 | % | | | 4.54 | % | | | 3.60 | % | | | 5.95 | % | | | 3.43 | % | | | 3.13 | % | | | | | |
| Held-to-maturity securities | | | — | | | | — | | | | 353 | | | $ | — | | | | — | | | | — | | | $ | 353 | | | $ | 384 | | |
| Weighted average rate | | | — | | | | — | | | | 7.36 | % | | | — | | | | — | | | | — | | | | 7.36 | % | | | | | | | 3.68 | % | | | 5.12 | % | | | 3.35 | % | | | 2.47 | % | | | 2.43 | % | | | 3.33 | % | | | 3.29 | % | | | | |
| Adjustable rate loans | | $ | 1,510,178 | | | $ | 23,624 | | | $ | 40,942 | | | $ | 50,291 | | | $ | 36,485 | | | $ | 9,572 | | | $ | 1,671,092 | | | $ | 1,671,358 | | | $ | 1,983,704 | | | $ | 87,167 | | | $ | 43,032 | | | $ | 11,740 | | | $ | 32,874 | | | $ | 98,057 | | | $ | 2,256,574 | | | $ | 2,189,440 | |
| Weighted average rate | | | 3.83 | % | | | 3.67 | % | | | 4.03 | % | | | 4.18 | % | | | 4.26 | % | | | 4.23 | % | | | 3.85 | % | | | | | | | 5.28 | % | | | 3.80 | % | | | 4.03 | % | | | 3.70 | % | | | 4.41 | % | | | 3.95 | % | | | 5.12 | % | | | | |
| Fixed rate loans | | $ | 240,699 | | | $ | 231,031 | | | $ | 279,110 | | | $ | 331,689 | | | $ | 292,824 | | | $ | 393,416 | | | $ | 1,768,769 | | | $ | 1,783,891 | | | $ | 279,268 | | | $ | 307,867 | | | $ | 375,550 | | | $ | 251,209 | | | $ | 249,104 | | | $ | 333,688 | | | $ | 1,796,686 | | | $ | 1,766,346 | |
| Weighted average rate | | | 4.85 | % | | | 4.77 | % | | | 4.83 | % | | | 4.91 | % | | | 5.16 | % | | | 6.35 | % | | | 5.23 | % | | | | | | | 4.45 | % | | | 4.72 | % | | | 5.06 | % | | | 5.73 | % | | | 5.48 | % | | | 5.31 | % | | | 5.11 | % | | | | |
| Federal Home Loan Bank stock | | $ | 15,303 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 15,303 | | | $ | 15,303 | | | $ | 12,438 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 12,438 | | | $ | 12,438 | |
| Weighted average rate | | | 2.57 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2.57 | % | | | | | | | 4.68 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4.68 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total financial assets | | $ | 1,971,227 | | | $ | 274,929 | | | $ | 330,756 | | | $ | 415,035 | | | $ | 347,954 | | | $ | 462,457 | | | $ | 3,802,358 | | | | | | | $ | 2,411,246 | | | $ | 412,605 | | | $ | 431,339 | | | $ | 287,355 | | | $ | 318,000 | | | $ | 541,755 | | | $ | 4,402,300 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Time deposits | | $ | 929,469 | | | $ | 265,400 | | | $ | 60,360 | | | $ | 12,536 | | | $ | 15,644 | | | $ | 4,738 | | | $ | 1,288,147 | | | $ | 1,290,839 | | | $ | 1,215,822 | | | $ | 259,704 | | | $ | 73,724 | | | $ | 26,012 | | | $ | 14,705 | | | $ | 1,444 | | | $ | 1,591,411 | | | $ | 1,584,303 | |
| Weighted average rate | | | 0.77 | % | | | 1.13 | % | | | 1.42 | % | | | 1.37 | % | | | 1.79 | % | | | 2.40 | % | | | 0.90 | % | | | | | | | 1.92 | % | | | 2.22 | % | | | 2.20 | % | | | 1.93 | % | | | 2.18 | % | | | 1.77 | % | | | 1.98 | % | | | | |
| Interest-bearing demand | | $ | 1,408,850 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 1,408,850 | | | $ | 1,408,850 | | | $ | 1,472,535 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 1,472,535 | | | $ | 1,472,535 | |
| Weighted average rate | | | 0.24 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.24 | % | | | | | | | 0.46 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.46 | % | | | | |
| Non-interest-bearing demand(2) | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 571,629 | | | $ | 571,629 | | | $ | 571,629 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 661,061 | | | $ | 661,061 | | | $ | 661,061 | |
| Weighted average rate | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | |
| Federal Home Loan Bank advances | | $ | 262,111 | | | $ | 826 | | | $ | 81 | | | $ | 28 | | | $ | — | | | $ | 500 | | | $ | 263,546 | | | $ | 264,331 | | |
| Short-term borrowings | | | $ | 297,978 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 297,978 | | | $ | 297,978 | |
| Weighted average rate | | | 0.74 | % | | | 5.36 | % | | | 5.06 | % | | | 5.06 | % | | | — | | | | 5.54 | % | | | 0.76 | % | | | | | | | 1.68 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1.68 | % | | | | |
| Short-term borrowings | | $ | 117,477 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 117,477 | | | $ | 117,477 | | |
| Subordinated notes | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 75,000 | | | $ | 75,000 | | | $ | 75,188 | |
| Weighted average rate | | | 0.04 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.04 | % | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5.55 | % | | | 5.55 | % | | | | |
| Subordinated debentures | | $ | 25,774 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 25,774 | | | $ | 25,774 | | | $ | 25,774 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 25,774 | | | $ | 25,774 | |
| Weighted average rate | | | 1.93 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1.93 | % | | | | | | | 4.14 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4.14 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total financial liabilities | | $ | 2,743,681 | | | $ | 266,226 | | | $ | 60,441 | | | $ | 12,564 | | | $ | 15,644 | | | $ | 576,867 | | | $ | 3,675,423 | | | | | | | $ | 3,012,109 | | | $ | 259,704 | | | $ | 73,724 | | | $ | 26,012 | | | $ | 14,705 | | | $ | 737,505 | | | $ | 4,123,759 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Periodic repricing GAP | | $ | (772,454 | ) | | $ | 8,703 | | | $ | 270,315 | | | $ | 402,471 | | | $ | 332,310 | | | $ | (114,410 | ) | | $ | 126,935 | | | | | | | $ | (600,863 | ) | | $ | 152,901 | | | $ | 357,615 | | | $ | 261,343 | | | $ | 303,295 | | | $ | (195,750 | ) | | $ | 278,541 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative repricing GAP | | $ | (772,454 | ) | | $ | (763,751 | ) | | $ | (493,436 | ) | | $ | (90,965 | ) | | $ | 241,345 | | | $ | 126,935 | | | | | | | | | | | $ | (600,863 | ) | | $ | (447,962 | ) | | $ | (90,347 | ) | | $ | 170,996 | | | $ | 474,291 | | | $ | 278,541 | | | | | | | | | |
| _______________ |
| (1) | Available-for-sale debt securities include approximately $161.2$192.5 million of mortgage-backed securities which pay interest and principal monthly to the Company. Of this total, $143.1$84.0 million represents securities that have variable rates of interest after a fixed interest period. These securities will experience rate changes at varying times over the next ten years. This table does not show the effect of these monthly repayments of principal or rate changes. |
| (2) | Non-interest-bearing demand is included in this table in the column labeled "Thereafter" since there is no interest rate related to these liabilities and therefore there is nothing to reprice. |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Great Southern Bancorp, Inc.
Springfield, Missouri
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Great Southern Bancorp, Inc. (the “Company”) as of December 31, 20152018 and 2014, and2017, the related consolidated statements of income, comprehensive income, stockholders'stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2015. The Company's management is responsible2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for theseeach of the years in the three-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial statements.reporting as of December 31, 2018, based on Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 7, 2019, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Great Southern Bancorp, Inc. as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Great Southern Bancorp, Inc.'s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 3, 2016, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
BKD, LLP
/s/ BKD, LLP
We have served as the Company’s auditor since 1975.
Springfield, Missouri
March 3, 2016
7, 2019
Consolidated Statements of Financial Condition
December 31, 20152018 and 20142017
(In Thousands, Except Per Share Data)
| | | 2018 | | | 2017 | |
| Assets | | | | | | |
| Cash | | $ | 110,108 | | | $ | 115,600 | |
| Interest-bearing deposits in other financial institutions | | | 92,634 | | | | 126,653 | |
| Cash and cash equivalents | | | 202,742 | | | | 242,253 | |
| Available-for-sale securities | | | 243,968 | | | | 179,179 | |
| Held-to-maturity securities | | | — | | | | 130 | |
| Mortgage loans held for sale | | | 1,650 | | | | 8,203 | |
Loans receivable, net of allowance for loan losses of $38,409 and $36,492 at December 31, 2018 and 2017, respectively | | | 3,989,001 | | | | 3,726,302 | |
| Interest receivable | | | 13,448 | | | | 12,338 | |
| Prepaid expenses and other assets | | | 55,336 | | | | 47,122 | |
| Other real estate owned and repossessions, net | | | 8,440 | | | | 22,002 | |
| Premises and equipment, net | | | 132,424 | | | | 138,018 | |
| Goodwill and other intangible assets | | | 9,288 | | | | 10,850 | |
| Federal Home Loan Bank stock | | | 12,438 | | | | 11,182 | |
| Current and deferred income taxes | | | 7,465 | | | | 16,942 | |
| Total assets | | $ | 4,676,200 | | | $ | 4,414,521 | |
| | | | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | | | |
| Liabilities | | | | | | | | |
| Deposits | | $ | 3,725,007 | | | $ | 3,597,144 | |
| Federal Home Loan Bank advances | | | — | | | | 127,500 | |
| Securities sold under reverse repurchase agreements with customers | | | 105,253 | | | | 80,531 | |
Short-term borrowings and other interest-bearing liabilities
| | | 192,725 | | | | 16,604 | |
| Subordinated debentures issued to capital trust | | | 25,774 | | | | 25,774 | |
| Subordinated notes | | | 73,842 | | | | 73,688 | |
| Accrued interest payable | | | 3,570 | | | | 2,904 | |
| Advances from borrowers for taxes and insurance | | | 5,092 | | | | 5,319 | |
| Accrued expenses and other liabilities | | | 12,960 | | | | 13,395 | |
| Total liabilities | | | 4,144,223 | | | | 3,942,859 | |
| | | | | | | | | |
| Commitments and Contingencies | | | — | | | | — | |
| | | | | | | | | |
| Stockholders’ Equity | | | | | | | | |
| Capital stock | | | | | | | | |
Serial preferred stock, $.01 par value; authorized 1,000,000 shares; issued and outstanding 2018 and 2017 – -0- shares | | | — | | | | — | |
Common stock, $.01 par value; authorized 20,000,000 shares; issued and outstanding 2018 – 14,151,198 shares, 2017 – 14,087,533 shares | | | 142 | | | | 141 | |
| Additional paid-in capital | | | 30,121 | | | | 28,203 | |
| Retained earnings | | | 492,087 | | | | 442,077 | |
Accumulated other comprehensive income, net of income taxes of $2,844
and $708 at December 31, 2018 and 2017, respectively | | | 9,627 | | | | 1,241 | |
| | | | | | | | | |
| Total stockholders’ equity | | | 531,977 | | | | 471,662 | |
| Total liabilities and stockholders’ equity | | $ | 4,676,200 | | | $ | 4,414,521 | |
Assets
| | | 2015 | | | 2014 | |
| | | | | | | |
| Cash | | $ | 115,198 | | | $ | 109,052 | |
| | | | | | | | | |
| Interest-bearing deposits in other financial institutions | | | 83,985 | | | | 109,595 | |
| | | | | | | | | |
| Cash and cash equivalents | | | 199,183 | | | | 218,647 | |
| | | | | | | | | |
| | | | | | | | | |
| Available-for-sale securities | | | 262,856 | | | | 365,506 | |
| | | | | | | | | |
| Held-to-maturity securities | | | 353 | | | | 450 | |
| | | | | | | | | |
| Mortgage loans held for sale | | | 12,261 | | | | 14,579 | |
| | | | | | | | | |
Loans receivable, net of allowance for loan losses of $38,149 and $38,435 at December 31, 2015 and 2014, respectively | | | 3,340,536 | | | | 3,038,848 | |
| | | | | | | | | |
| FDIC indemnification asset | | | 24,082 | | | | 44,334 | |
| | | | | | | | | |
| Interest receivable | | | 10,930 | | | | 11,219 | |
| | | | | | | | | |
| Prepaid expenses and other assets | | | 59,322 | | | | 60,452 | |
| | | | | | | | | |
| Other real estate owned, net | | | 31,893 | | | | 45,838 | |
| | | | | | | | | |
| Premises and equipment, net | | | 129,655 | | | | 124,841 | |
| | | | | | | | | |
| Goodwill and other intangible assets | | | 5,758 | | | | 7,508 | |
| | | | | | | | | |
| Federal Home Loan Bank stock | | | 15,303 | | | | 16,893 | |
| | | | | | | | | |
| Current and deferred income taxes | | | 12,057 | | | | 2,219 | |
| | | | | | | | | |
| Total assets | | $ | 4,104,189 | | | $ | 3,951,334 | |
Liabilities and Stockholders' Equity
| | | 2015 | | | 2014 | |
| Liabilities | | | | | | |
| Deposits | | $ | 3,268,626 | | | $ | 2,990,840 | |
| Federal Home Loan Bank advances | | | 263,546 | | | | 271,641 | |
| Securities sold under reverse repurchase agreements with customers | | | 116,182 | | | | 168,993 | |
| Short-term borrowings | | | 1,295 | | | | 42,451 | |
| Subordinated debentures issued to capital trust | | | 25,774 | | | | 30,929 | |
| Accrued interest payable | | | 1,080 | | | | 1,067 | |
| Advances from borrowers for taxes and insurance | | | 4,681 | | | | 4,929 | |
| Accrued expenses and other liabilities | | | 24,778 | | | | 20,739 | |
| | | | | | | | | |
| Total liabilities | | | 3,705,962 | | | | 3,531,589 | |
| | | | | | | | | |
| Commitments and Contingencies | | | — | | | | — | |
| | | | | | | | | |
| Stockholders' Equity | | | | | | | | |
| Capital stock | | | | | | | | |
Serial preferred stock – $.01 par value; authorized 1,000,000 shares; issued and outstanding 2015 – -0- shares and 2014 – 57,943 shares of SBLF | | | — | | | | 57,943 | |
Common stock, $.01 par value; authorized 20,000,000 shares; issued and outstanding
2015 – 13,887,932 shares, 2014 – 13,754,806 shares | | | 139 | | | | 138 | |
| Additional paid-in capital | | | 24,371 | | | | 22,345 | |
| Retained earnings | | | 368,053 | | | | 332,283 | |
Accumulated other comprehensive income, net of income taxes of $3,227 and $3,789 at December 31, 2015 and 2014, respectively | | | 5,664 | | | | 7,036 | |
| | | | | | | | | |
| Total stockholders' equity | | | 398,227 | | | | 419,745 | |
| | | | | | | | | |
| Total liabilities and stockholders' equity | | $ | 4,104,189 | | | $ | 3,951,334 | |
Consolidated Statements of Income
Years Ended December 31, 2015, 20142018, 2017 and 20132016
(In Thousands, Except Per Share Data)
| | | 2018 | | | 2017 | | | 2016 | |
| Interest Income | | | | | | | | | |
| Loans | | $ | 198,226 | | | $ | 176,654 | | | $ | 178,883 | |
| Investment securities and other | | | 7,723 | | | | 6,407 | | | | 6,292 | |
| | | | 205,949 | | | | 183,061 | | | | 185,175 | |
| Interest Expense | | | | | | | | | | | | |
| Deposits | | | 27,957 | | | | 20,595 | | | | 17,387 | |
| Federal Home Loan Bank advances | | | 3,985 | | | | 1,516 | | | | 1,214 | |
| Short-term borrowings and repurchase agreements | | | 765 | | | | 747 | | | | 1,137 | |
| Subordinated debentures issued to capital trust | | | 953 | | | | 949 | | | | 803 | |
| Subordinated notes | | | 4,097 | | | | 4,098 | | | | 1,578 | |
| | | | 37,757 | | | | 27,905 | | | | 22,119 | |
| | | | | | | | | | | | | |
| Net Interest Income | | | 168,192 | | | | 155,156 | | | | 163,056 | |
| Provision for Loan Losses | | | 7,150 | | | | 9,100 | | | | 9,281 | |
| Net Interest Income After Provision for Loan Losses | | | 161,042 | | | | 146,056 | | | | 153,775 | |
| | | | | | | | | | | | | |
| Noninterest Income | | | | | | | | | | | | |
| Commissions | | | 1,137 | | | | 1,041 | | | | 1,097 | |
| Service charges and ATM fees | | | 21,695 | | | | 21,628 | | | | 21,666 | |
| Net gains on loan sales | | | 1,788 | | | | 3,150 | | | | 3,941 | |
| Net realized gains on sales of available-for-sale securities | | | 2 | | | | — | | | | 2,873 | |
| Late charges and fees on loans | | | 1,622 | | | | 2,231 | | | | 1,747 | |
| Gain on derivative interest rate products | | | 25 | | | | 28 | | | | 66 | |
| Gain on sale of business units | | | 7,414 | | | | — | | | | — | |
| Gain (loss) on termination of loss sharing agreements | | | — | | | | 7,705 | | | | (584 | ) |
| Amortization of income/expense related to business acquisitions | | | — | | | | (486 | ) | | | (6,351 | ) |
| Other income | | | 2,535 | | | | 3,230 | | | | 4,055 | |
| | | | 36,218 | | | | 38,527 | | | | 28,510 | |
| | | | | | | | | | | | | |
| Noninterest Expense | | | | | | | | | | | | |
| Salaries and employee benefits | | | 60,215 | | | | 60,034 | | | | 60,377 | |
| Net occupancy expense | | | 25,628 | | | | 24,613 | | | | 26,077 | |
| Postage | | | 3,348 | | | | 3,461 | | | | 3,791 | |
| Insurance | | | 2,674 | | | | 2,959 | | | | 3,482 | |
| Advertising | | | 2,460 | | | | 2,311 | | | | 2,228 | |
| Office supplies and printing | | | 1,047 | | | | 1,446 | | | | 1,708 | |
| Telephone | | | 3,272 | | | | 3,188 | | | | 3,483 | |
| Legal, audit and other professional fees | | | 3,423 | | | | 2,862 | | | | 3,191 | |
| Expense on other real estate and repossessions | | | 4,919 | | | | 3,929 | | | | 4,111 | |
| Partnership tax credit investment amortization | | | 575 | | | | 930 | | | | 1,681 | |
| Acquired deposit intangible asset amortization | | | 1,562 | | | | 1,650 | | | | 1,910 | |
| Other operating expenses | | | 6,187 | | | | 6,878 | | | | 8,388 | |
| | | | 115,310 | | | | 114,261 | | | | 120,427 | |
| | | | | | | | | | | | | |
| Income Before Income Taxes | |
| 81,950 | | |
| 70,322 | | |
| 61,858 | |
| | | | | | | | | | | | | |
| Provision for Income Taxes | | | 14,841 | | | | 18,758 | | | | 16,516 | |
| | | | | | | | | | | | | |
| Net Income and Net Income Available to Common Shareholders | | $ | 67,109 | | | $ | 51,564 | | | $ | 45,342 | |
| | | | | | | | | | | | | |
| Earnings Per Common Share | | | | | | | | | | | | |
| Basic | | $ | 4.75 | | | $ | 3.67 | | | $ | 3.26 | |
| | | | | | | | | | | | | |
| Diluted | | $ | 4.71 | | | $ | 3.64 | | | $ | 3.21 | |
| | | 2015 | | | 2014 | | | 2013 | |
| Interest Income | | | | | | | | | |
| Loans | | $ | 177,240 | | | $ | 172,569 | | | $ | 163,903 | |
| Investment securities and other | | | 7,111 | | | | 10,793 | | | | 14,892 | |
| | | | 184,351 | | | | 183,362 | | | | 178,795 | |
| Interest Expense | | | | | | | | | | | | |
| Deposits | | | 13,511 | | | | 11,225 | | | | 12,346 | |
| Federal Home Loan Bank advances | | | 1,707 | | | | 2,910 | | | | 3,972 | |
| Short-term borrowings and repurchase agreements | | | 65 | | | | 1,099 | | | | 2,324 | |
| Subordinated debentures issued to capital trust | | | 714 | | | | 567 | | | | 561 | |
| | | | 15,997 | | | | 15,801 | | | | 19,203 | |
| | | | | | | | | | | | | |
| Net Interest Income | | | 168,354 | | | | 167,561 | | | | 159,592 | |
| Provision for Loan Losses | | | 5,519 | | | | 4,151 | | | | 17,386 | |
| Net Interest Income After Provision for Loan Losses | | | 162,835 | | | | 163,410 | | | | 142,206 | |
| | | | | | | | | | | | | |
| Noninterest Income | | | | | | | | | | | | |
| Commissions | | | 1,136 | | | | 1,163 | | | | 1,065 | |
| Service charges and ATM fees | | | 19,841 | | | | 19,075 | | | | 18,227 | |
| Net gains on loan sales | | | 3,888 | | | | 4,133 | | | | 4,915 | |
| Net realized gains on sales of available-for-sale securities | | | 2 | | | | 2,139 | | | | 243 | |
| Late charges and fees on loans | | | 2,129 | | | | 1,400 | | | | 1,264 | |
| Gain (loss) on derivative interest rate products | | | (43 | ) | | | (345 | ) | | | 295 | |
| Gain recognized on business acquisitions | | | — | | | | 10,805 | | | | — | |
| Accretion (amortization) of income/expense related to business acquisitions | | | (18,345 | ) | | | (27,868 | ) | | | (25,260 | ) |
| Other income | | | 4,973 | | | | 4,229 | | | | 4,566 | |
| | | | 13,581 | | | | 14,731 | | | | 5,315 | |
| | | | | | | | | | | | | |
| Noninterest Expense | | | | | | | | | | | | |
| Salaries and employee benefits | | | 58,682 | | | | 56,032 | | | | 52,468 | |
| Net occupancy expense | | | 25,985 | | | | 23,541 | | | | 20,658 | |
| Postage | | | 3,787 | | | | 3,578 | | | | 3,315 | |
| Insurance | | | 3,566 | | | | 3,837 | | | | 4,189 | |
| Advertising | | | 2,317 | | | | 2,404 | | | | 2,165 | |
| Office supplies and printing | | | 1,333 | | | | 1,464 | | | | 1,303 | |
| Telephone | | | 3,235 | | | | 2,866 | | | | 2,868 | |
| Legal, audit and other professional fees | | | 2,713 | | | | 3,957 | | | | 4,348 | |
| Expense on other real estate owned | | | 2,526 | | | | 5,636 | | | | 4,068 | |
| Partnership tax credit | | | 1,680 | | | | 1,720 | | | | 2,108 | |
| Other operating expenses | | | 8,526 | | | | 15,824 | | | | 8,128 | |
| | | | 114,350 | | | | 120,859 | | | | 105,618 | |
See Notes to Consolidated Financial Statements
Great Southern Bancorp, Inc.
Consolidated Statements of IncomeYears Ended December 31, 2015, 2014 and 2013
(In Thousands, Except Per Share Data)
| | | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | | |
| Income Before Income Taxes | | $ | 62,066 | | | $ | 57,282 | | | $ | 41,903 | |
| | | | | | | | | | | | | |
| Provision for Income Taxes | | | 15,564 | | | | 13,753 | | | | 8,174 | |
| | | | | | | | | | | | | |
| Net Income | | | 46,502 | | | | 43,529 | | | | 33,729 | |
| | | | | | | | | | | | | |
| Preferred Stock Dividends | | | 554 | | | | 579 | | | | 579 | |
| | | | | | | | | | | | | |
| Net Income Available to Common Shareholders | | $ | 45,948 | | | $ | 42,950 | | | $ | 33,150 | |
| | | | | | | | | | | | | |
| Earnings Per Common Share | | | | | | | | | | | | |
| Basic | | $ | 3.33 | | | $ | 3.14 | | | $ | 2.43 | |
| | | | | | | | | | | | | |
| Diluted | | $ | 3.28 | | | $ | 3.10 | | | $ | 2.42 | |
| | | | | | | | | | | | | |
Great Southern Bancorp, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2015, 20142018, 2017 and 20132016
(In Thousands)
| | | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | | |
| Net Income | | $ | 46,502 | | | $ | 43,529 | | | $ | 33,729 | |
| | | | | | | | | | | | | |
Unrealized appreciation (depreciation) on available-for-sale securities, net of taxes (credit) of $(528), $3,301and $(7,516) for 2015, 2014 and 2013, respectively | | | (1,321 | ) | | | 6,128 | | | | (13,959 | ) |
| | | | | | | | | | | | | |
Noncredit component of unrealized gain (loss) on available-for-sale debt securities for which a portion of an other-than-temporary impairment has been recognized, net of taxes (credit) of $0, $0 and $(20) for 2015, 2014 and 2013, respectively | | | — | | | | — | | | | (37 | ) |
| | | | | | | | | | | | | |
Less: reclassification adjustment for gains included in net income, net of taxes of $(1), $(749) and $(85) for 2015, 2014 and 2013, respectively | | | (1 | ) | | | (1,390 | ) | | | (158 | ) |
| | | | | | | | | | | | | |
Change in fair value of cash flow hedge, net of taxes (credit) of $(34), $(88) and $(19) for 2015, 2014 and 2013, respectively | | | (50 | ) | | | (164 | ) | | | (34 | ) |
| | | | | | | | | | | | | |
| Other comprehensive income (loss) | | | (1,372 | ) | | | 4,574 | | | | (14,188 | ) |
| | | | | | | | | | | | | |
| Comprehensive Income | | $ | 45,130 | | | $ | 48,103 | | | $ | 19,541 | |
| | | | | | | | | | | | | |
| | | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | | |
| Net Income | | $ | 67,109 | | | $ | 51,564 | | | $ | 45,342 | |
| | | | | | | | | | | | | |
| Unrealized depreciation on available-for-sale securities, net of taxes (credit) of $(353), $(272) and $(1,346) for 2018, 2017 and 2016, respectively | | | (1,229 | ) | | | (478 | ) | | | (2,363 | ) |
| | | | | | | | | | | | | |
| Less: reclassification adjustment for gains included in net income, net of taxes (credit) of $0, $0 and $(1,043) for 2018, 2017 and 2016, respectively | | | (2 | ) | | | — | | | | (1,830 | ) |
| | | | | | | | | | | | | |
| Change in fair value of cash flow hedge, net of taxes of $2,761, $93 and $50 for 2018, 2017 and 2016, respectively | | | 9,345 | | | | 161 | | | | 87 | |
| | | | | | | | | | | | | |
| Other comprehensive income (loss) | | | 8,114 | | | | (317 | ) | | | (4,106 | ) |
| | | | | | | | | | | | | |
| Comprehensive Income | | $ | 75,223 | | | $ | 51,247 | | | $ | 41,236 | |
| | | | | | | | | | | | | |
Great Southern Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2018, 2017 and 2016
(In Thousands, Except Per Share Data)
| | | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | | | | | Other | | | | | | | |
| | | | | | Additional | | | | | | Comprehensive | | | | | | | |
| | | Common | | | Paid-in | | | Retained | | | Income | | | Treasury | | | | |
| | | Stock | | | Capital | | | Earnings | | | (Loss) | | | Stock | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Balance, January 1, 2016 | | $ | 139 | | | $ | 24,371 | | | $ | 368,053 | | | $ | 5,664 | | | $ | — | | | $ | 398,227 | |
| Net income | | | — | | | | — | | | | 45,342 | | | | — | | | | — | | | | 45,342 | |
| Stock issued under Stock Option Plan | | | — | | | | 1,571 | | | | — | | | | — | | | | 1,022 | | | | 2,593 | |
Common dividends declared, $.88 per share
| | | — | | | | — | | | | (12,250 | ) | | | — | | | | — | | | | (12,250 | ) |
| Other comprehensive loss | | | — | | | | — | | | | — | | | | (4,106 | ) | | | — | | | | (4,106 | ) |
Reclassification of treasury stock per Maryland law | | | 1 | | | | — | | | | 1,021 | | | | — | | | | (1,022 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2016 | | | 140 | | | | 25,942 | | | | 402,166 | | | | 1,558 | | | | — | | | | 429,806 | |
| Net income | | | — | | | | — | | | | 51,564 | | | | — | | | | — | | | | 51,564 | |
| Stock issued under Stock Option Plan | | | — | | | | 2,261 | | | | — | | | | — | | | | 1,550 | | | | 3,811 | |
Common dividends declared, $.94 per share
| | | — | | | | — | | | | (13,202 | ) | | | — | | | | — | | | | (13,202 | ) |
| Other comprehensive loss | | | — | | | | — | | | | — | | | | (317 | ) | | | — | | | | (317 | ) |
Reclassification of treasury stock per Maryland law | | | 1 | | | | — | | | | 1,549 | | | | — | | | | (1,550 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2017 | | | 141 | | | | 28,203 | | | | 442,077 | | | | 1,241 | | | | — | | | | 471,662 | |
| Net income | | | — | | | | — | | | | 67,109 | | | | — | | | | — | | | | 67,109 | |
| Stock issued under Stock Option Plan | | | — | | | | 1,918 | | | | — | | | | — | | | | 1,043 | | | | 2,961 | |
Common dividends declared, $1.20 per share
| | | — | | | | — | | | | (16,966 | ) | | | — | | | | — | | | | (16,966 | ) |
| Purchase of the Company’s common stock | | | — | | | | — | | | | — | | | | — | | | | (903 | ) | | | (903 | ) |
Reclassification of stranded tax effects resulting from
change in Federal income tax rate | | | — | | | | — | | | | (272 | ) | | | 272 | | | | — | | | | — | |
| Other comprehensive gain | | | — | | | | — | | | | — | | | | 8,114 | | | | — | | | | 8,114 | |
Reclassification of treasury stock per Maryland law | | | 1 | | | | — | | | | 139 | | | | — | | | | (140 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2018 | | $ | 142 | | | $ | 30,121 | | | $ | 492,087 | | | $ | 9,627 | | | $ | — | | | $ | 531,977 | |
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2015, 20142018, 2017 and 20132016
| Note 1: | Nature of Operations and Summary of Significant Accounting Policies |
Nature of Operations and Operating Segments
Great Southern Bancorp, Inc. ("GSBC"(“GSBC��� or the "Company"“Company”) operates as a one-bank holding company. GSBC'sGSBC’s business primarily consists of the operations of Great Southern Bank (the "Bank"“Bank”), which provides a full range of financial services to customers primarily located in Missouri, Iowa, Kansas, Minnesota, Nebraska and Arkansas. The Bank also originates commercial loans from lending offices in Dallas, Texas, Tulsa, Okla., Chicago, Ill., Atlanta, Ga., Denver, Colo. and Omaha, Neb. The Company and the Bank are subject to regulation by certain federal and state agencies and undergo periodic examinations by those regulatory agencies.
The Company'sCompany’s banking operation is its only reportable segment. The banking operation is principally engaged in the business of originating residential and commercial real estate loans, construction loans, commercial business loans and consumer loans and funding these loans by attracting deposits from the general public, accepting brokered deposits and borrowing from the Federal Home Loan Bank and others. The operating results of this segment are regularly reviewed by management to make decisions about resource allocations and to assess performance. Selected information is not presented separately for the Company'sCompany’s reportable segment, as there is no material difference between that information and the corresponding information in the consolidated financial statements.
Use of Estimates
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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the valuation of loans acquired with indication of impairment, the valuation of the FDIC indemnification asset (prior to December 31, 2017) and other-than-temporary impairments (OTTI) and fair values of financial instruments. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets held for sale, management obtains independent appraisals for significant properties. The valuation of the FDIC indemnification asset iswas determined in relation to the fair value of assets acquired through FDIC-assisted transactions for which cash flows are monitored on an ongoing basis. In addition, the Company considers that the determination of the carrying value of goodwill and intangible assets involves a high degree of judgment and complexity.
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2015, 20142018, 2017 and 20132016
Principles of Consolidation
The consolidated financial statements include the accounts of Great Southern Bancorp, Inc., its wholly owned subsidiary, the Bank, and the Bank'sBank’s wholly owned subsidiaries, Great Southern Real Estate Development Corporation, GSB One LLC (including its wholly owned subsidiary, GSB Two LLC), Great Southern Financial Corporation, Great Southern Community Development Company, LLC (including its wholly owned subsidiary, Great Southern CDE, LLC), GS, LLC, GSSC, LLC, GSTC Investments, LLC, GS-RE Holding, LLC (including its wholly owned subsidiary, GS RE Management, LLC), GS-RE Holding II, LLC, GS-RE Holding III, LLC, VFP Conclusion Holding, LLC and VFP Conclusion Holding II, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain prior periods' amounts have been reclassified to conform to the 2015 financial statements presentation. These reclassifications had no effect on net income.
Federal Home Loan Bank Stock
Federal Home Loan Bank common stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in common stock is based on a predetermined formula, carried at cost and evaluated for impairment.
Securities
Available-for-sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses are recorded, net of related income tax effects, in other comprehensive income.
Held-to-maturity securities, which include any security for which the Company has the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts.
Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method.
For debt securities with fair value below carrying value when the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment ("OTTI"(“OTTI”) of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an OTTI recorded in other comprehensive income for the noncredit portion of a previous OTTI is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.
The Company'sCompany’s consolidated statements of income reflect the full impairment (that is, the difference between the security'ssecurity’s amortized cost basis and fair value) on debt securities that the Company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.
For equity securities, if any, when the Company has decided to sell an impaired available-for-sale security and the Company does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed OTTI in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other-than-temporary even if a decision to sell has not been made.
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016
Mortgage Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Write-downs to fair value are recognized as a charge to earnings at the time the decline in value occurs. Nonbinding forward commitments to sell individual mortgage loans are generally obtained to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Fees received from borrowers to guarantee the funding of mortgage loans held for sale and fees paid to investors to ensure the ultimate sale of such mortgage loans are recognized as income or expense when the loans are sold or when it becomes evident that the commitment will not be used.
Loans Originated by the Company
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Past due status is based on the contractual terms of a loan. Generally, loans are placed on nonaccrual status at 90 days past due and interest is considered a loss, unless the loan is well secured and in the process of collection. Payments received on nonaccrual loans are applied to principal until the loans are returned to accrual status. Loans are returned to accrual status when all payments contractually due are brought current, payment performance is sustained for a period of time, generally six months, and future payments are reasonably assured. With the exception of consumer loans, charge-offs on loans are recorded when available information indicates a loan is not fully collectible and the loss is reasonably quantifiable. Consumer loans are charged-off at specified delinquency dates consistent with regulatory guidelines.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management'smanagement’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower'sborrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Company'sCompany’s internal risk rating process. Other adjustments may be made to the allowance for certain loan segments after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable that not all of the principal and interest due under the loan agreement will be collected in accordance with contractual terms. For non-homogeneous loans, such as commercial loans, management determines which loans are reviewed for impairment based on information obtained by account officers, weekly past due meetings, various analyses including annual reviews of large loan relationships, calculations of loan debt coverage ratios as financial information is obtained and periodic reviews of all loans over $1.0 million. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the