Great Southern Bancorp(GSBC) - 2019 Q1 - Quarterly Report

FORM 10-Q - Registrant is an Accelerated Filer[3] - Common Stock, par value $0.01 per share, trading symbol GSBC on The NASDAQ Stock Market LLC[4] - 14,196,383 shares of common stock outstanding at May 6, 2019[4] PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. This section presents the unaudited interim consolidated financial statements for Great Southern Bancorp, Inc. as of March 31, 2019 Consolidated Statements of Financial Condition | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | |:---|:---|:---| | Assets | | | | Cash and cash equivalents | $206,090 | $202,742 | | Available-for-sale securities | $277,750 | $243,968 | | Loans receivable, net | $4,050,336 | $3,989,001 | | Total Assets | $4,778,220 | $4,676,200 | | Liabilities | | | | Deposits | $3,956,091 | $3,725,007 | | Total Liabilities | $4,234,585 | $4,144,223 | | Stockholders' Equity | | | | Total Stockholders' Equity | $543,635 | $531,977 | Consolidated Statements of Income | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | |:---|:---|:---| | Total Interest Income | $57,358 | $46,882 | | Total Interest Expense | $12,753 | $7,444 | | Net Interest Income | $44,605 | $39,438 | | Provision for Loan Losses | $1,950 | $1,950 | | Total Non-Interest Income | $7,450 | $6,935 | | Total Non-Interest Expense | $28,495 | $28,312 | | Income Before Income Taxes | $21,610 | $16,111 | | Provision for Income Taxes | $3,998 | $2,645 | | Net Income | $17,612 | $13,466 | | Basic Earnings Per Common Share | $1.24 | $0.95 | | Diluted Earnings Per Common Share | $1.23 | $0.95 | | Dividends Declared Per Common Share | $1.07 | $0.28 | Consolidated Statements of Comprehensive Income | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | |:---|:---|:---| | Net Income | $17,612 | $13,466 | | Unrealized appreciation (depreciation) on available-for-sale securities, net of taxes | $2,977 | $(1,881) | | Change in fair value of cash flow hedge, net of taxes | $5,800 | — | | Comprehensive Income | $26,381 | $11,585 | Consolidated Statements of Stockholders' Equity | Metric | March 31, 2019 (in thousands) | January 1, 2019 (in thousands) | |:---|:---|:---| | Common Stock | $142 | $142 | | Additional Paid-in Capital | $30,916 | $30,121 | | Retained Earnings | $494,181 | $492,087 | | Accumulated Other Comprehensive Income (Loss) | $18,396 | $9,627 | | Total Stockholders' Equity | $543,635 | $531,977 | - Net income for the three months ended March 31, 2019, was $17.6 million[13] - Common dividends declared were $15.1 million ($1.07 per share) for the three months ended March 31, 2019[13] Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | |:---|:---|:---| | Net cash provided by operating activities | $29,760 | $29,915 | | Net cash used in investing activities | $(88,205) | $(36,964) | | Net cash provided by (used in) financing activities | $61,793 | $(15,222) | | Increases (decreases) in cash and cash equivalents | $3,348 | $(22,271) | | Cash and cash equivalents, end of period | $206,090 | $219,982 | Notes to Consolidated Financial Statements Note 1: Basis of Presentation - Unaudited interim consolidated financial statements prepared in accordance with GAAP for interim financial information[17] - Operating results for the three months ended March 31, 2019, are not necessarily indicative of full-year results[17] - Statements should be read in conjunction with the Company's Annual Report on Form 10-K for 2018[18] Note 2: Nature of Operations and Operating Segments - Company operates as a one-bank holding company, primarily through Great Southern Bank[19] - Bank provides financial services across seven states and originates commercial loans from offices in six major cities[19] - The banking operation is the Company's only reportable segment[20] Note 3: Recent Accounting Pronouncements - Adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019, recognizing a $9.5 million lease liability and right-of-use asset with no material income statement impact[21] - Evaluating ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), effective March 31, 2020, expecting a one-time cumulative effect adjustment to the allowance for loan losses[23] - Evaluating ASU No. 2017-04, Goodwill Impairment (Topic 350), effective for fiscal years beginning after December 15, 2019, with no material impact expected[24] Note 4: Earnings Per Share | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |:---|:---|:---| | Basic Earnings Per Common Share | $1.24 | $0.95 | | Diluted Earnings Per Common Share | $1.23 | $0.95 | | Net income and net income available to common stockholders (in thousands) | $17,612 | $13,466 | - Options to purchase 413,719 shares (2019) and 252,911 shares (2018) were excluded from diluted EPS due to exercise prices exceeding average market prices[27] Note 5: Investment Securities | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | |:---|:---|:---| | Available-for-Sale Securities (Fair Value) | | | | Agency mortgage-backed securities | $180,196 | $153,258 | | Agency collateralized mortgage obligations | $53,006 | $39,260 | | States and political subdivisions | $44,548 | $51,450 | | Total Available-for-Sale Securities | $277,750 | $243,968 | | Gross Unrealized Gains | $5,772 | $2,950 | | Gross Unrealized Losses | $1,561 | $2,585 | - Total fair value of investments with unrealized losses was approximately $67.1 million (24.2% of portfolio) at March 31, 2019, a decrease from $95.7 million (39.2%) at December 31, 2018[30] - No securities were determined to have other-than-temporary impairment during the three months ended March 31, 2019 and 2018[36] Note 6: Loans and Allowance for Loan Losses | Loan Class | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | |:---|:---|:---| | Commercial construction | $1,328,853 | $1,417,166 | | Commercial real estate | $1,388,678 | $1,371,435 | | Other residential | $864,990 | $784,894 | | Total Loans Receivable (gross) | $4,975,335 | $4,993,251 | | Allowance for loan losses | $(38,651) | $(38,409) | | Loans receivable, net | $4,050,336 | $3,989,001 | | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | |:---|:---|:---| | Allowance for loan losses, beginning balance | $38,409 | $36,492 | | Provision (benefit) charged to expense | $1,950 | $1,950 | | Losses charged off | $(2,766) | $(3,640) | | Recoveries | $1,058 | $1,508 | | Allowance for loan losses, ending balance | $38,651 | $36,310 | | Nonaccruing Loans (excluding FDIC-assisted) | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | |:---|:---|:---| | Total Nonaccruing Loans | $4,637 | $6,300 | - Troubled debt restructurings totaled $5.3 million at March 31, 2019, a decrease from $6.9 million at December 31, 2018[52] Note 7: FDIC-Acquired Loans - All loss sharing agreements for FDIC-assisted acquisitions were terminated by April 26, 2016, or June 9, 2017[60][62][64][66] - Post-termination, all recoveries, gains, losses, and expenses related to these assets are recognized entirely by Great Southern Bank[68] | Impact on Financial Results | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | |:---|:---|:---| | Impact on net interest income | $1,512 | $1,157 | | Impact on net interest margin (in basis points) | 13 bps | 12 bps | | Net impact to pre-tax income | $1,512 | $1,157 | | Net impact net of taxes | $1,167 | $898 | | Impact to diluted earnings per share | $0.08 | $0.06 | Note 8: Other Real Estate Owned and Repossessions | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | |:---|:---|:---| | Foreclosed assets held for sale and repossessions | $5,694 | $5,480 | | Foreclosed assets acquired through FDIC-assisted transactions, net of discounts | $1,563 | $1,401 | | Other real estate owned not acquired through foreclosure | $1,515 | $1,559 | | Total Other real estate owned and repossessions | $8,772 | $8,440 | | Expenses on OREO and Repossessions | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | |:---|:---|:---| | Net gains on sales | $(166) | $(472) | | Valuation write-downs | $247 | $616 | | Operating expenses, net of rental income | $539 | $997 | | Total Expense | $620 | $1,141 | Note 9: Premises and Equipment | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | |:---|:---|:---| | Land | $40,571 | $40,508 | | Buildings and improvements | $95,253 | $95,039 | | Furniture, fixtures and equipment | $54,805 | $54,327 | | Operating leases right of use asset | $9,323 | — | | Less accumulated depreciation | $(58,198) | $(57,450) | | Total Premises and equipment, net | $141,754 | $132,424 | - Adoption of ASU 2016-02 on January 1, 2019, resulted in recognizing a $9.5 million right-of-use asset and corresponding lease liability[80] - The Company elected the "package of practical expedients" and the short-term lease recognition exemption for leases under twelve months[82][83] Note 10: Deposits | Deposit Type | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | |:---|:---|:---| | Time Deposits (Total) | $1,754,851 | $1,591,411 | | Non-interest-bearing demand deposits | $668,829 | $661,061 | | Interest-bearing demand and savings deposits | $1,532,411 | $1,472,535 | | Total Deposits | $3,956,091 | $3,725,007 | - Time deposits with rates between 2.00% - 2.99% significantly increased from $857.97 million to $1,176.12 million[87] Note 11: Advances from Federal Home Loan Bank - No outstanding FHLBank advances at March 31, 2019, and December 31, 2018[89] Note 12: Securities Sold Under Reverse Repurchase Agreements and Short-Term Borrowings | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | |:---|:---|:---| | Short-term borrowings and other interest-bearing liabilities | $22,219 | $192,725 | | Securities sold under reverse repurchase agreements with customers | $118,618 | $105,253 | - Overnight borrowings from the Federal Home Loan Bank decreased from $178.0 million at December 31, 2018, to $0 at March 31, 2019[90] Note 13: Subordinated Notes - $75.0 million subordinated notes due August 15, 2026, carry a fixed interest rate of 5.25% until August 15, 2021, then float at three-month LIBOR + 4.087%[93] - Debt issuance costs of approximately $1.5 million are amortized over five years, resulting in an imputed interest rate of 5.83%[93] | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | |:---|:---|:---| | Subordinated notes (gross) | $75,000 | $75,000 | | Less: unamortized debt issuance costs | $1,049 | $1,158 | | Subordinated notes (net) | $73,951 | $73,842 | Note 14: Income Taxes | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |:---|:---|:---| | Tax at statutory rate | 21.0% | 21.0% | | Nontaxable interest and dividends | (0.5)% | (1.1)% | | Tax credits | (4.5)% | (4.5)% | | State taxes | 1.4% | 1.2% | | Other | 1.1% | (0.2)% | | Effective tax rate | 18.5% | 16.4% | - The Company does not expect significant adjustments from ongoing IRS examinations for 2006-2007 or State of Missouri tax examinations for 2014-2015[97][98] Note 15: Disclosures About Fair Value of Financial Instruments - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (other observable inputs), and Level 3 (significant unobservable inputs)[103] | Recurring Fair Value Measurements (in thousands) | March 31, 2019 (Level 2) | December 31, 2018 (Level 2) | |:---|:---|:---| | Agency mortgage-backed securities | $180,196 | $153,258 | | Agency collateralized mortgage obligations | $53,006 | $39,260 | | States and political subdivisions | $44,548 | $51,450 | | Interest rate derivative asset | $20,338 | $12,800 | | Interest rate derivative liability | $(768) | $(716) | | Nonrecurring Fair Value Measurements (in thousands) | March 31, 2019 (Level 3) | December 31, 2018 (Level 3) | |:---|:---|:---| | Impaired loans | $1,212 | $2,805 | | Foreclosed assets held for sale | $343 | $1,776 | Note 16: Derivatives and Hedging Activities - Company uses interest rate swaps for non-designated hedges (customer service, matched book) and designated cash flow hedges for interest rate risk management[121][122][124] - A $400 million notional interest rate swap (fixed 3.018% receive, one-month USD-LIBOR pay) was initiated in October 2018 as a cash flow hedge for floating rate loans[124] | Derivative Fair Value (in thousands) | March 31, 2019 | December 31, 2018 | |:---|:---|:---| | Derivatives designated as hedging instruments (Interest rate swap asset) | $19,618 | $12,106 | | Derivatives not designated as hedging instruments (Asset Derivatives) | $720 | $694 | | Derivatives not designated as hedging instruments (Liability Derivatives) | $768 | $716 | PART II. OTHER INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses the Company's financial condition and operational results for the three months ended March 31, 2019, covering key policies, economic factors, and performance metrics Forward-looking Statements - Identifies forward-looking statements using specific phrases such as "will likely result" and "are expected to"[129] - Risks and uncertainties include economic conditions, interest rate fluctuations, lending risks, regulatory changes, and competition[129] - The Company does not undertake to publicly release revisions to forward-looking statements[130] Critical Accounting Policies, Judgments and Estimates Allowance for Loan Losses and Valuation of Foreclosed Assets - Determination of allowance for loan losses involves significant judgment and estimates, including expected default probabilities, loss severity, and future cash flows[133] - Adoption of ASU No. 2016-13 (Credit Losses) in Q1 2020 will require a one-time cumulative effect adjustment to the allowance for loan losses, with magnitude yet to be determined[136] - Valuation of foreclosed assets involves high judgment, with carrying values based on management's best estimate of sales proceeds, which may differ from actual outcomes[137] Carrying Value of Loans Acquired in FDIC-assisted Transactions - Carrying value of FDIC-acquired loans reflects management's ongoing estimates of amounts to be realized, requiring significant judgment in monitoring cash flows, credit losses, and accretable yield[138][140] - All loss sharing agreements with the FDIC have been terminated, eliminating the indemnification asset[138] Goodwill and Intangible Assets - Goodwill and indefinite-lived intangible assets are tested for impairment at least annually; the Company had one reporting unit (the Bank) with $5.4 million goodwill at March 31, 2019[141] - Amortizable intangible assets, primarily core deposit intangibles, totaled $3.6 million at March 31, 2019, amortized over seven years[141] | Metric (in thousands) | March 31, 2019 | December 31, 2018 | |:---|:---|:---| | Goodwill – Branch acquisitions | $5,396 | $5,396 | | Deposit intangibles | $3,567 | $3,892 | | Total Goodwill and other intangible assets | $8,963 | $9,288 | Current Economic Conditions - National unemployment rate remained steady at 3.8% in March 2019, a decrease from 4.1% in March 2018[146] - New single-family home sales increased 4.5% in March 2019 (seasonally adjusted annual rate of 692,000 units) compared to February 2019, and 3% from March 2018[147] - Existing home sales decreased 5% in March 2019 to a seasonally adjusted rate of 5.21 million, while the national median existing home price rose 3.8% year-over-year to $259,400[148][149] - Multi-family, suburban office, retail, and industrial commercial real estate sectors are largely in expansion phases across the Company's market areas, with some exceptions of hyper-supply or recovery[150][151][153][154] General - Total assets increased $102.0 million (2.2%) to $4.78 billion at March 31, 2019[158] - Net outstanding loans increased $61.3 million (1.5%) to $4.05 billion, driven by commercial construction, commercial real estate, and other residential loans, partially offset by decreases in consumer auto loans[159] - Total deposit balances increased $231.1 million (6.2%) to $3.96 billion, with increases in transaction accounts and retail certificates of deposit[168] - Interest rate risk models indicate that rising interest rates are expected to have a positive impact on net interest income, while declining rates are expected to have a negative impact, with greater effects in the 12-36 month horizon[175][280] Effect of Federal Laws and Regulations - Dodd-Frank Act introduced significant changes, including the Consumer Financial Protection Bureau and new capital rules[178] - EGRRCP Act modifies certain Dodd-Frank rules, expanding qualified mortgages and simplifying capital rules for institutions under $10 billion by establishing a "Community Bank Leverage Ratio" (8-10%)[185][186] - The capital conservation buffer requirement of 2.5% of risk-weighted assets became fully implemented on January 1, 2019[183] Business Initiatives - Upgraded online account opening platform in Q1 2019 for faster customer experience[189] - Ceased indirect automobile financing unit operations effective March 31, 2019, due to market forces, with approximately $180 million in indirect loans to be serviced[190] - Consolidated Fayetteville, Ark., banking center into Rogers, Ark., in April 2019, now operating one banking center in Arkansas[191] Comparison of Financial Condition at March 31, 2019 and December 31, 2018 Cash and cash equivalents - Cash and cash equivalents increased by $3.4 million (1.7%) to $206.1 million at March 31, 2019[192] Available-for-sale Securities - Available-for-sale securities increased by $33.8 million (13.8%) to $277.8 million, primarily due to purchases of FNMA and GNMA fixed-rate multi-family mortgage-backed securities[193] Net loans - Net loans increased by $61.3 million to $4.05 billion[194] - Increases were primarily in commercial construction, commercial real estate, other residential, and one- to four-family residential mortgage loans, offset by $24 million reduction in consumer auto loans and $7 million in FDIC-acquired loan portfolios[194] Other real estate owned and repossessions - Other real estate owned and repossessions increased by $332 thousand (3.9%) to $8.8 million[196] Premises and equipment - Premises and equipment increased by $9.4 million (7.0%) to $141.8 million, primarily due to recording a $9.3 million right-of-use asset from new lease accounting standards[197] Total liabilities - Total liabilities increased by $90.4 million to $4.23 billion[198] Total deposits - Total deposits increased by $231.1 million (6.2%) to $3.96 billion, with transaction accounts up $67.6 million and retail certificates of deposit up $89.6 million[199] - Brokered deposits, including CDARS, increased by $73.9 million to $400.8 million[199] FHLBank advances - FHLBank advances remained at $0 at both March 31, 2019, and December 31, 2018[200] Short term borrowings and other interest-bearing liabilities - Short-term borrowings and other interest-bearing liabilities decreased by $170.5 million to $22.2 million, primarily due to the reduction of $178.0 million in overnight FHLBank borrowings[201] Securities sold under reverse repurchase agreements with customers - Securities sold under reverse repurchase agreements with customers increased by $13.3 million to $118.6 million[202] Total stockholders' equity - Total stockholders' equity increased by $11.6 million to $543.6 million[203] - Increase driven by $17.6 million net income, $8.8 million increase in accumulated other comprehensive income, and $1.3 million from stock option exercises, partially offset by $15.1 million in dividends and $849 thousand in stock repurchases[203] Results of Operations and Comparison for the Three Months Ended March 31, 2019 and 2018 General - Net income increased by $4.1 million (30.8%) to $17.6 million for the three months ended March 31, 2019, compared to $13.5 million in the prior year[204] - This increase was primarily due to a $5.2 million (13.1%) increase in net interest income and a $515 thousand (7.4%) increase in non-interest income, partially offset by higher income tax expense and non-interest expense[204] Total Interest Income - Total interest income increased by $10.5 million (22.3%) to $57.36 million for the three months ended March 31, 2019[205] - Increase was due to a $9.4 million increase in interest income on loans and a $1.1 million increase in interest income on investments and other interest-earning assets[205] Interest Income – Loans - Interest income on loans increased by $5.7 million due to higher average interest rates (yield on loans increased from 4.84% to 5.42%)[206] - Interest income on loans increased by $3.7 million due to higher average loan balances (from $3.78 billion to $4.08 billion)[206] - Adjustments from FDIC-acquired loan pools increased interest income by $1.5 million in Q1 2019 (vs. $1.2 million in Q1 2018)[207] Interest Income – Investments and Other Interest-earning Assets - Interest income on investments increased by $716 thousand due to higher average balances ($278.5 million vs. $187.0 million) and $226 thousand due to higher average interest rates (3.28% vs. 2.84%)[210] - Interest income on other interest-earning assets increased by $161 thousand due to higher average interest rates (2.37% vs. 1.67%)[211] Total Interest Expense - Total interest expense increased by $5.3 million (71.3%) to $12.75 million[212] - Primary drivers were increases in interest expense on deposits ($4.9 million), short-term borrowings and repurchase agreements ($894 thousand), subordinated debentures ($65 thousand), and subordinated notes ($69 thousand), partially offset by a decrease in FHLBank advances ($605 thousand)[212] Interest Expense – Deposits - Interest expense on demand deposits increased by $525 thousand due to higher average rates (0.49% vs. 0.34%), partially offset by a $72 thousand decrease due to lower average balances[213] - Interest expense on time deposits increased by $3.1 million due to higher average rates (2.11% vs. 1.30%) and $1.3 million due to increased average balances ($1.67 billion vs. $1.33 billion)[214] Interest Expense – FHLBank Advances, Short-term Borrowings and Repurchase Agreements, Subordinated Debentures Issued to Capital Trusts and Subordinated Notes - Interest expense on FHLBank advances decreased by $605 thousand due to a decrease in average balances (from $145.5 million to $0)[215] - Interest expense on short-term borrowings and repurchase agreements increased by $787 thousand due to higher average rates (1.45% vs. 0.11%) and $107 thousand due to increased average balances ($258.2 million vs. $99.5 million)[216] - Interest expense on subordinated debentures increased by $65 thousand due to higher average interest rates (4.20% vs. 3.18%)[218] - Interest expense on subordinated notes increased by $66 thousand due to deferred issuance cost amortization[219] Net Interest Income - Net interest income increased by $5.2 million to $44.6 million[220] - Net interest margin increased by 13 basis points to 4.06%[220] - The overall average interest rate spread increased one basis point to 3.75%, with a 55 basis point increase in asset yield partially offset by a 54 basis point increase in liability rates[221] Provision for Loan Losses and Allowance for Loan Losses - Provision for loan losses remained unchanged at $2.0 million for both Q1 2019 and Q1 2018[226] - Total net charge-offs were $1.7 million in Q1 2019 (vs. $2.1 million in Q1 2018), with $934 thousand in consumer auto and $371 thousand in one commercial loan[226] - The allowance for loan losses as a percentage of total loans (excluding FDIC-acquired) was 0.97% at March 31, 2019 (vs. 0.98% at December 31, 2018)[228] Non-performing Assets - Non-performing assets (excluding FDIC-assisted) decreased by $1.5 million to $10.3 million at March 31, 2019 (0.22% of total assets)[232] - Non-performing loans decreased by $1.7 million to $4.6 million, while foreclosed assets increased by $214 thousand to $5.7 million[233] - Potential problem loans increased by $1.8 million (54.7%) to $5.1 million[235] Non-interest Income - Non-interest income increased by $515 thousand to $7.5 million[241] - Other income increased by $1.0 million, primarily due to $677 thousand from sales/recoveries of FDIC-assisted receivables/assets and $293 thousand from new debit card contracts[241] - Service charges and ATM fees decreased by $286 thousand due to lower overdraft and insufficient funds fees[242] - Net gains on loan sales decreased by $214 thousand due to fewer fixed-rate loan originations sold in the secondary market[243] Non-interest Expense - Non-interest expense increased by $183 thousand to $28.5 million[244] - Salaries and employee benefits increased by $1.0 million due to staffing additions in new loan production offices and annual compensation increases[244] - Expense on other real estate and repossessions decreased by $521 thousand due to lower valuation write-downs and consumer repossession expenses[245] - Partnership tax credit investment amortization decreased by $211 thousand as the tax credit period for certain investments ended in 2018[246] - Efficiency ratio improved to 54.74% (from 61.05% in Q1 2018), primarily due to increased net interest income[247] Provision for Income Taxes - Effective tax rate was 18.5% in Q1 2019 (vs. 16.4% in Q1 2018), lower than the 21% statutory rate due to investment tax credits and tax-exempt investments/loans[249] - Company expects its effective tax rate to be approximately 17.5% to 19.0% in future years[248] Average Balances, Interest Rates and Yields | Metric | Q1 2019 Average Balance (in thousands) | Q1 2019 Yield/Rate | Q1 2018 Average Balance (in thousands) | Q1 2018 Yield/Rate | |:---|:---|:---|:---|:---| | Total loans receivable | $4,079,624 | 5.42% | $3,784,181 | 4.84% | | Total investment securities | $278,536 | 3.28% | $187,007 | 2.84% | | Total interest-earning assets | $4,452,534 | 5.22% | $4,070,268 | 4.67% | | Total deposits | $3,145,636 | 1.35% | $2,896,084 | 0.78% | | Total interest-bearing liabilities | $3,503,493 | 1.47% | $3,240,577 | 0.93% | | Net interest income | | $44,605 | | $39,438 | | Net interest margin | | 4.06% | | 3.93% | Rate/Volume Analysis | Change in Interest Income/Expense (in thousands) | Due to Rate | Due to Volume | Total Increase (Decrease) | |:---|:---|:---|:---| | Interest-earning assets: | | | | | Loans receivable | $5,698 | $3,693 | $9,391 | | Investment securities | $226 | $716 | $942 | | Other interest-earning assets | $161 | $(18) | $143 | | Total interest-earning assets | $6,085 | $4,391 | $10,476 | | Interest-bearing liabilities: | | | | | Total deposits | $3,664 | $1,222 | $4,886 | | Short-term borrowings | $787 | $107 | $894 | | Subordinated debentures | $65 | $0 | $65 | | Subordinated notes | $66 | $3 | $69 | | FHLBank advances | $0 | $(605) | $(605) | | Total interest-bearing liabilities | $4,582 | $727 | $5,309 | | Net interest income | $1,503 | $3,664 | $5,167 | Liquidity - Primary sources of funds include customer deposits, FHLBank advances, other borrowings, loan repayments, unpledged securities, and proceeds from asset sales[257] | Available Secured Lines and On-Balance Sheet Liquidity (March 31, 2019) | Amount (in millions) | |:---|:---| | Federal Home Loan Bank line | $981.9 | | Federal Reserve Bank line | $428.5 | | Cash and cash equivalents | $206.1 | | Unpledged securities | $114.8 | - Operating activities provided $29.8 million in cash, investing activities used $88.2 million, and financing activities provided $61.8 million for Q1 2019[259][260][261] Capital Resources Dividends - Declared common stock cash dividends of $1.07 per share in Q1 2019 (87% of diluted EPS), including a regular dividend of $0.32 and a special dividend of $0.75[269] - In Q1 2018, declared $0.28 per share (29% of diluted EPS)[269] Common Stock Repurchases and Issuances - Repurchased 16,040 shares of common stock at an average price of $52.93 per share during Q1 2019[270][299] - Issued 35,600 shares at an average price of $29.56 per share to cover stock option exercises in Q1 2019[270] - Board authorized a program on April 18, 2018, to repurchase up to 500,000 shares; 466,418 shares remained available as of February 28, 2019[271][299] Non-GAAP Financial Measures - Presents tangible common equity to tangible assets ratio as a non-GAAP measure[273] - This ratio is calculated by subtracting period-end intangible assets from common equity and total assets[274] - Management believes this measure helps assess tangible capital utilization, capital strength, and facilitates peer comparison[274] | Metric (in thousands) | March 31, 2019 | December 31, 2018 | |:---|:---|:---| | Common equity at period end | $543,635 | $531,977 | | Less: Intangible assets at period end | $8,963 | $9,288 | | Tangible common equity at period end | $534,672 | $522,689 | | Total assets at period end | $4,778,220 | $4,676,200 | | Less: Intangible assets at period end | $8,963 | $9,288 | | Tangible assets at period end | $4,769,257 | $4,666,912 | | Tangible common equity to tangible assets | 11.21% | 11.20% | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details the Company's market risk exposure, primarily interest rate risk, and its management strategies, including repricing gap analysis and derivative use Asset and Liability Management and Market Risk - Objective is to produce stable earnings through a favorable and sustainable interest rate spread[277] - Reduces interest rate risk by matching repricing periods of interest-bearing liabilities and interest-earning assets, using adjustable-rate mortgages and shorter-term loans[277] How We Measure the Risk to Us Associated with Interest Rate Changes - Monitors interest rate risk by analyzing interest rate repricing "gap" and sensitivity of assets/liabilities to market rate changes[279][280] - Models indicate rising interest rates generally have a positive impact on net interest income, while declining rates have a negative impact, with effects greater in the 12-36 month horizon[280] - Asset and Liability Committee (ALCO) sets and monitors policies, meeting monthly to review economic conditions, liquidity, capital, and asset/liability mix[284] - Uses interest rate swaps for customer service (matched book) and a $400 million cash flow hedge (fixed 3.018% receive, one-month USD-LIBOR pay) to manage floating rate loan risk[288][290] ITEM 4. CONTROLS AND PROCEDURES The Company's disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter - Disclosure controls and procedures were effective as of March 31, 2019, ensuring accurate and timely reporting[292] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2019[293] - Acknowledges inherent limitations of control procedures, which provide reasonable, not absolute, assurance against errors and fraud[294] Item 1. Legal Proceedings The Company is subject to normal course legal actions, with management expecting no material adverse effect on its financial condition or operations - Company is subject to pending and threatened legal actions in the normal course of business[295] - Management believes the outcome of current litigation will not have a material adverse effect on the Company's business, financial condition, or results of operations[295] Item 1A. Risk Factors No material changes to risk factors from the Company's 2018 Annual Report on Form 10-K - No material changes to risk factors from the 2018 Annual Report on Form 10-K[296] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company repurchased 16,040 shares of common stock in Q1 2019, with 466,418 shares remaining available under the April 2018 repurchase program - Repurchased 16,040 shares of common stock at an average price of $52.93 per share during Q1 2019[298][299] - Board authorized a program on April 18, 2018, to repurchase up to 500,000 shares; 466,418 shares remained available as of February 28, 2019[297][299] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - No defaults upon senior securities[300] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable[301] Item 5. Other Information No other information is reported under this item - None[301] Item 6. Exhibits and Financial Statement Schedules This section lists all exhibits filed with the 10-Q report, including various agreements and certifications - Includes various exhibits such as Plan of acquisition, reorganization, arrangement, liquidation, or succession (FDIC Purchase and Assumption Agreements)[304] - Includes Articles of incorporation and Bylaws, and Instruments defining the rights of security holders[304] - Material contracts include stock option and incentive plans, employment agreements, and the Small Business Lending Fund – Securities Purchase Agreement[305][306][307][308][309][310][311][312][313][314][315][316][317][318][319] - Certifications include Rule 13a-14(a) Certifications of Chief Executive Officer and Treasurer, and Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002[320] SIGNATURES - Report signed by Joseph W. Turner (President and CEO) and Rex A. Copeland (Treasurer) on May 8, 2019[322]