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Great Southern Bancorp, Inc. Reports Preliminary Second Quarter Earnings of$0.97 Per Diluted Common Share

Preliminary Financial Results and Other Matters for the Second Quarter and First Six Months of 2018: 

  • Significant Unusual Income or Expense Items: During the three months ended June 30, 2018, the Company recorded the following unusual item: the Company made valuation write-downs totaling $2.1 million on several foreclosed asset relationships, which is included in the Consolidated Statements of Income under “Noninterest Expense – Expense on foreclosed assets.”  These write-downs resulted from management’s decision, after marketing these assets for an extended period, to reduce the asking price for several parcels of land (subdivision ground, residential lots and commercial lots and undeveloped ground).   The impact of this item, after the effect of the full tax rate for the Company, reduced earnings per common share by approximately $0.11.
  • Total Loans:  Total gross loans (including the undisbursed portion of loans), excluding FDIC-assisted acquired loans and mortgage loans held for sale, increased $274.5 million, or 6.3%, from December 31, 2017, to June 30, 2018 and increased $194.2 million from March 31, 2018.  This increase was primarily in construction loans, commercial real estate loans, other residential (multi-family) loans and one- to four-family residential mortgage loans.  The FDIC-acquired loan portfolios had net decreases totaling $25.5 million during the six months ended June 30, 2018, and consumer auto loans outstanding decreased $58.2 million during the six months ended June 30, 2018.  Outstanding net loan receivable balances increased $133.5 million, from $3.73 billion at December 31, 2017 to $3.86 billion at June 30, 2018 and increased $98.1 million from March 31, 2018.
  • Asset QualityNon-performing assets and potential problem loans, excluding those acquired in FDIC-assisted transactions (which are accounted for and analyzed as loan pools rather than individual loans), totaled $30.2 million at June 30, 2018, a decrease of $5.6 million from $35.8 million at December 31, 2017.  Non-performing assets at June 30, 2018 were $21.5 million (0.47% of total assets), down $6.3 million from $27.8 million (0.63% of total assets) at December 31, 2017 and down $5.9 million from $27.4 million (0.62% of total assets) at March 31, 2018. 
  • Capital:  The capital position of the Company continues to be strong, significantly exceeding the thresholds established by regulators. On a preliminary basis, as of June 30, 2018, the Company’s Tier 1 Leverage Ratio was 11.3%, Common Equity Tier 1 Capital Ratio was 10.9%, Tier 1 Capital Ratio was 11.5%, and Total Capital Ratio was 14.1%. 
  • Net Interest Income:  Net interest income for the second quarter of 2018 increased $3.3 million to $41.2 million compared to $37.9 million for the second quarter of 2017.  Net interest income was $39.4 million for the first quarter of 2018.  Net interest margin was 3.94% for the quarter ended June 30, 2018, compared to 3.68% for the quarter ended June 30, 2017 and 3.93% for the quarter ended March 31, 2018.  The increase in net interest margin compared to the prior year second quarter is primarily due to increased yields in most loan categories and higher overall yields on investments and interest-earning deposits at the Federal Reserve Bank, partially offset by an increase in the average interest rate paid on deposits.  The positive impact on net interest margin from the additional yield accretion on acquired loan pools that was recorded during the period was 10, 12 and 12 basis points for the quarters ended June 30, 2018, June 30, 2017, and March 31, 2018, respectively.  For further discussion of the additional yield accretion of the discount on acquired loan pools, see “Net Interest Income.”

SPRINGFIELD, Mo., July 18, 2018 (GLOBE NEWSWIRE) — Great Southern Bancorp, Inc. (NASDAQ:GSBC), the holding company for Great Southern Bank, today reported that preliminary earnings for the three months ended June 30, 2018, were $0.97 per diluted common share ($13.8 million available to common shareholders) compared to $1.14 per diluted common share ($16.2 million available to common shareholders) for the three months ended June 30, 2017. 

Preliminary earnings for the six months ended June 30, 2018, were $1.91 per diluted common share ($27.3 million available to common shareholders) compared to $1.95 per diluted common share ($27.7 million available to common shareholders) for the six months ended June 30, 2017. 

For the quarter ended June 30, 2018, annualized return on average common equity was 11.32%, annualized return on average assets was 1.23%, and net interest margin was 3.94%, compared to 14.37%, 1.45% and 3.68%, respectively, for the quarter ended June 30, 2017.  For the six months ended June 30, 2018, annualized return on average common equity was 11.27%; annualized return on average assets was 1.23%; and net interest margin was 3.93% compared to 12.46%, 1.24% and 3.73%, respectively, for the six months ended June 30, 2017. 

President and CEO Joseph W. Turner commented, “Second quarter results were very strong, driven by an expanding core net interest margin, loan growth and expense containment.  Core net interest margin for the second quarter 2018 expanded to 3.84%, which was an increase of 28 and three basis points from the year ago quarter and most recent quarter, respectively. The primary driver of the margin expansion was increased yields in most of our loan categories, partially offset by a gradual, but steady, increase in deposit costs.  As in the first quarter of this year, our income tax expense was lower than the year-ago quarter due to enactment of the federal tax legislation last December.

“Commercial real estate and construction loan production was strong during the second quarter and our level of loan commitments and unfunded balances increased. Total gross loans, including the undisbursed portion of loans and excluding FDIC-assisted acquired loans and mortgages held for sale, have increased $274.5 million, or 6.3%, from the end of 2017. Credit quality during the quarter was stable with decreased net charge-offs ($704,000) and decreases in non-performing loans and foreclosed assets and repossessions.  During the quarter we reduced the list prices for several of our foreclosed land assets, resulting in a pre-tax net write-down of $2.1 million.”  

Turner continued, “As noted, loan growth has been good in the first half of this year; however, there is strong competition for these loans and we did receive some significant loan repayments in late June. While we are experiencing good production throughout our nine-state franchise, we look for strategic opportunities to expand our reach into other markets by adding quality lenders in loan production offices.  As such, we are pleased to announce that we expect to open loan production offices in Atlanta and Denver during the third quarter of 2018.  Local and highly-experienced commercial lenders have been hired to manage these offices, which will be modeled similar to our current offices in Chicago, Dallas, Omaha and Tulsa.

“Lastly, we expect to close on the sale of the four Omaha-area banking centers on July 20, 2018.  As we noted in previous regulatory filings, this transaction will result in a significant gain being recorded in the third quarter.”  

Selected Financial Data:

(In thousands, except per share data) Three Months Ended
June 30,
  Six Months Ended
June 30,
    2018   2017     2018   2017
Net interest income $   41,212  $   37,901   $   80,651  $   76,602
Provision for loan losses     1,950     1,950       3,900     4,200
Non-interest income     7,459     15,800       14,394     23,496
Non-interest expense      29,915      28,371        58,228      56,941
Provision for income taxes     2,967     7,204       5,612     11,262
Net income and net income available to common shareholders $   13,839  $   16,176   $   27,305  $   27,695
           
Earnings per diluted common share $   0.97  $   1.14   $   1.91  $   1.95
           

NET INTEREST INCOME

Net interest income for the second quarter of 2018 increased $3.3 million to $41.2 million compared to $37.9 million for the second quarter of 2017.  Net interest margin was 3.94% in the second quarter of 2018, compared to 3.68% in the same period of 2017, an increase of 26 basis points.  For the three months ended June 30, 2018, the net interest margin increased one basis point compared to the net interest margin of 3.93% in the three months ended March 31, 2018.  The increase in the margin from the prior year second quarter was primarily the result of increased yields in most loan categories and higher overall yields on investments and interest-earning deposits at the Federal Reserve Bank, partially offset by an increase in the average interest rate on deposits and 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 period.  The average interest rate spread was 3.72% for the three months ended June 30, 2018, compared to 3.53% for the three months ended June 30, 2017 and 3.74% for the three months ended March 31, 2018. 

Net interest income for the six months ended June 30, 2018 increased $4.1 million to $80.7 million compared to $76.6 million for the six months ended June 30, 2017.  Net interest margin was 3.93% in the six months ended June 30, 2018, compared to 3.73% in the same period of 2017, an increase of 20 basis points.  The average interest rate spread was 3.73% for the six months ended June 30, 2018, compared to 3.58% for the six months ended June 30, 2017. 

The Company’s net interest margin has been positively impacted by significant additional yield accretion recognized in conjunction with updated estimates of the fair value of the loan pools acquired in the FDIC-assisted transactions. On an on-going basis, the Company estimates the cash flows expected to be collected from the acquired loan pools. For each of the loan portfolios acquired, the cash flow estimates increased during the current and prior periods presented below, based on payment histories and reduced credit loss expectations. This resulted in increased income that has been spread, on a level-yield basis, over the remaining expected lives of the loan pools (and, therefore, has decreased over time). In the prior year six month period, the increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements with the FDIC (when such agreements were in place), which were recorded as indemnification assets, with such reductions amortized on a comparable basis over the remainder of the terms of the loss sharing agreements or the remaining expected lives of the loan pools, whichever was shorter.  Additional estimated cash flows totaling approximately $725,000 and $2.5 million were recorded in the three and six months ended June 30, 2018, respectively, related to all of these loan pools. 

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

     
  Three Months Ended  
  June 30, 2018   June 30, 2017  
  (In thousands, except basis points data)
Impact on net interest income/net interest margin (in basis points) $   1,070   10 bps   $   1,282   12 bps  
Non-interest income       —           —    
Net impact to pre-tax income $   1,070     $   1,282    

  Six Months Ended  
  June 30, 2018   June 30, 2017  
  (In thousands, except basis points data)
Impact on net interest income/net interest margin (in basis points) $   2,227   11 bps   $   3,262     16 bps  
Non-interest income       —           (634 )    
Net impact to pre-tax income $   2,227     $   2,628      
 

Because these adjustments will be recognized generally over the remaining lives of the loan pools, they will impact future periods as well.  The remaining accretable yield adjustment that will affect interest income is $2.9 million.  Of the remaining adjustments affecting interest income, we expect to recognize $1.4 million of interest income during the remainder of 2018.  Additional adjustments may be recorded in future periods from the FDIC-assisted transactions, as the Company continues to estimate expected cash flows from the acquired loan pools. 

Excluding the impact of the additional yield accretion, net interest margin for the three and six months ended June 30, 2018, increased 28 and 25 basis points, respectively, when compared to the year-ago periods.  The increase in net interest margin in the three and six month periods is primarily due to increased yields in most loan categories and higher overall yields on investments and interest-earning deposits at the Federal Reserve Bank, partially offset by an increase in the average interest rate on deposits.

For additional information on net interest income components, see the “Average Balances, Interest Rates and Yields” tables in this release.

NON-INTEREST INCOME

For the quarter ended June 30, 2018, non-interest income decreased $8.3 million to $7.5 million when compared to the quarter ended June 30, 2017, primarily as a result of the following items:

  • 2017 gain on early termination of FDIC loss sharing agreement for Inter Savings Bank:  In the quarter ended June 30, 2017, the Company recognized a one-time gross gain of $7.7 million from the termination of the loss sharing agreement for Inter Savings Bank, which was recorded in the accretion of income related to business acquisitions line item of the consolidated statements of income for the three months ended June 30, 2017. 
  • Other income:  Other income decreased $348,000 compared to the prior year quarter.  This decrease was primarily due to fee income totaling approximately $275,000 related to interest rate swaps entered into in the prior year quarter, which was not repeated in the current year quarter. 
  • Late charges and fees on loans:  Late charges and fees on loans decreased $223,000 compared to the prior year quarter.  The decrease was primarily due to fees totaling $130,000 on loan payoffs received on two commercial loan relationships during the 2017 quarter, with no similar large fees in the current year quarter.   

For the six months ended June 30, 2018, non-interest income decreased $9.1 million to $14.4 million when compared to the six months ended June 30, 2017, primarily as a result of the following items:

  • 2017 gain on early termination of FDIC loss sharing agreement for Inter Savings Bank:  In 2017, the Company recognized a one-time gross gain of $7.7 million from the termination of the loss sharing agreement for Inter Savings Bank, which was recorded in the accretion of income related to business acquisitions line item of the consolidated statements of income for the six months ended June 30, 2017. 
  • Amortization of income related to business acquisitions:  Because of the termination of the loss sharing agreements in previous years, the net amortization expense related to business acquisitions was $-0- for the six months ended June 30, 2018, compared to $485,000 for the six months ended June 30, 2017, which reduced non-interest income by that amount in the previous year period.   
  • Late charges and fees on loans:  Late charges and fees on loans decreased $711,000 compared to the prior year period.  The decrease was primarily due to fees totaling $632,000 on loan payoffs received on four loan relationships in the 2017 period which were not repeated in the 2018 period.   
  • Other income:  Other income decreased $687,000 compared to the prior year period.  The decrease was primarily due to the interest rate swap income in 2017 noted above and the receipt of approximately $212,000 related to the exit of certain tax credit partnerships in 2017.  
  • Net gains on loan sales:  Net gains on loan sales decreased $603,000 compared to the prior year period.  The decrease was due to a decrease in originations of fixed-rate loans during the 2018 period compared to the 2017 period.  Fixed rate single-family mortgage loans originated are generally subsequently sold in the secondary market. In 2018, the Company has originated more variable-rate single-family mortgage loans, which have been retained in the Company’s portfolio.

NON-INTEREST EXPENSE

For the quarter ended June 30, 2018, non-interest expense increased $1.5 million to $29.9 million when compared to the quarter ended June 30, 2017, primarily as a result of the following items:

  • Expense on foreclosed assets and repossessions:  Expense on foreclosed assets increased $2.1 million compared to the prior year period primarily due to net write-downs of certain foreclosed assets during the current period, totaling approximately $2.1 million.  These write-downs resulted from management’s decision to reduce the asking price for several parcels of land (subdivision ground, residential lots and commercial lots and undeveloped ground).  
  • Salaries and employee benefits:  Salaries and employee benefits increased $449,000 from the prior year quarter.  This increase is approximately 3% over the prior year expense total and is primarily attributable to normal annual raises for employees and increases in costs for health insurance and retirement benefits.
  • Legal, audit and other professional fees:  Legal, audit and other professional fees decreased $372,000 in the quarter ended June 30, 2018 compared to the same period in 2017.  The decrease was primarily due to the recovery of previously expensed legal fees and lower collection costs for problem loans and foreclosed assets.    
  • Other operating expenses:  Other operating expenses decreased $650,000 in the quarter ended June 30, 2018 compared to the same period in 2017.  During the 2017 quarter, the Company incurred a $340,000 prepayment penalty when FHLB advances totaling $31.4 million were repaid prior to maturity, which was not repeated in the 2018 quarter. 

For the six months ended June 30, 2018, non-interest expense increased $1.3 million to $58.2 million when compared to the six months ended June 30, 2017, primarily as a result of the following items:

  • Expense on foreclosed assets and repossessions:  Expense on foreclosed assets increased $2.6 million compared to the prior year period primarily due to the write-down of certain foreclosed assets during the current period, totaling approximately $2.1 million, as discussed above.  
  • Office supplies and printing expense:  Office supplies and printing expense decreased $396,000 in the six months ended June 30, 2018 compared to the same period in 2017.  During the 2017 period the Bank incurred printing and other costs totaling $373,000 related to the replacement of a portion of customer debit cards with chip-enabled cards, which was not repeated in the current year period.
  • Other operating expenses:  Other operating expenses decreased $855,000 in the six months ended June 30, 2018 compared to the same period in 2017.  During the 2017 period, the Company incurred a $340,000 prepayment penalty when FHLB advances totaling $31.4 million were repaid prior to maturity, which was not repeated in the 2018 period.  In addition, the Company experienced significantly lower debit card and check fraud losses in the 2018 period compared to the 2017 period.

The Company’s efficiency ratio for the quarter ended June 30, 2018, was 61.46% compared to 52.83% for the same quarter in 2017.  The efficiency ratio for the six months ended June 30, 2018, was 61.26% compared to 56.89% for the same period in 2017.  The increase in the ratio in both the 2018 three and six month periods was primarily due to a decrease in non-interest income and an increase in non-interest expense, partially offset by an increase in net interest income.  In the 2017 periods, the Company’s efficiency ratio was positively impacted by the significant gain recorded related to the termination of the InterSavings Bank loss sharing agreements.  In the 2018 periods, the Company’s efficiency ratio was negatively impacted by the significant write-down of foreclosed assets.  Excluding these items, the Company’s efficiency ratio would have improved in the 2018 periods compared to the 2017 periods.  The Company’s ratio of non-interest expense to average assets was 2.66% and 2.63% for the three and six months ended June 30, 2018, respectively, compared to 2.55% and 2.55% for the three and six months ended June 30, 2017, respectively.  The increase in the current period ratios was due to an increase in non-interest expense in the 2018 periods compared to the 2017 periods, primarily related to the previously discussed write-down of foreclosed assets in 2018.  Average assets for the quarter ended June 30, 2018, increased $43.6 million, or 1.0%, from the quarter ended June 30, 2017, primarily due to an increase in loans receivable, partially offset by a decrease in investment securities.  Average assets for the six months ended June 30, 2018, decreased $35.4 million, or 0.8%, from the six months ended June 30, 2017, primarily due to decreases in investment securities and other interest-earning assets, partially offset by organic loan growth. 

INCOME TAXES

On December 22, 2017, H.R.1, originally known as the Tax Cuts and Jobs Act (the “Act”), was signed into law. Among other things, the Act permanently lowers the corporate federal income tax rate to 21% from the prior maximum rate of 35%, effective for tax years including or commencing January 1, 2018.  The Company currently expects its effective tax rate (combined federal and state) to decrease from approximately 26.7% in 2017 to approximately 16.5% to 18.5% in 2018, mainly as a result of the Act.

For the three months ended June 30, 2018 and 2017, the Company’s effective tax rate was 17.6% and 30.8%, respectively.  For the six months ended June 30, 2018 and 2017, the Company’s effective tax rate was 17.0% and 28.9%, respectively.  These effective rates were lower than the statutory federal tax rates of 21% (2018) and 35% (2017), due primarily to the utilization of certain investment tax credits and to tax-exempt investments and tax-exempt loans which reduced the Company’s effective tax rate.  The Company’s effective tax rate may fluctuate in future periods as it is impacted by the level and timing of the Company’s utilization of tax credits and the level of tax-exempt investments and loans and the overall level of pre-tax income.  The Company’s effective income tax rate is currently expected to continue to be less than the statutory rate due primarily to the factors noted above.

CAPITAL

As of June 30, 2018, total stockholders’ equity and common stockholders’ equity were $490.3 million (10.7% of total assets), equivalent to a book value of $34.69 per common share.  Total stockholders’ equity and common stockholders’ equity at December 31, 2017, were $471.7 million (10.7% of total assets), equivalent to a book value of $33.48 per common share.  At June 30, 2018, the Company’s tangible common equity to tangible assets ratio was 10.5%, compared to 10.5% at December 31, 2017.   

On a preliminary basis, as of June 30, 2018, the Company’s Tier 1 Leverage Ratio was 11.3%, Common Equity Tier 1 Capital Ratio was 10.9%, Tier 1 Capital Ratio was 11.5%, and Total Capital Ratio was 14.1%.  On June 30, 2018, and on a preliminary basis, the Bank’s Tier 1 Leverage Ratio was 12.1%, Common Equity Tier 1 Capital Ratio was 12.3%, Tier 1 Capital Ratio was 12.3%, and Total Capital Ratio was 13.2%. 

Effective April 18, 2018, the Company approved a new common stock repurchase plan. The plan authorizes the repurchase of up to 500,000 shares of its common stock, representing approximately 3.5% of outstanding shares. The new plan replaces and terminates the Company’s repurchase plan that was approved November 15, 2006.  No shares were repurchased by the Company during the three months ended June 30, 2018.

The Company 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 the control of the Company. The primary factors, however, are the number of shares available in the market from sellers at any given time, the price of the stock within the market as determined by the market, and the projected impact on the Company’s earnings per share and capital.

LOANS

Total gross loans (including the undisbursed portion of loans), excluding FDIC-assisted acquired loans and mortgage loans held for sale, increased $274.5 million, or 6.3%, from December 31, 2017, to June 30, 2018.  This increase was primarily in construction loans ($202 million), commercial real estate loans ($73 million), other residential (multi-family) loans ($40 million) and one- to four-family residential mortgage loans ($31 million).  These increases were partially offset by decreases in consumer auto loans ($58 million).  The FDIC-acquired loan portfolios had net decreases totaling $25.5 million during the six months ended June 30, 2018.

Loan commitments and the unfunded portion of loans at the dates indicated were as follows (in thousands):

           
   June 30,
2018
 March 31, 
2018
December 31,
2017
December 31,
2016
December 31,
2015
Closed loans with unused available lines          
Secured by real estate (one- to four-family) $   144,994 $   138,375 $   133,587 $   123,433 $   105,390
Secured by real estate (not one- to four-family)   15,306   12,382   10,836   26,062   21,857
Not secured by real estate – commercial business   104,749   108,262   113,317   79,937   63,865
           
Closed construction loans with unused available lines          
Secured by real estate (one-to four-family)   31,221   29,757   20,919   10,047   14,242
Secured by real estate (not one-to four-family)   830,592   749,926   718,277   542,326   385,969
           
Loan Commitments not closed          
Secured by real estate (one-to four-family)   47,040   37,144   23,340   15,884   13,411
Secured by real estate (not one-to four-family)   128,200   200,192   156,658   119,126   120,817
Not secured by real estate – commercial business     —     12,995     4,870     7,022     —
           
  $   1,302,102 $   1,289,033 $   1,181,804 $   923,837 $   725,551
                     

For further information about the Company’s loan portfolio, please see the quarterly loan portfolio presentation available on the Company’s Investor Relations website under “Presentations.” 

PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES

Management records a provision for loan losses in an amount it believes sufficient to result in an allowance for loan losses that will cover current net charge-offs as well as risks believed to be inherent in the loan portfolio of the Bank. The amount of provision charged against current income is based on several factors, including, but not limited to, past loss experience, current portfolio mix, actual and potential losses identified in the loan portfolio, economic conditions, and internal as well as external reviews.  The levels of non-performing assets, potential problem loans, loan loss provisions and net charge-offs fluctuate from period to period and are difficult to predict.

Weak economic conditions, higher inflation or interest rates, or other factors may lead to increased losses in the portfolio and/or requirements for an increase in loan loss provision expense. Management maintains various controls in an attempt to limit future losses, such as a watch list of possible problem loans, documented loan administration policies and loan review staff to review the quality and anticipated collectability of the portfolio. Additional procedures provide for frequent management review of the loan portfolio based on loan size, loan type, delinquencies, financial analysis, on-going correspondence with borrowers and problem loan work-outs. Management determines which loans are potentially uncollectible, or represent a greater risk of loss, and makes additional provisions to expense, if necessary, to maintain the allowance at a satisfactory level.

The provision for loan losses for the quarter ended June 30, 2018 was $2.0 million, unchanged from the quarter ended June 30, 2017.  At June 30, 2018 and December 31, 2017, the allowance for loan losses was $37.6 million and $36.5 million, respectively.  Total net charge-offs were $704,000 and $2.4 million for the quarters ended June 30, 2018 and 2017, respectively.  During the quarter ended June 30, 2018, $748,000 of net charge-offs were in the consumer auto category.  Total net charge-offs were $2.8 million and $5.1 million for the six months ended June 30, 2018 and 2017, respectively.  During the six months ended June 30, 2018, $2.0 million of the $2.8 million of net charge-offs were in the consumer auto category.  In response to a more challenging consumer credit environment, the Company tightened its underwriting guidelines on automobile lending in the latter part of 2016.  Management took this step in an effort to improve credit quality in the portfolio and reduce delinquencies and charge-offs.  This action also resulted in a lower level of origination volume and, as such, the outstanding balance of the Company’s automobile loans declined approximately $58 million in the six months ended June 30, 2018.  We expect to see further declines in the automobile loan outstanding balance through the remainder of 2018.  In addition, one commercial loan relationship amounted to $245,000 of the total net charge-offs during the current quarter.  Charge-offs were partially offset by recoveries on multiple loans during the quarter.  Four commercial loan relationships amounted to $871,000 of the total charge-offs during the six months ended June 30, 2018.  General market conditions and unique circumstances related to individual borrowers and projects contributed to the level of provisions and charge-offs.  As assets were categorized as potential problem loans, non-performing loans or foreclosed assets, evaluations were made of the values of these assets with corresponding charge-offs as appropriate.   

In June 2017, the loss sharing agreements for Inter Savings Bank were terminated.  In April 2016, the loss sharing agreements for Team Bank, Vantus Bank and Sun Security Bank were terminated.  Loans acquired from the FDIC related to Valley Bank did not have a loss sharing agreement.  All acquired loans were grouped into pools based on common characteristics and were recorded at their estimated fair values, which incorporated estimated credit losses at the acquisition date.  These loan pools are systematically reviewed by 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 review of financial information, collateral valuations and customer interaction to determine if additional reserves are warranted.

The Bank’s allowance for loan losses as a percentage of total loans, excluding FDIC-acquired loans, was 1.02%, 1.01% and 1.02% at June 30, 2018, December 31, 2017 and March 31, 2018, respectively.  Management considers the allowance for loan losses adequate to cover losses inherent in the Bank’s loan portfolio at June 30, 2018, based on recent reviews of the Bank’s loan portfolio and current economic conditions. If economic conditions were to deteriorate or management’s assessment of the loan portfolio were to change, it is possible that additional loan loss provisions would be required, thereby adversely affecting future results of operations and financial condition.

ASSET QUALITY

Former TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley 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. These assets were initially recorded at their estimated fair values as of their acquisition dates and are accounted for in pools; therefore, these loan pools are analyzed rather than the individual loans.  The performance of the loan pools acquired in each of the five transactions has been better than expectations as of the acquisition dates. 

As a result of changes in balances and composition of the loan portfolio, changes in economic and market conditions that occur from time to time and other factors specific to a borrower’s circumstances, the level of non-performing assets will fluctuate. 

Non-performing assets, excluding all FDIC-assisted acquired assets, at June 30, 2018 were $21.5 million, a decrease of $6.3 million from $27.8 million at December 31, 2017 and a decrease of $5.9 million from $27.4 million at March 31, 2018.  Non-performing assets, excluding all FDIC-assisted acquired assets, as a percentage of total assets were 0.47% at June 30, 2018, compared to 0.63% at December 31, 2017 and 0.62% of total assets at March 31, 2018. 

Compared to December 31, 2017, non-performing loans decreased $3.1 million to $8.1 million at June 30, 2018, and foreclosed assets decreased $3.2 million to $13.4 million at June 30, 2018.  Compared to March 31, 2018, non-performing loans decreased $1.2 million and foreclosed assets decreased $4.7 million at June 30, 2018.  Non-performing commercial business loans comprised $2.9 million, or 35.1%, of the total $8.1 million of non-performing loans at June 30, 2018, a decrease of $408,000 from March 31, 2018.  Non-performing one- to four-family residential loans comprised $2.6 million, or 31.9%, of the total non-performing loans at June 30, 2018, a decrease of $193,000 from March 31, 2018.  Non-performing consumer loans comprised $2.2 million, or 27.6%, of the total non-performing loans at June 30, 2018, a decrease of $597,000 from March 31, 2018.  Non-performing commercial real estate loans comprised $352,000, or 4.3%, of the total non-performing loans at June 30, 2018, a decrease of $8,000 from March 31, 2018.  Non-performing construction and land development loans comprised $91,000, or 1.1%, of the total non-performing loans at June 30, 2018, a decrease of $5,000 from March 31, 2018.

Compared to March 31, 2018, potential problem loans increased $945,000 to $8.7 million at June 30, 2018.  The increase during the quarter was due to the addition of $2.1 million of loans to potential problem loans, partially offset by $672,000 in payments, $443,000 in loans moved to non-performing loans and $3,000 in charge-offs.

Activity in the non-performing loans category during the quarter ended June 30, 2018, was as follows:

<td class="gnw_border_bottom_solid g

                 
  Beginning
Balance,
April 1
Additions to
Non-
Performing
Removed
from Non-
Performing
Transfers
to Potential
Problem
Loans
Transfers to
Foreclosed
Assets and
Repossessions