Great Southern Bancorp, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are primarily with FY 2018. The filing was signed March 6, 2020. Great Southern is a bank holding company operating through Great Southern Bank, with 97 banking centers across six states and commercial loan offices in several additional markets.
Financial performance and position
| Metric | FY / year-end 2019 | FY / year-end 2018 |
|---|---|---|
| Total assets | $5.02 billion | $4.68 billion |
| Net income | $73.6 million | $67.1 million |
| Diluted EPS | $5.14 | $4.71 |
| Net interest income | $180.4 million | $168.2 million |
| Net interest margin | 3.95% | 3.99% |
| Deposits | $3.96 billion | $3.73 billion |
| Stockholders’ equity | $603.1 million | $532.0 million |
- Earnings and margins: Net income rose 9.7%. Net interest income increased 7.3%, while total interest income grew 14.1%; higher deposit and short-term borrowing costs outpaced some asset-yield gains, reducing net interest margin by 4 basis points. The company’s efficiency ratio improved to 54.48% from 56.41%.
- Revenue and expenses: Noninterest income fell 14.5% to $31.0 million, largely because 2018 included a $7.4 million gain on the Omaha-area branch sale. Noninterest expense was nearly flat at $115.1 million. The effective tax rate was 18.3%, versus 18.1%.
- Loans and credit: Net loans were $4.15 billion on the consolidated balance sheet; selected financial data reports $4.16 billion, including mortgage loans held for sale. Net loans increased about 4.1%; gross loans excluding acquired portfolios and mortgage loans held for sale rose 2.1%. Commercial real estate, multifamily and residential mortgage lending grew, while construction and consumer auto balances declined. The allowance for loan losses was $40.3 million; net charge-offs were $4.3 million, or 0.10% of average loans. Nonperforming assets declined to $8.2 million, 0.16% of average total assets, from $11.8 million and 0.26%.
- Cash flow and liquidity: Operating cash flow was $86.4 million, investing cash flow was negative $295.1 million and financing cash flow was positive $226.1 million. Cash and cash equivalents totaled $220.2 million at year-end. Available liquidity included $867.1 million under the FHLBank line, $367.8 million under the Federal Reserve line and $228.5 million of unpledged securities.
- Funding and debt: Deposits grew 6.3%. Brokered deposits were $371.7 million, and overnight FHLBank borrowings were $196.0 million. Year-end short-term borrowings and other interest-bearing liabilities were $228.2 million; reverse repurchase agreements were $84.2 million. The company also had $75.0 million face value of subordinated notes and $25.8 million of subordinated debentures. Loans-to-deposits were 105.13%.
- Capital and shareholder returns: The Bank’s CET1, Tier 1, total capital and leverage ratios were 13.1%, 13.1%, 14.0% and 12.3%, respectively; regulators classified it as well-capitalized. Tangible common equity to tangible assets was 11.9%. Declared dividends increased to $2.07 per share from $1.20; the payout ratio was 40.3%.
Material changes versus FY 2018
- Asset growth of 7.2% reflected increases in loans and available-for-sale securities. Securities rose 53.4% to $374.2 million.
- Deposits increased $235.1 million, with growth in transaction accounts, internet-channel certificates and brokered funding. Time deposits increased about $130 million.
- The allowance rose from $38.4 million to $40.3 million, while provision expense fell from $7.2 million to $6.2 million and net charge-offs declined from $5.2 million to $4.3 million.
- Consumer auto loans continued to contract; the Bank exited indirect automobile originations in March 2019. Fayetteville, Arkansas, and Ames, Iowa, banking centers were consolidated.
- Fourth-quarter diluted EPS was $1.24, compared with $1.21 in Q4 2018; quarterly net income was $17.9 million versus $17.3 million.
Outlook, risks and unusual items
- Management did not provide specific earnings guidance. It said loan growth may not match prior levels, expects to continue limiting land-development lending, and anticipates commercial real estate and construction growth if economic conditions remain strong. The filing cited strong competition and margin pressure after three Federal Reserve rate cuts in 2019.
- Credit exposure is concentrated in real estate-related lending; the filing states commercial and other residential construction, commercial real estate, multifamily and other commercial loans represented approximately 81.8% of the portfolio. Management identified regional economic weakness, property values, borrower cash flows and the adequacy of loan-loss reserves as significant risks.
- Management flagged the emerging coronavirus outbreak as a potential risk to borrowers, demand, operations and financial markets; its eventual impact was uncertain at filing. LIBOR’s expected phaseout after 2021 also creates transition and contract risks.
- CECL took effect January 1, 2020. The company estimated an $11–$14 million increase in credit-loss allowance, a $7–$10 million liability for unfunded exposures and a $14–$18 million after-tax reduction in retained earnings; estimates remained subject to change. Management expected capital status to remain well-capitalized.
- After year-end, on March 2, 2020, the company terminated its $400 million cash-flow hedge before its 2025 maturity and received $45.9 million, including accrued interest. The filing says the net amount will be recorded in accumulated other comprehensive income and recognized into interest income over the original remaining term.
- Auditors issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective. Management said pending litigation was not expected to have a material adverse effect.
Investor facts to verify
- How much of 2019 earnings growth came from recurring net interest income versus acquired-loan accretion ($7.4 million of interest income) and other nonrecurring items?
- Whether deposit pricing, brokered funding and overnight FHLBank borrowing costs continue to pressure net interest margin.
- Credit performance and collateral values in commercial real estate, construction and multifamily portfolios, including the rising potential-problem-loan balance and CECL transition assumptions.
- The realized accounting and earnings effects of the $45.9 million swap termination, and the timing of related accumulated other comprehensive income recognition.
- Actual CECL adoption adjustments, future loan growth, capital and liquidity levels, and any effects from the coronavirus or LIBOR transition.