Great Southern Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Great Southern is a bank holding company operating primarily through Great Southern Bank, serving customers across several Midwestern states and originating commercial loans in additional markets. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable / prior date |
|---|---|---|
| Interest income | $71.5 | $46.7 in Q1 2022 |
| Net interest income | $53.2 | $43.3 in Q1 2022 |
| Net interest margin | 3.99% | 3.43% in Q1 2022 |
| Net income | $20.5 | $17.0 in Q1 2022; up 20.4% |
| Diluted earnings per share | $1.67 | $1.30 in Q1 2022 |
| Non-interest income / expense | $7.9 / $34.5 | $9.2 / $31.3 in Q1 2022 |
| Total assets | $5,768.7 | $5,680.7 at December 31, 2022 |
| Net loans | $4,569.3 | $4,506.8 at December 31, 2022 |
| Deposits | $4,799.1 | $4,684.9 at December 31, 2022 |
| Cash and cash equivalents | $184.7 | $168.5 at December 31, 2022 |
| Stockholders' equity | $555.5 | $533.1 at December 31, 2022 |
| Operating / investing / financing cash flows | $5.4 / $(53.4) / $64.1 | $31.4 / $(318.4) / $(77.2) in Q1 2022 |
Net income rose mainly because net interest income increased $9.9 million, reflecting higher asset yields and loan balances. Average loan yield increased to 5.76% from 4.23%; funding costs also rose sharply. Efficiency ratio improved to 56.42% from 59.62%. Dividends declared were $0.40 per share, versus $0.36 a year earlier.
Material changes and balance-sheet details
- Net loans increased $62.5 million, led by multi-family residential and commercial real estate lending; commercial construction loans declined. The loan portfolio's weighted-average rate was 5.81%, up from 5.54% at year-end.
- Deposits increased $114.2 million. Brokered deposits rose $125.5 million to $537.0 million; approximately 14% of deposits were uninsured. Demand and savings deposit rates and time-deposit rates increased as competition for funding intensified.
- Overnight Federal Home Loan Bank borrowings increased to $154.5 million from $88.5 million. Reverse repurchase agreements declined to $70.7 million from $176.8 million. Subordinated notes were $74.4 million and subordinated debentures were $25.8 million.
- Available-for-sale securities were $493.3 million, with $54.0 million of gross unrealized losses. Held-to-maturity securities were $200.4 million; their fair value was $179.9 million, a $20.6 million unrealized shortfall not reflected in reported equity. Management said it intended and was able to hold these securities to repayment and viewed the fair-value declines as temporary.
- Allowance for loan credit losses increased to $65.0 million, or 1.40% of loans, from $63.5 million, or 1.39%, at year-end. Nonperforming assets fell to $3.0 million, or 0.05% of assets, from $3.7 million, or 0.07%. Potential problem loans declined to $0.6 million from $1.6 million.
- The Bank was well-capitalized: CET1 12.3%, Tier 1 risk-based 12.3%, total risk-based 13.5%, and Tier 1 leverage 11.7%. Company tangible common equity to tangible assets was 9.46%, versus 9.21% at year-end.
Outlook, commentary, risks and contingencies
- The filing provides no formal earnings or revenue guidance. Management said it currently expects an effective tax rate of approximately 20.5% to 21.5% in future periods.
- Management described intense deposit competition and noted that deposit costs were rising, including likely replacement rates near or above 4% for near-term certificate maturities. It expects rising rates generally to support net interest income, while falling rates could pressure it; outcomes depend on funding costs and asset repricing.
- Credit risks include economic deterioration, inflation, higher rates, and commercial real estate conditions. The filing discusses weakening multi-family fundamentals, higher office vacancies, and rising supply in some markets. Management said it monitors regional and national economic and property-market indicators.
- Liquidity sources include cash, unpledged securities, and secured Federal Home Loan Bank and Federal Reserve lines. At March 31, the company reported $184.7 million cash, $376.3 million of unpledged AFS securities, $176.7 million of unpledged HTM securities, and available secured lines of $850.0 million at FHLB and $418.4 million at the Federal Reserve. It also had $1.89 billion of unused lines and unadvanced loans, plus $60.2 million of loan-origination commitments.
- The company recorded $1.3 million of training, implementation, and consulting costs for its core-system conversion. The migration is now expected in mid-2024, extended from the prior Q3 2023 target for additional testing and functionality work. A new ITM-only express center was expected to open in Springfield in Q3 2023.
- A Missouri tax dispute concerning 2014 and 2015 returns remains before the Missouri Administrative Hearing Commission. Management believes it will prevail; if not, the tax obligation could be up to $4.0 million, with additional amounts possible for later tax years. Management said pending litigation was not expected to have a material adverse effect.
- Interest-rate risk includes substantial floating-rate lending and derivatives, including a $300 million swap that reduced loan interest income by $2.2 million in Q1 2023. Derivative agreements also contain default and regulatory termination provisions. The filing identifies funding access, securities losses, credit quality, regulatory actions, cybersecurity, competition, and economic conditions among forward-looking risks.
Important facts for investors to verify
- Whether deposit retention and funding costs remain manageable, especially given brokered deposit growth, uninsured deposits, and near-term certificate maturities.
- Whether net interest margin and earnings hold up as loan yields, deposit costs, and swap settlements change.
- Whether the credit allowance remains adequate if commercial real estate or broader economic conditions weaken.
- How unrealized securities losses, including the HTM fair-value shortfall, affect liquidity and capital under changing market conditions.
- The outcome and potential exposure from the Missouri tax dispute, and the timing, cost, and execution of the mid-2024 core-system conversion.