Great Southern Bancorp, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2020. Great Southern is a one-bank holding company whose banking business serves customers primarily across the Midwest, with commercial lending offices in several other U.S. markets. Results are unaudited and prepared under the incurred-loss accounting method; the company deferred CECL adoption until Q4 2020.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $44.2m | $45.9m | $132.6m | $135.4m |
| Provision for loan losses | $4.5m | $2.0m | $14.4m | $5.5m |
| Non-interest income | $9.5m | $8.7m | $25.1m | $23.3m |
| Non-interest expense | $32.0m | $28.7m | $92.2m | $85.6m |
| Net income | $13.5m | $19.7m | $41.5m | $55.7m |
| Diluted EPS | $0.96 | $1.38 | $2.93 | $3.90 |
| Net interest margin | 3.36% | 3.95% | 3.52% | 3.99% |
Balance sheet at September 30, 2020: Total assets were $5.44bn, up 8.5% from year-end 2019. Net loans were $4.41bn, up 6.3%; deposits were $4.44bn, up 12.2%; available-for-sale securities were $445.9m; cash and cash equivalents were $338.3m. Stockholders’ equity was $624.6m, or 11.5% of assets; tangible common equity to tangible assets was 11.36%.
Credit, liquidity and capital: The allowance for loan losses was $54.2m, versus $40.3m at year-end 2019; it was 1.24% of loans excluding FDIC-assisted acquired loans, compared with 1.00% at year-end. Non-performing assets excluding acquired assets were $5.5m, or 0.10% of assets, down from $8.2m and 0.16%. The Bank and holding company were reported as well capitalized; the Bank’s total capital ratio was 14.4% and the company’s was 16.7%. Available funding included $338.3m cash, $223.1m unpledged securities, and secured lines of $1.13bn at the FHLB and $431.5m at the Federal Reserve.
Cash flow and borrowings: For the nine months, operating activities provided $35.8m, investing activities used $278.9m, and financing activities provided $361.2m; cash increased $118.1m to $338.3m. Subordinated notes were $148.2m, reflecting a $75m issuance in June. Short-term borrowings and other interest-bearing liabilities fell to $1.2m from $228.2m at year-end 2019; reverse repurchase agreements rose to $155.0m.
Material changes versus comparable periods
- Net income declined 31.8% in Q3 and 25.5% year to date. Management attributed the declines mainly to higher loan-loss provisions, higher operating expenses and lower net interest income.
- Net interest margin fell 59 basis points in Q3 and 47 basis points year to date, primarily reflecting lower market rates and lower asset yields. Lower deposit and borrowing costs partly offset the pressure.
- Loan growth included multifamily, commercial business, residential mortgage and approximately $121m of PPP loans; construction and consumer auto balances declined. Management reported minimal loan growth expected for the foreseeable future.
- Deposit growth was concentrated in transaction accounts, while certificates of deposit and brokered deposits declined. The company held excess cash after paying down overnight FHLB borrowings.
- Loan-sale gains increased with higher fixed-rate mortgage originations, while service-charge, debit-card and ATM fee income declined, partly due to pandemic-related fee waivers and reduced customer activity.
- Q3 efficiency ratio increased to 59.64% from 52.63%; year-to-date it increased to 58.45% from 53.94%.
Outlook, risks and unusual items
- COVID-19 and credit: The duration and economic effects of the pandemic remain uncertain. Retail, hotel/motel and restaurant borrowers are among the more affected sectors. At quarter-end, 495 loans totaling approximately $395.5m had pandemic-related modifications; management warned further modifications, defaults and loan-loss provisions could occur. These modifications were generally not classified as troubled debt restructurings under applicable guidance.
- CECL transition: For Q4 adoption, management estimated an initial $11m–$14m increase in the allowance and a $7m–$10m liability for unfunded commitments, with an after-tax retained-earnings decrease of $14m–$18m. A hypothetical January 2020 adoption was estimated to require an additional $0m–$3m provision through September, beyond the $14.4m already recorded under incurred-loss accounting. Estimates may change.
- Rate and funding sensitivity: Management expects rising rates generally to benefit net interest income and falling rates to pressure it, while noting near-term effects can differ. About $2.10bn of loans were indexed to LIBOR and $256m to prime; most LIBOR-indexed balances had rate floors. LIBOR transition is a stated risk.
- Swap termination: The company terminated its $400m cash-flow hedge in March and received $45.9m. The gain is recorded in accumulated other comprehensive income and is being accreted to loan interest income through the original 2025 maturity; management expected about $2.0m of related interest income per quarter from Q2 2020 onward.
- Other outlook and actions: Management expected a full-year 2020 effective tax rate of approximately 18.5%–19.5%, versus 17.5%–18.5% in future years. A $0.34-per-share quarterly dividend was declared. On October 21, 2020, the Board authorized a new repurchase program for up to one million shares, effective after completing the prior program.
- The company stated it did not identify goodwill or intangible-asset impairment at September 30. Management believed pending and threatened litigation would not have a material adverse effect; no material risk-factor changes were reported in this quarter’s filing.
Most important facts for investors to verify
- Whether modified borrowers resume scheduled payments and whether COVID-affected commercial real estate and business credits generate rising delinquencies, non-performing assets or charge-offs.
- The final CECL adoption impact, including allowance and unfunded-commitment liability, and how the accounting change affects reported capital and earnings.
- Whether deposit growth persists and at what cost, alongside liquidity needs, loan demand and concentration in customer reverse-repurchase funding.
- Net interest margin trends, including the contribution from the terminated swap, PPP fee accretion, loan floors and the transition away from LIBOR.
- Whether loan-sale gains and mortgage origination activity can offset weaker service-charge income and higher operating costs; monitor the elevated efficiency ratio.
- Capital and shareholder returns after the special dividend, share repurchases and subordinated-note issuance; confirm the new repurchase program’s execution.