Great Southern Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; interim financial statements are unaudited. The company operates as a one-bank holding company, with Great Southern Bank serving customers primarily across Missouri and nearby states and commercial lending markets in several other states.
Financial performance and position
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $75.3 | $59.7 | $220.4 | $159.0 |
| Net interest income | $46.7 | $52.9 | $148.1 | $145.0 |
| Net income | $15.9 | $18.1 | $54.7 | $53.3 |
| Diluted EPS | $1.33 | $1.46 | $4.52 | $4.20 |
| Net interest margin | 3.43% | 3.96% | 3.66% | 3.73% |
| Non-interest expense | $35.6 | $34.8 | $104.7 | $99.0 |
- Quarterly comparison: Net income declined 12.4%, mainly as net interest income fell $6.2 million and non-interest expense rose $0.8 million. Lower loan and unfunded-commitment provisions partly offset these pressures.
- Nine-month comparison: Net income increased 2.5%. Higher net interest income and lower credit-loss provisions more than offset higher expenses, lower non-interest income, and higher taxes.
- Balance sheet at September 30: Assets were $5.75 billion, up 1.2% from year-end 2022. Net loans were $4.56 billion, up 1.3%; deposits were $4.85 billion, up 3.6%. Stockholders’ equity was $531.7 million, or 9.3% of assets; tangible common equity to tangible assets was 9.08%.
- Funding and debt: Brokered deposits increased to $669.3 million from $411.5 million at year-end 2022. Reverse repurchase agreements fell to $58.2 million from $176.8 million. Short-term borrowings and other interest-bearing liabilities were $84.1 million, including $82.5 million of overnight FHLBank borrowings. Subordinated debentures and notes totaled about $100.3 million; the notes have a 5.50% fixed rate through June 2025, then float.
- Credit quality: Allowance for loan losses was $64.8 million, 1.40% of loans. Non-performing assets rose to $10.9 million, or 0.19% of assets, from $3.7 million and 0.07% at year-end; the increase was largely CRE loans, including an $8.5 million office-building relationship. Net charge-offs were $0.1 million for the quarter and $0.2 million year to date.
- Cash flow and liquidity: Operating activities provided $40.1 million in the first nine months, investing activities used $39.1 million, and financing activities provided $12.8 million. Cash and cash equivalents ended at $182.3 million. Management said liquidity sources were ample; available facilities included $1.053 billion from FHLBank and $439.8 million from the Federal Reserve, alongside cash and unpledged securities.
Material changes and notable items
- Interest expense rose sharply with higher market rates and deposit competition: total interest expense was $28.5 million in Q3 versus $6.8 million a year earlier, and $72.3 million year to date versus $14.0 million.
- Loan yields benefited from repricing and higher rates on new loans, but funding costs rose faster in Q3. The nine-month margin also narrowed, though less significantly.
- Unrealized losses were substantial: AFS securities had $84.3 million of gross unrealized losses and HTM securities $30.6 million at September 30. Management attributed declines to market rates, stated it intended and was able to hold HTM securities, and assessed the declines as not credit-related. HTM losses are excluded from reported equity; including them net of tax would reduce equity by $23.1 million.
- Accumulated other comprehensive loss increased to $76.8 million from $53.4 million at year-end, reflecting securities and hedge valuation changes. The company repurchased 376,122 shares for $19.5 million during the nine months and declared $1.20 per share in dividends.
- Interest-rate swaps reduced loan interest income by a net $5.8 million in the first nine months, partly offset by $6.1 million of income from accretion of a previously terminated swap. Management estimated a combined negative swap impact of about $3.7 million in Q4 2023.
Outlook, commentary, and risks
- Management expects the combined federal and state effective tax rate to be approximately 20.5%–22.0% in future periods. The filing provides no specific earnings, revenue, or margin guidance.
- Management’s interest-rate models indicate rising rates would generally have a slightly positive effect on net interest income over the next 12 months, while falling rates would have a slightly negative effect. Deposit pricing, competition, and funding mix could alter outcomes. Management noted that roughly $1.06 billion of time deposits mature over the following 12 months and October replacement rates were likely around 4.25%–4.75%.
- Management identified inflation, rate changes, recession risk, deposit competition and access to funding, commercial real estate conditions, loan losses, securities values, and cyber and regulatory risks as factors that could affect results. It cautioned that operating results through September are not necessarily indicative of full-year results.
- The planned core banking platform conversion was delayed from Q3 2023 to mid-2024. Contractual disputes with the vendor remain unresolved, with no assurance of resolution; the company expects to continue using its current provider in the meantime.
- A Missouri tax dispute remains before the Missouri Administrative Hearing Commission. The company believes it will prevail, but potential exposure could be up to $4.0 million for 2014–2015, with possible additional amounts for later years.
- The Bank and holding company reported regulatory capital ratios above well-capitalized thresholds. Management reported no material changes to risk factors from the 2022 Form 10-K; pending and threatened litigation was not expected to have a material adverse effect.
Investor verification priorities
- Track deposit pricing, brokered-deposit reliance, uninsured-deposit levels, and liquidity availability; uninsured deposits were reported at approximately 16% excluding company subsidiaries and 35% including specified subsidiary and collateralized deposits.
- Monitor CRE credit performance, especially the non-performing office-building loan, and changes in nonaccrual loans, classified assets, and the allowance.
- Assess margin pressure from deposit repricing and the continuing costs and maturities of interest-rate swaps.
- Review securities valuation losses, AOCI, and the potential capital effect if HTM securities were measured at fair value.
- Follow resolution of the core-system vendor dispute, the mid-2024 conversion timetable, and the Missouri tax proceeding.