Great Southern Bancorp, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Great Southern is a one-bank holding company whose banking operation serves customers primarily across the Midwest, with additional commercial lending offices in several U.S. cities. This unaudited quarterly report covers the three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods unless otherwise noted. Amounts below are in millions except per-share data.
Financial performance and position
- Q2 earnings: Net income was $18.3 million, up 0.5% from $18.2 million. Diluted EPS was $1.52 versus $1.44. Total interest and non-interest income was $81.4 million, versus $62.0 million, while net interest income fell 1.4% to $48.1 million.
- First-half earnings: Net income rose 10.1% to $38.8 million from $35.2 million; diluted EPS was $3.19 versus $2.73. Total interest and non-interest income was $160.7 million versus $117.9 million.
- Margins and costs: Net interest margin was 3.56% in Q2, down from 3.78%; for the first half it was 3.77%, up from 3.61%. Q2 non-interest expense increased 5.2% to $34.7 million, and the efficiency ratio worsened to 62.10% from 56.76%.
- Assets and loans: Total assets were $5.72 billion, up 0.7% from year-end 2022. Net loans were $4.52 billion, up 0.2%; growth in multifamily residential loans was largely offset by declines in commercial construction and commercial real estate loans.
- Deposits and liquidity: Deposits increased 3.0% to $4.82 billion. Brokered deposits rose to $669.7 million from $411.5 million at year-end; non-interest-bearing demand deposits declined. Cash and cash equivalents were $203.9 million. Management said liquidity was ample and reported available secured lines of $1.20 billion at the FHLB and $409.6 million at the Federal Reserve, plus unpledged securities.
- Borrowings and capital: Short-term borrowings and other interest-bearing liabilities were $72.1 million; customer repurchase agreements were $59.3 million. Subordinated debentures and notes totaled $100.2 million. Stockholders’ equity was $546.3 million, or 9.6% of assets; tangible common equity to tangible assets was 9.38%. The Bank and holding company reported capital ratios above applicable well-capitalized thresholds.
- Cash flows, first half: Operating activities provided $47.6 million; investing activities provided $3.9 million; financing activities used $16.1 million. Cash and cash equivalents increased $35.4 million to $203.9 million.
- Credit quality: The allowance for credit losses was $64.9 million, or 1.41% of loans, versus 1.39% at year-end. Non-performing assets rose to $11.2 million from $3.7 million, primarily reflecting commercial real estate loans; non-performing assets were 0.20% of assets versus 0.07%.
- Dividends and repurchases: The company declared $0.40 per share for Q2 and $0.80 per share for the first half. It repurchased 269,321 shares for $14.3 million in the first half; approximately 908,000 shares remained authorized for repurchase at June 30.
Material changes versus comparable periods
- Q2 net interest income declined despite higher loan yields: rapidly rising deposit and borrowing costs more than offset asset-yield improvement. Deposit interest expense rose to $21.8 million from $2.4 million.
- First-half net interest income increased 10.0%, supported by higher loan yields, but funding costs rose sharply. Total interest expense was $43.8 million versus $7.3 million.
- First-half provision for loan losses was $1.5 million, compared with none in 2022, while the provision for unfunded commitments was a credit of $2.4 million versus a $2.0 million expense. The lower unfunded-commitment reserve supported reported earnings.
- First-half non-interest income decreased 15.3% to $15.7 million, including lower ATM/POS fees and loan-sale gains and a $289,000 derivative-related loss. Non-interest expense increased 7.6% to $69.2 million, including higher professional fees, occupancy costs and compensation.
- Brokered deposits increased, while customer repurchase agreements and non-interest-bearing checking balances decreased. Management cited deposit competition and the repricing of more than $500 million of time deposits during Q2.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or growth guidance. Management said future deposit replacement rates could be near or above 4.00%, based on July 2023 market rates, and noted that higher funding costs could offset loan-yield benefits. It expects interest-rate decisions to remain data-dependent.
- Credit and real estate risks: A commercial real estate office-building relationship of approximately $8.6 million was moved to non-performing status in Q2. Management reported national multifamily oversupply and elevated office vacancies, including weakening office fundamentals; it identifies commercial real estate, construction, multifamily and certain other lending as higher-risk categories.
- Funding and market risks: Approximately 15% of deposits were uninsured excluding deposits of consolidated subsidiaries (28% including them). The company warns that deposit competition, brokered-funding availability, interest-rate changes, recession risk, real estate values and bank-industry sentiment could affect liquidity, margins and earnings.
- Investment securities: At June 30, available-for-sale securities had $62.5 million of gross unrealized losses; held-to-maturity securities had $24.7 million. Management attributed declines principally to interest rates rather than credit and said it had the intent and ability to hold HTM securities to repayment. HTM fair value was $173.7 million against $198.4 million carrying value.
- Hedges and rate exposure: Interest-rate hedges reduced loan interest income by $4.2 million in Q2 and $6.4 million in the first half, principally due to active cash-flow swaps. The filing also describes ongoing amortization into loan interest income of a gain from a 2020-terminated swap.
- Contingency: A Missouri state tax dispute for 2014–2015 remains before the Missouri Administrative Hearing Commission, with no hearing held as of the filing. The potential tax obligation could be up to $4.0 million for those years, with possible additional amounts for later years; management believes it will prevail.
- Operations and controls: Core banking system conversion is planned for mid-2024 after the timeline was extended for testing and functionality work. Q2 included $986,000 of costs primarily related to training, implementation and consultants. Disclosure controls were reported effective, with no material control changes during the quarter.
- Other developments: The company completed its transition of remaining LIBOR-based loans to SOFR-based indices effective July 1, 2023. It plans to open a new Springfield drive-thru Express Center using interactive teller machines in early September 2023.
Most important facts for investors to verify
- Whether elevated deposit and wholesale funding costs continue to compress net interest margin, particularly as $1.03 billion of time deposits mature within 12 months.
- Developments in the $8.6 million office-property credit and the broader commercial real estate portfolio, including migration to non-performing status, collateral values and reserve adequacy.
- Deposit retention, brokered-deposit dependence, uninsured deposit levels and continued access to secured funding lines.
- The sensitivity of earnings and capital to interest rates, hedge settlements and the substantial unrealized losses in the securities portfolio.
- The resolution and potential exposure from the Missouri tax dispute, and the costs and execution risks of the planned core-platform conversion.