Great Southern Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial-statement amounts are in millions unless otherwise noted. Great Southern is a bank holding company operating primarily through Great Southern Bank, serving customers across several Midwestern and Southern states.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Interest income | $52.7 | $50.5 | $99.4 | $101.1 |
| Net interest income | $48.8 | $44.7 | $92.1 | $88.8 |
| Net interest margin | 3.78% | 3.35% | 3.61% | 3.38% |
| Net income | $18.2 | $20.1 | $35.2 | $39.0 |
| Diluted EPS | $1.44 | $1.46 | $2.73 | $2.82 |
| Dividends declared per share | $0.40 | $0.34 | $0.76 | $0.68 |
- Balance sheet at June 30: Assets were $5.55 billion, up 1.9% from year-end 2021. Net loans were $4.36 billion, up 8.8%; deposits were $4.52 billion, down 0.8%.
- Profitability and costs: Q2 non-interest income was $9.3 million and non-interest expense was $33.0 million. The efficiency ratio rose to 56.76% from 55.63%. For the first half, non-interest income was $18.5 million, expense was $64.3 million, and the efficiency ratio was 58.12% versus 55.98%.
- Credit quality: The loan allowance was $61.1 million, or 1.38% of loans, versus $60.8 million and 1.49% at year-end. No loan-loss provision was recorded in Q2 or the first half; the unfunded-commitment provision was $2.2 million in Q2 and $2.0 million in the first half. Non-performing assets were $4.3 million, 0.08% of assets, down from $6.0 million and 0.11% at year-end. Potential problem loans were $2.2 million.
- Cash flow and liquidity: First-half operating cash flow was $36.8 million, investing cash flow was negative $647.2 million, and financing cash flow was positive $88.9 million. Cash and equivalents fell $521.6 million to $195.7 million, mainly as excess funds were deployed into securities and loans. Management said liquidity was sufficient. Available sources included $727.4 million of FHLBank lines, $374.6 million of Federal Reserve lines, and unpledged securities of $328.7 million AFS and $196.0 million HTM.
- Funding and debt: Short-term borrowings and other interest-bearing liabilities were $171.9 million, including $170.0 million of overnight FHLBank borrowings; reverse repurchase agreements were $145.8 million. Subordinated notes were $74.1 million and subordinated debentures were $25.8 million. Brokered deposits increased to $273.5 million from $67.4 million at year-end.
- Capital: Stockholders’ equity was $549.6 million, or 9.9% of assets, versus $616.8 million, or 11.3%, at year-end. Tangible common equity to tangible assets was 9.72%, compared with 11.22%. The Bank and holding company remained well capitalized; the Bank’s CET1 ratio was 12.2% and the company’s was 10.8%.
Material changes versus comparable periods
- Q2 net income decreased 9.4%; first-half net income decreased 9.7%. Higher net interest income and lower tax expense were outweighed by higher expenses, the unfunded-commitment provision, and lower non-interest income.
- Net interest margin expanded as interest rates rose and deposit and subordinated-note costs remained lower. First-half interest income on loans fell, reflecting lower average balances and yields and lower PPP fee accretion; investment income increased with higher balances and rates.
- Loan growth was concentrated in multifamily residential, commercial real estate, and one- to four-family residential lending, partly offset by lower construction loans. Funding included increased FHLBank overnight borrowing and brokered deposits as total deposits declined.
- Equity fell primarily because of a $46.1 million decline in accumulated other comprehensive income, reflecting market-value losses on securities and cash-flow hedges, and $50.4 million of share repurchases. The company repurchased 849,315 shares in the first half.
- The company transferred $226.5 million of AFS securities to HTM. At June 30, AFS securities had $36.9 million of gross unrealized losses; management characterized the declines as temporary, citing market-rate changes and the securities’ credit characteristics.
Outlook, commentary, risks, and unusual items
- Management expected rising market rates to support loan yields, net interest income, and margin, while noting that outcomes depend on deposit pricing, competition, asset repricing, and economic conditions. The filing does not provide formal earnings or growth guidance.
- Management described inflation, rapid rate increases, supply-chain and labor constraints, and recession concerns as sources of economic uncertainty. Risks cited include credit deterioration, real-estate values and conditions, securities losses, funding access, competition, cyber threats, regulation, and LIBOR transition. The company reported $122 million in 47 legacy commercial LIBOR loans, of which $55 million matured after June 2023, and approximately $381 million in LIBOR-linked residential mortgages.
- Commitments included approximately $173.4 million to fund loan originations, $1.82 billion in unused lines and unadvanced loans, and $13.8 million in letters of credit. These commitments could increase funding needs when drawn.
- Notable items included a $1.1 million gain on fixed-asset sales, a $500,000 card-processor bonus, a $1.1 million employee bonus, and $580,000 of Q2 core-systems conversion and related professional costs. A $5.5 million arena naming-rights intangible was recorded in 2022.
- A Missouri tax dispute concerning 2014–2015 returns remained pending; the company said the potential obligation could reach $4.0 million, with additional amounts possible for later years, and management believed it would prevail. Management expected ordinary-course litigation not to have a material adverse effect.
- After quarter-end, the company entered two $200 million interest-rate swaps, effective May 2023 and ending May 2028. The filing also notes a planned core-systems conversion and branch changes, including a St. Louis-area consolidation.
Important facts for investors to verify
- Whether loan growth, delinquencies, criticized/problem loans, and the $11.7 million unfunded-commitment liability evolve as expected, and whether the allowance remains adequate.
- How deposit balances, deposit pricing, brokered funding, and FHLBank borrowing change as loan demand and market rates shift.
- Whether securities unrealized losses and accumulated other comprehensive income recover or lead to realized losses, and how the AFS-to-HTM transfer affects flexibility.
- Whether higher rates improve net interest income as management anticipates, considering loan floors, deposit repricing, swaps, and LIBOR replacement.
- The outcome of the Missouri tax matter and the costs, timing, and execution of the core-systems conversion and other planned initiatives.