Great Southern Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Unaudited consolidated results. Amounts below are in U.S. dollars; financial figures are rounded to millions unless otherwise noted.
Business context
Great Southern is a one-bank holding company. Great Southern Bank provides retail and commercial banking services primarily across Missouri, Iowa, Kansas, Minnesota, Nebraska and Arkansas, with commercial lending offices in other markets. The filing describes the effects of COVID-19 as a central source of uncertainty for borrowers, operations and financial results.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable / prior balance |
|---|---|---|
| Net interest income | $44.9 million | $44.6 million, Q1 2019 |
| Provision for loan losses | $3.9 million | $2.0 million, Q1 2019 |
| Non-interest income | $7.4 million | $7.5 million, Q1 2019 |
| Non-interest expense | $30.8 million | $28.5 million, Q1 2019 |
| Net income | $14.9 million; diluted EPS $1.04 | $17.6 million; diluted EPS $1.23, Q1 2019 |
| Net interest margin | 3.84% | 4.06%, Q1 2019 |
| Efficiency ratio | 58.91% | 54.74%, Q1 2019 |
| Total assets | $5.07 billion | $5.02 billion |
| Net loans | $4.20 billion | $4.15 billion |
| Deposits | $4.18 billion | $3.96 billion |
| Stockholders’ equity | $614.2 million | $603.1 million |
| Cash and cash equivalents | $240.5 million | $220.2 million |
Net income fell 15.6% year over year. Net interest income rose 0.75%, but higher loan-loss provision and operating expenses more than offset that improvement. Total interest income was $57.5 million and total interest expense was $12.5 million. The weighted-average loan rate was 4.77% at quarter-end, compared with 4.97% at year-end.
Operating cash flow was $17.7 million; investing activities used $4.3 million and financing activities provided $7.0 million. Cash and cash equivalents increased $20.3 million during the quarter. The company reported $125.8 million of securities sold under repurchase agreements and other short-term liabilities at March 31, including $124.5 million of customer repurchase agreements; short-term borrowings and other interest-bearing liabilities had been $228.2 million at year-end. Subordinated debentures and notes totaled approximately $100.2 million.
The Bank was reported well-capitalized: common equity Tier 1 and Tier 1 ratios were 13.2%, total capital was 14.2%, and Tier 1 leverage was 12.4%. The company’s tangible common equity to tangible assets ratio was 11.97%. Available liquidity included $240.5 million cash, $249.8 million unpledged securities, a $1.027 billion FHLBank line and a $368.0 million Federal Reserve line. The company reported $1.16 billion of unused lines and unadvanced loans, plus $237.1 million of commitments to fund loan originations.
Material changes versus comparable periods
- Net income declined $2.7 million year over year, mainly from a $2.3 million increase in non-interest expense and a $1.9 million increase in provision expense; lower income taxes and higher net interest income partially offset the declines.
- Net interest margin compressed 22 basis points year over year, reflecting lower market rates and slower repricing of funding costs. Lower loan yields were partly offset by loan growth and higher investment balances.
- Deposits rose $218.8 million, or 5.5%, from year-end; brokered deposits, including CDARS purchased funds, increased to $496.2 million from $371.7 million. Net loans rose $41.1 million, with growth in multifamily, owner-occupied residential and commercial real estate loans, partly offset by lower construction and auto loans.
- The allowance for loan losses increased to $43.9 million from $40.3 million. Net charge-offs were $237,000 versus $1.7 million in Q1 2019; non-performing assets excluding acquired assets were $8.1 million, or 0.16% of assets.
- The company terminated its $400 million cash-flow hedge swap on March 2, receiving $45.9 million, including accrued interest. The net gain is recorded in accumulated other comprehensive income and is expected to be recognized in loan interest income over the swap’s original term; management expected approximately $2.0 million of related quarterly interest income in future periods.
Outlook, commentary, risks and unusual items
- COVID-19 and credit outlook: Management expected minimal loan growth for the foreseeable future. It warned that borrower distress, defaults, delinquencies and charge-offs could increase, particularly in retail, hotels/motels and restaurants, potentially requiring additional loan-loss provisions. Near-term net interest income and margin were also expected to be adversely affected by low rates.
- Loan relief: At March 31, 747 loans totaling $359.2 million had been modified under CARES Act provisions and were not classified as troubled debt restructurings. Through April 27, the company reported 1,765 modified commercial, consumer and mortgage loans totaling $772.6 million; those later figures are subsequent-period information.
- PPP: Based on approvals or funding through April 2020, management anticipated approximately 1,500 Paycheck Protection Program loans totaling $119 million and approximately $4.4 million in SBA origination fees. Fees, net of costs, were to be deferred and recognized over loan lives, with significant accretion expected in Q3 2020. The filing notes SBA-guaranty and litigation risks.
- CECL: The company elected to delay adoption of the credit-loss standard under CARES Act guidance and used the incurred-loss method for Q1. It estimated initial adoption would raise the allowance by $11–$14 million and create a $7–$10 million liability for unfunded commitments, reducing retained earnings by $14–$18 million after tax. Its estimate of the additional Q1 provision if CECL had been applied was $7–$12 million, plus $1–$2 million of additional expense for unfunded exposures; estimates remained subject to revision.
- Dividends and repurchases: Q1 dividends declared were $1.34 per share, including a $1.00 special dividend, equal to 129% of diluted Q1 EPS. The company repurchased 183,707 shares for $8.1 million. The board’s future dividend decisions were not specified as guidance.
- Tax outlook: Management expected a 2020 and future effective tax rate of approximately 16.0%–17.5%, subject to tax-credit use, tax-exempt income and pre-tax earnings.
- Other items: Q1 included a $1.1 million employee COVID-19 bonus expense (paid in April), approximately $441,000 of income from exiting tax-credit partnerships, and $407,000 of non-cash losses on customer-related derivatives. The company reported no goodwill impairment trigger at March 31. Legal proceedings were not expected by management to have a material adverse effect; no specific quantified contingency was disclosed.
- Forward-looking risks: Key risks include pandemic duration and economic recovery, loan and real-estate credit quality, interest-rate and funding pressure, deposit competition, regulatory actions, cybersecurity and service continuity. The filing provides no numerical earnings guidance.
Important facts for investors to verify
- How COVID-related modifications perform as payment relief expires, especially in higher-impact commercial sectors, and whether provisions and non-performing loans rise.
- Whether the CECL adoption assumptions and estimated retained-earnings impact change as models and economic forecasts are refined.
- PPP loan funding, forgiveness, fee recognition and any SBA-guaranty or litigation exposure.
- Whether net interest margin stabilizes after rapid rate cuts and how much of reported and future interest income depends on the terminated swap and acquired-loan accretion.
- The sustainability of deposit growth, brokered-deposit reliance, available liquidity and the dividend following a quarter in which declared dividends exceeded earnings.
- The filing reports no material legal contingency, but investors should monitor subsequent disclosures for developments or quantified exposures.