GREAT SOUTHERN BANCORP, INC. quarterly report, Q3 FY2021

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Great Southern Bancorp, Inc. — Q3 2021 Form 10-Q

Business context and reporting period. Great Southern is a bank holding company whose sole reportable segment is Great Southern Bank. The Bank serves customers primarily across several Midwestern and Southern states and originates commercial loans in additional markets. This unaudited filing covers the three and nine months ended September 30, 2021; balance-sheet comparisons are to December 31, 2020. Amounts below are in U.S. dollars unless stated otherwise.

Financial performance and condition

  • Q3 earnings: Net income was $20.4 million, up 51.4% from $13.5 million in Q3 2020. Diluted EPS was $1.49 versus $0.96. Net interest income was $44.9 million, up 1.7%; non-interest income was $9.8 million, up 3.5%; and non-interest expense was $31.3 million, down 2.0%.
  • Nine-month earnings: Net income was $59.3 million, up 42.9% from $41.5 million. Diluted EPS was $4.32 versus $2.93. Net interest income rose 0.9% to $133.7 million; non-interest income rose 16.0% to $29.1 million; non-interest expense declined 0.3% to $91.9 million.
  • Net interest margin: Q3 NIM was 3.36%, unchanged year over year. Nine-month NIM was 3.37%, down from 3.52%; excluding acquired-loan yield accretion, management reported 3.34% versus 3.40%.
  • Credit costs and asset quality: The loan-loss provision was a $3.0 million credit in Q3 2021, versus a $4.5 million expense in Q3 2020; for nine months it was a $3.7 million credit versus a $14.4 million expense. The loan allowance was $63.6 million at quarter-end. Non-performing assets were $7.9 million, or 0.15% of assets, including FDIC-assisted acquired assets; excluding those assets, they were $5.2 million, or 0.10% of assets. Net charge-offs were $9,000 for the nine-month period.
  • Assets, loans and equity: Total assets were $5.45 billion, down 1.3% from year-end 2020. Net loans were $4.03 billion, down $271.1 million, or 6.3%. Stockholders’ equity was $624.6 million, or 11.5% of assets; tangible common equity to tangible assets was 11.36%.
  • Deposits and liquidity: Deposits were $4.51 billion, down 0.1%. Cash and cash equivalents increased $205.5 million to $769.2 million. Management stated liquidity was sufficient; available sources included $905.7 million of FHLBank capacity, $396.6 million of Federal Reserve capacity, and $236.4 million of unpledged securities, in addition to cash.
  • Debt and capital: The Company redeemed $75 million of 5.25% subordinated notes in August; subordinated notes, net of issuance costs, were $73.9 million at September 30, versus $148.4 million at year-end. The Bank and holding company were reported as well capitalized. Bank total risk-based capital was 15.9%; holding-company total risk-based capital was 16.9%.
  • Cash flow and shareholder returns: Nine-month operating cash flow was $77.7 million, investing cash flow was positive $239.9 million, and financing cash flow was negative $112.2 million. Cash and cash equivalents ended at $769.2 million. The Company repurchased $23.8 million of stock (449,438 shares) and declared $1.04 per share in dividends during the nine months.

Material changes versus comparable periods

  • Higher earnings primarily reflected lower loan credit-loss provisions, alongside modestly higher net interest income and non-interest income. The 2021 provision credits followed 2020 pandemic-related provisioning and reflected lower loan balances, improving asset-quality measures and a more favorable economic forecast.
  • Interest income fell year over year in both the quarter and nine-month period, mainly because of lower loan balances and yields. Lower deposit interest expense more than offset the decline in interest income, supporting quarterly NIM stability.
  • Loan balances contracted as repayments exceeded originations, particularly in multifamily/other residential, commercial business, commercial real estate and auto loans. Construction and one- to four-family residential balances increased.
  • Deposit mix shifted toward transaction accounts, which increased $328.3 million, while retail certificates of deposit declined $243.7 million. The Company also reduced brokered deposits by $91.3 million.
  • Accumulated other comprehensive income declined $15.9 million from year-end, principally due to lower fair values of available-for-sale securities and amortization of the terminated cash-flow hedge gain.
  • The nine-month 2020 dividend total included a $1.00 per-share special dividend; the 2021 nine-month declared dividend was $1.04 per share.

Outlook, commentary, risks and unusual items

  • Outlook: Management expected minimal net loan growth for the foreseeable future, citing elevated repayments and uncertainty. No specific earnings or revenue guidance was provided; management said the filing’s forward-looking statements are subject to risks and actual results may differ.
  • Credit and COVID-19: Management described economic recovery as improving but uncertain, including renewed pandemic pressures. Further borrower stress or loan modifications could increase non-performing loans and credit-loss provisions. Remaining pandemic-related modifications at September 30 included $38.2 million of commercial loans and $1.6 million of consumer and mortgage loans; these were not classified as TDRs under applicable guidance.
  • Interest-rate and funding risks: Management’s models generally indicated rising rates could benefit NII and falling rates could reduce it, while estimating limited first-year sensitivity under modeled scenarios. Low rates, competition for deposits and loans, refinancing of loans at floors, and access to brokered deposits or FHLBank funding remain risks. The Company also continued preparing for LIBOR replacement; about $249 million of legacy commercial loans were identified for monitoring, with $39 million maturing after June 2023.
  • PPP and acquired-loan income: Remaining net deferred PPP fees were $2.1 million at quarter-end; management expected a significant portion to be recognized in the remainder of 2021. Acquired-loan accretable yield was $606,000, with approximately $178,000 expected to be recognized in Q4 2021. The terminated $400 million cash-flow hedge continued to contribute about $2.0 million of quarterly loan interest income through scheduled amortization; faster recognition could be required if eligible variable-rate loans decline significantly.
  • Accounting transition: CECL adoption on January 1, 2021 increased the loan allowance by $11.6 million, created an $8.7 million liability for unfunded commitments and reduced retained earnings by $14.2 million after tax. This change limits direct comparability of credit-loss measures with 2020.
  • Contingency and other items: The Company is contesting a Missouri tax matter related to 2014 and 2015; management believes it will prevail, but the potential tax obligation could be up to $4.0 million. Unrealized securities losses were attributed by management to market-rate changes and considered temporary; no credit-loss allowance was recorded on the disclosed securities. Management reported no material adverse effect expected from pending or threatened litigation and no material changes to previously disclosed risk factors.

Important facts for investors to verify

  1. Whether loan repayments continue to outpace originations and how this affects loan growth, asset yields and NIM.
  2. Whether credit quality and the allowance remain adequate as pandemic-related borrower accommodations expire, including performance of commercial real estate exposures and modified loans.
  3. How quickly deferred PPP fees and acquired-loan accretion are recognized, and whether the hedge-related income remains supported by eligible variable-rate loans.
  4. Liquidity and funding mix trends, including deposit pricing, brokered-deposit access, unused commitments and the impact of the subordinated-note redemption.
  5. The outcome and potential financial effect of the Missouri tax dispute, and the sensitivity of securities values and capital to further interest-rate changes.