Great Southern Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Great Southern is a one-bank holding company; its banking operations serve customers primarily across the Midwest and originate commercial loans in additional markets. Financial amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $44.7 | $43.5 | $88.8 | $88.4 |
| Net interest margin | 3.35% | 3.39% | 3.38% | 3.61% |
| Non-interest income | $9.6 | $8.3 | $19.3 | $15.6 |
| Non-interest expense | $30.2 | $29.3 | $60.5 | $60.2 |
| Net income | $20.1 | $13.2 | $39.0 | $28.1 |
| Diluted EPS | $1.46 | $0.93 | $2.82 | $1.98 |
| Efficiency ratio | 55.63% | 56.75% | 55.98% | 57.84% |
Q2 net income increased 52.3%; six-month net income increased 38.9%. The principal driver was lower credit-loss provisioning: Q2 included a $1.0 million loan provision credit and a $0.3 million unfunded-commitment credit, versus a $6.0 million loan provision in Q2 2020. For the first half, loan provision was a $0.7 million credit and unfunded-commitment provision was a $1.0 million credit, compared with $9.9 million of loan provision in the prior-year period. Management attributed the credits to improving asset-quality trends and a better economic forecast.
Lower deposit costs supported earnings: interest expense fell 45.4% in Q2 and 46.7% for the first half. This more than offset lower asset yields; first-half net interest margin declined 23 basis points year over year. Non-interest income gains included higher mortgage loan-sale gains and card/ATM fees. Salaries and benefits rose in Q2, while first-half expense was broadly stable. The Q2 dividend declared was $0.34 per share; first-half dividends were $0.68 per share versus $1.68 a year earlier, which included a $1.00 special dividend.
Financial condition, cash flow and capital
- Total assets were $5.58 billion at June 30, up $51.2 million (0.9%) from year-end 2020. Cash and cash equivalents were $681.8 million; available-for-sale securities were $450.8 million.
- Net loans were $4.21 billion, down $82.5 million from year-end. Excluding FDIC-acquired loans and mortgage loans held for sale, gross loans decreased $40.0 million (0.8%). Commercial real estate and residential/multifamily balances increased, while construction, commercial business and auto loans declined.
- Deposits totaled $4.57 billion, up $49.5 million. Transaction accounts increased $281.0 million to $3.41 billion; retail certificates of deposit decreased $140.2 million. Brokered deposits, including IntraFi Funding deposits, fell $91.3 million to $67.4 million.
- At June 30, subordinated notes had a $150 million principal balance ($148.8 million carrying amount); subordinated debentures were $25.8 million. No FHLBank advances were outstanding. The Company announced redemption of $75 million of 5.25% subordinated notes on August 15, 2021, using excess cash. Reverse-repurchase agreements with customers were $158.4 million.
- Six-month cash flows were $54.8 million provided by operating activities, $33.5 million provided by investing activities and $29.8 million provided by financing activities. Cash and cash equivalents rose $118.1 million to $681.8 million.
- Stockholders’ equity was $629.6 million, or 11.3% of assets; tangible common equity to tangible assets was 11.19%. The Bank’s CET1, Tier 1, total capital and leverage ratios were 14.4%, 14.4%, 15.6% and 11.7%, respectively; the Company reported 13.0%, 13.6%, 18.1% and 11.0%. Both were reported well capitalized.
- Reported nonperforming assets, including FDIC-acquired assets, were $8.6 million (0.15% of assets). Nonperforming loans excluding FDIC-acquired loans were $5.4 million, up $2.4 million from year-end. The allowance for credit losses was $66.6 million, or 1.56% of total loans; the unfunded-commitment liability was $7.7 million.
Material changes and unusual items
- The company adopted CECL on January 1, 2021. Adoption added $11.6 million to the loan allowance and established an $8.7 million liability for unfunded commitments; the after-tax reduction to retained earnings was $14.2 million. Prior-year comparisons use the former incurred-loss method.
- Q2 net interest income included $0.4 million of accretion from FDIC-acquired loan discounts, compared with $1.5 million in Q2 2020. Remaining accretable yield was $0.9 million, of which approximately $0.5 million was expected to be recognized during the rest of 2021. The terminated 2018 cash-flow hedge continued to contribute about $2.0 million of quarterly loan interest income through its original 2025 term.
- Unrealized gains on available-for-sale securities declined during the first half, contributing to a $10.9 million decrease in accumulated other comprehensive income. The securities portfolio grew $35.9 million, principally through purchases of agency mortgage-backed and collateralized mortgage obligation securities.
- The company repurchased 142,379 shares for $7.5 million in the first half. It declared $0.68 per share in dividends, compared with $1.68 in the prior-year first half, which included a special dividend.
- COVID-related modified loans outstanding at June 30 included 15 commercial loans totaling $91 million and 30 consumer and mortgage loans totaling $0.9 million. These modifications were not classified as troubled debt restructurings under applicable guidance. PPP originations in the 2021 reopening totaled approximately $58 million; $3.7 million of related net deferred fees remained at quarter-end.
Outlook, risks and contingencies
- Management expected minimal loan growth for the foreseeable future amid pandemic-related uncertainty and continued its focus on credit and interest-rate risk. It reported that rising rates generally could benefit net interest income and falling rates could hurt it; its models indicated no significant net-interest-income impact in the first 12 months after a rate change, though rapid declines could pressure near-term margin.
- COVID-19 effects remained uncertain, including potential loan defaults, further modifications or allowance increases, reduced loan demand, fee waivers, added operating costs and continued low interest rates. Hotel, retail and restaurant borrowers were identified as more affected industries. Management noted the emergence of a COVID variant and renewed health-related pressures.
- Credit quality and the allowance depend on estimates, economic forecasts and borrower and collateral conditions. Management considered the allowance adequate but stated that worse or longer-lasting economic conditions could require additional provisions. Nonperforming loans and potential problem loans increased in certain categories; commercial real estate nonperformers included a $2.4 million Chicago-area office loan.
- Interest-rate and LIBOR transition risks remain relevant. Approximately $245 million of legacy commercial LIBOR loans had not matured or been modified by quarter-end; $38 million of these loans mature after June 2023. Approximately $427 million of residential mortgage loans were also tied to LIBOR and were being monitored.
- A Missouri income-tax dispute concerning 2014 and 2015 remains unresolved. The company filed a formal protest in June 2021 and believes it will prevail, but the potential state tax obligation could be up to $4.0 million.
- Other disclosed risks include funding competition and access to brokered deposits or borrowing facilities, commercial real estate conditions, cybersecurity and systems interruptions, regulation, litigation, and the possibility that COVID-related or other economic changes affect asset values or liquidity. Management expected its effective tax rate to be approximately 20%–21% in future periods.
Most important facts for investors to verify
- Whether earnings growth persists when provision credits are excluded, and whether loan yields and net interest margin stabilize.
- Subsequent trends in nonperforming loans, modified loans, criticized/watch loans, charge-offs and the CECL allowance and assumptions.
- Deposit growth and mix, funding costs, liquidity usage, and the effect of redeeming $75 million of subordinated notes on capital and interest expense.
- Realization of the expected remaining FDIC-acquired loan accretion and continued eligibility to recognize income from the terminated hedge.
- Outcome and potential financial impact of the Missouri tax dispute, and progress in the LIBOR transition.
- Whether the company’s loan-growth expectations, COVID-related risks and commercial property exposures change; the filing does not provide formal earnings guidance.