Great Southern Bancorp, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2022. Great Southern is a one-bank holding company; its banking operation provides commercial and consumer banking services primarily across several Midwestern states, with additional commercial lending offices in other U.S. markets.
Key financial metrics
Amounts below are in U.S. dollars; balance-sheet figures are as of period end. Income and cash-flow comparisons are year over year.
| Metric | Q3 2022 | Nine months 2022 |
|---|---|---|
| Interest income | $59.7 million, up 20.2% | $159.0 million, up 5.5% |
| Net interest income | $52.9 million, up 17.8% | $145.0 million, up 8.5% |
| Net interest margin | 3.96%, versus 3.36% | 3.73%, versus 3.37% |
| Net income | $18.1 million, down 11.0% | $53.3 million, down 10.1% |
| Diluted EPS | $1.46, versus $1.49 | $4.20, versus $4.32 |
| Dividends declared per share | $0.40, versus $0.36 | $1.16, versus $1.04 |
- Assets and loans: Total assets were $5.68 billion, up 4.2% from year-end 2021. Net loans were $4.50 billion, up 12.2%, led by multifamily, one- to four-family residential and commercial real estate lending. The reported weighted-average loan rate was 4.92%, versus 4.26% at year-end 2021.
- Deposits, liquidity and borrowings: Deposits rose 4.1% to $4.74 billion. Cash and cash equivalents fell to $189.0 million from $717.3 million. The company reported $98.0 million of overnight FHLBank borrowings and $124.2 million in repurchase agreements; subordinated notes were $74.2 million and subordinated debentures $25.8 million. Available liquidity sources included $954.3 million in FHLBank capacity, $316.7 million in Federal Reserve capacity, and unpledged securities of $302.1 million AFS and $177.3 million HTM. Management said liquidity was sufficient.
- Cash flow: For the nine months, operating activities provided $53.9 million, investing activities used $788.9 million, and financing activities provided $206.7 million. Cash and cash equivalents declined $528.3 million, reflecting securities purchases, loan growth and funding flows.
- Margins, expenses and capital: Q3 non-interest expense rose 10.9% to $34.8 million; the nine-month total rose 7.8% to $99.0 million. The nine-month efficiency ratio increased to 57.75% from 56.42%. Stockholders’ equity was $511.3 million, or 9.0% of assets, down from $616.8 million at year-end. The Bank and holding company remained “well capitalized”; the Bank’s CET1 ratio was 10.4% and total capital ratio 13.4%.
Material changes versus comparable periods
- Higher market rates, loan growth and larger investment balances drove Q3 net interest income higher. Deposit expense increased as rates rose; nine-month interest expense nevertheless declined, mainly due to the prior-year redemption of $75 million in subordinated notes and lower deposit expense.
- Despite improved net interest income, net income declined in both reported periods. Higher loan and unfunded-commitment provisions, higher operating expenses and lower non-interest income more than offset the gains in net interest income.
- Loan-loss provision was $2.0 million in both the quarter and nine-month period, compared with credits of $3.0 million and $3.7 million, respectively, in the 2021 periods. Unfunded-commitment provision was $1.3 million for Q3 and $3.3 million year to date; management attributed the increases to growth in unfunded commitments and required reserves.
- Loan-sale gains fell to $0.6 million in Q3 and $2.2 million year to date, as rising mortgage rates reduced fixed-rate single-family originations and refinancing. The nine-month period also included a $1.1 million gain on fixed-asset sales and a $0.5 million one-time card-processor bonus.
- Equity fell principally because of a $91.1 million decline in accumulated other comprehensive income, reflecting lower AFS securities and cash-flow-hedge values, and $59.3 million of share repurchases. The company repurchased 999,586 shares during the nine months.
Outlook, risks and unusual items
- Management stated that rising rates are generally expected to benefit net interest income and margin, while falling rates are expected to be adverse. This is not formal earnings guidance; the filing gives no numerical earnings or revenue forecast. Deposit competition and repricing could raise funding costs, and management noted risks from recession, inflation and slower growth.
- The investment portfolio had significant rate-related unrealized losses: AFS securities had $67.0 million of gross unrealized losses at September 30, 2022; HTM securities had a fair value of $180.4 million versus $206.5 million carrying value. The company transferred $226.5 million of securities from AFS to HTM during the first quarter. Management considered the declines temporary; AFS valuation changes and hedge marks contributed to lower equity.
- Interest-rate exposure includes floating-rate loans and cash-flow swaps. A $300 million swap entered in February 2022 generated a Q3 reduction of $428,000 in loan interest income as floating rates exceeded its fixed rate. Two additional $200 million swaps were entered into in July, effective May 2023. At quarter-end, the company had posted $20.8 million cash collateral to a derivative counterparty; derivative termination value in an overall net liability position was $21.7 million.
- Funding risks include declining transaction balances, increased use of brokered deposits ($361.6 million versus $67.4 million at year-end) and overnight FHLBank borrowing. Approximately $1.2 billion of time deposits were due to mature within twelve months after September 30, 2022. The company also reported $112.6 million of commitments to fund loan originations, $2.02 billion of unused lines and unadvanced loans, and $15.7 million of letters of credit.
- Other notable items: Q3 included $1.1 million of core-system conversion training and implementation costs and $372,000 in fees on July swaps. Year-to-date professional fees included $1.6 million for the core conversion and $492,000 for swaps; employee costs included a $1.1 million special cash bonus. A $5.5 million university arena naming-rights agreement was signed in April 2022.
- A Missouri tax dispute for 2014–2015 remains unresolved. Management believes it will prevail, but the potential obligation could reach $4.0 million for those years, with possible additional amounts for subsequent years. Management said pending litigation was not expected to have a material adverse effect. The filing reported no material changes to the risk factors in the 2021 Form 10-K.
Most important facts for investors to verify
- Whether loan growth, credit quality and provisions remain consistent with management’s assumptions; non-performing assets were $3.4 million, 0.06% of assets, versus $6.0 million and 0.11% at year-end.
- How deposit pricing, brokered funding, deposit maturities and FHLBank borrowings affect liquidity and net interest margin as rates change.
- The effect of securities and cash-flow-hedge valuation changes on equity, and the company’s ability and intent to hold HTM securities through maturity.
- Future swap settlements, collateral requirements and the continued availability of eligible variable-rate loans to recognize deferred income from the terminated 2018 swap.
- The outcome and potential exposure of the Missouri tax proceeding, as well as the eventual cost and execution of the core-system conversion.