Great Southern Bancorp, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Great Southern is a bank holding company whose sole reportable segment is banking, primarily serving customers in the Midwest and originating commercial loans in additional markets. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $43.5m | $44.9m | $88.4m | $89.5m |
| Provision for loan losses | $6.0m | $1.6m | $9.9m | $3.6m |
| Non-interest income | $8.3m | $7.2m | $15.6m | $14.6m |
| Non-interest expense | $29.3m | $28.4m | $60.2m | $56.9m |
| Net income | $13.2m | $18.4m | $28.1m | $36.0m |
| Diluted EPS | $0.93 | $1.28 | $1.98 | $2.52 |
| Net interest margin | 3.39% | 3.97% | 3.61% | 4.02% |
- At June 30, total assets were $5.57bn, up 11.0% from year-end 2019. Net loans were $4.40bn, up 5.9%; deposits were $4.51bn, up 13.9%; and stockholders’ equity was $626.7m.
- Cash and cash equivalents were $473.6m, compared with $220.2m at December 31, 2019. For the first half, operating cash flow was $35.4m, investing cash outflow was $259.5m, and financing cash inflow was $477.6m.
- Interest-bearing deposit costs fell, but lower loan yields and growth in lower-yielding cash, securities and PPP lending weighed on net interest margin. The Q2 average loan yield was 4.64%, versus 5.40% a year earlier.
- Subordinated notes totaled $148.0m net at quarter-end, following a June $75m issuance that generated approximately $73.5m net proceeds. No FHLB advances or overnight FHLB borrowings were outstanding at June 30; customer repurchase agreements were $191.6m.
- The Bank reported capital ratios of 13.1% CET1, 13.1% Tier 1, 14.2% total capital and 11.5% leverage, and was classified as well capitalized. Company total capital ratio was 17.2%. Tangible common equity to tangible assets was 11.14%, compared with 11.88% at year-end.
Material changes versus comparable periods
- Net income declined 28.1% in Q2 and 22.0% for the first half. Higher credit-loss provision was the principal driver, alongside lower net interest income and higher operating expenses.
- Q2 provision expense rose $4.4m year over year; first-half provision rose $6.3m. The allowance for loan losses increased to $49.8m from $40.3m at year-end. Management reported an allowance equal to 1.14% of loans excluding FDIC-assisted acquired loans, versus 1.00% at year-end.
- Non-interest income increased, supported by mortgage loan-sale gains and customer swap fees, while service charges and ATM fees declined amid lower customer activity and pandemic-related fee waivers. First-half expenses included a $1.1m special employee bonus.
- Deposits grew sharply, particularly transaction accounts. The company also issued subordinated notes, terminated its $400m cash-flow hedge, repurchased 183,707 shares for $8.1m during the first half, and declared a $1.00-per-share special dividend in addition to regular dividends.
Outlook, risks and unusual items
- Management expects minimal loan growth for the foreseeable future due to pandemic-related economic deterioration. It expects COVID-19 to weigh on results, with the duration and severity of effects uncertain; no full-year earnings or revenue guidance is provided.
- At June 30, 2,133 loans with $1.01bn principal outstanding had pandemic-related modifications, including $931m commercial and $80m consumer and mortgage loans. These modifications were made under applicable relief provisions and were not classified as troubled debt restructurings. Loans totaling $724m were scheduled to resume normal payments from July through September; management expected a large portion to return to normal by August, subject to economic conditions.
- The Bank originated approximately 1,600 PPP loans totaling about $120m and had received $4.7m in SBA fees. PPP loans are generally SBA-guaranteed and may be forgiven, but the filing notes potential guaranty and litigation risks.
- Retail, hotel/motel, restaurant and other commercial real estate borrowers face pandemic-related pressures. Further deterioration could increase delinquencies, criticized loans, charge-offs and provision expense. Non-performing assets excluding acquired assets were $7.6m, or 0.14% of assets; non-performing loans were $5.3m. Potential problem loans were $4.0m.
- The company elected to delay CECL adoption under the CARES Act. It estimated initial adoption would increase the allowance by $11m–$14m and establish a $7m–$10m unfunded-commitment liability, reducing retained earnings after tax by $14m–$18m. Its hypothetical first-half CECL analysis indicated an additional $3m–$7m provision beyond the $9.9m already recorded under the incurred-loss method; estimates remain subject to change.
- The $400m cash-flow hedge was terminated in March for $45.9m including accrued interest. The remaining pre-tax gain of $42.8m is expected to be recognized in loan interest income through the original October 2025 termination date; management expected approximately $2.0m quarterly income beginning Q2 2020.
- Management expected a 2020 effective tax rate of approximately 16.0%–17.5%. It said declining rates can pressure loan yields and near-term margins, while eventual lower time-deposit renewal costs may help stabilize margins. Legal proceedings were not expected by management to have a material adverse effect; the Missouri tax examination was not expected to produce significant adjustments.
Key facts investors should verify
- Whether modified borrowers resume payments as expected and how credit quality, criticized loans and the allowance evolve as relief programs expire.
- Actual PPP forgiveness, fee recognition and any SBA guaranty or litigation exposure.
- Net interest margin and deposit costs under persistently low rates, including the contribution from the terminated hedge and remaining acquired-loan accretion.
- CECL adoption timing and final transition adjustments, including the unfunded-commitment liability.
- Liquidity and funding trends, including deposit concentration, brokered deposits, customer repurchase agreements and substantial unfunded commitments.
- Dividend and repurchase sustainability relative to earnings, capital needs and the special dividend’s effect on retained earnings.