Business context and reporting period
Great Southern Bancorp, Inc. is the bank holding company for Great Southern Bank, a regional lender operating primarily in Missouri, Iowa, Kansas, Minnesota, Arkansas and Nebraska, with commercial loan offices in additional states. This Form 10-K covers the fiscal year ended December 31, 2020; it is an annual report, not a standalone fourth-quarter filing. The bank focuses on real estate, construction, commercial business and consumer lending.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets, year-end | $5.53 billion | $5.02 billion |
| Net loans, year-end | $4.30 billion | $4.15 billion |
| Deposits, year-end | $4.52 billion | $3.96 billion |
| Stockholders’ equity, year-end | $629.7 million | $603.1 million |
| Net interest income | $177.1 million | $180.4 million |
| Provision for loan losses | $15.9 million | $6.2 million |
| Net income | $59.3 million | $73.6 million |
| Diluted earnings per share | $4.21 | $5.14 |
| Net interest margin | 3.49% | 3.95% |
Net income fell 19.4%. Lower loan yields and higher credit-loss provisioning and operating expenses more than offset reduced funding costs and stronger loan-sale gains. Return on average assets was 1.11% (1.52% in 2019); return on average equity was 9.53% (12.88%). The efficiency ratio increased to 58.07% from 54.48%. Fourth-quarter net income was $17.8 million, compared with $17.9 million in fourth-quarter 2019; diluted EPS was $1.28 versus $1.24.
Loans grew 3.4% net year over year. Growth in commercial real estate, multifamily, one-to-four-family residential and commercial business lending was partly offset by lower construction, consumer auto and acquired-loan balances. Real estate secured 88.2% of the loan portfolio. Commercial real estate and construction lending concentrations, together with other residential/multifamily and commercial lending, are a significant portfolio risk.
Net charge-offs were $0.4 million, down from $4.3 million; the allowance for loan losses rose to $55.7 million from $40.3 million, or 1.32% of loans excluding FDIC-acquired loans versus 1.00%. Nonperforming assets were $3.8 million, or 0.07% of total assets, down from $8.2 million, or 0.16%; acquired-loan nonperforming assets are excluded from these figures.
Operating cash flow was $46.0 million, investing cash flow was negative $131.3 million, and financing cash flow was positive $428.9 million. Cash and cash equivalents increased $343.6 million to $563.7 million, mainly reflecting deposit growth and repayment of overnight FHLBank borrowings. Year-end loans-to-deposits were 95.52%. Available liquidity included $195.1 million of unpledged securities, a $1.07 billion FHLBank line and a $436.4 million Federal Reserve line; neither line was drawn at year-end.
Total borrowings and other interest-bearing liabilities were $339.9 million at year-end, including $164.2 million of repurchase agreements, $148.4 million of subordinated notes and $25.8 million of subordinated debentures. The company issued $75 million of 5.50% fixed-to-floating subordinated notes in June 2020. The company and bank reported capital ratios above applicable well-capitalized thresholds.
Material changes, outlook and risks
- COVID-19 and Federal Reserve rate cuts compressed margins: the average loan yield declined to 4.66% from 5.37%, while deposit interest expense fell. The company reported $121 million of first-round PPP originations and $95 million outstanding at year-end; it originated a further $45 million in the next round through February 2021.
- At December 31, 2020, 65 modified commercial loans totaling about $233 million and 581 modified consumer and mortgage loans totaling about $18 million remained under pandemic-related relief terms. These modifications were not classified as troubled debt restructurings under applicable guidance. Further deterioration could lead to more defaults, provisions and longer-term restructurings.
- Management said pandemic effects could continue through 2021 or longer, with uncertain impacts on borrowers, loan demand, fees, credit quality and earnings. It provided no specific earnings guidance. Management expected a future effective tax rate of approximately 18.5%–19.5%.
- The company terminated a $400 million cash-flow hedge in March 2020 and received $45.9 million. The gain was recorded in accumulated other comprehensive income and is being recognized in loan interest income through the swap’s original October 2025 maturity; $38.7 million remained to be recognized before tax at year-end.
- CECL became effective for the company January 1, 2021. Management estimated an initial allowance increase of about $12 million, an $8 million liability for unfunded commitments, and an after-tax retained-earnings reduction of about $13 million; estimates were subject to refinement.
- Key risks include commercial real estate and construction concentrations, pandemic-exposed hotel, retail and restaurant borrowers, interest-rate and LIBOR-transition risks, deposit competition and funding access, and cyber and operational risks. Management said pending litigation was not expected to have a material adverse effect. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether pandemic-related loan deferrals have fully ended and whether borrowers can resume contractual payments, especially in hotels, retail and other vulnerable sectors.
- How CECL adoption affected actual 2021 allowance balances, unfunded-commitment reserves, retained earnings and regulatory capital versus management’s estimates.
- Whether loan growth, credit costs and the allowance remain consistent with the portfolio’s commercial real estate and construction concentrations.
- How quickly the $45.9 million hedge-termination gain is accreted into interest income, and the resulting effect on reported margins.
- Deposit mix, renewal pricing and liquidity as certificates mature, and the company’s continuing reliance on repurchase agreements and supplemental funding sources.
- Dividend and repurchase capacity, including the effect of the increased dividend payout and the 2020 share repurchases.