Great Southern Bancorp, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 13, 2023. This is an annual report, not a standalone Q4 filing. Great Southern is a bank holding company operating Great Southern Bank, with 92 banking centers across six states and commercial lending offices in eight additional markets.
Financial performance and condition
- Profit: 2022 net income was $75.9 million, up 1.8% from $74.6 million in 2021. Diluted EPS rose to $6.02 from $5.46. In Q4 2022, net income available to common shareholders was $22.6 million and diluted EPS was $1.84; Q4 2021 was $15.3 million and $1.14, respectively.
- Interest income and margins: Interest income was $227.0 million, up 14.2%; interest expense rose 31.9% to $27.4 million. Net interest income increased 12.2% to $199.6 million, and net interest margin expanded 43 basis points to 3.80%. Higher market rates and loan yields supported the increase, while funding costs also rose.
- Non-interest items and expenses: Non-interest income declined 10.9% to $34.1 million, chiefly because loan-sale gains fell to $2.6 million from $9.5 million. Non-interest expense increased 4.5% to $133.4 million, including higher salaries and benefits. The efficiency ratio improved to 57.05% from 59.03%.
- Loans and credit: Net loans grew 12.5% to $4.51 billion; total loans were $4.58 billion. Real estate secured 89.4% of total loans. The allowance for credit losses was $63.5 million, or 1.39% of loans, versus $60.8 million, or 1.49%, a year earlier. Non-performing loans fell to $3.7 million (0.08% of loans) from $5.4 million (0.13%); net charge-offs were $274,000.
- Balance sheet and liquidity: Assets rose 4.2% to $5.68 billion. Deposits increased 2.9% to $4.68 billion, while cash and cash equivalents fell 76.5% to $168.5 million, as excess cash was deployed into loans and securities. The loan-to-deposit ratio was 96.3%, versus 88.2%. Available liquidity included $1.01 billion of FHLBank capacity, $397 million of Federal Reserve capacity and unpledged securities; these are stated capacities, not cash on hand.
- Funding and debt: Brokered deposits increased to $411.5 million from $67.4 million, and year-end overnight FHLBank borrowings were $88.5 million. Reverse repurchase agreements were $176.8 million. The Company had $74.3 million of subordinated notes and $25.8 million of subordinated debentures outstanding. Total stockholders’ equity declined to $533.1 million from $616.8 million.
- Cash flow: Operating activities provided $66.6 million; investing activities used $801.3 million, principally reflecting loan and securities deployment; financing activities provided $186.0 million. Cash and equivalents decreased $548.7 million during the year.
- Capital and shareholder returns: The Bank remained well-capitalized, with a 11.9% CET1 ratio and 13.1% total capital ratio. The Company declared $1.56 per share in dividends and repurchased 1.04 million shares. Book value per share was $43.58, down from $46.98.
Material changes versus 2021
- Rapid rate increases lifted loan yields and net interest margin, but deposit costs rose and the bank used more brokered deposits and overnight borrowings.
- Loan balances increased by about $499 million, led by one- to four-family residential, construction, multifamily and commercial real estate lending. Loans grew faster than deposits.
- Available-for-sale securities had $62.7 million of gross unrealized losses at year-end, versus $3.3 million in 2021. The Company transferred $226.5 million of securities to held-to-maturity during 2022; their fair value was $177.8 million against a $202.5 million carrying amount.
- Equity fell despite positive earnings, principally because accumulated other comprehensive income declined $86.1 million as rates reduced securities and hedge values, and the Company repurchased $61.8 million of stock.
- Credit indicators remained low overall: non-performing assets declined to $3.7 million from $6.0 million. However, the provision for loan and unfunded commitment losses increased to $6.2 million combined, from a $5.8 million combined credit in 2021.
Outlook, risks and unusual items
- Outlook: The filing provides no earnings or revenue guidance. Management said higher rates were generally expected to benefit net interest income, while warning that increased funding costs could offset some benefit. Management expected a combined effective tax rate of approximately 20.5%–21.5% in future periods.
- Credit and concentrations: Commercial real estate, construction, multifamily and other commercial lending are significant exposures; management reported these categories together as approximately 76% of the loan portfolio. At year-end, $1.43 billion of closed construction loans remained unfunded. Management cautioned that economic deterioration, higher rates and weaker property markets could increase credit losses.
- Market and funding risks: Deposit competition and possible further deposit repricing could pressure margins. The bank relies in part on brokered deposits and FHLBank funding. The securities portfolio’s large unrealized losses could affect capital or liquidity if securities must be sold, although the Company said it expected to hold transferred securities to maturity or repayment.
- Interest-rate hedges and LIBOR: A $400 million swap terminated in 2020 continues to contribute $8.1 million annually to loan interest income through its original 2025 end date; faster recognition could be required if eligible variable-rate loans decline significantly. New hedges included a $300 million swap and two $200 million swaps effective in 2023. The filing identifies remaining LIBOR-linked loans and transition risks.
- Other unusual items and contingencies: 2022 included a $1.0 million gain on fixed-asset sales, a $500,000 card-processor bonus, and a $1.1 million employee special bonus. A Missouri tax dispute could result in up to $4.0 million of tax for 2014–2015, with possible additional amounts for later years; management believes it will prevail. Management did not expect pending litigation to have a material adverse effect.
- Operations: The Company is preparing to replace its core banking and ancillary systems, a project that could disrupt operations or customer service. The auditor issued unqualified opinions on the financial statements and internal controls; the allowance for credit losses was identified as a critical audit matter.
Important facts for investors to verify
- Quarterly trend in net interest margin and deposit costs, including the pace and cost of any additional wholesale funding.
- Commercial real estate and construction exposure, unfunded commitments, borrower performance and allowance assumptions under CECL.
- Liquidity sensitivity if deposits run off or pledged/unpledged securities lose value; distinguish available borrowing capacity from immediately available cash.
- Magnitude and duration of unrealized securities losses and the consequences of the available-for-sale to held-to-maturity transfer.
- Progress, cost and operational controls for the core-system conversion, and the remaining LIBOR transition.
- Outcome of the Missouri tax proceeding and whether any additional liability is recorded.