Business context and reporting period
Great Southern Bancorp, Inc. is a one-bank holding company; its banking business serves customers primarily across the Midwest and originates commercial loans in several additional U.S. markets. This unaudited Form 10-Q covers the three months ended March 31, 2022. Unless noted, amounts below are in U.S. dollars and millions; income and cash-flow comparisons are year over year.
Financial results and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable / prior period |
|---|---|---|
| Total interest income | $46.7 | $50.6 in Q1 2021 |
| Net interest income | $43.3 | $44.1 in Q1 2021 |
| Net income | $17.0 | $18.9 in Q1 2021 |
| Diluted EPS | $1.30 | $1.36 in Q1 2021 |
| Net interest margin | 3.43% | 3.41% in Q1 2021 |
| Non-interest income / expense | $9.2 / $31.3 | $9.7 / $30.3 in Q1 2021 |
| Efficiency ratio | 59.62% | 56.33% in Q1 2021 |
| Operating cash flow | $31.4 | $24.5 in Q1 2021 |
| Investing / financing cash flow | $(318.4) / $(77.2) | $(55.9) / $80.2 in Q1 2021 |
Net income declined 10.0% year over year. Net interest income fell 1.9%; lower interest expense partly offset reduced interest income. The quarter had no loan-loss provision, compared with a $0.3 million provision in Q1 2021. A $0.193 million credit for unfunded commitments also reduced expense.
At March 31, total assets were $5.374 billion, down from $5.450 billion at December 31, 2021. Net loans were $4.111 billion, up 2.5%; deposits were $4.489 billion, down 1.4%; and cash and cash equivalents were $353.0 million, down from $717.3 million. Stockholders’ equity was $582.6 million, versus $616.8 million. The quarter’s net cash decrease was $364.2 million, mainly reflecting investment-security purchases and loan funding, as well as share repurchases and deposit outflows.
The allowance for credit losses was $60.8 million, or 1.46% of loans. Nonperforming assets were $5.2 million, or 0.10% of assets. Bank capital ratios remained above regulatory “well capitalized” thresholds: CET1 13.3%, Tier 1 13.3%, total capital 14.6%, and Tier 1 leverage 12.0%.
Reported liabilities included $148.0 million of securities sold under reverse repurchase agreements, $74.1 million of subordinated notes, and $25.8 million of subordinated debentures. No term or overnight FHLBank advances were outstanding at quarter-end. Available liquidity sources included $353.0 million cash, $404.3 million of unpledged available-for-sale securities, $92.7 million of unpledged held-to-maturity securities, and secured lines of $844.5 million at FHLBank and $357.2 million at the Federal Reserve. Commitments included $271.1 million to fund loan originations, $1.55 billion in unused lines and unadvanced loans, and $11.9 million in letters of credit.
Material changes and notable items
- Loan growth was concentrated in multifamily, commercial real estate, and one- to four-family residential lending; construction loans declined. Total net loans rose $104 million, while commercial construction balances fell $179 million in the loan-class table.
- The company transferred $226.5 million of securities from available-for-sale to held-to-maturity. AFS securities declined to $461.4 million; HTM securities were $227.4 million at quarter-end. The company reported $16.0 million of gross unrealized losses on AFS securities and $7.3 million on HTM securities, and said it considered declines temporary.
- Comprehensive loss was $7.1 million despite net income of $17.0 million, principally reflecting unrealized securities depreciation and changes in cash-flow hedge values. AOCI fell to $8.7 million from $32.8 million at year-end.
- The company repurchased 419,215 shares for $25.3 million at an average $60.40 per share. The board authorized a new repurchase program of up to one million shares; approximately 700,000 remained available as of May 3, 2022. The declared quarterly dividend was $0.36 per share.
- Non-interest income included a one-time $0.5 million card-processor bonus. Loan-sale gains fell as mortgage refinancing and originations slowed. Salary and benefits expense increased, partly reflecting higher merit increases and the new Phoenix loan office.
- In April 2022, the bank agreed to pay $5.5 million over seven years for Missouri State University arena naming rights. It expects to record an intangible asset and corresponding liability and amortize the asset over no more than 15 years.
Outlook, commentary, and risks
Management provided no specific earnings or revenue guidance. It expected the effective tax rate to be approximately 20.5%–21.5%. Its interest-rate models indicated that rising rates would generally benefit net interest income, while falling rates would generally hurt it; the company also cautioned that rapid rate moves could have greater near-term effects. Management noted that rate expectations and economic conditions remained uncertain.
Key risks discussed include credit quality and loan-loss estimates; interest-rate, securities valuation, and funding risks; commercial real estate and construction exposures; inflation and economic volatility; COVID-19 effects; competition; cyber and operational risks; and the transition from LIBOR. The company had about 47 legacy commercial LIBOR loans totaling $122 million, of which 26 loans totaling $22 million matured after June 2023; approximately $410 million of residential mortgages were also tied to LIBOR indices. The company said most relevant commercial loans had fallback language.
A Missouri tax dispute concerning 2014–2015 tax years remained unresolved. The potential tax obligation could be up to $4.0 million, with possible additional amounts for certain later years; the company said it believed it would prevail. Illinois had begun an examination of 2018–2019 business income taxes. Management said pending litigation was not expected to have a material adverse effect. It also stated that disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan growth, credit performance, and the $60.8 million allowance remain appropriate as economic and interest-rate conditions change.
- The duration and potential earnings or capital effects of unrealized securities losses, including the HTM transfer and management’s “temporary” loss assessment.
- How rate increases, loan floors, deposit repricing, and the new $300 million cash-flow hedge affect future net interest income and margin.
- Funding and liquidity trends, including deposit outflows, large unused credit commitments, and availability of secured borrowing lines.
- The outcome and financial impact of the Missouri tax dispute and Illinois tax examination, and the cost and accounting treatment of the naming-rights agreement.
- The effect of ongoing share repurchases and dividends on capital, per-share results, and book value.