Great Southern Bancorp, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are against December 31, 2020. Great Southern is a bank holding company operating primarily through Great Southern Bank, serving customers across several Midwestern and Southern states. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and position
- Earnings: Net income was $18.9 million, up 26.9% from $14.9 million. Diluted EPS was $1.36 versus $1.04.
- Interest income and margin: Interest income was $50.6 million, down 11.9%; interest expense fell 47.8% to $6.5 million. Net interest income declined 1.9% to $44.1 million. Net interest margin fell 43 basis points to 3.41% from 3.84%.
- Credit costs: Loan-loss provision was $0.3 million, compared with $3.9 million in Q1 2020; a $0.7 million credit for unfunded commitments also benefited results. The company adopted CECL on January 1, 2021.
- Other income and expenses: Non-interest income rose 32.2% to $9.7 million, led by higher loan-sale gains and derivative gains. Non-interest expense declined 1.6% to $30.3 million. The efficiency ratio improved to 56.33% from 58.91%.
- Assets and loans: Total assets were $5.60 billion, up 1.4% from year-end. Net loans were $4.29 billion, down 0.3%; available-for-sale securities increased 10.3% to $457.7 million.
- Deposits and liquidity: Deposits rose 2.4% to $4.63 billion, primarily from growth in transaction accounts; time deposits declined. Cash and cash equivalents were $612.6 million. The company reported $1.00 billion of FHLB borrowing capacity, a $444.8 million Federal Reserve line, and $270.7 million of unpledged securities. There were no FHLB advances outstanding.
- Cash flow: Operating activities provided $24.5 million, investing activities used $55.9 million, and financing activities provided $80.2 million. Cash and cash equivalents increased $48.8 million to $612.6 million.
- Debt and capital: Subordinated notes had a carrying value of $148.6 million and subordinated debentures were $25.8 million. Reverse repurchase agreements were $140.7 million. Stockholders’ equity was $611.5 million, or 10.9% of assets; tangible common equity to tangible assets was 10.81%. The Bank and holding company reported regulatory capital ratios above well-capitalized thresholds.
- Credit quality: Non-performing assets were $10.9 million, or 0.19% of assets, versus $8.1 million and 0.15% at year-end. Non-performing loans excluding FDIC-acquired loans increased to $6.0 million from $3.0 million. The allowance for credit losses was $67.7 million, or 1.56% of total loans.
Material changes versus the prior comparable period
- Net income increased despite lower net interest income, principally because credit-loss provisions were substantially lower and non-interest income increased.
- Interest income declined with lower asset yields, including lower rates on loans and cash balances. Lower deposit and borrowing costs partly offset the decline.
- Loan-sale gains increased to $2.7 million from $0.6 million. Derivative interest-rate products produced a $0.5 million gain versus a $0.4 million loss.
- Q1 2020 included a $1.00-per-share special dividend; Q1 2021 dividends declared were $0.34 per share. The 2021 quarter included $3.8 million of share repurchases.
- Compared with year-end 2020, deposits grew $110.0 million while reverse repurchase agreements fell $23.5 million. Total stockholders’ equity declined $18.3 million, reflecting CECL adoption, lower securities and hedge-related accumulated comprehensive income, dividends and repurchases, partly offset by earnings.
Outlook, commentary, risks and unusual items
- Management expected minimal loan growth in the foreseeable future amid uncertainty related to COVID-19, competitive conditions and its focus on pricing discipline and credit quality. The filing provides no quantitative earnings or margin guidance.
- Management expected an effective tax rate of approximately 19.5%–20.5% in future periods.
- COVID-19 remains a key uncertainty. Risks cited include borrower defaults, additional loan modifications and credit-loss provisions, reduced loan demand, persistently low rates, fee reductions and higher operating costs. Modified loans outstanding at March 31 included $141 million of commercial loans and $5 million of consumer and mortgage loans; these modifications were not classified as troubled debt restructurings under the applicable guidance.
- CECL adoption increased the loan allowance by $11.6 million and established an $8.7 million liability for unfunded commitments; the after-tax reduction to retained earnings was $14.2 million. These were adoption adjustments, not current-quarter provision expense.
- The terminated $400 million cash-flow hedge continues to affect reported interest income: management expected approximately $2.0 million of quarterly interest income accretion through the original October 2025 end date, subject to eligible variable-rate loan balances.
- Interest-rate sensitivity, commercial real estate conditions, LIBOR transition, funding access, securities valuation, cyber and operational risks, and regulatory or legal developments were identified as risks. Management said it considered the allowance adequate, but noted that worsening economic conditions could require additional provisions. It reported no material change to previously disclosed risk factors and did not expect pending or threatened litigation to have a material adverse effect.
Important facts for investors to verify
- Track non-performing loans, modified commercial exposures, potential problem loans and CECL allowance assumptions as pandemic-related relief and modifications evolve.
- Assess whether deposit growth and lower funding costs can offset pressure on asset yields and the 43-basis-point year-over-year decline in net interest margin.
- Verify the pace of PPP forgiveness and recognition of the remaining $3.9 million in net deferred PPP fees; the filing reported $1.2 million recognized in Q1.
- Monitor deposit mix, brokered funding, unused credit commitments and liquidity capacity, including the $1.18 billion of unused lines and unadvanced loans reported at quarter-end.
- Review the impact of securities-market movements on accumulated other comprehensive income and capital, and the ongoing accretion of the terminated hedge balance.
- Confirm future dividend and repurchase decisions; the board’s October 2020 authorization permitted repurchases of up to one million shares, with 861,670 shares remaining under the program at March 31.