Great Southern Bancorp(US:GSBC)2021-05-06 20:13PART I FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements for Q1 2021 reflect total assets of $5.60 billion, net income of $18.9 million, and the adoption of the CECL standard which reduced retained earnings by $14.2 million Loans and Allowance for Credit Losses The company adopted the CECL methodology, increasing the allowance for credit losses to $67.7 million and leading to a rise in non-accruing loans to $9.5 million Loan Portfolio Composition (In Thousands) | Loan Class | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Commercial construction | $1,206,687 | $1,212,837 | | Commercial real estate | $1,588,771 | $1,553,677 | | Other residential | $1,055,395 | $1,021,145 | | Owner occupied one- to four-family | $510,343 | $470,436 | | Commercial business | $372,533 | $370,898 | | Other | $481,185 | $596,835 | | Total Gross Loans | $5,216,114 | $5,225,529 | Activity in Allowance for Credit Losses (ACL) - Q1 2021 (In Thousands) | Description | Amount | | :--- | :--- | | Balance, December 31, 2020 | $55,743 | | CECL adoption impact | $11,595 | | Balance, January 1, 2021 | $67,338 | | Provision charged to expense | $300 | | Charge-offs | ($655) | | Recoveries | $719 | | Balance, March 31, 2021 | $67,702 | - Total non-accruing loans increased to $9.5 million at March 31, 2021, primarily in owner-occupied residential and commercial real estate loans49 - As of March 31, 2021, the company had 19 modified commercial loans totaling $141 million and 92 modified consumer/mortgage loans totaling $5 million under CARES Act guidance, not classified as TDRs67 Derivatives and Hedging Activities The company uses interest rate swaps for risk management and customer facilitation, with a terminated $400 million swap contributing $2.0 million to Q1 2021 interest income - In March 2020, the company terminated a $400 million interest rate swap, receiving a $45.9 million payment, with the gain accreted to interest income through October 2025139 - The terminated swap's gain contributed $2.0 million to loan interest income in Q1 2021, compared to $1.6 million from an active swap in Q1 2020138141 - A back-to-back swap program for commercial customers, not designated for hedge accounting, resulted in a net gain of $0.47 million in Q1 2021, contrasting with a net loss of $0.41 million in Q1 2020135137 Consolidated Statements of Financial Condition (Balance Sheet) | Metric | March 31, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $5,603,770 | $5,526,420 | | Cash and cash equivalents | $612,556 | $563,729 | | Loans receivable, net | $4,285,737 | $4,296,804 | | Total Liabilities | $4,992,313 | $4,896,679 | | Deposits | $4,626,936 | $4,516,903 | | Total Stockholders' Equity | $611,457 | $629,741 | Consolidated Statements of Income | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net Interest Income | $44,089 | $44,938 | | Provision for Credit Losses on Loans | $300 | $3,871 | | Non-Interest Income | $9,736 | $7,367 | | Non-Interest Expense | $30,321 | $30,815 | | Net Income | $18,868 | $14,868 | | Diluted EPS | $1.36 | $1.04 | - The company adopted the CECL accounting standard on January 1, 2021, resulting in a one-time $11.6 million increase to the allowance for credit losses and a $14.2 million after-tax decrease in retained earnings2236 Management's Discussion and Analysis (MD&A) Management reported a 26.9% increase in Q1 2021 net income to $18.9 million, driven by lower credit loss provisions and higher non-interest income, despite net interest margin compression Financial Condition Analysis Total assets increased by $77.4 million to $5.60 billion, driven by cash and securities growth, while stockholders' equity decreased by $18.3 million due to CECL adoption and share repurchases - Total assets increased by $77.4 million (1.4%) to $5.60 billion, primarily from increases in cash and available-for-sale securities199233 - Net loans decreased by $11.1 million (0.3%) to $4.29 billion, with declines in construction and consumer auto loans offset by multi-family and commercial real estate growth200237 - Total deposits grew by $110.0 million (2.4%), driven by a $249.2 million increase in transaction accounts, despite an $80.9 million decrease in retail certificates of deposit210239 - Stockholders' equity decreased by $18.3 million, primarily due to the $14.2 million CECL adoption impact, a $15.5 million decrease in AOCI, $3.8 million in share repurchases, and $4.7 million in dividends, partially offset by $18.9 million in net income241 Results of Operations Analysis Net income for Q1 2021 increased 26.9% to $18.9 million, driven by a significant decrease in credit loss provisions and higher non-interest income, despite net interest margin compression Q1 2021 vs. Q1 2020 Performance Summary (In Thousands) | Metric | Q1 2021 | Q1 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $44,089 | $44,938 | (1.9%) | | Provision for Credit Losses | $300 | $3,871 | (92.2%) | | Non-Interest Income | $9,736 | $7,367 | 32.2% | | Non-Interest Expense | $30,321 | $30,815 | (1.6%) | | Net Income | $18,868 | $14,868 | 26.9% | - The provision for credit losses on loans was significantly lower at $0.3 million in Q1 2021 compared to $3.9 million in Q1 2020, reflecting improved economic forecasts under the new CECL model272 - Net interest margin decreased by 43 basis points to 3.41%, primarily due to changes in asset mix and the issuance of subordinated notes264 - Non-interest income increased by $2.4 million, largely due to a $2.1 million increase in net gains on loan sales from higher fixed-rate mortgage origination and sale activity287 Credit Quality Non-performing assets increased to $10.9 million (0.19% of total assets), primarily due to a $2.7 million rise in non-performing commercial real estate loans, while potential problem loans decreased to $5.1 million Non-Performing Assets (In Thousands) | Category | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Non-performing loans | $9,546 | $6,886 | | Foreclosed assets | $1,319 | $1,223 | | Total Non-performing Assets | $10,865 | $8,109 | | As a % of Total Assets | 0.19% | 0.15% | - The increase in non-performing loans was primarily driven by a $2.5 million increase in non-performing commercial real estate loans, including one new relationship totaling $2.4 million277278 - Potential problem loans decreased by $0.76 million to $5.1 million at March 31, 2021280 Capital and Liquidity The company and its bank subsidiary remained well-capitalized, with the company's Tier 1 leverage ratio at 11.0% and Total risk-based capital ratio at 17.8%, while repurchasing 74,865 shares for $3.8 million Regulatory Capital Ratios as of March 31, 2021 | Ratio | Company | Bank | Well-Capitalized Minimum | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 12.7% | 14.1% | 6.50% | | Tier 1 Capital | 13.2% | 14.1% | 8.00% | | Total Capital | 17.8% | 15.4% | 10.00% | | Tier 1 Leverage | 11.0% | 11.8% | 5.00% | - During Q1 2021, the company repurchased 74,865 shares of common stock at an average price of $50.50 per share320 - A quarterly cash dividend of $0.34 per common share was declared during Q1 2021319 Market Risk Disclosures The company's primary market risk is interest rate risk, with models indicating positive sensitivity to rising rates and $2.0 billion of LIBOR-tied loans largely protected by interest rate floors - The company's primary market risk is interest rate risk, with models indicating a positive impact on net interest income from rising rates and a negative impact from declining rates328330 - A significant portion of the loan portfolio, $2.0 billion, is tied to LIBOR, with $1.97 billion protected by interest rate floors to mitigate falling rate impacts331 - The company is actively preparing for LIBOR discontinuation, having implemented robust fallback language in new and renewed commercial loan agreements since late 2018207208 Controls and Procedures The company's disclosure controls and procedures were deemed effective as of March 31, 2021, with no material changes in internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of the end of the period344 - No material changes in internal control over financial reporting occurred during the quarter345 PART II OTHER INFORMATION Share Repurchases Under a board authorization for up to 1 million shares, the company repurchased 74,865 shares of common stock for $3.8 million during Q1 2021, with 0.86 million shares remaining available Common Stock Repurchase Activity - Q1 2021 | Period | Total Shares Purchased | Average Price Per Share | | :--- | :--- | :--- | | January 2021 | 18,559 | $49.29 | | February 2021 | 55,853 | $50.87 | | March 2021 | 453 | $53.53 | | Total Q1 2021 | 74,865 | $50.50 | - The current share repurchase program, authorized in October 2020, allows for up to 1 million shares and has no expiration date349