When used in this Quarterly Report and in documents filed or furnished by
Great Southern Bancorp, Inc.(the "Company") with the Securities and Exchange Commission(the "SEC"), in the Company's press releases or other public or stockholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "may," "might," "could," "should," "will likely result," "are expected to," "will continue," "is anticipated," "believe," "estimate," "project," "intends" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements also include, but are not limited to, statements regarding plans, objectives, expectations or consequences of announced transactions, known trends and statements about future performance, operations, products and services of the Company. The Company's ability to predict results or the actual effects of future plans or strategies is inherently uncertain, and the Company's actual results could differ materially from those contained in the forward-looking statements. The novel coronavirus disease, or COVID-19, pandemic has adversely affected the Company, its customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on the Company's business, financial position, results of operations, liquidity, and prospects is uncertain. While general business and economic conditions have improved, increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect the Company's revenues and the values of its assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to, COVID-19, could affect the Company in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: (i) expected revenues, cost savings, earnings accretion, synergies and other benefits from the Company's merger and acquisition activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; (ii) changes in economic conditions, either nationally or in the Company's market areas; (iii) fluctuations in interest rates; (iv) the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses; (v) the possibility of realized or unrealized losses on securities held in the Company's investment portfolio; (vi) the Company's ability to access cost-effective funding; (vii) fluctuations in real estate values and both residential and commercial real estate market conditions; (viii) the ability to adapt successfully to technological changes to meet customers' needs and developments in the marketplace; (ix) the possibility that security measures implemented might not be sufficient to mitigate the risk of a cyber-attack or cyber theft, and that such security measures might not protect against systems failures or interruptions; (x) legislative or regulatory changes that adversely affect the Company's business; (xi) changes in accounting policies and practices or accounting standards; (xii) results of examinations of the Company and Great Southern Bankby their regulators, including the possibility that the regulators may, among other things, require the Company to limit its business activities, change its business mix, increase its allowance for credit losses, write-down assets or increase its capital levels, or affect its ability to borrow funds or maintain or increase deposits, which could adversely affect its liquidity and earnings; (xiv) costs and effects of litigation, including settlements and judgments; (xv) competition; (xvi) uncertainty regarding the future of LIBOR and potential replacement indexes; and (xvii) natural disasters, war, terrorist activities or civil unrest and their effects on economic and business environments in which the Company operates. The Company wishes to advise readers that the factors listed above and other risks described from time to time in documents filed or furnished by the Company with the SECcould affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake-and specifically declines any obligation- to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 31
Critical accounting policies, judgments and estimates
The accounting and reporting policies of the Company conform to accounting principles generally accepted in
the United States of Americaand general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
Allowance for credit losses and valuation of foreclosed assets
The Company believes that the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for credit losses is calculated with the objective of maintaining an allowance level believed by management to be sufficient to absorb estimated credit losses. The allowance for credit losses is measured using an average historical loss model which incorporates relevant information about past events (including historical credit loss experience on loans with similar risk characteristics), current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral and repayment types and expected credit loss patterns. Loans that do not share similar risk characteristics, primarily classified and/or TDR loans with a balance greater than or equal to
$100,000which are classified or restructured troubled debt, are evaluated on an individual basis. For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using the Company's historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and outstanding loan balances during a lookback period. Lookback periods can be different based on the individual pool and represent management's credit expectations for the pool of loans over the remaining contractual life. In certain loan pools, if the Company's own historical loss rate is not reflective of the loss expectations, the historical loss rate is augmented by industry and peer data. The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts. These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given economic forecasts of key macroeconomic variables including, but not limited to, unemployment rate, GDP, disposable income and market volatility. The adjustments are based on results from various regression models projecting the impact of the macroeconomic variables to loss rates. The forecast is used for a reasonable and supportable period before reverting back to historical averages using a straight-line method. The forecast adjusted loss rate is applied to the amortized cost of loans over the remaining contractual lives, adjusted for expected prepayments. The contractual term excludes expected extensions, renewals and modifications unless there is a reasonable expectation that a troubled debt restructuring will be executed. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecast such as changes in portfolio composition, underwriting practices, or significant unique events or conditions. See Note 6 "Loans and Allowance for Credit Losses" of the accompanying financial statements for additional information regarding the allowance for credit losses. Inherent in this process is the evaluation of individual significant credit relationships. From time to time certain credit relationships may deteriorate due to payment performance, cash flow of the borrower, value of collateral, or other factors. In these instances, management may revise its loss estimates and assumptions for these specific credits due to changing circumstances. In some cases, additional losses may be realized; in other instances, the factors that led to the deterioration may improve or the credit may be refinanced elsewhere and allocated allowances may be released from the particular credit. Significant changes were made to management's overall methodology for evaluating the allowance for credit losses beginning in 2021 due to the adoption of ASU 2016-13. On January 1, 2021, the Company adopted the new accounting standard related to the Allowance for Credit Losses. For assets held at amortized cost basis, this standard eliminates the probable initial recognition threshold in GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. See Note 6 of the accompanying financial statements for additional information. In addition, the Company considers that the determination of the valuations of foreclosed assets held for sale involves a high degree of judgment and complexity. The carrying value of foreclosed assets reflects management's best estimate of the amount to be realized from the sales of the assets. While the estimate is generally based on a valuation by an independent appraiser or recent sales of similar properties, the amount that the Company realizes from the sales of the assets could differ materially from the carrying value reflected in the financial statements, resulting in losses that could adversely impact earnings in future periods. 32
Goodwilland intangible assets that have indefinite useful lives are subject to an impairment test at least annually and more frequently if circumstances indicate their value may not be recoverable. Goodwillis tested for impairment using a process that estimates the fair value of each of the Company's reporting units compared with its carrying value. The Company defines reporting units as a level below each of its operating segments for which there is discrete financial information that is regularly reviewed. As of March 31, 2022, the Company had one reporting unit to which goodwill has been allocated - the Bank. If the fair value of a reporting unit exceeds its carrying value, then no impairment is recorded. If the carrying value exceeds the fair value of a reporting unit, further testing is completed comparing the implied fair value of the reporting unit's goodwill to its carrying value to measure the amount of impairment, if any. Intangible assets that are not amortized will be tested for impairment at least annually by comparing the fair values of those assets to their carrying values. At March 31, 2022, goodwill consisted of $5.4 millionat the Bank reporting unit, which included goodwill of $4.2 millionthat was recorded during 2016 related to the acquisition of 12 branches and the assumption of related deposits in the St. Louismarket from Fifth Third Bank. Other identifiable intangible assets that are subject to amortization are amortized on a straight-line basis over a period of seven years. At March 31, 2022, the amortizable intangible assets consisted of core deposit intangibles of $527,000, which are reflected in the table below. These amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable based on a comparison of fair value. For purposes of testing goodwill for impairment, the Company used a market approach to value its reporting unit. The market approach applies a market multiple, based on observed purchase transactions for each reporting unit, to the metrics appropriate for the valuation of the operating unit. Significant judgment is applied when goodwill is assessed for impairment. This judgment may include developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables and incorporating general economic and market conditions. Management does not believe any of the Company's goodwill or other intangible assets were impaired as of March 31, 2022. While management believes no impairment existed at March 31, 2022, different conditions or assumptions used to measure fair value of the reporting unit, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company's impairment evaluation in the future.
The summary of goodwill and intangible assets is as follows:
March 31, December 31, 20222021 (In Thousands)
Deposit of intangible assets
$ 5,923 $ 6,081Current Economic Conditions Changes in economic conditions could cause the values of assets and liabilities recorded in the financial statements to change rapidly, resulting in material future adjustments in asset values, the allowance for credit losses, or capital that could negatively impact the Company's ability to meet regulatory capital requirements and maintain sufficient liquidity. Following the housing and mortgage crisis and correction beginning in mid-2007, the United Statesentered an economic downturn. Unemployment rose from 4.7% in November 2007to peak at 10.0% in October 2009. Economic conditions improved in the subsequent years, as indicated by higher consumer confidence levels, increased economic activity and low unemployment levels. The U.S.economy continued to operate at historically strong levels until the COVID-19 pandemic in March 2020. While U.S.economic trends have rebounded, new COVID variants have emerged and the severity and extent of the coronavirus on the global, national and regional economies is still uncertain. Any long-term impact on the performance of the financial sector remains indeterminable. The economy plunged into recession in the first quarter of 2020, as efforts to contain the spread of the coronavirus forced all but essential business activity, or any work that could not be done from home, to stop, shuttering factories, restaurants, entertainment, sports events, retail shops, personal services, and more. 33 More than 22 million jobs were lost in March and April 2020as businesses closed their doors or reduced their operations, sending employees home on furlough or layoffs. Hunkered down at home with uncertain incomes and limited buying opportunities, consumer spending plummeted. As a result, gross domestic product (GDP), the broadest measure of the nation's economic output, plunged. Since then, significant improvements in consumer spending, GDP, and employment have occurred, greatly supported by the actions described below. The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), a fiscal relief bill passed by Congressand signed by the President in March 2020, injected approximately $3 trillioninto the economy through direct payments to individuals and grants to small businesses that would keep employees on their payroll, fueling a historic bounce-back in economic activity. To help our customers navigate through the pandemic situation, we offered and supplied Paycheck Protection Program (PPP) loans and short-term modifications to loan terms. PPP loans and loan modifications were made in accordance with guidance from banking regulatory authorities. These modifications did not result in loans being classified as troubled debt restructurings, potential problem loans or non-performing loans. More severely impacted industries in our loan portfolio included retail, hotel and restaurants. Nearly all modified loans have returned to original terms. The Federal Reserveacted decisively, employing a wide arsenal of tools, including slashing its benchmark interest rate to near zero and ensuring credit availability to businesses, households, and municipal governments. The Federal Reserve'sefforts largely insulated the financial system from the problems in the economy, a significant difference from the financial crisis of 2007-2008. Purchases of Treasuryand agency mortgage-backed securities totaling $120 billioneach month by the Federal Reservecommenced shortly after the pandemic began. In November 2021, the Federal Reservedecided to taper its quantitative easing (QE), winding down its bond purchases with its final open market purchase conducted on March 9, 2022. Additionally, Federal fund rates, which have been at zero lower bound since the pandemic began, increased 12 basis points in March 2022. Financial markets are anticipating an aggressive increase in interest rates in 2022, with three to six hikes anticipated. Several factors prompting the Federal Reserveto begin normalizing policy include: the strengthening economy, the recent surge in inflation, higher inflation expectations, upward trajectory of wages, reduced pandemic concerns and the strong housing market. However, the military hostilities in Ukrainehave now created uncertainty regarding the world economy and the path of market interest rates, including the aggressiveness of Federal Reserveinterest rate increases. The "American Rescue Plan," an economic relief fiscal measure of approximately $1.9 trillionwith an emphasis on vaccination, individual and small business relief, was enacted early in 2021. Additionally, many of the climate-related policies in the "Build Back Better" package may be passed into law later this year to be paid for with higher corporate taxes and tax enforcement. The federal government posted a deficit of $2.8 trillionin the 2021 fiscal year and is expected to post a deficit of $1.2 trillionin the 2022 fiscal year. While Congresshas not been focused on deficits during the pandemic, it will likely face pressure to address the mounting fiscal debt. 34
The national unemployment rate dropped from 3.8% in
February 2022to 3.6% in March 2022, or 6 million unemployed individuals, compared to February 2020, just prior to the beginning of the COVID-19 pandemic, at which time the unemployment rate was 3.5% and unemployed persons numbered 5.7 million. The U.S.economy added 431,000 jobs in March 2022with overall job growth averaging 562,000 per month in the first quarter of 2022, the same as the average monthly gain for 2021. The labor market remains tighter than headline unemployment data would indicate as companies are still competing for qualified workers. Wages and salaries grew 4.5% in 2021. Across industries, the economic recovery remains uneven. Employment in the financial activities, professional and business services, retail and transportation and warehousing sectors are now above pre-pandemic levels; however, leisure and entertainment, healthcare and manufacturing remain under February 2020employment levels. One of the largest employment sectors in the country, leisure and hospitality, although showing job increases, remains negatively impacted by the loss of 1.5 million jobs, or 8.7% of the workforce, since February 2020. Most jobs in the leisure and hospitality industry cannot be performed remotely, with many businesses closed or experiencing a sharp reduction in business at the onset of the health and economic crises. As of March 2022, the labor force participation rate (the share of working-age Americans employed or actively looking for a job) was 62.4% which remains below the February 2020reported rate of 63.4%. The unemployment rate for the Midwest, where the Company conducts most of its business, has decreased from 5.2% in March 2021to 3.5% in March 2022. Unemployment rates for March 2022in the states where the Company has a branch or loan production offices were Arizonaat 3.3%, Arkansasat 3.1%, Coloradoat 3.7%, Georgiaat 3.1%, Illinoisat 4.7%, Iowaat 3.3%, Kansasat 2.5%, Minnesotaat 2.5%, Missouriat 3.6%, Nebraskaat 2.0%, Oklahomaat 2.7%, and Texasat 4.4%. Of the metropolitan areas in which the Company does business, most are below the national unemployment rate of 3.6% for March 2022. Chicagoleads our markets with a higher unemployment rate of 4.5%, followed by St. Louisat 3.7% and Denverat 3.6% in March 2022.
New home sales in
the United Statesdropped 8.6% in March 2022when compared to February 2022, to a seasonally adjusted annual rate of 763,000 in March of 2022, according to U.S. Census Bureauand Department of Housing and Urban Developmentestimates. The median sales price of new houses sold in March 2022was $436,700, up from $359,600a year earlier. The average sales price in March 2022of $523,900was up from $414,700in March 2021. The inventory of new homes for sale, at an estimated 406,000 at the end of March 2022, would support a 6.4 months' supply at the current sales rate, up from 4.2 months' supply at the end of March 2021. The housing market is beginning to feel the impact of sharply rising mortgage rates and higher inflation on purchasing power. With rising mortgage rates, cash sales made up a larger percentage of transactions, climbing to its highest share since 2014. Total existing-home sales dipped 2.7% from February 2022to a seasonally adjusted annual rate of 5.77 million in March 2022. Year-over-year, sales fell 4.5% (6.05 million in March 2021). There were 950,000 previously owned homes on the market in March 2022, up 11.8% from February and down 9.5% from one year ago (1.05 million). With slower demand, the inventory of unsold existing homes increased to 590,000 as of the end of March 2022, which would support 2 months at the monthly sales pace up from 1.7 months in February 2022and down from 2.1 months in March 2021. The median existing-home sales price as of March 2022was $375,300, up 15% from $326,300at March 2021as prices rose in each region. This marks 121consecutive months of year-over-year increases, the longest-running streak on record. Home prices have consistently moved upward as supply remains tight; however, if and when demand subsides, easy-profit gains and multiple offers can be expected to decline. Properties typically remained on the market for 17 days in March 2022, down from 18 days in February 2022and 18 days in March 2021. 87% of homes sold in March 2022were on the market for less than a month. Year-over-year, prices increased in every region of the United States, with the Midwest showing an increase of 10.4%, with median prices increasing from $245,500in March 2021to $271,000in March 2022.
First-time buyers accounted for 30% of sales in
According to Freddie Mac, the average commitment rate for a conventional 30-year fixed rate mortgage was 4.17% in
There has been unprecedented demand for apartments, with the vacancy rate hitting historic lows at the end of 2021 and continuing into 2022. The overall lack of available housing, both single-family and rental apartment units, has pricing on a significant upward trajectory, resulting in a vacancy rate of 4.9% for the first quarter of 2022. Rents nationally rose 11% in 2021 with the nation absorbing 714,000 units in 2021, twice the annual average of the past five years. With demand and rent growth indicators surging, investors have shown high interest for apartment assets, creating a highly competitive acquisition environment and driving the average national cap rate to an all-time low. Our market areas reflected the following apartment vacancy levels as of
March 31, 2022: Springfield, Missouriat 2.9%, St. Louisat 6.9%, Kansas Cityat 6.1%, Minneapolisat 6.1%, Tulsa, Oklahomaat 6.1%, Dallas-Fort Worthat 6.1%, Chicagoat 5.7%, Atlantaat 6.5%, Phoenixat 6.2%, and Denverat 6.6%. Three of our market areas, Dallas-Fort Worth, Phoenixand Atlanta, were in the top ten metropolitan areas for current construction and 12 month deliveries to market. The national office market is showing early signs of a recovery, but the sector still has a long way to go before it reaches pre-pandemic levels of performance. Remote and hybrid work structures instituted early on in the pandemic appear here to stay, at least to an extent, and it is likely that office-using companies will continue to reassess their physical footprints as their leases roll over. Office-using employment has bounced back quicker than the average for all employment sectors, and more office jobs could lead to stronger office leasing. However, leasing volume is still below pre-pandemic norms, and the amount of sublet space on the market remains near record highs. Furthermore, the national office market is contending with a glut of newly vacated space and a still-robust supply pipeline. These trends, combined with the looming prospect of firms exploring more permanent remote and flexible work setups, may continue to place upward pressure on the national office vacancy rate in the near term. Rent growth is flat on a year-over-year basis, and it will remain difficult for office owners to push asking rents until leasing activity returns to pre-pandemic levels for an extended period of time. Despite a still uncertain near-term outlook, office sales volume rebounded in the second half of 2021. As of March 31, 2022, national office vacancy rates remained about the same at 12.3%, compared to December 31, 2021, while our market areas reflected the following vacancy levels at March 31, 2022: Springfield, Missouriat 2.8%, St. Louisat 9.0%, Kansas Cityat 9.5%, Minneapolisat 10.0%, Tulsa, Oklahomaat 12.2%, Dallas-Fort Worthat 17.6%, Chicagoat 15.3%, Atlantaat 14.1% and Denverat 14.4%. The retail sector continued its positive momentum into first quarter of 2022, as consumers drove continued improvement in the sector. Retail sales have accelerated briskly since mid-2021, due to the significant increase in consumers' disposable income resulting from pandemic-related government transfers and strong wage growth. With additional funds at their disposal, American consumers pushed brick and mortar retail sales to record levels in 2021. With sales sitting at record highs, some retailers have selectively turned back to expansion mode. While demand for retail space is on the rise, construction activity continues to fall. Just over 13 million square feet of retail space was delivered during the first quarter of 2022, 80% of which was pre-leased. Most recent construction activity has consisted of single-tenant build-to-suits or smaller ground floor spaces in mixed-use developments. Thanks to growing demand and minimal new supply, vacancy rates declined across most retail segments in the first quarter of 2022, with exceptions still including regional and super-regional malls. Rents increased at their fastest clip, 3.8%, in over a decade during the period from March 31, 2021to March 31, 2022. Retail rent growth is forecast to accelerate over the coming quarters due to the combination of a strong retail sales environment and continued rising demand for space. Inflation expectations will weigh on the real rate of rental growth though, likely keeping it in line with or slightly below the average growth rate seen during the five years preceding the pandemic. At March 31, 2022, national retail vacancy rates remained level at 4.5% while our market areas reflected the following vacancy levels: Springfield, Missouriat 3.3%, St. Louisat 6.0%, Kansas Cityat 5.0%, Minneapolisat 3.2%, Tulsa, Oklahomaat 3.5%, Dallas-Fort Worthat 4.9%, Chicagoat 5.9%, Atlantaat 4.2%, Phoenixat 6.0% and Denverat 4.6%. The U.S.industrial market is experiencing a record level of new logistics facilities deliveries from late 2021 through the first quarter of 2022. The U.S.has been in the midst of a historic boom in household spending on retail goods (both online and in store), all of which need to be stored in logistics properties across the country before reaching the end consumer. Record savings accumulated during the pandemic and the strongest wage growth in more than 20 years will likely remain as tailwinds for elevated consumer spending over the next several months; however, rising gas prices and inflation risk partially eroding consumers' purchasing power, causing real goods spending to slow from current levels. Signals are emerging that a gradual slowing in leasing and absorption is approaching, which should cause rent growth to slow given the active construction pipeline. Amazon announced early in 2022 that it would be slowing growth in its distribution network from its recent breakneck pace. 36 At March 31, 2022, national industrial vacancy rates sat at a record low of 4.1% while our market areas reflected the following vacancy levels: Springfield, Missouriat 1.4%, St. Louisat 2.9%, Kansas Cityat 4.4%, Minneapolisat 3.5%, Tulsa, Oklahomaat 3.7%, Dallas-Fort Worthat 5.7%, Chicagoat 4.7%, Atlantaat 4.0%, Phoenixat 4.6% and Denverat 5.2%. Our management will continue to monitor regional, national, and global economic indicators such as unemployment, GDP, housing starts and prices, commercial real estate occupancy, absorption and rental rates, as these could significantly affect customers in each of our market areas.
Impact of COVID-19 on our business and response
Great Southern continues to monitor and respond to the effects of the COVID 19 pandemic. As always, the health, safety and well-being of our customers, associates and communities, while maintaining uninterrupted service, are the Company's top priorities.
Centers for Disease Control and Prevention( CDC) guidelines, as well as directives from federal, state and local officials, are being closely followed to make informed operational decisions, if necessary. The Company continues to work diligently with its nearly 1,100 associates to enforce the most current health, hygiene and social distancing practices. To date, there have been no service disruptions or reductions in staffing. As always, customers can conduct their banking business using our banking center network, online and mobile banking services, ATMs, Telephone Banking, and online account opening services. As health conditions in local markets dictate, Great Southern banking center lobbies are open following social distancing and health protocols. Great Southern continues to work with customers experiencing hardships caused by the pandemic. As a resource to customers, a COVID-19 information center continues to be available on the Company's website, www.GreatSouthernBank.com. General information about the Company's pandemic response, how to receive assistance, and how to avoid COVID-19 scams and fraud are included. Impacts to Our Business Going Forward: The magnitude of the impact on the Company of the COVID-19 pandemic continues to evolve and will ultimately depend on the remaining length and severity of the economic downturn brought on by the pandemic. Some positive economic signs have occurred in 2021 and early 2022, such as lower unemployment rates, improving gross domestic product ("GDP") levels and other measures of the economy and increased vaccination rates. Over the previous two years, the COVID-19 pandemic has impacted the Company's business in one or more of the following ways, among others.
Long-term, consistently low market interest rates have
? had a negative impact on our variable and fixed rate borrowings, resulting in
decrease in net interest income
? Certain fees for deposit and loan products have been waived or reduced for a period
? Non-interest expenses increased due to the effects of COVID-19
pandemic, including cleaning costs, supplies, equipment and other items
? The halls of banking centers have been closed several times and may close again in
future periods if the pandemic situation worsens again
? Loan modifications have taken place
? A contraction in economic activity has reduced demand for our loans and for our
other products and services
Current COVID-19 infection rates are low in our markets and the
CDChas relaxed most restrictions that were previously in place. Our business is currently operating normally, similar to operations prior to the onset of the COVID-19 pandemic. We continue to monitor infection rates and other health and economic indicators to ensure we are prepared to respond to future challenges, should they arise.
Paycheck Protection Program Loans
Great Southern has actively participated in the PPP through the SBA. In the first round of the PPP, we originated approximately 1,600 PPP loans, totaling approximately
$121 million. SBA forgiveness was approved and processed, and full repayment proceeds were received by us, for all of these PPP loans during 2021. In the second round of the PPP, we funded approximately 1,650 PPP loans, totaling approximately $58 million. As of March 31, 2022, full forgiveness proceeds have been received by us from the SBA for 1,608 of these PPP loans, totaling approximately $57 million. 37 Great Southern received fees from the SBA for originating PPP loans based on the amount of each loan. At March 31, 2022, remaining net deferred fees related to PPP loans totaled $88,000, and we expect these remaining net deferred fees will accrete to interest income during the second quarter of 2022. The fees, net of origination costs, are deferred in accordance with standard accounting practices and accreted to interest income on loans over the contractual life of each loan. In the three months ended March 31, 2022and 2021, Great Southern recorded approximately $415,000and $1.2 million, respectively, of net deferred fees
in interest income on PPP loans. General
The profitability of the Company and, more specifically, the profitability of its primary subsidiary, the Bank, depend primarily on net interest income, as well as provisions for credit losses and the level of non-interest income and non-interest expense. Net interest income is the difference between the interest income the Bank earns on its loans and investment portfolios, and the interest it pays on interest-bearing liabilities, which consists mainly of interest paid on deposits and borrowings. Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on these balances. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. Great Southern's total assets decreased
$75.7 million, or 1.4%, from $5.45 billionat December 31, 2021, to $5.37 billionat March 31, 2022. Details of the current period changes in total assets are provided in the "Comparison of Financial Condition at March 31, 2022and December 31, 2021" section of this Quarterly Report on Form 10-Q. Loans. Net outstanding loans increased $104.0 million, or 2.5%, from $4.01 billionat December 31, 2021, to $4.11 billionat March 31, 2022. The increase was primarily in other residential (multi-family) loans, commercial real estate loans and one- to four family residential loans. These increases were partially offset by a decrease in construction loans. As loan demand is affected by a variety of factors, including general economic conditions, and because of the competition we face and our focus on pricing discipline and credit quality, we cannot be assured that our loan growth will match or exceed the average level of growth achieved in prior years. The Company's strategy continues to be focused on maintaining credit risk and interest rate risk at appropriate levels. Recent growth has occurred in some loan types, primarily other residential (multi-family) and commercial real estate, and in most of Great Southern's primary lending locations, including Springfield, St. Louis, Kansas City, Des Moinesand Minneapolis, as well as our loan production offices in Atlanta, Chicago, Dallas, Denver, Omahaand Tulsa. Certain minimum underwriting standards and monitoring help assure the Company's portfolio quality. Great Southern's loan committee reviews and approves all new loan originations in excess of lender approval authorities. Generally, the Company considers commercial construction, consumer, other residential (multi-family) and commercial real estate loans to involve a higher degree of risk compared to some other types of loans, such as first mortgage loans on one- to four-family, owner-occupied residential properties. For other residential (multi-family), commercial real estate, commercial business and construction loans, the credits are subject to an analysis of the borrower's and guarantor's financial condition, credit history, verification of liquid assets, collateral, market analysis and repayment ability. It has been, and continues to be, Great Southern's practice to verify information from potential borrowers regarding assets, income or payment ability and credit ratings as applicable and as required by the authority approving the loan. To minimize construction risk, projects are monitored as construction draws are requested by comparison to budget and with progress verified through property inspections. The geographic and product diversity of collateral, equity requirements and limitations on speculative construction projects help to mitigate overall risk in these loans. Underwriting standards for all loans also include loan-to-value ratio limitations which vary depending on collateral type, debt service coverage ratios or debt payment to income ratio guidelines, where applicable, credit histories, use of guaranties and other recommended terms relating to equity requirements, amortization, and maturity. Consumer loans, other than home equity loans, are primarily secured by new and used motor vehicles and these loans are also subject to certain minimum underwriting standards to assure portfolio quality. In 2019, the Company decided to discontinue indirect auto loan originations. While our policy allows us to lend up to 95% of the appraised value on one-to four-family residential properties, originations of loans with loan-to-value ratios at that level are minimal. Private mortgage insurance is typically required for loan amounts above the 80% level. Few exceptions occur and would be based on analyses which determined minimal transactional risk to be involved. We consider these lending practices to be consistent with or more conservative than what we believe to be the norm for banks our size. At both March 31, 2022and December 31, 2021, 0.3% of our owner occupied one-to four-family residential loans had loan-to-value ratios above 100% at origination. At both March 31, 2022and December 31, 2021, an estimated 0.2% of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination. At March 31, 2022, TDRs totaled $3.7 million, or 0.1% of total loans, a decrease of $121,000from $3.9 million, or 0.1% of total loans, at December 31, 2021. Concessions granted to borrowers experiencing financial difficulties may include a reduction in the 38 interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. For TDRs occurring during the three months ended March 31, 2022, none were restructured into multiple new loans. For TDRs occurring during the year ended December 31, 2021, one loan totaling $45,000was restructured into multiple new loans. For further information on TDRs, see Note 6 of the Notes to Consolidated Financial Statements contained in this report. The level of non-performing loans and foreclosed assets affects our net interest income and net income. We generally do not accrue interest income on these loans and do not recognize interest income until the loans are repaid or interest payments have been made for a period of time sufficient to provide evidence of performance on the loans. Generally, the higher the level of non-performing assets, the greater the negative impact on interest income and net income. The Company continues its preparation for discontinuation of use of interest rates such as LIBOR. LIBOR is a benchmark interest rate referenced in a variety of agreements used by the Company, but by far the most significant area impacted by LIBOR is related to commercial and residential mortgage loans. After 2021, certain LIBOR rates may no longer be published and it is expected to eventually be discontinued as a reference rate by June 2023. Other interest rates used globally could also be discontinued for similar reasons. The Company has been regularly monitoring its portfolio of loans tied to LIBOR since 2019, with specific groups of loans identified. The Company implemented robust LIBOR fallback language for all commercial loan transactions beginning near the end of 2018, with such language utilized for all new originations and renewed/modified commercial loans since that time. The Company is particularly monitoring the remaining group of loans that were originated prior to the fourth quarter of 2018, and have not been renewed or modified since that time. At March 31, 2022, this represented approximately 47 commercial loans totaling approximately $122 million; however, only 26 of those loans, totaling $22 million, mature after June 2023(the date upon which the LIBOR indices used by the Company are expected to no longer be available). The Company also has a portfolio of residential mortgage loans tied to LIBOR indices with standard index replacement language included (approximately $410 millionat March 31, 2022), and that portfolio is being monitored for potential changes that may be facilitated by the mortgage industry. As described, the vast majority of the loan portfolio tied to LIBOR now includes robust LIBOR replacement language which identifies appropriate "trigger" events for the cessation of LIBOR and the steps that the Company will take upon the occurrence of one or more of those events, including adjustments to any rate margin to ensure that the replacement interest rate on the loan is substantially similar to the previous LIBOR-based rate. Available-for-sale Securities. In the three months ended March 31, 2022, available-for-sale securities decreased $39.7 million, or 7.9%, from $501.0 millionat December 31, 2021, to $461.4 millionat March 31, 2022. The decrease was primarily due to $226.5 millionin available-for-sale securities being transferred to held-to-maturity during the period and calls of municipal securities and normal monthly payments received related to the portfolio of U.S. Governmentagency mortgage-backed securities and collateralized mortgage obligations. This was partially offset by the purchase of U.S. Governmentagency fixed-rate single-family and multi-family mortgage-backed securities and collateralized mortgage obligations. The Company used excess liquid funds and loan repayments to fund this increase in investment securities. In determining securities that were elected to be transferred to the held-to-maturity category, the Company reviewed all of its investment securities purchased prior to 2022 and determined that certain of those securities, for various reasons, would likely be held to their maturity or full repayment prior to contractual maturity. Held-to-maturity Securities. In the three months ended March 31, 2022, as noted above, available-for-sale securities of $226.5 millionwere transferred to held-to-maturity. This transfer included $220.2 millionof mortgage-backed securities and collateralized mortgage obligations and $6.3 millionin municipal securities. Deposits. The Company attracts deposit accounts through its retail branch network, correspondent banking and corporate services areas, and brokered deposits. The Company then utilizes these deposit funds, along with FHLBank advances and other borrowings, to meet loan demand or otherwise fund its activities. In the three months ended March 31, 2022, total deposit balances decreased $62.8 million, or 1.4%. Compared to December 31, 2021, transaction account balances remained flat at $3.59 billionat March 31, 2022, while retail certificates of deposit decreased $63.0 million, or 7.1%, to $830.7 millionat March 31, 2022. Increases in transaction accounts were primarily a result of increases in various money market accounts and NOW deposit accounts, offset by decreases in non-interest-bearing accounts. Retail time deposits decreased due to a decrease in retail certificates generated through the banking center network and decreases in national time deposits initiated through internet channels. Time deposits initiated through internet channels experienced a planned decrease due to increases in overall liquidity levels and to reduce the Company's cost of funds. Brokered deposits were $67.4 millionat both March 31, 2022and December 31, 2021. Our deposit balances may fluctuate depending on customer preferences and our relative need for funding. We do not consider our retail certificates of deposit to be guaranteed long-term funding because customers can withdraw their funds at any time with minimal interest penalty. When loan demand trends upward, we can increase rates paid on deposits to attract more deposits and utilize brokered 39 deposits to provide additional funding. The level of competition for deposits in our markets is high. It is our goal to gain deposit market share, particularly checking accounts, in our branch footprint. To accomplish this goal, increasing rates to attract deposits may be necessary, which could negatively impact the Company's net interest margin. Our ability to fund growth in future periods may also depend on our ability to continue to access brokered deposits and FHLBank advances. In times when our loan demand has outpaced our generation of new deposits, we have utilized brokered deposits and FHLBank advances to fund these loans. These funding sources have been attractive to us because we can create either fixed or variable rate funding, as desired, which more closely matches the interest rate nature of much of our loan portfolio. It also gives us greater flexibility in increasing or decreasing the duration of our funding. While we do not currently anticipate that our ability to access these sources will be reduced or eliminated in future periods, if this should happen, the limitation on our ability to fund additional loans could have a material adverse effect on our business, financial condition and results of operations. Securities sold under reverse repurchase agreements with customers. Securities sold under reverse repurchase agreements with customers increased $10.9 millionfrom $137.1 millionat December 31, 2021to $148.0 millionat March 31, 2022. These balances fluctuate over time based on customer demand for this product. Net Interest Income and Interest Rate Risk Management. Our net interest income may be affected positively or negatively by changes in market interest rates. A large portion of our loan portfolio is tied to one-month LIBOR, three-month LIBOR or the "prime rate" and adjusts immediately or shortly after the index rate adjusts (subject to the effect of contractual interest rate floors on some of the loans, which are discussed below). We monitor our sensitivity to interest rate changes on an ongoing basis (see "Item 3. Quantitative and Qualitative Disclosures About Market Risk"). The current level and shape of the interest rate yield curve poses challenges for interest rate risk management. Prior to its increase of 0.25% on December 16, 2015, the FRB had last changed interest rates on December 16, 2008. This was the first rate increase since September 29, 2006. The FRB also implemented rate change increases of 0.25% on eight additional occasions beginning December 14, 2016and through December 31, 2018, with the Federal Funds rate reaching as high as 2.50%. After December 2018, the FRB paused its rate increases and, in July, September and October 2019, implemented rate decreases of 0.25% on each of those occasions. At December 31, 2019, the Federal Funds rate stood at 1.75%. In response to the COVID-19 pandemic, the FRB decreased interest rates on two occasions in March 2020, a 0.50% decrease on March 3and a 1.00% decrease on March 16. In March 2022, the FRB increased interest rates 0.25%. At March 31, 2022, the Federal Funds rate stood at 0.50%. Financial markets are anticipating an aggressive increase in interest rates in 2022, with up to 2.00% of cumulative rate hikes currently anticipated. A substantial portion of Great Southern's loan portfolio ( $1.31 billionat March 31, 2022) is tied to the one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days after March 31, 2022. Of these loans, $1.30 billionhad interest rate floors. Great Southern also has a portfolio of loans ( $613 millionat March 31, 2022) tied to a "prime rate" of interest and will adjust immediately or within 90 days with changes to the "prime rate" of interest. Of these loans, $592 millionhad interest rate floors at various rates. At March 31, 2022, $800 millionin LIBOR and "prime rate" loans were at their floor rate. If interest rates were to increase 50 basis points, approximately $460 millionof these loans would move above their floor rate. A rate cut by the FRB generally would have an anticipated immediate negative impact on the Company's net interest income due to the large total balance of loans tied to the one-month or three-month LIBOR index or the "prime rate" index and will be subject to adjustment at least once within 90 days or loans which generally adjust immediately as the Federal Funds rate adjusts. Interest rate floors may at least partially mitigate the negative impact of interest rate decreases. Loans at their floor rates are, however, subject to the risk that borrowers will seek to refinance elsewhere at the lower market rate. Because the Federal Funds rate is again very low, there may also be a negative impact on the Company's net interest income due to the Company's inability to significantly lower its funding costs in the current competitive rate environment, although interest rates on assets may decline further. Conversely, market interest rate increases would normally result in increased interest rates on our LIBOR-based and prime-based loans. As of March 31, 2022, Great Southern's interest rate risk models indicate that, generally, rising interest rates are expected to have a positive impact on the Company's net interest income, while declining interest rates are expected to have a negative impact on net interest income. We model various interest rate scenarios for rising and falling rates, including both parallel and non-parallel shifts in rates. The results of our modeling indicate that net interest income is not likely to be significantly affected either positively or negatively in the first twelve months following relatively minor changes in market interest rates because our portfolios are relatively well-matched in a twelve-month horizon. In a situation where market interest rates increase significantly in a short period of time, our net interest margin increase may be more pronounced in the very near term (first one to three months), due to fairly rapid increases in LIBOR interest rates and "prime" interest rates. In a situation where market interest rates decrease significantly in a short period of time, as they did in March 2020, our net interest margin decrease may be more pronounced in the very near term (first one to three months), due to fairly rapid decreases in LIBOR interest rates and "prime" interest rates. In the subsequent months we expect that the net interest margin would stabilize and begin to improve, as renewal interest rates on maturing time deposits are expected to decrease 40 compared to the current rates paid on those products. During 2020, we did experience some compression of our net interest margin percentage due to 2.25% of Federal Fundrate cuts during the nine month period of July 2019through March 2020. Margin compression primarily resulted from changes in the asset mix, mainly the addition of lower-yielding assets and the issuance of subordinated notes during 2020 and the net interest margin remained lower than our historical average in 2021. LIBOR interest rates decreased significantly in 2020 and remained very low in 2021, putting pressure on loan yields, and strong pricing competition for loans and deposits remains in most of our markets. For further discussion of the processes used to manage our exposure to interest rate risk, see "Item 3. Quantitative and Qualitative Disclosures About Market Risk - How We Measure the Risks to Us Associated with Interest Rate Changes." Non-Interest Income and Non-Interest (Operating) Expenses. The Company's profitability is also affected by the level of its non-interest income and operating expenses. Non-interest income consists primarily of service charges and ATM fees, POS interchange fees, late charges and prepayment fees on loans, gains on sales of loans and available-for-sale investments and other general operating income. Non-interest income may also be affected by the Company's interest rate derivative activities, if the Company chooses to implement derivatives. See Note 16 "Derivatives and Hedging Activities" in the Notes to Consolidated Financial Statements included in this report. Operating expenses consist primarily of salaries and employee benefits, occupancy-related expenses, expenses related to foreclosed assets, postage, FDICdeposit insurance, advertising and public relations, telephone, professional fees, office expenses and other general operating expenses. Details of the current period changes in non-interest income and non-interest expense are provided in the "Results of Operations and Comparison for the Three Months Ended March 31, 2022and 2021" section of this report.
Effect of Federal Laws and Regulations
General. Federal legislation and regulation significantly affect the operations of the Company and the Bank, and have increased competition among commercial banks, savings institutions, mortgage banking enterprises and other financial institutions. In particular, the capital requirements and operations of regulated banking organizations such as the Company and the Bank have been and will be subject to changes in applicable statutes and regulations from time to time, which changes could, under certain circumstances, adversely affect the Company or the Bank. Dodd-Frank Act. In 2010, sweeping financial regulatory reform legislation entitled the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Dodd-Frank Act") was signed into law. The Dodd-Frank Act implemented far-reaching changes across the financial regulatory landscape. Certain aspects of the Dodd-Frank Act have been affected by the more recently enacted Economic Growth Act, as defined and discussed below under "-Economic Growth Act." Capital Rules. The federal banking agencies have adopted regulatory capital rules that substantially amend the risk-based capital rules applicable to the Bank and the Company. The rules implement the "Basel III" regulatory capital reforms and changes required by the Dodd-Frank Act. "Basel III" refers to various documents released by the
Basel Committee on Banking Supervision. For the Company and the Bank, the general effective date of the rules was January 1, 2015, and, for certain provisions, various phase-in periods and later effective dates apply. The chief features of these rules are summarized below. The rules refine the definitions of what constitutes regulatory capital and add a new regulatory capital element, common equity Tier 1 capital. The minimum capital ratios are (i) a common equity Tier 1 ("CET1") risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6%; (iii) a total risk-based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. In addition to the minimum capital ratios, the rules include a capital conservation buffer, under which a banking organization must have CET1 more than 2.5% above each of its minimum risk-based capital ratios in order to avoid restrictions on paying dividends, repurchasing shares, and paying certain discretionary bonuses. The capital conservation buffer requirement began phasing in on January 1, 2016when a buffer greater than 0.625% of risk-weighted assets was required, which amount increased an equal amount each year until the buffer requirement of greater than 2.5% of risk-weighted assets became fully implemented on January 1, 2019. Effective January 1, 2015, these rules also revised the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels show signs of weakness. Under the revised prompt corrective action requirements, insured depository institutions are required to meet the following in order to qualify as "well capitalized:" (i) a common equity Tier 1 risk-based capital ratio of at least 6.5%, (ii) a Tier 1 risk-based capital ratio of at least 8%, (iii) a total risk-based capital ratio of at least 10% and (iv) a Tier 1 leverage ratio of 5%, and must not be subject to an order, agreement or directive mandating a specific capital level. Economic Growth Act. In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Economic Growth Act"), was enacted to modify or eliminate certain financial reform rules and regulations, including some implemented under the Dodd- 41 Frank Act. While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billionand for large banks with assets of more than $50 billion. Many of these amendments could result in meaningful regulatory changes. The Economic Growth Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billionby instructing the federal banking regulators to establish a single "Community Bank Leverage Ratio" ("CBLR") of between 8 and 10 percent. Any qualifying depository institution or its holding company that exceeds the CBLR will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered "well-capitalized" under the prompt corrective action rules. Effective January 1, 2020, the CBLR was 9.0%. In April 2020, pursuant to the CARES Act, the federal bank regulatory agencies announced the issuance of two interim final rules, effective immediately, to provide temporary relief to community banking organizations. Under the interim final rules, the CBLR requirement was a minimum of 8.5% for calendar year 2021, and is 9% thereafter. The Company and the Bank have chosen to not utilize the new CBLR due to the Company's size and complexity, including its commercial real estate and construction lending concentrations and significant off-balance sheet funding commitments.
In addition, the Economic Growth Act provides regulatory relief in the areas of review cycles, call reports, mortgage disclosures, and risk weightings for certain high-risk commercial real estate loans.
Great Southern continues to monitor and respond to the effects of the COVID-19 pandemic. As always, the health, safety and well-being of our customers, associates and communities, while maintaining uninterrupted service, are the Company's top priorities.
Centers for Disease Control and Prevention( CDC) guidelines, as well as directives from federal, state and local officials, are being followed to make informed operational decisions, if necessary. The Company's banking center network continues to be optimized. During 2022, the high-performing banking center in Kimberling City, Missouri, will be replaced with a newly constructed building on the same property at 14309 Highway 13. Customers will be served in a temporary building on the property during construction. The new office is expected to open in the fourth quarter of 2022. Including this office, the Company operates three banking centers in the BransonTri-Lakes area of southwest Missouri. In February 2022, the Company opened a new commercial loan production office (LPO) in Phoenix, Arizona, which represents the seventh LPO in the Company's franchise. A local and highly-experienced lender was hired to manage the office. The new LPO provides a wide variety of commercial lending services, including commercial real estate loans for new and existing properties and commercial construction loans. The Company expects to continue looking for opportunities to open additional LPOs in other markets during 2022. The Company announced that its 2022 Annual Meeting of Stockholders, to be held at 10 a.m. Central Timeon May 11, 2022, will be a virtual meeting over the internet and will not be held at a physical location. Stockholders will be able to attend the Annual Meeting via a live webcast. Holders of record of Great Southern Bancorp, Inc.common stock at the close of business on the record date, March 2, 2022, may vote during the live webcast of the Annual Meeting or by proxy. Please see the Company's Notice of Annual Meeting and Proxy Statement available on the Company's website, www.GreatSouthernBank.com, (click "About" then "Investor Relations") for additional information about the Annual Meeting.
Comparison of the financial situation at
During the three months ended
March 31, 2022, the Company's total assets decreased by $75.7 millionto $5.37 billion. The decrease was primarily in cash equivalents, and was partially offset by an increase in loans and investment securities. Cash and cash equivalents were $353.0 millionat March 31, 2022, a decrease of $364.2 million, or 50.8%, from $717.3 millionat December 31, 2021. Excess funds held at the Federal Reserve Bankat December 31, 2021were primarily the result of increases in net loan repayments throughout 2021. In 2022, these excess funds were used to fund the purchase of new investment securities and to fund loan originations. The Company's available-for-sale securities decreased $39.7 million, or 7.9%, compared to December 31, 2021. The decrease was primarily due to the transfer of $226.5 millionin available-for-sale securities to held-to-maturity during the period and by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities and collateralized mortgage obligations. This was mostly offset by the purchase of U.S. Governmentagency fixed-rate single-family or multi-family 42 mortgage-backed securities and collateralized mortgage obligations. The Company used excess funds held at the Federal Reserve Bankand loan repayments to fund this increase in investment securities. The available-for-sale securities portfolio was 8.6% and 9.2% of total assets at March 31, 2022and December 31, 2021, respectively. The transfer of $226.5 millionin available-for-sale securities to held-to-maturity included $220.2 millionof mortgage-backed securities and collateralized mortgage obligations and $6.3 millionin municipal securities. In determining securities that were elected to be transferred to the held-to-maturity category, the Company reviewed all of its investment securities purchased prior to 2022 and determined that certain of those securities, for various reasons, would likely be held to their maturity or full repayment prior to contractual maturity. The held-to-maturity securities portfolio was 4.2% of total assets at March 31, 2022. Net loans increased $104.0 millionfrom December 31, 2021, to $4.11 billionat March 31, 2022. This increase was primarily in other residential (multi-family) loans ( $152 millionincrease), commercial real estate loans ( $82 millionincrease) and one- to four-family residential loans ( $51 millionincrease). These increases were partially offset by a decrease in construction loans ( $181 milliondecrease). Loan origination volume in the three months ended March 31, 2022was similar to loan origination volume that occurred in 2020 and 2021. Total liabilities decreased $41.5 million, from $4.83 billionat December 31, 2021to $4.79 billionat March 31, 2022. The decrease was primarily attributable to a reduction in total deposits, primarily time deposits. Time deposits initiated through internet channels experienced a planned decrease due to increases in overall liquidity levels and to reduce the Company's cost of funds. Total deposits decreased $62.8 million, or 1.4%, to $4.49 billionat March 31, 2022. Transaction account balances were flat at $3.59 billionat March 31, 2022, while retail certificates of deposit decreased $63.0 millioncompared to December 31, 2021, to $830.7 millionat March 31, 2022. Changes in transaction account balances were primarily a result of increases in NOW deposit accounts and money market accounts, offset by decreases in IntraFi Network Reciprocal Deposits and non-interest-bearing checking accounts. Total interest-bearing checking accounts increased $33.8 millionwhile demand deposit accounts decreased $33.5 million. Customer retail time deposits initiated through our banking center network decreased $15.4 millionand time deposits initiated through our national internet network decreased $44.7 million. Customer deposits at March 31, 2022and December 31, 2021totaling $38.9 millionand $41.7 million, respectively, were part of the IntraFi Network Deposits program, which allows customers to maintain balances in an insured manner that would otherwise exceed the FDICdeposit insurance limit. Brokered deposits were $67.4 millionat both March 31, 2022and December 31, 2021. Securities sold under reverse repurchase agreements with customers increased $10.9 millionfrom $137.1 millionat December 31, 2021to $148.0 millionat March 31, 2022. These balances fluctuate over time based on customer demand for this product. Total stockholders' equity decreased $34.2 million, from $616.8 millionat December 31, 2021to $582.6 millionat March 31, 2022. Accumulated other comprehensive income decreased $24.1 millionduring the three months ended March 31, 2022, primarily due to decreases in the fair value of available-for-sale investment securities. Stockholders' equity also decreased due to repurchases of the Company's common stock totaling $25.3 millionand dividends declared on common stock of $4.6 million. The Company recorded net income of $17.0 millionfor the three months ended March 31, 2022. In addition, stockholders' equity increased $2.8 milliondue to stock option exercises.
Results of operations and comparison for the three months ended
General Netincome was $17.0 millionfor the three months ended March 31, 2022compared to $18.9 millionfor the three months ended March 31, 2021. This decrease of $1.9 million, or 10.0%, was primarily due to an increase in noninterest expense of $947,000, or 3.1%, a decrease in net interest income of $823,000, or 1.9%, a decrease in noninterest income of $560,000, or 5.8%, and a smaller negative provision for credit losses on loans and unfunded commitments of $181,000, or 48.4%, partially offset by a decrease in income tax expense of $630,000, or 12.6%.
Total interest income
Total interest income decreased
$4.0 million, or 7.8%, during the three months ended March 31, 2022compared to the three months ended March 31, 2021. The decrease was due to a $4.6 milliondecrease in interest income on loans, partially offset by a $684,000increase in interest income on investment securities and other interest-earning assets. Interest income on loans decreased for the three months ended March 31, 2022compared to the same period in 2021, primarily due to lower average loan balances, combined with lower average rates of interest. Interest income from investment securities and other interest-earning assets increased during the three 43
Interest Income – Loans
During the three months ended
March 31, 2022compared to the three months ended March 31, 2021, interest income on loans decreased $3.0 millionas the result of lower average loan balances, which decreased from $4.41 billionduring the three months ended March 31, 2021, to $4.13 billionduring the three months ended March 31, 2022. The lower average balances were primarily due to higher loan repayments during 2021. Interest income on loans also decreased $1.7 millionas a result of lower average interest rates on loans. The average yield on loans decreased from 4.39% during the three months ended March 31, 2021, to 4.23% during the three months ended March 31, 2022. This decrease was primarily due to decreased yields in most loan categories as some loans with higher rates refinanced or repaid as a result of the sale of the financed project. In addition, some new loans originated after March 31, 2021, had an average contractual interest rate that was less than the average contractual interest rate for the portfolio at the time. Additionally, the Company's net interest income included accretion of net deferred fees related to PPP loans originated in 2020 and 2021. The amount of net deferred fees recognized in interest income was $416,000in the three months ended March 31, 2022compared to $1.2 millionin the three months ended March 31, 2021and $1.6 millionin the three months ended December 31, 2021. At March 31, 2022, remaining net deferred fees related to PPP loans was $88,000. In October 2018, the Company entered into an interest rate swap transaction as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans. The notional amount of the swap was $400 millionwith a contractual termination date in October 2025. As previously disclosed by the Company, in March 2020, the Company and its swap counterparty mutually agreed to terminate the $400 millioninterest rate swap prior to its contractual maturity. The Company received a payment of $45.9 millionfrom its swap counterparty as a result of this termination. This $45.9 million, less the accrued to date interest portion and net of deferred income taxes, is reflected in the Company's stockholders' equity as Accumulated Other Comprehensive Income and is being accreted to interest income on loans monthly through the original contractual termination date of October 6, 2025. This has the effect of reducing Accumulated Other Comprehensive Income and increasing Net Interest Income and Retained Earnings over the periods. The Company recorded interest income related to this terminated interest rate swap of $2.0 millionin each of the three months ended March 31, 2022and 2021. The Company currently expects to have a sufficient amount of eligible variable rate loans to continue to accrete this interest income ratably in future periods. If this expectation changes and the amount of eligible variable rate loans decreases significantly, the Company may be required to recognize this interest income more rapidly. In February 2022, the Company entered into an interest rate swap transaction as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans. The notional amount of the swap is $300 millionwith an effective date of March 1, 2022and a termination date of March 1, 2024. Under the terms of the swap, the Company will receive a fixed rate of interest of 1.6725% and will pay a floating rate of interest equal to one-month USD-LIBOR (or the equivalent replacement rate if USD-LIBOR rate is not available). The floating rate resets monthly and net settlements of interest due to/from the counterparty also occur monthly. The initial floating rate of interest was set at 0.2414%. To the extent that the fixed rate of interest continues to exceed one-month USD-LIBOR, the Company will receive net interest settlements, which will be recorded as loan interest income. If one-month USD-LIBOR exceeds the fixed rate of interest in future periods, the Company will be required to pay net settlements to the counterparty and will record those net payments as a reduction of interest income on loans. The Company recorded loan interest income related to this swap transaction of $370,000in the three months ended March 31, 2022.
Interest income – Investments and other interest-earning assets
Interest income on investments increased
$593,000in the three months ended March 31, 2022compared to the three months ended March 31, 2021. Interest income increased $770,000as a result of an increase in average balances from $414.7 millionduring the three months ended March 31, 2021, to $534.0 millionduring the three months ended March 31, 2022. Average balances of securities increased primarily due to purchases of agency multi-family mortgage-backed securities which have a fixed rate of interest with expected lives of four to ten years. These purchased securities fit with the Company's current asset/liability management strategies. Partially offsetting that increase, interest income decreased $177,000as a result of lower average interest rates from 2.75% during the three months ended March 31, 2021, to 2.59% during the three month period ended March 31, 2022. Interest income on other interest-earning assets increased $91,000in the three months ended March 31, 2022compared to the three months ended March 31, 2021. Interest income increased $80,000as a result of higher average interest rates from 0.10% during the three months ended March 31, 2021, to 0.18% during the three month period ended March 31, 2022. Interest income increased $11,000as a result of an increase in average balances from $419.4 millionduring the three months ended March 31, 2021, to $458.6 millionduring the three months ended March 31, 2022. The increase in the average interest rates was due to the increase in the rate 44
paid out of funds held in
Total interest expense
Total interest expense decreased
$3.1 million, or 47.9%, during the three months ended March 31, 2022, when compared with the three months ended March 31, 2021, due to a decrease in interest expense on deposits of $2.0 million, or 48.5% and a decrease in interest expense on subordinated notes of $1.1 million, or 49.8%.
Interest charges – Deposits
Interest expense on demand deposits decreased
$512,000due to average rates of interest that decreased from 0.22% in the three months ended March 31, 2021to 0.13% in the three months ended March 31, 2022. Interest rates paid on demand deposits were significantly lower in the 2022 period due to significant reductions in the federal funds rate of interest and other market interest rates since 2020. Partially offsetting this decrease, interest expense on demand deposits increased $95,000, due to an increase in average balances from $2.19 billionduring the three months ended March 31, 2021to $2.38 billionduring the three months ended March 31, 2022. The Company experienced increased balances in various types of money market accounts and certain types of NOW accounts. Interest expense on time deposits decreased $892,000as a result of a decrease in average rates of interest from 0.94% during the three months ended March 31, 2021, to 0.61% during the three months ended March 31, 2022. Interest expense on time deposits also decreased $740,000due to a decrease in average balances of time deposits from $1.31 billionduring the three months ended March 31, 2021to $931.1 millionin the three months ended March 31, 2022. A large portion of the Company's certificate of deposit portfolio matures within six to twelve months and therefore reprices fairly quickly; this is consistent with the portfolio over the past several years. Older certificates of deposit that renewed or were replaced with new deposits generally resulted in the Company paying a lower rate of interest due to market interest rate decreases throughout 2021 with rates only beginning to increase minimally during the three months ended March 31, 2022due to increases in the Federal Funds rate. The decrease in average balances of time deposits was a result of decreases in retail customer time deposits obtained through the banking center network and retail customer time deposits obtained through on-line channels. On-line channel deposits were actively reduced by the Company during 2021 and 2022 as other deposit sources increased.
Interest charges –
Advances from FHLBank and overnight borrowings from FHLBank were not utilized during the quarter ended
Interest expense on repurchase agreements increased
$1,000during the three months ended March 31, 2022when compared to the three months ended March 31, 2021. The average rate of interest was 0.03% for both the three months ended March 31, 2022and the three months ended March 31, 2021. The average balance of repurchase agreements decreased $16.2 millionfrom $144.5 millionin the three months ended March 31, 2022to $128.3 millionin the three months ended March 31, 2022, which was due to changes in customers' need for this product, which can fluctuate. Interest expense on short-term borrowings and other interest-bearing liabilities increased $1,000during the three months ended March 31, 2022when compared to the three months ended March 31, 2021. The average rate of interest was 0.08% for the three months ended March 31, 2022, compared to 0.00% for the three months ended March 31, 2021. The average balance of short-term borrowings and other interest-bearing liabilities increased $1.9 millionfrom $1.7 millionin the three months ended March 31, 2021to $3.6 millionin the three months ended March 31, 2022, which was primarily due to cash collateral provided to the Company from one of its derivative counterparties to satisfy collateral pledging requirements. During the three months ended March 31, 2022, compared to the three months ended March 31, 2021, interest expense on subordinated debentures issued to capital trusts increased $5,000due to higher average interest rates. The average interest rate was 1.86% in the three months ended March 31, 2022compared to 1.78% in the three months ended March 31, 2021. The subordinated debentures are variable-rate debentures which bear interest at an average rate of three-month LIBOR plus 1.60%, adjusting quarterly, which was 1.92% at March 31, 2022. There was no change in the average balance of the subordinated debentures between the 2021 and 2022 periods. In August 2016, the Company issued $75.0 millionof 5.25% fixed-to-floating rate subordinated notes due August 15, 2026. The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions and other issuance costs, of approximately 45 $73.5 million. In June 2020, the Company issued $75.0 millionof 5.50% fixed-to-floating rate subordinated notes due June 15, 2030. The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions and other issuance costs, of approximately $73.5 million. In both cases, these issuance costs are amortized over the expected life of the notes, which is five years from the issuance date, impacting the overall interest expense on the notes. On August 15, 2021, the Company completed the redemption of $75.0 millionaggregate principal amount of its 5.25% subordinated notes due August 15, 2026. The notes were redeemed for cash by the Company at 100% of their principal amount, plus accrued and unpaid interest. During the three months ended March 31, 2022, compared to the three months ended March 31, 2021, interest expense on subordinated notes decreased $1.1 milliondue to lower average balances during the three months ended March 31, 2022resulting from the redemption of the 5.25% subordinated notes due August 15, 2026. The average balance of subordinated notes was $74.0 millionin the three months ended March 31, 2022compared to $148.5 millionin the three months ended March 31, 2021. Interest expense on subordinated notes increased $18,000due to slightly higher weighted average interest rates. The average interest rate was 6.06% in the three months ended March 31, 2022compared to 6.01% in the three months ended March 31, 2021.
Net interest income
Net interest income for the three months ended
March 31, 2022decreased $823,000to $43.3 millioncompared to $44.1 millionfor the three months ended March 31, 2021. Net interest margin was 3.43% in the three months ended March 31, 2022, compared to 3.41% in the three months ended March 31, 2021, an increase of two basis points, or 0.6%. In the 2021 period compared to the 2022 period, the Company recorded a higher amount of interest income related to net deferred fees on PPP loans. The Company's overall average interest rate spread increased eight basis points, or 2.5%, from 3.23% during the three months ended March 31, 2021to 3.31% during the three months ended March 31, 2022. The increase was due to a 30 basis point decrease in the weighted average rate paid on interest-bearing liabilities, partially offset by a 22 basis point decrease in the weighted average yield on interest-earning assets. In comparing the two periods, the yield on loans decreased 16 basis points, the yield on investment securities decreased 16 basis points and the yield on other interest-earning assets increased eight basis points. The rate paid on deposits decreased 22 basis points, the rate paid on subordinated debentures issued to capital trusts increased eight basis points, and the rate paid on subordinated notes increased five basis points.
For more information on the components of net interest income, see the “Average Balances, Interest Rates and Yields” tables in this Quarterly Report on Form 10-Q.
Allowance and Provision for Credit Losses
The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective
January 1, 2021. The CECL methodology replaces the incurred loss methodology with a lifetime "expected credit loss" measurement objective for loans, held-to-maturity debt securities and other receivables measured at amortized cost at the time the financial asset is originated or acquired. This standard requires the consideration of historical loss experience and current conditions adjusted for reasonable and supportable economic forecasts. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, commercial real estate price index, housing price index and national retail sales index. Worsening economic conditions from the COVID-19 pandemic or similar events, higher inflation or interest rates, or other factors may lead to increased losses in the portfolio and/or requirements for an increase in provision expense. Management maintains various controls in an attempt to identify and limit future losses, such as a watch list of problem loans and potential problem loans, documented loan administration policies and loan review staff to review the quality and anticipated collectability of the portfolio. Additional procedures provide for frequent management review of the loan portfolio based on loan size, loan type, delinquencies, financial analysis, on-going correspondence with borrowers and problem loan work-outs. Management determines which loans are collateral-dependent, evaluates risk of loss and makes additional provisions to expense, if necessary, to maintain the allowance at a satisfactory level. During the three months ended March 31, 2022, the Company did not record a provision expense on its portfolio of outstanding loans, compared to a $300,000provision expense recorded for the three months ended March 31, 2021. In the three months ended March 31, 2022and 2021, the Company experienced net recoveries of $43,000and $64,000, respectively. The negative provision for losses on 46 unfunded commitments for the three months ended March 31, 2022was $193,000compared to a negative provision of $674,000for the three months ended March 31, 2021. The level and mix of unfunded commitments resulted in a decrease in the required reserve for such potential losses. General market conditions and unique circumstances related to specific industries and individual projects contributed to the level of provisions and charge-offs. Collateral and repayment evaluations of all assets categorized as potential problem loans, non-performing loans or foreclosed assets were completed with corresponding charge-offs or reserve allocations made as appropriate. All FDIC-assisted acquired loans were grouped into pools based on common characteristics and were recorded at their estimated fair values, which incorporated estimated credit losses at the acquisition date. These loan pools have been systematically reviewed by the Company to determine the risk of losses that may exceed those identified at the time of the acquisition. Techniques used in determining risk of loss are similar to those used to determine the risk of loss for the legacy Great Southern Bankportfolio, with most focus being placed on those loan pools which include the larger loan relationships and those loan pools which exhibit higher risk characteristics. Review of the acquired loan portfolio also includes review of financial information, collateral valuations and customer interaction to determine if additional reserves are warranted. The Bank's allowance for credit losses as a percentage of total loans was 1.46% and 1.49% at March 31, 2022and December 31, 2021, respectively. Management considers the allowance for credit losses adequate to cover losses inherent in the Bank's loan portfolio at March 31, 2022, based on recent reviews of the Bank's loan portfolio and current economic conditions. If challenging economic conditions were to last longer than anticipated or deteriorate further or management's assessment of the loan portfolio were to change, additional loan loss provisions could be required, thereby adversely affecting the Company's future results of operations and financial condition.
Due to changes in loan portfolio balances and composition, changes in economic and market conditions, and other factors specific to a borrower’s circumstances, the level of non-performing assets will fluctuate.
December 31, 2021, non-performing loans decreased $454,000, to $5.0 millionat March 31, 2022, and foreclosed and repossessed assets decreased $367,000, to $221,000at March 31, 2022. Non-performing one- to four-family residential loans comprised $2.0 million, or 40.3%, of the total non-performing loans at March 31, 2022, a decrease of $212,000from December 31, 2021. Non-performing commercial real estate loans comprised $1.8 million, or 35.7%, of the total non-performing loans at March 31, 2022, a decrease of $233,000from December 31, 2021. Non-performing consumer loans comprised $724,000, or 14.6%, of the total non-performing loans at March 31, 2022, a decrease of $9,000from December 31, 2021. Non-performing construction and land development loans comprised $468,000, or 9.4%, of the total non-performing loans at March 31, 2022, unchanged from December 31, 2021. 47
Non-performing loans. Activity in the non-performing loan category during the quarter ended
Transfers to Transfers to Beginning Additions Removed Potential Foreclosed Ending Balance, to Non- from Non- Problem Assets and Charge- Balance, January 1 Performing Performing Loans Repossessions Offs Payments March 31 (In Thousands) One- to four-family construction $ - $ - $
- $ - $ - $ - $ - $ - Subdivision construction - - - - - - - - Land development 468 - - - - - - 468 Commercial construction - - - - - - - -
One- to four-family residential 2,216 -
- (5) - (36) (171) 2,004 Other residential - - - - - - - - Commercial real estate 2,006 - - - - - (233) 1,773 Commercial business - - - - - - - - Consumer 733 32 - (4) - (7) (30) 724 Total non-performing loans
$ 5,423$ 32 $ - $ (9) $ - $ (43) $ (434) $ 4,969 FDIC-assisted acquired loans included above $ 1,736$ - $ - $ - $ - $ - $ (84) $ 1,652At March 31, 2022, the non-performing one- to four-family residential category included 34 loans, none of which were added during the three months ended March 31, 2022. The largest relationship in the category totaled $322,000, or 16.1% of the total category. The non-performing commercial real estate category includes two loans, neither of which were added during the three months ended March 31, 2022. The largest relationship in the category, which totaled $1.5 million, or 86.1% of the total category, was transferred from potential problems during the fourth quarter of 2021, and is collateralized by a mixed use commercial retail building. The non-performing land development category consisted of one loan added during the first quarter of 2021, which totaled $468,000and is collateralized by unimproved zoned vacant ground in southern Illinois. The non-performing consumer category included 30 loans, four of which were added during the three months ended March 31, 2022. Potential Problem Loans. Compared to December 31, 2021, potential problem loans decreased $117,000, or 5.9%, to $1.9 millionat March 31, 2022. Potential problem loans are loans which management has identified through routine internal review procedures as having possible credit problems that may cause the borrowers difficulty in complying with the current repayment terms. These loans are not reflected in non-performing assets.
Activity in potentially problematic loan categories during the quarter ended
Removed Transfers to Beginning Additions from Transfers to Foreclosed Ending Balance, to Potential Potential Non- Assets and Charge- Balance, January 1 Problem Problem Performing Repossessions Offs Payments March 31 (In Thousands)
One- to four-family construction $ - $ - $
- $ - $ - $ - $ - $ - Subdivision construction 15 - - - - - (3) 12 Land development - - - - - - - - Commercial construction - - - - - - - -
One- to four-family residential 1,432 5
- - - - (55) 1,382 Other residential - - - - - - - - Commercial real estate 210 - - - - - (5) 205 Commercial business - - - - - - - - Consumer 323 12 - - (14) (9) (48) 264
Total potential problem loans
$ 1,980$ 17 $ - $ - $ (14) $ (9) $ (111)
FDIC-assisted acquired loans included above $ 1,004$ - $ - $ - $ - $ - $ (17) $ 987At March 31, 2022, the one- to four-family residential category of potential problem loans included 25 loans, one of which was added during the three months ended March 31, 2022. The largest relationship in this category totaled $168,000, or 12.2% of the total 48 category. The commercial real estate category of potential problem loans included one loan, which was added in a previous period. The consumer category of potential problem loans included 23 loans, four of which were added during the three months ended March 31, 2022. Other Real Estate Owned and Repossessions. Of the total $1.7 millionof other real estate owned and repossessions at March 31, 2022, $1.5 millionrepresents properties which were not acquired through foreclosure.
Activity of other real estate owned and repossessed during the quarter ended
Beginning Ending Balance, Capitalized Write- Balance, January 1 Additions Sales Costs Downs March 31 (In Thousands)
One- to four-family construction $ - $ -
$ - $ - $ - $ - Subdivision construction - - - - - - Land development 315 - (300) - (15) - Commercial construction - - - - - -
One- to four-family residential 183 -
- - - 183 Other residential - - - - - - Commercial real estate - - - - - - Commercial business - - - - - - Consumer 90 78 (130) - - 38
Total foreclosed assets and repossessions
$ 588 $ 78 $ (430)$ - $ (15) $ 221FDIC-assisted acquired assets included above $ 498$ - $ (300)$ - $ (15) $ 183At March 31, 2022, the one- to four-family residential category of foreclosed assets consisted of two properties (both of which were FDIC-assisted acquired assets). The land development category of foreclosed assets previously consisted of one property in central Iowa(this was an FDIC-assisted acquired asset) which was sold during the three months ended March 31, 2022. The additions and sales in the consumer category were due to the volume of repossessions of automobiles, which generally are subject to a shorter repossession process.
Watch Classified Loans
The Company reviews the credit quality of its loan portfolio using an internal grading system that classifies loans as "Satisfactory," "Watch," "Special Mention," "Substandard" and "Doubtful." Loans classified as "Watch" are being monitored because of indications of potential weaknesses or deficiencies that may require future classification as special mention or substandard. In the three months ended
March 31, 2022, loans classified as "Watch" increased $33,000, from $30.7 millionat December 31, 2021to $30.8 millionat March 31, 2022. See Note 6 for further discussion of the Company's loan grading system.
For the three months ended
Net gains on loan sales: Net gains on loan sales decreased
$1.6 millioncompared to the prior year period. The decrease was due to a decrease in originations of fixed-rate single-family mortgage loans during the 2022 period compared to the 2021 period. Fixed rate single-family mortgage loans originated are generally subsequently sold in the secondary market. These loan originations increased substantially when market interest rates decreased to historically low levels in 2020 and 2021. As a result of the significant volume of refinance activity in 2020 and 2021, and as market interest rates have moved higher in the first quarter of 2022, mortgage refinance volume has decreased and loan originations and related gains on sales of these loans have decreased substantially. 49 Point-of-sale and ATM fees: Point-of-sale and ATM fees increased $606,000compared to the prior year period. This increase was almost entirely due to increased customer debit card transactions in the 2022 period compared to the 2021 period. In the latter half of 2021 and in the three months ended March 31, 2022, debit card usage by customers rebounded and was back to normal levels, and in many cases, increased levels of activity. Other income: Other income increased $255,000compared to the prior year period. In the 2022 period, the Company recorded a one-time bonus of $500,000from its card processor as a result of achieving certain benchmarks related to debit
card activity. Non-interest Expense
For the three months ended
Salaries and employee benefits: Salaries and employee benefits increased
$960,000from the prior year period. A significant amount of this increase related to normal annual merit increases in various lending and operations areas. In 2022, many of these increases were larger than in previous years due to the current employment environment. In addition, the new Phoenixloan production office was opened in the first quarter of 2022. Lastly, certain loan origination compensation costs were deferred under accounting standards in the 2021 period that related primarily to the origination of PPP loans; therefore, more costs were deferred in the 2021 period versus the 2022 period. Other expense categories experienced smaller changes compared to the prior year period, including a $186,000increase in travel and entertainment expenses as there was very little in-person activity in the 2021 period due to COVID-19 restrictions; a $120,000increase in professional fees related to the swap transaction completed in 2022; a $131,000decrease in amortization of deposit intangibles due to the completion of the amortization for the 2014 acquisitions; and a $105,000decrease in expenses on other real estate owned and repossessions due to fewer foreclosed properties and repossessed autos in the 2022 period. The Company's efficiency ratio for the three months ended March 31, 2022, was 59.62% compared to 56.33% for the same period in 2021. In the three-month period ended March 31, 2022, the higher efficiency ratio was primarily due to an increase in non-interest expense. The Company's ratio of non-interest expense to average assets was 2.34% and 2.22% for the three months ended March 31, 2022and 2021, respectively. Average assets for the three months ended March 31, 2022, decreased $121.8 million, or 2.2%, from the three months ended March 31, 2021, primarily due to a decrease in average net loans receivable, partially offset by increases in average investment securities and interest bearing cash equivalents.
Provision for income taxes
For the three months ended
March 31, 2022and 2021, the Company's effective tax rate was 20.5% and 21.0%, respectively. These effective rates were at or below the statutory federal tax rate of 21%, due primarily to the utilization of certain investment tax credits and to tax-exempt investments and tax-exempt loans, which reduced the Company's effective tax rate. The Company's effective tax rate may fluctuate in future periods as it is impacted by the level and timing of the Company's utilization of tax credits, the level of tax-exempt investments and loans, the amount of taxable income in various state jurisdictions and the overall level of pre-tax income. State tax expense estimates evolved throughout 2021 as taxable income and apportionment between states were analyzed. The Company's effective income tax rate is currently generally expected to remain near the statutory federal tax rate due primarily to the factors noted above. The Company currently expects its effective tax rate (combined federal and state) will be approximately 20.5% to 21.5% in future periods. 50
Average Balances, Interest Rates and Yields
The following tables present, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Average balances of loans receivable include the average balances of non-accrual loans for each period. Interest income on loans includes interest received on non-accrual loans on a cash basis. Interest income on loans includes the amortization of net loan fees which were deferred in accordance with accounting standards. Net fees included in interest income were
$1.7 millionand $2.5 millionfor the three months ended March 31, 2022and 2021, respectively. Tax-exempt income was not calculated on a tax equivalent basis. The table does not reflect any effect of income taxes. March 31, Three Months Ended Three Months Ended 2022 March 31, 2022 March 31, 2021 Yield/ Average Yield/ Average Yield/ Rate Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Interest-earning assets: Loans receivable: One- to four-family residential 3.21 % $ 701,330$
8,417 4.49 999,094 10,927 4.44 Business property
4.07 1,489,762 15,346 4.18 1,562,689 16,584 4.30 Construction 4.19 668,220 7,529 4.57 604,382 6,731 4.52 Commercial business 3.95 289,230 3,326 4.66 323,429 3,887 4.87 Other loans 4.57 204,510
2,244 4.45 237,499 2,891 4.94 Industrial revenue bonds(1)
162 4.69 14,924 173 4.70
Total loans receivable 4.13 4,126,657
43,065 4.23 4,406,579 47,709 4.39
Investment securities(1) 2.54 533,976
3,410 2.59 414,696 2,817 2.75 Interest-bearing deposits in other banks
198 0.18 419 426 107 0.10
Total interest-earning assets 3.73 5,119,276 46,673 3.70 5,240,701 50,633 3.92 Non-interest-earning assets: Cash and cash equivalents 90,586 94,210 Other non-earning assets 136,701 133,443 Total assets
$ 5,346,563 $ 5,468,354
Interest-bearing liabilities: Interest-bearing demand and savings 0.12
1,396 0.61 1,312,089 3,028 0.94 Total deposits
2,173 0.27 3,501,067 4,222 0.49 Securities sold under resale agreements
0.03 128,264 10 0.03 144,487 9 0.03 Short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities 0.33 3,628 1 0.08 1,661 - - Subordinated debentures issued to capital trusts 1.92 25,774 118 1.86 25,774 113 1.78 Subordinated notes 5.97 74,019 1,105 6.06 148,514 2,200 6.01 Total interest-bearing liabilities 0.36 3,538,713 3,407 0.39 3,821,503 6,544 0.69 Non-interest-bearing liabilities: Demand deposits 1,160,013 983,120 Other liabilities 37,907 43,890 Total liabilities 4,736,633 4,848,513 Stockholders' equity 609,930 619,841 Total liabilities and stockholders' equity
$ 5,346,563 $ 5,468,354Net interest income: Interest rate spread 3.37 % $ 43,2663.31 % $ 44,0893.23 % Net interest margin* 3.43 % 3.41 % Average interest-earning assets to average interest- bearing liabilities 144.7 % 137.1 %
* Defined as the Company’s net interest income divided by average total interest-earning assets.
Of the total average marketable securities balances, the tax-exempt average
the investment securities have been
tax-exempt loans and industrial revenue bonds have been
million for the three months ended
income on tax-exempt assets included in this table was
the three months have ended
net of non-deductible interest expense related to tax-exempt assets has been
The following tables present the dollar amounts of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the periods shown. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in rate (i.e., changes in rate multiplied by old volume) and (ii) changes in volume (i.e., changes in volume multiplied by old rate). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to volume and rate. Tax-exempt income was not calculated on a tax equivalent basis. Three Months Ended March 31, 2022 vs. 2021 Increase (Decrease) Total Due to Increase Rate Volume (Decrease) (Dollars in Thousands)
Interest-earning assets: Loans receivable
$ (1,683) $ (2,961) $ (4,644)Investment securities (177) 770 593
Interest-earning deposits in other banks 80 11 91 Total interest-earning assets (1,780) (2,180) (3,960) Interest-bearing liabilities: Demand deposits (512) 95 (417) Time deposits (892) (740) (1,632) Total deposits (1,404) (645) (2,049)
Securities sold under reverse repurchase agreements 1 - 1
FHLBank short-term borrowings, overnight borrowings and other interest-bearing liabilities
1 - 1 Subordinated debentures issued to capital trust 5 - 5 Subordinated notes 18 (1,113) (1,095) Total interest-bearing liabilities
(1,379) (1,758) (3,137) Net interest income
$ (401) $ (422) $ (823)Liquidity
Liquidity is a measure of the Company's ability to generate sufficient cash to meet present and future financial obligations in a timely manner through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. These obligations include the credit needs of customers, funding deposit withdrawals, and the day-to-day operations of the Company. Liquid assets include cash, interest-bearing deposits with financial institutions and certain investment securities and loans. As a result of the Company's management of the ability to generate liquidity primarily through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its borrowers' credit needs. At March 52 31, 2022, the Company had commitments of approximately
$271.1 millionto fund loan originations, $1.55 billionof unused lines of credit and unadvanced loans, and $11.9 millionof outstanding letters of credit.
Loan commitments and the unfunded portion of loans as of the dates indicated were as follows (in thousands):
March 31, December 31,
2022 2021 2020 2019 2018 Closed non-construction loans with unused available lines Secured by real estate (one- to four-family)
$ 185,101 $ 175,682 $ 164,480 $ 155,831 $ 150,948Secured by real estate (not one- to four-family) - 23,752 22,273 19,512 11,063 Not secured by real estate - commercial business 89,252 91,786 77,411 83,782 87,480 Closed construction loans with unused available lines Secured by real estate (one-to four-family) 75,214 74,501 42,162 48,213 37,162 Secured by real estate (not one-to four-family) 1,089,844 1,092,029 823,106 798,810 906,006 Loan commitments not closed Secured by real estate (one-to four-family) 109,472 53,529 85,917 69,295 24,253 Secured by real estate (not one-to four-family) 212,264 146,826 45,860 92,434 104,871 Not secured by real estate - commercial business 8,223 12,920
699 - 405
$ 1,769,370 $ 1,671,025 $ 1,261,908 $ 1,267,877 $ 1,322,188The Company's primary sources of funds are customer deposits, FHLBank advances, other borrowings, loan repayments, unpledged securities, proceeds from sales of loans and available-for-sale securities and funds provided from operations. The Company utilizes particular sources of funds based on the comparative costs and availability at the time. The Company has from time to time chosen not to pay rates on deposits as high as the rates paid by certain of its competitors and, when believed to be appropriate, supplements deposits with less expensive alternative sources of funds.
March 31, 2022 December 31, 2021 Federal Home Loan Bank line
$ 844.5 million $ 756.5 millionFederal Reserve Bank line $ 357.2 million $ 352.4 millionCash and cash equivalents $ 353.0 million $ 717.3 million
Unpledged securities – Available for sale
Unpledged Securities – Held to Maturity
Statements of Cash Flows. During the three months ended
March 31, 2022and 2021, the Company had positive cash flows from operating activities and negative cash flows from investing activities. The Company had negative cash flows from financing activities during the three months ended March 31, 2022and positive cash flows from financing activities during the three months ended March 31, 2021. Cash flows from operating activities for the periods covered by the Statements of Cash Flows have been primarily related to changes in accrued and deferred assets, credits and other liabilities, the provision for credit losses, depreciation and amortization, realized gains on sales of loans and the amortization of deferred loan origination fees and discounts (premiums) on loans and investments, all of which are non-cash or non-operating adjustments to operating cash flows. Net income adjusted for non-cash and non-operating items and the origination and sale of loans held for sale were the primary source of cash flows from operating activities. Operating activities provided cash flows of $31.4 millionand $24.5 millionduring the three months ended March 31, 2022and 2021, respectively. During the three months ended March 31, 2022and 2021, investing activities used cash of $318.4 millionand $55.9 million, respectively. Investing activities in the 2022 period used cash primarily due to the purchase of investment securities, the purchases of loans and the net origination of loans, partially offset by payments received on investment securities. Investing activities in the 2021 period used cash primarily due to the purchase of investment securities and the purchases of loans, partially offset by payments received on investment securities and the net repayments of loans. 53 Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows were due to changes in deposits after interest credited and changes in short-term borrowings, as well as advances from borrowers for taxes and insurance, dividend payments to stockholders, repurchases of the Company's common stock and the exercise of common stock options. Financing activities used cash of $77.2 millionduring the three months ended March 31, 2022and provided cash of $80.2 millionduring the three months ended March 31, 2021. In the 2022 three-month period, financing activities used cash primarily as a result of decreases in time deposits, dividends paid to stockholders and the repurchase of the Company's common stock, partially offset by net increases in short-term borrowings. In the 2021 three-month period, financing activities provided cash primarily as a result of net increases in checking account balances, partially offset by decreases in time deposits, decreases in short-term borrowings, dividends paid to stockholders and the purchase of the Company's common stock.
Management continuously reviews the capital position of the Company and the Bank to ensure compliance with minimum regulatory requirements, as well as to explore ways to increase capital either by retained earnings or other means. At
March 31, 2022, the Company's total stockholders' equity and common stockholders' equity were each $582.6 million, or 10.8% of total assets, equivalent to a book value of $45.65per common share. As of December 31, 2021, total stockholders' equity and common stockholders' equity were each $616.8 million, or 11.3% of total assets, equivalent to a book value of $46.98per common share. At March 31, 2022, the Company's tangible common equity to tangible assets ratio was 10.7%, compared to 11.2% at December 31, 2021(See Non-GAAP Financial Measures below). Included in stockholders' equity at March 31, 2022and December 31, 2021, were unrealized gains (losses) (net of taxes) on the Company's available-for-sale investment securities totaling $(11.1 million)and $9.1 million, respectively. This decrease in unrealized gains primarily resulted from rising market interest rates, which decreased the fair value of investment securities. Also included in stockholders' equity at March 31, 2022, were unrealized gains (net of taxes) on the Company's held-to-maturity investment securities totaling $759,000. Approximately $227 millionof investment securities which were previously included in available-for-sale were transferred to held-to-maturity during the first quarter of 2022. In addition, included in stockholders' equity at March 31, 2022, were realized gains (net of taxes) on the Company's terminated cash flow hedge (interest rate swap), totaling $22.1 million. This amount, plus associated deferred taxes, is expected to be accreted to interest income over the remaining term of the original interest rate swap contract, which was to end in October 2025. At March 31, 2022, the remaining pre-tax amount to be recorded in interest income was $28.6 million. The net effect on total stockholders' equity over time will be no impact as the reduction of this realized gain will be offset by an increase in retained earnings (as the interest income flows through pre-tax income). Also included in stockholders' equity at March 31, 2022, was an unrealized loss (net of taxes) on the Company's outstanding cash flow hedge (interest rate swap) totaling $3.1 million. Anticipated higher market interest rates have caused the fair value of this interest rate swap to decrease. Banks are required to maintain minimum risk-based capital ratios. These ratios compare capital, as defined by the risk-based regulations, to assets adjusted for their relative risk as defined by the regulations. Under current guidelines, which became effective January 1, 2015, banks must have a minimum common equity Tier 1 capital ratio of 4.50%, a minimum Tier 1 risk-based capital ratio of 6.00%, a minimum total risk-based capital ratio of 8.00%, and a minimum Tier 1 leverage ratio of 4.00%. To be considered "well capitalized," banks must have a minimum common equity Tier 1 capital ratio of 6.50%, a minimum Tier 1 risk-based capital ratio of 8.00%, a minimum total risk-based capital ratio of 10.00%, and a minimum Tier 1 leverage ratio of 5.00%. On March 31, 2022, the Bank's common equity Tier 1 capital ratio was 13.3%, its Tier 1 capital ratio was 13.3%, its total capital ratio was 14.6% and its Tier 1 leverage ratio was 12.0%. As a result, as of March 31, 2022, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such. On December 31, 2021, the Bank's common equity Tier 1 capital ratio was 14.1%, its Tier 1 capital ratio was 14.1%, its total capital ratio was 15.4% and its Tier 1 leverage ratio was 11.9%. As a result, as of December 31, 2021, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such. The FRB has established capital regulations for bank holding companies that generally parallel the capital regulations for banks. On March 31, 2022, the Company's common equity Tier 1 capital ratio was 12.0%, its Tier 1 capital ratio was 12.5%, its total capital ratio was 15.3% and its Tier 1 leverage ratio was 11.2%. To be considered well capitalized, a bank holding company must have a Tier 1 risk-based capital ratio of at least 6.00% and a total risk-based capital ratio of at least 10.00%. As of March 31, 2022, the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such. On December 31, 2021, the Company's common equity Tier 1 capital ratio was 12.9%, its Tier 1 capital ratio was 13.4%, its total capital ratio was 16.3% and its 54
The Tier 1 leverage ratio was 11.3%. From
In addition to the minimum common equity Tier 1 capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio, the Company and the Bank have to maintain a capital conservation buffer consisting of additional common equity Tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At
March 31, 2022, the Company and the Bank both had additional common equity Tier 1 capital in excess of the buffer amount. On August 15, 2021, the Company completed the redemption, at par, of all $75.0 millionaggregate principal amount of its 5.25% subordinated notes due August 15, 2026. The Company utilized cash on hand for the redemption payment. The annual combined interest expense and amortization of deferred issuance costs on these subordinated notes was approximately $4.3 million. These subordinated notes were included as capital in the Company's calculation of its total capital ratio. Dividends. During the three months ended March 31, 2022, the Company declared a common stock cash dividend of $0.36per share, or 28% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.36per share (which was declared in December 2021). During the three months ended March 31, 2021, the Company declared a common stock cash dividend of $0.34per share, or 25% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.34per share (which was declared in December 2020). The Board of Directors meets regularly to consider the level and the timing of dividend payments. The $0.36per share dividend declared but unpaid as of March 31, 2022, was paid to stockholders in April 2022. Common Stock Repurchases and Issuances. The Company has been in various buy-back programs since May 1990. During the three months ended March 31, 2022, the Company repurchased 419,215 shares of its common stock at an average price of $60.40per share and issued 51,694 shares of common stock at an average price of $47.49per share to cover stock option exercises. During the three months ended March 31, 2021, the Company repurchased 74,865 shares of its common stock at an average price of $50.50per share and issued 15,904 shares of common stock at an average price of $39.09per share to cover stock option exercises. On January 19, 2022, the Company's Board of Directors authorized management to purchase up to one million shares of the Company's outstanding common stock, under a program of open market purchases or privately negotiated transactions. This program does not have an expiration date. The authorization of this program became effective upon completion of the previous repurchase program authorized in October 2020. As of May 3, 2022, a total of approximately 700,000 shares were available in the Company's stock repurchase authorization. Management has historically utilized stock buy-back programs from time to time as long as management believed that repurchasing the Company's common stock would contribute to the overall growth of shareholder value. The number of shares that will be repurchased at any particular time and the prices that will be paid are subject to many factors, several of which are outside of the control of the Company. The primary factors typically include the number of shares available in the market from sellers at any given time, the market price of the stock and the projected impact on the Company's earnings per share and capital.
Non-GAAP Financial Measures
This document contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in
the United States("GAAP"). These non-GAAP financial measures include the ratio of tangible common equity to tangible assets. In calculating the ratio of tangible common equity to tangible assets, we subtract period-end intangible assets from common equity and from total assets. Management believes that the presentation of this measure excluding the impact of intangible assets provides useful supplemental information that is helpful in understanding our financial condition and results of operations, as it provides a method to assess management's success in utilizing our tangible capital as well as our capital strength. Management also believes that providing a measure that excludes balances of intangible assets, which are subjective components of valuation, facilitates the comparison of our performance with the performance of our peers. In addition, management believes that this is a standard financial measure used in the banking industry to evaluate performance. These non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP financial measures. Because not all companies use the same calculation of non-GAAP measures, this presentation may not be comparable to similarly titled measures as calculated by other companies. 55 Non-GAAP Reconciliation: Ratio of Tangible Common Equity to Tangible Assets
March 31, 2022 December 31, 2021 (Dollars in Thousands) Common equity at period end
$ 582,551$ 616,752
Less: Intangible assets at period end 5,923
Ordinary tangible equity at the end of the period (a)
Total assets at period end
Less: Intangible assets at period end 5,923
Tangible assets at period end (b)
Tangible common equity to tangible assets (a) / (b) 10.74 %
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