EDGAR 10-K Filing

Company CIK: 854560
Filing Year: 2024
Filename: 854560_10-K_2024_0001410578-24-000178.json

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ITEM 1. BUSINESS
ITEM 1.BUSINESS.
THE COMPANY
Great Southern Bancorp, Inc.
Great Southern Bancorp, Inc. (“Bancorp” or “Company”) is a bank holding company, a financial holding company and the parent of Great Southern Bank (“Great Southern” or the “Bank”). Bancorp was incorporated under the laws of the State of Delaware in July 1989 as a unitary savings and loan holding company. The Company became a one-bank holding company on June 30, 1998, upon the conversion of Great Southern to a Missouri-chartered trust company. In 2004, Bancorp was re-incorporated under the laws of the State of Maryland.
As a Maryland corporation, the Company is authorized to engage in any activity that is permitted by the Maryland General Corporation Law and not prohibited by law or regulatory policy. The Company currently conducts its business as a financial holding company. Through the financial holding company structure, it is possible to expand the size and scope of the financial services offered by the Company beyond those offered by the Bank, although the Company has not yet chosen to offer financial services beyond those offered by the Bank. The financial holding company structure provides the Company with greater flexibility than the Bank has to diversify its business activities, through existing or newly formed subsidiaries, or through acquisitions of or mergers with other financial institutions as well as other companies. At December 31, 2023, Bancorp’s consolidated total assets were $5.81 billion, consolidated net loans were $4.59 billion, consolidated deposits were $4.72 billion and consolidated total stockholders’ equity was $571.8 million. For details about the Company’s assets, revenues and profits for each of the last five fiscal years, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The assets of the Company at the holding company level consist primarily of the stock of Great Southern and cash.
Through the Bank and subsidiaries of the Bank, the Company primarily offers a variety of banking and banking-related services, which are discussed further below. The activities of the Company are funded by retained earnings and through dividends from Great Southern. Activities of the Company may also be funded through borrowings from third parties or sales of additional securities.
The executive offices of the Company are located at 1451 East Battlefield, Springfield, Missouri, 65804, and its telephone number at that address is (417) 887-4400.
Great Southern Bank
Great Southern was formed as a Missouri-chartered mutual savings and loan association in 1923, and, in 1989, converted to a Missouri-chartered stock savings and loan association. In 1994, Great Southern changed to a federal savings bank charter and then, on June 30, 1998, changed to a Missouri-chartered trust company (the equivalent of a commercial bank charter). Headquartered in Springfield, Missouri, Great Southern offers a broad range of banking services through its 89 banking centers located in southern and central Missouri; the Kansas City, Missouri area; the St. Louis area; eastern Kansas; northwestern Arkansas; the Minneapolis area and eastern, western and central Iowa. At December 31, 2023, the Bank had total assets of $5.81 billion, net loans of $4.59 billion, deposits of $4.77 billion and equity capital of $629.1 million, or 10.8% of total assets. Its deposits are insured by the Deposit Insurance Fund (“DIF”) to the maximum levels permitted by the Federal Deposit Insurance Corporation (“FDIC”).
The size and complexity of the Bank’s operations increased substantially in 2009 with the completion of two FDIC-assisted transactions, and again in 2011, 2012 and 2014 with the completion of another FDIC-assisted transaction in each of those years. In 2009, the Bank entered into two separate purchase and assumption agreements (including loss sharing) with the FDIC to assume all of the deposits (excluding brokered deposits) and certain liabilities and acquire certain assets of TeamBank, N.A. and Vantus Bank. In these two transactions, we acquired assets with a fair value of approximately $499.9 million (approximately 18.8% of the Company’s total consolidated assets at acquisition) and $294.2 million (approximately 8.8% of the Company’s total consolidated assets at acquisition), respectively, and assumed liabilities with a fair value of $610.2 million (approximately 24.9% of the Company’s total consolidated assets at acquisition) and $440.0 million (approximately 13.2% of the Company’s total consolidated assets at acquisition), respectively. They also resulted in gains of $43.9 million and $45.9 million, respectively, which were included in Non-interest Income in the Company’s Consolidated Statement of Income for the year ended December 31, 2009. Prior to these acquisitions, the Company operated banking centers in Missouri with loan production offices in Arkansas and Kansas. These acquisitions added 31 banking centers and expanded our footprint to cover five states - Iowa, Kansas, Missouri, Arkansas and Nebraska.
In 2011, the Bank entered into a purchase and assumption agreement (including loss sharing) with the FDIC to assume all of the deposits and certain liabilities and acquire certain assets of Sun Security Bank, which added locations in southern Missouri and St. Louis. In this transaction, we acquired assets with a fair value of approximately $248.9 million (approximately 7.3% of the Company’s total consolidated assets at acquisition) and assumed liabilities with a fair value of $345.8 million (approximately 10.1% of the Company’s total consolidated assets at acquisition). It also resulted in a gain of $16.5 million, which was included in Non-interest Income in the Company’s Consolidated Statement of Income for the year ended December 31, 2011.
In 2012, the Bank entered into a purchase and assumption agreement (including loss sharing) with the FDIC to assume all of the deposits and certain liabilities and acquire certain assets of Inter Savings Bank, FSB (“InterBank”), which added four locations in the greater Minneapolis area and represented a new market for the Company. In this transaction, we acquired assets with a fair value of approximately $364.2 million (approximately 9.4% of the Company’s total consolidated assets at acquisition) and assumed liabilities with a fair value of approximately $458.7 million (approximately 11.9% of the Company’s total consolidated assets at acquisition). It also resulted in a gain of $31.3 million, which was included in Non-interest Income in the Company’s Consolidated Statement of Income for the year ended December 31, 2012.
In 2014, the Bank entered into a purchase and assumption agreement (without loss sharing) with the FDIC to assume all of the deposits and certain liabilities and acquire certain assets of Valley Bank (“Valley”), which added five locations in the Quad Cities area of eastern Iowa and six locations in central Iowa, primarily in the Des Moines market area. These represented new markets for the Company in eastern Iowa and enhanced our market presence in central Iowa. In this transaction, we acquired assets with a fair value of approximately $378.7 million (approximately 10.0% of the Company’s total consolidated assets at acquisition) and assumed liabilities with a fair value of approximately $367.9 million (approximately 9.8% of the Company’s total consolidated assets at acquisition). It also resulted in a gain of $10.8 million, which was included in Non-interest Income in the Company’s Consolidated Statement of Income for the year ended December 31, 2014.
Also in 2014, the Bank entered into a purchase and assumption agreement to acquire certain assets and depository accounts from Neosho, Missouri-based Boulevard Bank (“Boulevard”), which added one location in the Neosho, Missouri market, where the Company already operated a banking center. In this transaction, we acquired assets (primarily cash and cash equivalents) with a fair value of approximately $92.5 million (approximately 2.6% of the Company’s total consolidated assets at acquisition) and assumed liabilities (all deposits and related accrued interest) with a fair value of approximately $93.3 million (approximately 2.6% of the Company’s total consolidated assets at acquisition). This acquisition resulted in recognition of $790,000 of goodwill.
The Company also opened commercial loan production offices in Dallas, and Tulsa, Oklahoma, during 2014. The primary products offered in these offices are commercial real estate, commercial business and commercial construction loans. The Tulsa office was closed in February 2024 after an analysis of lending priorities and operational efficiencies.
In 2015, the Company announced plans to consolidate operations of 16 of its banking centers into other nearby Great Southern banking center locations. As part of an ongoing performance review of its entire banking center network, Great Southern evaluated each location for a number of criteria, including access and availability of services to affected customers, the proximity of other Great Southern banking centers, profitability and transaction volumes, and market dynamics. Subsequent to this announcement, the Bank entered into separate definitive agreements to sell two of the 16 banking centers, including all of the associated deposits (totaling
approximately $20 million), to separate bank purchasers. One of those sale transactions was completed on February 19, 2016 and the other was completed on March 18, 2016. The closing of the remaining 14 facilities, which resulted in the transfer of approximately $127 million in deposits and banking center operations to other Great Southern locations, occurred at the close of business on January 8, 2016.
Also in 2015, the Company announced that it entered into a purchase and assumption agreement to acquire 12 branches, including related loans, and to assume related deposits in the St. Louis area from Cincinnati-based Fifth Third Bank. The acquisition was completed at the close of business on January 29, 2016. The deposits assumed totaled approximately $228 million and the loans acquired totaled approximately $159 million.
The loss sharing agreements related to the FDIC-assisted transactions in 2009, 2011 and 2012 added to the complexity of our operations by creating the need for new employees and processes to ensure compliance with the loss sharing agreements and the collection of problem assets acquired. See Note 4 included in Item 8. “Financial Statements and Supplementary Information” for a more detailed discussion of these FDIC-assisted transactions and the loss sharing agreements. The loss sharing agreements related to the 2009 and 2011 FDIC-assisted transactions were terminated during 2016. The loss sharing agreements related to the 2012 FDIC-assisted transaction were terminated during 2017. The Company opened a commercial loan production office in Chicago during 2017. The primary products offered in this office are commercial real estate, commercial business and commercial construction loans.
In March 2018, the Bank entered into a definitive agreement to sell its four banking centers, including all of the associated deposits (totaling approximately $56 million), in the Omaha, Nebraska market to Lincoln, Nebraska-based West Gate Bank. This sale transaction was completed in July 2018.
The Company opened two commercial loan production offices - one in Denver and one in Atlanta - in late 2018. The primary products offered in these offices are commercial real estate, commercial business and commercial construction loans.
In March 2019, the Company ceased operating its indirect automobile financing unit. Market forces, including strong rate competition for well-qualified borrowers, made indirect lending through automobile dealerships a significant challenge to efficient and profitable operations over the long term. In addition, indirect loan balances had significantly declined in 2018 and 2019 after tightened underwriting guidelines were implemented by the Company in the latter part of 2016, in response to more challenging consumer credit conditions. The Company continues to offer direct consumer loans through its banking center network.
In April 2019, the Company consolidated its Fayetteville, Arkansas, location into its Rogers, Arkansas, banking center. The Company now operates one banking center in Arkansas. In September 2019, the Company consolidated its Ames, Iowa, banking center into its North Ankeny, Iowa, office. The Company entered the Ames market with only one banking center through the Valley Bank FDIC-assisted acquisition in 2014.
In April 2020, the Company was notified by its landlord that the Great Southern banking centers located inside the Hy-Vee stores at 2900 Devils Glen Rd in Bettendorf, Iowa, and 2351 W. Locust St. in Davenport, Iowa, had to permanently cease operations at those locations due to store infrastructure changes. Customer accounts were transferred to nearby offices. Great Southern operates three banking centers in the Quad Cities market area - two in Davenport and one in Bettendorf.
In August 2020, remodeling of the downtown office at 1900 Main in Parsons, Kansas, was completed, which included the addition of drive-thru banking lanes. With this completion, the nearby drive-thru facility was consolidated into the downtown office, leaving one location serving the Parsons market.
In September 2021, the Company opened a new banking center at 2801 E. 32nd Street in Joplin, Missouri, replacing a nearby leased office. The Company currently has two banking centers serving the Joplin market.
In November 2021, the Company consolidated one banking center in the St. Louis region. The Westfall Plaza banking center was consolidated into a Great Southern office less than three miles away.
In August 2022, the Company consolidated one banking center in the St. Louis region. The Clayton office was consolidated into the nearby Brentwood banking center. The Company continues to operate commercial lending services from the Clayton office building. The Company now operates 17 banking centers serving the greater St. Louis area.
Also in August 2022, a newly-constructed banking center opened in Kimberling City, Missouri. The new banking center replaced the former facility located on the same property.
The Company opened two commercial loan production offices - one in Phoenix and one in Charlotte - in 2022. The primary products offered in these offices are commercial real estate, commercial business and commercial construction loans.
In March 2023, a leased retail banking center office at 1232 S. Rangeline Road in Joplin, Missouri, was consolidated into a nearby office at 2801 E. 32nd Street. One banking center now serves the Joplin market.
In September 2023, in Springfield, Missouri, the Company opened Great Southern Express, a modern four-lane drive-through center using only interactive teller machine (ITM) technology to serve customers. This new facility at 1615 W. Sunshine replaced an outdated razed banking office on the same property. ITMs, also known as video remote tellers, offer an ATM-like interface, but with the enhancement of a video screen that allows customers to speak directly to a service representative in real time and in a highly personal manner during extended business hours seven days a week. Nearly any teller transaction that can be performed in the traditional drive-thru can be performed at an ITM, including cashing a check to the penny. ITMs provide convenience and enhanced access for customers, while creating greater operational efficiencies for the Bank.
In January 2024, in Springfield, Missouri, a retail banking center at 600 W. Republic Road was consolidated into a banking center at 2945 W. Republic Road, a short distance away. For customers’ convenience, an on-site ITM is currently available at the closed facility.
Great Southern is principally engaged in the business of originating commercial real estate loans, construction loans, other commercial loans, multi-family and single-family residential real estate loans and consumer loans and funding these loans by attracting deposits from the general public, obtaining brokered deposits and through borrowings from the Federal Home Loan Bank of Des Moines (the “FHLBank”) and others.
For many years, Great Southern has followed a strategy of emphasizing loan originations through residential, commercial and consumer lending activities in its market areas. The goal of this strategy is to be one of the leading providers of financial services in Great Southern’s market areas, while simultaneously diversifying assets and reducing interest rate risk by originating and holding adjustable-rate loans and fixed-rate loans, primarily with terms of five years or less, in its portfolio and by selling longer-term fixed-rate single-family mortgage loans in the secondary market. The Bank continues to emphasize real estate lending while also expanding and increasing its originations of commercial business loans.
The corporate office of Great Southern is located at 218 S. Glenstone, Springfield, Missouri, 65802 and its telephone number at that address is 417-887-4400.
Internet Website
Bancorp maintains a website at www.greatsouthernbank.com. The information contained on that website is not included as part of, or incorporated by reference into, this Annual Report on Form 10-K. Bancorp currently makes available on or through its website Bancorp’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments, if any, to these reports. These materials are also available free of charge (other than a user’s regular internet access charges) on the Securities and Exchange Commission’s website at www.sec.gov.
Market Areas
The Company currently operates 89 full-service retail banking offices, serving nearly 131,000 households in six states - Missouri, Iowa, Kansas, Minnesota, Arkansas and Nebraska. The Company also operates commercial loan production offices in Atlanta; Charlotte; Chicago; Dallas; Denver; Omaha; and Phoenix; and a mortgage lending office in Springfield, Missouri.
The Company regularly evaluates its banking center network and lines of business to ensure that it is serving customers in the best way possible. The banking center network constantly evolves with changes in customer needs and preferences, emerging technology and local market developments. In response to these changes, the Company opens banking centers and invests resources where customer demand leads, and from time to time, consolidates banking centers when market conditions dictate.
Great Southern’s largest concentrations of deposits and loans are in the Springfield, Missouri, and St. Louis, market areas. Besides the Springfield and St. Louis market areas, the Company has deposit and loan concentrations in the following market areas: Kansas City, Missouri; Sioux City, Iowa; Des Moines, Iowa; Northwest Arkansas; Minneapolis; and Eastern Iowa in the area known as the “Quad Cities.” Deposits and loans are also generated in banking centers in rural markets in Missouri, Iowa, and Kansas.
At December 31, 2023, the Company’s total deposits were $4.72 billion. At that date, the Company had deposits in Missouri of $3.48 billion, which included its two largest deposit concentrations, in the Springfield and St. Louis areas, with $1.95 billion and $588 million, respectively. At December 31, 2023, the Company also had deposits of $696 million in Iowa, $339 million in Kansas, $149 million in Minnesota, $22 million in Nebraska and $34 million in Arkansas.
The Company’s commercial loan production offices generate a significant percentage of the Company’s commercial loan production. Commercial lending groups in our Kansas City, Des Moines, Minneapolis, Springfield, and St. Louis banking offices also generate a significant percentage of the Company’s commercial loan production.
Lending Activities
General
From its beginnings in 1923 through the early 1980s, Great Southern primarily made long-term, fixed-rate residential real estate loans that it retained in its loan portfolio. Beginning in the early 1980s, Great Southern increased its efforts to originate short-term and adjustable-rate loans. Beginning in the mid-1980s, Great Southern increased its efforts to originate commercial real estate and other residential (multi-family) loans, primarily with adjustable rates or shorter-term fixed rates. In addition, some competitor banking organizations merged with larger institutions and changed their business practices or moved operations away from the Springfield, Missouri area, and others consolidated operations from the Springfield, Missouri area to larger cities. This provided Great Southern expanded opportunities in residential and commercial real estate lending as well as in the origination of commercial business and consumer loans in the Springfield, Missouri area.
In addition to originating loans, the Bank has expanded and enlarged its relationships with other banks of varying asset sizes to purchase participations (at par, generally with no servicing costs) in loans these other banks originate but are unable to retain the entire balance in their portfolios due to capital or borrower relationship size limitations. The Bank uses the same underwriting guidelines in evaluating these participations as it does in its direct loan originations. At December 31, 2023, the balance of loan participations purchased and held in the portfolio was $440.0 million, or 9.6% of the total loan portfolio. One of these loan participations, at $2.2 million, was included in non-performing loans at December 31, 2023. Of the total $440.0 million of purchased participation loans outstanding at December 31, 2023, the largest aggregate amount outstanding purchased from one institution was $98.8 million. This amount was comprised of 14 loans, eight of which were secured by warehouses, four were secured by hotels, one was secured by a commercial land and development project in the St. Louis area and one was secured by a multi-family housing project in the St. Louis area.
One of the principal historical lending activities of Great Southern is the origination of fixed and adjustable-rate conventional residential real estate loans to enable borrowers to purchase or refinance owner-occupied homes. Great Southern originates a variety of conventional residential real estate mortgage loans, principally in compliance with Freddie Mac and Fannie Mae standards for resale in the secondary market. Great Southern promptly sells most of the fixed-rate residential mortgage loans that it originates. To date, Great Southern has not experienced difficulties selling these loans in the secondary market and has had minimal repurchase requests. Depending on market conditions, the ongoing servicing of these loans is at times retained by Great Southern, but generally servicing is released to the purchaser of the loan. Great Southern retains in its portfolio substantially all of the adjustable-rate mortgage loans that it originates.
Another principal lending activity of Great Southern is the origination of commercial real estate, other residential (multi-family) and multi-family and commercial construction loans. Since the early 1990s, commercial real estate, other residential (multi-family) and multi-family and commercial construction loans have represented the largest percentage of the loan portfolio. At December 31, 2023, commercial real estate, other residential (multi-family) and multi-family and commercial construction loans accounted for approximately 33%, 20% and 16%, respectively, of the total outstanding portfolio. In addition, at December 31, 2023, one- to four-family residential loans accounted for approximately 19% of the total outstanding portfolio.
Great Southern in recent years has also increased its emphasis on the origination of other commercial loans and home equity loans, and has issued letters of credit. Letters of credit are contingent obligations and are not included in the Bank’s loan portfolio. See “- Other Commercial Lending,” “- Classified Assets,” and “Loan Delinquencies and Defaults” below.
The percentage of collateral value Great Southern will loan on real estate and other property varies based on factors including, but not limited to, the type of property and its location and the borrower’s credit history. As a general rule, Great Southern will loan up to 95% of the appraised value on one-to four-family residential properties. Typically, private mortgage insurance is required for loan amounts above the 80% level. At December 31, 2023 and 2022, loans secured by second liens on residential properties were $87.2 million, or 1.9%, and $82.3 million, or 1.8%, respectively, of our total loan portfolio. For commercial real estate and other residential real property loans, Great Southern may loan up to 85% of the appraised value. The origination of loans secured by other property is considered and determined on an individual basis by management with the assistance of any industry guides and other information which may be available. Collateral values are reappraised or reassessed as loans are renewed or when significant events indicating potential impairment occur. On a quarterly basis, management reviews individually evaluated loans to determine whether updated appraisals or reassessments are necessary based on loan performance, collateral type and guarantor support. While not specifically required by our policy, we seek to obtain cross-collateralization of loans to a borrower when it is available and it is most frequently done on commercial real estate loans.
Loan applications are approved at various levels of authority, depending on the type, amount and loan-to-value ratio of the loan. These authorities are reviewed annually and updated as needed throughout the year. This includes individual loans and aggregate exposures that require loan committee approval. The loan committee is comprised of the Chief Executive Officer of the Bank, the Chief Credit Officer (chairman of the committee), Chief Lending Officer, Director of Commercial Lending, Director of Credit Underwriting, and other Regional Managing Directors of the Bank involved in lending activities. All loans, regardless of size or type, are required to conform to certain minimum underwriting standards to assure portfolio quality. These standards and procedures include, but are not limited to, an analysis of the borrower’s financial condition, collateral, repayment ability, inquiry and analysis of liquid assets and credit history as required by loan type. It has been, and continues to be, our 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. Underwriting standards also include loan-to-value ratios which vary depending on collateral type, debt service coverage ratios or debt payment to income ratios, where applicable, credit histories, use of guaranties and other recommended terms relating to equity requirements, amortization, and maturity. Generally, deviations from approved underwriting standards may only be allowed when doing so is not in violation of regulations or statutes and when appropriate lending authority is obtained. The loan committee reviews all new loan originations in excess of lender approval authorities. For secured loans originated and held, most lenders have approval authorities of $250,000 or below while twelve Senior Managers have approval authority of varying amounts up to $2 million. Lender approval authorities are also subject to loans-to-one borrower limits of $500,000 or below for most lenders and of varying amounts up to $5 million for Senior Managers and Underwriters.
In general, state banking laws restrict loans to a single borrower and related entities to no more than 25% of a bank’s unimpaired capital and unimpaired surplus, plus an additional 10% if the loan is collateralized by certain readily marketable collateral. Real estate is not included in the definition of “readily marketable collateral.” As computed on the basis of the Bank’s unimpaired capital and surplus at December 31, 2023, this limit was approximately $182 million. See “Government Supervision and Regulation.” At December 31, 2023, the Bank was in compliance with the loans-to-one borrower limit. At December 31, 2023, the Bank’s largest relationship for purposes of this limit consisted of twenty-seven loans totaling $105.6 million. This amount represents the total commitment for this relationship at December 31, 2023; the outstanding balance at that date totaled $80.9 million. Twenty-three of these loans had fully disbursed credit lines. The collateral for the loans consists of multiple real estate projects on which a personal guarantee from the principal owner of the borrowing entities was obtained. All loans included in this relationship were current at December 31, 2023. Including this relationship, we had nine loan relationships that each exceeded $50 million at December 31, 2023. Our policy does not set a loans-to-one borrower limit that is below the legal limits described; however, we do recognize the need to limit credit risk to any one borrower or group of related borrowers upon consideration of various risk factors. Extensions of credit to borrowers whose past due loans were charged-off or whose loans are classified as substandard require special lending approval.
Great Southern is permitted under applicable regulations to originate or purchase loans and loan participations secured by real estate located in any part of the United States. In addition to the market areas where the Bank has offices, the Bank has made or purchased loans, secured primarily by commercial real estate, in other states, primarily Florida, Indiana, Michigan, South Carolina, and Wisconsin. At December 31, 2023, loans in these states comprised approximately 8% combined of the total loan portfolio.
Loan Portfolio Composition
The following table sets forth information concerning the composition of the Bank’s loan portfolio in dollar amounts and in percentages (before deductions for loans in process, deferred fees and discounts and allowance for credit losses) as of the dates indicated. The table is based on information prepared in accordance with generally accepted accounting principles and is qualified by reference to the Company’s Consolidated Financial Statements and the notes thereto contained in Item 8 of this report.
Great Southern Loan Portfolio Composition:
December 31,
2020(3)
2019(3)
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(Dollars In Thousands)
Real Estate Loans:
One- to four- family(1)
$
895,675
19.2
%
$
908,214
19.8
%
$
690,328
16.9
%
$
661,859
15.1
%
$
595,995
14.1
%
Other residential
942,071
20.2
781,761
17.0
697,903
17.1
1,005,764
22.9
818,088
19.4
Commercial(2)
1,533,080
32.8
1,543,515
33.7
1,490,433
36.5
1,580,313
36.1
1,510,250
35.8
Residential construction:
One- to four- family
59,888
1.3
82,051
1.8
62,161
1.5
28,191
0.6
25,573
0.6
Other residential
562,112
12.1
518,407
11.3
480,474
11.8
374,188
8.5
490,797
11.6
Commercial construction
182,408
3.9
264,761
5.8
177,693
4.3
164,193
3.8
185,965
4.4
Total real estate loans
4,175,234
89.5
4,098,709
89.4
3,598,992
88.1
3,814,508
87.0
3,626,668
85.9
Other Loans:
Consumer loans:
Automobile, boat, etc.
57,489
1.2
70,236
1.5
86,074
2.1
126,364
3.0
197,658
4.7
Home equity and improvement
115,883
2.5
123,242
2.7
119,965
2.9
120,201
2.7
131,200
3.1
Other
-
-
-
1,582
-
2,474
0.1
Total consumer loans
173,912
3.7
194,255
4.2
206,782
5.0
248,147
5.7
331,332
7.9
Other commercial loans
318,050
6.8
293,228
6.4
280,513
6.9
320,860
7.3
261,991
6.2
Total other loans
491,962
10.5
487,483
10.6
487,295
11.9
569,007
13.0
593,323
14.1
Total loans
4,667,196
100.0
%
4,586,192
100.0
%
4,086,287
100.0
%
4,383,515
100.0
%
4,219,991
100.0
%
Less:
Deferred fees and discounts
7,058
11,065
9,298
13,188
16,473
Allowance for credit losses
64,670
63,480
60,754
55,743
40,294
Total loans receivable, net
$
4,595,468
$
4,511,647
$
4,016,235
$
4,314,584
$
4,163,224
(1) Includes loans held for sale.
(2) Total commercial real estate loans included industrial revenue bonds of $12.0 million, $12.9 million, $14.2 million, $15.1 million, and $14.4 million at December 31, 2023, 2022, 2021, 2020, and 2019.
(3) The portfolio composition tables presented in the Bancorp Annual Reports on Form 10-K for the years ended December 31, 2019 and 2020 were divided into legacy loans and loans accounted for under ASC 310-30. At December 31, 2021 through 2023, this information has been consolidated into one table as Great Southern Loan Portfolio Composition.
The following table shows the fixed- and adjustable-rate composition of the Bank’s loan portfolio at the dates indicated. The table is based on information prepared in accordance with generally accepted accounting principles. The portfolio composition by fixed and adjustable rate tables presented in the Bancorp Annual Reports on Form 10-K for the years ended December 31, 2019 and 2020 was divided into legacy loans and loans accounted for under ASC 310-30. At December 31, 2021 through 2023, this information has been consolidated into one table as Great Southern Loan Portfolio Composition.
Great Southern Loan Portfolio Composition by Fixed- and Adjustable-Rates:
December 31,
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(Dollars In Thousands)
Fixed-Rate Loans:
Real Estate Loans
One- to four- family
$
191,232
4.1
%
$
189,936
4.2
%
$
161,077
3.9
%
$
167,738
3.8
%
$
183,971
4.3
%
Other residential
352,055
7.5
311,181
6.8
328,726
8.1
342,884
7.8
346,027
8.2
Commercial
950,095
20.4
868,374
18.9
776,967
19.0
744,021
17.0
761,389
18.1
Residential construction:
One- to four- family
31,147
0.7
35,576
0.8
31,941
0.8
11,245
0.2
11,412
0.3
Other residential
45,901
1.0
79,571
1.7
59,214
1.5
52,261
1.2
39,223
0.9
Commercial construction
51,289
1.1
46,942
1.0
28,612
0.7
34,621
0.8
43,893
1.0
Total real estate loans
1,621,719
34.8
1,531,580
33.4
1,386,537
34.0
1,352,770
30.8
1,385,915
32.8
Consumer
52,571
1.1
62,558
1.4
78,643
1.9
120,007
2.8
192,619
4.6
Other commercial
142,959
3.1
128,604
2.8
144,196
3.5
221,995
5.1
122,300
2.9
Total fixed-rate loans
1,817,249
39.0
1,722,742
37.6
1,609,376
39.4
1,694,772
38.7
1,700,834
40.3
Adjustable-Rate Loans:
Real Estate Loans
One- to four- family
704,443
15.1
718,278
15.7
529,251
13.0
494,121
11.3
412,024
9.8
Other residential
590,016
12.6
470,580
10.3
369,177
9.0
662,880
15.1
472,061
11.2
Commercial
582,985
12.5
675,141
14.7
713,466
17.5
836,292
19.1
748,861
17.7
Residential construction:
One- to four- family
28,741
0.6
46,475
1.0
30,220
0.7
16,946
0.4
14,161
0.3
Other residential
516,211
11.1
438,836
9.6
421,260
10.3
321,927
7.3
451,574
10.7
Commercial construction
131,119
2.8
217,819
4.7
149,081
3.6
129,572
3.0
142,072
3.4
Total real estate loans
2,553,515
54.7
2,567,129
56.0
2,212,455
54.1
2,461,738
56.2
2,240,753
53.1
Consumer
121,341
2.6
131,697
2.8
128,139
3.1
128,140
2.9
138,713
3.3
Other commercial
175,091
3.7
164,624
3.6
136,317
3.4
98,865
2.2
139,691
3.3
Total adjustable-rate loans
2,849,947
61.0
2,863,450
62.4
2,476,911
60.6
2,688,743
61.3
2,519,157
59.7
Total Loans
4,667,196
100.0
%
4,586,192
100.0
%
4,086,287
100.0
%
4,383,515
100.0
%
4,219,991
100.0
%
Less:
Deferred fees and discounts
7,058
11,065
9,298
13,188
16,473
Allowance for credit losses
64,670
63,480
60,754
55,743
40,294
Total loans receivable, net
$
4,595,468
$
4,511,647
$
4,016,235
$
4,314,584
$
4,163,224
The following table sets forth information as of December 31, 2023, regarding the loans in our portfolio based on their contractual terms to maturity.
Great Southern Loan Portfolio Composition by Contractual Maturities:
One Year
After One Year
After Five Years
After Fifteen
or Less
through Five Years
through Fifteen Years
Years
Total
(In Thousands)
Real Estate Loans:
Residential
One- to four- family
$
29,542
$
88,238
$
88,661
$
689,234
$
895,675
Other residential
348,664
529,541
56,276
7,590
942,071
Commercial
353,082
998,721
179,605
1,672
1,533,080
Residential construction:
One- to four- family
27,044
29,759
2,791
59,888
Other residential
62,270
496,048
1,997
1,797
562,112
Commercial construction
56,756
123,655
1,997
-
182,408
Total real estate loans
877,358
2,265,962
328,830
703,084
4,175,234
Other Loans:
Consumer loans:
Automobile and other
10,545
35,099
11,579
58,029
Home equity and improvement
14,186
38,875
62,235
115,883
Total consumer loans
24,731
73,974
73,814
1,393
173,912
Other commercial loans
134,689
165,712
17,192
318,050
Total other loans
159,420
239,686
91,006
1,850
491,962
Total loans
$
1,036,778
$
2,505,648
$
419,836
$
704,934
$
4,667,196
The below table presents loans due after December 31, 2024 with fixed and adjustable interest rates as of December 31, 2023.
Fixed Rates
Adjustable Rates
Total Loans
(In Thousands)
Real Estate Loans:
Residential
One- to four- family
$
168,557
$
697,576
$
866,133
Other residential
303,135
290,272
593,407
Commercial
799,576
380,422
1,179,998
Residential construction:
One- to four- family
23,046
9,798
32,844
Other residential
40,284
459,558
499,842
Commercial construction
45,701
79,951
125,652
Total real estate loans
1,380,299
1,917,577
3,297,876
Other Loans:
Consumer loans:
Automobile and other
45,615
1,869
47,484
Home equity and improvement
101,112
101,697
Total consumer loans
46,200
102,981
149,181
Other commercial loans
129,282
54,079
183,361
Total other loans
175,482
157,060
332,542
Total loans
$
1,555,781
$
2,074,637
$
3,630,418
At December 31, 2023, $87.2 million, or 1.9%, of total loans were secured by junior lien mortgages and $20.8 million, or 2.6% of residential real estate loans, were interest only residential real estate loans. At December 31, 2022, $82.3 million, or 1.8%, of total loans were secured by junior lien mortgages and $13.4 million, or 1.7% of residential real estate loans, were interest only residential real estate loans. While high loan-to-value ratio mortgage loans are occasionally originated and held, they are typically either considered low risk based on analyses performed or are required to have private mortgage insurance. The Company does not originate or hold option ARM loans or significant amounts of loans with initial teaser rates or subprime loans in its residential real estate portfolio.
To monitor and control risks related to concentrations of credit in the composition of the loan portfolio, management reviews the loan portfolio by loan types, industries and market areas on a monthly basis for credit quality and known and anticipated market conditions. Changes in loan portfolio composition may be made by management based on the performance of each area of business, known and anticipated market conditions, credit demands, the deposit structure of the Bank and the expertise and/or depth of the lending staff. Loan portfolio industry and market areas are monitored regularly for credit quality and trends. Reports detailed by industry and geography are provided to the Board of Directors on a monthly and quarterly basis.
The composition of the Bank’s loan portfolio has changed over the past several years; speculative construction and land development loan types have been limited, consumer lending for automobiles and boats has decreased significantly (indirect automobile and boat lending was eliminated), commercial real estate loan types have been stabilized and diversified and emphasis has been placed on increasing our other residential (multi-family) and commercial business loan portfolios.
Environmental Issues
Loans secured by real property, whether commercial, residential or other, may have a material, negative effect on the financial position and results of operations of the lender if the collateral is environmentally contaminated. The result can be, but is not necessarily limited to, liability for the cost of cleaning up the contamination imposed on the lender by certain federal and state laws, a reduction in the borrower’s ability to pay because of the liability imposed upon it for any clean-up costs, a reduction in the value of the collateral because of the presence of contamination or a subordination of security interests in the collateral to a super priority lien securing the cleanup costs by certain state laws.
Management is aware of the risk that the Bank may be negatively affected by environmentally contaminated collateral and attempts to control this risk through commercially reasonable methods, consistent with guidelines arising from applicable government or regulatory rules and regulations, and to a more limited extent, publications of the lending industry. Management currently is unaware (without, in many circumstances, specific inquiry or investigation of existing collateral, some of which was accepted as collateral before risk controlling measures were implemented) of any environmental contamination of real property securing loans in the Bank’s portfolio that would subject the Bank to any material risk. No assurance can be given, however, that the Bank will not be adversely affected by environmental contamination.
Residential Real Estate Lending
At December 31, 2023 and 2022, loans secured by residential real estate, excluding that which is under construction, totaled $1.8 billion and $1.7 billion, respectively, and represented approximately 39.4% and 36.8%, respectively, of the Bank’s total loan portfolio. The Bank’s one- to four-family residential real estate loan portfolio increased during 2022 due to organic growth and was fairly stable during 2023. In the first half of 2022, new loan origination volumes were strong and consistent with levels seen in the past couple of years. As residential loan rates began to increase significantly along with the increase in market interest rates, much of the Bank’s one- to four-family loans originated in 2022 and 2023 were adjustable rate loans, which are fixed for a period of a few years, then adjust annually. For many years, other residential (multi-family) loan balances had increased as the Bank emphasized this type of loan. The exception to this was in 2021, when loan balances decreased due to projects refinancing or being sold and paying off at a faster pace. The Bank’s outstanding other residential (multi-family) loan portfolio increased by approximately 20.5% in 2023. This increase was due to construction multi-family projects being completed and moved to the other residential loan category and refinancings and early pay-offs on these types of loans continued to be slow as interest rates remained high.
The Bank currently is originating one- to four-family adjustable-rate residential mortgage loans primarily with one-year adjustment periods or with rates that are fixed for the first few years of the loan and then adjust annually. Rate adjustments on these loans are generally based upon changes in prevailing rates for one-year U.S. Treasury securities. Rate adjustments are generally limited to 2% maximum annually as well as a maximum aggregate adjustment over the life of the loan. Accordingly, the interest rates on these loans typically may not be as rate sensitive as is the Bank’s cost of funds. Generally, the Bank’s adjustable-rate mortgage loans are not convertible into fixed-rate loans, do not permit negative amortization of principal and carry no prepayment penalty. The Bank also currently is originating other residential (multi-family) mortgage loans with interest rates that are generally either adjustable with changes to the prime rate of interest or a Secured Overnight Funding Rate (SOFR)-index interest rate, or initially fixed for short periods of time (one to five years) and then adjust annually based on the prime rate of interest or a SOFR index interest rate.
Since the adjustable-rate mortgage loans currently held in the Bank’s portfolio have not been subject to an interest rate environment which causes them to adjust to the maximum, these loans entail unquantifiable risks resulting from potential increased payment obligations on the borrower as a result of upward repricing. Until 2022, the indices used by Great Southern for these types of loans increased, but not significantly, at various times in the previous ten years. In 2022 and 2023, one-year U.S. Treasury interest rates and SOFR-index interest rates increased significantly throughout 2022 and during the first half of 2023. These interest rates declined slightly in the fourth quarter of 2023, but remained above comparable interest rates in prior years. Compared to fixed-rate mortgage loans, these loans are subject to increased risk of delinquency or default if a higher, fully-indexed rate of interest subsequently comes into effect in replacement of a lower rate currently in effect. From 2008 through 2012, as a result of the significant recession in the economy, including residential real estate, the Bank experienced a significant increase in delinquencies in adjustable-rate mortgage loans. In 2013 through 2023, these delinquencies trended much lower.
In underwriting one- to four-family residential real estate loans, Great Southern evaluates the borrower’s ability to make monthly payments and the value of the property securing the loan. It is the policy of Great Southern that generally all one- to four-family residential loans in excess of 80% of the appraised value of the property be insured by a private mortgage insurance company approved by Great Southern for the amount of the loan in excess of 80% of the appraised value. In addition, Great Southern requires borrowers to obtain title and fire and casualty insurance in an amount not less than the amount of the loan. Real estate loans originated by the Bank generally contain a “due on sale” clause allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the property securing the loan. The Bank may enforce these due on sale clauses to the extent permitted by law.
Commercial Real Estate and Construction Lending
Commercial real estate lending has been a significant part of Great Southern’s business activities since the mid-1980s. Great Southern engages in commercial real estate lending in order to increase the potential yield on, and the proportion of interest rate sensitive loans in, its portfolio. At December 31, 2008, commercial real estate loans and commercial construction loans each made up about one fourth of the total loan portfolio. The economic recession that began in 2008 resulted in reduced activity in the market caused by the downturn in the economy and reduced real estate values. In response, Great Southern began limiting residential and commercial land development lending to reduce the risk in the portfolio and began originating more commercial real estate loans. Since December 31, 2008, the commercial construction loan portfolio (including multi-family residential construction) has decreased from 32% of the loan portfolio to 16% of the loan portfolio at December 31, 2023, while, overall, the percentage of commercial real estate loans in the total loan portfolio has trended upward, and was about 33% of the total loan portfolio at December 31, 2023. Over the last five years, commercial real estate loans made up approximately 32-37% of the total loan portfolio while outstanding commercial construction loans (including multi-family residential construction) were 12-17%. The COVID-19 pandemic negatively impacted commercial real estate lending activity in 2020, but activity generally resumed after 2020. See “Government Supervision and Regulation” below.
At December 31, 2023 and 2022, loans secured by commercial real estate, excluding that which is under construction, totaled $1.5 billion and $1.5 billion, respectively, or approximately 32.8% and 33.7%, respectively, of the Bank’s total loan portfolio. In addition, at December 31, 2023 and 2022, construction loans secured by projects under construction and the land on which the projects are located aggregated $804.4 million and $865.2 million, respectively, or 17.2% and 18.9%, respectively, of the Bank’s total loan portfolio. A majority of the Bank’s commercial real estate loans have been originated with adjustable rates of interest, most of which are tied either to the national prime rate or to SOFR interest rates or fixed rates of interest with short-term maturities. A large majority of the Bank’s commercial real estate loans (both fixed and adjustable) mature in five years or less. Substantially all of these loans were originated with loan commitments which did not exceed 80% of the appraised value of the properties securing the loans.
Beyond the outstanding balance of our construction loans, our loan portfolio possesses increased risk due to the amount of unfunded portions of commercial, residential and other residential (multi-family) loans for the purpose of construction. At December 31, 2023 and 2022, we had $695.4 million and $1.41 billion in the unfunded portion of loans originated with the purpose of construction that had been closed, but were not yet fully funded. These balances are managed through the Bank’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.
The Bank’s construction loans generally have a term of eighteen months or less. The construction loan agreements for one- to four-family projects generally require principal reductions as individual condominium units or single-family houses are built and sold to a third party. This ensures that the remaining loan balance, as a proportion of the value of the remaining security, does not increase, assuming that the value of the remaining security does not decrease. Loan proceeds are disbursed in increments as construction progresses. Generally, the amount of each disbursement is based on the construction cost estimate with inspections of the project performed in connection with each disbursement request. Normally, Great Southern’s commercial real estate and other residential construction loans are made either as the initial stage of a combination loan (i.e., with a commitment from the Bank to provide permanent financing upon completion of the project) or with a commitment from a third party to provide permanent financing.
The Bank’s commercial real estate and construction loan portfolios consist of loans with diverse collateral types. The following table sets forth loans that were secured by certain types of collateral at December 31, 2023. These collateral types represented the five highest percentage concentrations of commercial real estate and construction loan types in the loan portfolio at that date.
Percentage of
Non-Performing
Total Loan
Loans at
Collateral Type
Loan Balance
Portfolio
December 31, 2023
(Dollars In Thousands)
Retail (Varied Projects)
$
338,935
7.4
%
$
-
Warehouses
$
291,812
6.4
%
$
-
Health Care Facilities
$
287,292
6.3
%
$
2,230
Motels/Hotels
$
254,641
5.5
%
$
-
Office Industry
$
215,025
4.7
%
$
8,058
Commercial real estate lending and construction lending generally affords the Bank an opportunity to receive interest at rates higher than those obtainable from residential mortgage lending and to receive higher origination and other loan fees. In addition, commercial real estate loans and construction loans are generally made with adjustable rates of interest or, if made on a fixed-rate basis, for relatively short terms. Commercial real estate lending does, however, entail significant additional risks as compared with residential mortgage lending. Commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by commercial properties is typically dependent on the successful operation of the related real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economy generally.
Construction loans involve additional risks attributable to the fact that loan funds are advanced based on the value of the project under construction, which is of uncertain value prior to the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, delays arising from labor shortages and other problems, material shortages, and other unpredictable contingencies, it is relatively difficult to evaluate accurately the total loan funds required to complete a project, and the related loan-to-value ratios. See also the discussion under the headings “- Classified Assets” and “- Loan Delinquencies and Defaults” below.
The Company executes interest rate swaps with certain commercial banking customers to facilitate their respective risk management strategies. The Company began offering this service during 2011. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of December 31, 2023, the Company had six interest rate swaps totaling $82.2 million in notional amount with commercial customers, and six interest rate swaps with the same notional amount with third parties related to this program. As of December 31, 2022, the Company had six interest rate swaps and one interest rate cap totaling $107.0 million in notional amount with commercial customers, and six interest rate swaps and one interest rate cap with the same notional amount with third parties related to this program. During the years ended December 31, 2023 and 2022, the Company recognized net gains (losses) of $(337,000) and $321,000 respectively, in non-interest income related to changes in the fair value of interest rate swaps.
Other Commercial Lending
At December 31, 2023 and 2022, Great Southern had $318 million and $293 million, respectively, in other commercial loans outstanding, or 6.8% and 6.4%, respectively, of the Bank’s total loan portfolio. Great Southern’s other commercial lending activities encompass loans with a variety of purposes and security, including loans to finance accounts receivable, inventory and equipment. Great Southern expects to continue to originate loans in this category subject to market conditions and applicable regulatory restrictions. See “Government Supervision and Regulation” below.
Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property, the value of which tends to be more easily ascertainable, other commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. Commercial loans are generally secured by business assets, such as accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of other commercial loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
The Bank’s management recognizes the generally increased risks associated with other commercial lending. Great Southern’s commercial lending policy emphasizes complete credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of the industry conditions affecting the borrower. Review of the borrower’s past, present and future cash flows is also an important aspect of Great Southern’s credit analysis. In addition, the Bank generally obtains personal guarantees from the borrowers on these types of loans. Historically, the majority of Great Southern’s commercial loans have been to borrowers in southwestern and central Missouri and the St. Louis, Missouri area. With the FDIC-assisted acquisitions in 2009, 2011, 2012 and 2014, geographic concentrations for commercial loans expanded to include the greater Kansas City, Missouri area, several areas in Iowa, and the Minneapolis-St. Paul area. Great Southern has continued its commercial lending in all of these geographic areas as well as through our loan production offices in Atlanta, Charlotte, Chicago, Dallas, Denver, Omaha, and Phoenix.
As part of its commercial lending activities, Great Southern issues letters of credit and receives fees averaging approximately 1% of the amount of the letter of credit per year. At December 31, 2023, Great Southern had 56 letters of credit outstanding in the aggregate amount of $16.5 million. Approximately 30% of the aggregate dollar amount of these letters of credit was secured, including 14 letters of credit totaling $5.0 million secured by real estate.
Consumer Lending
Consumer loans generally have short terms to maturity, thus reducing Great Southern’s exposure to changes in interest rates, and carry higher rates of interest than do residential mortgage loans. In addition, Great Southern believes offering consumer loan products helps expand and create stronger ties to its existing customer base.
Great Southern offers a variety of secured consumer loans, including automobile loans, boat loans, home equity loans and loans secured by savings deposits. In addition, Great Southern also offers home improvement loans and unsecured consumer loans. Consumer loans totaled $174 million and $194 million at December 31, 2023 and 2022, respectively, or 3.7% and 4.2%, respectively, of the Bank’s total loan portfolio.
The underwriting standards employed by the Bank for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes a comparison of the value of the underlying collateral, if any, in relation to the proposed loan amount.
Beginning in 1998, the Bank implemented indirect lending relationships, primarily with automobile dealerships. Through these dealer relationships, the dealer completes the application with the consumer and then submits it to the Bank for credit approval. While the Bank’s initial and ongoing concentrated effort was on automobiles, the program evolved for use from time to time with other tangible products where financing of the product is provided through the seller, including, to a lesser extent, boats and manufactured homes.
The environment for providing indirect automobile lending services has been difficult over the last several years. As indicated above, in the latter part of 2016, in response to more challenging consumer credit conditions, the Company tightened its underwriting guidelines on automobile lending. Management took this step in an effort to improve credit quality in the portfolio and lower delinquencies and charge-offs. The changes in underwriting guidelines resulted in lower origination volume, and as such, outstanding consumer auto loan balances have decreased significantly since the end of 2016. After a review of the indirect automobile lending model, the decision was made to exit this business line effective March 2019. Market and financial forces, including strong rate competition for well-qualified borrowers, have made indirect automobile lending less profitable over the long term. The Company will continue servicing indirect automobile loans made before March 2019, until each loan agreement is satisfied. Direct consumer lending through the Company’s banking center network is expected to continue as normal.
At December 31, 2023 and 2022, the Bank had $57.5 million and $70.2 million, respectively, of direct and indirect auto, boat, modular home and recreational vehicle loans in its portfolio. Indirect consumer loans were $10 million and $16 million at December 31, 2023 and 2022, respectively. The total indirect consumer loan portfolio at December 31, 2023 was comprised of the following types of loans: $840,000 of new and used auto loans, $9 million of manufactured home loans and various other loans including loans for new autos, RVs, boats, ATVs and motorcycles.
Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial strength, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state consumer bankruptcy and insolvency laws, may limit the amount which can be recovered on these loans. These loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of these loans such as the Bank, and a borrower may be able to assert against the assignee claims and defenses which it has against the seller of the underlying collateral.
Originations, Purchases, Sales and Servicing of Loans
The Bank originates loans through internal loan production personnel located in the Bank’s main and branch offices, as well as loan production offices. Walk-in customers and referrals from existing customers of the Company are also important sources of loan originations.
Great Southern may also purchase whole loans and participation interests in loans (generally without recourse, except in cases of breach of representation, warranty or covenant) from other banks, thrift institutions and life insurance companies (originators). The purchase transaction is governed by a participation agreement entered into by the originator and participant (Great Southern) containing guidelines as to ownership, control and servicing rights, among others. The originator may retain all rights with respect to enforcement, collection and administration of the loan. This may limit Great Southern’s ability to control its credit risk when it purchases participations in these loans. For instance, the terms of participation agreements vary; however, generally Great Southern may not have direct access to the borrower, and the institution administering the loan may have some discretion in the administration of performing loans and the collection of non-performing loans.
Over the years, a number of banks, both locally and regionally, have sought to diversify the risk in their portfolios. In order to take advantage of this situation, Great Southern purchases participations in commercial real estate, commercial construction and other commercial loans. Great Southern subjects these loans to its normal underwriting standards used for originated loans and rejects any credits that do not meet those guidelines. The originating bank generally retains the servicing of these loans. The Bank purchased $400,000 and $361.8 million of these loans in the fiscal years ended December 31, 2023 and 2022, respectively. These balances represent the total loan amount, including the unfunded portion of loans purchased. At the time of purchase, these loans had outstanding funded balances of $-0- and $27.8 million, respectively.
Lending activity declined significantly in late 2022 and throughout 2023. As interest rates and inflation rapidly increased, many potential borrowers put projects on hold while waiting to see how the economy and real estate values would perform. In addition, the banking industry generally experienced liquidity competition, with some banks experiencing liquidity crises leading to a few bank failures.
From time to time, Great Southern also sells non-residential loan participations generally without recourse to private investors, such as other banks, thrift institutions and life insurance companies (participants). The sales transaction is governed by a participation agreement entered into by the originator (Great Southern) and participant containing guidelines as to ownership, control and servicing rights, among others. Great Southern generally retains servicing rights for these participations sold.
Great Southern also sells whole residential real estate loans without recourse to Freddie Mac and Fannie Mae as well as to private investors, such as other banks, thrift institutions, mortgage companies and life insurance companies. Whole real estate loans are sold with a provision for repurchase upon breach of representation, warranty or covenant. These representations, warranties and covenants include those regarding the compliance of loan originations with all applicable legal requirements, mortgage title insurance policies
when applicable, enforceable liens on collateral, collateral type, borrower creditworthiness, private mortgage insurance when required and compliance with all applicable federal regulations. A minimal number of repurchase requests have been received to date based on a breach of representations, warranties or covenants as outlined in the investor contracts. These loans are generally sold for cash in amounts equal to the unpaid principal amount of the loans adjusted for current market yields to the buyer. The sale amounts generally produce gains to the Bank and allow a margin for servicing income on loans when the servicing is retained by the Bank. However, residential real estate loans sold in recent years have primarily been with Great Southern releasing control of the servicing of the loans.
The Bank sold one- to four-family whole real estate loans, SBA-guaranteed loans and loan participations in aggregate amounts of $154.9 million, $100.8 million and $341.9 million during fiscal 2023, 2022 and 2021, respectively. The Bank typically sells long-term fixed rate mortgages. Sales of whole real estate loans and participations in real estate loans can be beneficial to the Bank since these sales generally generate income at the time of sale, produce future servicing income on loans where servicing is retained, provide funds for additional lending and other investments, and increase liquidity.
Gains, losses and transfer fees on sales of loans and loan participations are recognized at the time of the sale. When real estate loans and loan participations sold have an average contractual interest rate that differs from the agreed upon yield to the purchaser (less the agreed upon servicing fee), resulting gains or losses are recognized in an amount equal to the present value of the differential over the estimated remaining life of the loans. Any resulting discount or premium is accreted or amortized over the same estimated life using a method approximating the level yield interest method. When real estate loans and loan participations are sold with servicing released, as the Bank primarily does, an additional fee is received for the servicing rights. Net gains and transfer fees on sales of loans for the years ended December 31, 2023, 2022 and 2021 were $2.3 million, $2.6 million and $9.5 million, respectively. These gains were primarily from the sale of fixed-rate residential loans.
The Bank serviced loans owned by others totaling approximately $439.9 million and $540.2 million at December 31, 2023 and 2022, respectively. Of the total loans serviced for others at December 31, 2023, $334.6 million related to commercial real estate, commercial business and construction loans, portions of which were sold to other parties. The remaining $105.3 million of loans serviced for others related to one- to four-family real estate loans which the Bank had originated and sold, but retained the obligation to service, or had acquired the servicing through various FDIC-assisted transactions. The servicing of these loans generated fees (net of amortization of the servicing rights) to the Bank for the years ended December 31, 2023, 2022 and 2021, of $202,000, $185,000 and $237,000, respectively.
In addition to interest earned on loans and loan origination fees, the Bank receives fees for loan commitments, letters of credit, prepayments, modifications, late payments, transfers of loans due to changes of property ownership and other miscellaneous services. The fees vary from time to time, generally depending on the supply of funds and other competitive conditions in the market. Fees from prepayments, commitments, letters of credit and late payments totaled $898,000, $1.3 million and $1.6 million for the years ended December 31, 2023, 2022 and 2021, respectively. Loan origination fees, net of related costs, are accounted for in accordance with FASB ASC 310-20, Receivables - Nonrefundable Fees and Other Costs. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized in interest income using the level-yield method over the contractual life of the loan. For further discussion of this matter, see Note 1 to the accompanying audited financial statements, included in Item 8 of this Report.
Loan Delinquencies and Defaults
When a borrower fails to make a required payment on a loan, the Bank attempts to cause the delinquency to be cured by contacting the borrower. In the case of loans secured by residential real estate, a late notice is sent 15 days after the due date. If the delinquency is not cured by the 30th day, a delinquent notice is sent to the borrower.
Additional written contacts are made with the borrower 45 and 60 days after the due date. If the delinquency continues for a period of 120 days, the Bank usually institutes appropriate action to foreclose on the collateral. The actual time it takes to foreclose on the collateral varies depending on the particular circumstances and the applicable governing law. If foreclosed upon, the property is sold at public auction and may be purchased by the Bank. Delinquent consumer loans are handled in a generally similar manner, except that initial contacts are made when the payment is five days past due and appropriate action may be taken to collect any loan payment that is delinquent for more than 15 days. The Bank’s procedures for repossession and sale of consumer collateral are subject to various requirements under the applicable consumer protection laws as well as other applicable laws and the determination by the Bank that it would be beneficial from a cost basis.
Delinquent commercial business loans and loans secured by commercial real estate are initially handled by the loan officer in charge of the loan, who is responsible for contacting the borrower. Senior management also works with the commercial loan officers to see that necessary steps are taken to collect delinquent loans and may reassign the loan relationship to the special assets group. In addition, the Bank has a Problem Loan Committee which meets at least quarterly and reviews all classified assets, as well as other loans which management feels present possible collection problems. If an acceptable workout of a delinquent commercial loan cannot be agreed upon, the Bank may initiate foreclosure proceedings on any collateral securing the loan. However, in all cases, whether a commercial or other loan, the prevailing circumstances may be such that management may determine it is in the best interest of the Bank not to foreclose on the collateral.
The following tables set forth our loans by aging as of the dates indicated. The increase in commercial real estate loans over 90 days past due at December 31, 2023 is primarily due to two unrelated loans, both of which were added to non-performing loans during 2023. For additional information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations- Results of Operations and Comparison for the Years Ended December 31, 2023 and 2022-Non-Performing Assets.”
December 31, 2023
Total
30-59 Days
60-89 Days
Over 90 Days
Loans
Past Due
Past Due
Past Due
Total Past Due
Current
Receivable
#
Amount
#
Amount
#
Amount
#
Amount
Amount
Amount
(Dollars In Thousands)
One- to four-family residential construction
-
$
-
-
$
-
-
$
-
-
$
-
$
29,628
$
29,628
Subdivision construction
-
-
-
-
-
-
-
-
23,359
23,359
Land development
-
-
-
-
47,631
48,015
Commercial construction
-
-
-
-
-
-
-
-
703,407
703,407
Owner occupied one- to four-family residential
2,778
3,625
765,635
769,260
Non-owner occupied one- to four-family residential
-
-
-
-
-
-
-
-
121,275
121,275
Commercial real estate
10,552
10,831
1,510,201
1,521,032
Other residential
9,572
-
-
-
-
9,572
932,499
942,071
Commercial business
-
-
-
-
318,019
318,050
Industrial revenue bonds
-
-
-
-
-
-
-
-
12,047
12,047
Consumer auto
28,154
28,343
Consumer other
-
28,799
28,978
Home equity lines of credit
115,513
115,883
Total
$
13,125
$
$
11,748
$
25,181
$
4,636,167
$
4,661,348
December 31, 2022
Total
30-59 Days
60-89 Days
Over 90 Days
Loans
Past Due
Past Due
Past Due
Total Past Due
Current
Receivable
#
Amount
#
Amount
#
Amount
#
Amount
Amount
Amount
(Dollars In Thousands)
One- to four-family residential construction
-
$
-
-
$
-
-
$
-
-
$
-
$
33,849
$
33,849
Subdivision construction
-
-
-
-
-
-
-
-
32,067
32,067
Land development
-
-
-
-
41,229
41,613
Commercial construction
-
-
-
-
-
-
-
-
757,690
757,690
Owner occupied one- to four-family residential
2,568
3,752
774,781
778,533
Non-owner occupied one- to four-family residential
-
-
-
-
124,807
124,870
Commercial real estate
-
-
1,579
1,775
1,528,888
1,530,663
Other residential
-
-
-
-
-
-
-
-
781,761
781,761
Commercial business
-
-
292,634
293,228
Industrial revenue bonds
-
-
-
-
-
-
-
-
12,852
12,852
Consumer auto
37,133
37,281
Consumer other
33,219
33,732
Home equity lines of credit
122,696
123,242
Total
$
3,394
$
$
3,670
$
7,775
$
4,573,606
$
4,581,381
Classified Assets
Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered to be of lesser quality as “substandard,” “doubtful” or “loss” assets. The regulations require insured institutions to classify their own assets and to establish prudent specific allocations for losses from assets classified “substandard” or “doubtful.” “Substandard” assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful,” have all the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. For the portion of assets classified as “loss,” an institution is required to either establish specific allowances of 100% of the amount classified or charge such amount off its books. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess a potential weakness (referred to as “special mention” assets), are required to be listed on the Bank’s watch list and monitored for further deterioration or improvement. Following are the total classified assets at December 31, 2023 and 2022, per the Bank’s internal asset classification list. The allowances for credit losses reflected below are the portions of the Bank’s total allowances for credit losses relating to these classified loans. There were no significant off-balance sheet items classified at December 31, 2023 and 2022.
December 31, 2023
Total
Allowance
Asset Category
Substandard
Doubtful
Loss
Classified
for Losses
(In Thousands)
Investment securities
$
-
$
-
$
-
$
-
$
-
Loans
19,122
-
-
19,122
1,229
Foreclosed assets and repossessions
-
-
-
Total
$
19,145
$
-
$
-
$
19,145
$
1,229
December 31, 2022
Total
Allowance
Asset Category
Substandard
Doubtful
Loss
Classified
for Losses
(In Thousands)
Investment securities
$
-
$
-
$
-
$
-
$
-
Loans
5,246
-
-
5,246
Foreclosed assets and repossessions
-
-
-
Total
$
5,296
$
-
$
-
$
5,296
$
Loans classified as “Substandard” were $19.1 million and $5.2 million at December 31, 2023 and 2022, respectively. The largest substandard relationship, which totaled $8.1 million, was added to substandard loans during the year ended December 31, 2023 and is collateralized by an office building in Missouri. The loan was classified due to a decline in occupancy resulting in a stressed cash flow.
In addition to the classified loans in the table above, the Company has loans categorized as “Watch” and “Special Mention.” Loans classified as “Watch” are being monitored due to indications of potential weaknesses or deficiencies that may require future reclassification as special mention or substandard. Loans classified as “Watch” at December 31, 2023 and 2022 were $8.3 million and $28.7 million, respectively. While loans classified as “Special Mention” are not adversely classified, they are deserving of management’s close attention to ensure repayment prospects or the credit position of the assets do not deteriorate and expose the institution to elevated risk that may warrant adverse classification at a future date. Loans rated as “Special Mention” were $26.7 million and $-0- at December 31, 2023 and 2022, respectively. In the year ended December 31, 2023, four loan relationships were downgraded from “Satisfactory.” The largest relationship consisted of four commercial business loans totaling $9.9 million at December 31, 2023 and is secured by business assets, equipment, accounts receivable and real estate. The relationship was added to the “Special Mention” category during 2023 due to stressed cash flow associated with business expansion. Since that time, the borrower has reduced debt by restructuring business operations, resulting in improved business cash flow and collateral margins. Monthly payments continue to amortize the loan balance. At December 31, 2023, a $9.6 million relationship was also included in the “Special Mention” category. The balance represents a participation in a loan collateralized by a student housing project in Texas. The Company is not the lead lender for this relationship. The project has suffered from rising debt service requirements and a decline in occupancy. A relationship totaling $4.4 million at December 31, 2023 was added to the “Special Mention” category in 2023. This relationship is collateralized by three assisted care facilities located in southwest Missouri. Business cash flow was negatively impacted by a labor shortage and a decrease in Medicaid reimbursement during 2022-2023. Monthly payments continue to amortize the loan balance.
Non-Performing Assets
The table below sets forth the amounts and categories of gross non-performing assets (classified loans which are not performing under regulatory guidelines and all foreclosed assets, including assets acquired in settlement of loans) in the Bank’s loan portfolio as of the dates indicated. Loans generally are placed on non-accrual status when the loan becomes 90 days delinquent or when the collection of principal, interest, or both, otherwise becomes doubtful.
Prior to the Company’s adoption of the Current Expected Credit Loss (“CECL”) accounting standard on January 1, 2021, FDIC-assisted acquired non-performing assets, including foreclosed assets and potential problem loans, were not included in the totals or in the discussion of non-performing loans, potential problem loans and foreclosed assets. These assets were initially recorded at their estimated fair values as of their acquisition dates and accounted for in pools. The loan pools were analyzed rather than the individual loans. The performance of the loan pools acquired in each of the Company’s five FDIC-assisted transactions has been better than expectations as of the acquisition dates. In the tables below, FDIC-assisted acquired assets are included in their particular collateral categories for the years ended after December 31, 2020.
December 31,
(In Thousands)
Non-accruing loans:
One- to four-family residential
$
$
$
2,216
$
1,571
$
1,379
One- to four-family construction
-
-
-
-
-
Land development
-
-
Other residential
-
-
-
-
-
Commercial real estate
10,552
(1)
1,579
(2)
2,006
(2)
Other commercial
-
1,235
(3)
Commercial construction and land development
-
-
-
-
-
Consumer
1,273
Total gross non-accruing loans
11,748
3,670
5,423
3,043
4,519
Loans over 90 days delinquent still accruing interest:
One- to four-family residential
-
-
-
-
-
Commercial real estate
-
-
-
-
-
Other commercial
-
-
-
-
-
Commercial construction and land development
-
-
-
-
-
Consumer
-
-
-
-
-
Total loans over 90 days delinquent still accruing interest
-
-
-
-
-
Total gross non-performing loans
11,748
3,670
5,423
3,043
4,519
Foreclosed assets:
One- to four-family residential
-
-
One- to four-family construction
-
-
-
-
Other residential
-
-
-
-
-
Commercial real estate
-
-
-
-
-
Commercial construction and land development
-
-
-
2,505
Other commercial
-
-
-
-
-
Total foreclosed assets
-
-
3,106
Repossessions
Total gross non-performing assets
$
11,771
$
3,720
$
6,011
$
3,820
$
8,170
Total gross non-performing assets as a percentage of average total assets
0.20
%
0.07
%
0.11
%
0.07
%
0.16
%
(1) Two relationships were $10.3 million of this total at December 31, 2023.
(2) One relationship was $1.3 million and $1.7 million of this total at December 31, 2022 and 2021, respectively.
(3) One relationship was $1.1 million of this total at December 31, 2019.
See Item 7. ”Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-performing Assets” for further information.
Gross collateral-dependent loans totaled $18.8 million at December 31, 2023. Gross collateral-dependent loans totaled $4.5 million at December 31, 2022. See Note 3 to the accompanying audited financial statements included in Item 8 for additional information, including further detail of non-accruing and collateral-dependent loans and details of modified loans. See also Note 15 of the accompanying audited financial statements included in Item 8 for additional information, including further detail of the fair value of collateral-dependent loans.
For the year ended December 31, 2023, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $509,000. No interest income was included on these loans for the year ended December 31, 2023. For the year ended December 31, 2022, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $292,000. No interest income was included on these loans for the year ended December 31, 2022. For the year ended December 31, 2021, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $432,000. No interest income was included on these loans for the year ended December 31, 2021.
Modified Loans
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the troubled debt restructuring recognition and measurement guidance and, instead, requires that an entity evaluate whether the loan modification represents a new loan or a continuation of an existing loan. It also enhances existing disclosure requirements and introduces new disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU 2022-02 became effective for the Company on January 1, 2023.
Adoption of this ASU did not have a material impact on the Company’s results of operations, financial position or liquidity, but resulted in additional disclosure requirements related to gross charge offs by vintage year and the removal of troubled debt restructuring (“TDR”) disclosures, replaced by additional disclosures on the types of modifications of loans to borrowers experiencing financial difficulties. The Corporation has adopted this update prospectively.
Under ASU 2022-02, loan modifications are reported if concessions have been granted to borrowers that are experiencing financial difficulty. Information on these loan modifications originated after the effective date is presented according to the new accounting guidance. Reporting periods prior to the adoption of ASU 2022-02 present information on TDRs under the previous disclosure requirements.
The estimate of lifetime expected losses utilized in the allowance for credit losses model is developed using average historical loss on loans with similar risk characteristics, which includes losses from modifications of loans to borrowers experiencing financial difficulty. As a result, a change to the allowance for credit losses is generally not recorded upon modification. For modifications to loans made to borrowers experiencing financial difficulty that are adversely classified, the Company determines the allowance for credit losses on an individual basis, using the same process that it utilizes for other adversely classified loans. If collection efforts have begun and the modified loan is subsequently deemed collateral-dependent, the loan is placed on non-accrual status and the allowance for credit losses is determined based on an individual evaluation. If necessary, the loan is charged down to fair market value less sales costs.
The following table shows the composition of loan modifications made to borrowers experiencing financial difficulty by the loan portfolio and type of concessions granted during the year ended December 31, 2023. Each of the types of concessions granted comprised 2% or less of their respective classes of loan portfolios at December 31, 2023. During the year ended December 31, 2023, principal forgiveness of $563,000 was completed on commercial business loans and consumer loans.
Year Ended December 31, 2023
Interest Rate
Term
Total
Reduction
Extension
Combination
Modifications
(In Thousands)
Construction and land development
$
-
$
-
$
1,553
$
1,553
One- to four-family residential
-
-
-
-
Other residential
-
2,750
-
2,750
Commercial real estate
-
20,365
20,442
Commercial business
-
-
-
-
Consumer
-
$
$
2,834
$
21,918
$
24,757
The Company closely monitors the performance of loans to borrowers experiencing financial difficulty that are modified to understand the effectiveness of its modification efforts. The following table depicts the performance (under modified terms) at December 31, 2023 of loans that were modified during the year ended December 31, 2023:
December 31, 2023
30-89 Days
Over 90 Days
Current
Past Due
Past Due
Total
(In Thousands)
Construction and land development
$
1,553
$
-
$
-
$
1,553
One- to four-family residential
-
-
-
-
Other residential
2,750
-
-
2,750
Commercial real estate
12,384
-
8,058
20,442
Commercial business
-
-
-
-
Consumer
-
-
$
16,699
$
-
$
8,058
$
24,757
Included in impaired loans at December 31, 2022, were TDRs. TDRs by class are presented below as of December 31, 2022.
December 31, 2022
Accruing TDR Loans
Non-accruing TDR Loans
Total TDR Loans
Number
Balance
Number
Balance
Number
Balance
(Dollars In Thousands)
Construction and land development
-
$
-
-
$
-
-
$
-
One- to four-family residential
1,028
1,126
Other residential
-
-
-
-
-
-
Commercial real estate
-
-
1,571
1,571
Commercial business
-
-
-
-
-
-
Consumer
$
1,238
$
1,711
$
2,949
Allowance for Credit Losses
On January 1, 2021, the Company adopted the new accounting standard related to the allowance for credit losses. 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 3 to the accompanying financial statements included in Item 8 of this Report for additional information.
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 that 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 loans with a balance greater than or equal to $100,000, 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 principal balance over the remaining contractual lives, adjusted for expected prepayments. The contractual term excludes expected extensions, renewals and modifications. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecasts such as changes in portfolio composition, underwriting practices, or significant unique events or conditions.
See Note 3 “Loans and Allowance for Credit Losses” to the accompanying financial statements contained in Item 8 of this Report 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.
At December 31, 2023, Great Southern had an allowance for credit losses of $64.7 million, of which $1.2 million had been allocated to specific loans. At December 31, 2022, Great Southern had an allowance for credit losses of $63.5 million, of which $245,000 had been allocated to specific loans. All loans with specific allowances were considered to be collateral-dependent loans. The allowance and the activity within the allowance during 2023, 2022 and 2021 are discussed further in Note 3 “Loans and Allowance for Credit Losses” of the accompanying audited financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 8 and Item 7 of this Report, respectively.
The allocation of the allowance for losses on loans at the dates indicated is summarized as follows.
December 31,
% of
% of
% of
% of
% of
Loans to
Loans to
Loans to
Loans to
Loans to
Total
Total
Total
Total
Total
Amount
Loans
Amount
Loans
Amount
Loans
Amount
Loans (1)
Amount
Loans (1)
(Dollars In Thousands)
One- to four-family residential and construction
$
9,820
20.5
%
$
11,171
21.6
%
$
9,364
18.4
%
$
4,472
15.7
%
$
4,171
14.6
%
Other residential and construction
13,370
32.2
12,110
28.3
10,502
28.9
9,282
31.4
5,101
31.0
Commercial real estate
28,171
32.9
27,096
33.7
28,604
36.5
33,382
36.1
24,087
35.8
Commercial construction
2,844
3.9
2,865
5.8
2,797
4.3
3,378
3.8
2,940
4.5
Other commercial
6,935
6.8
5,822
6.4
4,142
6.9
2,345
7.3
1,319
6.2
Consumer and overdrafts
3,530
3.7
4,416
4.2
5,345
5.0
2,204
5.7
2,015
7.9
Acquired loans not covered by loss sharing agreements
-
-
-
-
-
-
-
-
Total
$
64,670
100.0
%
$
63,480
100.0
%
$
60,754
100.0
%
$
55,743
100.0
%
$
40,294
100.0
%
(1) Excludes loans acquired through FDIC-assisted transactions. For periods prior to the adoption of ASU 2016-13 in 2021, this table was prepared using the previous GAAP incurred loss method.
The following table sets forth credit ratios as of December 31, 2023 and 2022.
December 31,
(Dollars In Thousands)
Allowance for Credit Losses
$
64,670
$
63,480
Total Loans
4,661,348
4,581,381
Ratio of Allowance for Credit Losses to Total Loans
1.39
%
1.39
%
Non-performing Loans
$
11,748
$
3,670
Total Loans
4,661,348
4,581,381
Ratio of Non-performing Loans to Total Loans
0.25
%
0.08
%
Ratio of Allowance for Credit Losses to Non-performing Loans
550.48
%
1,726.69
%
The following table sets forth an analysis of activity in the Bank’s allowance for credit losses showing the details of the activity by types of loans.
December 31,
(Dollars In Thousands)
Balance at beginning of period
$
63,480
$
60,754
$
55,743
$
40,294
$
38,409
CECL adoption adjustment:
One- to four-family residential
-
-
4,533
-
-
Other residential
-
-
5,832
-
-
Commercial real estate
-
-
(2,531)
-
-
Construction
-
-
(1,165)
-
-
Other commercial
-
-
1,499
-
-
Consumer, overdrafts and other loans
-
-
3,427
-
-
Total CECL adoption adjustment
-
-
11,595
-
-
Charge-offs:
One- to four-family residential
Other residential
-
-
-
-
Commercial real estate
-
Construction
-
Other commercial
1,037
Consumer, overdrafts and other loans
1,754
1,950
2,054
3,152
6,723
Total charge-offs
2,822
2,169
2,621
3,294
8,062
Recoveries:
One- to four-family residential
Other residential
-
Commercial real estate
Construction
-
Other commercial
Consumer, overdrafts and other loans
1,300
1,349
1,758
2,083
3,104
Total recoveries
1,762
1,895
2,737
2,872
3,797
Net charge-offs (recoveries)
1,060
(116)
4,265
Provision (credit) for losses on loans
2,250
3,000
(6,700)
15,871
6,150
Balance at end of period
$
64,670
$
63,480
$
60,754
$
55,743
$
40,294
Ratio of net charge-offs to average loans outstanding by loan category
One- to four-family residential
-
%
-
%
(0.01)
%
-
%
0.01
%
Other residential
-
-
-
-
-
Commercial real estate
-
-
-
-
-
Construction
-
-
-
-
-
Other commercial
0.3
-
(0.01)
-
-
Consumer, overdrafts and other loans
0.3
0.01
0.01
0.02
0.09
Ratio of net charge-offs to average loans outstanding
0.02
%
0.01
%
-
%
0.01
%
0.10
%
Investment Activities
Excluding securities issued by the United States Government, or its agencies, there were no investment securities in excess of 10% of the Company’s stockholders’ equity at December 31, 2023, 2022 and 2021, respectively. Agencies, for this purpose, primarily include Freddie Mac, Fannie Mae, Ginnie Mae, Small Business Administration and FHLBank.
As of December 31, 2023 and 2022, the Company held approximately $195.0 million and $202.5 million, respectively, in principal amount of investment securities which the Company classified as held-to-maturity. In addition, as of December 31, 2023 and 2022,
the Company held approximately $478.2 million and $490.6 million, respectively, in fair value of investment securities which the Company classified as available-for-sale. During 2022, the Company transferred, at fair value, $226.5 million of securities from the available-for-sale portfolio to the held-to-maturity portfolio after determining that those securities, for various reasons, would likely be held to their maturity or full repayment prior to contractual maturity. See Notes 1 and 2 to the accompanying audited financial statements included in Item 8 of this Report.
The amortized cost and fair values of, and gross unrealized gains and losses on, investment securities at the dates indicated are summarized as follows.
December 31, 2023
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In Thousands)
AVAILABLE-FOR-SALE SECURITIES:
Agency mortgage-backed securities
$
316,114
$
$
35,890
$
280,231
Agency collateralized mortgage obligations
85,989
-
10,043
75,946
States and political subdivisions securities
59,141
1,531
58,137
Small Business Administration securities
70,648
-
6,755
63,893
$
531,892
$
$
54,219
$
478,207
December 31, 2023
Amortized
Gross
Gross
Amortized
Fair Value
Carrying
Unrealized
Unrealized
Fair
Cost
Adjustment
Value
Gains
Losses
Value
(In Thousands)
HELD-TO-MATURITY SECURITIES:
Agency mortgage-backed securities
$
72,495
$
2,436
$
74,931
$
-
$
8,686
$
66,245
Agency collateralized mortgage obligations
116,405
(2,502)
113,903
-
14,662
99,241
States and political subdivisions
6,188
6,189
-
5,707
$
195,088
$
(65)
$
195,023
$
-
$
23,830
$
171,193
December 31, 2022
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In Thousands)
AVAILABLE-FOR-SALE SECURITIES:
Agency mortgage-backed securities
$
327,266
$
-
$
40,784
$
286,482
Agency collateralized mortgage obligations
90,205
-
11,731
78,474
States and political subdivisions securities
60,667
3,291
57,495
Small Business Administration securities
75,076
-
6,935
68,141
$
553,214
$
$
62,741
$
490,592
December 31, 2022
Amortized
Gross
Gross
Amortized
Fair Value
Carrying
Unrealized
Unrealized
Fair
Cost
Adjustment
Value
Gains
Losses
Value
(In Thousands)
HELD-TO-MATURITY SECURITIES:
Agency mortgage-backed securities
$
73,891
$
3,015
$
76,906
$
-
$
9,820
$
67,086
Agency collateralized mortgage obligations
122,247
(2,885)
119,362
-
14,129
105,233
States and political subdivisions
6,239
(12)
6,227
-
5,446
$
202,377
$
$
202,495
$
-
$
24,730
$
177,765
December 31, 2021
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In Thousands)
AVAILABLE-FOR-SALE SECURITIES:
Agency mortgage-backed securities
$
219,624
$
10,561
$
$
229,441
Agency collateralized mortgage obligations
204,332
2,443
2,498
204,277
States and political subdivisions securities
38,440
1,618
40,015
Small Business Administration securities
26,802
-
27,299
$
489,198
$
15,119
$
3,285
$
501,032
No securities were classified as held-to-maturity at December 31, 2021.
At December 31, 2023, the Company’s available-for-sale agency mortgage-backed securities portfolio consisted of FNMA securities totaling $190.9 million, FHLMC securities totaling $86.4 million and GNMA securities totaling $2.9 million. At December 31, 2022, the Company’s available-for-sale agency mortgage-backed securities portfolio consisted of FNMA securities totaling $196.4 million, FHLMC securities totaling $90.1 million and GNMA securities totaling $78.5 million. At December 31, 2021, the Company’s available-for-sale agency mortgage-backed securities portfolio consisted of FNMA securities totaling $180.5 million, FHLMC securities totaling $47.4 million and GNMA securities totaling $1.5 million. At December 31, 2023, 2022 and 2021, all of the Company’s agency mortgage-backed securities had fixed rates of interest.
At December 31, 2023, the Company’s available-for-sale agency collateralized mortgage-backed obligations portfolio consisted of FNMA securities totaling $4.1 million, FHLMC securities totaling $66.6 million and GNMA securities totaling $5.3 million. At December 31, 2022, the Company’s available-for-sale agency collateralized mortgage-backed obligations portfolio consisted of FNMA securities totaling $3.9 million, FHLMC securities totaling $67.8 million and GNMA securities totaling $6.7 million. At December 31, 2021, the Company’s available-for-sale agency collateralized mortgage-backed obligations portfolio consisted of FNMA securities totaling $80.5 million, FHLMC securities totaling $51.4 million and GNMA securities totaling $72.4 million. At December 31, 2023 and 2022, all of the Company’s agency collateralized mortgage-backed obligations had fixed rates of interest. At December 31, 2021, $170.5 million of the Company’s agency collateralized mortgage obligations had fixed rates of interest and $33.8 million had variable rates of interest.
The following tables present the contractual maturities and weighted average tax-equivalent yields of available-for-sale and held-to-maturity securities at December 31, 2023. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized
Tax-Equivalent
Cost
Amortized Yield
Fair Value
(Dollars In Thousands)
AVAILABLE-FOR-SALE SECURITIES
One year or less
$
-
-
$
-
After one through five years
1,197
4.74
%
1,226
After five through ten years
-
-
-
After ten years
57,944
3.86
%
56,911
Securities not due on a single maturity date
472,751
2.60
%
420,070
Total
$
531,892
2.74
%
$
478,207
Amortized
Tax-Equivalent
Carrying Value
Amortized Yield
Fair Value
(Dollars In Thousands)
HELD-TO-MATURITY SECURITIES
One year or less
$
-
-
$
-
After one through five years
-
-
-
After five through ten years
1,018
5.99
%
After ten years
5,171
1.69
%
4,748
Securities not due on a single maturity date
188,834
2.64
%
165,486
Total
$
195,023
2.63
%
$
171,193
Securities
Not Due
After One
After Five
After
on a Single
One Year
Through
Through
Ten
Maturity
or Less
Five Years
Ten Years
Years
Date
Total
(In Thousands)
AVAILABLE-FOR-SALE SECURITIES
Agency mortgage-backed securities
$
-
$
-
$
-
$
-
$
280,231
$
280,231
Agency collateralized mortgage obligations
-
-
-
-
75,946
75,946
Small business administration securities
-
-
-
-
63,893
63,893
States and political subdivisions securities
-
1,226
-
56,911
-
58,137
$
-
$
1,226
$
-
$
56,911
$
420,070
$
478,207
HELD-TO-MATURITY SECURITIES
Agency mortgage-backed securities
$
-
$
-
$
-
$
-
$
74,931
$
74,931
Agency collateralized mortgage obligations
-
-
-
-
113,903
113,903
States and political subdivisions securities
-
-
1,018
5,171
-
6,189
$
-
$
-
$
1,018
$
5,171
$
188,834
$
195,023
The following table shows our investments’ gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2023, 2022 and 2021, respectively:
Less than 12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Description of Securities
Value
Losses
Value
Losses
Value
Losses
(In Thousands)
AVAILABLE-FOR-SALE SECURITIES
Agency mortgage-backed securities
$
4,318
$
(9)
$
274,801
$
(35,881)
$
279,119
$
(35,890)
Agency collateralized mortgage obligations
9,080
(216)
66,866
(9,827)
75,946
(10,043)
Small Business Administration securities
7,782
(133)
56,111
(6,622)
63,893
(6,755)
States and political subdivisions securities
-
-
37,969
(1,531)
37,969
(1,531)
$
21,180
$
(358)
$
435,747
$
(53,861)
$
456,927
$
(54,219)
HELD-TO-MATURITY SECURITIES
Agency mortgage-backed securities
$
-
$
-
$
66,245
$
(8,686)
$
66,245
$
(8,686)
Agency collateralized mortgage obligations
-
-
99,241
(14,662)
99,241
(14,662)
States and political subdivisions securities
-
-
5,707
(482)
5,707
(482)
$
-
$
-
$
171,193
$
(23,830)
$
171,193
$
(23,830)
Less than 12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Description of Securities
Value
Losses
Value
Losses
Value
Losses
(In Thousands)
AVAILABLE-FOR-SALE SECURITIES
Agency mortgage-backed securities
$
221,562
$
(27,597)
$
64,918
$
(13,187)
$
286,480
$
(40,784)
Agency collateralized mortgage obligations
28,537
(3,262)
40,642
(8,469)
69,179
(11,731)
Small Business Administration securities
60,473
(5,224)
7,667
(1,711)
68,140
(6,935)
States and political subdivisions securities
44,455
(2,913)
3,753
(378)
48,208
(3,291)
$
355,027
$
(38,996)
$
116,980
$
(23,745)
$
472,007
$
(62,741)
HELD-TO-MATURITY SECURITIES
Agency mortgage-backed securities
$
59,218
$
(7,766)
$
7,868
$
(2,054)
$
67,086
$
(9,820)
Agency collateralized mortgage obligations
61,055
(6,411)
44,178
(7,718)
105,233
(14,129)
States and political subdivisions securities
(101)
4,546
(680)
5,446
(781)
$
121,173
$
(14,278)
$
56,592
$
(10,452)
$
177,765
$
(24,730)
Less than 12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Description of Securities
Value
Losses
Value
Losses
Value
Losses
(In Thousands)
AVAILABLE-FOR-SALE SECURITIES
Agency mortgage-backed securities
$
47,769
$
(388)
$
10,583
$
(356)
$
58,352
$
(744)
Agency collateralized mortgage obligations
92,727
(1,588)
16,298
(910)
109,025
(2,498)
States and political subdivisions securities
6,537
(43)
-
-
6,537
(43)
$
147,033
$
(2,019)
$
26,881
$
(1,266)
$
173,914
$
(3,285)
Allowance for Credit Losses As of January 1, 2021, the Company began evaluating all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. All of the mortgage-backed, collateralized mortgage, and SBA securities held by the Company are issued by U.S. government-sponsored entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. Likewise, the Company has not experienced historical losses on these types of securities. Accordingly, no allowance for credit losses has been recorded for these securities.
Regarding securities issued by state and political subdivisions, management considers the following when evaluating these securities: (i) current issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) updated financial information of the issuer, (v) internal forecasts and (vi) whether such securities provide insurance or other credit enhancement or are pre-refunded by the issuers. These securities are highly rated by major rating agencies and have a long history of no credit losses. Likewise, the Company historically has not experienced losses on these types of securities. Accordingly, no allowance for credit losses has been recorded for these securities.
Sources of Funds
General. Deposit accounts have traditionally been the principal source of the Bank’s funds for use in lending and for other general business purposes. In addition to deposits, the Bank obtains funds through advances from the Federal Home Loan Bank of Des Moines (“FHLBank”) and other borrowings, loan repayments, loan sales, and cash flows generated from operations. Scheduled loan payments are a relatively stable source of funds, while deposit inflows and outflows and the related costs of such funds have varied widely. Borrowings such as FHLBank advances may be used on a short-term basis to compensate for seasonal reductions in deposits or deposit inflows at less than projected levels and may be used on a longer-term basis to support expanded lending activities. The availability of funds from loan sales is influenced generally by the level of interest rates, which in turn may impact the volume of originations.
Deposits. The Bank attracts both short-term and long-term deposits from the general public by offering a wide variety of accounts and rates and purchases brokered deposits from time to time. The Bank offers regular savings accounts, checking accounts, various money market accounts, fixed-interest rate certificates with varying maturities, certificates of deposit in minimum amounts of $250,000 (“Jumbo” accounts), brokered certificates and individual retirement accounts. Non-interest-bearing demand deposits increased $225 million in 2021, while interest-bearing demand and savings deposits increased $240 million. During 2021, the Bank also decreased its total time deposits by approximately $430 million. Time deposits originated through the Bank’s internet channel decreased by $200 million and brokered deposits, including IntraFi purchased funds, decreased $91 million. The brokered deposits and deposits originated through the Bank’s internet channel were allowed to mature without replacement as other deposit categories increased in 2021. In the latter half of 2022, some of the interest-bearing demand and savings deposits and non-interest-bearing demand deposits decreased as some of the COVID-19 pandemic “surge deposits” flowed out of both retail and business customer accounts. Total balances in these categories did not return to pre-pandemic levels, but they declined from peak balance levels in 2021 and early 2022. Non-interest-bearing demand deposits decreased $146 million in 2022 and interest-bearing demand and savings deposits, excluding brokered deposits, decreased $193 million. During 2022, in response to customer demand in a rising interest rate environment, the Bank increased its total time deposits by approximately $322 million. Time deposits originated through the Bank’s internet channel decreased by $152 million and brokered time deposits, including IntraFi purchased funds, increased $194 million. The Bank’s retail time deposits originated through its banking center and corporate services network increased $309 million. In 2023, non-interest-bearing demand deposits decreased $168 million and interest-bearing demand and savings deposits, excluding brokered deposits, increased $28 million. During 2023, time deposits originated through the Bank’s internet channel decreased by $35 million and
brokered time deposits increased $100 million. The Bank’s retail time deposits originated through its banking center and corporate services network decreased $35 million. Other brokered deposits increased $150.0 million in 2023.
The following table sets forth the dollar amount of deposits, by interest rate range, in the various types of deposit programs offered by the Bank at the dates indicated.
December 31,
Percent of
Percent of
Percent of
Amount
Total
Amount
Total
Amount
Total
(Dollars In Thousands)
Time deposits:
0.00% - 0.99%
$
86,831
1.84
%
$
280,784
5.99
%
$
785,917
17.26
%
1.00% - 1.99%
22,485
0.48
125,951
2.69
45,464
1.00
2.00% - 2.99%
44,354
0.94
381,547
8.15
55,509
1.22
3.00% - 3.99%
46,304
0.98
228,131
4.87
6,780
0.15
4.00% - 4.99%
739,645
15.66
4,883
0.10
-
-
5.00% and above
8,583
0.18
-
-
-
-
Total time deposits
948,202
20.08
1,021,296
21.80
893,670
19.63
Non-interest-bearing demand deposits
895,496
18.97
1,063,588
22.70
1,209,822
26.58
Interest-bearing demand and savings deposits (1.67% - 0.65% - 0.12%)
2,216,482
46.94
2,188,535
46.72
2,381,210
52.31
Brokered deposits (5.20% - 4.03% - 0.60%)
661,528
14.01
411,491
8.78
67,399
1.48
Total Deposits
$
4,721,708
100.00
%
$
4,684,910
100.00
%
$
4,552,101
100.00
%
A table showing maturity information for the Bank’s time deposits as of December 31, 2023, is presented in Note 8 of the accompanying audited financial statements, which are included in Item 8 of this Report.
The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious and the Bank’s deposit mix may vary. The Bank manages the pricing of its deposits in keeping with its asset/liability management, liquidity and profitability objectives. Based on its experience, management believes that the Bank’s certificate accounts are relatively stable sources of deposits, while its checking accounts have proven to be more volatile. The Bank’s ability to attract and maintain deposits, and the rates paid on these deposits, has been and will continue to be significantly affected by money market conditions.
The following table sets forth the time remaining until maturity of the Bank’s time deposits as of December 31, 2023. The table is based on information prepared in accordance with GAAP.
Maturity
3 Months
Over 3 to 6
Over 6 to 12
Over
Or Less
Months
Months
12 Months
Total
(In Thousands)
Time deposits:
Less than $250,000
$
279,975
$
202,473
$
228,736
$
25,203
$
736,387
$250,000 or more
101,318
46,231
51,431
1,513
200,493
Brokered
11,200
70,000
185,581
394,747
661,528
Public funds(1)
1,669
4,831
4,822
-
11,322
Total
$
394,162
$
323,535
$
470,570
$
421,463
$
1,609,730
(1) Deposits from governmental and other public entities.
The following table sets forth the time remaining until maturity of the Bank’s uninsured time deposits as of December 31, 2023 and December 31, 2022. The table is based on information prepared in accordance with GAAP.
Maturities as of December 31, 2023
3 Months
Over 3 to 6
Over 6 to 12
Over
Or Less
Months
Months
12 Months
Total
(In Thousands)
Uninsured Time Deposits
$
89,110
$
45,431
$
53,630
$
1,360
$
189,531
Maturities as of December 31, 2022
3 Months
Over 3 to 6
Over 6 to 12
Over
Or Less
Months
Months
12 Months
Total
(In Thousands)
Uninsured Time Deposits
$
33,992
$
90,437
$
69,930
$
5,804
$
200,163
In addition to the uninsured time deposits noted above, the uninsured deposits with no maturity date were $1.34 billion and $1.67 billion, respectively, at December 31, 2023 and 2022, for total uninsured deposits at those dates of $1.53 billion and $1.87 billion, respectively. These totals include deposit accounts of consolidated subsidiaries of the Company (which are eliminated from total deposits shown in the consolidated financial statements of the Company) and collateralized deposits of unaffiliated entities, as required by FDIC guidance. At December 31, 2023 and 2022, the total uninsured deposits reported here included $802.9 million and $933.1 million, respectively, of deposit accounts of consolidated subsidiaries of the Company.
Brokered deposits. Brokered deposits are marketed through national brokerage firms to their customers in $1,000 increments. The Bank maintains only one account for the total deposit amount while the detailed records of owners are maintained by the Depository Trust Company under the name of CEDE & Co. The deposits are transferable just like a stock or bond investment and the customer can open the account with a phone call or an online request. This provides a large deposit for the Bank at a lower operating cost since the Bank only has one account to maintain versus several accounts with multiple interest and maturity dates. At December 31, 2023 and 2022, the Bank had approximately $661.5 million and $411.5 million in brokered deposits, respectively.
Included in the brokered deposits totals at December 31, 2023 and 2022, were $300.0 million and $150.0 million, respectively, in IntraFi Funding accounts. IntraFi Funding transactions represent a cost-effective source of funding without collateralization or credit limits for the Company. These transactions help the Company obtain large blocks of funding while providing control over pricing and diversity of wholesale funding options. At December 31, 2023 and 2022, all of these IntraFi deposits were at floating rates indexed to the effective fed funds rate.
Previously included in brokered deposits were IntraFi Network Deposit accounts. In 2018, the FDIC amended its regulations to exclude these deposits from its definition of brokered deposits. IntraFi Network Deposit accounts are accounts that are just like any other deposit account on the Company’s books, except that the account total exceeds the FDIC deposit insurance maximum. When a customer places a large deposit with an IntraFi Network bank, that bank uses IntraFi to place the funds into deposit accounts issued by other banks in the IntraFi Network. This occurs in increments of less than the standard FDIC insurance maximum, so that both principal and interest are eligible for complete FDIC protection. Other Network members do the same thing with their customers’ funds. At December 31, 2023 and 2022, the Bank had approximately $8.8 million and $12.4 million in IntraFi Network Deposits, respectively.
Unlike non-brokered certificates of deposit, which can be withdrawn (with a penalty) prior to maturity for any reason, including increasing interest rates, a brokered deposit (excluding IntraFi Network Deposits) can only be withdrawn prior to maturity in the event of the death, or court declared mental incompetence, of the depositor. This allows the Bank to better manage the maturity of its deposits. Additionally, the Bank may issue brokered deposits which are callable at the Bank’s discretion prior to their stated maturity date. Currently, the rates offered by the Bank for brokered deposits are similar to those offered for retail certificates of deposit of similar size and maturity. The Bank maintained increased liquidity during and after the economic recession that began in 2008. After 2009, we had gradually reduced the amount of brokered deposits (excluding IntraFi Network Deposits) utilized as we added deposits from FDIC-assisted acquisitions. As loan demand began to increase starting in 2013, we gradually increased our usage of brokered deposits again from time to time. During 2021, we decreased our usage of brokered deposits as we experienced growth in a variety of non-time deposits that year. During 2022 and 2023, as loan demand trended upward and as other deposit sources declined, we again utilized brokered deposits to obtain additional funding.
The Company may use interest rate swaps from time to time to manage its interest rate risks from recorded financial liabilities. In the past, the Company entered into interest rate swap agreements with the objective of economically hedging against the effects of changes in the fair value of its liabilities for fixed rate brokered certificates of deposit caused by changes in market interest rates. These interest rate swaps have allowed the Company to create funding of varying maturities at a variable rate that in the past has approximated three-month SOFR. In February 2023, the Company entered into five new interest rate swap transactions. At December 31, 2023, the Company had $95.0 million in interest rate swaps on brokered deposits, which were accounted for as fair value hedges. Subsequent to December 31, 2023, the Company elected to terminate these swaps prior to their contractual termination date in 2025. The Company received a net settlement payment from the swap counterparty totaling $26,500 upon termination. The Company did not utilize these types of interest rate swaps on brokered deposits in 2022 or 2021.
Borrowings. Great Southern’s other sources of funds include advances from the FHLBank, a Qualified Loan Review (“QLR”) arrangement with the FRB, customer repurchase agreements and other borrowings.
As a member of the FHLBank, the Bank is required to own capital stock in the FHLBank and is authorized to apply for advances from the FHLBank. Each FHLBank credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLBank may prescribe the acceptable uses for these advances, as well as other risks on availability, limitations on the size of the advances and repayment provisions. At both December 31, 2023 and 2022, the Bank had no FHLBank term advances outstanding. The Bank had outstanding overnight borrowings of $251.0 million and $88.5 million from the FHLBank at December 31, 2023 and December 31, 2022, respectively. Because they are overnight borrowings, any outstanding balances are included in short-term borrowings in the Company’s financial statements. The Bank has in the past utilized, and may again utilize, FHLBank advances from time to time to fund loan growth.
The Federal Reserve Bank of St. Louis (“FRBSL”) has a QLR program where the Bank can borrow on a temporary basis using commercial loans pledged to the FRBSL. Under the QLR program, the Bank can borrow any amount up to a calculated collateral value of the commercial loans pledged, for virtually any reason that creates a temporary cash need. Examples of this could be: (1) the need to fund for late outgoing wires or cash letter settlements, (2) the need to disburse one or more loans but the permanent source of funds will not be available for a few days; (3) a temporary spike in interest rates on other funding sources that are being used; or (4) the need to purchase a security for collateral pledging purposes a few days prior to the funds becoming available on an existing security that is maturing. The Bank had commercial, consumer and other loans pledged to the FRBSL at December 31, 2023 that would have allowed approximately $448.7 million to be borrowed under the QLR program. There were no outstanding borrowings under the QLR program at December 31, 2023 or 2022 and the facility was not used during 2023 or 2022.
The FRBSL also has a Bank Term Funding Program (“BTFP”) which was created in March 2023 to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. The BTFP offers loans of up to one year to depository institutions pledging any collateral eligible for purchase by the Federal Reserve Banks in open market operations, such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities. There were no outstanding borrowings from the BTFP at December 31, 2023 and the facility was not used during 2023. In January 2024, the Bank borrowed $180.0 million under the BTFP at an interest rate of 4.83% and for a term of one year. The Bank may repay this borrowing without penalty prior to the contractual maturity.
The Bank enters into sales of securities under agreements to repurchase (reverse repurchase agreements). Reverse repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the statements of
financial condition. The dollar amount of securities underlying the agreements remains in the asset accounts. Securities underlying the agreements are held by the Bank during the agreement period. The agreements generally are written on a term of one-month or less.
In November 2006, Great Southern Capital Trust II (“Trust II”), a statutory trust formed by the Company for the purpose of issuing the securities, issued $25.0 million aggregate liquidation amount of floating rate cumulative trust preferred securities. The Trust II securities bear a floating distribution rate equal to 90-day LIBOR plus 1.60%. The Trust II securities became redeemable at the Company’s option in February 2012, and if not sooner redeemed, mature on February 1, 2037. The Trust II securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended. The gross proceeds of the offering were used to purchase Junior Subordinated Debentures from the Company totaling $25.8 million and bearing an interest rate identical to the distribution rate on the Trust II securities. The initial interest rate on the Trust II debentures was 6.98%. The interest rate was 7.24% and 6.04% at December 31, 2023 and 2022, respectively.
On August 8, 2016, the Company completed the public offering and sale of $75.0 million of its subordinated notes. The notes were due August 15, 2026, and had a fixed interest rate of 5.25% until August 15, 2021, at which time the rate was to become floating at a rate equal to three-month LIBOR plus 4.087%. The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions, legal, accounting and other professional fees, of approximately $73.5 million. Total debt issuance costs of approximately $1.5 million were deferred and amortized over the five-year expected life of the notes.
On August 15, 2021, in accordance with the terms of the notes, the Company redeemed all $75.0 million aggregate principal amount of the notes at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest.
On June 10, 2020, the Company completed the public offering and sale of $75.0 million of its subordinated notes. The notes are due June 15, 2030, and have a fixed interest rate of 5.50% until June 15, 2025, at which time the rate becomes floating at a rate expected to be equal to three-month term SOFR plus 5.325%. The Company may call the notes at par beginning on June 15, 2025, and on any scheduled interest payment date thereafter. The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions, legal, accounting and other professional fees, of approximately $73.5 million. Total debt issuance costs of approximately $1.5 million were deferred and are being amortized over the expected life of the notes, which is five years.
Amortization of the debt issuance costs during the years ended December 31, 2023, 2022 and 2021, totaled $298,000, $297,000 and $587,000, respectively, and is included in interest expense on subordinated notes in the consolidated statements of income, resulting in an imputed interest rate of 5.92% at December 31, 2023.
The following tables set forth the maximum month-end balances, average daily balances and weighted average interest rates of other borrowings during the years indicated.
Year Ended December 31, 2023
Weighted
Maximum
Average
Average
Balance
Balance
Interest Rate
(Dollars In Thousands)
Other Borrowings:
Securities sold under reverse repurchase agreements
$
181,476
$
82,218
1.47
%
Overnight borrowings - FHLBank
251,000
141,474
5.25
Other
1,610
1,392
-
Total
$
225,084
3.87
%
Total maximum month-end balance
410,573
Year Ended December 31, 2022
Weighted
Maximum
Average
Average
Balance
Balance
Interest Rate
(Dollars In Thousands)
Other Borrowings:
Securities sold under reverse repurchase agreements
$
176,843
$
132,595
0.24
%
Overnight borrowings - FHLBank
170,000
46,404
2.29
Collateral held for interest rate swap
3,250
0.38
Other
1,449
1,159
-
Total
$
181,125
0.77
%
Total maximum month-end balance
317,727
Year Ended December 31, 2021
Weighted
Maximum
Average
Average
Balance
Balance
Interest Rate
(Dollars In Thousands)
Other Borrowings:
Securities sold under reverse repurchase agreements
$
183,047
$
143,757
0.03
%
Collateral held for interest rate swap
1,420
0.09
Other
1,518
1,240
-
Total
$
145,286
0.03
%
Total maximum month-end balance
184,231
The following table sets forth year-end balances and weighted average interest rates of the Company’s other borrowings at the dates indicated.
December 31,
Weighted
Weighted
Weighted
Average
Average
Average
Interest
Interest
Interest
Balance
Rate
Balance
Rate
Balance
Rate
(Dollars In Thousands)
Other borrowings:
Securities sold under reverse repurchase agreements
$
70,843
1.66
%
$
176,843
0.94
%
$
137,116
0.02
%
Overnight borrowings - FHLBank
251,000
5.64
88,500
4.60
-
-
Collateral held for interest rate swap
-
-
-
-
0.09
Other
1,610
-
1,083
-
1,449
-
Total
$
323,453
4.76
%
$
266,426
2.16
%
$
138,955
0.02
%
The following table sets forth the maximum month-end balances, average daily balances and weighted average interest rates of subordinated debentures issued to a capital trust during the years indicated.
Year Ended December 31,
(Dollars In Thousands)
Subordinated debentures:
Maximum balance
$
25,774
$
25,774
$
25,774
Average balance
25,774
25,774
25,774
Weighted average interest rate
6.74
%
3.40
%
1.74
%
The following table sets forth certain information as to the Company’s subordinated debentures issued to a capital trust at the dates indicated.
December 31,
(Dollars In Thousands)
Subordinated debentures
$
25,774
$
25,774
$
25,774
Weighted average interest rate of subordinated debentures
7.24
%
6.04
%
1.73
%
The following table sets forth the maximum month-end balances, average daily balances and weighted average interest rates of subordinated notes during the years indicated.
Year Ended December 31,
(Dollars In Thousands)
Subordinated notes:
Maximum balance
$
74,579
$
74,281
$
148,824
Average balance
74,430
74,131
119,780
Weighted average interest rate
5.94
%
5.97
%
5.98
%
The following table sets forth certain information as to the Company’s subordinated notes at the dates indicated.
December 31,
(Dollars In Thousands)
Subordinated notes
$
74,579
$
74,281
$
73,984
Weighted average interest rate of subordinated debentures
5.92
%
5.95
%
5.97
%
Subsidiaries
Great Southern. As a Missouri-chartered trust company, Great Southern may invest up to 3%, which was equal to $174.4 million at December 31, 2023, of its assets in service corporations. At December 31, 2023, the Bank’s total investment in Great Southern Real Estate Development Corporation (“Real Estate Development”) was $2.7 million. Real Estate Development was incorporated and organized in 2003 under the laws of the State of Missouri. At December 31, 2023, the Bank’s total investment in Great Southern Financial Corporation (“GSFC”) was $6.2 million. GSFC is incorporated under the laws of the State of Missouri, and has not had any business activity since November 30, 2012, when it sold Great Southern Insurance and Great Southern Travel, two divisions of Great Southern that were operated through GSFC. At December 31, 2023, the Bank’s total investment in Great Southern Community Development Company, L.L.C. (“CDC”) and its subsidiary Great Southern CDE, L.L.C. (“CDE”) was $715,000. CDC and CDE were formed in 2010 under the laws of the State of Missouri. At December 31, 2023, the Bank’s total investment in GS, L.L.C. (“GSLLC”) was $34.9 million. GSLLC was formed in 2005 under the laws of the State of Missouri. At December 31, 2023, the Bank’s total investment in GSSC, L.L.C. (“GSSCLLC”) was $21.1 million. GSSCLLC was formed in 2009 under the laws of the State of Missouri. At December 31, 2023, the Bank’s total investment in GSRE Holding, L.L.C. (“GSRE Holding”) was $2.5 million. GSRE Holding was formed in 2009 under the laws of the State of Missouri. At December 31, 2023, the Bank’s total investment in GSRE Holding II, L.L.C. (“GSRE Holding II”) was $961,000. GSRE Holding II was formed in 2009 under the laws of the State of Missouri. At December 31, 2023, the Bank’s total investment in GSRE Holding III, L.L.C. (“GSRE Holding III”) was $-0-. GSRE Holding III was formed in 2012 under the laws of the State of Missouri. At December 31, 2023, the Bank’s total investment in GSTC Investments, L.L.C. (“GSTCLLC”) was $37.4 million. GSTCLLC was formed in 2016 under the laws of the State of Missouri. These subsidiaries are primarily engaged in the activities described below. In addition, Great Southern has four other subsidiary companies that are not considered service corporations, GSB One, L.L.C., GSB Two, L.L.C., VFP Conclusion Holding, L.L.C. and VFP Conclusion Holding II, L.L.C. These companies are also described below.
Great Southern Real Estate Development Corporation. Generally, the purpose of Real Estate Development is to hold real estate assets which have been obtained through foreclosure by the Bank and which require ongoing operation of a business or completion of construction. During 2023 and 2022, Real Estate Development did not hold any real estate assets related to foreclosed property. Real Estate Development had net income of $-0- in each of the years ended December 31, 2023 and 2022.
Great Southern Community Development Company, L.L.C. and Great Southern CDE, L.L.C. Generally, the purpose of CDC is to invest in community development projects that have a public benefit and are permissible under Missouri and Kansas law. These include activities such as investing in real estate and investing in other community development entities. CDC also serves as parent to subsidiary CDE which invests in limited liability entities for the purpose of acquiring federal tax credits to be utilized by Great Southern. CDC had consolidated net income of $-0- in each of the years ended December 31, 2023 and 2022.
GS, L.L.C. GSLLC was organized in 2005. GSLLC is a limited liability company that invests in multiple limited liability entities for the purpose of acquiring state and federal tax credits which are utilized by Great Southern. GSLLC had net losses of $34,000 and $86,000 in the years ended December 31, 2023 and 2022, respectively, which primarily resulted from the tax credits utilized by Great Southern.
GSSC, L.L.C. GSSCLLC was organized in 2009. GSSCLLC is a limited liability company that invests in multiple limited liability entities for the purpose of acquiring state tax credits which are utilized by Great Southern or sold to third parties. GSSCLLC had net losses of $3,000 and $2,000 in the years ended December 31, 2023 and 2022, respectively.
GSRE Holding, L.L.C. Generally, the purpose of GSRE Holding is to hold real estate assets which have been obtained through foreclosure by the Bank and which require ongoing operation of a business or completion of construction. At December 31, 2023, GSRE Holding held cash of $2.5 million and no real estate assets. GSRE Holding had net losses of $2,000 in each of the years ended December 31, 2023 and 2022.
GSRE Holding II, L.L.C. Generally, the purpose of GSRE Holding II is to hold real estate assets which have been obtained through foreclosure by the Bank and which require ongoing operation of a business or completion of construction. In 2023 and 2022, GSRE Holding II did not hold any significant real estate assets. GSRE Holding II had net losses of $2,000 in each of the years ended December 31, 2023 and 2022.
GSRE Holding III, L.L.C. Generally, the purpose of GSRE Holding III is to hold real estate assets which have been obtained through foreclosure by the Bank and which require ongoing operation of a business or completion of construction. In 2023 and 2022, GSRE Holding III did not hold any significant real estate assets. GSRE Holding III had net income of $-0- in each of the years ended December 31, 2023 and 2022.
GSTC Investments, L.L.C. GSTCLLC was organized in 2016. GSTCLLC is a limited liability company that invests in multiple limited liability entities for the purpose of acquiring state and federal tax credits which are utilized by Great Southern. GSTCLLC had net income of $-0- in the year ended December 31, 2023 and a net loss of $32,000 in the year ended December 31, 2022.
GSB One, L.L.C. At December 31, 2023, the Bank’s total investment in GSB One, L.L.C. (“GSB One”) and GSB Two, L.L.C. (“GSB Two”) was $2.30 billion. The capital contribution was made by transferring participations in loans to GSB Two. GSB One is a Missouri limited liability company that was formed in 1998. Currently the only activity of this company is the ownership of GSB Two.
GSB Two, L.L.C. This is a Missouri limited liability company that was formed in 1998. GSB Two is a real estate investment trust (“REIT”). It holds interests in real estate mortgages transferred from the Bank. The Bank continues to service the loans in return for a management and servicing fee from GSB Two. GSB Two had net income of $72.6 million and $58.3 million in the years ended December 31, 2023 and 2022, respectively.
VFP Conclusion Holding, L.L.C. VFP Conclusion Holding, L.L.C. (“VFP”) is a Missouri limited liability company that was formed in 2011. Generally, the purpose of VFP is to hold real estate assets which have been obtained through foreclosure by the Bank. The real estate assets obtained through foreclosure were formerly collateral for a participation loan sold by the Bank. The Bank has a 50 percent interest in VFP and at December 31, 2023 its investment totaled $4.2 million. Two other entities also have interests in VFP as
a result of their participation in the loan sold by the Bank. At December 31, 2023, the only asset of VFP was cash. VFP had net income of $-0- in each of the years ended December 31, 2023 and 2022.
VFP Conclusion Holding II, L.L.C. VFP Conclusion Holding II, L.L.C. (“VFP II”) is a Missouri limited liability company that was formed in 2012. Generally, the purpose of VFP II is to hold real estate assets which have been obtained through foreclosure by the Bank. The real estate assets obtained through foreclosure were formerly collateral for a participation loan sold by the Bank. The Bank has a 50 percent interest in VFP II and at December 31, 2023 its investment totaled $2.2 million. One other entity also has an interest in VFP II as a result of its participation in the loan sold by the Bank. At December 31, 2023, the only asset of VFP II was cash. VFP II had net income of $-0- for each of the years ended December 31, 2023 and 2022.
Competition
The banking industry in the Company’s market areas is highly competitive. In addition to competing with other commercial and savings banks, the Company competes with credit unions, finance companies, leasing companies, mortgage companies, insurance companies, brokerage and investment banking firms, financial technology “fintech” companies, and many other financial service firms. Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, price, reputation, interest rates on loans and deposits, lending limits and customer convenience. Our ability to continue to compete effectively also depends in large part on our ability to attract new employees and retain and motivate our existing employees, while managing compensation and other costs.
A substantial number of the commercial banks operating in most of the Company’s market areas are branches or subsidiaries of large organizations affiliated with statewide, regional or national banking companies and as a result they may have greater resources with which to compete. Additionally, the Company faces competition from a large number of community banks, many of which have senior management who were previously with other local banks or investor groups with strong local business and community ties.
The Company encounters strong competition in attracting deposits throughout its six-state retail footprint. The Company attracts a significant amount of deposits through its branch offices primarily from the communities in which those branch offices are located. Of our total branch offices at the end of 2023, approximately 73.6% of our deposit franchise dollars were located in Missouri, where our total market share at June 30, 2023, was 1.4%, or tenth in the state (based on FDIC market share deposits). The financial institutions with the top three market share positions in Missouri at June 30, 2023, were U.S. Bank, UMB Bank, and Bank of America, which had a combined market share of 29.9% (based on FDIC market share deposits). We also have branch offices in the states of Iowa, Kansas, Minnesota, Arkansas and Nebraska, which made up approximately 15.0%, 6.8%, 3.5%, 0.7%, and 0.4% of our total deposit franchise dollars, respectively (based on FDIC market share deposits of June 30, 2023). The Company’s market share in its primary metropolitan statistical areas was as follows at June 30, 2023:
Number of
Percentage of Total
Metropolitan Statistical Area
Branch Offices
Market Share
Rank
Institution with Leading Market Share Position
Springfield, MO
13.6%
Great Southern Bank
Sioux City, IA-NE-SD
7.0%
Security National Bank of Sioux City
Davenport/Moline/Rock Island, IA-IL
1.3%
Quad City Bank and Trust Co.
Des Moines/West Des Moines, IA
0.7%
Principal Bank
St. Louis, MO-IL
0.5%
U.S. Bank
Kansas City, MO-KS
0.4%
UMB Bank
Fayetteville/Springdale/Rogers, AR-MO
0.2%
Arvest Bank
Minneapolis/St. Paul/Bloomington, MN-WI
0.1%
US Bank NA
Our most direct competition for deposits has historically come from other commercial banks, savings institutions and credit unions located in our market areas. The Bank competes for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours, and accessible branch, online, mobile and ATM services. In addition, some competitors located outside of our market areas conduct business primarily over the Internet, which may enable them to realize certain savings and offer certain deposit products and services at lower costs or at higher rates and with greater convenience to certain customers. Our ability to attract and retain customer deposits depends on our ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities.
Competition in originating real estate loans comes primarily from other commercial banks, savings institutions and mortgage bankers making loans secured by real estate located in the Bank’s market area. The specific institutions are similar to those discussed above in regards to deposit market share. Commercial banks and finance companies provide vigorous competition in commercial and consumer lending. The Bank competes for real estate and other loans principally on the basis of the interest rates and loan fees it charges, the types of loans it originates, the quality of services it provides to borrowers and the locations of our branch office network and loan production offices.
Many of our competitors have substantially greater resources, name recognition and market presence, which benefit them in attracting business. In addition, larger competitors (including nationwide banks that have a significant presence in our market areas) may be able to price loans and deposits more aggressively than we do because of their greater economies of scale. Smaller and newer competitors may also be more aggressive than we are in terms of pricing loan and deposit products in order to obtain a larger share of the market. In addition, some competitors located outside of our market areas conduct business primarily over the Internet, which may enable them to realize certain savings and offer products and services at more favorable rates and with greater convenience to certain customers.
We also depend, from time to time, on outside funding sources, including brokered deposits, where we experience nationwide competition, and Federal Home Loan Bank advances. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on insured depositary institutions and their holding companies. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services. Since mid-2022, the Company has increased the interest rates it pays on many deposit products. The Company has also utilized both fixed-rate and floating-rate brokered deposits of varying terms, as well as overnight FHLBank borrowings.
Despite the highly competitive environment and the challenges it presents to us, management believes the Company will continue to be competitive because of its strong commitment to quality customer service, competitive products and pricing, convenient local branches, online and mobile capabilities, and active community involvement.
Employees and Human Capital Resources
At December 31, 2023, the Company and its affiliates had a total of 1,133 employees, including 219 part-time employees. None of the Company’s employees are represented by any collective bargaining agreement. Management considers its employee relations to be good.
Our human capital objectives include attracting, training, motivating, rewarding and retaining our employees. We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development are advanced through annual performance and development conversations with employees, internally developed training programs, customized corporate training engagements and seminars, conferences, and other training events employees are encouraged to attend in connection with their job duties.
Great Southern remains committed and focused on the health and safety of our associates, customers, and communities, especially as the COVID-19 virus remains a threat. Company management continues to monitor information related to the COVID-19 and other impactful viruses, using federal and state guidelines for public safety to manage the threat. The Company also remains focused on the overall wellbeing of its associates and their family members with a comprehensive no cost benefit offered through the Company’s employee assistance program.
Great Southern associates actively share their talents in their communities through leadership roles and volunteer activities in education, economic development, human and health services, and community reinvestment. Our Community Matters program allows each associate to be paid up to 32 hours per year, with supervisory approval, to volunteer for activities in their community during normal work hours. During 2023 Great Southern associates found creative and meaningful ways to give back to their communities. Great Southern associates donated over 5,600 hours in support of more than 200 organizations. Each year, the Bill and Ann Turner Distinguished Community Service Award is presented to a Great Southern associate who demonstrates excellence in volunteer service to their community. Every year, all associates are encouraged to nominate coworkers for this award. An external panel of community leaders reviews the nominees and determines the award winner. In addition to volunteerism, Great Southern associates generously supported their communities in 2023 through monetary donations totaling nearly $65,000.
Government Supervision and Regulation
General
The Company and its subsidiaries are subject to supervision and examination by applicable federal and state banking agencies. The earnings of the Company’s subsidiaries, and therefore the earnings of the Company, are affected by general economic conditions, management policies, federal and state legislation, and actions of various regulatory authorities, including the Board of Governors of the Federal Reserve System, often referred to as the Federal Reserve Board (the “FRB”), the Federal Deposit Insurance Corporation (the “FDIC”) and the Missouri Division of Finance (the “MDF”). The following is a brief summary of certain aspects of the regulation of the Company and the Bank and does not purport to fully discuss such regulation. Such regulation is intended primarily for the protection of depositors and the DIF, and not for the protection of stockholders.
Significant Legislation Impacting the Financial Services Industry
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.
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-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 billion and 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 billion by 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. Currently, the CBLR is 9.0%. 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 includes regulatory relief in the areas of examination cycles, call reports, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
Anti-Money Laundering and Anti-Terrorism Legislation. A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued, and in some cases proposed, a number of regulations that apply various requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. The regulations also impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of
the relevant laws or regulations, could have serious financial, legal and reputational consequences for the institution and could block or substantially delay a merger or other acquisition transaction.
The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act of 1970 (“BSA”), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the U.S. Department of the Treasury to promulgate priorities for anti-money laundering and countering the financing of terrorism policy; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and expands BSA whistleblower incentives and protections. Many of the statutory provisions in the AMLA will require additional rulemakings, reports and other measures, and the impact of the AMLA will depend on, among other things, rulemaking and implementation guidance. In June 2021, the Financial Crimes Enforcement Network, a bureau of the U.S. Department of the Treasury, issued the priorities for anti-money laundering and countering the financing of terrorism policy required under the AMLA. The priorities include corruption, cybercrime, terrorist financing, fraud, transnational crime, drug trafficking, human trafficking and proliferation financing.
Privacy Standards and Cybersecurity. Federal banking agencies, including the FDIC, have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. These regulations require the Bank to disclose its privacy policy, including informing consumers of its information sharing practices and informing consumers of their rights to opt out of certain practices. In addition, the federal banking agencies have adopted a final rule providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents. Specifically, the new rule requires a banking organization to notify its primary federal regulator as soon as possible, and no later than 36 hours after, the banking organization determines that a “computer-security incident” rising to the level of a “notification incident” has occurred. Notification is required for incidents that have materially affected or are reasonably likely to materially affect the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector. Service providers are required under the rule to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect the banking organization’s customers for four or more hours. Non-compliance with federal or similar state privacy and cybersecurity laws and regulations could lead to substantial regulatory fines and penalties, damages from private causes of action and/or reputational harm.
Bank Holding Company Regulation
The Company is a bank holding company that has elected to be treated as a financial holding company by the FRB. Financial holding companies are subject to comprehensive regulation by the FRB under the Bank Holding Company Act and the regulations of the FRB. The Company is required to file reports with the FRB and such additional information as the FRB may require, and is subject to regular examinations by the FRB. The FRB also has extensive enforcement authority over financial holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.
Under FRB policy and the Dodd-Frank Act, a bank holding company must serve as a source of financial and managerial strength for its subsidiary banks. Accordingly, the FRB may require, and has required in the past, that a bank holding company contribute additional capital to an undercapitalized subsidiary bank.
Under the Bank Holding Company Act, a financial holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company that is not a subsidiary if, after such acquisition, it would own or control more than 5% of such shares; (ii) acquiring all or substantially all of the assets of another bank or bank or financial holding company; or (iii) merging or consolidating with another bank or financial holding company.
The Bank Holding Company Act also prohibits a financial holding company generally from engaging directly or indirectly in activities other than those involving banking, activities closely related to banking that are permitted for a bank holding company, and certain securities, insurance and merchant banking activities. Certain investments greater than 5% in companies engaged in activities not permitted for a bank holding company are prohibited.
Volcker Rule
The federal banking agencies have adopted regulations to implement the provisions of the Dodd-Frank Act known as the Volcker Rule. Under the regulations, FDIC-insured depository institutions, their holding companies, subsidiaries and affiliates are generally prohibited, subject to certain exemptions, from proprietary trading of securities and other financial instruments and from acquiring or retaining an ownership interest in a “covered fund.” Effective July 22, 2019, a bank and its holding company are exempt from the Volcker Rule if the bank and every company that controls it have consolidated assets of $10 billion or less and have total consolidated trading assets and liabilities of 5% or less of its consolidated assets.
Interstate Banking and Branching
Federal law allows the FRB to approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than such holding company’s home state, without regard to whether the transaction is prohibited by the laws of any state. The FRB may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. Federal law also prohibits the FRB from approving such an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or if the applicant would control 30% or more of the deposits in any state in which the target bank maintains a branch and in which the applicant or any of its depository institution affiliates controls a depository institution or branch immediately prior to the acquisition of the target bank. Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit. Missouri law prohibits a bank holding company from acquiring a depository institution if total deposits would exceed 13% of statewide deposits excluding bank certificates of deposit of $100,000 or more, deposits from sources outside the United States and deposits of banks other than banks controlled by the bank holding company.
The federal banking agencies are generally authorized to approve interstate bank merger transactions and de novo branching without regard to whether such transactions are prohibited by the law of any state. Interstate acquisitions of branches are generally permitted only if the law of the state in which the branch is located permits such acquisitions.
As required by federal law, federal regulations prohibit any out-of-state bank from using the interstate branching authority primarily for the purpose of deposit production, including guidelines to ensure that interstate branches operated by an out-of-state bank in a host state reasonably help to meet the credit needs of the communities they serve.
Certain Transactions with Affiliates and Other Persons
Transactions involving the Bank and its affiliates are subject to sections 23A and 23B of the Federal Reserve Act, and regulations thereunder, which impose certain quantitative limits and collateral requirements on such transactions, and require all such transactions to be on terms at least as favorable to the Bank as are available in transactions with non-affiliates.
All loans by the Bank to the principal stockholders, directors and executive officers of the Bank or any affiliate are subject to regulations restricting loans and other transactions with insiders of the Bank and its affiliates. Transactions involving such persons must be on terms and conditions as favorable to the bank as those that apply in similar transactions with non-insiders. A bank may allow favorable rate loans to insiders pursuant to an employee benefit program available to bank employees generally. The Bank has such a program.
Dividends
The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB’s view that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, a bank holding company may be prohibited from paying any dividends if the holding company’s bank subsidiary is not adequately capitalized, and dividends payable by a bank holding company and its depository institutions subsidiaries can be restricted if the capital conservation buffer requirement is not met. See “Capital” below.
A bank holding company is required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB. This notification requirement does not apply to any company that meets the well-capitalized standard for bank holding companies, is well-managed, and is not subject to any unresolved supervisory issues. Under Missouri law, the Bank may pay dividends from certain undivided profits and may not pay dividends if its capital is impaired. Dividends of the Company and the Bank may also be restricted under the capital conservation buffer rules, as discussed below under “-Capital.”
Capital
The Company and the Bank are subject to capital regulations adopted by the FRB and the FDIC, which established minimum required ratios for common equity Tier 1 (“CET1”) capital, Tier 1 capital and total capital and the minimum leverage ratio; set forth the risk-weightings of assets and certain off-balance sheet items for purposes of the risk-based capital ratios; require an additional capital conservation buffer over the required risk-based capital ratios, and define what qualifies as capital for purposes of meeting the capital requirements.
Under the capital regulations, the minimum capital ratios are: (1) a CET1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total risk-based capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio (the ratio of Tier 1 capital to average total adjusted assets) of 4.0%. CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income (“AOCI”) unless an institution has elected to exclude AOCI from regulatory capital; and certain minority interests; all subject to applicable regulatory adjustments and deductions. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock. Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for loan and lease losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital.
Mortgage servicing and deferred tax assets over designated percentages of CET1 are deducted from capital. In addition, Tier 1 capital includes AOCI, which includes all unrealized gains and losses on available-for-sale debt and equity securities. However, because of our asset size, we were eligible to elect to permanently opt out of the inclusion of unrealized gains and losses on available-for-sale debt and equity securities in our capital calculations. We elected this option.
For purposes of determining risk-based capital, assets and certain off-balance sheet items are risk-weighted from 0% to 1,250%, depending on the risk characteristics of the asset or item. The risk weights include, for example, a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; and a 250% risk weight for mortgage servicing and deferred tax assets that are not deducted from capital.
In addition to the minimum CET1, Tier 1 and total capital ratios, the Company and the Bank must maintain a capital conservation buffer consisting of additional CET1 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.
The Financial Accounting Standards Board has adopted a new accounting standard for US GAAP that became effective for us on January 1, 2021. This standard, referred to as Current Expected Credit Loss, or CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets. CECL covers a broader range of assets than the prior method of recognizing credit losses and generally results in earlier recognition of credit losses. Upon adoption of CECL, a one-time adjustment was recorded to the credit loss allowances as of the beginning of the fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances under the current methodology and the amount required under CECL. Implementation of CECL reduced retained earnings, and affected other items, in a manner that reduced regulatory capital. The federal banking regulators (the Federal Reserve, the OCC and the FDIC) adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital. We elected this option.
Under the FDIC’s prompt corrective action standards, in order to be considered well-capitalized, the Bank must have a ratio of CET1 capital to risk-weighted assets of 6.5%, a ratio of Tier 1 capital to risk-weighted assets of 8%, a ratio of total capital to risk-weighted assets of 10%, and a leverage ratio of 5%; and must not be subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. In order to be considered adequately capitalized, an institution must have the minimum capital ratios described above. As of December 31, 2023, the Bank was “well-capitalized.” An institution that is not well-capitalized is subject to certain restrictions on brokered deposits and interest rates on deposits.
The federal banking regulators are required to take prompt corrective action if an institution fails to satisfy the requirements to qualify as adequately capitalized. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to fail to satisfy the requirements to qualify as adequately capitalized. An institution that is not at least adequately capitalized is: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan (including certain guarantees by any company controlling the institution) within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of business. Additional restrictions and appointment of a receiver or conservator, can apply, depending on the institution’s capital level. The FDIC has jurisdiction over the Bank for purposes of prompt corrective action. When the FDIC as receiver liquidates an institution, the claims of depositors and the FDIC as their successor (for deposits covered by FDIC insurance) have priority over other unsecured claims against the institution, including claims of stockholders.
To be considered “well-capitalized,” a bank holding company must have, on a consolidated basis, a total risk-based capital ratio of 10.0% or greater and a Tier 1 risk-based capital ratio of 6.0% or greater and must not be subject to an individual order, directive or agreement under which the FRB requires it to maintain a specific capital level. As of December 31, 2023, the Company was “well-capitalized.”
The federal banking agencies consider concentrations of credit risk and risks from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation is generally made as part of the institution’s regular safety and soundness examination. Under their regulations, the federal banking agencies also consider interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of a bank’s capital adequacy. The banking agencies have issued guidance on evaluating interest rate risk.
Although we continue to evaluate the impact that the capital rules have on the Company and the Bank, we anticipate that the Company and the Bank will remain well-capitalized, and will continue to meet the capital conservation buffer requirement.
Insurance of Accounts and Regulation by the FDIC
Great Southern is a member of the DIF, which is administered by the FDIC. Deposits are insured up to the applicable limits by the FDIC, backed by the full faith and credit of the United States Government. The general deposit insurance limit is $250,000 per deposit relationship.
The FDIC assesses deposit insurance premiums on all FDIC-insured institutions quarterly based on annualized rates. These premiums are assessed on an institution’s total assets minus its tangible equity. Under these rules, assessment rates for an institution with total assets of less than $10 billion are determined by weighted average CAMELS composite ratings and certain financial ratios, and range from 5.0 to 32.0 basis points, subject to certain adjustments. In an emergency, the FDIC may also impose a special assessment.
The Dodd-Frank Act establishes 1.35% as the minimum reserve ratio. The FDIC adopted a plan to meet this ratio, which was achieved on September 30, 2018, ahead of the September 30, 2020 statutory deadline. In addition to the statutory minimum ratio, the FDIC has the authority to establish a reserve ratio known as the designated reserve ratio or DRR, which may exceed the statutory minimum. The FDIC has established 2.0% as the DRR. Extraordinary growth in insured deposits during the first and second quarters of 2020 caused the reserve ratio to decline below the statutory minimum of 1.35 percent as of June 30, 2020. In September 2020, the FDIC Board of Directors adopted a Restoration Plan to restore the reserve ratio to at least 1.35 percent within eight years, absent extraordinary circumstances, as required by the Federal Deposit Insurance Act. The Restoration Plan maintained the assessment rate schedules in place at the time and required the FDIC to update its analysis and projections for the DIF balance and reserve ratio at least semiannually.
In the semiannual update for the Restoration Plan in June 2022, the FDIC projected that the reserve ratio was at risk of not reaching the statutory minimum of 1.35 percent by September 30, 2028, the statutory deadline to restore the reserve ratio. Based on this update, the FDIC Board approved an Amended Restoration Plan, and concurrently proposed an increase in initial base deposit insurance assessment rate schedules uniformly by 2 basis points, applicable to all insured depository institutions.
In October 2022, the FDIC Board finalized the increase with an effective date of January 1, 2023, applicable to the first quarterly assessment period of 2023. The revised assessment rate schedules are intended to increase the likelihood that the reserve ratio of the DIF reaches the statutory minimum level of 1.35 percent by September 30, 2028.
The FDIC is authorized to conduct examinations of and to require reporting by FDIC-insured institutions, and is the primary federal banking regulator of state banks that are not members of the Federal Reserve, such as the Bank. The FDIC examines the Bank regularly. The FDIC may prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF. The FDIC also has the authority to take enforcement actions against banks and savings associations.
Guidance on Commercial Real Estate Concentrations
The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a bank’s commercial real estate lending but to guide banks in developing risk management practices and maintaining capital levels commensurate with the level and nature of real estate concentrations. A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk: total loans for construction, land development, and other land represent 100% or more of the bank’s total capital; or total commercial real estate loans (as defined in the guidance) greater than 300% of the Bank’s total capital and an increase in the bank’s commercial real estate portfolio of 50% or more during the prior 36 months.
Federal Reserve System
Banks are authorized to borrow from the FRB “discount window,” but FRB regulations only allow this borrowing for short periods of time and generally require banks to exhaust other reasonable alternative sources of funds where practical, including FHLBank advances, before borrowing from the FRB. See “Sources of Funds” above.
The Federal Reserve created the BTFP to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. The BTFP offers loans of up to one year in length to banks and other eligible depository institutions pledging any collateral eligible for purchase by the Federal Reserve Banks in open market operations, such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities. These assets will be valued at par for collateral purposes. Under this program, advances can be requested until March 11, 2024.
Federal Home Loan Bank System
The Bank is a member of the FHLBank of Des Moines, which is one of 11 regional FHLBanks.
As a member, Great Southern is required to purchase and maintain stock in the FHLBank of Des Moines in an amount equal to the greater of 1% of its outstanding home loans or 5% of its outstanding FHLBank advances. At December 31, 2023, Great Southern had $14.7 million in FHLBank of Des Moines stock, which was in compliance with this requirement. In past years, the Bank has received dividends on its FHLBank stock. Over the past five years, such dividends have averaged 6.36% and were 8.04% for the year ended December 31, 2023.
Legislative and Regulatory Proposals
Any changes in the extensive regulatory scheme to which the Company or the Bank is and will be subject, whether by any of the federal banking agencies or Congress, or the Missouri legislature or MDF, could have a material effect on the Company or the Bank, and the Company and the Bank cannot predict what, if any, future actions may be taken by legislative or regulatory authorities or what impact such actions may have.
Federal and State Taxation
General
The following discussion contains a summary of certain federal and state income tax provisions applicable to the Company and the Bank. It is not a comprehensive description of the federal or state income tax laws that may affect the Company and the Bank. The following discussion is based upon current provisions of the Internal Revenue Code of 1986 (the “Code”) and Treasury and judicial interpretations thereof.
The Company and its subsidiaries file a consolidated federal income tax return using the accrual method of accounting, with the exception of GSB Two which files a separate return as a REIT. All corporations joining in the consolidated federal income tax return are jointly and severally liable for taxes due and payable by the consolidated group. The following discussion primarily focuses upon the taxation of the Bank, since the federal income tax law contains certain special provisions with respect to banks.
Financial institutions, such as the Bank, are subject, with certain exceptions, to the provisions of the Code generally applicable to corporations.
Bad Debt Deduction
As of December 31, 2023 and 2022, retained earnings included approximately $17.5 million for which no deferred income tax liability had been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only for tax years prior to 1988. If the Bank were to liquidate, the entire amount would have to be recaptured and would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $4.3 million at both December 31, 2023 and December 31, 2022.
The Bank is required to follow the specific charge-off method which only allows a bad debt deduction equal to actual charge-offs, net of recoveries, experienced during the fiscal year of the deduction. In a year where recoveries exceed charge-offs, the Bank would be required to include the net recoveries in taxable income.
Interest Deduction
In the case of a financial institution, such as the Bank, no deduction is allowed for the pro rata portion of its interest expense which is allocable to tax-exempt interest on obligations acquired after August 7, 1986. A limited class of tax-exempt obligations acquired after August 7, 1986 will not be subject to this complete disallowance rule. For certain tax-exempt obligations issued in 2009 and 2010, an amount of tax-exempt obligations that are not generally considered part of the “limited class of tax-exempt obligations” noted above may be treated as part of the “limited class of tax-exempt obligations” to the extent of two percent of a financial institution’s total assets. For tax-exempt obligations acquired after December 31, 1982 and before August 8, 1986 and for obligations acquired after August 7, 1986 that are not subject to the complete disallowance rule, 80% of interest incurred to purchase or carry such obligations will be deductible. No portion of the interest expense allocable to tax-exempt obligations acquired by a financial institution before January 1, 1983, which is otherwise deductible, will be disallowed. The interest expense disallowance rules cited above have not significantly impacted the Bank.
State Taxation
Missouri-based banks, such as the Bank, are subject to a franchise tax which is imposed on the bank’s taxable income at the rate of 4.48% of the taxable income (determined without regard for any net operating losses) - income-based calculation. Prior to 2020, this rate was 7.00%. Missouri-based banks are entitled to a credit against the income-based franchise tax for all other state or local taxes on banks, except taxes on real estate, unemployment taxes, bank tax, and taxes on tangible personal property owned by the Bank and held for lease or rental to others.
The Company and all subsidiaries are subject to a Missouri income tax that is imposed on the corporation’s taxable income at the rate of 4.00%. The return is filed on a consolidated basis by all members of the consolidated group, including the Bank but excluding GSB Two. As a REIT, GSB Two files a separate Missouri income tax return. Prior to 2020, the Missouri corporate income tax rate was 6.25%.
The Bank also has full-service offices in Iowa, Kansas, Minnesota, Nebraska and Arkansas, and has commercial loan production offices in Arizona, Colorado, Georgia, Illinois, Nebraska, North Carolina, Oklahoma, and Texas. As a result, the Bank and/or the Company is subject to franchise and income taxes that are imposed on the corporation’s taxable income attributable to those states. In addition, due to lending activity, the Bank and/or the Company is subject to income taxes in additional jurisdictions.
As a Maryland corporation, the Company is required to file an annual report with and pay an annual fee to the State of Maryland.
Examinations
The Company and its consolidated subsidiaries have not been audited recently by the Internal Revenue Service (IRS). As a result, federal tax years through December 31, 2019 are now closed.
The Company was previously under State of Missouri income and franchise tax examinations for its 2014 and 2015 tax years. The examinations concluded with one unresolved issue related to the exclusion of certain income in the calculation of Missouri income tax. The Missouri Department of Revenue (MoDOR) denied the Company’s administrative protest regarding the 2014 and 2015 tax years’ examinations. In June 2021, the Company filed a formal protest with the Missouri Administrative Hearing Commission (MAHC), which has special jurisdiction to hear tax matters and is similar to a trial court, to continue defending the Company’s rights and associated tax position. The Company previously filed a motion for summary decision with the MAHC and, on January 26, 2024, the MAHC granted the motion in favor of the Company, upholding its position related to the exclusion of certain income in the calculation of Missouri income tax. In February 2024, the MoDOR confirmed to the Company in writing that it would not exercise its right to appeal this decision to the Missouri State Supreme Court.
No other state examinations are in progress at this time. As a result, tax years through December 31, 2019, with few exceptions, are now closed.

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ITEM 1A. RISK FACTORS
ITEM 1A.RISK FACTORS
An investment in the common stock of the Company is speculative in nature and is subject to certain risks inherent in the business of the Company and the Bank. The material risks and uncertainties that management believes affect the Company and the Bank are described below. You should carefully consider the risks described below, as well as the other information included in this Annual Report on Form 10-K, before making an investment in the Company’s common stock. The risks described below are not the only ones we face in our business. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition or operating results could be materially harmed. In such an event, our common stock could decline in value.
References to “we,” “us,” and “our” in this “Risk Factors” section refer to the Company and its subsidiaries, including the Bank, unless otherwise specified or unless the context otherwise requires.
Risks Relating to the Company and the Bank
Risks Relating to Macroeconomic Conditions
Economic conditions have adversely affected and could continue to adversely affect our business and financial performance.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services that we offer, is highly dependent upon the business environment in the markets where we operate and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; political uncertainty, both domestic and international, and other geopolitical events; natural disasters; wars; terrorist acts; pandemics or other public health crises; or a combination of these or other factors. An economic downturn, sustained high unemployment levels, or stock market volatility may negatively impact our operating results and have a negative effect on the ability of our borrowers to make timely repayments of their loans, increasing the risk of loan defaults and losses.
Since our business is primarily concentrated in Missouri, Iowa, Kansas and Minnesota, a significant downturn in these state or local economies, particularly in the St. Louis and Springfield, Missouri areas, may adversely affect our business. We also have originated a significant dollar amount of loans in Texas from our commercial loan production office in Dallas. A significant downturn in that state’s economy may adversely affect our business.
Our lending and deposit gathering activities historically were concentrated primarily in the Springfield and southwest Missouri areas. Our success continues to depend heavily on general economic conditions in Springfield and the surrounding areas. Although we believe the economy in these areas has recently been favorable relative to other areas, we do not know whether these conditions will continue. Until the past few years, our greatest concentration of loans and deposits has traditionally been in the greater Springfield area. With a population of approximately 485,000, the greater Springfield area is the third largest metropolitan area in Missouri. At December 31, 2023, approximately $354.8 million, or 7.6%, of our loan portfolio consisted of loans to borrowers in or secured by properties in the Springfield metropolitan area.
In addition to the concentrations in the southwest Missouri area, we now have our largest concentration of loans to borrowers in or secured by properties in the St. Louis metropolitan area. At December 31, 2023, approximately $788.6 million, or 16.9%, of our loan portfolio consisted of loans for apartments and other types of commercial real estate properties in the St. Louis metropolitan area.
Also, we have a significant amount of loans to borrowers in or secured by properties in Texas. At December 31, 2023, approximately $502.0 million, or 10.8%, of our loan portfolio consisted of loans primarily for various types of commercial real estate in Texas.
With the FDIC-assisted transactions that were completed in 2009-2014, we have additional concentrations of loans in the Minneapolis metropolitan area and in Western, Eastern and Central Iowa. At December 31, 2023, approximately $401.1 million, or 8.6%, and $279.2 million, or 6.0%, of our loan portfolio consisted of loans primarily for various types of commercial real estate in Minnesota
and Iowa, respectively. In recent years, we have opened commercial loan production offices in Atlanta, Chicago and Denver, and in 2022 we opened commercial loan production offices in Phoenix and Charlotte, North Carolina. We expect loans originated through these offices to result in significant loan balances secured by properties located in Georgia, Illinois, Colorado, Arizona and North Carolina.
Adverse changes in regional and general economic conditions could reduce our growth rate, impair our ability to collect payments on loans, increase loan delinquencies, increase problem assets and foreclosures, increase claims and lawsuits, decrease demand for our products and services, and decrease the value of collateral for loans, especially real estate, thereby having a material adverse effect on our financial condition and results of operations. Real estate values can also be affected by governmental rules or policies and, as noted below, natural disasters.
Inflationary pressures and rising prices may affect our results of operations and financial condition.
Inflation has risen sharply since the end of 2021 to levels not seen in more than 40 years. In the second half of 2023, inflation measures moderated but are still higher than levels targeted by the FRB. Small to medium-sized businesses may be impacted more during periods of high inflation, as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition.
The economic impact of the COVID-19 pandemic, or similar crises, could continue to adversely affect us.
The COVID-19 pandemic adversely impacted the global and national economy and certain industries and geographies in which our customers reside and operate. Because of its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on the Company and its customers, employees and third-party service providers. The extent of this impact will depend on future developments, which are highly uncertain. Additionally, the responses of various governmental and nongovernmental authorities and consumers to the pandemic may have material long-term effects on the Company and its customers, which are difficult to quantify in the near-term or long-term.
We could be subject to a number of risks as the result of the COVID-19 pandemic, or other similar crises, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. These risks include, but are not limited to, changes in demand for our products and services; increased loan losses or other impairments in our loan portfolios and increases in our allowance for loan losses; a decline in collateral for our loans, especially real estate; unanticipated unavailability of employees; increased cyber security risks to the extent employees work remotely; a prolonged weakness in economic conditions; and increased costs as we and our regulators, customers and third-party service providers adapt to evolving pandemic conditions.
Severe weather and other natural disasters, acts of war or terrorism, new public health issues or other adverse external events could harm our business.
Severe weather and other natural disasters, acts of war or terrorism, new public health issues or other adverse external events could have a significant impact on our ability to conduct business. Such events could harm our operations through interference with communications, including the interruption or loss of our computer systems, which could prevent or impede us from gathering deposits, originating loans and processing and controlling the flow of business, as well as through the destruction of our facilities and our operational, financial and management information systems. There is no assurance that our business continuity and disaster recovery program can adequately mitigate these risks. Such events could also affect the stability of our deposit base, cause significant property damage, adversely affect our employees, adversely impact the values of collateral securing our loans and/or interfere with our borrowers’ abilities to repay their debt obligations to us.
Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact our business.
The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. In recent years, governments across the world have entered into international agreements relating to climate change. The U.S. Congress, state legislatures and federal and state regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. Such initiatives are expected to continue, including potentially increasing supervisory expectations with respect to banks’ risk management practices and credit portfolio concentrations based on climate-related factors, as well as encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. These measures may result in the imposition of taxes and fees and the implementation of operational changes, each of which may require us to incur significant compliance, operating and other costs.
Risks Relating to Lending Activities
Our loan portfolio possesses increased risk due to our relatively high concentration of commercial and residential construction, commercial real estate, other residential (multi-family) and other commercial loans.
Our commercial and other residential (multi-family) construction, commercial real estate, other residential (multi-family) and other commercial loans accounted for approximately 77.1% of our total loan portfolio as of December 31, 2023. Generally, we consider these types of loans to involve a higher degree of risk compared to first mortgage loans on one- to four-family, owner-occupied residential properties. At December 31, 2023, including completed projects and those under construction, we had $1.50 billion of loans secured by apartments, $319.2 million of loans secured by retail-related projects, $291.8 million of loans secured by warehouse facilities, $287.3 million of loans secured by healthcare facilities, $254.6 million of loans secured by motels/hotels and $215.0 million of loans secured by office facilities, which are particularly sensitive to certain risks, including the following:
● large loan balances owed by a single borrower;
● payments that are dependent on the successful operation of the project; and
● loans that are more directly impacted by adverse conditions in the real estate market or the economy generally.
The risks associated with construction lending include the borrower’s inability to complete the construction process on time and within budget, the sale of the project within projected absorption periods, the economic risks associated with real estate collateral, and the potential of a rising interest rate environment. This activity may involve financing land purchases, infrastructure development (e.g., roads, utilities, etc.), as well as construction of residences or other residential (multi-family) dwellings for subsequent sale by the developer/builder. Because the sale of developed properties is critical to the success of the developer’s business, loan repayment may be especially subject to the volatility of real estate market sales activity. Management has established underwriting and monitoring criteria to help minimize the inherent risks of commercial real estate construction lending. However, there is no guarantee that these criteria will reduce losses on this type of lending.
Commercial real estate and other residential (multi-family) lending typically involves higher loan principal amounts and the repayment of these loans generally is dependent, in large part, on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Other commercial loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business or investment. These loans may therefore be more adversely affected by conditions in the real estate markets or in the economy generally. For example, if the cash flow from the borrower’s project is reduced due to leases not being obtained or renewed, the borrower’s ability to repay the loan may be impaired. In addition, many commercial and other residential (multi-family) loans are not fully amortized over the loan period, but have balloon payments due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or complete a timely sale of the underlying property.
We plan to continue to originate commercial real estate and construction loans based on economic and market conditions. From 2008 to 2013, there was not significant demand for these types of loans due to the economic downturn. In more recent years, demand for these types of loans has increased and we expect to continue to originate these types of loans. Because of the increased risks related to
these types of loans, we may determine it necessary to increase the level of our provision for credit losses. Increased provisions for credit losses would adversely impact our operating results. See “Item 1. Business-The Company-Lending Activities-Commercial Real Estate and Construction Lending,” “-Other Commercial Lending,” “-Residential Real Estate Lending” and “-Allowance for Losses on Loans and Foreclosed Assets” and “Item 7. Management’s Discussion of Financial Condition and Results of Operations - Non-performing Assets” in this Report.
A slowdown in the residential or commercial real estate markets may adversely affect our earnings and liquidity position.
The overall credit quality of our construction loan portfolio is impacted by trends in real estate values. We continually monitor changes in key regional and national economic factors because changes in these factors can impact our residential and commercial construction loan portfolio and the ability of our borrowers to repay their loans. Across the United States for several years, the residential real estate market experienced significant adverse trends, including accelerated price depreciation and rising delinquency and default rates, and weaknesses arose in the commercial real estate market as well. The conditions in the residential real estate market led to significant increases in loan delinquencies and credit losses as well as higher provisioning for credit losses, which in turn had a negative effect on earnings for many banks across the country. Likewise, we also experienced delinquencies in our construction loan portfolio from 2009 through 2012, almost entirely related to loans originated prior to 2009. Many of these older construction projects were “build to sell” types of projects where repayment of the loans was reliant on the borrower completing the project and then selling it. Conditions of both the residential and the commercial real estate markets could negatively impact real estate values and the ability of our borrowers to liquidate properties. A lack of liquidity in the real estate market or tightening of credit standards within the banking industry could diminish sales, further reducing our borrowers’ cash flows and weakening their ability to repay their debt obligations to us, which could lead to material adverse impacts on our financial condition and results of operations.
Our allowance for credit losses may prove to be insufficient to absorb potential losses in our loan portfolio.
Lending money is a substantial part of our business. However, every loan we make carries a certain risk of non-payment. This risk is affected by, among other things:
● cash flows of the borrower and/or the project being financed;
● in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
● the credit history of a particular borrower;
● changes in economic and industry conditions; and
● the duration of the loan.
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. 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. 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 modification 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.
In addition, bank regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize further loan charge-offs. Any increase in our allowance for credit losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.
Risks Relating to Market Interest Rates
We may be adversely affected by interest rate changes.
Our earnings are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and investment securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, in particular, the FRB. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but these changes could also affect our ability to originate loans and obtain deposits, the fair values of our financial assets and liabilities and the average duration of our loan and mortgage-backed securities portfolios. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. In addition, a substantial portion of our loans (approximately 61% of our total loan portfolio as of December 31, 2023) have adjustable rates of interest. While the higher payment amounts we would receive on these loans in a rising interest rate environment may increase our interest income, some borrowers may be less able to afford the higher payment amounts, which may result in a higher rate of default. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
We generally seek to maintain a reasonably neutral position in terms of the volume of assets and liabilities that mature or re-price during any period. As such, we have adopted asset and liability management strategies to attempt to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of fixed-rate and variable-rate loans, investments and funding sources, including interest rate derivatives, so that we may reasonably maintain the Company’s net interest income and net interest margin. However, interest rate fluctuations, the level and shape of the interest rate yield curve, maintaining excess liquidity levels, loan prepayments, loan production and deposit flows are constantly changing and influence the ability to maintain a neutral position. Accordingly, we may not be successful in maintaining a neutral position and, as a result, our net interest margin may be adversely impacted. For additional information, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”
The fair value of our investment securities can fluctuate due to market conditions outside of our control.
Factors beyond our control can significantly influence the fair value of securities in our investment securities portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or with respect to the underlying securities, changes in market rates of interest and instability in the credit markets. Any of these mentioned factors could cause an impairment of these assets, which would lead to accounting charges which could have a material negative effect on our financial condition and/or results of operations.
Risks Relating to Liquidity
Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.
Liquidity is essential to our business, as we must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets could have a substantial adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could negatively affect our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole.
Our operations may depend upon our continued ability to access brokered deposits, Federal Home Loan Bank advances and Federal Reserve Bank borrowings.
Due to the high level of competition for deposits in our markets, we have from time to time utilized a sizable amount of certificates of deposit obtained through deposit brokers and advances from the FHLBank to help fund our asset base. Brokered deposits are marketed through national brokerage firms that solicit funds from their customers for deposit in banks, including our bank. Brokered deposits and FHLBank advances may generally be more sensitive to changes in interest rates and volatility in the capital markets than retail deposits attracted through our branch network, and our reliance on these sources of funds increases the sensitivity of our portfolio to these external factors. Our brokered deposits and term FHLBank advances totaled $661.5 million and $-0- at December 31, 2023, compared with $411.5 million and $-0- at December 31, 2022. We had overnight borrowings from the FHLBank of $251.0 million and $88.5 million at December 31, 2023 and 2022, respectively. We expect to continue to utilize FHLBank advances and overnight borrowings and brokered deposits from time to time as a supplemental funding source.
Additionally, we have approved collateralized borrowing lines with the FRBSTL. In January 2024, the Bank borrowed $180.0 million under the Federal Reserve Bank’s BTFP. The borrowing, which matures in January 2025 and has a fixed interest rate of 4.83%, may be repaid in full or in part without penalty prior to its stated maturity date. The line is secured primarily by the Bank’s held-to-maturity investment securities, with assets pledged totaling approximately $191 million.
Bank regulators can restrict our access to these sources of funds in certain circumstances. For example, if the Bank’s regulatory capital ratios declined below the “well-capitalized” status, banking regulators would require the Bank to obtain their approval prior to obtaining or renewing brokered deposits. The regulators might not approve our acceptance of brokered deposits in amounts that we desire or at all. In addition, the availability of brokered deposits and the rates paid on these brokered deposits may be volatile as the balance of the supply of and the demand for brokered deposits changes. Market credit and liquidity concerns may also impact the availability and cost of brokered deposits. Similarly, FHLBank advances are only available to borrowers that meet certain conditions. If Great Southern were to cease meeting these conditions, our access to FHLBank advances could be significantly reduced or eliminated.
Certain Federal Home Loan Banks, including the Federal Home Loan Bank of Des Moines, have experienced lower earnings from time to time and paid out lower dividends to their members. Future problems at the Federal Home Loan Banks may impact the collateral necessary to secure borrowings and limit the borrowings extended to its member banks, as well as require additional capital contributions by its member banks. If this occurs, our short-term liquidity needs could be negatively impacted. Should Great Southern be restricted from using FHLBank advances due to weakness in the system or with the FHLBank of Des Moines, Great Southern may be forced to find alternative funding sources. These alternative funding sources may include the utilization of existing lines of credit with third party banks or the Federal Reserve Bank along with seeking other lines of credit, borrowing under repurchase agreement lines, increasing deposit rates to attract additional funds, accessing additional brokered deposits, or selling loans or investment securities in order to maintain adequate levels of liquidity. At December 31, 2023, the Bank owned $14.7 million of stock in the FHLBank of Des Moines, which declared and paid an annualized dividend approximating 8.50% during the fourth quarter of 2023. The FHLBank of Des Moines may eliminate or reduce dividend payments at any time in the future in order for it to maintain or restore its retained earnings, which would negatively affect our results of operations.
Risks Relating to Future Growth
Our strategy of pursuing acquisitions exposes us to financial, execution and operational risks that could adversely affect us.
We have in the past pursued, and may again in the future pursue, a strategy of supplementing internal growth by acquiring other financial institutions or branches that we believe will help us fulfill our strategic objectives and enhance our earnings. There are risks associated with this strategy, however, including the following:
● We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks or businesses we acquire. If these issues or liabilities exceed our estimates, our earnings and financial condition may be adversely affected;
● Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices our management considered acceptable and expect that we will experience this condition in the future in one or more markets;
● The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity in order to make the transaction economically feasible. This integration process is complicated and time consuming and can be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame or to the extent anticipated, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful;
● To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing stockholders; and
● We may not be able to continue to sustain our past rate of growth or to grow at all in the future. We completed two acquisitions in 2009, one acquisition in 2011, one acquisition in 2012, one acquisition in 2014 and opened additional banking offices and commercial loan production offices in recent years that enhanced our rate of growth. Also in 2014, we acquired certain loans, deposits and branches from Boulevard Bank, and in 2016, we completed an acquisition of certain loans, deposits and branches in St. Louis from Fifth Third Bank.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed. If available, the cost of that capital may also be very high.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support the growth of our business or to finance acquisitions, if any, or we may elect to raise additional capital for other reasons. Should we be required by regulatory authorities or otherwise elect to raise additional capital, we may seek to do so through the issuance of, among other things, our common stock or securities convertible into our common stock, which could dilute an existing stockholder’s ownership interest in the Company.
Our ability to raise additional capital, if needed or desired, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances of our ability to raise additional capital if needed or desired, or on terms that will be acceptable to us. If we cannot raise additional capital when needed or desired, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our financial condition and liquidity could be materially adversely affected.
Risks Relating to Competition
Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
We face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. To date, we have grown our business successfully by focusing on our geographic market, expanding into complementary markets and emphasizing the high level of service and responsiveness desired by our customers. We compete for loans, deposits and other financial services with other commercial banks, thrifts, credit unions, consumer finance companies, insurance companies and brokerage firms. Many of our competitors offer products and services that we do not offer, and many have substantially greater resources, name recognition and market presence that benefit them in attracting business. In addition, larger competitors (including certain nationwide banks that have a significant presence in our market areas) may be able to price loans and deposits more aggressively than we do, and smaller and newer competitors may be more aggressive in terms of pricing loan and deposit products than us in order to obtain a larger share of the market. As we have grown, we have become dependent from time to time on outside funding sources, including funds borrowed from the FHLBank and brokered deposits, where we face nationwide competition. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on insured depositary institutions and their holding companies. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services.
We also experience competition from a variety of institutions outside of our market areas. Some of these institutions conduct business primarily over the Internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer.
Risks Relating to Regulation
Our business may be adversely affected by the highly regulated environment in which we operate, including the various capital adequacy guidelines we are required to meet.
We are subject to extensive federal and state legislation, regulation, examination and supervision. Recently enacted, proposed and future legislation and regulations have had, will continue to have, or may have an adverse effect on our business and operations.
Our success depends on our continued ability to maintain compliance with the various regulations to which we are subject. Some of these regulations may increase our costs and thus place other financial institutions in stronger, more favorable competitive positions. We cannot predict what restrictions may be imposed upon us by future legislation. See “Item 1.-The Company -Government Supervision and Regulation” in this Report.
The Company and the Bank are required to meet certain regulatory capital adequacy guidelines and other regulatory requirements imposed by the FRB, the FDIC and the Missouri Division of Finance. If the Company or the Bank fails to meet these minimum capital guidelines and other regulatory requirements, our financial condition and results of operations could be materially and adversely affected and could compromise the status of the Company as a financial holding company. See “Item 1.-The Company -Government Supervision and Regulation” in this Report.
We currently exceed thresholds defined in interagency guidance on commercial real estate concentrations, and as such, we may incur additional expense or slow the growth of certain categories of commercial real estate lending.
The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending (see “Item 1. Business-- Government Supervision and Regulation-Guidance on Commercial Real Estate Concentrations”). For purposes of this guidance, “commercial real estate” includes, among other types, other residential (multi-family) loans and non-owner occupied nonresidential loans, two categories which have been a source of loan growth for the Company. A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk: total loans for construction land development and other land representing 100% or more of the bank’s tier 1 regulatory capital plus the allowance for loan losses includable in total regulatory capital; or total commercial real estate loans (as defined in the guidance) that exceed 300% of the bank’s tier 1 regulatory capital plus the allowance for loan losses includable in total regulatory capital and the bank’s commercial real estate portfolio has increased by 50% or more during the prior 36 months. Our total commercial real estate loans exceeded the 300% threshold at December 31, 2023.
We may see our non-owner occupied commercial real estate lending grow as a percentage of total regulatory capital, or we may slow the growth of this type of lending activity. Should we continue to grow this category of our loan portfolio, we may incur additional expense to meet increasing supervisory expectations related to this lending activity. If we slow the growth of commercial real estate loans generally, or particular concentrations of borrowers or categories of properties within that definition, we may be negatively impacted in terms of our asset growth, net interest margin and earnings, leverage, or other targets.
Risks Relating to Technology and Cybersecurity and Other Operational Matters
Our exposure to operational risks may adversely affect us.
Similar to other financial institutions, we are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, the risk that sensitive customer or Company data is compromised, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors. If any of these risks occur, it could result in material adverse consequences for us.
We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. Our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our clients.
The Company plans to convert its core operating systems and may encounter significant adverse developments.
The Company plans to replace its core operating systems, including those for loans, deposits, financials and other ancillary systems (collectively referred to as core system). The core system is used to track customer relationships and accounts and report financial information for the Company. The core system is integrated with various other applications that are used to service customer requests by Bank personnel or directly by customers (such as online banking and mobile applications). Changing the core system will subject the Company to operational risks during and after the conversion, including disruptions to its technology systems, which may adversely impact our customers. The Company has plans, policies and procedures designed to prevent or limit the risks of a failure during or after the conversion of our core system. However, there can be no assurance that any such adverse developments will not occur or, if they do occur, that they will be timely and adequately remediated. The ultimate impact of any adverse development could damage the Company’s reputation, result in a loss of customer business, subject the Company to regulatory scrutiny, or expose it to civil litigation and possibly financial liability, any of which could have a material effect on the Company’s business, financial condition, and results of operations.
We are also subject to security-related risks in connection with our use of technology, and our security measures may not be sufficient to mitigate the risk of a cyber-attack or to protect us from systems failures or interruptions.
Communications and information systems are essential to the conduct of our business. We use such systems to manage our client relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our clients’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our clients or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.
As a service to our clients, we currently offer an Internet PC banking product and a smartphone application for iPhone and Android users. Use of these services involves the transmission of confidential information over public networks. We cannot be sure that advances in computer capabilities, new discoveries in the field of cryptography or other developments will not result in a compromise or breach in the commercially available encryption and authentication technology that we use to protect our clients’ transaction data. If we were to experience such a breach or compromise, we could suffer losses and reputational damage and our results of operations could be materially adversely affected.
While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of client information through various other vendors and their personnel.
The occurrence of any systems failure or interruption could damage our reputation and result in a loss of clients and business, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our business, financial condition and results of operations.
Our controls and procedures may be ineffective.
We regularly review and update our internal controls, disclosure controls and procedures and corporate governance policies and procedures. As a result, we may incur increased costs to maintain and improve our controls and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls or procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations or financial condition.
Risks Relating to Accounting Matters
Our accounting policies and methods impact how we report our financial condition and results of operations. Application of these policies and methods may require management to make estimates about matters that are uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in our reporting materially different amounts than would have been reported under a different alternative. Our significant accounting policies are described in Note 1 of the accompanying audited financial statements included in Item 8 of this Report. These accounting policies are critical to presenting our financial condition and results of operations. They may require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions.
Changes in accounting standards could materially impact our consolidated financial statements.
The accounting standard setters, including the Financial Accounting Standards Board, Securities and Exchange Commission and other regulatory bodies, from time to time may change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings.
Risks Relating to our Common Stock
The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell our common stock when you want or at prices you find attractive.
We cannot predict how our common stock will trade in the future. The market value of our common stock will likely continue to fluctuate in response to a number of factors including the following, most of which are beyond our control, as well as the other factors described in this “Risk Factors” section:
● actual or anticipated quarterly fluctuations in our operating and financial results;
● developments related to investigations, proceedings or litigation that involve us;
● changes in financial estimates and recommendations by financial analysts;
● dispositions, acquisitions and financings;
● actions of our current stockholders, including sales of common stock by existing stockholders and our directors and executive officers;
● fluctuations in the stock price and operating results of our competitors;
● regulatory developments; and
● other developments related to the financial services industry.
The market value of our common stock may also be affected by conditions affecting the financial markets in general, including price and trading fluctuations. These conditions may result in (i) volatility in the level of, and fluctuations in, the market prices of stocks generally and, in turn, our common stock and (ii) sales of substantial amounts of our common stock in the market, in each case that could be unrelated or disproportionate to changes in our operating performance. These broad market fluctuations may adversely affect the market value of our common stock. Our common stock also has a low average daily trading volume relative to many other stocks, which may limit an investor’s ability to quickly accumulate or divest themselves of large blocks of our stock. This can lead to significant price swings even when a relatively small number of shares are being traded.
There may be future sales of additional shares of common stock or other dilution of our equity, which may adversely affect the market price of our common stock.
We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.
Our board of directors is authorized to cause us to issue additional shares of common stock, as well as classes or series of preferred stock, generally without any action on the part of the stockholders. In addition, the board has the power, generally without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over the common stock with respect to dividends or upon the liquidation, dissolution or winding-up of our business and other terms. If we issue preferred stock in the future that has a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market value of the common stock could be adversely affected.
Regulatory and contractual restrictions may limit or prevent us from paying dividends on and repurchasing our common stock.
Great Southern Bancorp, Inc. is an entity separate and distinct from its principal subsidiary, Great Southern Bank, and derives substantially all of its revenue in the form of dividends from that subsidiary. Accordingly, Great Southern Bancorp, Inc. is and will be dependent upon dividends from the Bank to pay the principal of and interest on its indebtedness, to satisfy its other cash needs and to pay dividends on its common stock. The Bank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event the Bank is unable to pay dividends to Great Southern Bancorp, Inc., Great Southern Bancorp, Inc. may not be able to pay dividends on its common stock. Also, Great Southern Bancorp, Inc.’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.
As described below in the next risk factor, the terms of our outstanding junior subordinated debt securities prohibit us from paying dividends on or repurchasing our common stock at any time when we have elected to defer the payment of interest on such debt securities or certain events of default under the terms of those debt securities have occurred and are continuing. These restrictions could have a negative effect on the value of our common stock. Moreover, holders of our common stock are entitled to receive dividends only when, as and if declared by our board of directors. Although we have historically paid cash dividends on our common stock, we are not required to do so and our board of directors could reduce, suspend or eliminate our common stock cash dividend in the future.
If we defer payments of interest on our outstanding junior subordinated debt securities or if certain defaults relating to those debt securities occur, we will be prohibited from declaring or paying dividends or distributions on, and from making liquidation payments with respect to, our common stock.
As of December 31, 2023, we had outstanding $25.8 million aggregate principal amount of junior subordinated debt securities issued in connection with the sale of trust preferred securities by one of our subsidiaries that is a statutory business trust. We have also guaranteed those trust preferred securities. The indenture governing the junior subordinated debt securities, together with the related guarantee, prohibits us, subject to limited exceptions, from declaring or paying any dividends or distributions on, or redeeming, repurchasing, acquiring or making any liquidation payments with respect to, any of our capital stock (including any preferred stock and our common stock) at any time when (i) there shall have occurred and be continuing an event of default under the indenture or any event, act or condition that with notice or lapse of time or both would constitute an event of default under the indenture; or (ii) we are in default with respect to payment of any obligations under the related guarantee; or (iii) we have deferred payment of interest on the junior subordinated debt securities. In that regard, we are entitled, at our option but subject to certain conditions, to defer payments of interest on the junior subordinated debt securities from time to time for up to five years.
Events of default under the indenture generally consist of our failure to pay interest on the junior subordinated debt securities under certain circumstances, our failure to pay any principal of or premium on the junior subordinated debt securities when due, our failure to comply with certain covenants under the indenture, and certain events of bankruptcy, insolvency or liquidation relating to us or the Bank.
As a result of these provisions, if we were to elect to defer payments of interest on the junior subordinated debt securities, or if any of the other events described in clause (i) or (ii) of the first paragraph of this risk factor were to occur, we would be prohibited from declaring or paying any dividends on our stock, from redeeming, repurchasing or otherwise acquiring any of our stock, and from making any payments to holders of our stock in the event of our liquidation, which would likely have a material adverse effect on the market value of our common stock. Moreover, without notice to or consent from our stockholders, we may issue additional series of junior subordinated debt securities in the future with terms similar to those of our existing junior subordinated debt securities or enter into other financing agreements that limit our ability to purchase or to pay dividends or distributions on our capital stock, including our common stock.
The voting limitation provision in our charter could limit your voting rights as a holder of our common stock.
Our charter provides that any person or group who acquires beneficial ownership of our common stock in excess of 10.0% of the outstanding shares may not vote the excess shares. Accordingly, if you acquire beneficial ownership of more than 10.0% of the outstanding shares of our common stock, your voting rights with respect to the common stock will not be commensurate with your economic interest in the Company.
Anti-takeover provisions could adversely impact our stockholders.
Provisions in our charter and bylaws, the corporate law of the state of Maryland and federal regulations could delay or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the market price of any class of our equity securities, including our common stock. These provisions include: a prohibition on voting shares of common stock beneficially owned in excess of 10% of total shares outstanding, supermajority voting requirements for certain business combinations with any person who beneficially owns 10% or more of our outstanding common stock; the election of directors to staggered terms of three years; advance notice requirements for nominations for election to our board of directors and for proposing matters that stockholders may act on at stockholder meetings, a requirement that only directors may fill a vacancy in our board of directors, and supermajority voting requirements to remove any of our directors. Our charter also authorizes our board of directors to issue preferred stock, and preferred stock could be issued as a defensive measure in response to a takeover proposal. In addition, because we are a bank holding company, purchasers of 10% or more of our common stock may be required to obtain approvals under the Change in Bank Control Act of 1978, as amended, or the Bank Holding Company Act of 1956, as amended (and in certain cases such approvals may be required at a lesser percentage of ownership). Specifically, under regulations adopted by the Federal Reserve Board, (a) any other bank holding company may be required to obtain the approval of the Federal Reserve Board to acquire or retain 5% or more of our common stock and (b) any person other than a bank holding company may be required to obtain the approval of the Federal Reserve Board to acquire or retain 10% or more of our common stock.
These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions also could discourage proxy contests and make it more difficult for holders of our common stock to elect directors other than the candidates nominated by our board of directors.
Three members of the Turner family may exert substantial influence over the Company through their board and management positions and their ownership of the Company’s stock.
The Company’s Chairman of the Board, William V. Turner, and the Company’s Director, President and Chief Executive Officer, Joseph W. Turner, are father and son, respectively. Julie Turner Brown, a director of the Company, is the sister of Joseph Turner and the daughter of William Turner. These three Turner family members hold three of the Company’s nine Board positions. As of December 31, 2023, they also collectively beneficially owned approximately 2,108,835 shares of the Company’s common stock (excluding 85,876 shares underlying stock options exercisable as of or within 60 days after that date), representing approximately 17.9% of total shares outstanding, though they are subject to the voting limitation provision in our charter which precludes any person or group with beneficial ownership in excess of 10% of total shares outstanding from voting shares in excess of that threshold. Through their board and management positions and their ownership of the Company’s stock, these three members of the Turner family may exert substantial influence over the direction of the Company and the outcome of Board and stockholder votes.
In addition to the Turner family members, we are aware of other beneficial owners of more than five percent of the outstanding shares of our common stock. One of these beneficial owners is also a director of the Company.
As of December 31, 2023, one of the Company’s directors, Earl A. Steinert, beneficially owned 939,596 shares of our common stock (excluding 7,000 shares underlying stock options exercisable as of or within 60 days after that date), representing approximately 8.0% of total shares outstanding. The shares that can be voted by the Turner family members (1,180,443 shares as of December 31, 2023, per the ten percent voting limitation in our charter) and the shares beneficially owned by Mr. Steinert (939,596) total 2,120,039, representing approximately 18.0% of total shares outstanding. While they have no agreement to do so, to the extent they vote in the same manner, these stockholders may be able to exercise influence over the management and business affairs of our Company. For example, using their collective voting power, these stockholders may be able to affect the outcome of director elections or block significant transactions, such as a merger or acquisition, or any other matter that might otherwise be favored by other stockholders.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2.PROPERTIES.
The Company’s corporate offices and operations center are located in Springfield, Missouri. At December 31, 2023, the Company operated 90 retail banking centers and over 200 automated teller machines (“ATMs”) in Missouri, Iowa, Minnesota, Kansas, Nebraska and Arkansas. Of the 91 banking centers, the Company owns 87 of its locations and four were leased for various terms. The majority of our banking center locations are in southwest and central Missouri, including the Springfield, Missouri metropolitan area, with additional concentrations in the Sioux City, Iowa; Des Moines, Iowa; Quad Cities, Iowa; Minneapolis; St. Louis and Kansas City, Missouri metropolitan areas. The ATMs are located at various banking centers and primarily convenience stores and retail centers located throughout southwest and central Missouri. At December 31, 2023, the Company also operated eight commercial loan production offices and one mortgage loan production office. The Company owns one of its loan production office locations and eight locations are leased. All buildings that are owned are owned free of encumbrances or mortgages. In the opinion of management, the Company’s facilities are adequate and suitable for the Company’s needs. The aggregate net book value of the Company’s premises and equipment was $138.6 million and $141.1 million at December 31, 2023 and 2022, respectively. See also Note 6 of the accompanying audited financial statements, which are included in Item 8 of this Report.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.LEGAL PROCEEDINGS.
In the normal course of business, the Company and its subsidiaries are subject to pending and threatened legal actions, some of which seek substantial relief or damages. While the ultimate outcome of such legal proceedings cannot be predicted with certainty, after reviewing pending and threatened litigation with counsel, management currently believes that the outcome of such litigation will not have a material adverse effect on the Company’s business, financial condition or results of operations.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 4A.INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Pursuant to General Instruction G(3) of Form 10-K and the instruction to Item 401 of Regulation S-K, the following information is furnished in lieu of being included in the Registrant’s definitive proxy statement.
The following information as to the business experience during the past five years is supplied with respect to executive officers of the Company and its subsidiaries who are not directors of the Company. There are no arrangements or understandings between the persons named and any other person pursuant to which such officers were selected. The executive officers are elected annually and serve at the discretion of the respective Boards of Directors of the Company and its subsidiaries. Unless specifically indicated, each individual has held his current position for at least five years.
Kevin L Baker. Mr. Baker, age 56, is Vice President and Chief Credit Officer of the Bank. He joined the Bank in 2005 and is responsible for the overall credit approval process, the commercial and consumer loan collection process and the loan documentation and servicing processes. Prior to joining the Bank, Mr. Baker was a lending officer at a commercial bank.
John M. Bugh. Mr. Bugh, age 56, is Vice President and Chief Lending Officer of the Bank. He joined the Bank in 2011 and is in charge of all loan production for the Bank, including commercial, residential and consumer loans. Prior to joining the Bank, Mr. Bugh was a lending officer at other commercial banks and was an examiner for the FDIC.
Rex A. Copeland. Mr. Copeland, age 59, is Treasurer of the Company and Senior Vice President and Chief Financial Officer of the Bank. He joined the Bank in 2000 and is responsible for the financial functions of the Company, including the internal and external financial reporting of the Company and its subsidiaries. Mr. Copeland is a Certified Public Accountant. Prior to joining the Bank, Mr. Copeland served other financial services companies in the areas of corporate accounting, internal audit and independent public accounting.
Mark A. Maples. Mr. Maples, age 60, is Assistant Secretary of the Company, Vice President and Chief Operations Officer of the Bank, Bank Secrecy Act Officer. He joined the Bank in 2005 and is responsible for all operations functions of the Bank. Prior to assuming his current responsibilities in 2021, Mr. Maples most recently served as the Managing Director of BSA and Loss Prevention of the Bank since 2006. Prior to joining the Bank, Mr. Maples, who has been in the banking industry since 1982, held leadership roles at other commercial financial institutions with experience in retail, data/item processing, compliance/risk management and deposit operations.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
The Company’s common stock is listed on The NASDAQ Global Select Market under the symbol “GSBC.”
As of December 31, 2023, there were 11,804,430 total shares of common stock outstanding and approximately 2,000 stockholders of record.
The Company’s ability to pay dividends is substantially dependent on the dividend payments it receives from the Bank. For a description of the regulatory restrictions on the ability of the Bank to pay dividends to the Company, and the ability of the Company to pay dividends to its stockholders, see “Item 1. Business - Government Supervision and Regulation - Dividends.”
Stock Repurchases
On January 19, 2022, the Company’s Board of Directors authorized management to repurchase up to 1,000,000 shares of the Company’s outstanding common stock, under a program of open market purchases or privately negotiated transactions. The Company completed this repurchase program in the second quarter of 2023.
On December 21, 2022, the Company’s Board of Directors authorized management to repurchase up to 1,000,000 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 in April 2023, upon completion of the previously authorized repurchase program.
From time to time, the Company may utilize a pre-arranged trading plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934 to repurchase its shares under its repurchase programs.
As indicated below, the Company repurchased the following shares of its common stock during the three months ended December 31, 2023.
Total Number
Maximum
of Shares
Number of
Total Number
Average
Purchased as
Shares that May
of Shares
Price
Part of Publicly
Yet Be Purchased
Purchased
Per Share
Announced Program
Under the Program (1)
October 1, 2023 - October 31, 2023
69,400
$
48.308
69,400
731,812
November 1, 2023 - November 30, 2023
4,100
49.979
4,100
727,712
December 1, 2023 - December 31, 2023
-
-
-
727,712
73,500
48.402
73,500
(1) Amount represents the number of shares available to be repurchased under the then-current program as of the last calendar day of the month shown.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.RESERVED

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following sets forth selected consolidated financial information and other financial data of the Company. The summary statement of financial condition information and statement of income information are derived from our consolidated financial statements, which have been audited by FORVIS, LLP. See Item 8. “Financial Statements and Supplementary Information.” Results for past periods are not necessarily indicative of results that may be expected for any future period.
December 31,
(Dollars In Thousands)
Summary Statement of Financial Condition Information:
Assets
$
5,812,402
$
5,680,702
$
5,449,944
$
5,526,420
$
5,015,072
Loans receivable, net
4,595,469
4,511,647
4,016,235
4,314,584
4,163,224
Allowance for credit losses on loans
64,670
63,480
60,754
55,743
40,294
Available-for-sale securities
478,207
490,592
501,032
414,933
374,175
Held-to-maturity securities
195,023
202,495
-
-
-
Other real estate and repossessions, net
2,087
1,877
5,525
Deposits
4,721,708
4,684,910
4,552,101
4,516,903
3,960,106
Total borrowings and other interest- bearing liabilities
423,806
366,481
238,713
339,863
412,374
Stockholders’ equity (retained earnings substantially restricted)
571,829
533,087
616,752
629,741
603,066
Common stockholders’ equity
571,829
533,087
616,752
629,741
603,066
Average loans receivable
4,631,856
4,386,042
4,274,176
4,399,259
4,155,780
Average total assets
5,719,196
5,519,790
5,502,356
5,323,426
4,855,007
Average deposits
4,754,310
4,607,363
4,539,740
4,330,271
3,889,910
Average stockholders’ equity
550,920
565,173
627,516
622,437
571,637
Number of deposit accounts
230,697
232,688
229,942
229,470
228,247
Number of full-service offices
For the Year Ended December 31,
(In Thousands)
Summary Statement of Income Information:
Interest income:
Loans
$
271,952
$
205,751
$
186,269
$
204,964
$
223,047
Investment securities and other
24,883
21,226
12,404
12,739
11,947
296,835
226,977
198,673
217,703
234,994
Interest expense:
Deposits
88,757
20,676
13,102
32,431
45,570
Securities sold under reverse repurchase agreements
1,205
Short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities
7,500
1,066
-
3,616
Subordinated debentures issued to capital trust
1,736
1,019
Subordinated notes
4,422
4,422
7,165
6,831
4,378
103,620
27,363
20,752
40,565
54,602
Net interest income
193,215
199,614
177,921
177,138
180,392
Provision (credit) for credit losses on loans
2,250
3,000
(6,700)
15,871
6,150
Provision (credit) for unfunded commitments
(5,329)
3,187
-
-
Net interest income after provision (credit) for credit losses and provision (credit) for unfunded commitments
196,294
193,427
183,682
161,267
174,242
Non-interest income:
Commissions
1,153
1,208
1,263
Overdraft and insufficient funds fees
7,617
7,872
6,686
6,481
8,249
Point-of-sale and ATM fee income and service charges
14,346
15,705
15,029
12,203
12,649
Net gain on loan sales
2,354
2,584
9,463
8,089
2,607
Net realized gain (loss) on sales of available-for-sale securities
-
(130)
-
(62)
Late charges and fees on loans
1,182
1,434
1,419
1,432
Gain (loss) on derivative interest rate products
(337)
(264)
(104)
Other income
4,154
5,399
4,130
6,152
5,297
30,073
34,141
38,317
35,050
30,957
Non-interest expense:
Salaries and employee benefits
78,521
75,300
70,290
70,810
63,224
Net occupancy and equipment expense
30,834
28,471
29,163
27,582
26,217
Postage
3,590
3,379
3,164
3,069
3,198
Insurance
4,542
3,197
3,061
2,405
2,015
Advertising
3,396
3,261
3,072
2,631
2,808
Office supplies and printing
1,057
1,016
1,077
Telephone
2,730
3,170
3,458
3,794
3,580
Legal, audit and other professional fees
7,086
6,330
6,555
2,378
2,624
Expense on other real estate and repossessions
2,023
2,184
Acquired deposit intangible asset amortization
1,154
1,190
Other operating expenses
8,670
8,264
6,534
6,363
7,021
141,023
133,366
127,635
123,225
115,138
Income before income taxes
85,344
94,202
94,364
73,092
90,061
Provision for income taxes
17,544
18,254
19,737
13,779
16,449
Net income
$
67,800
$
75,948
$
74,627
$
59,313
$
73,612
At or For the Year Ended December 31,
(Number of Shares In Thousands)
Performance Data and Ratios:
Per Common Share Data:
Basic earnings per common share
$
5.65
$
6.07
$
5.50
$
4.22
$
5.18
Diluted earnings per common share
5.61
6.02
5.46
4.21
5.14
Cash dividends declared
1.60
1.56
1.40
2.36
2.07
Book value per common share
48.44
43.58
46.98
45.79
42.29
Average shares outstanding
11,992
12,517
13,558
14,043
14,201
Year-end actual shares outstanding
11,804
12,231
13,128
13,753
14,261
Average fully diluted shares outstanding
12,080
12,607
13,674
14,104
14,330
Earnings Performance Ratios:
Return on average assets(1)
1.19
%
1.38
%
1.36
%
1.11
%
1.52
%
Return on average stockholders’ equity(2)
12.31
13.44
11.89
9.53
12.88
Non-interest income to average total assets
0.53
0.62
0.70
0.66
0.64
Non-interest expense to average total assets
2.47
2.42
2.32
2.31
2.37
Average interest rate spread(3)
2.97
3.59
3.22
3.23
3.62
Year-end interest rate spread
2.78
3.63
3.20
3.08
3.28
Net interest margin(4)
3.57
3.80
3.37
3.49
3.95
Efficiency ratio(5)
63.16
57.05
59.03
58.07
54.48
Net overhead ratio(6)
1.94
1.80
1.62
1.66
1.73
Common dividend pay-out ratio(7)
28.52
25.91
25.64
56.06
40.27
Asset Quality Ratios (8):
Allowance for credit losses/year-end loans
1.39
%
1.39
%
1.49
%
1.32
%
1.00
%
Non-performing assets/year-end loans and foreclosed assets
0.25
0.08
0.15
0.09
0.19
Allowance for credit losses/non-performing loans
550.48
1,729.69
1,120.31
1,831.86
891.66
Net charge-offs/average loans
0.02
0.01
0.00
0.01
0.10
Gross non-performing assets/year end assets
0.20
0.07
0.11
0.07
0.16
Non-performing loans/year-end loans
0.25
0.08
0.13
0.07
0.11
Balance Sheet Ratios:
Loans to deposits
97.33
%
96.30
%
88.23
%
95.52
%
105.13
%
Average interest-earning assets as a percentage of average interest-bearing liabilities
131.11
140.32
139.94
132.49
127.50
Capital Ratios:
Average common stockholders’ equity to average assets
9.6
%
10.2
%
11.4
%
11.7
%
11.8
%
Year-end tangible common stockholders’ equity to tangible assets(9)
9.7
9.2
11.2
11.3
11.9
Great Southern Bancorp, Inc.:
Tier 1 capital ratio
12.4
11.0
13.4
12.7
12.5
Total capital ratio
15.2
13.5
16.3
17.2
15.0
Tier 1 leverage ratio
11.0
10.6
11.3
10.9
11.8
Common equity Tier 1 ratio
11.9
10.6
12.9
12.2
12.0
Great Southern Bank:
Tier 1 capital ratio
13.1
11.9
14.1
13.7
13.1
Total capital ratio
14.3
13.1
15.4
14.9
14.0
Tier 1 leverage ratio
11.6
11.5
11.9
11.8
12.3
Common equity Tier 1 ratio
13.1
11.9
14.1
13.7
13.1
(1) Net income divided by average total assets.
(2) Net income divided by average stockholders’ equity.
(3) Yield on average interest-earning assets less rate on average interest-bearing liabilities.
(4) Net interest income divided by average interest-earning assets.
(5) Non-interest expense divided by the sum of net interest income plus non-interest income.
(6) Non-interest expense less non-interest income divided by average total assets.
(7) Cash dividends per common share divided by earnings per common share.
(8) Prior to January 1, 2021, these ratios excluded FDIC-assisted acquired loans.
(9) Non-GAAP Financial Measure. For additional information, including a reconciliation to GAAP, see “- Non-GAAP Financial Measures.”
Forward-looking Statements
When used in this Annual Report and in other 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.
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) the remaining effects of the COVID-19 pandemic on general economic and financial market conditions and on public health; (iv) fluctuations in interest rates, the effects of inflation or a potential recession, whether caused by Federal Reserve actions or otherwise; (v) the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; (vi) slower economic growth caused by changes in energy prices, supply chain disruptions or other factors; (vii) 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; (viii) the possibility of realized or unrealized losses on securities held in the Company’s investment portfolio; (ix) the Company’s ability to access cost-effective funding and maintain sufficient liquidity; (x) fluctuations in real estate values and both residential and commercial real estate market conditions; (xi) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the marketplace; (xii) 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; (xiii) legislative or regulatory changes that adversely affect the Company’s business; (xiv) changes in accounting policies and practices or accounting standards; (xv) results of examinations of the Company and Great Southern Bank by 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; (xvi) costs and effects of litigation, including settlements and judgments; (xvii) competition; and (xviii) 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 in the Company’s most recent Annual Report on Form 10-K, including, without limitation, those described under “Item 1A. Risk Factors,” subsequent Quarterly Reports on Form 10-Q and other documents filed or furnished from time to time by the Company with the SEC (which are available on our website at www.greatsouthernbank.com and the SEC’s website at www.sec.gov), could affect the Company’s financial performance and 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.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires 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
On January 1, 2021, the Company adopted the new accounting standard related to the allowance for credit losses. 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 3 to the accompanying financial statements contained in Item 8 of this Report for additional information.
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 that 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 loans with a balance greater than or equal to $100,000, 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 principal balance over the remaining contractual lives, adjusted for expected prepayments. The contractual term excludes expected extensions, renewals and modifications. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecasts such as changes in portfolio composition, underwriting practices, or significant unique events or conditions.
See Note 3 “Loans and Allowance for Credit Losses” to 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.
Goodwill and Intangible Assets
Goodwill and 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. Goodwill is 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 December 31, 2023, the Company has 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 amount 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. 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 December 31, 2023, goodwill consisted of $5.4 million at the Bank reporting unit, which included goodwill of $4.2 million that was recorded during 2016 related to the acquisition of 12 branches and related deposits in the St. Louis market. Other identifiable deposit intangible assets that are subject to amortization are amortized on a straight-line basis over a period of seven years. In April 2022, the Company, through its subsidiary Great Southern Bank, entered into a naming rights agreement with Missouri State University related to the main arena on the university’s campus in Springfield, Missouri. The terms of the agreement provide the naming rights to Great Southern Bank for a total cost of $5.5 million, to be paid over a period of seven years. The Company expects to amortize the naming rights intangible assets through non-interest expense over a period not to exceed 15 years. At December 31, 2023, the amortizable intangible assets consisted of the arena naming rights of $5.1 million. The amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable based on a comparison of fair value. See Note 1 to the accompanying audited financial statements for additional information.
Based on the Company’s qualitative goodwill impairment testing, management does not believe any of the Company’s goodwill or other intangible assets were impaired as of December 31, 2023. While management believes no impairment existed at December 31, 2023, 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.
Current Economic Conditions
Changes in economic conditions could cause the values of assets and liabilities recorded in the Company’s financial statements to change rapidly, resulting in material future adjustments to asset values, the allowance for credit losses, or capital that could negatively affect 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 States entered an economic downturn. Unemployment rose from 4.7% in November 2007 to 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, which severely affected tourism, labor markets, business travel, immigration and the global supply chain, among other areas. 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, sporting events, retail shops, personal services, and more.
More than 22 million jobs were lost in March and April 2020 as businesses closed their doors or reduced their operations, sending employees home on furlough or layoffs. 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. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), a fiscal relief bill passed by Congress and signed by the President in March 2020, injected approximately $3 trillion into the economy through direct payments to individuals and loans to small businesses intended to help keep employees on their payroll, fueling a historic bounce-back in economic activity.
Total fiscal support to the economy throughout the pandemic, including the CARES Act, the American Rescue Plan of March 2021, and several smaller fiscal packages, totaled well over $5 trillion. The amount of this support was equal to almost 25% of pre-pandemic 2019 GDP and approximately three times the level of support provided during the global financial crisis of 2007-2008.
Additionally, the Federal Reserve acted decisively by slashing its benchmark interest rate to near zero and ensuring credit availability to businesses, households, and municipal governments. The Federal Reserve’s efforts largely insulated the financial system from the problems in the economy, a significant difference from the financial crisis of 2007-2008. Purchases of Treasury and agency mortgage-backed securities totaling $120 billion each month by the Federal Reserve commenced shortly after the pandemic began. In November 2021, the Federal Reserve began to taper its quantitative easing (QE), winding down its bond purchases with its final open market purchase conducted on March 9, 2022. The federal government deficit was $2.8 trillion in fiscal 2021, close to $1.38 trillion in fiscal 2022, and was expected to increase slightly to $1.4 trillion in fiscal 2023.
The Federal Reserve aggressively raised the federal funds interest rate from early 2022 through mid-2023, pushing the federal funds rate to more than 5.50%, its highest level in 22 years. The Fed’s actions were motivated by surging inflation in 2021 caused by pandemic-fueled spending, which outpaced the ability of producers to supply goods and services after having been impacted by
COVID-related shutdowns and clogged transportation systems. The Fed has made some headway in its attempt to force inflation down. The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred measure of inflation, eased from its peak of 7.1% in June 2022 to 2.6% in November 2023, but core PCE, which excludes food and energy prices, has been slower to retreat and still sat at 3.2% at December 2023, well above the Federal Reserve’s target of 2.0%.
Moody’s is projecting real GDP in 2024 to be slightly higher than previously forecast, but the persistence of high interest rates may slow economic growth. Real GDP is projected to rise 1.9% in 2024 on an annual average basis, an upward revision of 0.2%, and is projected to grow 1.6% in 2025 and 2.1% in 2026.
Employment
The national unemployment rate remained unchanged for the month at 3.7% as of December 2023, ranging from 3.4% to 3.8% since March 2022. The number of unemployed individuals also remained steady at 6.3 million as of December 2023, with 216,000 jobs added in December 2023. In December 2023, employment in leisure and hospitality and professional changed little, with government, health care, construction and social assistance rising minimally. While the labor market remains strong, there are signs of softening. Wage growth has been moderating and, while layoffs are not rising, departure rates are down to pre-pandemic levels. Employers are cutting back on hours and are hiring fewer temporary workers, an early sign that demand for labor is pulling back.
As of December 2023, the labor force participation rate (the share of working-age Americans employed or actively looking for a job) remained stable at 62.5%. The unemployment rate for the Midwest, where the Company conducts most of its business, increased from 3.5% in December 2022 to 3.7% in December 2023. Unemployment rates for December 2023 in the states where the Company has a branch or loan production office were Arizona at 4.3%, Arkansas at 3.4%, Colorado at 3.4%, Georgia at 3.4%, Illinois at 4.8%, Iowa at 3.2%, Kansas at 2.8%, Minnesota at 2.9%, Missouri at 3.3%, Nebraska at 2.3%, North Carolina at 3.5%, Oklahoma at 3.4%, and Texas at 4.0%. Of the metropolitan areas in which the Company does business, most were below the national unemployment rate for December 2023 of 3.7%, except for Chicago at 4.3%.
Single Family Housing
Existing home sales decreased 1.0% in December 2023 to a seasonally adjusted annual rate of 3.78 million, down 6.2% from the previous year. In the Midwest, existing-home sales retracted 4.3% from November 2023 to an annual rate of 900,000 in December 2023, down 10.9% from one year ago.
The median existing-home sales price rose 4.4% from December 2022 to $382,600 in December 2023 - the sixth consecutive month of year-over-year price increases. Among the four major U.S. regions, sales slipped in the Midwest and South, rose in the West and were unchanged in the Northeast. The median price in the Midwest in December 2023 was $275,600, up 5.9% from December 2022. On an annual basis, existing-home sales in 2023 of 4.09 million dropped to the lowest level since 1995, while the median price reached a record high of $389,800 in 2023.
Total housing inventory registered at the end of December 2023 was 1.0 million units, down 11.5% from November 2023 and up 4.2% from one year ago of 960,000. Unsold inventory sat at a 3.2 month supply in December 2023, down from 3.5 months in November 2023 but up from 2.9 months in December 2022.
Nationally, properties on average remained on the market for 29 days in December 2023, up from 25 days in November 2023 and 26 days in December 2022. Fifty-six percent of homes sold in December 2023 were on the market for less than a month. New home construction dropped precipitously after the financial crisis of 2007-2008 and has yet to fully recover. Issues contributing to the country’s current housing shortage include increasing labor and materials costs, availability of building materials, increased interest rates and tighter lending underwriting standards.
Sales of new single-family houses in December 2023 were at a seasonally adjusted annual rate of 664,000, according to the U.S. Census Bureau and the Department of Housing and Urban Development. This is 8.0% above the revised November 2023 rate of 615,000 and 4.4% above the December 2022 rate of 636,000.
The median sales price of new houses sold in December 2023 was $413,200, down from $479,500 in December 2022. The average sales price in December 2023 of $487,300 was down from $568,700 in December 2022. The seasonally-adjusted estimate of new houses for sale at the end of December 2023 was 453,000. This represents a supply of 8.2 months at the current sales rate.
First-time buyers accounted for 29% of sales in December 2023, down from 31% in November 2023 and 31% in December 2022.
According to Freddie Mac, the average commitment rate for a 30-year, fixed-rate mortgage was 6.60% as of January 18, 2024 which is down from 6.66% the previous week and up from 6.15% one year ago.
Multi-Family Housing and Commercial Real Estate
Demand has been solid for three consecutive quarters in the multi-family market. Current projections put 2023 new deliveries at a 40-year high of almost 573,000 units, with an additional 443,000 units expected to deliver in 2024. The dramatic rise in Sun Belt development has left the nation with almost one million units under construction, the largest pipeline since the early 1970s. The majority of these units are expected to be delivered at the 4 and 5 Star price points. With supply outpacing demand, the national vacancy rate ended 2023 at 7.6%, which is 100 basis points higher than the pre-pandemic average. The rising interest rate environment, combined with a pullback in construction lending, has seen some developers unable to move forward on proposed projects, suggesting the beginning of a meaningful pause in deliveries towards the end of 2024 and into 2025.
Midwest markets have avoided the sharp reversal of rent growth seen in Sun Belt locations as their construction pipelines remained modest during the pandemic. Deliveries in the Midwest in 2023 were only 5,500 units higher than what was delivered in 2019. That limited increase in new supply for the Midwest allowed those markets to be better balanced and avoid the dramatic surge and now pullback in rent growth as experienced in Sun Belt locations.
Although factors such as declining household formations, rising supply deliveries, and weakening demand may present temporary obstacles, the long-term issue of a major housing shortage remains in our nation. Thus, rent growth is anticipated to eventually rebound above historical averages.
As noted above, as of December 31, 2023, national multi-family market vacancy rates increased to 7.6%. Our market areas reflected the following apartment vacancy levels as of December 2023: Springfield, Missouri at 4.8%, St. Louis at 10.3%, Kansas City at 8.5%, Minneapolis at 7.6%, Tulsa, Oklahoma at 8.3%, Dallas-Fort Worth at 10.4%, Chicago at 5.7%, Atlanta at 11.7%, Phoenix at 10.8%, Denver at 8.3% and Charlotte, North Carolina at 11.6%.
The office sector remained weak in 2023 with office vacancy rates continuing their climb to a record 13.6% nationally. Occupiers gave back 65 million of square footage (SF) in 2023, bringing the total to over 180 million since the beginning of 2020. A little over 53 million SF in new office inventory was completed in 2023 with about 15 million SF in obsolete stock being demolished or converted. The resulting 37 million SF in net deliveries was the lowest amount since 2014, though the expected 56 million in 2024 would be the second most over the same period. Thus, with demand still faltering, new supply may exacerbate vacancy rates in the near term.
Leasing volume is down nearly 20% from its average in the late 2010s. Office-using employment peaked in May 2023 and has stalled out ever since. Looking ahead, the forecast from Oxford Economics suggests an average growth rate of only 0.4% through 2031, less than half its average since 2000. All these factors are likely contributing to more conservative leasing behavior amid the expiration of leases that were executed at the high rates of the mid- to late 2010s. Should tenants continue adjusting their footprints as expected in the next 24 months, the result would be a further 190 million SF in negative absorption, with vacancy rising to 17.2% by early 2026.
As of December 31, 2023, national office vacancy rates increased to 13.6% from 12.7% as of December 31, 2022, while our market areas reflected the following vacancy levels at December 31, 2023: Springfield, Missouri at 4.2%, St. Louis at 10.6%, Kansas City at 12.0%, Minneapolis at 11.2%, Tulsa, Oklahoma at 10.7%, Dallas-Fort Worth at 17.8%, Chicago at 16.6%, Atlanta at 15.7%, Denver at 16.3%, Phoenix at 16.0% and Charlotte, North Carolina at 13.7%.
Demand from a diverse array of sectors, coupled with a below-average pace of store closures, and minimal new supply resulted in a resilient year for the U.S. retail sector in 2023.
Although a pullback in leasing activity has occurred, a significant slowdown in move-outs has contributed to consistent demand growth across the U.S. retail sector. A near historic low of approximately 52 million SF of new retail space was delivered in 2023, a level that is over 40% lower than the sector’s historical average. New construction has primarily focused on build-to-suits, grocery-anchored centers, or smaller retail spaces in large mixed-use projects, which helps explain the above-average leasing rates for new retail properties, as less than 20% of space delivered over the past year was available for lease at the end of 2023.
Availabilities are now at record-low levels within small to mid-sized centers and freestanding single-tenant properties. On the other hand, availabilities within the mall segment (which consists of regional and super-regional malls as well as lifestyle centers) have continued to increase since the pandemic. However, there is significant variation in performance across the mall segment, with 4 and 5 Star malls and lifestyle centers seeing fundamentals improve over the past year, while malls rated 3 Star and below continue to see vacancies rise. This difference is likely to persist, as numerous mall-based retailers such as Bath and Body Works, Victoria’s Secret, and Macy’s have announced plans to move more stores out of the mall and into open-air neighborhood and community centers with stronger foot traffic.
Despite longstanding concerns of a softening economy and eventual pullback in consumer spending, retail fundamentals should remain balanced for the near future, as minimal availability and a further pullback in new deliveries offset a minor pullback in demand formation.
During the fourth quarter of 2023, national retail vacancy rates remained steady at 4.1% while our market areas reflected the following vacancy levels: Springfield, Missouri at 3.2%, St. Louis at 4.6%, Kansas City at 4.1%, Minneapolis at 2.9%, Tulsa, Oklahoma at 2.8%, Dallas-Fort Worth at 4.5%, Chicago at 4.9%, Atlanta at 3.5%, Phoenix at 4.5%, Denver at 4.0%, and Charlotte, North Carolina at 2.7%.
U.S. industrial market performance continues to downshift as 2024 kicks off. Accelerating completions of new industrial developments have caused the U.S. industrial vacancy rate to inch up from a record low of 3.9% in mid-2022, to 5.9% as of fourth quarter 2023. Net absorption has remained positive but continued to lose steam over the past 12 months, with the second half of 2023 registering the lowest third and fourth quarter absorption tallies in 13 years.
Overall growth in real consumer goods spending has been re-accelerating since last spring as inflation has subsided and strong wage growth has persisted. If the U.S. economy resilience continues, business inventories will likely soon resume their long-term upward trend as major retailers including Walmart, Target, and Costco have worked through excess merchandise and now have inventory to sales ratios in line with pre-pandemic levels. Sales of warehouse space intensive retail categories like furniture and building materials still remains low.
While a potential stagnation in consumer spending poses downside risks in CoStar’s absorption forecast for the next 12 months, high-tech manufacturing will likely be a key driver of leasing from 2024-26. The 2022 passage of the CHIPS and Science Act and the Inflation Reduction Act approved over $400 billion worth of incentives for growth in U.S. based high-tech manufacturing. CoStar is tracking more than 30 planned semiconductor, electric vehicle, and battery plants with estimated payrolls of more than 1,000 employees. The majority of these plants are targeting 2024-25 to begin production, with Arizona, Texas, Georgia, and the Carolinas securing the most new operations.
New deliveries will likely remain elevated for the next six to nine months, driving the national vacancy rate higher. Higher interest rates have caused construction starts on new industrial projects to halt. Given the average construction time of 14 months for large industrial projects, this recent pullback in starts suggests that by late 2024, the number of new projects completing construction may begin to decline. This may set the stage for vacancies to stabilize or begin tightening again in late 2024, and for rent growth to accelerate thereafter.
For the fourth quarter of 2023, national industrial vacancy rates increased to 5.9% from 4.2% as of December 31, 2022. Our market areas reflected the following industrial vacancy levels at December 31, 2023: Springfield, Missouri at 1.8%, St. Louis at 4.7%, Kansas City at 5.2%, Minneapolis at 3.9%, Tulsa, Oklahoma at 2.9%, Dallas-Fort Worth at 8.9%, Chicago at 5.1%, Atlanta at 6.4%, Phoenix at 8.6%, Denver at 7.1% and Charlotte, North Carolina at 6.7%.
Our management will continue to monitor regional, national, and global economic indicators such as unemployment, GDP, housing starts and prices, consumer sentiment, commercial real estate price index and commercial real estate occupancy, absorption and rental rates, as these could significantly affect customers in each of our market area.
For discussion of the risk factors associated with multi-family and commercial real estate loans, see “Risk Factors - Risks Relating to Lending Activities - Our loan portfolio possesses increased risk due to our relatively high concentration of commercial and residential construction, commercial real estate, other residential (multi-family) and other commercial loans” and “Risk Factors - Risks Relating to Regulation - We currently exceed thresholds defined in interagency guidance on commercial real estate concentrations, and as such, we may incur additional expense or slow the growth of certain categories of commercial real estate lending.”
General
The profitability of the Company and, more specifically, the profitability of its primary subsidiary, the Bank, depend primarily on its 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.
The Company’s total assets increased $131.7 million, or 2.3%, from $5.68 billion at December 31, 2022, to $5.81 billion at December 31, 2023. Full details of the current year changes in total assets are provided below, under “Comparison of Financial Condition at December 31, 2023 and December 31, 2022.”
Loans. In the year ended December 31, 2023, the Company’s net loans increased $82.8 million, or 1.8%, from $4.51 billion at December 31, 2022, to $4.59 billion at December 31, 2023. This increase was primarily in other residential (multi-family) loans ($160 million increase) and commercial business loans ($25 million increase). These increases were partially offset by decreases in construction loans ($61 million decrease) and one- to four- family residential loans ($13 million decrease). The pipeline of loan commitments and the unfunded portion of construction loans remained strong at the end of 2023, but decreased significantly compared to the end of 2022. As construction projects were completed, the related loans were either paid off or moved from the construction category to the appropriate permanent loan categories. 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 business, and in most of Great Southern’s primary lending locations, including Springfield, St. Louis, Kansas City, Des Moines and Minneapolis, as well as our loan production offices in Atlanta, Charlotte, Chicago, Dallas, Denver, Omaha, Phoenix and 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 discontinued indirect auto loan originations.
Of the total loan portfolio at December 31, 2023 and 2022, 89.5% and 89.4%, respectively, was secured by real estate, as this is the Bank’s primary focus in its lending efforts. At December 31, 2023 and 2022, commercial real estate and commercial construction loans (excluding multi-family loans) were 36.8% and 39.4% of the Bank’s total loan portfolio, respectively. Commercial real estate and commercial construction loans generally afford the Bank an opportunity to increase the yield on, and the proportion of interest rate sensitive loans in, its portfolio. They do, however, present somewhat greater risk to the Bank because they may be more adversely affected by conditions in the real estate markets or in the economy generally. At December 31, 2023, loans made in the Springfield, Missouri metropolitan statistical area (Springfield MSA) comprised 8% of the Bank’s total loan portfolio, compared to 7% at December 31, 2022. The Company’s headquarters are located in Springfield and we have operated in this market since 1923. Loans made in the St. Louis metropolitan statistical area (St. Louis MSA) comprised 17% of the Bank’s total loan portfolio at December 31, 2023, compared to 18% at December 31, 2022. The Company’s expansion into the St. Louis MSA beginning in May 2009 has provided an opportunity to not only diversify from the Springfield MSA, but also has provided access to a larger economy with increased lending opportunities despite higher levels of competition. Loans made in the St. Louis MSA are primarily commercial real estate, commercial business and other residential (multi-family) loans, which are less likely to be impacted by the higher levels of unemployment rates, as mentioned above under “Current Economic Conditions,” than if the focus were on one- to four-family residential and consumer loans. For further discussions of the Bank’s loan portfolio, and specifically, commercial real estate and commercial construction loans, see “Item 1. Business - Lending Activities.”
The percentage of fixed-rate loans in our loan portfolio has been as much as 40% in recent years and was 39% as of December 31, 2023. The majority of the increase in fixed rate loans over the past few years was in commercial real estate, which typically has short durations within our portfolio. Of the total amount of fixed rate loans in our portfolio as of December 31, 2023, approximately 86% mature within the next five years and therefore are not considered to create significant long-term interest rate risk for the Company. Fixed rate loans make up only a portion of our balance sheet and our overall interest rate risk strategy. As of December 31, 2023, our interest rate risk models indicated a one-year interest rate earnings sensitivity position that is modestly positive in an increasing rate environment. For further discussion of our interest rate sensitivity gap and the processes used to manage our exposure to interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk - How We Measure the Risks to Us Associated with Interest Rate Changes.” For discussion of the risk factors associated with interest rate changes, see “Risk Factors - We may be adversely affected by interest rate changes.”
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 December 31, 2023 and 2022, 0.2% of our owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination. At December 31, 2023 and 2022, an estimated 0.4% and 0.2%, respectively, of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.
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 prepared for discontinuation of the 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. With the cessation of all remaining LIBOR indices as of June 30, 2023, the Company implemented its LIBOR fallback plan for all remaining LIBOR-based loans, replacing the LIBOR indices with various SOFR-based indices consistent with the regulations of the Board of Governors of the Federal Reserve System implementing the Adjustable Interest Rate (LIBOR) Act. All impacted customers were notified and the Company’s systems were updated with the applicable indices as of July 1, 2023.
Available-for-sale Securities. Available-for-sale securities decreased $12.4 million, or 2.5%, from $490.6 million at December 31, 2022, to $478.2 million at December 31, 2023. For further information on investment securities, see Note 2 to the accompanying financial statements contained in this Report.
Held-to-maturity Securities. Held-to-maturity securities decreased $7.5 million, or 3.7%, from $202.5 million at December 31, 2022, to $195.0 million at December 31, 2023.
Deposits. The Company attracts deposit accounts through its retail branch network, correspondent banking and corporate services areas, internet channels 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 year ended December 31, 2023, total deposit balances increased $36.8 million, or 0.8%. Transaction account balances decreased $140.1 million and retail certificates of deposit decreased $73.1 million compared to December 31, 2022. The decrease in transaction accounts was primarily a result of decreased balances in non-interest accounts and certain NOW account types. In addition, holders of some accounts that carried higher balances may have chosen to move funds into different checking account types or time deposits that now have a higher rate of interest. Retail certificates of deposit decreased due to a decrease in retail certificates generated through the banking center network and time deposits initiated through internet channels, which experienced a planned decrease as part of the Company’s balance sheet management between funding sources. Brokered deposits, including IntraFi program purchased funds, were $661.5 million at December 31, 2023, an increase of $250.0 million from $411.5 million at December 31, 2022. The Company uses brokered deposits of select maturities and interest rate characteristics from time to time to supplement its various funding channels and to manage interest rate risk.
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 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 decreased $106.0 million from $176.8 million at December 31, 2022 to $70.8 million at December 31, 2023. These balances fluctuate over time based on customer demand for this product.
Short-Term Borrowings and Other Interest-bearing Liabilities. The Company’s FHLBank term advances were $-0- at both December 31, 2023 and December 31, 2022. At December 31, 2023 and 2022, overnight borrowings from the FHLBank were $251.0 million and $88.5 million, respectively, which are included in short-term borrowings.
Short-term borrowings and other interest-bearing liabilities increased $163.0 million from $89.6 million at December 31, 2022 to $252.6 million at December 31, 2023. The Company may utilize overnight borrowings, short-term FHLBank advances, and BTFP borrowings from FRBSTL depending on relative interest rates.
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 SOFR, three-month SOFR 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 “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, 2016 and 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 3 and a 1.00% decrease on March 16. At December 31, 2021, the Federal Funds rate was 0.25%. In 2022, the FRB implemented rate increases of 0.25%, 0.50%, 0.75%, 0.75%, 0.75%, 0.75% and
0.50% in March, May, June, July, September, November and December 2022, respectively. At December 31, 2022, the Federal Funds rate was 4.50%. In 2023, the FRB implemented rate increases of 0.25%, 0.25%, 0.25% and 0.25% in February, March, May and July 2023, respectively. At December 31, 2023 the Federal Funds rate was 5.50%. Financial markets now expect the possibility of significant further increases in Federal Funds interest rates in early 2024 to be unlikely, with interest rate decisions being made at each FRB meeting based on economic data available at the time. However, the FRB has further indicated, and financial markets now have begun to price in, that it is likely that the Federal Funds interest rate will remain near this peak level for several months before any rate cuts occur. Great Southern’s loan portfolio includes loans ($1.29 billion at December 31, 2023) tied to various SOFR indices that will be subject to adjustment at least once within 90 days after December 31, 2023. All of these loans have interest rate floors at various rates. Great Southern also has a portfolio of loans ($788.9 million at December 31, 2023) tied to a “prime rate” of interest that will adjust immediately or within 90 days of a change to the “prime rate” of interest. All of these loans had interest rate floors at various rates. Great Southern also has a portfolio of loans ($6.7 million at December 31, 2023) tied to an AMERIBOR index that will adjust immediately or within 90 days of a change to the “prime rate” of interest. All of these loans had interest rate floors at various rates. At December 31, 2023, nearly all of these SOFR and “prime rate” loans had fully indexed rates that were at or above their floor rate and so are expected to move fully with future market interest rate increases.
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 SOFR indices 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. There may also be a negative impact on the Company’s net interest income if the Company is unable to significantly lower its funding costs due to a highly 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 SOFR-based, AMERIBOR-based and prime-based loans.
As of December 31, 2023, Great Southern’s interest rate risk models indicate that, generally, rising interest rates are expected to have a modestly positive impact on the Company’s net interest income, while declining interest rates are expected to have a modestly 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 SOFR 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 SOFR interest rates and “prime” interest rates. In the subsequent months, we would expect that net interest margin would stabilize and begin to improve, as renewal interest rates on maturing time deposits decrease.
During 2020, we experienced some compression of our net interest margin percentage due to Federal Fund rate cuts during the nine month period of July 2019 through 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 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 remained in most of our markets.
Beginning in March 2022, market interest rates, including LIBOR interest rates, SOFR interest rates and “prime” interest rates, began to increase rapidly. This resulted in increasing loan yields and expansion of our net interest income and net interest margin throughout 2022 and into the first three months of 2023. In 2023, market interest rate increases moderated and loan yield increases moderated in line with market rates. However, there has been increased competition for deposits and other sources of funding, resulting in higher costs for those funds. This has been especially true since early March 2023. For further discussion of the processes used to manage our exposure to interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk - How We Measure the Risks to Us Associated with Interest Rate Changes.”
Non-Interest Income and 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. Operating expenses consist primarily of salaries and employee benefits, occupancy-related expenses, expenses related to foreclosed assets, postage, FDIC deposit 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 under “Results of Operations and Comparison for the Years Ended December 31, 2023 and 2022.”
Business Initiatives
The Company’s banking centers and loan production offices are consistently reviewed to measure performance and ensure responsiveness to changing customer needs and preferences. As such, the Company may open banking centers and loan production offices and invest resources where customer demand leads, and from time to time, consolidate offices or even exit markets when conditions dictate.
The following changes were initiated in 2023 and early 2024:
● In March 2023, a leased retail banking center office at 1232 S. Rangeline Road in Joplin, Missouri, was consolidated into a nearby office at 2801 E. 32nd Street. One banking center now serves the Joplin market.
● In September 2023, in Springfield, Missouri, the Company opened Great Southern Express, a modern four-lane drive-through center using only interactive teller machine (ITM) technology to serve customers. This new facility at 1615 W. Sunshine replaced a small banking center on the same property. ITMs, also known as video remote tellers, offer an ATM-like interface, but with the enhancement of a video screen that allows customers to speak directly to a service representative in real time and in a highly personal manner during extended business hours seven days a week. Nearly any teller transaction that can be performed in the traditional drive-thru can be performed at an ITM, including cashing a check to the penny. ITMs provide convenience and enhanced access for customers, while creating greater operational efficiencies for the Bank.
● In January 2024, in Springfield, Missouri, a retail banking center at 600 W. Republic Road was consolidated into another banking center at 2945 W. Republic Road, a short distance away. For customers’ convenience, an on-site ITM is currently available at the closed facility.
● Effective February 16, 2024, the Company closed its loan production office in Tulsa, Oklahoma after an analysis of lending priorities and operational efficiencies. Loan clients served through this office have been reassigned to other relationship managers.
In November 2023, the Company launched a new and improved digital mobile banking application for its customers, available through the Apple App Store and Google Play Store. With more than 54,000 active mobile banking users, the application upgrade provides an improvement in overall functionality, including a better user experience, additional layers of security and faster loading times.
Since early 2022, Great Southern has been preparing to convert to a new core banking platform (New System) to be delivered by a third-party vendor. As previously disclosed, the migration to the New System, originally scheduled for the third quarter of 2023, has been delayed to mid-2024. As also previously disclosed, certain contractual disputes have arisen between Great Southern and the third-party vendor. While discussions are ongoing between the parties, to date, there has been no meaningful progress in resolving the contractual disputes. There is no assurance that a resolution with the vendor will be achieved, or that a migration to the New System can be successfully completed, which may prompt Great Southern to take action to protect its interests. In the meantime, Great Southern expects to continue operations with its current core banking provider, which will allow Great Southern to offer its full array of products and services.
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 became fully implemented on January 1, 2019.
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-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 billion and 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 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” (“CBLR”) of between 8 and 10 percent. Upon election, 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. Currently, the CBLR is 9.0%. 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 includes regulatory relief in the areas of examination cycles, call reports, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
Recent Accounting Pronouncements
See Note 1 to the accompanying audited financial statements, which are included in Item 8 of this Report, for a description of recent accounting pronouncements including the respective dates of adoption and expected effects on the Company’s financial position and results of operations.
Comparison of Financial Condition at December 31, 2023 and December 31, 2022
During the year ended December 31, 2023, total assets increased by $131.7 million, or 2.3%, to $5.81 billion. The increase was primarily attributable to increases in loans receivable and cash and cash equivalents, partially offset by decreases in investment securities.
Cash and cash equivalents were $211.3 million at December 31, 2023, an increase of $42.8 million, or 25.4%, from $168.5 million at December 31, 2022. This increase was primarily due to a $43.5 million increase in interest-bearing deposits in the FRBSTL.
The Company’s available-for-sale securities decreased $12.4 million, or 2.5%, compared to December 31, 2022. The decrease was primarily due to normal monthly payments received related to the portfolio of mortgage-backed securities and collateralized mortgage obligations. The available-for-sale securities portfolio was 8.2% and 8.6% of total assets at December 31, 2023 and December 31, 2022, respectively.
The Company’s held-to-maturity securities decreased $7.5 million, or 3.7%, compared to December 31, 2022. The decrease was primarily due to normal monthly payments received related to the portfolio of mortgage-backed securities and collateralized mortgage obligations. The held-to-maturity securities portfolio was 3.4% and 3.6% of total assets at December 31, 2023 and December 31, 2022, respectively.
Net loans increased $82.8 million, or 1.8%, from December 31, 2022, to $4.59 billion at December 31, 2023. This increase was primarily in other residential (multi-family) loans ($160 million increase) and commercial business loans ($25 million increase). These increases were partially offset by decreases in construction loans ($61 million decrease) and one- to four- family residential loans ($13 million decrease). The pipeline of loan commitments and the unfunded portion of construction loans remained strong in the fourth quarter of 2023, but decreased significantly compared to the end of 2022. As construction projects were completed, the related loans were either paid off or moved from the construction category to the appropriate permanent loan categories.
Total liabilities increased $93.0 million from $5.15 billion at December 31, 2022 to $5.24 billion at December 31, 2023. The increase was primarily due to increases in short-term borrowings from FHLBank and increases in brokered deposits, partially offset by the decrease in reverse repurchase agreements with customers.
Total deposits increased $36.8 million, or 0.8%, from $4.68 billion at December 31, 2022 to $4.72 billion at December 31, 2023. Transaction account balances decreased $140.1 million, from $3.25 billion at December 31, 2022 to $3.11 billion at December 31, 2023. Retail certificates of deposit decreased $73.1 million compared to December 31, 2022, to $948.2 million at December 31, 2023. Decreases in transaction account balances were primarily in certain NOW account types and non-interest-bearing checking accounts. Total interest-bearing checking increased $27.9 million and non-interest-bearing demand deposit accounts decreased $168.1 million, respectively. Customer retail time deposits initiated through our banking center network decreased $34.6 million and time deposits initiated through our national internet network decreased $34.9 million. Customer deposits at December 31, 2023 and December 31, 2022 totaling $8.8 million and $12.4 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 FDIC deposit insurance limit. Brokered deposits increased $250.0 million to $661.5 million at December 31, 2023, compared to $411.5 million at December 31, 2022. Brokered deposits were utilized to fund growth in outstanding loans and to offset reductions in balances in other deposit categories. The Company has the capacity to further expand its use of brokered deposits if it chooses to do so. Of the total brokered deposits at December 31, 2023, $300.0 million were floating rate deposits which adjust daily based on the effective federal funds rate index.
The Company’s term Federal Home Loan Bank advances were $-0- at both December 31, 2023 and 2022. At December 31, 2023 and 2022, there were no borrowings from the FHLBank, other than overnight borrowings, which are included in the short-term borrowings category. The Company maintains the flexibility to utilize both overnight borrowings and short-term FHLBank advances depending on relative interest rates.
Short-term borrowings and other interest-bearing liabilities increased $163.0 million, or 182.0%, from $89.6 million at December 31, 2022 to $252.6 million at December 31, 2023. The short-term borrowings included overnight FHLBank borrowings of $251.0 million at December 31, 2023, compared to $88.5 million at December 31, 2022. In January 2024, the Bank borrowed $180.0 million under the Federal Reserve Bank’s Bank Term Funding Program (BTFP). The borrowing, which matures in January 2025 and has a fixed interest rate of 4.83%, may be repaid in full or in part without penalty prior to its stated maturity date. The line is secured primarily by the Bank’s held-to-maturity investment securities, with total amount of assets pledged totaling approximately $191 million. These funds were primarily used to repay a portion of the Bank’s overnight borrowings from the FHLBank.
Securities sold under reverse repurchase agreements with customers decreased $106.0 million, or 59.9%, from $176.8 million at December 31, 2022 to $70.8 million at December 31, 2023. These balances fluctuate over time based on customer demand for this product.
Total stockholders’ equity increased $38.7 million, or 7.3%, from $533.1 million at December 31, 2022 to $571.8 million at December 31, 2023. The Company recorded net income of $67.8 million for the year ended December 31, 2023. In addition, total stockholders’ equity increased $2.5 million due to the issuance of the Company’s common stock upon stock option exercises. Accumulated other comprehensive income increased $10.9 million due to increases in the fair value of investment securities and the fair value of cash flow hedges, as a result of decreased market interest rate expectations. Total stockholders’ equity decreased $23.3 million due to repurchases of the Company’s common stock. Dividends declared on common stock, which also decreased total stockholders’ equity, were $19.1 million.
Results of Operations and Comparison for the Years Ended December 31, 2023 and 2022
General
Net income decreased $8.1 million, or 10.7%, during the year ended December 31, 2023, compared to the year ended December 31, 2022. Net income was $67.8 million for the year ended December 31, 2023 compared to $75.9 million for the year ended December 31, 2022. This decrease was primarily due to an increase in non-interest expense of $7.7 million, or 5.7%, a decrease in net interest income of $6.4 million, or 3.2%, and a decrease in non-interest income of $4.1 million, or 11.9%, partially offset by a decrease in provision for credit losses on loans and unfunded commitments of $9.3 million, and a decrease in provision for income taxes of $710,000, or 3.9%.
Total Interest Income
Total interest income increased $69.9 million, or 30.8%, during the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was due to a $66.2 million increase in interest income on loans and a $3.7 million increase in interest income on investment securities and other interest-earning assets. Interest income on loans increased for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to higher average rates of interest on loans and higher average loan balances. Interest income from investment securities and other interest-earning assets increased during the year ended December 31, 2023 compared to the year ended December 31, 2022, due to higher average balances of investment securities combined with higher average rates of interest on investment securities and other interest-earning assets, partially offset by a decrease in the average balance on other interest-earning assets.
Interest Income - Loans
During the year ended December 31, 2023 compared to the year ended December 31, 2022, interest income on loans increased $54.1 million as the result of higher average interest rates on loans. The average yield on loans increased from 4.69% during the year ended December 31, 2022 to 5.87% during the year ended December 31, 2023. This increase was primarily due to the repricing of floating rate loans in 2023 as market interest rates increased significantly and the origination of new fixed-rate loans at higher market interest rates. In addition, interest income on loans increased $12.1 million as a result of higher average loan balances, which increased from $4.39 billion during the year ended December 31, 2022, to $4.63 billion during the year ended December 31, 2023. The Company continued to originate loans at a pace similar to prior periods through the end of 2022, and overall loan repayments slowed in 2022 and 2023 compared to the level of repayments in 2021. Since the end of 2022, loan originations and net loan growth have been muted; however, some loan growth has come as a result of the funding of previously approved but unfunded balances on construction loans and the slowed loan repayments in 2023.
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 million with a contractual termination date in October 2025. As previously disclosed by the Company, on March 2, 2020, the Company and its swap counterparty mutually agreed to terminate this swap, effective immediately. The Company was paid $45.9 million, including accrued but unpaid interest, from 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 had 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 the interest rate swap of $8.1 million in each of the years ended December 31, 2023 and December 31, 2022. At December 31, 2023, the Company expected 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 March 2022, the Company entered into another 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 million with a contractual termination date of March 1, 2024. Under the terms of the swap, the Company received a fixed rate of interest of 1.6725% and paid a floating rate of interest equal to one-month USD-LIBOR (now the equivalent replacement USD-SOFR rate since USD-LIBOR rate is no longer available). The floating rate reset monthly and net settlements of interest due to/from the counterparty also occurred monthly. To the extent that the fixed rate exceeded one-month USD-SOFR, the Company received net interest settlements, which were recorded as loan interest income. If one-month USD-SOFR exceeded the fixed rate of interest, the Company paid net settlements to the counterparty and recorded those net payments as a reduction of interest income on loans. The Company recorded a reduction of loan interest income related to this swap transaction of $10.4 million in the year ended December 31, 2023, compared to a reduction of loan interest income related to this swap transaction of $941,000 in the year ended December 31, 2022. Based on market rates of interest in January 2024, the Company expects to record a reduction of loan interest income related to this swap of $1.9 million in the three months ending March 31, 2024, prior to the contractual termination date of March 1, 2024.
In July 2022, the Company entered into two additional interest rate swap transactions as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans. The notional amount of each swap is $200 million with an effective date of May 1, 2023 and a termination date of May 1, 2028. Under the terms of one swap, the Company receives a fixed rate of interest of 2.628% and pays a floating rate of interest equal to one-month USD-SOFR OIS. Under the terms of the other swap, the Company receives a fixed rate of interest of 5.725% and pays a floating rate of interest equal to one-month USD-Prime. In each case, the floating rate resets monthly and net settlements of interest due to/from the counterparty also occur monthly. To the extent the fixed rate of interest exceeds the floating rate of interest, the Company receives net interest settlements, which are recorded as loan interest income. If the floating rate of interest exceeds the fixed rate of interest, the Company pays net settlements to the counterparty and records those net payments as a reduction of interest income on loans. The Company recorded a reduction of loan interest income related to these swap transactions of $7.2 million in the year ended December 31, 2023. At December 31, 2023, the USD-Prime rate was 8.50% and the one-month USD-SOFR OIS rate was 5.34446%.
If market interest rates remain near their current levels, the Company’s interest rate swaps will continue to have a negative impact on net interest income.
Interest Income - Investments and Other Interest-earning Assets
Interest income on investments increased $772,000 in the year ended December 31, 2023 compared to the year ended December 31, 2022. Interest income increased $488,000 due to an increase in average interest rates from 2.84% during the year ended December 31, 2022 to 2.91% during the year ended December 31, 2023. At December 31, 2023, the investment portfolio did not include a material amount of adjustable rate securities. Interest income increased $284,000 as a result of an increase in average balances from $675.6 million during the year ended December 31, 2022, to $685.5 million during the year ended December 31, 2023. Average balances of securities increased primarily due to purchases of agency multi-family mortgage-backed securities that have a fixed rate of interest with expected lives of four to ten years, which fits with the Company’s current asset/liability management strategies, partially offset by normal monthly payments received related to the portfolio of U.S. Government agency mortgage-backed securities and collateralized mortgage obligations.
Interest income on other interest-earning assets increased $2.9 million in the year ended December 31, 2023 compared to the year ended December 31, 2022. Interest income increased $3.3 million as a result of higher average interest rates from 1.05% during the year ended December 31, 2022, to 5.04% during the year ended December 31, 2023. Partially offsetting that increase, interest income decreased $436,000 as a result of a decrease in average balances from $195.8 million during the year ended December 31, 2022, to $98.0 million during the year ended December 31, 2023. The increase in average interest rates was due to the increase in the rate paid on funds held at the Federal Reserve Bank. This rate was increased multiple times in 2022 and 2023 in conjunction with the increase in the Federal Funds target interest rate. The decrease in average balances was due to utilization of these funds in loan originations and securities purchases.
Total Interest Expense
Total interest expense increased $76.3 million, or 278.7%, during the year ended December 31, 2023, when compared with the year ended December 31, 2022, due to an increase in interest expense on deposits of $68.1 million, or 329.3%, an increase in interest expense on short-term borrowings of $6.4 million, or 603.6%, an increase in interest expense on securities sold under reverse repurchase agreements of $881,000, or 271.9%, and an increase in interest expense on subordinated debentures issued to capital trusts of $861,000, or 98.4%.
Interest Expense - Deposits
Interest expense on demand deposits increased $22.9 million due to an increase in average rates from 0.26% during the year ended December 31, 2022, to 1.30% during the year ended December 31, 2023. Interest rates paid on demand deposits were higher in 2023 due to significant increases in overall market rates in the latter half of 2022 and all of 2023. Partially offsetting that increase, interest on demand deposits decreased $293,000 due to a decrease in average balances from $2.32 billion in the year ended December 31, 2022, to $2.20 billion in the year ended December 31, 2023. The Company also experienced decreased balances in certain types of NOW accounts and IntraFi Network Reciprocal Deposits, mostly offset by increases in money market accounts, which generally have higher rates of interest than NOW accounts.
Interest expense on time deposits increased $19.8 million as a result of an increase in average rates of interest from 0.96% during the year ended December 31, 2022, to 2.97% during the year ended December 31, 2023. Interest expense on time deposits increased $1.1 million due to an increase in the average balance of time deposits from $890.5 million during the year ended December 31, 2022, to $991.2 million during the year ended December 31, 2023. 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 higher rate of interest due to increases in market interest rates in the latter half of 2022 and throughout 2023 and targeted rate promotions during 2023.
Interest expense on brokered deposits increased $14.1 million, due to an increase in average balances from $252.3 million during the year ended December 31, 2022 to $611.8 million during the year ended December 31, 2023. Interest expense on brokered deposits also increased $10.4 million due to average rates of interest that increased from 2.44% in the year ended December 31, 2022 to 5.02% in the year ended December 31, 2023. Brokered deposits added during 2023 were at higher market rates than brokered deposits previously issued. The Company uses brokered deposits of select maturities and interest rate structures from time to time to supplement its various funding channels and to manage interest rate risk.
The Company may use interest rate swaps from time to time to manage its interest rate risks from recorded financial liabilities, primarily brokered deposits. These interest rate swaps have allowed the Company to create funding of varying maturities at a variable rate that in the past has approximated three-month SOFR. In February 2023, the Company entered into five new interest rate swap transactions. At December 31, 2023, the Company had $95.0 million in interest rate swaps on brokered deposits, which were accounted for as fair value hedges. Subsequent to December 31, 2023, the Company elected to terminate these swaps prior to their contractual termination date in 2025. The Company received a net settlement payment from the swap counterparty totaling $26,500 upon termination. The Company did not utilize these types of interest rate swaps on brokered deposits in 2022 or 2021.
The Company’s net interest income was negatively impacted in 2023 by the high level of competition for deposits due to asset growth across the industry and the lingering effects of liquidity events at several banks in March 2023. The Company also had a substantial amount of time deposits maturing at relatively low rates in the second quarter of 2023, and these time deposits either renewed at
higher rates or left the Company, in turn requiring their replacement with other funding sources at then-current, higher market rates. In addition, sporadically throughout 2023, the Company experienced a higher-than-normal reduction in balances of non-interest-bearing deposits. Customer balances in both non-interest-bearing checking and interest-bearing checking accounts fluctuated during the year ended December 31, 2023. As market interest rates for certain checking account types and time deposit accounts have increased, some customers have chosen to reallocate funds into higher-rate accounts. As of December 31, 2023, time deposit maturities over the next 12 months were as follows: within three months -- $394 million with a weighted-average rate of 3.82%; within three to six months -- $324 million with a weighted-average rate of 4.32%; and within six to twelve months -- $371 million with a weighted-average rate of 4.08%. Based on time deposit market rates in January 2024, replacement rates for these maturing time deposits are likely to be approximately 4.00-4.50%.
Interest Expense - FHLBank Advances; Short-term Borrowings, Repurchase Agreements and Other Interest-bearing Liabilities; Subordinated Debentures Issued to Capital Trust and Subordinated Notes
FHLBank term advances were not utilized during the years ended December 31, 2023 and 2022. FHLBank overnight borrowings were utilized in 2023 and 2022.
Interest expense on reverse repurchase agreements increased $953,000 due to an increase in average rates during the year ended December 31, 2023 when compared to the year ended December 31, 2022. The average rate of interest was 1.47% for the year ended December 31, 2023, compared to 0.24% during the year ended December 31, 2022. The average balance of repurchase agreements decreased $50.4 million from $132.6 million in the year ended December 31, 2022 to $82.2 million in the year ended December 31, 2023, which was due to changes in customers’ desire for this product, which can fluctuate.
Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $3.8 million due to an increase in average balances from $48.5 million during the year ended December 31, 2022, to $142.9 million during the year ended December 31, 2023, which was primarily due to changes in the Company’s funding needs and the mix of funding, which can fluctuate. Most of this increase was due to the increased utilization of overnight borrowings from the FHLBank. In addition to this increase, interest expense on short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities increased $2.7 million due to average rates that increased from 2.20% in the year ended December 31, 2022, to 5.25% in the year ended December 31, 2023. Short-term market interest rates increased sharply in the latter half of 2022 and throughout 2023.
During the year ended December 31, 2023, compared to the year ended December 31, 2022, interest expense on subordinated debentures issued to capital trusts increased $861,000 due to higher average interest rates. The average interest rate was 3.40% in 2022, compared to 6.74% in 2023. The subordinated debentures are variable-rate debentures, as stated above. There was no change in the average balance of the subordinated debentures between 2022 and 2023.
In June 2020, the Company issued $75.0 million of 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. 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. Interest expense on subordinated notes increased $18,000 due to an increase in average balances from $74.1 million during the year ended December 31, 2022 to $74.4 million during the year ended December 31, 2023 due to this issuance cost amortization.
Net Interest Income
Net interest income for the year ended December 31, 2023 decreased $6.4 million, or 3.2%, to $193.2 million, compared to $199.6 million for the year ended December 31, 2022. Net interest margin was 3.57% for the year ended December 31, 2023, compared to 3.80% for the year ended December 31, 2022, a decrease of 23 basis points. The Company experienced increases in interest income on both loans and investment securities. The Company experienced increases in interest expense on deposits, short-term borrowings, subordinated debentures issued to capital trust and repurchase agreements.
The Company’s overall interest rate spread decreased 62 basis points, or 17.1%, from 3.59% during the year ended December 31, 2022, to 2.97% during the year ended December 31, 2023. The decrease was due to a 178 basis point increase in the weighted average rate paid on interest-bearing liabilities, partially offset by a 116 basis point increase in the weighted average yield on interest-earning assets. In comparing the two years, the yield on loans increased 118 basis points, the yield on investment securities increased 7 basis
points and the yield on other interest-earning assets increased 399 basis points. The rate paid on deposits increased 173 basis points, the rate paid on short-term borrowings and other interest-bearing liabilities increased 305 basis points, the rate paid on subordinated debentures issued to capital trusts increased 334 basis points and the rate paid on reverse repurchase agreements increased 123 basis points. Interest rates earned on loans and paid on deposits are affected by the mix of the loan and deposit portfolios, the stated maturity of loans and time deposits, the amount of fixed-rate and variable-rate loans and other repricing characteristics. Throughout 2022, competition for deposits was not as intense and market rates on deposits moved higher at a slower pace. In 2023, overall competition for deposits intensified as a few banks experienced significant liquidity issues in March 2023 and market rates moved higher more rapidly. Also, as market interest rates moved higher, some deposit holders chose to move funds into non-deposit investment products.
For additional information on net interest income components, refer to the “Average Balances, Interest Rates and Yields” table in this Report.
Provision for and Allowance 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 replaced 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 economic conditions, including but not limited to, changes in the national unemployment rate, commercial real estate price index, housing price index, consumer sentiment, gross domestic product (GDP) and construction spending.
Challenging or worsening economic conditions from higher inflation or interest rates, COVID-19 and subsequent variant outbreaks or similar events, global unrest 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, ongoing correspondence with borrowers and problem loan workouts. 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 year ended December 31, 2023, the Company recorded a provision expense of $2.3 million on its portfolio of outstanding loans, compared to a provision expense of $3.0 million for the year ended December 31, 2022. The Company experienced net charge offs of $1.1 million for the year ended December 31, 2023 compared to net charge offs of $274,000 for the year ended December 31, 2022. The Company recorded a negative provision for losses on unfunded commitments of $5.3 million for the year ended December 31, 2023, compared to provision expense of $3.2 million for the year ended December 31, 2022. General market conditions and unique circumstances related to specific industries and individual projects contribute to the level of provisions and charge-offs.
The Bank’s allowance for credit losses as a percentage of total loans was 1.39% at both December 31, 2023 and 2022. Management considers the allowance for credit losses adequate to cover losses inherent in the Bank’s loan portfolio at December 31, 2023, 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 credit loss provisions could be required, thereby adversely affecting the Company’s future results of operations and financial condition.
Non-performing Assets
As a result of changes in balances and composition of the loan portfolio, changes in economic and market conditions and other factors specific to a borrower’s circumstances, the level of non-performing assets will fluctuate.
Non-performing assets at December 31, 2023, were $11.8 million, an increase of $8.1 million from $3.7 million at December 31, 2022. Non-performing assets as a percentage of total assets were 0.20% at December 31, 2023, compared to 0.07% at December 31, 2022.
Compared to December 31, 2022, non-performing loans increased $8.1 million to $11.7 million at December 31, 2023, and foreclosed assets decreased $27,000, to $23,000 at December 31, 2023. The majority of the increase in non-performing loans was in the non-performing commercial real estate loans category, which increased $9.0 million from December 31, 2022, primarily due to one loan relationship being added to the category in 2023.
Non-performing Loans. Activity in the non-performing loans category during the year ended December 31, 2023, was as follows:
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
December 31
(In Thousands)
One- to four-family construction
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Subdivision construction
-
-
-
-
-
-
-
-
Land development
-
-
-
-
-
-
Commercial construction
-
-
-
-
-
-
-
-
One- to four-family residential
-
-
(21)
(31)
(664)
Other residential
-
-
-
-
-
-
-
-
Commercial real estate
1,579
10,991
-
-
-
-
(2,018)
10,552
Commercial business
-
-
-
-
(602)
Consumer
(11)
-
-
(123)
(410)
Total non-performing loans
$
3,670
$
11,958
$
(11)
$
-
$
(21)
$
(154)
$
(3,694)
$
11,748
FDIC-assisted acquired loans included above
$
$
2,298
$
-
$
-
$
(21)
$
(31)
$
(412)
$
2,262
At December 31, 2023, the non-performing commercial real estate category included four loans, two of which were added during the year ended December 31, 2023. The largest relationship in this category, which totaled $8.1 million, or 76.4% of the total category, was added to non-performing loans during the three months ended June 30, 2023 and is collateralized by an office building in Missouri. The loan was classified due to a decline in occupancy resulting in a stressed cash flow. Occupancy has improved somewhat and lease income from the building has continued, and the Company has received some principal paydowns from the borrower. Another significant relationship was added to the commercial real estate category in the three months ended December 31, 2023. This relationship totaled $2.2 million and is collateralized by an assisted living facility in Wisconsin. The non-performing one- to four-family residential category included three loans. The largest relationship in this category, which was added during 2023 and is collateralized by a single-family home in the Kansas City metro area, totaled $543,000, or 75.2% of the total category. The non-performing land development category consisted of one loan added in 2021, which totaled $384,000 and is collateralized by unimproved zoned vacant ground in southern Illinois. The non-performing commercial business category consisted of two loans that totaled $31,000 to a single borrower, both of which were added during 2023. The non-performing consumer category included six loans, three of which were added during 2023.
Other Real Estate Owned and Repossessions. All of the total $23,000 of other real estate owned and repossessions at December 31, 2023 were acquired through foreclosure.
Activity in foreclosed assets and repossessions during the year ended December 31, 2023, was as follows:
Beginning
Ending
Balance,
Capitalized
Write-
Balance,
January 1
Additions
Sales
Costs
Downs
December 31
(In Thousands)
One- to four-family construction
$
-
$
-
$
-
$
-
$
-
$
-
Subdivision construction
-
-
-
-
-
-
Land development
-
-
-
-
-
-
Commercial construction
-
-
-
-
-
-
One- to four-family residential
-
(21)
-
-
-
Other residential
-
-
-
-
-
-
Commercial real estate
-
-
-
-
-
-
Commercial business
-
-
-
-
-
-
Consumer
(115)
-
-
Total foreclosed assets and repossessions
$
$
$
(136)
$
-
$
-
$
FDIC-assisted acquired assets included above
$
-
$
$
(21)
$
-
$
-
$
-
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.
Potential Problem Loans. Potential problem loans increased $5.8 million during the year ended December 31, 2023, from $1.6 million at December 31, 2022 to $7.4 million at December 31, 2023. 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 current repayment terms. These loans are not reflected in non-performing assets.
Activity in the potential problem loans category during the year ended December 31, 2023, was as follows:
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
December 31
(In Thousands)
One- to four-family construction
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Subdivision construction
-
-
-
-
-
-
-
-
Land development
-
-
-
-
-
-
-
-
Commercial construction
-
-
-
-
-
-
-
-
One- to four-family residential
1,348
(1,016)
(105)
-
-
(236)
Other residential
-
7,162
-
-
-
-
-
7,162
Commercial real estate
-
-
-
-
-
-
-
-
Commercial business
-
-
-
-
-
-
-
-
Consumer
(143)
(6)
(5)
(15)
(67)
Total potential problem loans
$
1,578
$
7,389
$
(1,159)
$
(111)
$
(5)
$
(15)
$
(303)
$
7,374
FDIC-assisted acquired loans included above
$
$
-
$
(639)
$
-
$
-
$
-
$
(4)
$
At December 31, 2023, the other residential (multi-family) category of potential problem loans included one loan, which totaled $7.2 million, and was added in 2023. This loan is collateralized by an apartment and retail project in Oklahoma City, OK. This loan was added to potential problems loans due to a decline in occupancy resulting in a stressed cash flow. The borrower continues to make schedule interest payments. At December 31, 2023, the one- to four-family residential category of potential problem loans included
two loans. The largest relationship in this category totaled $99,000, or 62.5% of the total category. The consumer category of potential problem loans included six loans.
Loans Categorized as “Watch” and “Special Mention”
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.” Multiple loan reviews take place on a continuous basis by credit risk and lending management. Reviews are focused on financial performance, occupancy trends, delinquency status, covenant compliance, collateral support, economic considerations and various other factors. Loans classified as “Watch” are being monitored due to indications of potential weaknesses or deficiencies that may require future reclassification as special mention or substandard. Loans classified as “Watch” decreased $20.4 million, from $28.7 million at December 31, 2022 to $8.3 million at December 31, 2023, primarily due to the combination of one large loan being upgraded to “Satisfactory,” one unrelated large loan being downgraded to “Substandard” and added to non-performing loans, and one unrelated loan being downgraded to “Special Mention.” While loans classified as “Special Mention” are not adversely classified, they are deserving of management’s close attention to ensure repayment prospects or the credit position of the assets does not deteriorate and expose the institution to elevated risk to warrant adverse classification at a future date. In the year ended December 31, 2023, loans classified as “Special Mention” increased $26.7 million as four loan relationships were downgraded from “Satisfactory.” In the year ended December 31, 2023, four loan relationships were downgraded from “Satisfactory.” The largest relationship consisted of four commercial business loans totaling $9.9 million at December 31, 2023 and is secured by business assets, equipment, accounts receivable and real estate. The relationship was added to the “Special Mention” category during 2023 due to stressed cash flow associated with business expansion. Since that time, the borrower has reduced debt by restructuring business operations, resulting in improved business cash flow and collateral margins. At December 31, 2023, a $9.6 million relationship was included in the “Special Mention” category. The balance represents a participation in a loan collateralized by a student housing project in Texas. The company is not the lead lender for this relationship. The project has suffered from rising debt service requirements and a decline in occupancy. A relationship totaling $4.4 million at December 31, 2023 was added to the “Special Mention” category in 2023. This relationship is collateralized by three assisted care facilities located in southwest Missouri. Business cash flow was negatively impacted by a labor shortage and a decrease in Medicaid reimbursement during 2022-2023. Monthly payments continue to amortize the loan balance. See Note 3 for further discussion of the Company’s loan grading system.
Non-Interest Income
Non-interest income for the year ended December 31, 2023 was $30.1 million compared to $34.1 million for the year ended December 31, 2022. The decrease of $4.0 million, or 11.9%, was primarily as a result of the following items:
Point-of-sale and ATM fees: Point-of-sale and ATM fees decreased $1.4 million compared to the prior year. This decrease was primarily due to a portion of these transactions now being routed through channels with lower fees to the Company, which is expected to continue in future periods, and certain increases in related processing costs during the transition to a new debit card processor.
Other income: Other income decreased $1.2 million compared to the prior year. In 2022, a gain of $1.1 million was recognized on sales of fixed assets, with no similar transactions occurring in the current year.
Gain (loss) on derivative interest rate products: In 2023, the Company recognized a loss of $337,000 on the change in fair value of its back-to-back interest rate swaps related to commercial loans and the change in fair value on interest rate swaps related to brokered time deposits. In 2022, the Company recognized a gain of $321,000 on the change in fair value of its back-to-back interest rate swaps related to commercial loans.
Non-Interest Expense
Total non-interest expense increased $7.6 million, or 5.7%, from $133.4 million in the year ended December 31, 2022, to $141.0 million in the year ended December 31, 2023. The Company’s efficiency ratio for the year ended December 31, 2023 was 63.16%, compared to 57.05% for 2022. In the year ended December 31, 2023, the change in the efficiency ratio was primarily due to an increase in non-interest expense, and decreases non-interest income and net interest income. The Company’s ratio of non-interest expense to average assets was 2.47% for the year ended December 31, 2023 compared to 2.42% for the year ended December 31,
2022. Average assets for the year ended December 31, 2023, increased $199.4 million, or 3.6%, from the year ended December 31, 2022, primarily due to increases in average net loans receivable.
The following were significant items related to the increase in non-interest expense for the year ended December 31, 2023 as compared to the year ended December 31, 2022:
Salaries and employee benefits: Salaries and employee benefits increased $3.2 million from the prior year. A portion of this increase related to normal annual merit increases in various lending and operations areas. In 2023, some of these increases were larger than in previous years due to the current employment environment. Also, in the fourth quarter of 2023, the Company recorded expense totaling $441,000 related to discretionary bonuses awarded to various associates who have been involved significantly in the software and systems transition. In addition, compensation costs related to originated loans that are deferred under accounting rules decreased by $1.3 million in 2023 compared to 2022 (resulting in higher expense in 2023), as the volume of loans originated in 2023 decreased substantially compared to 2022.
Net occupancy expenses: Net occupancy expenses increased $2.4 million from the prior year. Various components of computer license and support expenses increased by $1.4 million in 2023 compared to 2022. In addition, various repairs and maintenance expenses increased by $252,000 in 2023 compared to 2022.
Insurance: Insurance expense increased $1.3 million from the prior year. The increase was primarily due to previously announced increases in deposit insurance rates for the FDIC’s Deposit Insurance Fund.
Legal, Audit and Other Professional Fees: Legal, audit and other professional fees increased $756,000 from the prior year, to $7.1 million. In 2023, the Company expensed a total of $4.0 million, primarily related to training and implementation costs for the upcoming core systems conversion and professional fees to consultants engaged to support the Company’s transition of core and ancillary software and information technology systems, compared to $3.1 million expensed in 2022. In addition, in 2022, the Company expensed $372,000 in fees related to the interest rate swaps initiated in July 2022, which was not repeated in 2023.
Provision for Income Taxes
For the years ended December 31, 2023 and 2022, the Company’s effective tax rate was 20.6% and 19.4%, respectively. These effective rates were near or below the statutory federal tax rate of 21%, due primarily to the utilization of certain investment tax credits and the Company’s 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 continually evolve as taxable income and apportionment between states are 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.
Average Balances, Interest Rates and Yields
The following table presents, 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 $5.7 million, $6.3 million and $11.2 million for 2023, 2022 and 2021, respectively. Tax-exempt income was not calculated on a tax equivalent basis. The table does not reflect any effect of income taxes.
Dec. 31,
Year Ended
Year Ended
Year Ended
December 31, 2023
December 31, 2022
December 31, 2021
Yield/
Average
Yield/
Average
Yield/
Average
Yield/
Rate
Balance
Interest
Rate
Balance
Interest
Rate
Balance
Interest
Rate
(Dollars In Thousands)
Interest-earning assets:
Loans receivable:
One- to four-family residential
3.88
%
$
905,102
$
33,693
3.72
%
$
811,896
$
27,853
3.43
%
$
678,900
$
25,251
3.72
%
Other residential
7.15
822,955
56,274
6.84
837,582
43,174
5.15
922,739
40,998
4.44
Commercial real estate
6.10
1,493,130
87,670
5.87
1,551,541
73,164
4.72
1,541,095
65,811
4.27
Construction
7.90
908,558
65,999
7.26
679,524
37,370
5.50
616,899
27,696
4.49
Commercial business
6.50
308,049
18,310
5.94
292,825
14,615
4.99
279,232
15,403
5.52
Other loans
6.70
181,649
9,125
5.02
199,336
8,864
4.45
220,783
10,347
4.69
Industrial revenue bonds (1)
6.10
12,413
7.10
13,338
5.33
14,528
5.25
Total loans receivable
6.25
4,631,856
271,952
5.87
4,386,042
205,751
4.69
4,274,176
186,269
4.36
Investment securities (1)
2.77
685,496
19,942
2.91
675,571
19,170
2.84
447,943
11,689
2.61
Interest-earning deposits in other banks
5.34
98,049
4,941
5.04
195,817
2,056
1.05
552,094
0.13
Total interest-earning assets
5.81
5,415,401
296,835
5.48
5,257,430
226,977
4.32
5,274,213
198,673
3.77
Non-interest-earning assets:
Cash and cash equivalents
90,881
96,353
96,989
Other non-earning assets
212,914
166,007
131,154
Total assets
$
5,719,196
$
5,519,790
$
5,502,356
Interest-bearing liabilities:
Interest-bearing demand and savings
1.67
$
2,202,242
28,579
1.30
$
2,322,915
5,968
0.26
$
2,316,890
4,023
0.17
Time deposits
3.79
991,202
29,459
2.97
890,507
8,546
0.96
1,076,446
8,090
0.75
Brokered deposits
5.20
611,821
30,719
5.02
252,281
6,162
2.44
84,688
1.17
Total deposits
2.80
3,805,265
88,757
2.33
3,465,703
20,676
0.60
3,478,024
13,102
0.38
Securities sold under reverse repurchase agreements
1.66
82,218
1,205
1.47
132,595
0.24
143,757
0.03
Short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities
5.64
142,866
7,500
5.25
48,530
1,066
2.20
1,529
-
-
Subordinated debentures issued to capital trust
7.24
25,774
1,736
6.74
25,774
3.40
25,774
1.74
Subordinated notes
5.92
74,430
4,422
5.94
74,131
4,422
5.97
119,780
7,165
5.98
Total interest-bearing liabilities
3.03
4,130,553
103,620
2.51
3,746,733
27,363
0.73
3,768,864
20,752
0.55
Non-interest-bearing liabilities:
Demand deposits
949,045
1,141,660
1,061,716
Other liabilities
88,678
66,224
44,260
Total liabilities
5,168,276
4,954,617
4,874,840
Stockholders’ equity
550,920
565,173
627,516
Total liabilities and stockholders’ equity
$
5,719,196
$
5,519,790
$
5,502,356
Net interest income:
Interest rate spread
2.78
%
$
193,215
2.97
%
$
199,614
3.59
%
$
177,921
3.22
%
Net interest margin*
3.57
%
3.80
%
3.37
%
Average interest-earning assets to average interest- bearing liabilities
131.1
%
140.3
%
139.9
%
*
Defined as the Company’s net interest income divided by total interest-earning assets.
(1)
Of the total average balance of investment securities, average tax-exempt investment securities were $56.0 million, $54.0 million and $42.3 million for 2023, 2022 and 2021, respectively. In addition, average tax-exempt industrial revenue bonds were $13.9 million, $16.4 million and $17.9 million in 2023, 2022 and 2021, respectively. Interest income on tax-exempt assets included in
this table was $2.4 million, $2.2 million and $1.6 million for 2023, 2022 and 2021, respectively. Interest income net of disallowed interest expense related to tax-exempt assets was $2.1 million, $2.1 million and $1.6 million for 2023, 2022 and 2021, respectively.
Rate/Volume Analysis
The following table presents the dollar amount 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.
Year Ended
Year Ended
December 31, 2023 vs.
December 31, 2022 vs.
December 31, 2022
December 31, 2021
Increase (Decrease)
Total
Increase (Decrease)
Total
Due to
Increase
Due to
Increase
Rate
Volume
(Decrease)
Rate
Volume
(Decrease)
(In Thousands)
Interest-earning assets:
Loans receivable
$
54,141
$
12,060
$
66,201
$
14,512
$
4,970
$
19,482
Investment securities
1,098
6,383
7,481
Interest-earning deposits in other banks
3,321
(436)
2,885
1,475
(134)
1,341
Total interest-earning assets
57,950
11,908
69,858
17,085
11,219
28,304
Interest-bearing liabilities:
Demand deposits
22,904
(293)
22,611
1,935
1,945
Time deposits
19,843
1,070
20,913
1,212
(756)
Brokered Deposits
10,449
14,108
24,557
1,839
3,334
5,173
Total deposits
53,196
14,885
68,081
4,986
2,588
7,574
Securities sold under reverse repurchase agreements
(72)
(3)
Short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities
2,684
3,750
6,434
1,066
Subordinated debentures issued to capital trust
-
-
Subordinated notes
(18)
-
(20)
(2,723)
(2,743)
Total interest-bearing liabilities
57,676
18,581
76,257
6,073
6,611
Net interest income
$
$
(6,673)
$
(6,399)
$
11,012
$
10,681
$
21,693
Results of Operations and Comparison for the Years Ended December 31, 2022 and 2021
General
Net income increased $1.3 million, or 1.8%, during the year ended December 31, 2022, compared to the year ended December 31, 2021. Net income was $75.9 million for the year ended December 31, 2022 compared to $74.6 million for the year ended December 31, 2021. This increase was primarily due to an increase in net interest income of $21.7 million, or 12.2%, and a decrease in income tax expense of $1.5 million, or 7.5%, partially offset by an increase in provision for credit losses on loans and unfunded commitments of $11.9 million, or 207.4%, an increase in non-interest expense of $5.7 million, or 4.5%, and a decrease in non-interest income of $4.2 million, or 10.9%.
Total Interest Income
Total interest income increased $28.3 million, or 14.2%, during the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was due to a $19.5 million increase in interest income on loans and an $8.8 million increase in interest income on investment securities and other interest-earning assets. Interest income on loans increased for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to higher average rates of interest on loans and higher average loan balances. Interest income from investment securities and other interest-earning assets increased during the year ended December 31, 2022 compared to the year ended December 31, 2021, due to higher average balances of investment securities combined with higher average rates of interest on investment securities and other interest-earning assets.
Interest Income - Loans
During the year ended December 31, 2022 compared to the year ended December 31, 2021, interest income on loans increased due to higher average balances and average interest rates. Interest income increased $14.5 million as the result of higher average interest rates on loans. The average yield on loans increased from 4.36% during the year ended December 31, 2021 to 4.69% during the year ended December 31, 2022. This increase was primarily due to the repricing of floating rates and the origination of new loans at current market rates in 2022 as market interest rates began to increase significantly. In addition, interest income on loans increased $5.0 million as a result of higher average loan balances, which increased from $4.27 billion during the year ended December 31, 2021, to $4.39 billion during the year ended December 31, 2022. The Company continued to originate loans at a pace similar to prior periods, but overall loan repayments slowed in 2022 compared to the level of repayments in 2021.
Additionally, the Company’s interest income on loans included accretion of net deferred fees related to Paycheck Protection Program (PPP) loans originated in 2020 and 2021. Net deferred fees recognized in interest income were $502,000 and $5.5 million in the years ended December 31, 2022 and December 31, 2021, respectively.
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 million with 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 this swap prior to its contractual maturity. The Company was paid $45.9 million from 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 the interest rate swap of $8.1 million in each of the years ended December 31, 2022 and December 31, 2021. At December 31, 2022, the Company expected 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 March 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 million with a contractual termination date of March 1, 2024. Under the terms of the swap, the Company received a fixed rate of interest of 1.6725% and paid 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 reset monthly and net settlements of interest due to/from the counterparty also occurred monthly. The initial floating rate of interest was set at 0.2414%. To the extent that the fixed rate of interest exceeded one-month USD-LIBOR, the Company received net interest settlements, which were recorded as loan interest income. If one-month USD-LIBOR exceeded the fixed rate of interest, the Company was required to pay net settlements to the counterparty and recorded those net payments as a reduction of interest income on loans. The Company recorded a reduction of loan interest income related to this swap transaction of $941,000 in the year ended December 31, 2022.
In July 2022, the Company entered into two additional interest rate swap transactions as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans. The notional amount of each swap is $200 million with an effective date of May 1, 2023 and a termination date of May 1, 2028. Under the terms of one swap, beginning in May 2023, the Company will receive a fixed rate of interest of 2.628% and will pay a floating rate of interest equal to one-month USD-SOFR OIS. Under the terms of the other swap, beginning in May 2023, the Company will receive a fixed rate of interest of 5.725% and will pay a floating rate of interest equal to one-month USD-Prime. In each case, the floating rate will be reset monthly and net settlements of interest due to/from the counterparty will also occur monthly. To the extent the fixed rate of interest exceeds the floating rate of interest, the Company will receive net interest settlements, which will be recorded as loan interest income. If the floating rate of interest exceeds the fixed rate of interest, 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. At December 31, 2022, the USD-Prime rate was 7.50% and the one-month USD-SOFR OIS rate was 4.06173%.
Interest Income - Investments and Other Interest-earning Assets
Interest income on investments increased $7.5 million in the year ended December 31, 2022 compared to the year ended December 31, 2021. Interest income increased $6.4 million as a result of an increase in average balances from $447.9 million during the year ended December 31, 2021, to $675.6 million during the year ended December 31, 2022. Interest income increased $1.1 million due to an increase in average interest rates from 2.61% during the year ended December 31, 2021 to 2.84% during the year ended December 31, 2022, due to higher market rates of interest on investment securities purchased during 2022 compared to securities already in the portfolio. At December 31, 2022, the investment portfolio did not include a material amount of adjustable rate securities.
Interest income on other interest-earning assets increased $1.3 million in the year ended December 31, 2022 compared to the year ended December 31, 2021. Interest income increased $1.5 million as a result of higher average interest rates from 0.13% during the year ended December 31, 2021, to 1.05% during the year ended December 31, 2022. Interest income decreased $134,000 as a result of a decrease in average balances from $552.1 million during the year ended December 31, 2021, to $195.8 million during the year ended December 31, 2022. The increase in the average interest rate was primarily due to the increase in the rate paid on funds held at the Federal Reserve Bank. This rate was increased multiple times in 2022 in conjunction with the increase in the Federal Funds target interest rate.
Total Interest Expense
Total interest expense increased $6.6 million, or 31.9%, during the year ended December 31, 2022, when compared with the year ended December 31, 2021, due to an increase in interest expense on deposits of $7.6 million, or 57.8%, an increase in interest expense on short-term borrowings of $1.1 million, or 100.0%, an increase in interest expense on subordinated debentures issued to capital trusts of $427,000, or 95.3%, and an increase in interest expense on securities sold under reverse repurchase agreements of $287,000, or 775.7%, partially offset by a decrease in interest expense on subordinated notes of $2.7 million, or 31.9%.
Interest Expense - Deposits
Interest expense on demand deposits increased $1.9 million due to an increase in average rates from 0.17% during the year ended December 31, 2021, to 0.26% during the year ended December 31, 2022. In addition, interest on demand deposits increased $10,000 due to an increase of $6.0 million in average balances to $2.32 billion in the year ended December 31, 2022, when compared to the year ended December 31, 2021. Interest rates paid on demand deposits increased due to increases in the federal funds rate of interest and other market interest rates during 2022.
Interest expense on time deposits increased $1.2 million due to an increase in average rates of interest from 0.75% during the year ended December 31, 2021, to 0.96% during the year ended December 31, 2022. Partially offsetting that increase, interest expense on time deposits decreased $756,000 due to a decrease in the average balance of time deposits from $1.08 billion during the year ended December 31, 2021, to $891.5 million during the year ended December 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 in the latter half of 2022 generally resulted in the Company paying a higher rate of interest due to market interest rate increases during 2022. The decrease in average balances of time deposits was a result of decreases in retail time deposits obtained through the Company’s banking center network and time deposits obtained through on-line channels. On-line channel time deposits were actively reduced by the Company as other deposit sources increased. The Company reduced its rates on these types of time deposits and allowed these deposits to mature without replacement during 2021 and 2022.
Interest expense on brokered deposits increased $3.3 million, due to an increase in average balances from $84.7 million during the year ended December 31, 2021 to $252.3 million during the year ended December 31, 2022. Interest expense on brokered deposits also increased $1.8 million due to average rates of interest that increased from 1.17% in the year ended December 31, 2021 to 2.44% in the year ended December 31, 2022. Brokered deposits added during 2022 were at higher market rates than brokered deposits previously issued. The Company uses brokered deposits of select maturities and interest rate structures from time to time to supplement its various funding channels and to manage interest rate risk.
Interest Expense - FHLBank Advances, Short-term Borrowings, Repurchase Agreements and Other Interest-bearing Liabilities; Subordinated Debentures Issued to Capital Trust and Subordinated Notes
FHLBank term advances were not utilized during the years ended December 31, 2022 and 2021. FHLBank overnight borrowings were utilized in 2022, but were not utilized in 2021.
Interest expense on reverse repurchase agreements increased $290,000 due to an increase in average rates during the year ended December 31, 2022 when compared to the year ended December 31, 2021. The average rate of interest was 0.24% for the year ended December 31, 2022, compared to 0.03% during the year ended December 31, 2021. The average balances of repurchase agreements decreased $11.2 million from $143.8 million in the year ended December 31, 2021, to $132.6 million in the year ended December 31, 2022, resulting in little change in interest expense.
Interest expense on short-term borrowings and other interest-bearing liabilities increased $676,000 due to an increase in average balances from $1.5 million during the year ended December 31, 2021, to $48.5 million during the year ended December 31, 2022, which was primarily due to changes in the Company’s funding needs and the mix of funding, which can fluctuate. Most of this increase was due to the utilization of overnight borrowings from the FHLBank. In addition to this increase, interest expense on short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities increased $390,000 due to average rates that increased from 0.02% in the year ended December 31, 2021, to 2.20% in the year ended December 31, 2022.
During the year ended December 31, 2022, compared to the year ended December 31, 2021, interest expense on subordinated debentures issued to capital trusts increased $427,000 due to higher average interest rates. The average interest rate was 1.74% in 2021, compared to 3.40% in 2022. The interest rate on subordinated debentures is a floating rate indexed to the three-month LIBOR interest rate. There was no change in the average balance of the subordinated debentures between 2022 and 2021.
In August 2016, the Company issued $75 million of 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 $73.5 million. In June 2020, the Company issued $75.0 million of 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, the issuance costs are amortized over the expected life of the notes, which is five years from the issuance date, and therefore impact the overall interest expense on the notes. In August 2021, the Company completed the redemption of all 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. Interest expense on subordinated notes decreased $2.7 million due to a decrease in average balances from $119.8 million during the year ended December 31, 2021 to $74.1 million during the year ended December 31, 2022, due to lower average balances resulting from the redemption of the subordinated notes maturing in 2026.
Net Interest Income
Net interest income for the year ended December 31, 2022 increased $21.7 million, or 12.2%, to $199.6 million, compared to $177.9 million for the year ended December 31, 2021. Net interest margin was 3.80% for the year ended December 31, 2022, compared to 3.37% for the year ended December 31, 2021, an increase of 43 basis points. The Company experienced increases in interest income on both loans and investment securities. The Company experienced increases in interest expense on deposits, short-term borrowings, subordinated debentures issued to capital trust and repurchase agreements, partially offset by a decrease in interest expense on subordinated notes.
The Company’s overall interest rate spread increased 37 basis points, or 11.5%, from 3.22% during the year ended December 31, 2021, to 3.59% during the year ended December 31, 2022. The increase was due to a 55 basis point increase in the weighted average yield on interest-earning assets and an 18 basis point increase in the weighted average rate paid on interest-bearing liabilities. In comparing the two years, the yield on loans increased 33 basis points, the yield on investment securities increased 23 basis points and the yield on other interest-earning assets increased 92 basis points. The rate paid on deposits increased 22 basis points, the rate paid on subordinated debentures issued to capital trusts increased 166 basis points, the rate paid on reverse repurchase agreements increased 21 basis points and the rate paid on subordinated notes decreased one basis point. In addition, the Company had outstanding overnight borrowings in the 2022 period, which had an average interest rate of 220 basis points compared to none in the 2021 period.
During the year ended December 31, 2022, the mix of the Company’s assets shifted somewhat, with net increases in outstanding loan balances and investment securities. The Company used excess funds that were previously held on account at the Federal Reserve Bank to fund the increases in loans and investments. Loans increased $499.3 million and investment securities increased $192.1 million, while cash and cash equivalents decreased $548.7 million. Also, in the latter half of 2022, the mix of deposits changed somewhat, with non-time account balances trending lower and time deposit balances trending higher. The increased time deposits are a mix of shorter-term retail deposits, fixed-rate brokered deposits callable at the Company’s discretion and variable-rate brokered deposits. From time to time, the Company also utilized overnight borrowings from the FHLBank.
For additional information on net interest income components, refer to the “Average Balances, Interest Rates and Yields” table in this Report.
Provision for and Allowance for Credit Losses
During the year ended December 31, 2022, the Company recorded a provision expense of $3.0 million on its portfolio of outstanding loans, compared to a negative provision of $6.7 million for the year ended December 31, 2021. The negative provision for credit losses in 2021 reflected decreased outstanding total loans and continued positive trends in asset quality metrics, combined with an improved economic forecast. In 2021, the national unemployment rate continued to decrease and many measures of economic growth improved. The Company experienced net charge offs of $274,000 for the year ended December 31, 2022 compared to net recoveries of $116,000 for the year ended December 31, 2021. The provision for losses on unfunded commitments for the year ended December 31, 2022 was $3.2 million, compared to $939,000 for the year ended December 31, 2021. 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.
The Bank’s allowance for credit losses as a percentage of total loans was 1.39% and 1.49% at December 31, 2022 and 2021, respectively.
Non-performing Assets
Non-performing assets at December 31, 2022, were $3.7 million, a decrease of $2.3 million from $6.0 million at December 31, 2021. Non-performing assets as a percentage of total assets were 0.07% at December 31, 2022, compared to 0.11% at December 31, 2021.
Compared to December 31, 2021, non-performing loans decreased $1.7 million to $3.7 million at December 31, 2022, and foreclosed assets decreased $538,000 to $50,000 at December 31, 2022. Non-performing commercial real estate loans were $1.6 million, or 43.0%, of total non-performing loans at December 31, 2022. Nonperforming one-to four-family residential loans were $722,000, or 19.6%, of the total non-performing loans at December 31, 2022. Non-performing commercial business loans were $586,000, or 16.0%, of total non-performing loans at December 31, 2022. Non-performing land development loans were $384,000, or 10.5%, of total nonperforming loans at December 31, 2022. Non-performing consumer loans were $399,000, or 10.9%, of the total non-performing loans at December 31, 2022.
Non-performing Loans. Activity in the non-performing loans category during the year ended December 31, 2022, was as follows:
Transfers to
Transfers to
Beginning
Additions to
Removed
Potential
Foreclosed
Ending
Balance,
Non-
from Non-
Problem
Assets and
Charge-
Balance,
January 1
Performing
Performing
Loans
Repossessions
Offs
Payments
December 31
(In Thousands)
One- to four-family construction
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Subdivision construction
-
-
-
-
-
-
-
-
Land development
-
-
-
-
(84)
-
Commercial construction
-
-
-
-
-
-
-
-
One- to four-family residential
2,216
(90)
(279)
-
(37)
(1,607)
Other residential
-
-
-
-
-
-
-
-
Commercial real estate
2,006
-
-
-
-
(665)
1,579
Commercial business
-
-
-
-
-
-
Consumer
-
(74)
(9)
(92)
(327)
Total non-performing loans
$
5,423
$
1,511
$
(90)
$
(353)
$
(9)
$
(213)
$
(2,599)
$
3,670
FDIC-assisted acquired loans included above
$
1,736
$
$
-
$
-
$
-
$
-
$
(1,580)
$
At December 31, 2022, the non-performing commercial real estate category included three loans, one of which was added during 2022. The largest relationship in this category, which totaled $1.3 million, or 83.3% of the total category, was transferred from potential problem loans in 2021 and is collateralized by a mixed use commercial retail building. The non-performing one- to four-family residential category included 23 loans, four of which were added during 2022. The largest relationship in this category, totaled $158,000, or 21.8% of the total category. The non-performing land development category consisted of one loan, which totaled $384,000 and is collateralized by unimproved zoned vacant ground in southern Illinois. The non-performing commercial business category consisted of two loans that totaled $586,000 to a single borrower, both of which were added during the fourth quarter of 2022 and subsequently paid off with no loss in the first quarter of 2023. The non-performing consumer category included 23 loans, 11 of which were added during 2022.
Other Real Estate Owned and Repossessions. Of the total $233,000 of other real estate owned and repossessions at December 31, 2022, $183,000 represents properties which were not acquired through foreclosure.
Activity in foreclosed assets and repossessions during the year ended December 31, 2022, was as follows:
Beginning
Ending
Balance,
Capitalized
Balance,
January 1
Additions
Sales
Costs
Write-Downs
December 31
(In Thousands)
One- to four-family construction
$
-
$
-
$
-
$
-
$
-
$
-
Subdivision construction
-
-
-
-
-
-
Land development
-
(300)
-
(15)
-
Commercial construction
-
-
-
-
-
-
One- to four-family residential
-
(175)
-
(8)
-
Other residential
-
-
-
-
-
-
Commercial real estate
-
-
-
-
-
-
Commercial business
-
-
-
-
-
-
Consumer
(384)
-
-
Total foreclosed assets and repossessions
$
$
$
(859)
$
-
$
(23)
$
FDIC-assisted acquired assets included above
$
$
-
$
(475)
$
-
$
(23)
$
-
The Company sold its three remaining foreclosed real estate properties in 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.
Potential Problem Loans. Potential problem loans decreased $402,000 during the year ended December 31, 2022, from $2.0 million at December 31, 2021 to $1.6 million at December 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 current repayment terms. These loans are not reflected in non-performing assets.
Activity in the potential problem loans category during the year ended December 31, 2022, was as follows:
Removed
Transfers to
Beginning
Additions
from
Transfers
Foreclosed
Ending
Balance,
to Potential
Potential
to Non-
Assets and
Balance,
January 1
Problem
Problem
Performing
Repossessions
Charge-Offs
Payments
December 31
(In Thousands)
One- to four-family construction
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Subdivision construction
-
-
-
-
-
(15)
-
Land development
-
-
-
-
-
-
-
-
Commercial construction
-
-
-
-
-
-
-
-
One- to four-family residential
1,432
(275)
-
-
-
(88)
1,348
Other residential
-
-
-
-
-
-
-
-
Commercial real estate
-
-
-
-
(44)
(166)
-
Commercial business
-
-
-
-
-
-
-
-
Consumer
(58)
(37)
(27)
(9)
(123)
Total potential problem loans
$
1,980
$
$
(333)
$
(37)
$
(27)
$
(53)
$
(392)
$
1,578
FDIC-assisted acquired loans included above
$
1,004
$
-
$
-
$
-
$
-
$
(44)
$
(217)
$
At December 31, 2022, the one- to four- family residential category of potential problem loans included 22 loans, one of which was added during the year ended December 31, 2022. The largest relationship in this category totaled $159,000, or 11.8% of the total category. The consumer category of potential problem loans included 26 loans, 17 of which were added during the year ended December 31, 2022.
Loans Classified “Watch”
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 year ended December 31, 2022, loans classified as “Watch” decreased $2.0 million, from $30.7 million at December 31, 2021 to $28.7 million at December 31, 2022 primarily due to loans being upgraded out of the “Watch” category, partially offset by loans being downgraded to the “Watch” category. See Note 3 to the accompanying audited financial statements, which are included in Item 8 of this report, for further discussion of the Company’s loan grading system.
Non-Interest Income
Non-interest income for the year ended December 31, 2022 was $34.1 million compared with $38.3 million for the year ended December 31, 2021. The decrease of $4.2 million, or 10.9%, was primarily as a result of the following items:
Net gains on loan sales: Net gains on loan sales decreased $6.9 million compared to the prior year. The decrease was due to a decrease in originations of fixed-rate single-family mortgage loans during 2022 compared to 2021. 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 2022
and 2021, and as market interest rates moved higher beginning in the second quarter of 2022, mortgage refinance volume decreased and fixed rate loan originations and related gains on sales of these loans decreased substantially.
Other income: Other income increased $1.3 million compared to the prior year. In 2022, a gain of $1.0 million was recognized on sales of fixed assets. Also in 2022, the Company recorded a one-time bonus of $500,000 from its card processor for achieving certain benchmarks related to debit card activity.
Overdraft and Insufficient funds fees: Overdraft and Insufficient funds fees increased $1.2 million compared to the prior year. It appears that consumers continued to spend significantly in 2022, but some may have lower account balances as prices for goods and services increased and government stimulus payments received by consumers in 2020 and 2021 were exhausted.
Point-of-sale and ATM fees: Point-of-sale and ATM fees increased $676,000 compared to the prior year. This increase was mainly due to increased customer debit card transactions in 2022 compared to 2021. In the latter half of 2021 and through 2022, debit card usage by customers rebounded and was back to historical levels, and in many cases, increased levels of activity. However, during the three months ended December 31, 2022, debit card usage and revenue to Great Southern decreased a bit compared to recent quarterly periods. It appears that debit card transaction volumes may have decreased and customers may be using credit cards for more transactions instead.
Non-Interest Expense
Total non-interest expense increased $5.7 million, or 4.5%, from $127.7 million in the year ended December 31, 2021, to $133.4 million in the year ended December 31, 2022. The Company’s efficiency ratio for the year ended December 31, 2022 was 57.05%, compared to 59.03% for 2021. The higher efficiency ratio in 2021 was primarily due to an increase in non-interest expense (primarily from the significant IT consulting expense and related contract termination liability incurred in December 2021), partially offset by an increase in total revenue. Excluding this consulting expense and contract termination liability, the Company’s efficiency ratio was 56.57% in 2021. In the year ended December 31, 2022, the improvement in the efficiency ratio was primarily due to an increase in net interest income, as a result of increased loan and investment balances and increased market interest rates compared to the year ended December 31, 2021, partially offset by increased non-interest expense. The Company’s ratio of non-interest expense to average assets was 2.42% for the year ended December 31, 2022 compared to 2.32% for the year ended December 31, 2021. Average assets for the year ended December 31, 2022, increased $17.4 million, or 0.3%, from the year ended December 31, 2021, primarily due to increases in net loans receivable and investment securities, partially offset by a decrease interest-bearing cash equivalents.
The following were key items related to the increase in non-interest expense for the year ended December 31, 2022 as compared to the year ended December 31, 2021:
Salaries and employee benefits: Salaries and employee benefits increased $5.0 million from the prior year. A portion 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 employment environment. Also, in the second quarter of 2022, the Company paid a special cash bonus to all employees totaling $1.1 million in response to the rapid and significant increases in prices for many goods and services. In addition, the Phoenix and Charlotte, North Carolina loan offices were opened in 2022, with the operation of these offices adding approximately $727,000 of salaries and benefits expense in the 2022 year.
Other operating expenses: Other operating expenses increased $1.7 million from the prior year, to $8.3 million. Of this increase, $443,000 related to deposit account fraud losses and $219,000 related to charitable contributions.
Provision for Income Taxes
For the years ended December 31, 2022 and 2021, the Company’s effective tax rate was 19.4% and 20.9%, 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 the Company’s tax-exempt investments and tax-exempt loans, which reduced the Company’s effective tax rate.
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 December 31, 2023, the Company had commitments of approximately $14.0 million to fund loan originations, $1.21 billion of unused lines of credit and unadvanced loans, and $16.5 million of outstanding letters of credit.
Loan commitments and the unfunded portion of loans at the dates indicated were as follows (in thousands):
December 31,
December 31,
December 31,
December 31,
December 31,
Closed non-construction loans with unused available lines
Secured by real estate (one- to four-family)
$
203,964
$
199,182
$
175,682
$
164,480
$
155,831
Secured by real estate (not one- to four-family)
-
-
23,752
22,273
19,512
Not secured by real estate - commercial business
82,435
104,452
91,786
77,411
83,782
Closed construction loans with unused available lines
Secured by real estate (one-to four-family)
101,545
100,669
74,501
42,162
48,213
Secured by real estate (not one-to four-family)
719,039
1,444,450
1,092,029
823,106
798,810
Loan commitments not closed
Secured by real estate (one-to four-family)
12,347
16,819
53,529
85,917
69,295
Secured by real estate (not one-to four-family)
48,153
157,645
146,826
45,860
92,434
Not secured by real estate - commercial business
11,763
50,145
12,920
-
$
1,179,246
$
2,073,362
$
1,671,025
$
1,261,908
$
1,267,877
The following table summarizes the Company’s fixed and determinable contractual obligations by payment date as of December 31, 2023. Additional information regarding these contractual obligations is discussed further in Notes 6, 8, 9, 10, 11, 12, 13 and 18 of the accompanying audited financial statements, which are included in Item 8 of this Report.
Payments Due In:
One Year or
Over One to
Over Five
Less
Five Years
Years
Total
(In Thousands)
Deposits without a stated maturity
$
3,111,978
$
-
$
-
$
3,111,978
Time and brokered certificates of deposit
1,188,266
420,406
1,058
1,609,730
Short-term borrowings
323,453
-
-
323,453
Subordinated debentures
-
-
25,774
25,774
Subordinated notes
-
-
74,579
74,579
Operating leases
1,313
4,610
1,899
7,822
Dividends declared but not paid
4,722
-
-
4,722
$
4,629,732
$
425,016
$
103,310
$
5,158,058
The Company’s primary sources of funds are customer deposits, brokered deposits, short-term borrowings at the FHLBank, other borrowings, loan repayments, unpledged securities, proceeds from sales of loans and available-for-sale securities, and funds provided from operations. The Company utilizes various 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. Since mid-2022, the Company has
increased the interest rates it pays on many deposit products. The Company has also utilized both fixed-rate and floating-rate brokered deposits of varying terms, as well as overnight FHLBank borrowings.
At December 31, 2023 and 2022, the Company had these available secured lines and on-balance sheet liquidity:
December 31, 2023
December 31, 2022
Federal Home Loan Bank line
$
919.1 million
$
1,005.1 million
Federal Reserve Bank line
448.7 million
397.0 million
Cash and cash equivalents
211.3 million
168.5 million
Unpledged securities - Available-for-sale
352.8 million
371.8 million
Unpledged securities - Held-to-maturity
191.7 million
202.5 million
Statements of Cash Flows. During the years ended December 31, 2023, 2022 and 2021, the Company had positive cash flows from operating activities. The Company experienced negative cash flows from investing activities during the years ended December 31, 2023 and 2022, and positive cash flows from investing activities during the year ended December 31, 2021. The Company experienced positive cash flows from financing activities during the years ended December 31, 2023 and 2022, and negative cash flows from financing activities during the year ended December 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, realized gains on the sale of investment securities and loans, depreciation and amortization 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 sources of cash flows from operating activities. Operating activities provided cash flows of $80.7 million, $84.8 million and $93.7 million during the years ended December 31, 2023, 2022 and 2021, respectively.
During the years ended December 31, 2023, 2022 and 2021, investing activities used cash of $88.2 million, used cash of $819.5 million and provided cash of $181.9 million, respectively, primarily due to the net increases and purchases of loans (2023 and 2022) and investment securities (2022 and 2021), partially offset by cash received from the proceeds of repayments from investment securities in each year. During 2021, investing activities provided cash as net loan repayments exceeded the purchase of loans and investment securities.
Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows are primarily due to changes in deposits after interest credited, changes in short-term borrowings, redemption of subordinated notes, purchases of the Company’s common stock and dividend payments to stockholders. Financing activities provided cash flows of $50.3 million and $186.0 million during the years ended December 31, 2023 and 2022, respectively, primarily due to net increases in customer deposit balances and net increases or decreases in various borrowings, partially offset by dividend payments to stockholders and purchases of the Company’s common stock. Financing activities used cash flows of $122.2 million during the year ended December 31, 2021, as dividend payments to stockholders, redemption of subordinated notes and purchases of the Company’s common stock exceeded the net increase in deposits.
Capital Resources
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.
As of December 31, 2023, total stockholders’ equity and common stockholders’ equity were each $571.8 million, or 9.8% of total assets, equivalent to a book value of $48.44 per common share. As of December 31, 2022, total stockholders’ equity and common stockholders’ equity were each $533.1 million, or 9.4% of total assets, equivalent to a book value of $43.58 per common share. At December 31, 2023, the Company’s tangible common equity to tangible assets ratio was 9.7%, compared to 9.2% at December 31, 2022. Included in stockholders’ equity at December 31, 2023 and 2022, were unrealized losses (net of taxes) on the Company’s available-for-sale investment securities totaling $40.5 million and $47.2 million, respectively. This change in net unrealized loss during 2023 primarily resulted from decreasing intermediate-term market interest rates (which generally increased the fair value of investment securities) during the first three months of 2023, followed by increasing intermediate-term market interest rates (which
generally decreased the fair value of investment securities) during the period from March 31, 2023 through September 30, 2023. In the three months ended December 31, 2023, intermediate-term market interest rates decreased significantly (which once again generally increased the fair value of investment securities).
In addition, included in stockholders’ equity at December 31, 2023, were realized gains (net of taxes) on the Company’s cash flow hedge (interest rate swap), which was terminated in March 2020, totaling $11.1 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 December 31, 2023, the remaining pre-tax amount to be recorded in interest income was $14.4 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 December 31, 2023, were unrealized losses (net of taxes) on the Company’s three outstanding cash flow hedges (three interest rate swaps) totaling $13.0 million. Significant increases in market interest rates since the inception of these hedges have caused their fair values to decrease; however, market interest rates decreased in the three months ended December 31, 2023, causing the fair values of these swaps to increase in that period.
As noted above, total stockholders’ equity increased $38.7 million, from $533.1 million at December 31, 2022 to $571.8 million at December 31, 2023. Stockholders’ equity increased due to the Company recording net income of $67.8 million for the year ended December 31, 2023 and increased by $2.5 million due to stock option exercises during 2023. AOCI (loss) decreased $10.9 million (increase to stockholders’ equity) during the year ended December 31, 2023, primarily due to changes in the market value of available-for-sale securities and changes in the fair value of cash flow hedges. Partially offsetting these increases were repurchases of the Company’s common stock totaling $23.3 million and dividends declared on common stock of $19.1 million.
The Company also had unrealized losses on its portfolio of held-to-maturity investment securities, which totaled $23.8 million at December 31, 2023, that were not included in its total capital balance. If these held-to-maturity unrealized losses were included in capital (net of taxes), this would have decreased total stockholder’s equity by $18.0 million at December 31, 2023. This amount was equal to 3.1% of total stockholders’ equity of $571.8 million at that date.
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 December 31, 2023, the Bank’s common equity Tier 1 capital ratio was 13.1%, its Tier 1 capital ratio was 13.1%, its total capital ratio was 14.3% and its Tier 1 leverage ratio was 11.6%. As a result, as of December 31, 2023, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such. On December 31, 2022, the Bank’s common equity Tier 1 capital ratio was 11.9%, its Tier 1 capital ratio was 11.9%, its total capital ratio was 13.1% and its Tier 1 leverage ratio was 11.5%. As a result, as of December 31, 2022, 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 December 31, 2023, the Company’s common equity Tier 1 capital ratio was 11.9%, its Tier 1 capital ratio was 12.4%, its total capital ratio was 15.2% and its Tier 1 leverage ratio was 11.0%. On December 31, 2022, the Company’s common equity Tier 1 capital ratio was 10.6%, its Tier 1 capital ratio was 11.0%, its total capital ratio was 13.5% and its Tier 1 leverage ratio was 10.6%.
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. Both the Company and the Bank had a capital conservation buffer that exceeded the required minimum levels at December 31, 2023 and 2022.
Dividends. During the year ended December 31, 2023, the Company declared common stock cash dividends of $1.60 per share (28.5% of net income per common share) and paid common stock cash dividends of $1.60 per share. During the year ended December 31, 2022, the Company declared common stock cash dividends of $1.56 per share (25.9% of net income per common share) and paid
common stock cash dividends of $1.52 per share. The Board of Directors meets regularly to consider the level and the timing of dividend payments. The $0.40 per share dividend declared but unpaid as of December 31, 2023, was paid to stockholders in January 2024.
Common Stock Repurchases and Issuances. The Company has been in various buy-back programs since May 1990. During the years ended December 31, 2023 and 2022, the Company repurchased 449,622 shares of its common stock at an average price of $51.38 per share and 1,043,804 shares of its common stock at an average price of $59.25 per share, respectively. During the years ended December 31, 2023 and 2022, the Company issued 22,762 shares of stock at an average price of $38.83 per share and 146,601 shares of stock at an average price of $42.69 per share, respectively, to cover stock option exercises.
In December 2022, the Company’s Board of Directors authorized the purchase of up to one million shares of the Company’s outstanding common stock, under a program of open market purchases or privately negotiated transactions. As of December 31, 2023, a total of approximately 728,000 shares remained 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 stockholder 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 State (“GAAP”). These non-GAAP financial measures include the efficiency ratio excluding consulting expense and related contract termination liability and the tangible common equity to tangible assets ratio.
We calculate the efficiency ratio excluding consulting expense and related contract termination liability by subtracting from the non-interest expense component of the ratio the consulting expense and contract termination fee we incurred during 2021 in connection with the evaluation of our core and ancillary software and information technology systems. We had no such expenses or fees during 2022 or 2023. Management believes the efficiency ratio calculated in this manner better reflects our core operating performance and makes this ratio more meaningful when comparing our operating results to different periods.
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 other similarly titled measures as calculated by other companies.
Non-GAAP Reconciliation: Efficiency Ratio Excluding Consulting Expense and Related Contract Termination Liability
Year Ended
December 31, 2021
(Dollars in Thousands)
Reported non-interest expense/ efficiency ratio
$
127,635
59.03
%
Less: Impact of one-time consulting expense and related contract termination liability
5,318
2.46
Core non-interest expense/ efficiency ratio
$
122,317
56.57
%
There were no non-GAAP adjustments to the efficiency ratio for years other than 2021.
Non-GAAP Reconciliation: Ratio of Tangible Common Equity to Tangible Assets
December 31,
December 31,
December 31,
December 31,
December 31,
(Dollars In Thousands)
Common equity at period end
$
571,829
$
533,087
$
616,752
$
629,741
$
603,066
Less: Intangible assets at period end
10,527
10,813
6,081
6,944
8,098
Tangible common equity at period end (a)
$
561,302
$
522,274
$
610,671
$
622,797
$
594,968
Total assets at period end
$
5,812,402
$
5,680,702
$
5,449,944
$
5,526,420
$
5,015,072
Less: Intangible assets at period end
10,527
10,813
6,081
6,944
8,098
Tangible assets at period end (b)
$
5,801,875
$
5,669,889
$
5,443,863
$
5,519,476
$
5,006,974
Tangible common equity to tangible assets (a) / (b)
9.67
%
9.21
%
11.22
%
11.28
%
11.88
%

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and Liability Management and Market Risk
A principal operating objective of the Company is to produce stable earnings by achieving a favorable interest rate spread that can be sustained during fluctuations in prevailing interest rates. The Company has sought to reduce its exposure to adverse changes in interest rates by attempting to achieve a closer match between the periods in which its interest-bearing liabilities and interest-earning assets can be expected to reprice through the origination of adjustable-rate mortgages and loans with shorter terms to maturity and the purchase of other shorter term interest-earning assets.
Our Risk When Interest Rates Change
The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
How We Measure the Risk to Us Associated with Interest Rate Changes
In an attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor Great Southern’s interest rate risk. In monitoring interest rate risk, we regularly analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to actual or potential changes in market interest rates.
The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread that can be sustained despite fluctuations in prevailing interest rates. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference, or the interest rate repricing “gap,” provides an indication of the extent to which an institution’s interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities repricing during the same period, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets during the same period. Generally, during a period of rising interest rates, a negative gap within shorter repricing periods would adversely affect net interest income, while a positive gap within shorter repricing periods would result in an increase in net interest income. During a period of falling interest rates, the opposite would be true. As of December 31, 2023, Great Southern’s interest rate risk models indicate that, generally, rising interest rates are expected to have a modestly positive impact on the Company’s net interest income within the next twelve months, while declining interest rates are expected to have a slightly negative impact on net interest income within the next twelve months. The negative impact of a falling Federal Funds rate and other market interest rates also falling could be more pronounced if we are not able to decrease non-maturity deposit rates accordingly. 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 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 SOFR interest rates (or their replacement 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 SOFR interest rates (or their replacement rates) and “prime” interest rates. In the subsequent months we would expect that net interest margin would stabilize and begin to improve, as renewal interest rates on maturing time deposits decrease compared to the then-current rates paid on those products. During 2020, we experienced some compression of our net interest margin percentage due to the Federal Fund rate being cut by a total of 2.25% from July 2019 through 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 net interest margin remained lower than our historical average in 2021. LIBOR/SOFR interest rates decreased significantly in 2020 and remained very low in 2021 and into the first three months of 2022, putting pressure on loan yields, and strong pricing competition for loans and deposits remained in most of our markets. Since March 2022, market interest rates have increased fairly rapidly. This increased loan yields and expanded our net interest income and net interest margin in the latter half of 2022 and the first three months of 2023. While market interest rate increases are expected to result in increases to loan yields, we expect that much of this benefit will be offset by increased funding costs, including changes in the funding mix, as experienced in the year ended December 31, 2023. As of December 31, 2023, time deposit maturities over the next 12 months are as follows: within three months -- $394 million with a weighted-average rate of 3.82%; within three to six months -- $324 million with a weighted-average rate of 4.32%; and within six to twelve months -- $371 million with a weighted-average rate of 4.08%. Based on time deposit market rates in January 2024, replacement rates for these maturing time deposits are likely to be approximately 4.00-4.50%.
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, 2016 and 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 3 and a 1.00% decrease on March 16. At December 31, 2021, the Federal Funds rate was 0.25%. In 2022, the FRB implemented rate increases of 0.25%, 0.50%, 0.75%, 0.75%, 0.75%, 0.75% and 0.50% in March, May, June, July, September, November and December 2022, respectively. At December 31, 2022, the Federal Funds rate was 4.50%. In 2023, the FRB implemented rate increases of 0.25%, 0.25%, 0.25% and 0.25% in February, March, May and July 2023, respectively. At December 31, 2023 the Federal Funds rate was 5.50%. Financial markets now expect the possibility of significant further increases in Federal Funds interest rates in 2024 to be unlikely, with interest rate decisions being made at each FRB meeting based on economic data available at the time. However, the FRB has further indicated, and financial markets now have begun to price in, that it is likely that the Federal Funds interest rate will remain near this peak level for several months before any rate cuts occur. Great Southern’s loan portfolio includes loans ($1.29 billion at December 31, 2023) tied to various SOFR indices that will be subject to adjustment at least once within 90 days after December 31, 2023. These loans had interest rate floors at various rates. Great Southern also has a portfolio of loans ($788.9 million at December 31, 2023) tied to a “prime rate” of interest that will adjust
immediately or within 90 days of a change to the “prime rate” of interest. These loans had interest rate floors at various rates. Great Southern also has a portfolio of loans ($6.7 million at December 31, 2023) tied to an AMERIBOR index that will adjust immediately or within 90 days of a change to the “prime rate” of interest. These loans had interest rate floors at various rates. At December 31, 2023, nearly all of these SOFR and “prime rate” loans had fully indexed rates that were at or above their floor rate and so are expected to move fully if there are future market interest rate increases.
Interest rate risk exposure estimates (the sensitivity gap) are not exact measures of an institution’s actual interest rate risk. They are only indicators of interest rate risk exposure produced in a simplified modeling environment designed to allow management to gauge the Bank’s sensitivity to changes in interest rates. They do not necessarily indicate the impact of general interest rate movements on the Bank’s net interest income because the repricing of certain categories of assets and liabilities is subject to competitive and other factors beyond the Bank’s control. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may in fact mature or reprice at different times and in different amounts and cause a change, which potentially could be material, in the Bank’s interest rate risk.
In order to minimize the potential for adverse effects of material and prolonged increases and decreases in interest rates on Great Southern’s results of operations, Great Southern has adopted asset and liability management policies to better match the maturities and repricing terms of Great Southern’s interest-earning assets and interest-bearing liabilities. Management recommends and the Board of Directors sets the asset and liability policies of Great Southern which are implemented by the Asset and Liability Committee. The Asset and Liability Committee is chaired by the Chief Financial Officer and is comprised of members of Great Southern’s senior management. The purpose of the Asset and Liability Committee is to communicate, coordinate and control asset/liability management consistent with Great Southern’s business plan and board-approved policies. The Asset and Liability Committee establishes and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals. The Asset and Liability Committee meets on a monthly basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital positions and anticipated changes in the volume and mix of assets and liabilities. At each meeting, the Asset and Liability Committee recommends appropriate strategy changes based on this review. The Chief Financial Officer or his designee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Board of Directors at their monthly meetings.
In order to manage its assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability and capital targets, Great Southern has focused its strategies on originating adjustable rate loans or loans with fixed rates that mature in less than five years, and managing its deposits and borrowings to establish stable relationships with both retail customers and wholesale funding sources.
At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, we may determine to increase our interest rate risk position somewhat in order to maintain or increase our net interest margin.
The Asset and Liability Committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and market value of portfolio equity, which is defined as the net present value of an institution’s existing assets, liabilities and off-balance sheet instruments, and evaluating such impacts against the maximum potential changes in net interest income and market value of portfolio equity that are authorized by the Board of Directors of Great Southern.
In the normal course of business, the Company may use derivative financial instruments (primarily interest rate swaps) from time to time to assist in its interest rate risk management. In 2011, the Company began executing interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. These interest rate derivatives result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.
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 million with a contractual termination date of October 6, 2025. Under the terms of the swap, the Company received a fixed rate of interest of 3.018% and paid a floating rate of interest equal to one-month USD-LIBOR (now SOFR). The floating rate reset monthly and net settlements of interest due to/from the counterparty also occurred monthly. Due to lower market interest rates, the Company received net interest settlements which were recorded as loan interest income. If USD-SOFR exceeded the fixed rate of interest, the Company was required to pay net settlements to the counterparty and record those net payments as a reduction of interest income on loans. The effective portion of the gain or loss on the derivative was reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affected earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
In March 2020, the Company and its swap counterparty mutually agreed to terminate the $400 million interest rate swap prior to its contractual maturity. The Company was paid $45.9 million from its swap counterparty as a result of this termination.
In March 2022, the Company entered into another 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 million with an effective date of March 1, 2022 and a termination date of March 1, 2024. Under the terms of the swap, the Company received a fixed rate of interest of 1.6725% and paid a floating rate of interest equal to one-month USD-LIBOR (now SOFR). The floating rate reset monthly and net settlements of interest due to/from the counterparty also occurred monthly. The initial floating rate of interest was set at 0.24143%. The Company received net interest settlements, which were recorded as loan interest income, to the extent that the fixed rate of interest exceeded one-month USD-SOFR. If the USD-SOFR rate exceeded the fixed rate of interest (as it does currently), the Company paid net settlements to the counterparty and recorded those net payments as a reduction of interest income on loans.
In July 2022, the Company entered into two interest rate swap transactions as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans. The notional amount of each swap is $200 million with an effective date of May 1, 2023 and a termination date of May 1, 2028. Under the terms of one swap, beginning in May 2023, the Company receives a fixed rate of interest of 2.628% and pays a floating rate of interest equal to one-month USD-SOFR OIS. Under the terms of the other swap, beginning in May 2023, the Company receives a fixed rate of interest of 5.725% and pays a floating rate of interest equal to one-month USD-Prime. In each case, the floating rate resets monthly and net settlements of interest due to/from the counterparty also occur monthly. To the extent the fixed rate of interest exceeds the floating rate of interest, the Company receives net interest settlements, which are recorded as loan interest income. If the floating rate of interest exceeds the fixed rate of interest (as it does currently), the Company pays net settlements to the counterparty and records those net payments as a reduction of interest income on loans.
In February 2023, the Company entered into interest rate swap transactions as part of its ongoing interest rate management strategies to hedge the risk of certain of its fixed rate brokered deposits. The total notional amount of the swaps was $95 million with a termination date of February 28, 2025. Under the terms of the swaps, the Company received a fixed rate of interest of 4.65% and paid a floating rate of interest equal to USD-SOFR-COMPOUND plus a spread. The floating rate reset monthly and net settlements of interest due to/from the counterparty also occurred monthly. To the extent that the fixed rate of interest exceeded USD-SOFR-COMPOUND plus the spread, the Company received net interest settlements, which were recorded as a reduction of deposit interest expense. If USD-SOFR-COMPOUND plus the spread exceeded the fixed rate of interest, the Company was required to pay net settlements to the counterparty and record those net payments as interest expense on deposits.
In January 2024, the Company elected to terminate the swaps related to brokered deposits prior to their contractual termination date in 2025. The Company received a net settlement payment from the swap counterparty totaling $26,500 upon termination. At the time of the early termination, the Company had recorded a market value adjustment to the brokered deposit of $163,000, which will be amortized as a reduction of interest expense from January 2024 through February 2025.
The Company’s interest rate derivatives and hedging activities are discussed further in Note 16 of the accompanying audited financial statements, which are included in Item 8 of this Report.
The following tables illustrate the expected maturities and repricing, respectively, of the Bank’s financial instruments at December 31, 2023. These schedules do not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. The tables are based on information prepared in accordance with generally accepted accounting principles.
Maturities
December 31,
December 31,
2029-2038
Thereafter
Total
Fair Value
(Dollars In Thousands)
Financial Assets:
Interest bearing deposits
$
108,804
-
-
-
-
-
-
$
108,804
$
108,804
Weighted average rate
5.35
%
-
-
-
-
-
-
5.35
%
Available-for-sale debt securities (1)
$
1,247
$
7,053
$
3,007
$
19,909
$
9,835
$
196,806
$
240,350
$
478,207
$
478,207
Weighted average rate
5.87
%
4.13
%
1.99
%
1.48
%
3.73
%
2.76
%
2.74
%
2.74
%
Held-to-maturity securities (2)
-
-
$
-
$
32,594
$
73,839
$
88,067
$
195,023
$
171,193
Weighted average rate
-
-
1.58
%
-
3.51
%
2.50
%
2.42
%
2.63
%
Adjustable rate loans
$
775,311
$
595,740
$
347,899
$
210,012
$
56,111
$
194,308
$
670,565
$
2,849,946
$
2,764,145
Weighted average rate
8.36
%
8.23
%
8.18
%
8.02
%
8.07
%
7.03
%
3.57
%
7.06
%
Fixed rate loans
$
261,468
$
347,537
$
422,101
$
301,451
$
224,795
$
223,927
$
35,972
$
1,817,251
$
1,713,626
Weighted average rate
5.00
%
4.83
%
4.54
%
4.63
%
5.12
%
4.04
%
4.53
%
4.69
%
Federal Home Loan Bank stock and other interest earning assets
$
11,590
-
-
-
-
-
$
14,723
$
26,313
$
26,313
Weighted average rate
5.33
%
-
-
-
-
-
7.23
%
6.39
%
Total financial assets
$
1,158,420
$
950,330
$
773,530
$
531,372
$
323,335
$
688,880
$
1,049,677
$
5,475,544
Financial Liabilities:
Time deposits
$
921,485
$
19,250
$
3,067
$
2,394
$
$
1,058
-
$
948,202
$
948,202
Weighted average rate
3.87
%
0.94
%
0.69
%
0.76
%
0.68
%
1.51
%
-
3.79
%
Brokered funds
$
266,781
$
296,552
$
98,195
-
-
-
-
$
661,528
$
661,528
Weighted average rate
5.28
%
5.11
%
5.25
%
-
-
-
-
5.20
%
Interest-bearing demand
$
2,216,482
-
-
-
-
-
-
$
2,216,482
$
2,216,482
Weighted average rate
1.67
%
-
-
-
-
-
-
1.67
%
Non-interest-bearing demand
$
895,496
-
-
-
-
-
-
$
895,496
$
895,496
Weighted average rate
-
-
-
-
-
-
-
-
Securities sold under reverse repurchase agreements
$
70,843
-
-
-
-
-
-
$
70,843
$
70,843
Weighted average rate
1.66
%
-
-
-
-
-
-
1.66
%
Short-term borrowings, overnight FHLB borrowings, and other liabilities
$
252,610
-
-
-
-
-
-
$
252,610
$
252,610
Weighted average rate
5.64
%
-
-
-
-
-
-
5.64
%
Subordinated notes
-
-
-
-
-
$
75,000
-
$
75,000
$
71,625
Weighted average rate
-
-
-
-
-
5.92
%
-
5.92
%
Subordinated debentures
-
-
-
-
-
-
$
25,774
$
25,774
$
25,774
Weighted average rate
-
-
-
-
-
-
7.24
%
7.24
%
Total financial liabilities
$
4,623,697
$
315,802
$
101,262
$
2,394
$
$
76,058
$
25,774
$
5,145,935
(1) Available-for-sale debt securities include approximately $420.1 million of mortgage-backed securities and collateralized mortgage obligations, which pay interest and principal monthly to the Company. This table does not show the effect of these monthly repayments of principal.
(2) Held-to-maturity debt securities include approximately $188.8 million of mortgage-backed securities and collateralized mortgage obligations, which pay interest and principal monthly to the Company. This table does not show the effect of these monthly repayments of principal.
Repricing
December 31,
December 31,
2029-2038
Thereafter
Total
Fair Value
(Dollars In Thousands)
Financial Assets:
Interest bearing deposits
$
108,804
-
-
-
-
-
-
$
108,804
$
108,804
Weighted average rate
5.35
%
-
-
-
-
-
-
5.35
%
Available-for-sale debt securities(1)
$
1,247
$
7,053
$
3,007
$
19,909
$
9,835
$
196,806
$
240,350
$
478,207
$
478,207
Weighted average rate
5.87
%
4.13
%
1.99
%
1.48
%
3.73
%
2.76
%
2.74
%
2.74
%
Held-to-maturity securities (2)
-
-
$
-
$
32,594
$
73,839
$
88,067
$
195,023
$
171,193
Weighted average rate
-
-
1.58
%
-
3.51
%
2.50
%
2.42
%
2.63
%
Adjustable rate loans
$
2,223,657
$
42,062
$
27,934
$
63,170
$
49,042
$
444,081
-
$
2,849,946
$
2,764,145
Weighted average rate
8.00
%
3.93
%
3.33
%
3.79
%
3.99
%
3.72
%
-
7.06
%
Fixed rate loans
$
261,468
$
347,537
$
422,101
$
301,451
$
224,795
$
223,927
$
35,972
$
1,817,251
$
1,713,626
Weighted average rate
5.00
%
4.83
%
4.54
%
4.63
%
5.12
%
4.04
%
4.53
%
4.69
%
Federal Home Loan Bank stock and other interest earning assets
$
26,313
-
-
-
-
-
-
$
26,313
$
26,313
Weighted average rate
6.39
%
-
-
-
-
-
-
64.39
%
Total financial assets
$
2,621,489
$
396,652
$
453,565
$
384,530
$
316,266
$
938,653
$
364,389
$
5,475,544
Financial Liabilities:
Time deposits
$
921,485
$
19,250
$
3,067
$
2,394
$
$
1,058
-
$
948,202
$
948,202
Weighted average rate
3.87
%
0.94
%
0.69
%
0.76
%
0.68
%
1.51
%
-
3.79
%
Brokered funds
$
466,781
$
146,552
$
48,195
-
-
-
-
$
661,528
$
661,528
Weighted average rate
5.42
%
4.59
%
4.90
%
-
-
-
-
5.20
%
Interest-bearing demand
$
2,216,482
-
-
-
-
-
-
$
2,216,482
$
2,216,482
Weighted average rate
1.67
%
-
-
-
-
-
-
1.67
%
Non-interest-bearing demand (3)
-
-
-
-
-
-
$
895,496
$
895,496
$
895,496
Weighted average rate
-
-
-
-
-
-
-
-
Securities sold under reverse repurchase agreements
$
70,843
-
-
-
-
-
-
$
70,843
$
70,843
Weighted average rate
1.66
%
-
-
-
-
-
-
1.66
%
Short-term borrowings, overnight FHLB borrowings, and other liabilities
$
252,610
-
-
-
-
-
-
$
252,610
$
252,610
Weighted average rate
5.64
%
-
-
-
-
-
-
5.64
%
Subordinated notes
-
$
75,000
-
-
-
-
-
$
75,000
$
71,625
Weighted average rate
-
5.92
%
-
-
-
-
-
5.92
%
Subordinated debentures
$
25,774
-
-
-
-
-
-
$
25,774
$
25,774
Weighted average rate
7.24
%
-
-
-
-
-
-
7.24
%
Total financial liabilities
$
3,953,975
$
240,802
$
51,262
$
2,394
$
$
1,058
$
895,496
$
5,145,935
Periodic repricing GAP
$
(1,332,486)
$
155,850
$
402,303
$
382,136
$
315,318
$
937,595
$
(531,107)
$
329,609
Cumulative repricing GAP
$
(1,332,486)
$
(1,176,636)
$
(774,333)
$
(392,197)
$
(76,879)
$
860,716
$
329,609
(1) Available-for-sale debt securities include approximately $420.1 million of mortgage-backed securities and collateralized mortgage obligations, which pay interest and principal monthly to the Company. This table does not show the effect of these monthly repayments of principal.
(2) Held-to-maturity debt securities include approximately $188.8 million of mortgage-backed securities and collateralized mortgage obligations, which pay interest and principal monthly to the Company. This table does not show the effect of these monthly repayments of principal.
(3) Non-interest-bearing demand deposits are included in this table in the column labeled “Thereafter” since there is no interest rate related to these liabilities and therefore there is nothing to reprice.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
Report of Independent Registered Public Accounting Firm
Stockholders, Board of Directors, and Audit Committee
Great Southern Bancorp, Inc.
Springfield, Missouri
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of Great Southern Bancorp, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 11, 2024, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involves our especially challenging, subjective, or complex judgments. The communication of this critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses on Loans
The Company’s loan portfolio totaled $4.7 billion as of December 31, 2023, and the allowance for credit losses (ACL) on loans was $64.7 million.
The ACL on loans as defined by Topic 326 is an estimate of lifetime expected credit losses on loans. The ACL on loans is measured on a collective basis based on pools of loans with similar risk characteristics. Average historical loss rates over a defined lookback period are analyzed for the segmented loan pools, and adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions and reasonable and supportable forecasts. Qualitative factors such as changes in economic conditions, concentrations of risk, and changes in portfolio risk are considered in determining the adequacy of the level of the ACL on loans. The Company discloses that this determination involves a high degree of judgment and complexity and is inherently subjective.
We identified the valuation of the ACL on loans as a critical audit matter. Auditing the ACL on loans involves a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic conditions and other qualitative or environmental factors, evaluating the adequacy of specifically identified losses on individually evaluated loans, and assessing the appropriateness of loan credit ratings.
The primary procedures we performed to address this critical audit matter included:
● Obtaining an understanding of the Company’s process for establishing the ACL on loans;
● Testing the design and operating effectiveness of controls, including those related to technology, over the ACL on loans including data completeness and accuracy, classifications of loans by loan segment, verification of historical net loss data and calculated net loss rates, the establishment of qualitative adjustments, credit ratings, and risk classification of loans and establishment of specific reserves on individually evaluated loans, and management’s review and disclosure controls over the ACL on loans;
● Testing of completeness and accuracy of the information utilized in the ACL on loans;
● Testing the mathematical accuracy of the calculation of the ACL on loans;
● Evaluating the qualitative adjustments, including assessing the basis for the adjustments and the reasonableness of significant assumptions;
● Testing the loan review function and evaluating the accuracy of loan credit ratings;
● Evaluating the reasonableness of specific allowances on individually evaluated loans;
● Evaluating the overall reasonableness of assumptions used by management considering the past performance of the Company and evaluating trends identified within peer groups;
● Evaluating the disclosures in the consolidated financial statements.
/s/ FORVIS, LLP
We have served as the Company’s auditor since 1975.
Springfield, Missouri
March 11, 2024
Great Southern Bancorp, Inc.
Consolidated Statements of Financial Condition
December 31, 2023 and 2022
(In Thousands, Except Per Share Data)
Assets
Cash
$
102,529
$
105,262
Interest-bearing deposits in other financial institutions
108,804
63,258
Cash and cash equivalents
211,333
168,520
Available-for-sale securities
478,207
490,592
Held-to-maturity securities
195,023
202,495
Mortgage loans held for sale
5,849
4,811
Loans receivable, net of allowance for credit losses of $64,670 and $63,480 at December 31, 2023 and 2022, respectively
4,589,620
4,506,836
Interest receivable
21,206
19,107
Prepaid expenses and other assets
106,225
69,461
Other real estate owned and repossessions, net
Premises and equipment, net
138,591
141,070
Goodwill and other intangible assets
10,527
10,813
Federal Home Loan Bank stock and other interest-earning assets
26,313
30,814
Current and deferred income taxes
29,485
35,950
Total assets
$
5,812,402
$
5,680,702
Liabilities and Stockholders’ Equity
Liabilities
Deposits
$
4,721,708
$
4,684,910
Securities sold under reverse repurchase agreements with customers
70,843
176,843
Short-term borrowings and other interest-bearing liabilities
252,610
89,583
Subordinated debentures issued to capital trust
25,774
25,774
Subordinated notes
74,579
74,281
Accrued interest payable
6,225
3,010
Advances from borrowers for taxes and insurance
4,946
6,590
Accrued expenses and other liabilities
76,401
73,808
Liability for unfunded commitments
7,487
12,816
Total liabilities
5,240,573
5,147,615
Commitments and Contingencies
-
-
Stockholders’ Equity
Capital stock
Serial preferred stock, $.01 par value; authorized 1,000,000 shares; issued and outstanding 2023 and 2022 - -0- shares
-
-
Common stock, $.01 par value; authorized 20,000,000 shares; issued and outstanding 2023 - 11,804,430 shares, 2022 -12,231,290 shares
Additional paid-in capital
44,320
42,445
Retained earnings
569,872
543,875
Accumulated other comprehensive income (loss), net of income taxes of $(14,211) and $(17,948) at December 31, 2023 and 2022, respectively
(42,481)
(53,355)
Total stockholders’ equity
571,829
533,087
Total liabilities and stockholders’ equity
$
5,812,402
$
5,680,702
See Notes to Accompanying Financial Statements
Great Southern Bancorp, Inc.
Consolidated Statements of Income
Years Ended December 31, 2023, 2022 and 2021
(In Thousands, Except Per Share Data)
Interest Income
Loans
$
271,952
$
205,751
$
186,269
Investment securities and other
24,883
21,226
12,404
296,835
226,977
198,673
Interest Expense
Deposits
88,757
20,676
13,102
Securities sold under reverse repurchase agreements
1,205
Short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities
7,500
1,066
-
Subordinated debentures issued to capital trust
1,736
Subordinated notes
4,422
4,422
7,165
103,620
27,363
20,752
Net Interest Income
193,215
199,614
177,921
Provision (Credit) for Credit Losses on Loans
2,250
3,000
(6,700)
Provision (Credit) for Unfunded Commitments
(5,329)
3,187
Net Interest Income After Provision (Credit) for Credit Losses and Provision (Credit) for Unfunded Commitments
196,294
193,427
183,682
Non-interest Income
Commissions
1,153
1,208
1,263
Overdraft and insufficient funds fees
7,617
7,872
6,686
Point-of-sale and ATM fee income and service charges
14,346
15,705
15,029
Net gain on loan sales
2,354
2,584
9,463
Net realized loss on sales of available-for-sale securities
-
(130)
-
Late charges and fees on loans
1,182
1,434
Gain (loss) on derivative interest rate products
(337)
Other income
4,154
5,399
4,130
30,073
34,141
38,317
Non-interest Expense
Salaries and employee benefits
78,521
75,300
70,290
Net occupancy and equipment expense
30,834
28,471
29,163
Postage
3,590
3,379
3,164
Insurance
4,542
3,197
3,061
Advertising
3,396
3,261
3,072
Office supplies and printing
1,057
Telephone
2,730
3,170
3,458
Legal, audit and other professional fees
7,086
6,330
6,555
Expense on other real estate and repossessions
Acquired intangible asset amortization
Other operating expenses
8,670
8,264
6,534
141,023
133,366
127,635
Income Before Income Taxes
85,344
94,202
94,364
Provision for Income Taxes
17,544
18,254
19,737
Net Income
$
67,800
$
75,948
$
74,627
Earnings Per Common Share
Basic
$
5.65
$
6.07
$
5.50
Diluted
$
5.61
$
6.02
$
5.46
See Notes to Accompanying Financial Statements
Great Southern Bancorp, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2023, 2022 and 2021
(In Thousands)
Net Income
$
67,800
$
75,948
$
74,627
Unrealized appreciation (depreciation) on available-for-sale securities, net of taxes (credit) of $2,199, $(18,106) and $(4,171) for 2023, 2022 and 2021, respectively
6,738
(56,448)
(14,121)
Unrealized loss (gain) on securities transferred to held-to-maturity, net of taxes (credit) of $(45), $29 and $-0- for 2023, 2022 and 2021, respectively
(138)
-
Less: reclassification adjustment for loss included in net income, net of taxes (credit) of $-0-, $32 and $-0- for 2023, 2022 and 2021, respectively
-
-
Amortization of realized gain on termination of cash flow hedge, net of taxes (credit) of $(1,855), $(1,852) and $(1,852), for 2023, 2022, and 2021, respectively
(6,267)
(6,271)
(6,271)
Change in value of active cash flow hedges, net of taxes (credit) of $3,441, $(7,695) and $-0- for 2023, 2022 and 2021, respectively
10,541
(23,582)
-
Other comprehensive income (loss)
10,874
(86,114)
(20,392)
Comprehensive Income (Loss)
$
78,674
$
(10,166)
$
54,235
See Notes to Accompanying Financial Statements
Great Southern Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2023, 2022 and 2021
(In Thousands, Except Per Share Data)
Accumulated
Additional
Other
Common
Paid-in
Retained
Comprehensive
Treasury
Stock
Capital
Earnings
Income (Loss)
Stock
Total
Balance, January 1, 2021
$
$
35,004
$
541,448
$
53,151
$
-
$
629,741
Net income
-
-
74,627
-
-
74,627
Stock issued under Stock Option Plan
-
3,310
-
-
1,615
4,925
Common cash dividends declared [1]
-
-
(18,851)
-
-
(18,851)
Impact of ASU 2016-13 adoption
-
-
(14,175)
-
-
(14,175)
Purchase of the Company’s common stock
-
-
-
-
(39,123)
(39,123)
Other comprehensive loss
-
-
-
(20,392)
-
(20,392)
Reclassification of treasury stock per Maryland law
(7)
-
(37,501)
-
37,508
-
Balance, December 31, 2021
38,314
545,548
32,759
-
616,752
Net income
-
-
75,948
-
-
75,948
Stock issued under Stock Option Plan
-
4,131
-
-
3,564
7,695
Common cash dividends declared [2]
-
-
(19,347)
-
-
(19,347)
Purchase of the Company’s common stock
-
-
-
-
(61,847)
(61,847)
Other comprehensive loss
-
-
-
(86,114)
-
(86,114)
Reclassification of treasury stock per Maryland law
(9)
-
(58,274)
-
58,283
-
Balance, December 31, 2022
42,445
543,875
(53,355)
-
533,087
Net income
-
-
67,800
-
-
67,800
Stock issued under Stock Option Plan
-
1,875
-
-
2,505
Common cash dividends declared [3]
-
-
(19,111)
-
-
(19,111)
Purchase of the Company’s common stock
-
-
-
-
(23,326)
(23,326)
Other comprehensive income
-
-
-
10,874
-
10,874
Reclassification of treasury stock per Maryland law
(4)
-
(22,692)
-
22,696
-
Balance, December 31, 2023
$
$
44,320
$
569,872
$
(42,481)
$
-
$
571,829
[1] $1.40 per share total dividends.
[2] $1.56 per share total dividends.
[3] $1.60 per share total dividends.
See Notes to Accompanying Financial Statements
Great Southern Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2023, 2022 and 2021
(In Thousands)
Operating Activities
Net income
$
67,800
$
75,948
$
74,627
Proceeds from sales of loans held for sale
157,213
103,347
351,391
Originations of loans held for sale
(155,995)
(95,007)
(332,289)
Items not requiring (providing) cash
Depreciation
8,723
8,498
9,555
Amortization
1,179
1,583
Compensation expense for stock option grants
1,621
1,437
1,225
Provision (credit) for credit losses
2,250
3,000
(6,700)
Provision (credit) for unfunded commitments
(5,329)
3,187
Net gain on loan sales
(2,354)
(2,584)
(9,463)
Net realized (gain) loss on available-for-sale securities
-
-
Loss (gain) on sale of premises and equipment
(1,023)
(1)
Loss (gain) on sale/write-down of other real estate and repossessions
(126)
(71)
Accretion of deferred income, premiums, discounts and other
(13,774)
(15,842)
(18,385)
Loss (gain) on derivative interest rate products
(321)
(312)
Deferred income taxes
2,985
2,485
3,712
Changes in
Interest receivable
(2,099)
(8,402)
2,088
Prepaid expenses and other assets
(4,543)
2,141
20,146
Accrued expenses and other liabilities
23,470
5,637
(2,495)
Income taxes refundable/payable
(259)
1,162
(1,808)
Net cash provided by operating activities
80,700
84,846
93,742
Investing Activities
Net change in loans
(79,096)
(134,344)
448,599
Purchase of loans
(400)
(361,817)
(152,797)
Purchase of premises and equipment
(7,300)
(20,110)
(5,739)
Proceeds from sale of premises and equipment
3,980
Proceeds from sale of other real estate and repossessions
2,351
2,230
Proceeds from sale of available-for-sale securities
-
18,375
-
Proceeds from repayments of held-to-maturity securities
7,228
23,821
-
Proceeds from maturities, calls and repayments of available-for-sale securities
26,888
51,348
72,149
Purchase of available-for-sale securities
(5,436)
(360,725)
(177,466)
Investment in tax credit partnerships
(35,160)
(18,266)
(8,766)
Redemption (purchase) of Federal Home Loan Bank stock and other interest-earning assets
4,501
(24,159)
3,151
Net cash provided by (used in) investing activities
(88,208)
(819,546)
181,947
Financing Activities
Net increase (decrease) in certificates of deposit
26,806
321,718
(429,723)
Net increase (decrease) in checking and savings accounts
9,856
(188,909)
464,921
Net increase (decrease) in short-term borrowings and other interest-bearing liabilities
57,027
127,471
(26,737)
Advances from (to) borrowers for taxes and insurance
(1,644)
(1,389)
Redemption of subordinated notes
-
-
(75,000)
Purchase of the company’s common stock
(23,326)
(61,847)
(39,123)
Dividends paid
(19,282)
(19,181)
(18,800)
Stock options exercised
6,258
3,700
Net cash provided by (used in) financing activities
50,321
185,953
(122,151)
Increase (Decrease) in Cash and Cash Equivalents
42,813
(548,747)
153,538
Cash and Cash Equivalents, Beginning of Year
168,520
717,267
563,729
Cash and Cash Equivalents, End of Year
$
211,333
$
168,520
$
717,267
See Notes to Accompanying Financial Statements
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations and Operating Segments
Great Southern Bancorp, Inc. (“GSBC” or the “Company”) operates as a one-bank holding company. GSBC’s business primarily consists of the operations of Great Southern Bank (the “Bank”), which provides a full range of financial services to customers primarily located in Missouri, Iowa, Kansas, Minnesota, Nebraska and Arkansas. The Bank also originates commercial loans from lending offices in Atlanta; Charlotte, North Carolina; Chicago; Dallas; Denver; Omaha, Nebraska; Phoenix; and Tulsa, Oklahoma. The Company and the Bank are subject to regulation by certain federal and state agencies and undergo periodic examinations by those regulatory agencies.
The Company’s banking operation is its only reportable segment. The banking operation is principally engaged in the business of originating residential and commercial real estate loans, construction loans, commercial business loans and consumer loans and funding these loans by attracting deposits from the general public, accepting brokered deposits and borrowing from the Federal Home Loan Bank and others. The operating results of this segment are regularly reviewed by management to make decisions about resource allocations and to assess performance. Selected information is not presented separately for the Company’s reportable segment, as there is no material difference between that information and the corresponding information in the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and fair values of financial instruments. In connection with the determination of the allowance for credit losses and the valuation of foreclosed assets held for sale, management obtains independent appraisals for significant properties. In addition, the Company considers that the determination of the carrying value of goodwill and intangible assets involves a high degree of judgment and complexity.
Principles of Consolidation
The consolidated financial statements include the accounts of Great Southern Bancorp, Inc., its wholly owned subsidiary, the Bank, and the Bank’s wholly owned subsidiaries, Great Southern Real Estate Development Corporation, GSB One LLC (including its wholly owned subsidiary, GSB Two LLC), Great Southern Financial Corporation, Great Southern Community Development Company, LLC (including its wholly owned subsidiary, Great Southern CDE, LLC), GS, LLC, GSSC, LLC, GSTC Investments, LLC, GS-RE Holding, LLC (including its wholly owned subsidiary, GS RE Management, LLC), GS-RE Holding II, LLC, GS-RE Holding III, LLC, VFP Conclusion Holding, LLC and VFP Conclusion Holding II, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
Federal Home Loan Bank Stock
Federal Home Loan Bank common stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in common stock is based on a predetermined formula, carried at cost and evaluated for impairment.
Securities
Available-for-sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses are recorded, net of related income tax effects, in other comprehensive income.
Held-to-maturity securities, which include any security for which the Company has the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts.
Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method.
The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company’s consolidated statements of income reflect the full impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income for available-for-sale securities. The credit loss component recognized in earnings through a provision for credit loss is identified as the amount of principal cash flows not expected to be received over the remaining term of the security based on cash flow projections.
Mortgage Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Write-downs to fair value are recognized as a charge to earnings at the time the decline in value occurs. Nonbinding forward commitments to sell individual mortgage loans are generally obtained to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Fees received from borrowers to guarantee the funding of mortgage loans held for sale and fees paid to investors to ensure the ultimate sale of such mortgage loans are recognized as income or expense when the loans are sold or when it becomes evident that the commitment will not be used.
Loans Originated by the Company
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for credit losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Past due status is based on the contractual terms of a loan. Generally, loans are placed on nonaccrual status at 90 days past due and interest is considered a loss, unless the loan is well secured and in the process of collection. Payments received on nonaccrual loans are applied to principal until the loans are returned to accrual status. Loans are returned to accrual status when all payments contractually due are brought current, payment performance is sustained for a period of time, generally six months, and future payments are reasonably assured. With the exception of consumer loans, charge-offs on loans are recorded when available information indicates a loan is not fully collectible and the loss is reasonably quantifiable. Consumer loans are charged-off at specified delinquency dates consistent with regulatory guidelines.
Allowance for Credit Losses
The allowance for credit losses is measured using an average historical loss model that 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 loans with a balance greater than or equal to $100,000, 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, gross domestic product (“GDP”), commercial real estate price index, consumer sentiment and construction spending. 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 to historical averages. The forecast-adjusted loss rate is applied to the principal balance over the remaining contractual lives, adjusted for expected prepayments. The contractual term excludes expected extensions, renewals and modifications. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecasts such as changes in portfolio composition, underwriting practices, or significant unique events or conditions.
In addition, ASU 2016-13 requires an allowance for off balance sheet credit exposures: unfunded lines of credit, undisbursed portions of loans, written residential and commercial commitments, and letters of credit. To determine the amount needed for allowance purposes, a utilization rate is determined either by the model or internally for each pool. Our loss model calculates the reserve on unfunded commitments based upon the utilization rate multiplied by the average loss rate factors in each pool with unfunded and committed balances. The liability for unfunded lending commitments utilizes the same model as the allowance for credit losses on loans; however, the liability for unfunded lending commitments incorporates assumptions for the portion of unfunded commitments that are expected to be funded.
Loans Acquired in Business Combinations
Loans acquired in business combinations under ASC Topic 805, Business Combinations, required the use of the acquisition method of accounting. Therefore, such loans were initially recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, Fair Value Measurements and Disclosures. The Company’s historical acquisitions all occurred under previous US GAAP prior to the Company’s adoption of ASU 2016-13. No allowance for credit losses related to the acquired loans was recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
For acquired loans not acquired in conjunction with an FDIC-assisted transaction that were not considered to be purchased credit-impaired loans, the Company evaluated those loans acquired in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount on these loans is accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered impaired loans. The Company’s historical acquisitions all occurred under previous US GAAP prior to the Company’s adoption of ASU 2016-13. The Company evaluated purchased credit-impaired loans in accordance with the provisions of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Loans acquired in business combinations with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected were considered to be credit impaired. Evidence of credit quality deterioration as of the purchase dates may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Acquired credit-impaired loans that are accounted for under the accounting guidance for loans acquired with deteriorated credit quality are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. At the date of CECL adoption, the Company did not reassess whether purchased credit impaired (PCI) loans met the criteria of purchased with credit deterioration (PCD) loans.
The Company evaluated all of its loans acquired in conjunction with its FDIC-assisted transactions in accordance with the provisions of ASC Topic 310-30. For purposes of applying ASC 310-30, loans acquired in FDIC-assisted business combinations are aggregated into pools of loans with common risk characteristics. All loans acquired in the FDIC transactions, both covered and not covered by loss sharing agreements, were deemed to be purchased credit-impaired loans as there is general evidence of credit deterioration since origination in the pools and there is some probability that not all contractually required payments will be collected. As a result, related discounts are recognized subsequently through accretion based on changes in the expected cash flows of these acquired loans.
Prior to the adoption of ASU 2016-13, the expected cash flows of the acquired loan pools in excess of the fair values recorded, referred to as the accretable yield, was recognized in interest income over the remaining estimated lives of the loan pools for impaired loans accounted for under ASC Topic 310-30. Subsequent to acquisition date, the Company estimated cash flows expected to be collected on pools of loans sharing common risk characteristics, which are treated in the aggregate when applying various valuation techniques. Increases in the Company’s cash flow expectations have been recognized as increases to the accretable yield while decreases have been recognized as impairments through the allowance for credit losses.
Other Real Estate Owned and Repossessions
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expense on foreclosed assets. Other real estate owned also includes bank premises formerly, but no longer, used for banking activities, as well as property originally acquired for future expansion but no longer intended to be used for that purpose.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line and accelerated methods over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized using the straight-line and accelerated methods over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter.
Material lease obligations consist of leases for various loan offices and banking centers. All of our leases are classified as operating leases (as they were prior to January 1, 2019), and therefore were previously not recognized on the Company’s consolidated statements of financial condition. With the adoption of ASU 2016-02, these operating leases are now included as a right of use asset in the premises and equipment line item on the Company’s consolidated statements of financial condition. The corresponding lease liability is included in the accrued expenses and other liabilities line item on the Company’s consolidated statements of financial condition.
The calculated amounts of the right of use assets and lease liabilities are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew for an extended term in the calculation of the right of use asset and lease liability. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the right of use asset and lease liability. Regarding the discount rate, the Company uses the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception over a similar term. The discount rate utilized is the FHLBank borrowing rate for the term corresponding to the expected term of the lease.
Long-Lived Asset Impairment
The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
No material asset impairment was recognized during the years ended December 31, 2023, 2022 and 2021.
Goodwill and Intangible Assets
Goodwill is evaluated annually for impairment or more frequently if impairment indicators are present. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company still may perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
Deposit intangible assets are amortized on the straight-line basis generally over a period of seven years. Arena naming rights intangible assets are being amortized on the straight-line basis generally over a period of fifteen years. Such assets are periodically evaluated as to the recoverability of their carrying value.
A summary of goodwill and intangible assets is as follows:
December 31,
(In Thousands)
Goodwill - Branch acquisitions
$
5,396
$
5,396
Deposit intangibles
Fifth Third Bank (January 2016)
-
Arena Naming Rights (April 2022)
5,131
5,364
5,131
5,417
$
10,527
$
10,813
Loan Servicing and Origination Fee Income
Loan servicing income represents fees earned for servicing real estate mortgage loans owned by various investors. The fees are generally calculated on the outstanding principal balances of the loans serviced and are recorded as income when earned. Loan origination fees, net of direct loan origination costs, are recognized as income using the level-yield method over the contractual life of the loan.
Stockholders’ Equity
The Company is incorporated in the State of Maryland. Under Maryland law, there is no concept of “Treasury Shares.” Instead, shares purchased by the Company constitute authorized but unissued shares under Maryland law. Accounting principles generally accepted in the United States of America state that accounting for treasury stock shall conform to state law. The cost of shares purchased by the Company has been allocated to common stock and retained earnings balances.
Earnings Per Common Share
Basic earnings per common share are computed based on the weighted average number of common shares outstanding during each year. Diluted earnings per common share are computed using the weighted average common shares and all potential dilutive common shares outstanding during the year.
Earnings per common share (EPS) were computed as follows:
(In Thousands, Except Per Share Data)
Net income and net income available to common shareholders
$
67,800
$
75,948
$
74,627
Average common shares outstanding
11,992
12,516
13,558
Average common share stock options outstanding
Average diluted common shares
12,080
12,607
13,674
Earnings per common share - basic
$
5.65
$
6.07
$
5.50
Earnings per common share - diluted
$
5.61
$
6.02
$
5.46
Options outstanding at December 31, 2023, 2022 and 2021, to purchase 749,833, 559,484 and 383,338 shares of common stock, respectively, were not included in the computation of diluted earnings per common share for each of the years because the exercise prices of such options were greater than the average market prices of the common stock for the years ended December 31, 2023, 2022 and 2021, respectively.
Stock Compensation Plans
The Company has stock-based employee compensation plans, which are described more fully in Note 20. In accordance with FASB ASC 718, Compensation - Stock Compensation, compensation cost related to share-based payment transactions is recognized in the Company’s consolidated financial statements based on the grant-date fair value of the award using the modified prospective transition method. For the years ended December 31, 2023, 2022 and 2021, share-based compensation expense totaling $1.6 million, $1.4 million and $1.2 million, respectively, was included in salaries and employee benefits expense in the consolidated statements of income.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2023 and 2022, cash equivalents consisted of interest-bearing deposits in other financial institutions. At December 31, 2023, nearly all of the interest-bearing deposits were uninsured and held at the Federal Home Loan Bank or the Federal Reserve Bank.
Income Taxes
The Company accounts for income taxes in accordance with income tax accounting guidance (FASB ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. At December 31, 2023 and 2022, no valuation allowance was established.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
The Company files consolidated income tax returns with its subsidiaries.
Derivatives and Hedging Activities
FASB ASC 815, Derivatives and Hedging, provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments. For detailed disclosures on derivatives and hedging activities, see Note 16.
As required by FASB ASC 815, the Company records all derivatives in the statement of financial condition at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides relief for companies preparing for discontinuation of interest rates such as the London Interbank Offered Rate (“LIBOR”). LIBOR is a benchmark interest rate referenced in a variety of agreements that are used by numerous entities. After 2021, certain LIBOR rates may no longer be published. As a result, LIBOR is expected to be discontinued as a reference rate. Other interest rates used globally could also be discontinued for similar reasons. ASU 2020-04 provides optional expedients and exceptions to contracts, hedging relationships and other transactions affected by reference rate reform. The main provisions for contract modifications include optional relief by allowing the modification as a continuation of the existing contract without additional analysis and other optional expedients regarding embedded features. Optional expedients for hedge accounting permit changes to critical terms of hedging relationships and to the designated benchmark interest rate in a fair value hedge and also provide relief for assessing hedge effectiveness for cash flow hedges. ASU 2020-04 was effective upon issuance; however, the guidance was originally only available generally through December 31, 2022. Based upon amendments provided in ASU 2022-06 discussed below, provisions of ASU 2020-04 can now generally be applied through December 31, 2024. The application of ASU 2020-04 has not had, and is not expected to have, a material impact on the Company’s consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. ASU 2021-01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance; however, the guidance was originally only available generally through December 31, 2022. Based upon amendments provided in ASU 2022-06 discussed below, provisions of ASU 2021-01 can now generally be applied through December 31, 2024. ASU 2021-01 has not had, and is not expected to have, a material impact on the Company’s consolidated financial statements.
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method. ASU 2022-01 further clarifies certain targeted improvements to the optional hedge accounting model that were made under ASU 2017-12. ASU 2022-01 expands the last-of-layer method and renames this method to portfolio layer method to reflect this expansion, as well as expanding the scope of the portfolio layer method to include nonprepayable financial assets. It also specifies eligible hedging instruments and provides additional guidance on the accounting for and disclosure of hedge basis adjustments that are applicable to the portfolio layer method. ASU 2022-01 permits an entity to apply the same portfolio hedging method to both prepayable and nonprepayable financial assets, thereby allowing consistent accounting for similar hedges. ASU 2022-01 became effective for the Company on January 1, 2023. The adoption of ASU 2022-01 did not have a material impact on the Company’s consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the troubled debt restructuring recognition and measurement guidance and, instead, requires that an entity evaluate whether a loan modification represents a new loan or a continuation of an existing loan. It also enhances existing disclosure requirements and introduces new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU 2022-02 became effective for the Company on January 1, 2023. The adoption of ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements. The adoption of this ASU does, however, require changes in disclosures related to certain loan modifications.
In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. ASU 2022-06 extends the period of time entities can utilize the reference rate reform relief guidance provided by ASU 2020-04 and ASU 2021-01, which are discussed above. ASU 2022-06 was effective upon issuance and defers the sunset date of this prior guidance to December 31, 2024, after which entities will no longer be permitted to apply the relief guidance in Topic 848. ASU 2022-06 has not had, and is not expected to have, a material impact on the Company’s consolidated financial statements.
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 is intended to improve the accounting and disclosures for investments in tax credit structures. ASU 2023-02 allows entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. Previously, this method was only available for qualifying tax equity investments in low-income housing tax credit structures. Currently, the Company does not have a material amount of tax credit structures, other than low-income housing tax credit structures. ASU 2023-02 became effective for the Company on January 1, 2024. The early adoption of ASU 2023-02 did not have a material impact on the Company’s consolidated financial statements.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 expands reportable segment disclosure requirements through enhanced disclosures about significant segment expenses. ASU 2023-07 implements a new requirement to disclose significant segment expenses regularly provided to the chief operating decision maker, expands certain annual disclosures to interim periods, clarifies that single reportable segment entities must apply Topic 280 in its entirety and permits more than one measure of segment profit or loss to be reported under certain conditions. ASU 2023-07 is effective for the Company for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the requirements of the expanded segment disclosures but does not currently expect the additional disclosures to have a material impact on the Company’s consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 is focused on additional income tax disclosures and requires public business entities, on an annual basis, to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income by the applicable statutory income tax rate). ASU 2023-09 is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2024, with early adoption permitted. While the Company is currently assessing the impact applying this standard will have on its income tax disclosures, the adoption of ASU 2023-09 is currently not expected to have a material impact on the Company’s consolidated financial statements.
Correction of an Immaterial Error in Prior Period Financial Statements
Certain prior period amounts in the Consolidated Statements of Cash Flows have been corrected as discussed below. No other financial statements or notes thereto were impacted by these corrections.
The Company has corrected its 2022 and 2021 Consolidated Statements of Cash Flows presentation within this Annual Report on Form 10-K for an error in classification within the operating activities section of the statements of cash flows regarding amortization of terminated hedging transactions and for an error in classification regarding investments in tax credit partnerships between the operating activities and investing activities sections of the statements of cash flows.
For the item related to the terminated hedging transactions, the Company is now including the amortization from accumulated other comprehensive income and related deferred taxes recognized in interest income as an item not providing cash in accretion of deferred income, premiums, discounts and other. This was previously included in net changes in prepaid expenses and other assets. For the item related to investments in tax credit partnerships, the Company is now including the amounts invested as an item using cash in the investing activities section. This was previously included in net changes in prepaid expenses and other assets in the operating activities section.
The Company assessed the materiality of this change in presentation on prior period consolidated financial statements in accordance with SEC Staff Accounting Bulletin No. 99, “Materiality,” (ASC Topic 250, Accounting Changes and Error Corrections). Based on this assessment, the Company concluded that these error corrections in its statements of cash flows are not material to any previously presented financial statements. The corrections had no impact on the Consolidated Statements of Financial Condition, Consolidated Statements of Income, Consolidated Statements of Comprehensive Income or Consolidated Statements of Stockholders’ Equity, or notes to these financial statements, for any previously presented interim or annual financial statements. Accordingly, the Company corrected the previously reported immaterial errors for the years ended December 31, 2022 and 2021 in this Annual Report on Form 10-K.
A summary of corrections reflecting the prior period impacts to the Company’s Consolidated Statements of Cash Flows are shown below (in thousands of dollars):
For the Year Ended December 31, 2022
As Previously
Presented
Net Change
As Corrected
Operating Activities
Accretion of deferred income, premiums, discounts and other
$
(7,719)
$
(8,123)
$
(15,842)
Prepaid expenses and other assets
(24,248)
26,389
2,141
Net cash provided by operating activities
66,580
18,266
84,846
Investing Activities
Investment in tax credit partnerships
-
(18,266)
(18,266)
Net cash used in investing activities
(801,280)
(18,266)
(819,546)
For the Year Ended December 31, 2021
As Previously
Presented
Net Change
As Corrected
Operating Activities
Accretion of deferred income, premiums, discounts and other
$
(10,262)
$
(8,123)
$
(18,385)
Prepaid expenses and other assets
3,257
16,889
20,146
Net cash provided by operating activities
84,976
8,766
93,742
Investing Activities
Investment in tax credit partnerships
-
(8,766)
(8,766)
Net cash provided by investing activities
190,713
(8,766)
181,947
Reclassifications
Prior period consolidated financial statements are reclassified whenever necessary to conform to the current period presentation.
Note 2: Investments in Securities
Held-to-maturity securities (“HTM”), which include any security for which the Company has both the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income over the security’s estimated life. Prepayments are anticipated for certain mortgage-backed securities. Premiums on callable securities are amortized to their earliest call date.
Available-for-sale securities (“AFS”), which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Realized gains and losses, based on specifically identified amortized cost of the individual security, are included in non-interest income. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders’ equity. Premiums and discounts are amortized and accreted, respectively, to interest income over the estimated life of the security. Prepayments are anticipated for certain mortgage-backed and Small Business Administration (SBA) securities. Premiums on callable securities are amortized to their earliest call date.
During the three months ended March 31, 2022, the Company transferred, at fair value, $226.5 million of securities from the available-for-sale portfolio to the held-to-maturity portfolio. The related net unrealized gross gains were $1.0 million; $775,000 (net of income taxes) remained in accumulated other comprehensive income are being amortized over the remaining life of the securities. No gains or losses on these securities were recognized at the time of transfer. As of December 31, 2023, the net unrealized gross losses remaining were $65,000; net of income taxes, these unrealized losses were $49,000.
The amortized cost and fair values of securities were as follows:
December 31, 2023
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In Thousands)
AVAILABLE-FOR-SALE SECURITIES:
Agency mortgage-backed securities
$
316,114
$
$
35,890
$
280,231
Agency collateralized mortgage obligations
85,989
-
10,043
75,946
States and political subdivisions securities
59,141
1,531
58,137
Small Business Administration securities
70,648
-
6,755
63,893
$
531,892
$
$
54,219
$
478,207
December 31, 2023
Amortized
Gross
Gross
Amortized
Fair Value
Carrying
Unrealized
Unrealized
Fair
Cost
Adjustment
Value
Gains
Losses
Value
(In Thousands)
HELD-TO-MATURITY SECURITIES:
Agency mortgage-backed securities
$
72,495
$
2,436
$
74,931
$
-
$
8,686
$
66,245
Agency collateralized mortgage obligations
116,405
(2,502)
113,903
-
14,662
99,241
States and political subdivisions
6,188
6,189
-
5,707
$
195,088
$
(65)
$
195,023
$
-
$
23,830
$
171,193
December 31, 2022
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In Thousands)
AVAILABLE-FOR-SALE SECURITIES:
Agency mortgage-backed securities
$
327,266
$
-
$
40,784
$
286,482
Agency collateralized mortgage obligations
90,205
-
11,731
78,474
States and political subdivisions securities
60,667
3,291
57,495
Small Business Administration securities
75,076
-
6,935
68,141
$
553,214
$
$
62,741
$
490,592
December 31, 2022
Amortized
Gross
Gross
Amortized
Fair Value
Carrying
Unrealized
Unrealized
Fair
Cost
Adjustment
Value
Gains
Losses
Value
(In Thousands)
HELD-TO-MATURITY SECURITIES:
Agency mortgage-backed securities
$
73,891
$
3,015
$
76,906
$
-
$
9,820
$
67,086
Agency collateralized mortgage obligations
122,247
(2,885)
119,362
-
14,129
105,233
States and political subdivisions
6,239
(12)
6,227
-
5,446
$
202,377
$
$
202,495
$
-
$
24,730
$
177,765
At December 31, 2023, the Company’s available-for-sale agency mortgage-backed securities portfolio consisted of FNMA securities totaling $190.9 million, FHLMC securities totaling $86.4 million and GNMA securities totaling $2.9 million. At December 31, 2022, available-for-sale agency mortgage-backed securities portfolio consisted of FNMA securities totaling $196.4 million, FHLMC securities totaling $90.1 million and GNMA securities totaling $78.5 million. At December 31, 2023 and 2022, all of the Company’s agency mortgage-backed securities totaled $280.2 million and $286.5 million, respectively, and had fixed rates of interest.
At December 31, 2023, the Company’s available-for-sale agency collateralized mortgage-backed securities portfolio consisted of FNMA securities totaling $4.1 million, FHLMC securities totaling $66.5 million and GNMA securities totaling $5.3 million. At December 31, 2022, available-for-sale agency collateralized mortgage-backed securities portfolio consisted of FNMA securities
totaling $3.9 million, FHLMC securities totaling $67.8 million and GNMA securities totaling $6.7 million. At December 31, 2023 and 2022, all of the Company’s agency collateralized mortgage-backed securities totaled $75.9 million and $78.4 million, respectively, and had fixed rates of interest.
The amortized cost and fair value of available-for-sale and held-to-maturity securities at December 31, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale
Held-to-Maturity
Amortized
Fair
Amortized
Fair
Cost
Value
Carrying Value
Value
(In Thousands)
One year or less
$
-
$
-
$
-
$
-
After one through two years
-
-
-
-
After two through three years
-
-
-
-
After three through four years
-
-
After four through five years
-
-
After five through fifteen years
9,682
9,634
3,247
2,986
After fifteen years
48,262
47,277
2,942
2,721
Securities not due on a single maturity date
472,751
420,070
188,834
165,486
$
531,892
$
478,207
$
195,023
$
171,193
The amortized cost and fair values of securities pledged as collateral were as follows at December 31, 2023 and 2022:
Amortized
Fair
Amortized
Fair
Cost
Value
Cost
Value
(In Thousands)
Public deposits
$
17,412
$
15,225
$
15,402
$
13,489
Collateralized borrowing accounts
123,220
109,660
210,330
186,170
Other
3,815
3,507
4,018
3,764
$
144,447
$
128,392
$
229,750
$
203,423
Available-for-sale investments in debt securities are reported in the financial statements at their fair value, which was $478.2 million and $490.6 million at December 31, 2023 and 2022, respectively. Total fair value of these investments for which the amortized cost exceeded the fair value at December 31, 2023 and 2022, was $456.9 million and $472.0 million, respectively, which is approximately 95.5% and 96.2%, respectively, of the Company’s available-for-sale investment portfolio. A high percentage of the unrealized losses were related to the Company’s mortgage-backed securities, collateralized mortgage obligations and Small Business Administration (SBA) securities, which are issued and guaranteed by U.S. government-sponsored entities and agencies. The Company’s state and political subdivisions securities are investments in insured fixed rate municipal bonds for which the issuers continue to make timely principal and interest payments under the contractual terms of the securities. Held-to-maturity investments in debt securities are reported in the financial statements at their amortized cost, which was $195.0 million and $202.5 million at December 31, 2023 and 2022, respectively. Total fair value of these investments at December 31, 2023 and 2022 was approximately $171.2 million and $177.8 million, respectively. Total fair value of these investments for which the amortized cost exceeded the fair value at December 31, 2023 and 2022, was $171.2 million and $177.8 million, which is 100.0% of the Company’s held-to-maturity investment portfolio. Held -to-maturity investment securities are evaluated for potential losses under ASU 2016-13.
Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these available-for-sale debt securities are not credit related.
The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2023 and 2022:
Less than 12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Description of Securities
Value
Losses
Value
Losses
Value
Losses
(In Thousands)
AVAILABLE-FOR-SALE SECURITIES:
Agency mortgage-backed securities
$
4,318
$
(9)
$
274,801
$
(35,881)
$
279,119
$
(35,890)
Agency collateralized mortgage obligations
9,080
(216)
66,866
(9,827)
75,946
(10,043)
Small Business Administration securities
7,782
(133)
56,111
(6,622)
63,893
(6,755)
States and political subdivisions securities
-
-
37,969
(1,531)
37,969
(1,531)
$
21,180
$
(358)
$
435,747
$
(53,861)
$
456,927
$
(54,219)
HELD-TO-MATURITY SECURITIES:
Agency mortgage-backed securities
$
-
$
-
$
66,245
$
(8,686)
$
66,245
$
(8,686)
Agency collateralized mortgage obligations
-
-
99,241
(14,662)
99,241
(14,662)
States and political subdivisions securities
-
-
5,707
(482)
5,707
(482)
$
-
$
-
$
171,193
$
(23,830)
$
171,193
$
(23,830)
Less than 12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Description of Securities
Value
Losses
Value
Losses
Value
Losses
(In Thousands)
AVAILABLE-FOR-SALE SECURITIES:
Agency mortgage-backed securities
$
221,562
$
(27,597)
$
64,918
$
(13,187)
$
286,480
$
(40,784)
Agency collateralized mortgage obligations
28,537
(3,262)
40,642
(8,469)
69,179
(11,731)
Small Business Administration securities
60,473
(5,224)
7,667
(1,711)
68,140
(6,935)
States and political subdivisions securities
44,455
(2,913)
3,753
(378)
48,208
(3,291)
$
355,027
$
(38,996)
$
116,980
$
(23,745)
$
472,007
$
(62,741)
HELD-TO-MATURITY SECURITIES:
Agency mortgage-backed securities
$
59,218
$
(7,766)
$
7,868
$
(2,054)
$
67,086
$
(9,820)
Agency collateralized mortgage obligations
61,055
(6,411)
44,178
(7,718)
105,233
(14,129)
States and political subdivisions securities
(101)
4,546
(680)
5,446
(781)
$
121,173
$
(14,278)
$
56,592
$
(10,452)
$
177,765
$
(24,730)
Allowance for Credit Losses On January 1, 2021, the Company began evaluating all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. All of the mortgage-backed, collateralized mortgage, and SBA securities held by the Company are issued by U.S. government-sponsored entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. Likewise, the Company has not experienced historical losses on these types of securities. Accordingly, no allowance for credit losses has been recorded for these securities.
Regarding securities issued by state and political subdivisions, management considers the following when evaluating these securities: (i) current issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) updated financial information of the issuer, (v) internal forecasts and (vi) whether such securities provide insurance or other credit enhancement or are pre-refunded by the issuers. These securities are highly rated by major rating agencies and have a long history of no credit losses. Likewise, the Company has not experienced historical losses on these types of securities. Accordingly, no allowance for credit losses has been recorded for these securities.
Note 3: Loans and Allowance 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 guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credits, financial guarantees, and other similar instruments. The Company adopted ASC 326 using the modified retrospective method for loans and off-balance sheet credit exposures. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses on loans of $11.6 million. This adjustment brought the balance of the allowance for credit losses on loans to $67.3 million as of January 1, 2021. In addition, the Company recorded an $8.7 million liability for unfunded commitments as of January 1, 2021. The after-tax effect decreased retained earnings by $14.2 million. The adjustment was based upon the Company’s analysis of then-current conditions, assumptions and economic forecasts at January 1, 2021.
Classes of loans at December 31, 2023 and 2022, included:
December 31,
December 31,
(In Thousands)
One- to four-family residential construction
$
29,628
$
33,849
Subdivision construction
23,359
32,067
Land development
48,015
41,613
Commercial construction
703,407
757,690
Owner occupied one- to four-family residential
769,260
778,533
Non-owner occupied one- to four-family residential
121,275
124,870
Commercial real estate
1,521,032
1,530,663
Other residential
942,071
781,761
Commercial business
318,050
293,228
Industrial revenue bonds
12,047
12,852
Consumer auto
28,343
37,281
Consumer other
28,978
33,732
Home equity lines of credit
115,883
123,242
4,661,348
4,581,381
Allowance for credit losses
(64,670)
(63,480)
Deferred loan fees and gains, net
(7,058)
(11,065)
$
4,589,620
$
4,506,836
Classes of loans by aging were as follows as of the dates indicated:
December 31, 2023
Total Loans
Over 90
Total
> 90 Days Past
30-59 Days
60-89 Days
Days
Total Past
Loans
Due and
Past Due
Past Due
Past Due
Due
Current
Receivable
Still Accruing
(In Thousands)
One- to four-family residential construction
$
-
$
-
$
-
$
-
$
29,628
$
29,628
$
-
Subdivision construction
-
-
-
-
23,359
23,359
-
Land development
-
-
47,631
48,015
-
Commercial construction
-
-
-
-
703,407
703,407
-
Owner occupied one- to four- family residential
2,778
3,625
765,635
769,260
-
Non-owner occupied one- to four-family residential
-
-
-
-
121,275
121,275
-
Commercial real estate
10,552
10,831
1,510,201
1,521,032
-
Other residential
9,572
-
-
9,572
932,499
942,071
-
Commercial business
-
-
318,019
318,050
-
Industrial revenue bonds
-
-
-
-
12,047
12,047
-
Consumer auto
28,154
28,343
-
Consumer other
-
28,799
28,978
-
Home equity lines of credit
115,513
115,883
-
Total
$
13,125
$
$
11,748
$
25,181
$
4,636,167
$
4,661,348
$
-
December 31, 2022
Total Loans
Over 90
Total
> 90 Days Past
30-59 Days
60-89 Days
Days
Total Past
Loans
Due and
Past Due
Past Due
Past Due
Due
Current
Receivable
Still Accruing
(In Thousands)
One- to four-family residential construction
$
-
$
-
$
-
$
-
$
33,849
$
33,849
$
-
Subdivision construction
-
-
-
-
32,067
32,067
-
Land development
-
-
41,229
41,613
-
Commercial construction
-
-
-
-
757,690
757,690
-
Owner occupied one- to four- family residential
2,568
3,752
774,781
778,533
-
Non-owner occupied one- to four-family residential
-
-
124,807
124,870
-
Commercial real estate
-
1,579
1,775
1,528,888
1,530,663
-
Other residential
-
-
-
-
781,761
781,761
-
Commercial business
-
292,634
293,228
-
Industrial revenue bonds
-
-
-
-
12,852
12,852
-
Consumer auto
37,133
37,281
-
Consumer other
33,219
33,732
-
Home equity lines of credit
122,696
123,242
-
Total
$
3,394
$
$
3,670
$
7,775
$
4,573,606
$
4,581,381
$
-
Loans are placed on nonaccrual status at 90 days past due and interest is considered a loss unless the loan is well secured and in the process of collection. Payments received on nonaccrual loans are applied to principal until the loans are returned to accrual status. Loans are returned to accrual status when all payments contractually due are brought current, payment performance is sustained for a period of time, generally six months, and future payments are reasonably assured. With the exception of consumer loans, charge-offs
on loans are recorded when available information indicates a loan is not fully collectible and the loss is reasonably quantifiable. Consumer loans are charged-off at specified delinquency dates consistent with regulatory guidelines.
Non-accruing loans are summarized as follows:
December 31,
December 31,
(In Thousands)
One- to four-family residential construction
$
-
$
-
Subdivision construction
-
-
Land development
Commercial construction
-
-
Owner occupied one- to four-family residential
Non-owner occupied one- to four-family residential
-
-
Commercial real estate
10,552
1,579
Other residential
-
-
Commercial business
Industrial revenue bonds
-
-
Consumer auto
Consumer other
Home equity lines of credit
Total non-accruing loans
$
11,748
$
3,670
No interest income was recorded on these loans for the years ended December 31, 2023 and 2022, respectively.
Nonaccrual loans for which there is no related allowance for credit losses as of December 31, 2023 had an amortized cost of $792,000. These loans are individually assessed and do not require an allowance due to being adequately collateralized under the collateral-dependent valuation method. A collateral-dependent loan is a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Company’s assessment as of the reporting date. Collateral-dependent loans are identified primarily by a classified risk rating with a loan balance equal to or greater than $100,000, including, but not limited to, any loan in process of foreclosure or repossession.
The following table presents the activity in the allowance for credit losses by portfolio segment for the years ended December 31, 2023, 2022 and 2021. On January 1, 2021, the Company adopted the CECL methodology, which added $11.6 million to the total Allowance for Credit Loss, including $1.9 million of remaining discount on loans that were previously accounted for as PCI.
One- to Four-
Family
Residential
and
Other
Commercial
Commercial
Commercial
Construction
Residential
Real Estate
Construction
Business
Consumer
Total
(In Thousands)
Allowance for credit losses
Balance, January 1, 2023
$
11,171
$
12,110
$
27,096
$
2,865
$
5,822
$
4,416
$
63,480
Provision (credit) charged to expense
(1,390)
1,260
(27)
1,909
(432)
2,250
Losses charged off
(31)
-
-
-
(1,037)
(1,754)
(2,822)
Recoveries
-
1,300
1,762
Balance, December 31, 2023
$
9,820
$
13,370
$
28,171
$
2,844
$
6,935
$
3,530
$
64,670
Allowance for credit losses
Balance, December 31, 2021
$
9,364
$
10,502
$
28,604
$
2,797
$
4,142
$
5,345
$
60,754
Provision (credit) charged to expense
1,652
1,498
(1,465)
1,491
(328)
3,000
Losses charged off
(40)
-
(44)
(84)
(51)
(1,950)
(2,169)
Recoveries
-
1,349
1,895
Balance, December 31, 2022
$
11,171
$
12,110
$
27,096
$
2,865
$
5,822
$
4,416
$
63,480
Allowance for credit losses
Balance, December 31, 2020
$
4,536
$
9,375
$
33,707
$
3,521
$
2,390
$
2,214
$
55,743
CECL adoption
4,533
5,832
(2,531)
(1,165)
1,499
3,427
11,595
Balance, January 1, 2021
9,069
15,207
31,176
2,356
3,889
5,641
67,338
Provision (credit) charged to expense
-
(4,797)
(2,478)
-
-
(6,700)
Losses charged off
(190)
-
(142)
(154)
(81)
(2,054)
(2,621)
Recoveries
1,758
2,737
Balance, December 31, 2021
$
9,364
$
10,502
$
28,604
$
2,797
$
4,142
$
5,345
$
60,754
The following table presents the activity in the allowance for unfunded commitments by portfolio segment for the years ended December 31, 2023, 2022 and 2021. On January 1, 2021, the Company adopted the CECL methodology, which created an $8.7 million allowance for unfunded commitments.
One- to Four-
Family
Residential
and
Other
Commercial
Commercial
Commercial
Construction
Residential
Real Estate
Construction
Business
Consumer
Total
(In Thousands)
Allowance for unfunded commitments
Balance, January 1, 2023
$
$
8,624
$
$
$
1,734
$
$
12,816
Provision (credit) charged to expense
(30)
(4,618)
(61)
(775)
(48)
(5,329)
Balance, December 31, 2023
$
$
4,006
$
$
$
$
$
7,487
Allowance for unfunded commitments
Balance, December 31, 2021
$
$
5,703
$
$
$
1,582
$
$
9,629
Provision (credit) charged to expense
2,921
(106)
3,187
Balance, December 31, 2022
$
$
8,624
$
$
$
1,734
$
$
12,816
Allowance for unfunded commitments
Balance, December 31, 2020
$
-
$
-
$
-
$
-
$
-
$
-
$
-
CECL adoption
5,227
8,690
Balance, January 1, 2021
5,227
8,690
Provision (credit) charged to expense
(230)
(2)
Balance, December 31, 2021
$
$
5,703
$
$
$
1,582
$
$
9,629
The portfolio segments used in the preceding tables correspond to the loan classes used in all other tables in Note 3 as follows:
● The one- to four-family residential and construction segment includes the one- to four-family residential construction, subdivision construction, owner occupied one- to four-family residential and non-owner occupied one- to four-family residential classes.
● The other residential (multi-family) segment corresponds to the other residential (multi-family) class.
● The commercial real estate segment includes the commercial real estate and industrial revenue bonds classes.
● The commercial construction segment includes the land development and commercial construction classes.
● The commercial business segment corresponds to the commercial business class.
● The consumer segment includes the consumer auto, consumer other and home equity lines of credit classes.
The weighted average interest rate on loans receivable at December 31, 2023 and 2022, was 6.25% and 5.54%, respectively.
Loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balance of loans serviced for others at December 31, 2023, was $439.9 million, consisting of $334.6 million of commercial loan participations sold to other financial institutions and $105.3 million of residential mortgage loans sold. The unpaid principal balance of loans serviced for others at December 31, 2022, was $540.2 million, consisting of $422.3 million of commercial loan participations sold to other financial institutions and $117.9 million of residential mortgage loans sold. In addition, available lines of credit on these loans were $123.6 million and $104.1 million at December 31, 2023 and 2022, respectively.
The following tables present the amortized cost basis of collateral-dependent loans by class of loans at the dates indicated:
December 31, 2023
Principal
Specific
Balance
Allowance
(In Thousands)
One- to four-family residential construction
$
-
$
-
Subdivision construction
-
-
Land development
-
Commercial construction
-
-
Owner occupied one- to four-family residential
Non-owner occupied one- to four-family residential
-
-
Commercial real estate
10,548
1,200
Other residential
7,162
-
Commercial business
-
-
Industrial revenue bonds
-
-
Consumer auto
-
-
Consumer other
-
-
Home equity lines of credit
-
-
Total
$
18,785
$
1,229
December 31, 2022
Principal
Specific
Balance
Allowance
(In Thousands)
One- to four-family residential construction
$
-
$
-
Subdivision construction
-
-
Land development
-
Commercial construction
-
-
Owner occupied one- to four-family residential
1,637
Non-owner occupied one- to four-family residential
-
-
Commercial real estate
1,571
-
Other residential
-
-
Commercial business
Industrial revenue bonds
-
-
Consumer auto
-
-
Consumer other
Home equity lines of credit
-
Total
$
4,473
$
For loans that were non-accruing, interest of approximately $509,000, $292,000 and $432,000 would have been recognized on an accrual basis during the years ended December 31, 2023, 2022 and 2021, respectively.
Modified Loans. As indicated in Note 1, in March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the troubled debt restructuring (TDR) recognition and measurement guidance and, instead, requires that an entity evaluate whether the loan modification represents a new loan or a continuation of an existing loan. It also enhances existing disclosure requirements and introduces new disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU 2022-02 became effective for the Company on January 1, 2023.
Adoption of this ASU did not have a material impact on the Company’s results of operations, financial position or liquidity, but resulted in additional disclosure requirements related to gross charge offs by vintage year and the removal of TDR disclosures, replaced by additional disclosures on the types of modifications of loans to borrowers experiencing financial difficulties. The Company has adopted this update prospectively.
Under ASU 2022-02, loan modifications are reported if concessions have been granted to borrowers that are experiencing financial difficulty. Information on these loan modifications originated after the effective date is presented according to the new accounting guidance. Reporting periods prior to the adoption of ASU 2022-02 present information on TDRs under the previous disclosure requirements.
The estimate of lifetime expected losses utilized in the allowance for credit losses model is developed using average historical loss on loans with similar risk characteristics, which includes losses from modifications of loans to borrowers experiencing financial difficulty. As a result, a change to the allowance for credit losses is generally not recorded upon modification. For modifications to loans made to borrowers experiencing financial difficulty that are adversely classified, the Company determines the allowance for credit losses on an individual basis, using the same process that it utilizes for other adversely classified loans. If collection efforts have begun and the modified loan is subsequently deemed collateral-dependent, the loan is placed on non-accrual status and the allowance for credit losses is determined based on an individual evaluation. If necessary, the loan is charged down to fair market value less estimated sales costs.
The following table shows the composition of loan modifications made to borrowers experiencing financial difficulty by the loan portfolio and type of concessions granted during the year ended December 31, 2023. Each of the types of concessions granted comprised 2% or less of their respective classes of loan portfolios at December 31, 2023. During the year ended December 31, 2023, principal forgiveness of $563,000 was completed on commercial business loans and consumer loans.
Year Ended December 31, 2023
Interest Rate
Term
Total
Reduction
Extension
Combination
Modifications
(In Thousands)
Construction and land development
$
-
$
-
$
1,553
$
1,553
One- to four-family residential
-
-
-
-
Other residential
-
2,750
-
2,750
Commercial real estate
-
20,365
20,442
Commercial business
-
-
-
-
Consumer
-
$
$
2,834
$
21,918
$
24,757
The Company closely monitors the performance of loans to borrowers experiencing financial difficulty that are modified to understand the effectiveness of its modification efforts. The following table depicts the performance (under modified terms) at December 31, 2023 of loans that were modified during the year ended December 31, 2023:
December 31, 2023
30-89 Days
Over 90 Days
Current
Past Due
Past Due
Total
(In Thousands)
Construction and land development
$
1,553
$
-
$
-
$
1,553
One- to four-family residential
-
-
-
-
Other residential
2,750
-
-
2,750
Commercial real estate
12,384
-
8,058
20,442
Commercial business
-
-
-
-
Consumer
-
-
$
16,699
$
-
$
8,058
$
24,757
TDRs by class are presented below as of December 31, 2022.
December 31, 2022
Accruing TDR Loans
Non-accruing TDR Loans
Total TDR Loans
Number
Balance
Number
Balance
Number
Balance
(In Thousands)
Construction and land development
-
$
-
-
$
-
-
$
-
One- to four-family residential
1,028
1,126
Other residential
-
-
-
-
-
-
Commercial real estate
-
-
1,571
1,571
Commercial business
-
-
-
-
-
-
Consumer
$
1,238
$
1,711
$
2,949
The following tables present newly restructured loans during the years ended December 31, 2022 and 2021 by type of modification:
Total
Interest Only
Term
Combination
Modification
(In Thousands)
Residential one-to-four family
$
-
$
-
$
$
Commercial real estate
-
-
Commercial business
-
-
-
-
Consumer
-
$
-
$
$
$
Total
Interest Only
Term
Combination
Modification
(In Thousands)
Residential one-to-four family
$
$
$
$
Commercial real estate
1,768
-
-
1,768
Commercial business
-
-
-
-
Consumer
-
$
1,799
$
$
$
2,405
At December 31, 2022, of the $2.9 million in TDRs, $1.7 million were classified as substandard using the Company’s internal grading system. The Company had no TDRs that were modified in the previous 12 months and subsequently defaulted during the year ended December 31, 2022.
Loan Risk Ratings. The nature and extent of impairments of modified loans, including those which have experienced a subsequent payment default, are considered in the determination of an appropriate level of the allowance for credit losses. The Company utilizes an internal risk rating system comprised of a series of grades to categorize loans according to perceived risk associated with the expectation of debt repayment. The analysis of the borrower’s ability to repay considers specific information, including but not limited to current financial information, historical payment experience, industry information, collateral levels and collateral types. A risk rating is assigned at loan origination and then monitored throughout the contractual term for possible risk rating changes.
Satisfactory loans range from Excellent to Moderate Risk, but generally are loans supported by strong recent financial statements. The character and capacity of the borrower are strong, including reasonable project performance, good industry experience, liquidity and/or net worth. The probability of financial deterioration seems unlikely. Repayment is expected from approved sources over a reasonable period of time.
Watch loans are identified when the borrower has capacity to perform according to terms; however, elements of uncertainty exist. Margins of debt service coverage may be narrow, historical patterns of financial performance may be erratic, collateral margins may be diminished and the borrower may be a new and/or thinly capitalized company. Some management weakness may also exist, the borrower may have somewhat limited access to other financial institutions, and that access may diminish in difficult economic times.
Special Mention loans have weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects or the Bank’s credit position at some future date. It is a transitional grade that is closely monitored for improvement or deterioration.
The Substandard rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.
Doubtful loans have all the weaknesses inherent to those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
The Loss category is used when loans are considered uncollectable and no longer included as an asset.
All loans are analyzed for risk rating updates regularly. For larger loans, rating assessments may be more frequent if relevant information is obtained earlier through debt covenant monitoring or overall relationship management. Smaller loans are monitored as identified by the loan officer based on the risk profile of the individual borrower or if the loan becomes past due related to credit issues. Loans rated Watch, Special Mention, Substandard or Doubtful are subject to quarterly review and monitoring processes. In addition to the regular monitoring performed by the lending personnel and credit committees, loans are subject to review by the credit review department, which verifies the appropriateness of the risk ratings for the loans chosen as part of its risk-based review plan.
The following tables present a summary of loans by category and risk rating separated by origination and loan class as of December 31, 2023 and 2022.
Term Loans by Origination Year
Revolving
Prior
Loans
Total
(In Thousands)
One- to four-family residential construction
Satisfactory (1-4)
$
12,528
$
9,878
$
$
-
$
-
$
-
$
7,181
$
29,628
Watch (5)
-
-
-
-
-
-
-
-
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
-
-
-
-
-
-
Total
12,528
9,878
-
-
-
7,181
29,628
Current Period Gross Charge Offs
-
-
-
-
-
-
-
-
Subdivision construction
Satisfactory (1-4)
1,022
21,333
-
23,359
Watch (5)
-
-
-
-
-
-
-
-
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
-
-
-
-
-
-
Total
1,022
21,333
-
23,359
Current Period Gross Charge Offs
-
-
-
-
-
-
-
-
Construction and land development
Satisfactory (1-4)
14,860
12,564
5,658
3,682
5,458
4,531
47,631
Watch (5)
-
-
-
-
-
-
-
-
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
-
-
-
-
Total
14,860
12,564
5,658
3,682
5,458
4,531
1,262
48,015
Current Period Gross Charge Offs
-
-
-
-
-
-
-
-
Other construction
Satisfactory (1-4)
60,895
422,727
203,918
15,867
-
-
-
703,407
Watch (5)
-
-
-
-
-
-
-
-
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
-
-
-
-
-
-
Total
60,895
422,727
203,918
15,867
-
-
-
703,407
Current Period Gross Charge Offs
-
-
-
-
-
-
-
-
One- to four-family residential
Satisfactory (1-4)
66,733
330,489
203,781
108,232
60,288
118,570
888,576
Watch (5)
-
-
-
-
1,079
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
-
-
Total
66,733
330,489
204,324
108,380
60,459
119,621
890,535
Current Period Gross Charge Offs
-
-
-
-
-
Other residential
Satisfactory (1-4)
18,795
108,389
391,516
180,916
108,173
111,462
3,335
922,586
Watch (5)
-
-
-
-
-
-
-
-
Special Mention (6)
-
-
-
-
-
12,322
-
12,322
Classified (7-9)
-
-
-
-
-
7,163
-
7,163
Total
18,795
108,389
391,516
180,916
108,173
130,947
3,335
942,071
Current Period Gross Charge Offs
-
-
-
-
-
-
-
-
Commercial real estate
Satisfactory (1-4)
53,158
284,738
237,822
103,393
161,680
624,515
35,276
1,500,582
Watch (5)
-
-
-
-
5,348
-
5,502
Special Mention (6)
-
-
-
-
-
4,396
-
4,396
Classified (7-9)
-
-
-
-
-
10,552
-
10,552
Total
53,158
284,738
237,822
103,393
161,834
644,811
35,276
1,521,032
Current Period Gross Charge Offs
-
-
-
-
-
-
-
-
Commercial business
Satisfactory (1-4)
58,551
92,224
30,361
15,371
10,043
55,044
57,177
318,771
Watch (5)
-
-
-
-
-
1,369
-
1,369
Special Mention (6)
-
1,186
3,840
-
-
-
4,900
9,926
Classified (7-9)
-
-
-
-
-
Total
58,551
93,410
34,205
15,398
10,043
56,413
62,077
330,097
Current Period Gross Charge Offs
-
-
-
-
1,030
-
1,037
Consumer
Satisfactory (1-4)
16,629
12,010
6,163
2,811
12,089
122,166
172,696
Watch (5)
-
Special Mention (6)
-
-
-
-
-
-
Classified (7-9)
-
-
-
Total
16,629
12,055
6,196
2,817
12,339
122,337
173,204
Current Period Gross Charge Offs
1,493
1,754
Combined
Satisfactory (1-4)
302,681
1,274,041
1,100,593
430,315
346,534
926,576
226,496
4,607,236
Watch (5)
-
7,780
8,338
Special Mention (6)
-
1,186
3,840
-
-
16,718
4,908
26,652
Classified (7-9)
-
-
17,953
19,122
Total
$
302,681
$
1,275,272
$
1,105,013
$
430,496
$
346,862
$
969,027
$
231,997
$
4,661,348
Current Period Gross Charge Offs
$
$
$
$
$
$
2,534
$
$
2,822
Term Loans by Origination Year
Revolving
Prior
Loans
Total
(In Thousands)
One- to four-family residential construction
Satisfactory (1-4)
$
21,885
$
7,265
$
1,391
$
-
$
-
$
-
$
3,308
$
33,849
Watch (5)
-
-
-
-
-
-
-
-
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
-
-
-
-
-
-
Total
21,885
7,265
1,391
-
-
-
3,308
33,849
Current Period Gross Charge Offs
-
-
-
-
-
-
-
-
Subdivision construction
Satisfactory (1-4)
4,478
25,864
-
32,067
Watch (5)
-
-
-
-
-
-
-
-
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
-
-
-
-
-
-
Total
4,478
25,864
-
32,067
Current Period Gross Charge Offs
-
-
-
-
-
-
-
-
Construction and land development
Satisfactory (1-4)
16,746
6,914
4,866
7,338
3,990
41,229
Watch (5)
-
-
-
-
-
-
-
-
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
-
-
-
-
Total
16,746
6,914
4,866
7,338
3,990
41,613
Current Period Gross Charge Offs
-
-
-
-
-
-
Other construction
Satisfactory (1-4)
113,512
446,125
176,340
21,713
-
-
-
757,690
Watch (5)
-
-
-
-
-
-
-
-
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
-
-
-
-
-
-
Total
113,512
446,125
176,340
21,713
-
-
-
757,690
Current Period Gross Charge Offs
-
-
-
-
-
-
-
-
One- to four-family residential
Satisfactory (1-4)
340,886
219,504
128,509
73,162
39,685
97,236
899,669
Watch (5)
-
-
-
1,341
1,665
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
-
-
1,832
2,069
Total
340,886
219,504
128,667
73,341
39,773
100,409
903,403
Current Period Gross Charge Offs
-
-
-
-
-
Other residential
Satisfactory (1-4)
83,822
133,648
168,232
142,630
122,614
123,538
3,939
778,423
Watch (5)
-
-
-
-
-
3,338
-
3,338
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
-
-
-
-
-
-
Total
83,822
133,648
168,232
142,630
122,614
126,876
3,939
781,761
Current Period Gross Charge Offs
-
-
-
-
-
-
-
-
Commercial real estate
Satisfactory (1-4)
221,341
171,484
109,939
203,426
185,682
577,216
36,658
1,505,746
Watch (5)
-
-
-
-
-
23,338
-
23,338
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
-
-
-
1,579
-
1,579
Total
221,341
171,484
109,939
203,426
185,682
602,133
36,658
1,530,663
Current Period Gross Charge Offs
-
-
-
-
-
-
Commercial business
Satisfactory (1-4)
45,349
66,258
39,645
15,505
9,309
65,307
64,088
305,461
Watch (5)
-
-
-
-
-
-
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
-
-
-
Total
45,349
66,258
39,645
15,505
9,309
65,735
64,279
306,080
Current Period Gross Charge Offs
-
-
-
-
-
-
Consumer
Satisfactory (1-4)
21,309
11,168
5,711
2,708
3,263
16,380
132,792
193,331
Watch (5)
-
-
-
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
Total
21,309
11,207
5,720
2,715
3,265
16,788
133,251
194,255
Current Period Gross Charge Offs
1,594
1,950
Combined
Satisfactory (1-4)
869,328
1,088,230
635,433
466,685
361,449
884,255
242,085
4,547,465
Watch (5)
-
-
28,211
28,670
Special Mention (6)
-
-
-
-
-
-
-
-
Classified (7-9)
-
-
4,053
1,013
5,246
Total
$
869,328
$
1,088,269
$
635,600
$
466,871
$
361,539
$
916,519
$
243,255
$
4,581,381
Current Period Gross Charge Offs
$
$
$
$
$
$
1,677
$
$
2,169
Certain of the Bank’s real estate loans are pledged as collateral for borrowings as set forth in Notes 9 and 11.
Certain directors and executive officers of the Company and the Bank, and their affiliates, are customers of and had transactions with the Bank in the ordinary course of business. Except for the interest rates on loans secured by personal residences, in the opinion of management, all loans included in such transactions were made on substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties. Generally, residential first mortgage loans and home equity lines of credit to all employees and directors have been granted at interest rates equal to the Bank’s cost of funds, subject to annual adjustments in the case of residential first mortgage loans and monthly adjustments in the case of home equity lines of credit. At December 31, 2023 and 2022, loans outstanding to these directors and executive officers, and their related interests, are summarized as follows:
(In Thousands)
Balance, beginning of year
$
7,950
$
10,097
New loans
10,694
3,079
Payments
(2,618)
(5,226)
Balance, end of year
$
16,026
$
7,950
Note 4: FDIC-Assisted Acquired Loans
On March 20, 2009, Great Southern Bank entered into a purchase and assumption agreement with loss share with the Federal Deposit Insurance Corporation (FDIC) to assume all of the deposits (excluding brokered deposits) and acquire certain assets of TeamBank, N.A., a full service commercial bank headquartered in Paola, Kansas. The related loss sharing agreement was terminated early, effective April 26, 2016, by mutual agreement of Great Southern Bank and the FDIC. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.
On September 4, 2009, Great Southern Bank entered into a purchase and assumption agreement with loss share with the FDIC to assume all of the deposits and acquire certain assets of Vantus Bank, a full service thrift headquartered in Sioux City, Iowa. The related loss sharing agreement was terminated early, effective April 26, 2016, by mutual agreement of Great Southern Bank and the FDIC. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.
On October 7, 2011, Great Southern Bank entered into a purchase and assumption agreement with loss share with the FDIC to assume all of the deposits and acquire certain assets of Sun Security Bank, a full service bank headquartered in Ellington, Missouri. The related loss sharing agreement was terminated early, effective April 26, 2016, by mutual agreement of Great Southern Bank and the FDIC. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.
On April 27, 2012, Great Southern Bank entered into a purchase and assumption agreement with loss share with the FDIC to assume all of the deposits and acquire certain assets of Inter Savings Bank, FSB (“InterBank”), a full service bank headquartered in Maple Grove, Minnesota. The related loss sharing agreement was terminated early, effective June 9, 2017, by mutual agreement of Great Southern Bank and the FDIC. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.
On June 20, 2014, Great Southern Bank entered into a purchase and assumption agreement with the FDIC to purchase a substantial portion of the loans and investment securities, as well as certain other assets, and assume all of the deposits, as well as certain other liabilities, of Valley Bank, a full-service bank headquartered in Moline, Illinois, with significant operations in Iowa. This transaction did not include a loss sharing agreement. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.
The following table presents the balances of the acquired loans related to the various FDIC-assisted transactions at December 31, 2023 and 2022.
Sun Security
TeamBank
Vantus Bank
Bank
InterBank
Valley Bank
(In Thousands)
December 31, 2023
Carrying value of loans receivable
$
2,191
$
3,052
$
6,263
$
19,727
$
10,323
December 31, 2022
Carrying value of loans receivable
$
2,703
$
3,983
$
7,221
$
24,402
$
12,750
Note 5: Other Real Estate Owned and Repossessions
Major classifications of other real estate owned at December 31, 2023 and 2022, were as follows:
(In Thousands)
Foreclosed assets held for sale and repossessions
One- to four-family construction
$
-
$
-
Subdivision construction
-
-
Land development
-
-
Commercial construction
-
-
One- to four-family residential
-
-
Other residential
-
-
Commercial real estate
-
-
Commercial business
-
-
Consumer
Foreclosed assets held for sale and repossessions
Other real estate owned not acquired through foreclosure
-
Other real estate owned and repossessions
$
$
At December 31, 2023, there was no other real estate owned not acquired through foreclosure, as two former branch locations were sold during the year.
At December 31, 2022, other real estate owned not acquired through foreclosure included two properties, both of which were branch locations that were closed and held for sale; these were sold during the year ended December 31, 2023, as indicated above. During the year ended December 31, 2022, two former branch location were sold. During the year ended December 31, 2022, no additional valuation write-downs were recorded on branch locations that were closed and held for sale.
At December 31, 2023 and 2022, residential mortgage loans totaling $-0- and $173,000, respectively, were in the process of foreclosure.
Expenses applicable to other real estate owned and repossessions for the years ended December 31, 2023, 2022 and 2021, included the following:
(In Thousands)
Net gains on sales of other real estate owned and repossessions
$
(42)
$
(149)
$
(282)
Valuation write-downs
Operating expenses, net of rental income
$
$
$
Note 6: Premises and Equipment
Major classifications of premises and equipment at December 31, 2023 and 2022, stated at cost, were as follows:
(In Thousands)
Land
$
39,617
$
39,622
Buildings and improvements
107,602
105,096
Furniture, fixtures and equipment
70,162
67,505
Operating leases right of use asset
6,621
7,397
224,002
219,620
Less accumulated depreciation
85,411
78,550
$
138,591
$
141,070
Leases. In 2019, the Company adopted ASU 2016-02, Leases (Topic 842). Adoption of this ASU resulted in the Company initially recognizing a right of use asset and corresponding lease liability of $9.5 million. The amount of the right of use asset and corresponding lease liability will fluctuate based on the Company’s lease terminations, new leases and lease modifications and renewals. As of December 31, 2023, the lease right of use asset value was $6.6 million and the corresponding lease liability was $6.9 million. As of December 31, 2022, the lease right of use asset value was $7.4 million and the corresponding lease liability was $7.6 million. At December 31, 2023, expected lease terms ranged from 0.3 years to 14.9 years with a weighted-average lease term of 6.9 years. The weighted-average discount rate was 3.79%.
For the years ended December 31, 2023, 2022 and 2021, lease expense was $1.7 million, $1.6 million and $1.5 million, respectively. The Company’s short-term leases related to offsite ATMs have both fixed and variable lease payment components, based on the number of transactions at the various ATMs. The variable portion of these lease payments is not material and the total lease expense related to ATMs was $ 317,000, $ 307,000 and $ 307,000 for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company does not sublease any of its leased facilities; however, it does lease to other third parties portions of facilities that it owns. In terms of being the lessor in these circumstances, all of these lease agreements are classified as operating leases. In the years ended December 31, 2023, 2022 and 2021, income recognized from these lease agreements was $1.3 million, $1.2 million, and $1.2 million respectively, and was included in occupancy and equipment expense.
At or For the Year Ended
December 31, 2023
December 31, 2022
(In Thousands)
Statement of Financial Condition
Operating leases right of use asset
$
6,621
$
7,397
Operating leases liability
$
6,870
$
7,599
Statement of Income
Operating lease costs classified as occupancy and equipment expense
$
1,740
$
1,579
(includes short-term lease costs and amortization of right of use asset)
Supplemental Cash Flow Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
1,681
$
1,547
Right of use assets obtained in exchange for lease obligations:
Operating leases
$
$
At December 31, 2023, future expected lease payments for leases with terms exceeding one year were as follows (in thousands):
$
1,313
1,297
1,241
1,172
Thereafter
1,899
Future lease payments expected
7,822
Less interest portion of lease payments
(952)
Lease liability
$
6,870
Note 7: Investments in Limited Partnerships
Investments in Affordable Housing Partnerships
The Company has invested in certain limited partnerships that were formed to develop and operate apartments and single-family houses designed as high-quality affordable housing for lower income tenants throughout Missouri and contiguous states. At December 31, 2023, the Company had 22 such investments, with a net carrying value of $66.3 million. At December 31, 2022, the Company had 19 such investments, with a net carrying value of $38.4 million. Due to the Company’s inability to exercise any significant influence over any of the investments in Affordable Housing Partnerships, they all are accounted for using the proportional amortization method. Each of the partnerships must meet the regulatory requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits. If the partnerships cease to qualify during the compliance period, the credits may be denied for any period in which the projects are not in compliance and a portion of the credits previously taken may be subject to recapture with interest.
The remaining federal affordable housing tax credits to be utilized through 2034 were $75.9 million as of December 31, 2023, assuming no tax credit recapture events occur and all projects currently under construction are completed as planned. Amortization of the investments in partnerships is expected to be approximately $68.9 million, assuming all projects currently under construction are
completed and funded as planned. The Company’s usage of federal affordable housing tax credits approximated $7.7 million, $4.9 million and $4.9 million during 2023, 2022 and 2021, respectively. Investment amortization was $7.2 million, $4.4 million and $4.2 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Investments in Community Development Entities
The Company has invested in certain limited partnerships that were formed to develop and operate business and real estate projects located in low-income communities. At December 31, 2023 the Company had one such investment, with a net carrying value of $361,000. At December 31, 2022, the Company had one such investment, with a net carrying value of $465,000. Due to the Company’s inability to exercise any significant influence over any of the investments in qualified Community Development Entities, they are all accounted for using the cost method. Each of the partnerships provides federal New Market Tax Credits over a seven-year credit allowance period. In each of the first three years, credits totaling five percent of the original investment are allowed on the credit allowance dates and for the final four years, credits totaling six percent of the original investment are allowed on the credit allowance dates. Each of the partnerships must be invested in a qualified Community Development Entity on each of the credit allowance dates during the seven-year period to utilize the tax credits. If the Community Development Entities cease to qualify during the seven-year period, the credits may be denied for any credit allowance date and a portion of the credits previously taken may be subject to recapture with interest. The investments in the Community Development Entities cannot be redeemed before the end of the seven-year period.
The Company’s usage of federal New Market Tax Credits approximated $100,000, $100,000 and $100,000 during 2023, 2022 and 2021, respectively. Investment amortization amounted to $83,000, $83,000 and $86,000 for the years ended December 31, 2023, 2022 and 2021, respectively.
Investments in Limited Partnerships for Federal Rehabilitation/Historic Tax Credits
From time to time, the Company has invested in certain limited partnerships that were formed to provide certain federal rehabilitation/historic tax credits. At December 31, 2023 the Company had one such investment, with a net carrying value of $415,000. At December 31, 2022 the Company had one such investment, with a net carrying value of $629,000. Under prior tax law, the Company utilized these credits in their entirety in the year the project was placed in service and the impact to the Consolidated Statements of Income has not been material. Currently, such partnerships provide federal rehabilitation/historic tax credits over a five-year credit allowance period.
Investments in Limited Partnerships for State Tax Credits
From time to time, the Company has invested in certain limited partnerships that were formed to provide certain state tax credits. The Company has primarily syndicated these tax credits and the impact to the Consolidated Statements of Income has not been material.
Note 8: Deposits
Deposits at December 31, 2023 and 2022, are summarized as follows:
Weighted Average
Interest Rate
(In Thousands, Except Interest Rates)
Non-interest-bearing accounts
-
$
895,496
$
1,063,588
Interest-bearing checking and savings accounts
1.67% and 0.65%
2,216,482
2,188,535
3,111,978
3,252,123
Certificate accounts
0.00% - 0.99%
86,831
280,784
1.00% - 1.99%
22,485
125,951
2.00% - 2.99%
44,354
381,547
3.00% - 3.99%
46,304
228,131
4.00% - 4.99%
739,645
4,883
5.00% and above
8,583
-
948,202
1,021,296
Brokered deposits
5.20% and 4.03%
661,528
411,491
661,528
411,491
$
4,721,708
$
4,684,910
The weighted average interest rate on certificates of deposit was 3.79% and 1.93% at December 31, 2023 and 2022, respectively.
The Bank utilizes brokered deposits as an additional funding source. The aggregate amount of brokered deposits was approximately $661.5 million and $411.5 million at December 31, 2023 and December 31, 2022, respectively. At December 31, 2023 and December 31, 2022, brokered deposits included $300.0 million and $150.0 million, respectively, of purchased funds through the IntraFi Financial network. These IntraFi Financial deposits have a rate of interest that floats daily with an index of effective federal funds rate plus a spread. At December 31, 2023, there were additional brokered deposits totaling $95.0 million that had variable rates of interest that reset monthly or quarterly and there were other brokered deposits totaling $185.3 million that had fixed rates of interest but are callable at the Bank’s discretion. At December 31, 2023, approximately 28% of the Company’s total deposits were uninsured, when including deposit accounts of consolidated subsidiaries of the Company and collateralized deposits of unaffiliated entities. Excluding deposit accounts of the Company’s consolidated subsidiaries, approximately 13% of the Company’s total deposits were uninsured at December 31, 2023.
At December 31, 2023, scheduled maturities of certificates of deposit and brokered deposits were as follows:
Retail
Brokered
Total
(In Thousands)
$
921,485
$
266,781
$
1,188,266
19,250
296,552
315,802
3,067
98,195
101,262
2,394
-
2,394
-
Thereafter
1,058
-
1,058
$
948,202
$
661,528
$
1,609,730
A summary of interest expense on deposits for the years ended December 31, 2023, 2022 and 2021, is as follows:
(In Thousands)
Checking and savings accounts
$
28,579
$
5,968
$
4,023
Certificate accounts
29,796
8,788
8,150
Brokered deposits
30,719
6,162
Early withdrawal penalties
(337)
(242)
(60)
$
88,757
$
20,676
$
13,102
Note 9: Advances From Federal Home Loan Bank
At December 31, 2023 and 2022, there were no outstanding term advances from the Federal Home Loan Bank of Des Moines. At December 31, 2023, there were outstanding overnight borrowings from the Federal Home Loan Bank of Des Moines, which are included in Short-Term Borrowings.
The Bank has pledged FHLB stock, investment securities and first mortgage loans free of other pledges, liens and encumbrances as collateral for outstanding advances. No investment securities were specifically pledged as collateral for FHLB borrowings at December 31, 2023 and 2022. Loans with carrying values of approximately $1.74 billion and $1.62 billion were pledged as collateral for outstanding advances at December 31, 2023 and 2022, respectively. The Bank had $919.1 million remaining available on its line of credit under a borrowing arrangement with the FHLB of Des Moines at December 31, 2023.
Note 10: Short-Term Borrowings
Short-term borrowings at December 31, 2023 and 2022, are summarized as follows:
(In Thousands)
Notes payable - Community Development Equity Funds
$
1,610
$
1,083
Securities sold under reverse repurchase agreements
70,843
176,843
Overnight borrowings from the Federal Home Loan Bank
251,000
88,500
$
323,453
$
266,426
The Bank enters into sales of securities under agreements to repurchase (reverse repurchase agreements). Reverse repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the statements of financial condition. The dollar amount of securities underlying the agreements remains in the asset accounts. Securities underlying the agreements are being held by the Bank during the agreement period. All agreements are written on a term of one-month or less.
Short-term borrowings had weighted average interest rates of 4.76% at December 31, 2023, compared to 2.16% at December 31, 2022. Short-term borrowings averaged approximately $225.1 million and $181.1 million for the years ended December 31, 2023 and 2022, respectively. The maximum amounts outstanding at any month end were $410.6 million and $317.7 million, respectively, during those same years.
The following table represents the Company’s securities sold under reverse repurchase agreements, which contractually mature daily, at December 31, 2023 and 2022:
(In Thousands)
Mortgage-backed securities - GNMA, FNMA, FHLMC
$
70,843
$
176,843
Note 11: Federal Reserve Bank Borrowings
At December 31, 2023 and 2022, the Bank had $452.0 million and $397.0 million, respectively, available under a primary line-of-credit borrowing arrangement with the Federal Reserve Bank. The line is secured primarily by consumer and commercial loans. There were no amounts borrowed under this arrangement at December 31, 2023 or 2022.
Subsequent to December 31, 2023, in January 2024 the Bank borrowed $180.0 million under the Federal Reserve Bank’s Bank Term Funding Program (BTFP). The borrowing, which matures in January 2025 and has a fixed interest rate of 4.83%, may be repaid in full or in part without penalty prior to its stated maturity date. The line is secured primarily by the Bank’s held-to-maturity investment securities, with total amount of assets pledged totaling approximately $191 million. These funds were primarily used to repay a portion of the Bank’s overnight borrowings from the FHLB.
Note 12: Subordinated Debentures Issued to Capital Trusts
In November 2006, Great Southern Capital Trust II (Trust II), a statutory trust formed by the Company for the purpose of issuing the securities, issued a $25.0 million aggregate liquidation amount of floating rate cumulative trust preferred securities. The Trust II securities bore a floating distribution rate equal to 90-day LIBOR plus 1.60% through June 30, 2023. After June 30, 2023, the Trust II securities bear a floating distribution rate equal to three-month CME Term SOFR, plus a spread adjustment for the change from LIBOR, plus 1.60%. The Trust II securities became redeemable at the Company’s option in February 2012, and if not sooner redeemed, mature on February 1, 2037. The Trust II securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended. The gross proceeds of the offering were used to purchase Junior Subordinated Debentures from the Company totaling $25.8 million and bearing an interest rate identical to the distribution rate on the Trust II securities. The initial interest rate on the Trust II debentures was 6.98%. The interest rate was 7.24% and 6.04% at December 31, 2023 and 2022, respectively.
At December 31, 2023 and 2022, subordinated debentures issued to capital trusts were as follows:
(In Thousands)
Subordinated debentures
$
25,774
$
25,774
Note 13: Subordinated Notes
On June 10, 2020, the Company completed the public offering and sale of $75.0 million of its subordinated notes. The notes are due June 15, 2030, and have a fixed interest rate of 5.50% until June 15, 2025, at which time the rate becomes floating at a rate expected to be equal to three-month term Secured Overnight Financing Rate (SOFR) plus 5.325%. The Company may call the notes at par beginning on June 15, 2025, and on any scheduled interest payment date thereafter. The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions, legal, accounting and other professional fees, of approximately $73.5 million. Total debt issuance costs of approximately $1.5 million were deferred and are being amortized over the expected life of the notes, which is five years.
Amortization of the debt issuance costs during the years ended December 31, 2023 and 2022, totaled $297,000 and $293,000, respectively, and is included in interest expense on subordinated notes in the consolidated statements of income, resulting in an imputed interest rate of 5.92 % and 5.95%, respectively.
At December 31, 2023 and 2022, subordinated notes are summarized as follows:
(In Thousands)
Subordinated notes
$
75,000
$
75,000
Less: unamortized debt issuance costs
$
74,579
$
74,281
Note 14: Income Taxes
The Company files a consolidated federal income tax return. As of December 31, 2023 and 2022, retained earnings included approximately $17.5 million for which no deferred income tax liability had been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only for tax years prior to 1988. If the Bank were to liquidate, the entire amount would have to be recaptured and would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $4.3 million and $4.3 million at December 31, 2023 and 2022, respectively.
During the years ended December 31, 2023, 2022 and 2021, the provision for income taxes included these components:
(In Thousands)
Taxes currently payable
$
14,559
$
15,769
$
16,025
Deferred income taxes
2,985
2,485
3,712
Income taxes
$
17,544
$
18,254
$
19,737
The tax effects of temporary differences related to deferred taxes shown on the statements of financial condition were:
December 31,
(In Thousands)
Deferred tax assets
Allowance for credit losses
$
15,911
$
15,618
Liability for unfunded commitments
1,842
3,153
Interest on nonperforming loans
Accrued expenses and other
1,676
1,341
Capital loss carryforward
Unrealized loss on available-for-sale securities
13,208
15,407
Unrealized loss on securities transferred to held-to-maturity securities
-
Unrealized loss on active cash flow derivatives
4,255
7,695
Income recognized for tax in excess of book related to terminated cash flow derivatives
3,532
5,530
Deferred income
Difference in basis for acquired assets and liabilities
41,138
49,853
Deferred tax liabilities
Tax depreciation in excess of book depreciation
(7,697)
(8,210)
FHLB stock dividends
(337)
(337)
Partnership tax credits
(998)
(668)
Prepaid expenses
(1,373)
(1,196)
Unrealized gain on securities transferred to held-to-maturity securities
-
(29)
Unrealized gain on terminated cash flow derivatives
(3,532)
(5,530)
Other
(277)
(235)
(14,214)
(16,205)
Net deferred tax asset
$
26,924
$
33,648
Reconciliations of the Company’s effective tax rates, for the years indicated, from continuing operations to the statutory corporate tax rates were as follows:
Tax at statutory rate
21.0
%
21.0
%
21.0
%
Nontaxable interest and dividends
(0.5)
(0.5)
(0.3)
Tax credits
(2.7)
(1.6)
(1.8)
State taxes
1.7
1.8
1.3
Deferred tax rate change benefit
-
(0.6)
-
Other
1.1
(0.7)
0.7
20.6
%
19.4
%
20.9
%
The Company and its consolidated subsidiaries have not been audited recently by the Internal Revenue Service (IRS). As a result, federal tax years through December 31, 2019 are now closed.
The Company was previously under State of Missouri income and franchise tax examinations for its 2014 and 2015 tax years. The examinations concluded with one unresolved issue related to the exclusion of certain income in the calculation of Missouri income tax. The Missouri Department of Revenue denied the Company’s administrative protest regarding the 2014 and 2015 tax years’ examinations. In June 2021, the Company filed a formal protest with the Missouri Administrative Hearing Commission (MAHC), which has special jurisdiction to hear tax matters and is similar to a trial court, to continue defending the Company’s rights and associated tax position. The Company previously filed a motion for summary decision with the MAHC and, on January 26, 2024, the MAHC granted the motion in favor of the Company, upholding its position related to the exclusion of certain income in the calculation of Missouri income tax. In February 2024, the Missouri Department of Revenue confirmed to the Company in writing that it would not exercise its right to appeal the decision to the Missouri State Supreme Court.
Note 15: Disclosures About Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
● Quoted prices in active markets for identical assets or liabilities (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
● Other observable inputs (Level 2): Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets, quoted prices for securities in inactive markets and inputs derived principally from or corroborated by observable market data by correlation or other means.
● Significant unobservable inputs (Level 3): Inputs that reflect assumptions of a source independent of the reporting entity or the reporting entity’s own assumptions that are supported by little or no market activity or observable inputs.
Financial instruments are broken down by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that, due to an event or circumstance, were required to be remeasured at fair value after initial recognition in the financial statements at some time during the reporting period.
The Company considers transfers between the levels of the hierarchy to be recognized at the end of related reporting periods.
Recurring Measurements
The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2023 and 2022:
Fair Value Measurements Using
Quoted Prices
in Active
Markets
Other
Significant
for Identical
Observable
Unobservable
Assets
Inputs
Inputs
Fair Value
(Level 1)
(Level 2)
(Level 3)
(In Thousands)
December 31, 2023
Available-for-sale securities
Agency mortgage-backed securities
$
280,231
$
-
$
280,231
$
-
Agency collateralized mortgage obligations
75,946
-
75,946
-
States and political subdivisions securities
58,137
-
58,137
-
Small Business Administration securities
63,893
-
63,893
-
Interest rate derivative asset
8,205
-
8,205
-
Interest rate derivative liability
(25,336)
-
(25,336)
-
December 31, 2022
Available-for-sale securities
Agency mortgage-backed securities
$
286,482
$
-
$
286,482
$
-
Agency collateralized mortgage obligations
78,474
-
78,474
-
States and political subdivisions securities
57,495
-
57,495
-
Small Business Administration securities
68,141
-
68,141
-
Interest rate derivative asset
11,061
-
11,061
-
Interest rate derivative liability
(42,097)
-
(42,097)
-
The following is a description of inputs and valuation methodologies used for assets recorded at fair value on a recurring basis and recognized in the accompanying statements of financial condition at December 31, 2023 and 2022, as well as the general classification of such assets pursuant to the valuation hierarchy. There were no significant changes in the valuation techniques during the year ended December 31, 2023.
Available-for-Sale Securities
Investment securities available-for-sale are recorded at fair value on a recurring basis. The fair values used by the Company are obtained from an independent pricing service, which represent either quoted market prices for the identical asset or fair values determined by pricing models, or other model-based valuation techniques, that consider observable market data, such as interest rate volatilities, SOFR yield curve, credit spreads and prices from market makers and live trading systems. Recurring Level 2 securities include U.S. government agency securities, mortgage-backed securities, state and municipal bonds and certain other investments. Inputs used for valuing Level 2 securities include observable data that may include dealer quotes, benchmark yields, market spreads, live trading levels and market consensus prepayment speeds, among other things. Additional inputs include indicative values derived from the independent pricing service’s proprietary computerized models. There were no recurring Level 3 securities at December 31, 2023 or December 31, 2022.
Interest Rate Derivatives
The fair value is estimated using forward-looking interest rate curves and is determined using observable market rates and, therefore, are classified within Level 2 of the valuation hierarchy.
Nonrecurring Measurements
The following tables present the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2023 and 2022:
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
Other
Significant
for Identical
Observable
Unobservable
Assets
Inputs
Inputs
Fair Value
(Level 1)
(Level 2)
(Level 3)
(In Thousands)
December 31, 2023
Collateral-dependent loans
$
7,372
$
-
$
-
$
7,372
December 31, 2022
Collateral-dependent loans
$
$
-
$
-
$
Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying statements of financial condition, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Loans Held for Sale
Mortgage loans held for sale are recorded at the lower of carrying value or fair value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies mortgage loans held for sale as Nonrecurring Level 2. Write-downs to fair value typically do not occur as the Company generally enters into commitments to sell individual mortgage loans at the time the loan is originated to reduce market risk. The Company typically does not have commercial loans held for sale. At December 31, 2023 and 2022, the aggregate fair value of mortgage loans held for sale was not materially different than their cost. Accordingly, no mortgage loans held for sale were marked down and reported at fair value.
Collateral-Dependent Loans
The Company records collateral-dependent loans as Nonrecurring Level 3. If a loan’s fair value as estimated by the Company is less than its carrying value, the Company either records a charge-off of the portion of the loan that exceeds the fair value or establishes a reserve within the allowance for credit losses specific to the loan. Loans for which such charge-offs or reserves were recorded during the years ended December 31, 2023 and December 31, 2022, are shown in the table above (net of reserves).
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are initially recorded at fair value less estimated cost to sell at the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell. Foreclosed assets held for sale are classified within Level 3 of the fair value hierarchy. There were no foreclosed assets held for sale at December 31, 2023 or 2022.
Fair Value of Financial Instruments
The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying statements of financial condition at amounts other than fair value.
Cash and Cash Equivalents and Federal Home Loan Bank Stock
The carrying amount approximates fair value.
Held-to-Maturity Securities
Fair values for held-to-maturity securities are estimated based on quoted market prices of similar securities. For these securities, the Company obtains fair value measurements from an independent pricing service, which represent either quoted market prices for the identical asset or fair values determined by pricing models, or other model-based valuation techniques, that consider observable market data, such as interest rate volatilities, SOFR yield curve, credit spreads and prices from market makers and live trading systems. These securities include U.S. government agency securities, mortgage-backed securities, state and municipal bonds and certain other investments.
Loans and Interest Receivable
The fair value of loans is estimated on an exit price basis incorporating contractual cash flows, prepayment discount spreads, credit loss and liquidity premiums. Loans with similar characteristics are aggregated for purposes of the calculations. The carrying amount of accrued interest receivable approximates its fair value.
Deposits and Accrued Interest Payable
The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date, i.e., their carrying amounts. The fair value of fixed maturity certificates of deposit is estimated based on a discounted cash flow calculation using the average advances yield curve from 11 districts of the FHLB for the as of date. The carrying amount of accrued interest payable approximates its fair value.
Short-Term Borrowings
The carrying amount approximates fair value.
Subordinated Debentures Issued to Capital Trusts
The subordinated debentures have floating rates that reset quarterly. The carrying amount of these debentures approximates their fair value.
Subordinated Notes
The fair values used by the Company are obtained from independent sources and are derived from quoted market prices of the Company’s subordinated notes and quoted market prices of other subordinated debt instruments with similar characteristics.
Commitments to Originate Loans, Letters of Credit and Lines of Credit
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
The following table presents estimated fair values of the Company’s financial instruments not recorded at fair value in the financial statements. The fair values of certain of these instruments were calculated by discounting expected cash flows, which method involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.
December 31, 2023
December 31, 2022
Carrying
Fair
Hierarchy
Carrying
Fair
Hierarchy
Amount
Value
Level
Amount
Value
Level
(Dollars in Thousands)
Financial assets
Cash and cash equivalents
$
211,333
$
211,333
$
168,520
$
168,520
Held-to-maturity securities
195,023
171,193
202,495
177,765
Mortgage loans held for sale
5,849
5,849
4,811
4,811
Loans, net of allowance for credit losses
4,589,620
4,402,314
4,506,836
4,391,084
Interest receivable
21,206
21,206
19,107
19,107
Investment in FHLB stock and other assets
26,313
26,313
30,814
30,814
Financial liabilities
Deposits
4,721,708
4,714,624
4,684,910
4,672,913
Short-term borrowings
323,453
323,453
266,426
266,426
Subordinated debentures
25,774
25,774
25,774
25,774
Subordinated notes
74,579
71,625
74,281
72,000
Interest payable
6,225
6,225
3,010
3,010
Unrecognized financial instruments (net of contractual value)
Commitments to originate loans
-
-
-
-
Letters of credit
Lines of credit
-
-
-
-
Note 16: Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities. In the normal course of business, the Company may use derivative financial instruments (primarily interest rate swaps) from time to time to assist in its interest rate risk management. The Company has interest rate derivatives that result from a service provided to certain qualifying loan customers that are not used to manage interest rate risk in the Company’s assets or liabilities and are not designated in a qualifying hedging relationship. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions. In addition, the Company has interest rate derivatives that were designated in a qualified hedging relationship.
Nondesignated Hedges
The Company has interest rate swaps that are not designated in a qualifying hedging relationship. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet
the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.
At December 31, 2023, the Company had six interest rate swaps, totaling $82.2 million in notional amount, with commercial customers, and six interest rate swaps with the same notional amount with third parties related to its program. In addition, at December 31, 2023, the Company had one participation loan purchased totaling $8.6 million, in which the lead institution has an interest rate swap with their customer and the economics of the counterparty swap are passed along to the Company through the loan participation. At December 31, 2022, the Company had six interest rate swaps and one interest rate cap totaling $107.0 million in notional amount with commercial customers, and six interest rate swaps and one interest rate cap with the same notional amount with third parties related to its program. In addition, at December 31, 2022, the Company had one participation loan purchased totaling $8.8 million, in which the lead institution has an interest rate swap with their customer and the economics of the counterparty swap are passed along to the Company through the loan participation. During the years ended December 31, 2023, 2022 and 2021, the Company recognized net gains (losses) of $(337,000), $321,000 and $312,000, respectively, in non-interest income related to changes in the fair value of these swaps.
Fair Value Hedges
Interest Rate Swaps. As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, in February 2023, the Company entered into interest rate swap transactions as part of its ongoing interest rate management strategies to hedge the risk of certain of its fixed rate brokered deposits. The total notional amount of the swaps was $95 million with a termination date of February 28, 2025. Under the terms of the swaps, the Company receives a fixed rate of interest of 4.65% and pays a floating rate of interest equal to USD-SOFR-COMPOUND plus a spread. The floating rate resets monthly and net settlements of interest due to/from the counterparty also occurs monthly. To the extent that the fixed rate of interest exceeds USD-SOFR-COMPOUND plus the spread, the Company receives net interest settlements which are recorded as a reduction of deposit interest expense. If USD-SOFR-COMPOUND plus the spread exceeds the fixed rate of interest, the Company is required to pay net settlements to the counterparty and record those net payments as interest expense on deposits.
Subsequent to December 31, 2023, the Company elected to terminate these swaps prior to their contractual termination date in 2025. The Company received a net settlement payment from the swap counterparty totaling $26,500 upon termination. At the time of the early termination, the Company had recorded a market value adjustment to the brokered deposit of $163,000, which will now be amortized as a reduction of interest expense beginning in January 2024 through February 2025.
Cash Flow Hedges
Interest Rate Swap. As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, 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 million with a termination date of October 6, 2025. Under the terms of the swap, the Company received a fixed rate of interest of 3.018% and paid a floating rate of interest equal to one-month USD-LIBOR. The floating rate was reset monthly and net settlements of interest due to/from the counterparty also occurred monthly. To the extent that the fixed rate of interest exceeded one-month USD-LIBOR, the Company received net interest settlements which were recorded as loan interest income. If USD-LIBOR exceeded the fixed rate of interest, the Company was required to pay net settlements to the counterparty and record those net payments as a reduction of interest income on loans.
In March 2020, the Company and its swap counterparty mutually agreed to terminate the $400 million interest rate swap prior to its contractual maturity. The Company was paid $45.9 million from its swap counterparty as a result of this termination. This $45.9 million, less the accrued interest portion and net of deferred income taxes, was reflected in the Company’s stockholders’ equity as part of Accumulated Other Comprehensive Income (AOCI) and a portion of it 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 period. The Company recorded interest income of $8.1 million, $8.1 million and $8.1 million on this interest rate swap during the years ended December 31, 2023, 2022 and 2021, respectively. At December 31, 2023, the Company expected to have a sufficient amount of eligible variable rate loans to continue to accrete this interest income 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 March 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 was $300 million, with a termination date of March 1, 2024. Under the terms of the swap, the Company received a fixed rate of interest of 1.6725% and paid 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 reset monthly and net settlements of interest due to/from the counterparty also occurred monthly. The floating rate of interest was 5.456% as of December 31, 2023. To the extent the floating rate of interest exceeded the fixed rate of interest, the Company was required to pay net settlements to the counterparty and record those net payments as a reduction of interest income on loans. If the fixed rate of interest exceeded the floating rate of interest, the Company received net interest settlements, which were recorded as loan interest income. The Company recorded a reduction of loan interest income related to this swap transaction of $10.4 million and $941,000 for the years ended December 31, 2023 and December 31, 2022, respectively.
In July 2022, the Company entered into two additional interest rate swap transactions as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans. The notional amount of each swap is $200 million with an effective date of May 1, 2023 and a termination date of May 1, 2028. Under the terms of one swap, the Company receives a fixed rate of interest of 2.628% and pays a floating rate of interest equal to one-month USD-SOFR OIS. Under the terms of the other swap, beginning in May 2023, the Company receives a fixed rate of interest of 5.725% and pays a floating rate of interest equal to one-month USD-Prime. In each case, the floating rate is reset monthly and net settlements of interest due to/from the counterparty also occur monthly. To the extent the fixed rate of interest exceeds the floating rate of interest, the Company receives net interest settlements, which is recorded as loan interest income. If the floating rate of interest exceeds the fixed rate of interest, the Company pays net settlements to the counterparty and records those net payments as a reduction of interest income on loans. At December 31, 2023, the USD-Prime rate was 8.50% and the one-month USD-SOFR OIS rate was 5.34446%. The Company recorded a reduction of loan interest income related to the two July 2022 interest rate swaps of $7.2 million for the year ended December 31, 2023. Net settlements on these two interest rate swaps began in May 2023.
The effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affected earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. During each of the three months and year ended December 31, 2023 and 2022, the Company recognized no non-interest income related to changes in the fair value of these derivatives.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition:
Location in
Fair Value
Consolidated Statements
December 31,
December 31,
of Financial Condition
(In Thousands)
Derivatives designated as hedging instruments
Derivative Liabilities
Active interest rate swaps
Accrued expenses and other liabilities
$
17,296
$
31,277
Total derivatives designated as hedging instruments
$
17,296
$
31,277
Derivatives not designated as hedging instruments
Derivative Assets
Interest rate products
Prepaid expenses and other assets
$
8,205
$
11,061
Total derivatives not designated as hedging instruments
$
8,205
$
11,061
Derivative Liabilities
Interest rate products
Accrued expenses and other liabilities
$
8,040
$
10,820
Total derivatives not designated as hedging instruments
$
8,040
$
10,820
The following table presents the effect of cash flow hedge accounting on the statements of comprehensive income:
Amount of Gain (Loss)
Recognized in AOCI
Year Ended December 31,
Cash Flow Hedges
(In Thousands)
Terminated interest rate swaps, net of income taxes
$
(6,267)
$
(6,271)
$
(6,271)
Active interest rate swaps, net of income taxes
10,541
(23,582)
-
$
4,274
$
(29,853)
$
(6,271)
The following table presents the effect of cash flow hedge accounting on the statements of income:
Year Ended December 31,
Cash Flow Hedges
Interest
Interest
Interest
Interest
Interest
Interest
Income
Expense
Income
Expense
Income
Expense
(In Thousands)
Terminated interest rate swaps
$
8,122
$
-
$
8,123
$
-
$
8,123
$
-
Active interest rate swaps
(17,618)
-
(941)
-
-
-
$
(9,496)
$
-
$
7,182
$
-
$
8,123
$
-
Agreements with Derivative Counterparties
The Company has agreements with its derivative counterparties. If the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. If the Bank fails to maintain its status as a well-capitalized institution, then the counterparty could
terminate the derivative positions and the Company would be required to settle its obligations under the agreements. Similarly, the Company could be required to settle its obligations under certain of its agreements if certain regulatory events occur, such as the issuance of a formal directive, or if the Company’s credit rating is downgraded below a specified level.
At December 31, 2023, the termination value of derivatives with our derivative dealer counterparties (related to loan level swaps with commercial lending customers and an active interest rate swap to hedge risk related to the Company’s variable rate loans) in an overall net asset position, which included accrued interest but excluded any adjustment for nonperformance risk, related to these agreements was $137,000. The Company has minimum collateral posting thresholds with its derivative dealer counterparties. At December 31, 2023, the Company had given cash collateral to one derivative counterparty of $11.6 million to cover its net fair value position. This counterparty position included collateral from the counterparty of $8.2 million for commercial lending swaps, collateral from the Company of $19.2 million for interest rate swaps related to variable rate loans and collateral from the Company of $44,000 for swaps related to brokered deposits.
At December 31, 2022, the termination value of derivatives with our derivative dealer counterparties (related to loan level swaps with commercial lending customers) in a net asset position, which included accrued interest but excluded any adjustment for nonperformance risk, related to these agreements was $242,000. Additionally, the Company’s activity with one of its derivative counterparties met the level at which the minimum collateral posting thresholds take effect (collateral to be given by the Company) and the Company had posted collateral of $20.7 million to the derivative counterparty.
If the Company had breached any of these provisions at December 31, 2023 or December 31, 2022, it could have been required to settle its obligations under the agreements at the termination value. Under the collateral agreements between the parties, either party may choose to provide cash or securities to satisfy its collateral requirements.
Note 17: Commitments and Credit Risk
Commitments to Originate Loans
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a significant portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, commercial real estate and residential real estate.
At December 31, 2023 and 2022, the Bank had outstanding commitments to originate loans and fund commercial construction loans aggregating approximately $1.6 million and $97.1 million, respectively. The commitments extend over varying periods of time with the majority being disbursed within a 30- to 180-day period.
Mortgage loans in the process of origination represent amounts that the Bank plans to fund within a normal period of 60 to 90 days, many of which are intended for sale to investors in the secondary market. Total mortgage loans in the process of origination amounted to approximately $12.3 million and $16.8 million at December 31, 2023 and 2022, respectively.
Letters of Credit
Standby letters of credit are irrevocable conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under nonfinancial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Fees for letters of credit issued are initially recorded by the Bank as deferred revenue and are included in earnings at the termination of the respective agreements. Should the Bank be obligated to perform under the standby letters of credit, the Bank may seek recourse from the customer for reimbursement of amounts paid.
The Company had total outstanding standby letters of credit amounting to approximately $16.5 million and $16.7 million at December 31, 2023 and 2022, respectively, with no letters of credit having terms over five years.
Lines of Credit
Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, commercial real estate and residential real estate. The Bank uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.
At December 31, 2023, the Bank had granted unused lines of credit to borrowers aggregating approximately $1.0 billion and $204.0 million for commercial lines and open-end consumer lines, respectively. At December 31, 2022, the Bank had granted unused lines of credit to borrowers aggregating approximately $1.8 billion and $199.2 million for commercial lines and open-end consumer lines, respectively.
Credit Risk
The Bank grants collateralized commercial, real estate and consumer loans primarily to customers in its market areas. Although the Bank has a diversified portfolio, loans (including FDIC-assisted acquired loans) aggregating approximately $788.6 million and $814.1 million at December 31, 2023 and 2022, respectively, were secured primarily by apartments, condominiums, residential and commercial land developments, industrial revenue bonds and other types of commercial properties in the St. Louis area.
Note 18: Additional Cash Flow Information
Year Ended December 31,
(In Thousands)
Noncash Investing and Financing Activities
Real estate acquired in settlement of loans
$
$
$
1,154
Transfer of available-for-sale securities to held-to-maturity
-
226,500
-
Conversion of premises and equipment to foreclosed assets
-
-
1,215
Dividends declared but not paid
4,722
4,893
4,727
Additional Cash Payment Information
Interest paid
100,405
24,999
22,700
Income taxes paid
7,888
10,258
12,959
Note 19: Employee Benefits
The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB Plan), a multiemployer defined benefit pension plan covering all employees who have met minimum service requirements. Effective July 1, 2006, this plan was closed to new participants. Employees already in the plan continue to accrue benefits. The Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 333. The Company’s policy is to fund pension cost accrued. Employer contributions charged to expense for this plan for the years ended December 31, 2023, 2022 and 2021, were approximately $1.7 million, $1.5 million and $2.1 million, respectively. The Company’s contributions to the Pentegra DB Plan were not more than 5% of the total contributions to the plan. The funded status of the plan as of July 1, 2023 and 2022, was 94.4% and 100.0%, respectively. The funded status was calculated by taking the market value of plan assets, which reflected contributions received through June 30, 2023 and 2022, respectively, divided by the funding target. No collective bargaining agreements are in place that require contributions to the Pentegra DB Plan.
The Company has a defined contribution retirement plan covering substantially all employees. The Company matches 100% of the employee’s contribution on the first 3% of the employee’s compensation and also matches an additional 50% of the employee’s contribution on the next 2% of the employee’s compensation. Employer contributions charged to expense for this plan for the years ended December 31, 2023, 2022 and 2021, were approximately $1.8 million, $1.7 million and $1.7 million, respectively.
Note 20: Stock Compensation Plans
The Company established the 2013 Equity Incentive Plan (the “2013 Plan”) for employees and directors of the Company and its subsidiaries. Under the plan, stock options or other awards could be granted with respect to 700,000 shares of common stock. On May 9, 2018, the Company’s stockholders approved the Great Southern Bancorp, Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”). Upon the stockholders’ approval of the 2018 Plan, the 2013 Plan was frozen. As a result, no new stock options or other awards may be granted under the 2013 Plan; however, existing outstanding awards under the 2013 Plan were not affected. At December 31, 2023, 215,394 options were outstanding under the 2013 Plan.
The Company established the 2018 Plan for employees and directors of the Company and its subsidiaries. Under the plan, stock options or other awards could be granted with respect to 800,000 shares of common stock. On May 11, 2022, the Company’s stockholders approved the Great Southern Bancorp, Inc. 2022 Omnibus Incentive Plan (the “2022 Plan”). Upon the stockholders’ approval of the 2022 Plan, the 2018 Plan was frozen. As a result, no new stock options or other awards may be granted under the 2018 Plan; however, existing outstanding awards under the 2018 Plan were not affected. At December 31, 2023, 612,511 options were outstanding under the 2018 Plan.
The 2022 Plan provides for the grant from time to time to directors, emeritus directors, officers, employees and advisory directors of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units. The number of shares of common stock available for awards under the 2022 Plan is 900,000 (the “2022 Plan Limit”). Shares utilized for awards other than stock options and stock appreciation rights will be counted against the 2022 Plan Limit on a 2.5-to-1 basis. At December 31, 2023, 412,400 options were outstanding under the 2022 Plan.
Stock options may be either incentive stock options or nonqualified stock options, and the option price must be at least equal to the fair value of the Company’s common stock on the date of grant. Options generally are granted for a 10-year term and generally become exercisable in four cumulative annual installments of 25% commencing two years from the date of grant. The Compensation Committee has discretion to accelerate a participant’s right to exercise an option.
Stock awards may be granted upon terms and conditions determined solely at the discretion of the Compensation Committee.
The table below summarizes transactions under the Company’s stock compensation plans, all of which related to stock options granted under such plans:
Shares
Weighted
Available
Under
Average
to Grant
Option
Exercise Price
Balance, January 1, 2021
245,350
971,107
$
48.079
Granted from 2018 Plan
(202,700)
202,700
57.980
Exercised
-
(91,285)
40.532
Forfeited from terminated plan(s)
-
(5,197)
44.563
Forfeited from current plan(s)
44,022
(44,022)
52.256
Balance, December 31, 2021
86,672
1,033,303
50.528
Granted from 2018 Plan
(2,500)
2,500
61.550
Forfeited from terminated plan(s)
39,235
(39,235)
52.523
Termination of 2018 Plan
(123,407)
-
-
Available to Grant from 2022 Plan
900,000
-
-
Granted from 2022 Plan
(205,900)
205,900
61.505
Exercised
-
(136,801)
42.149
Forfeited from current plan(s)
(750)
61.550
Balance, December 31, 2022
694,850
1,064,917
53.671
Forfeited from terminated plan(s)
-
(9,100)
51.123
Granted from 2022 Plan
(210,300)
210,300
53.166
Exercised
-
(22,762)
38.830
Forfeited from current plan(s)
3,050
(3,050)
61.550
Balance, December 31, 2023
487,600
1,240,305
$
53.857
The Company’s stock option grants contain terms that provide for a graded vesting schedule whereby portions of the options vest in increments over the requisite service period. These options typically vest one-fourth at the end of each of years two, three, four and five from the grant date. As provided for under FASB ASC 718, the Company has elected to recognize compensation expense for options with graded vesting schedules on a straight-line basis over the requisite service period for the entire option grant. In addition, ASC 718 requires companies to recognize compensation expense based on the estimated number of stock options for which service is expected to be rendered. The Company’s historical forfeitures of its share-based awards have not been significant. Forfeitures are estimated annually based on historical information.
The fair value of each option award is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions for the years ended December 31, 2023, 2022 and 2021:
Expected dividends per share
$
1.60
$
1.60
$
1.44
Risk-free interest rate
4.51
%
3.77
%
1.24
%
Expected life of options
6 years
6 years
5 years
Expected volatility
23.69
%
23.70
%
28.33
%
Weighted average fair value of options granted during year
$
11.69
$
13.46
$
11.56
Expected volatilities are based on the historical volatility of the Company’s stock price over the measured period. The expected life of options granted is based on actual historical exercise behavior of all employees and directors and approximates the graded vesting period of the options. Expected dividends are based on the annualized dividends declared at the time of the option grant. For 2023 and 2022, the risk-free interest rate is based on the average of the five-year treasury rate and the seven-year treasury rate on the grant date of the options. For 2021, the risk-free interest rate is based on the five-year treasury rate on the grant date of the options.
The following table presents the activity related to options under all plans for the year ended December 31, 2023:
Weighted
Weighted
Average
Average
Remaining
Exercise
Contractual
Options
Price
Term
Options outstanding, January 1, 2023
1,064,917
$
53.671
7.13 years
Granted
210,300
53.166
Exercised
(22,762)
38.830
Forfeited
(12,150)
53.741
Options outstanding, December 31, 2023
1,240,305
53.857
6.74 years
Options exercisable, December 31, 2023
571,490
$
51.688
4.64 years
For the years ended December 31, 2023, 2022 and 2021, options granted were 210,300, 208,400, and 202,700, respectively. The total intrinsic value (amount by which the fair value of the underlying stock exceeds the exercise price of an option on exercise date) of options exercised during the years ended December 31, 2023, 2022 and 2021, was $354,000, $2.6 million and $1.4 million, respectively. Cash received from the exercise of options for the years ended December 31, 2023, 2022 and 2021, was $884,000, $6.3 million and $3.7 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $212,000 million, $2.3 million and $1.2 million for the years ended December 31, 2023, 2022 and 2021, respectively. The total intrinsic value of options outstanding at December 31, 2023, 2022 and 2021, was $7.4 million, $6.7 million and $9.2 million, respectively. The total intrinsic value of options exercisable at December 31, 2023, 2022 and 2021, was $4.5 million, $4.1 million and $5.3 million, respectively.
The following table presents the activity related to nonvested options under all plans for the year ended December 31, 2023.
Weighted
Weighted
Average
Average
Exercise
Grant Date
Options
Price
Fair Value
Nonvested options, January 1, 2023
636,844
$
56.073
$
11.117
Granted
210,300
53.166
11.681
Vested this period
(169,592)
53.882
9.755
Nonvested options forfeited
(8,737)
56.347
11.299
Nonvested options, December 31, 2023
668,815
$
55.711
$
11.640
For the years ended December 31, 2023, 2022 and 2021, compensation expense for stock option grants was $1.6 million, $1.4 million and $1.2 million, respectively. At December 31, 2023, there was $7.0 million of total unrecognized compensation cost related to nonvested options granted under the Company’s plans. This compensation cost is expected to be recognized through 2029, with the majority of this expense recognized in 2024 and 2025.
The following table further summarizes information about stock options outstanding at December 31, 2023:
Options Outstanding
Weighted
Options Exercisable
Average
Weighted
Weighted
Remaining
Average
Average
Number
Contractual
Exercise
Number
Exercise
Range of Exercise Prices
Outstanding
Term
Price
Exercisable
Price
$32.590 to 38.610
26,906
0.96 years
$
33.317
26,906
$
33.317
$41.300 to 41.740
200,538
5.71 years
41.628
119,930
41.552
$50.250 to 59.750
668,327
6.87 years
54.686
316,725
54.194
$60.150 to 62.010
344,534
7.55 years
60.971
107,929
60.176
1,240,305
6.74 years
$
53.857
571,490
$
51.688
Note 21: Significant Estimates and Concentrations
GAAP requires disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for credit losses are reflected in Note 3. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnotes on loans, deposits and on commitments and credit risk.
Note 22: Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income (AOCI), included in stockholders’ equity, are as follows:
(In Thousands)
Net unrealized gain (loss) on available-for-sale securities
$
(53,685)
$
(62,622)
Net unrealized gain (loss) on held-to-maturity securities
(65)
Net unrealized gain (loss) on active derivatives used for cash flow hedges
(17,296)
(31,277)
Net unrealized gain on terminated derivatives used for cash flow hedges
14,354
22,478
(56,692)
(71,303)
Tax effect
14,211
17,948
Net-of-tax amount
$
(42,481)
$
(53,355)
Amounts reclassified from AOCI and the affected line items in the statements of income during the years ended December 31, 2023, 2022 and 2021, were as follows:
Amounts Reclassified
from AOCI
Affected Line Item in the
Statements of Income
(In Thousands)
Unrealized loss on available-for-sale securities
$
-
$
(130)
$
-
Net realized gains (losses) on
available-for-sale securities (total
reclassified amount before tax)
Change in fair value of cash flow hedge
8,122
8,123
8,123
Amortization of realized gain on
termination of cash flow hedge (total
reclassification amount before tax)
Income taxes
(1,855)
(1,820)
(1,852)
Tax (expense) benefit
Total reclassifications out of AOCI
$
6,267
$
6,173
$
6,271
Note 23: Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct and material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under GAAP, regulatory reporting practices, and regulatory capital standards. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulatory reporting standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below as of December 31, 2023) of Total and Tier I Capital (as defined) to risk-weighted assets (as defined), of Tier I Capital (as defined) to adjusted tangible assets (as defined) and of Common Equity Tier 1 Capital (as defined) to risk-weighted assets (as defined). Management believes, as of December 31, 2023, that the Bank met all capital adequacy requirements to which it was then subject.
As of December 31, 2023, the most recent notification from the Bank’s regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized as of December 31, 2023, the Bank must have maintained minimum Total capital, Tier I capital, Tier 1 Leverage capital and Common Equity Tier 1 capital ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Company and the Bank are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2023 and 2022, the Company and the Bank exceeded their minimum capital requirements then in effect. The entities may not pay dividends which would reduce capital below the minimum requirements shown below. In addition to the minimum capital ratios, the capital rules include a capital conservation buffer, under which a banking organization must have Common Equity Tier 1 capital 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 net unrealized gain or loss on securities is not included in computing regulatory capital.
The Company’s and the Bank’s actual capital amounts and ratios are presented in the following table. No amount was deducted from capital for interest-rate risk.
To Be Well
Capitalized Under
For Capital
Prompt Corrective
Actual
Adequacy Purposes
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars In Thousands)
As of December 31, 2023
Total capital
Great Southern Bancorp, Inc.
$
770,885
15.2
%
$
406,994
8.0
%
N/A
N/A
Great Southern Bank
$
728,113
14.3
%
$
406,744
8.0
%
$
508,430
10.0
%
Tier I capital
Great Southern Bancorp, Inc.
$
632,279
12.4
%
$
305,246
6.0
%
N/A
N/A
Great Southern Bank
$
664,545
13.1
%
$
305,058
6.0
%
$
406,744
8.0
%
Tier I leverage capital
Great Southern Bancorp, Inc.
$
632,279
11.0
%
$
229,992
4.0
%
N/A
N/A
Great Southern Bank
$
664,545
11.6
%
$
229,692
4.0
%
$
287,115
5.0
%
Common equity Tier I capital
Great Southern Bancorp, Inc.
$
607,279
11.9
%
$
228,934
4.5
%
N/A
N/A
Great Southern Bank
$
664,545
13.1
%
$
228,794
4.5
%
$
330,480
6.5
%
As of December 31, 2022
Total capital
Great Southern Bancorp, Inc.
$
746,287
13.5
%
$
440,767
8.0
%
N/A
N/A
Great Southern Bank
$
721,616
13.1
%
$
440,683
8.0
%
$
550,854
10.0
%
Tier I capital
Great Southern Bancorp, Inc.
$
607,807
11.0
%
$
330,575
6.0
%
N/A
N/A
Great Southern Bank
$
658,136
11.9
%
$
330,512
6.0
%
$
440,683
8.0
%
Tier I leverage capital
Great Southern Bancorp, Inc.
$
607,807
10.6
%
$
228,673
4.0
%
N/A
N/A
Great Southern Bank
$
658,136
11.5
%
$
228,511
4.0
%
$
285,638
5.0
%
Common equity Tier I capital
Great Southern Bancorp, Inc.
$
582,807
10.6
%
$
247,932
4.5
%
N/A
N/A
Great Southern Bank
$
658,136
11.9
%
$
247,884
4.5
%
$
358,055
6.5
%
Note 24: Litigation Matters
In the normal course of business, the Company and its subsidiaries are subject to pending and threatened legal actions, some of which seek substantial relief or damages. While the ultimate outcome of such legal proceedings cannot be predicted with certainty, after reviewing pending and threatened litigation with counsel, management believes at this time that the outcome of such litigation will not have a material adverse effect on the Company’s business, financial condition or results of operations.
Note 25: Summary of Unaudited Quarterly Operating Results
Following is a summary of unaudited quarterly operating results for the years 2023, 2022 and 2021:
Three Months Ended
March 31
June 30
September 30
December 31
(In Thousands, Except Per Share Data)
Interest income
$
71,463
$
73,618
$
75,272
$
76,482
Interest expense
18,271
25,480
28,534
31,335
Provision for credit losses on loans
1,500
-
-
Provision (credit) for unfunded commitments
(826)
(1,619)
(1,195)
(1,689)
Net realized gain (loss) on available-for-sale securities
-
-
-
-
Non-interest income
7,889
7,769
7,852
6,563
Non-interest expense
34,463
34,718
35,557
36,285
Provision for income taxes
5,488
4,488
4,349
3,219
Net income available to common shareholders
20,456
18,320
15,879
13,145
Earnings per common share - diluted
1.67
1.52
1.33
1.11
Three Months Ended
March 31
June 30
September 30
December 31
(In Thousands, Except Per Share Data)
Interest income
$
46,673
$
52,698
$
59,657
$
67,949
Interest expense
3,407
3,867
6,759
13,330
Provision for credit losses on loans
-
-
2,000
1,000
Provision (credit) for unfunded commitments
(193)
2,223
1,315
(159)
Net realized gain (loss) on available-for-sale securities
-
(168)
Non-interest income
9,176
9,319
7,984
7,661
Non-interest expense
31,268
33,004
34,758
34,336
Provision for income taxes
4,380
4,699
4,676
4,499
Net income available to common shareholders
16,987
18,224
18,133
22,604
Earnings per common share - diluted
1.30
1.44
1.46
1.84
Three Months Ended
March 31
June 30
September 30
December 31
(In Thousands, Except Per Share Data)
Interest income
$
50,633
$
50,452
$
49,640
$
47,948
Interest expense
6,544
5,768
4,717
3,723
Provision (credit) for credit losses on loans
(1,000)
(3,000)
(3,000)
Provision (credit) for unfunded commitments
-
-
-
-
Net realized gain (loss) on available-for-sale securities
(674)
(307)
1,277
Non-interest income
9,736
9,585
9,798
9,198
Non-interest expense
30,321
30,191
31,339
35,784
Provision for income taxes
5,010
5,271
5,375
4,081
Net income available to common shareholders
18,868
20,114
20,364
15,281
Earnings per common share - diluted
1.36
1.46
1.49
1.14
Note 26: Condensed Parent Company Statements
The condensed statements of financial condition at December 31, 2023 and 2022, and statements of income, comprehensive income and cash flows for the years ended December 31, 2023, 2022 and 2021, for the parent company, Great Southern Bancorp, Inc., were as follows:
December 31,
(In Thousands)
Statements of Financial Condition
Assets
Cash
$
47,048
$
29,097
Investment in subsidiary bank
629,096
608,416
Deferred and accrued income taxes
Prepaid expenses and other assets
$
677,662
$
638,543
Liabilities and Stockholders’ Equity
Accounts payable and accrued expenses
$
5,480
$
5,401
Subordinated debentures issued to capital trust
25,774
25,774
Subordinated notes
74,579
74,281
Common stock
Additional paid-in capital
44,320
42,445
Retained earnings
569,872
543,875
Accumulated other comprehensive income (loss)
(42,481)
(53,355)
$
677,662
$
638,543
(In Thousands)
Statements of Income
Income
Dividends from subsidiary bank
$
65,000
$
60,000
$
74,000
Other income
-
-
-
65,000
60,000
74,000
Expense
Operating expenses
2,780
2,550
2,121
Interest expense
6,158
5,298
7,613
8,938
7,848
9,734
Income before income tax and equity in undistributed earnings of subsidiaries
56,062
52,152
64,266
Credit for income taxes
(1,932)
(1,608)
(1,850)
Income before equity in earnings of subsidiaries
57,994
53,760
66,116
Equity in undistributed earnings of subsidiaries
9,806
22,188
8,511
Net income
$
67,800
$
75,948
$
74,627
(In Thousands)
Statements of Cash Flows
Operating Activities
Net income
$
67,800
$
75,948
$
74,627
Items not requiring (providing) cash
Equity in undistributed earnings of subsidiary
(9,806)
(22,188)
(8,511)
Compensation expense for stock option grants
1,621
1,437
1,225
Amortization of interest rate derivative and deferred costs on subordinated notes
Changes in
Prepaid expenses and other assets
(14)
Accounts payable and accrued expenses
(1,661)
Income taxes
(493)
(54)
Net cash provided by operating activities
59,675
55,495
66,345
Investing Activities
Net cash provided by investing activities
-
-
-
Financing Activities
Purchases of the Company’s common stock
(23,326)
(61,847)
(39,123)
Redemption of subordinated notes
-
-
(75,000)
Dividends paid
(19,282)
(19,181)
(18,800)
Stock options exercised
6,258
3,700
Net cash used in financing activities
(41,724)
(74,770)
(129,223)
Increase (Decrease) in Cash
17,951
(19,275)
(62,878)
Cash, Beginning of Year
29,097
48,372
111,250
Cash, End of Year
$
47,048
$
29,097
$
48,372
Additional Cash Payment Information
Interest paid
$
6,107
$
5,115
$
9,103
(In Thousands)
Statements of Comprehensive Income
Net Income
$
67,800
$
75,948
$
74,627
Comprehensive income (loss) of subsidiaries
10,874
(86,114)
(20,392)
Comprehensive Income
$
78,674
$
(10,166)
$
54,235

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.CONTROLS AND PROCEDURES.
We maintain a system of disclosure controls and procedures (as defined in Rule 13(a)-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) that is designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate. An evaluation of our disclosure controls and procedures was carried out as of December 31, 2023, under the supervision and with the participation of our principal executive officer, principal financial officer and several other members of our senior management. Our principal executive officer and principal financial officer concluded that, as of December 31, 2023, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the principal executive officer and principal financial officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the quarter ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The annual report of management on the effectiveness of internal control over financial reporting and the attestation report thereon issued by our independent registered public accounting firm are set forth below under “Management’s Report on Internal Control Over Financial Reporting” and “Report of the Independent Registered Public Accounting Firm.”
We do not expect that our internal control over financial reporting will prevent all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Great Southern Bancorp, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on that assessment, management concluded that, as of December 31, 2023, the Company’s internal control over financial reporting was effective.
The Company’s internal control over financial reporting as of December 31, 2023, has been audited by FORVIS, LLP, an independent registered public accounting firm. Their attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023 is set forth below.
Report of Independent Registered Public Accounting Firm
Stockholders, Board of Directors, and Audit Committee
Great Southern Bancorp, Inc.
Springfield, Missouri
Opinion on the Internal Control over Financial Reporting
We have audited Great Southern Bancorp, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of December 31, 2023 and 2022, and for each of the three years in the period ended December 31, 2023, and our report dated March 11, 2024, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
/s/FORVIS, LLP
Springfield, Missouri
March 11, 2024

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ITEM 9B. OTHER INFORMATION
ITEM 9B.OTHER INFORMATION.
Trading Plans
During the three months ended December 31, 2023, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers. The information concerning our directors and executive officers and corporate governance matters required by this item is incorporated herein by reference from our definitive proxy statement for our 2024 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
Delinquent Section 16(a) Reports. Any information concerning compliance with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 by our directors, officers and ten percent stockholders required by this item is incorporated herein by reference from our definitive proxy statement for our 2024 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
Code of Ethics. We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, and persons performing similar functions, and to all of our other employees and our directors. Our code of ethics is available on our website, at https://investors.greatsouthernbank.com/corporate-governance/documents.

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.EXECUTIVE COMPENSATION.
The information concerning compensation and other matters required by this item is incorporated herein by reference from our definitive proxy statement for our 2024 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information concerning security ownership of certain beneficial owners and management required by this item is incorporated herein by reference from our definitive proxy statement for our 2024 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.
The following table sets forth information as of December 31, 2023 with respect to compensation plans under which shares of our common stock may be issued:
Equity Compensation Plan Information
Number of Shares
to be issued upon
Weighted Average
Number of Shares
Exercise of
Exercise Price of
Remaining Available for Future Issuance
Outstanding
Outstanding
Under Equity Compensation
Options, Warrants
Options, Warrants
Plans (Excluding Shares
Plan Category
and Rights
and Rights
Reflected in the First Column)
Equity compensation plans approved by stockholders
1,240,305
$
53.857
487,600
(1)
Equity compensation plans not approved by stockholders
N/A
N/A
N/A
Total
1,240,305
$
53.857
487,600
(1) Represents shares available for future awards under the Company’s 2022 Omnibus Incentive Plan. Awards in the form of restricted stock, restricted stock units, performance shares and performance units will reduce the number of shares available under the Company’s 2022 Omnibus Incentive Plan on a 2.5-to-1 basis.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information concerning certain relationships and related transactions and director independence required by this item is incorporated herein by reference from our definitive proxy statement for our 2024 Annual Meeting of Stockholders, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information concerning principal accounting fees and services required by this item is incorporated herein by reference from our definitive proxy statement for our 2024 Annual Meeting of Stockholders, a copy of which will be filed not later than 120 days after the end of our fiscal year.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)
List of Documents Filed as Part of This Report
(1)
Financial Statements
The Consolidated Financial Statements and Independent Auditor’s Report are included in Item 8.
(2)
Financial Statement Schedules
Inapplicable.
(3)
List of Exhibits
Exhibits incorporated by reference below are incorporated by reference pursuant to Rule 12b-32.
Exhibit
No.
Exhibit
(2)
Plan of acquisition, reorganization, arrangement, liquidation, or succession
(i)
The Purchase and Assumption Agreement, dated as of March 20, 2009, among Federal Deposit Insurance Corporation, Receiver of TeamBank, N.A., Paola, Kansas, Federal Deposit Insurance Corporation and Great Southern Bank, previously filed with the Commission (File no. 000-18082) as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on March 26, 2009 is incorporated herein by reference as Exhibit 2(i).
(ii)
The Purchase and Assumption Agreement, dated as of September 4, 2009, among Federal Deposit Insurance Corporation, Receiver of Vantus Bank, Sioux City, Iowa, Federal Deposit Insurance Corporation and Great Southern Bank, previously filed with the Commission (File no. 000-18082) as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on September 11, 2009 is incorporated herein by reference as Exhibit 2(ii).
(iii)
The Purchase and Assumption Agreement, dated as of October 7, 2011, among Federal Deposit Insurance Corporation, Receiver of Sun Security Bank, Ellington, Missouri, Federal Deposit Insurance Corporation and Great Southern Bank, previously filed with the Commission (File no. 000-18082) as Exhibit 2.1(iii) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 is incorporated herein by reference as Exhibit 2(iii).
(iv)
The Purchase and Assumption Agreement, dated as of April 27, 2012, among Federal Deposit Insurance Corporation, Receiver of Inter Savings Bank, FSB, Maple Grove, Minnesota, Federal Deposit Insurance Corporation and Great Southern Bank, previously filed with the Commission (File no. 000-18082) as Exhibit 2.1(iv) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 is incorporated herein by reference as Exhibit 2(iv).
(v)
The Purchase and Assumption Agreement All Deposits, dated as of June 20, 2014, among Federal Deposit Insurance Corporation, Receiver of Valley Bank, Moline, Illinois, Federal Deposit Insurance Corporation and Great Southern Bank, previously filed with the Commission (File no. 000-18082) as Exhibit 2.1(iv) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 is incorporated herein by reference as Exhibit 2(v)
(3)
Articles of incorporation and Bylaws
(i)
The Registrant’s Charter previously filed with the Commission as Appendix D to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 31, 2004 (File No. 000-18082), is incorporated herein by reference as Exhibit 3.1.
(ii)
The Registrant’s Bylaws, previously filed with the Commission (File no. 000-18082) as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on October 19, 2007, are incorporated herein by reference as Exhibit 3.2.
(4)
Instruments defining the rights of security holders, including indentures
The description of the Registrant’s securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, previously filed with the Commission (File no. 000-18082) as Exhibit 4 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2020, is incorporated herein by reference.
The Indenture, dated June 12, 2020, between the Registrant and U.S. Bank National Association, as Trustee, previously filed with the Commission (File no. 000-18082) as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on June 12, 2020, is incorporated herein by reference as Exhibit 4.1.
The First Supplemental Indenture, dated June 12, 2020, between the Registrant and U.S. Bank National Association, as Trustee (relating to the Registrant’s 5.50% Fixed-to-Floating Rate Subordinated Notes due June 15, 2030), including the form of subordinated note included therein, previously filed with the Commission (File no. 000-18082) as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on June 12, 2020, is incorporated herein by reference as Exhibit 4.2.
The Registrant hereby agrees to furnish the SEC upon request, copies of the instruments defining the rights of the holders of each other issue of the Registrant’s long-term debt.
(9)
Voting trust agreement
Inapplicable.
(10)
Material contracts
The Amended and Restated Employment Agreement, dated November 4, 2019, between the Registrant and William V. Turner previously filed with the Commission (File no. 000-18082) as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019, is incorporated herein by reference as Exhibit 10.3.*
Amendment No. 1, dated as of November 17, 2021, to the Amended and Restated Employment Agreement, dated as of November 4, 2019, between the Registrant and William V. Turner, previously filed with the Commission (File no. 000-18082) as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 22, 2021, is incorporated herein by reference as Exhibit 10.3A.*
The Amended and Restated Employment Agreement, dated November 4, 2019, between the Registrant and Joseph W. Turner previously filed with the Commission (File no. 000-18082) as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period fiscal year ended September 30, 2019, is incorporated herein by reference as Exhibit 10.4.*
Amendment No. 1, dated as of March 5, 2020, to the Amended and Restated Employment Agreement, dated as of November 4, 2019, between the Registrant and Joseph W. Turner, previously filed with the Commission (File no. 000-18082) as Exhibit 10.4A to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2019, is incorporated herein by reference as Exhibit 10.4A.*
Amendment No. 2, dated as of November 17, 2021, to the Amended and Restated Employment Agreement, dated as of November 4, 2019, between the Registrant and Joseph W. Turner, previously filed with the Commission (File no. 000-18082) as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 22, 2021, is incorporated herein by reference as Exhibit 10.4B.*
A description of the current salary and bonus arrangements for the Registrant’s executive officers for 2023 is attached as Exhibit 10.7.*
A description of the current fee arrangements for the Registrant’s directors is attached as Exhibit 10.8.*
The Registrant’s 2013 Equity Incentive Plan previously filed with the Commission (File No. 000-18082) as Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on April 4, 2013, is incorporated herein by reference as Exhibit 10.10.*
The form of incentive stock option award agreement under the Registrant’s 2013 Equity Incentive Plan previously filed with the Commission as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-8 (No. 333-189497) filed on June 20, 2013 is incorporated herein by reference as Exhibit 10.11.*
The form of non-qualified stock option award agreement under the Registrant’s 2013 Equity Incentive Plan previously filed with the Commission as Exhibit 10.3 to the Registrant’s Registration Statement on Form S-8 (No. 333-189497) filed on June 20, 2013 is incorporated herein by reference as Exhibit 10.12.*
The Registrant’s 2018 Omnibus Incentive Plan previously filed with the Commission (File No. 000-18082) as Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 27, 2018, is incorporated herein by reference as Exhibit 10.15.*
The form of incentive stock option award agreement under the Registrant’s 2018 Omnibus Incentive Plan previously filed with the Commission as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-8 (File no. 333-225665) filed on June 15, 2018 is incorporated herein by reference as Exhibit 10.16.*
The form of non-qualified stock option award agreement under the Registrant’s 2018 Omnibus Incentive Plan previously filed with the Commission as Exhibit 10.3 to the Registrant’s Registration Statement on Form S-8 (File no. 333-225665) filed on June 15, 2018 is incorporated herein by reference as Exhibit 10.17.*
The Registrant’s 2022 Omnibus Incentive Plan previously filed with the Commission (File No. 000-18082) as Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 31, 2022, is incorporated herein by reference as Exhibit 10.18.*
The form of incentive stock option award agreement under the Registrant’s 2022 Omnibus Incentive Plan previously filed with the Commission as Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (File no. 333-265683) filed on June 17, 2022 is incorporated herein by reference as Exhibit 10.19.*
The form of non-qualified stock option award agreement under the Registrant’s 2022 Omnibus Incentive Plan previously filed with the Commission as Exhibit 99.3 to the Registrant’s Registration Statement on Form S-8 (File no. 333-265683) filed on June 17, 2022 is incorporated herein by reference as Exhibit 10.20.*
The form of Executive Officer Stock Option Alternative Cash Payment Election Form previously filed with the Commission as Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023, is incorporated herein by reference as Exhibit 10.21.*
(13)
Annual report to security holders, Form 10-Q or quarterly report to security holders
Inapplicable.
(14)
Code of Ethics
Available on the investor relations page of the Registrant’s website, at
https://investors.greatsouthernbank.com/corporate-governance/documents.
(16)
Letter re change in certifying accountant
Inapplicable.
(18)
Letter re change in accounting principles
Inapplicable.
(21)
Subsidiaries of the registrant
A list of the Registrant’s subsidiaries is attached hereto as Exhibit 21.
(22)
Published report regarding matters submitted to vote of security holders
Inapplicable.
(23)
Consents of experts and counsel
The consent of FORVIS, LLP (PCAOB ID 686) to the incorporation by reference into the Registration Statements on Form S-8 (File nos. 333-189497, 333-225665 and 333-265683) previously filed with the Commission of their reports included in this Form 10-K, is attached hereto as Exhibit 23.
(24)
Power of attorney
Included as part of signature page.
(31.1)
Rule 13a-14(a) Certification of Chief Executive Officer
Attached as Exhibit 31.1
(31.2)
Rule 13a-14(a) Certification of Treasurer
Attached as Exhibit 31.2
(32)
Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
Attached as Exhibit 32.
(97)
Great Southern Bancorp, Inc. Compensation Recovery Policy
Attached as Exhibit 97.
(101)
Attached as Exhibit 101 are the following financial statements from the Great Southern Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2023, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated statements of financial condition, (ii) consolidated statements of income, (iii) consolidated statements of cash flows and (iv) the notes to consolidated financial statements.
(104)
Cover Page Interactive Data File formatted in Inline XBRL (contained in Exhibit 101).
* Management contract or compensatory plan or arrangement.