GREAT SOUTHERN BANCORP, INC. The following table 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 byFORVIS, LLP , formerlyBKD, 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, 2022 2021 2020 2019 2018 (Dollars In Thousands) Summary Statement of Financial Condition Information: Assets$ 5,680,702 $ 5,449,944 $ 5,526,420 $ 5,015,072 $ 4,676,200 Loans receivable, net 4,511,647 4,016,235 4,314,584 4,163,224 3,990,651
Allowance for credit losses on loans 63,480 60,754 55,743 40,294 38,409 Available-for-sale securities 490,592 501,032 414,933 374,175 243,968 Held-to-maturity securities 202,495 - - - - Other real estate and repossessions, net 233 2,087 1,877 5,525 8,440 Deposits 4,684,910 4,552,101 4,516,903 3,960,106 3,725,007 Total borrowings and other interest- bearing liabilities 366,481 238,713 339,863 412,374 397,594 Stockholders' equity (retained earnings substantially restricted) 533,087 616,752 629,741 603,066 531,977 Common stockholders' equity 533,087 616,752 629,741 603,066 531,977 Average loans receivable 4,386,042 4,274,176 4,399,259 4,155,780 3,910,819 Average total assets 5,519,790 5,502,356 5,323,426 4,855,007 4,503,326 Average deposits 4,607,363 4,539,740 4,330,271 3,889,910 3,556,240 Average stockholders' equity 565,173 627,516 622,437 571,637 498,508 Number of deposit accounts 232,688 229,942 229,470 228,247 227,240
Number of full-service offices 92 93
94 97 99
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For the Year Ended December 31,
2022 2021 2020 2019 2018
(In Thousands)
Summary Statement of Income
Information:
Interest income:
Loans $ 205,751 $ 186,269 $ 204,964 $ 223,047 $ 198,226
Investment securities and other 21,226 12,404 12,739 11,947 7,723
226,977 198,673 217,703 234,994 205,949
Interest expense:
Deposits 20,676 13,102 32,431 45,570 27,957
Federal Home Loan Bank advances - - - - 3,985
Securities sold under reverse
repurchase agreements 324 37 31 19 31
Short-term borrowings, overnight
FHLBank borrowings and other
interest-bearing liabilities 1,066 - 644 3,616 734
Subordinated debentures issued to
capital trust 875 448 628 1,019 953
Subordinated notes 4,422 7,165 6,831 4,378 4,097
27,363 20,752 40,565 54,602 37,757
Net interest income 199,614 177,921 177,138 180,392 168,192
Provision (credit) for credit losses on
loans 3,000 (6,700) 15,871 6,150 7,150
Provision for unfunded commitments 3,187 939 - - -
Net interest income after provision
(credit) for credit losses and
provision for unfunded commitments 193,427 183,682 161,267 174,242 161,042
Non-interest income:
Commissions 1,208 1,263 892 889 1,137
Overdraft and insufficient funds fees 7,872 6,686 6,481 8,249 8,688
Point-of-sale and ATM fee income and
service charges 15,705 15,029 12,203 12,649 13,007
Net gain on loan sales 2,584 9,463 8,089 2,607 1,788
Net realized gain (loss) on sales of
available-for-sale securities (130) - 78 (62) 2
Late charges and fees on loans 1,182 1,434 1,419 1,432 1,622
Gain (loss) on derivative interest rate
products 321 312 (264) (104) 25
Gain recognized on sale of business
units - - - - 7,414
Other income 5,399 4,130 6,152 5,297 2,535
34,141 38,317 35,050 30,957 36,218
Non-interest expense:
Salaries and employee benefits 75,300 70,290 70,810 63,224 60,215
Net occupancy and equipment expense 28,471 29,163 27,582 26,217 25,628
Postage 3,379 3,164 3,069 3,198 3,348
Insurance 3,197 3,061 2,405 2,015 2,674
Advertising 3,261 3,072 2,631 2,808 2,460
Office supplies and printing 867 848 1,016 1,077 1,047
Telephone 3,170 3,458 3,794 3,580 3,272
Legal, audit and other professional
fees 6,330 6,555 2,378 2,624 3,423
Expense on other real estate and
repossessions 359 627 2,023 2,184 4,919
Acquired deposit intangible asset
amortization 768 863 1,154 1,190 1,562
Other operating expenses 8,264 6,534 6,363 7,021 6,762
133,366 127,635 123,225 115,138 115,310
Income before income taxes 94,202 94,364 73,092 90,061 81,950
Provision for income taxes 18,254 19,737 13,779 16,449 14,841
Net income $ 75,948 $ 74,627 $ 59,313 $ 73,612 $ 67,109
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At or For the Year Ended December 31,
2022 2021 2020 2019 2018
(Number of Shares In Thousands)
Per Common Share Data:Basic earnings per common share$ 6.07 $ 5.50 $ 4.22 $ 5.18 $ 4.75 Diluted earnings per common share 6.02 5.46 4.21 5.14 4.71 Cash dividends declared 1.56 1.40 2.36 2.07 1.20 Book value per common share 43.58 46.98
45.79 42.29 37.59
Average shares outstanding 12,517 13,558 14,043 14,201 14,132 Year-end actual shares outstanding 12,231 13,128 13,753 14,261 14,151 Average fully diluted shares outstanding 12,607 13,674
14,104 14,330 14,260
Earnings Performance Ratios: Return on average assets(1) 1.38 % 1.36 % 1.11 % 1.52 % 1.49 % Return on average stockholders' equity(2) 13.44 11.89 9.53 12.88 13.46 Non-interest income to average total assets 0.62 0.70 0.66 0.64 0.80 Non-interest expense to average total assets 2.42 2.32 2.31 2.37 2.56 Average interest rate spread(3) 3.59 3.22
3.23 3.62 3.75 Year-end interest rate spread 3.63 3.20 3.08 3.28 3.60 Net interest margin(4) 3.80 3.37 3.49 3.95 3.99 Efficiency ratio(5) 57.05 59.03 58.07 54.48 56.41 Net overhead ratio(6) 1.80 1.62 1.66 1.73 1.76
Common dividend pay-out ratio(7) 25.91 25.64
56.06 40.27 25.48
Asset Quality Ratios (8): Allowance for credit losses/year-end loans 1.39 % 1.49 % 1.32 % 1.00 % 0.98 % Non-performing assets/year-end loans and foreclosed assets 0.08 0.15 0.09 0.19 0.29 Allowance for credit losses/non-performing loans 1,729.69 1,120.31 1,831.86 891.66 609.67 Net charge-offs/average loans 0.01 0.00 0.01 0.10 0.13 Gross non-performing assets/year end assets 0.07 0.11 0.07 0.16 0.25 Non-performing loans/year-end loans 0.08 0.13
0.07 0.11 0.16 Balance Sheet Ratios: Loans to deposits 96.30 % 88.23 % 95.52 % 105.13 % 107.13 % Average interest-earning assets as a percentage of average interest-bearing liabilities 140.32 139.94
132.49 127.50 126.47
Capital Ratios: Average common stockholders' equity to average assets 10.2 % 11.4 % 11.7 % 11.8 % 11.1 % Year-end tangible common stockholders' equity to tangible assets(9) 9.2 11.2 11.3 11.9 11.2Great Southern Bancorp, Inc. : Tier 1 capital ratio 11.0 13.4 12.7 12.5 11.9 Total capital ratio 13.5 16.3 17.2 15.0 14.4 Tier 1 leverage ratio 10.6 11.3 10.9 11.8 11.7 Common equity Tier 1 ratio 10.6 12.9 12.2 12.0 11.4Great Southern Bank : Tier 1 capital ratio 11.9 14.1 13.7 13.1 12.4 Total capital ratio 13.1 15.4 14.9 14.0 13.3 Tier 1 leverage ratio 11.5 11.9 11.8 12.3 12.2 Common equity Tier 1 ratio 11.9 14.1 13.7 13.1 12.4
(1) Net income divided by average total assets.
(2) Net income divided by average stockholders' equity.
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(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
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 byGreat Southern Bancorp, Inc. (the "Company") with theSecurities 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, and labor shortages 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, including on our credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic; (iv) fluctuations in interest rates and the effects of inflation, a potential recession or slower economic growth caused by changes in energy prices or supply chain disruptions; (v) 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; (vi) the possibility of realized or unrealized losses on securities held in the Company's investment portfolio; (vii) the Company's ability to access cost-effective funding; (viii) fluctuations in real estate values and both residential and commercial real estate market conditions; (ix) the ability to adapt successfully to technological changes to meet customers' needs and developments in the marketplace; (x) 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; (xi) legislative or regulatory changes that adversely affect the Company's business; (xii) changes in accounting policies and practices or accounting standards; (xiii) results of examinations of the Company andGreat 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; (xiv) costs and effects of litigation, including settlements and judgments; (xv) competition; (xvi) uncertainty regarding the future of LIBOR and potential replacement indexes; and (xvii) natural disasters, war, terrorist activities or civil unrest and their effects on economic and business environments in which the Company operates. The Company wishes to advise readers that the factors listed above and other risks described in this report, including, without limitation, those described under "Item 1A. Risk Factors," and from time to time in other documents filed or furnished by the Company with theSEC , 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. 64 Table of Contents
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with accounting principles generally accepted inthe United States and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted inthe 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 and Valuation of Foreclosed Assets
The Company believes that the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for credit losses is calculated with the objective of maintaining an allowance level believed by management to be sufficient to absorb estimated credit losses. The allowance for credit losses is measured using an average historical loss model 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 and/or TDR loans with a balance greater than or equal to$100,000 which are classified or restructured troubled debt, are evaluated on an individual basis. For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using the Company's historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and outstanding loan balances during a lookback period. Lookback periods can be different based on the individual pool and represent management's credit expectations for the pool of loans over the remaining contractual life. In certain loan pools, if the Company's own historical loss rate is not reflective of the loss expectations, the historical loss rate is augmented by industry and peer data. The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts. These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given economic forecasts of key macroeconomic variables including, but not limited to, unemployment rate, GDP, disposable income and market volatility. The adjustments are based on results from various regression models projecting the impact of the macroeconomic variables to loss rates. The forecast is used for a reasonable and supportable period before reverting back to historical averages using a straight-line method. The forecast adjusted loss rate is applied to the amortized cost of loans over the remaining contractual lives, adjusted for expected prepayments. The contractual term excludes expected extensions, renewals and modifications unless there is a reasonable expectation that a troubled debt restructuring will be executed. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecast such as changes in portfolio composition, underwriting practices, or significant unique events or conditions. See Note 3 "Loans and Allowance for Credit Losses" included in Item 1 for additional information regarding the allowance for credit losses. Inherent in this process is the evaluation of individual significant credit relationships. From time to time certain credit relationships may deteriorate due to payment performance, cash flow of the borrower, value of collateral, or other factors. In these instances, management may revise its loss estimates and assumptions for these specific credits due to changing circumstances. In some cases, additional losses may be realized; in other instances, the factors that led to the deterioration may improve or the credit may be refinanced elsewhere and allocated allowances may be released from the particular credit. Significant changes were made to management's overall methodology for evaluating the allowance for credit losses during the periods presented in the financial statements of this report due to the adoption of ASU 2016-13. OnJanuary 1, 2021 , the Company adopted the new accounting standard related to the Allowance for Credit Losses. For assets held at amortized cost basis, this standard eliminates the probable initial recognition threshold in GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. See Note 3 of the accompanying financial statements for additional information. In addition, the Company considers that the determination of the valuations of foreclosed assets held for sale involves a high degree of judgment and complexity. The carrying value of foreclosed assets reflects management's best estimate of the amount to be realized from the sales of the assets. While the estimate is generally based on a valuation by an independent appraiser or recent sales of similar 65 Table of Contents properties, the amount that the Company realizes from the sales of the assets could differ materially from the carrying value reflected in the financial statements, resulting in losses that could adversely impact earnings in future periods.
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 ofDecember 31, 2022 , 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. AtDecember 31, 2022 , 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 theSt. Louis market. Other identifiable intangible assets that are subject to amortization are amortized on a straight-line basis over a period of seven years. InApril 2022 , the Company, through its subsidiaryGreat Southern Bank , entered into a naming rights agreement withMissouri State University related to the main arena on the university's campus inSpringfield, Missouri . The terms of the agreement provide the naming rights toGreat 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 intangible asset through non-interest expense over a period not to exceed 15 years. AtDecember 31, 2022 , the amortizable intangible assets consisted of core deposit intangibles of$53,000 and the arena naming rights of$5.4 million . These 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 of the accompanying audited financial statements for additional information. For purposes of testing goodwill for impairment, the Company used a market approach to value its reporting unit. The market approach applies a market multiple, based on observed purchase transactions for each reporting unit, to the metrics appropriate for the valuation of the operating unit. Significant judgment is applied when goodwill is assessed for impairment. This judgment may include developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables and incorporating general economic and market conditions. Based on the Company's goodwill impairment testing, management does not believe any of the Company's goodwill or other intangible assets were impaired as ofDecember 31, 2022 . While management believes no impairment existed atDecember 31, 2022 , different conditions or assumptions used to measure fair value of the reporting unit, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company's impairment evaluation in the future.
Current Economic Conditions
Changes in economic conditions could cause the values of assets and liabilities recorded in the financial statements to change rapidly, resulting in material future adjustments in asset values, the allowance for credit losses, or capital that could negatively 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% inNovember 2007 to peak at 10.0% inOctober 2009 . Economic conditions improved in the subsequent years, as indicated by higher consumer confidence levels, increased economic activity and low unemployment levels. TheU.S. economy continued to operate at historically strong levels until the COVID-19 pandemic inMarch 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, sports events, retail shops, personal services, and more. Currently, the pandemic continues to recede and is thus becoming less disruptive to theU.S. and global economies. While there are likely to be future waves of the virus, governments, households and businesses are increasingly adept at adjusting to the virus. More than 22 million jobs in theU.S. were lost in March andApril 2020 as businesses closed their doors or reduced their operations, sending employees home on furlough or layoffs. Hunkered down at home with uncertain incomes and limited buying opportunities, 66 Table of Contents
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 that would 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 passed into law in March 2020 , 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 that provided during the global financial crisis of 2007-2008.
Additionally, the Federal Reserve slashed its benchmark interest rate to near
zero and ensured 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 Reserve raised the federal funds interest rate 4.25% in 2022 and
indicates that it expects to continue to further tighten monetary policy.
Policymakers are strongly signaling they will raise rates further into 2023, and
that they will allow the Fed's balance sheet to shrink through quantitative
tightening. The federal government deficit was $2.8 trillion in fiscal 2021,
close to $1.4 trillion in fiscal 2022, and is expected to narrow to $850 billion
in fiscal 2023. The publicly traded debt-to-GDP ratio is near 95%, up from 80%
prior to the pandemic and 35% prior to the global financial crisis. Real gross
domestic product (GDP) increased at an annual rate of 2.9% in the fourth quarter
of 2022 according to the "advance" estimate released by the Bureau of Economic
Analysis . In the third quarter of 2022, real GDP increased 3.2%. The increase in
the fourth quarter of 2022 primarily reflected increases in inventory investment
and consumer spending that were partly offset by a decrease in housing
investment.
Prompting the Fed to take such a hawkish policy stance is the painfully high
inflation, prompted largely by pandemic-related disruptions to global supply
chains and labor markets, and Russia's invasion of Ukraine , which pushed up oil
and other commodity prices. Adding to the pressure to act is the resilient
growth in jobs, low unemployment in the mid-3s (consistent with full
employment), and overly strong wage growth. The unemployment rate returned to
its post-pandemic low of 3.5%, and it did so even as the labor force expanded by
439,000 and the participation rate edged higher to 62.3%. The unemployment rate
was down or unchanged across most major demographic groups. However, the least
educated workers saw an increase in joblessness from 4.4% to 5%. The Fed
increased the fed funds rate by 50 basis points at the December 2022 meeting of
the Federal Open Market Committee and by another 25 basis points at its meeting
on January 31 - February 1, 2023 . This brought the funds rate target to 4.5% to
4.75%. The Fed also continues to allow the assets on its balance sheet,
including more than $8 trillion remaining in Treasury and mortgage-backed
securities, to mature and prepay. Nearly $100 billion in securities are expected
to run off monthly.
Persistent shortages of materials and labor and snags in supply chains have
caused prices to vault higher for months. The annual increase in the inflation
rate as of December 2022 was 6.5% compared to December 2021 as measured by the
consumer price index.
The recently passed Inflation Reduction Act raises nearly $750 billion over the
next decade through higher taxes on large corporations and wealthy individuals
and lower Medicare prescription drug costs, to pay for nearly $450 billion in
tax credits and deductions and additional government spending to address climate
change and lower health insurance premiums for Americans who benefit from the
Affordable Care Act. The remaining more than $300 billion is intended to go
toward reducing future budget deficits.
OPEC's recent decision to cut its production quotas has pushed oil prices back
up toward $100 per barrel. Prices had slumped to less than $90 per barrel on a
weaker global economy and oil demand, the strong U.S. dollar, and the European
Union's slow implementation of sanctions on its imports of Russian oil.
Ten-year Treasury yields are close to 4% as global bond investors digest the
implications of the Fed's aggressive monetary actions. Yields are consistent
with their estimated long-run equilibrium, which is consistent with Moody's
Analytic's estimate of nominal potential GDP growth of 4% (2% long-run inflation
plus 2% real potential GDP growth).
Employment
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The national unemployment rate edged down to 3.5% in December 2022 , a decrease
from 3.9% in December 2021 . The number of unemployed individuals decreased to
5.7 million, with the economy adding 223,000 jobs in December 2022 . The economy
has added 4.5 million jobs for a total of more than 10.7 million new jobs over
the past two years. Unemployment levels have now recovered to pre-pandemic
levels as of February 2020 when the unemployment rate registered at 3.5% and
there were 5.7 million unemployed individuals.
Notable job gains occurring in December 2022 were in the leisure and
hospitality, healthcare, construction and social assistance sectors. Job cuts in
technology and housing have occurred in recent months due to concerns of a
recession as the Federal Reserve aggressively tightens monetary policy to quell
inflation.
As of December 2022 , the labor force participation rate (the share of
working-age Americans employed or actively looking for a job) remained little
changed at 62.3%. The unemployment rate for the Midwest, where the Company
conducts most of its business, has decreased from 4% in December 2021 to 3.6% in
December 2022 . Unemployment rates for December 2022 in the states where the
Company has a branch or loan production offices were Arizona at 4.0%, Arkansas
at 3.6%, Colorado at 3.3%, Georgia at 3.0%, Illinois at 4.7%, Iowa at 3.1%,
Kansas at 2.9%, Minnesota at 2.5%, Missouri at 2.8%, Nebraska at 2.6%, North
Carolina at 3.9%, Oklahoma at 3.4%, and Texas at 3.9%. Of the metropolitan areas
in which the Company does business, most are below the national unemployment
rate of 3.5% for December 2022 , with the major outlier being Chicago at 4.2%.
Sales of new single-family houses inDecember 2022 were at a seasonally adjusted annual rate of 616,000, according toU.S. Census Bureau andDepartment of Housing and Urban Development estimates. This is 2.3% above the revisedNovember 2022 rate of 602,000 but 28.6% below theDecember 2021 estimate of 839,000. An estimated 644,000 new homes were sold in 2022. This is 16.4% below the 2021 total of 771,000. The median new home sales price inDecember 2022 was$442,100 , up from$410,000 inDecember 2021 . The average sales price inDecember 2022 of$528,400 was up from$491,000 inDecember 2021 . The inventory of new homes for sale, at an estimated 461,000 at the end ofDecember 2022 , would support 9.0 months of sales at the current sales rate. National existing-home sales inDecember 2022 declined for the eleventh consecutive month to a seasonally adjusted annual rate of 4.02 million. Sales were down 1.5% fromNovember 2022 and 34.0% fromDecember 2021 . Existing-home sales in the Midwest slid 1.0% fromNovember 2022 to an annual rate of 1.01 million inDecember 2022 , falling 30.3% fromDecember 2021 sales. The median existing-home sales price nationally as ofDecember 30, 2022 climbed 2.3% to$366,900 from$358,800 as ofDecember 2021 . This marked 130 consecutive months of year-over-year increases, the longest running streak on record. The median price in the Midwest was$262,000 , up 2.9% from the prior year median Midwest price.
Nationally, properties on average remained on the market for 26 days in
The inventory of unsold existing homes at the end ofDecember 2022 was 970,000, which was down 13.4% fromNovember 2022 but up 10.2% fromDecember 2021 . Unsold inventory inDecember 2022 represents 2.9 months' supply at the current monthly sales pace, down from 3.3 months in November but up from 1.7 months inDecember 2021 . The housing market continues to feel the impact of sharply rising mortgage rates and higher inflation on housing affordability. If consumer price inflation continues to remain at current levels, mortgage rates can be expected to move higher. Additionally, while home prices have consistently increased due to tight supply, prices may decline as available inventory increases due to lower demand.
First-time buyers accounted for 31% of sales in
According to Freddie Mac, the average commitment rate for a 30-year,
conventional, fixed-rate mortgage was 6.33% as of
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During 2021, multi-family demand significantly outpaced supply additions and drove rent growth to new records. In 2022, demand receded well below new deliveries as economic uncertainty held back household formations. With new deliveries outpacing demand, national year-over-year rent growth pulled back dramatically from 11.0% to 3.1% Midwest and Northeast markets fared the best over the past 12 months, with rent growth down marginally.St. Louis andKansas City registered 2022 annual rent growth of 5.7%, which remains significantly higher than their 5-year pre-pandemic average. The overall downward movement of rents may continue during 2023 as the risk of recession hangs over the economy, holding back multifamily demand. Nationally, absorption totaled only 141,000 units in 2022, well below the record totals posted in 2021 but also below average compared to pre-pandemic figures. This is a concern as the majority of demand occurred during the first two quarters of the year and trended much weaker in the second half of 2022. The tempering of demand was likely due to rising inflation cutting into potential renter households' budgets. The moderating absorption nationally conversely hit at an inopportune time, as 435,000 new units were delivered during the fourth quarter of 2022. The resulting supply/demand imbalance pushed the vacancy rate up to up to 6.5%. While no oversupply of multifamily exists nationally, there are several markets in which construction deliveries have outpaced recent demand growth. Vacancy rates in 1 & 2 Star and the 3 Star properties remain below the national 6.3% vacancy rate. On the other side of the price spectrum, 4 & 5 Star assets have recently been witnessing a vacancy rate increase after hitting an all-time low in the third quarter of 2021 of 6.4%. The 4 & 5 Star vacancy rate since then has increased to 8.3% at the end of 2022. As most new developments are luxury mid- and high-rise buildings, a slowing of demand at this price point will immediately impact overall vacancy rates. New developments at the luxury price point cannot readily increase demand for their units by trying to draw 3 Star households with large concession packages. Therefore, the potential demand for newly developed 4 & 5 Star properties remains dependent on an expanding pool of high-income renter households. Investment capital remained focused on the multifamily sector during the fourth quarter of 2022, as multifamily transaction activity topped the four major real estate sectors. However, the combination of rising interest rates, more expensive debt and lower pro-forma rents may lead to 4 and 5 Star cap rates rising during 2023. Some investors have already moved to the sidelines as they await further signaling on the direction of economic growth and theFederal Reserve's inflation fighting. As ofDecember 31, 2022 , national multifamily market vacancy rates increased to 6.4%. Our market areas reflected the following apartment vacancy levels as ofDecember 2022 :Springfield, Missouri at 3.1%,St. Louis at 8.7%,Kansas City at 6.7%,Minneapolis at 7.4%,Tulsa, Oklahoma at 8.1%,Dallas-Fort Worth at 8.2 %,Chicago at 5.4%,Atlanta at 9.0%,Phoenix at 9.2%,Denver at 7.7% andCharlotte, North Carolina at 8.8%. Job growth in major office-using industries turned negative at the end of 2022. The pace of layoffs accelerated, especially in the technology sector, which had previously been in an expansion mode. Uncertainty remains the prevailing theme, as firms continue to debate workplace schedules and assess real estate requirements. Multiple factors could stress both office leasing and sales activity and pricing in the office market going forward; including higher interest rates and subsequent cost of debt, slowing economic growth and a continued shift to remote and hybrid workplace schedules. The current oversupply of available space, both existing and forthcoming, point to downside risk with a full recovery in the office market likely a long-term proposition. As ofDecember 31, 2022 , national office vacancy rates increased to 12.7% from 12.5% as ofSeptember 30, 2022 , while our market areas reflected the following vacancy levels atDecember 31, 2022 :Springfield, Missouri at 4.3%,St. Louis at 10.2%,Kansas City at 10.6%,Minneapolis at 10.9%,Tulsa, Oklahoma at 11.3%,Dallas-Fort Worth at 17.7%,Chicago at 15.2%,Atlanta at 14.2%,Denver at 14.7%,Phoenix at 15.2% andCharlotte, North Carolina at 12.1%. The retail sector remains in expansion mode despite growing headwinds from inflation and rising interest rates. Overall, consumers continue to spend at a very healthy clip, though the increased cost of necessities such as food, gas, and housing are starting to weigh on the real growth of spending for non-essential goods. Leasing activity for smaller spaces is being overwhelmingly driven by growth 69 Table of Contents in quick service restaurants and cellular service retailers. While demand for retail space is on the rise, construction activity continues to fall. Most recent construction activity has consisted of single-tenant build-to-suits or smaller ground floor spaces in mixed-use developments. Due to growing demand and minimal new supply, vacancy rates declined across most retail segments as of fourth quarter of 2022. Rents increased at 3.8% over the most recent 12 month period, with retail tenants appearing to shrug off concerns surrounding inflation, rising interest rates and a potential recession. However, rent growth has slowed in each of the past two quarters and is forecast to decelerate further over coming quarters due to above-average inflation. During the fourth quarter of 2022, national retail vacancy rates declined slightly to 4.2% while our market areas reflected the following vacancy levels:Springfield, Missouri at 3.3%,St. Louis at 5.1%,Kansas City at 4.2%,Minneapolis at 3.1%,Tulsa, Oklahoma at 3.2%,Dallas-Fort Worth at 4.7%,Chicago at 5.4%,Atlanta at 3.8%,Phoenix at 5.2%,Denver at 4.0%, andCharlotte, North Carolina at 3.5 %. TheU.S. has been in the midst of a historic boom in household spending on retail goods (both online and in store), all of which need to be stored in logistics properties across the country before reaching the end consumer.U.S. industrial leasing has held up remarkably well despite rising interest rates and stubbornly high inflation rates eroding household purchasing power. Even when adjusted for inflation, consumer goods sales are still booming and coming in well above their pre-pandemic growth trend every month. The supply ofU.S. industrial properties is set to grow by almost 4% in 2023, marking the fastest pace of supply growth the market has seen in more than three decades. Construction starts on new industrial projects peaked during the first three quarters of 2022. With typical construction times for these projects of about one year, deliveries look set to remain elevated throughout 2023. Amid increased concerns of rising interest rates causing values of newly-delivered projects to dip below replacement costs, developers pulled back 30-40% on construction starts during fourth quarter of 2022. This pullback signals that by spring 2024, the number of new projects completing construction each quarter will begin to slow. This slowdown will somewhat be mitigated by the planned opening of 18+ electric vehicle, battery and semiconductor plants across theU.S. during 2024-2025 which may result in millions of additional square footage leasing over that period. A decline in rent growth during 2024-25 is anticipated due the elevated deliveries with industrial rent growth already slowing heading into 2023, from the 3% quarterly gains recorded a year ago to 2% quarterly growth as of first quarter 2023. Increases in rent growth look unlikely in 2023, as landlords may be contending with a high number of speculative development projects completing at a time when 2022's sharp interest rate increases will likely still be weighing on the macro economy. AtDecember 31, 2022 , national industrial vacancy rates increased slightly to 4.2% over the previously recorded record low of 4.0% during third quarter 2022. Our market areas reflected the following vacancy levels:Springfield, Missouri at 1.2%,St. Louis at 4.2%,Kansas City at 3.3%,Minneapolis at 3.0%,Tulsa, Oklahoma at 4.2%,Dallas-Fort Worth at 5.7%,Chicago at 3.9%,Atlanta at 3.9%,Phoenix at 4.9%,Denver at 6.0% andCharlotte, North Carolina at 5.3%.
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.
COVID-19 Impact to Our Business and Response
Great Southern continues to monitor and respond to the effects of the COVID-19 pandemic. As always, the health, safety and well-being of our customers, associates and communities, while maintaining uninterrupted service, are the Company's top priorities.Centers for Disease Control and Prevention (CDC ) guidelines, as well as directives from federal, state and local officials, are being closely followed to make informed operational decisions, if necessary. Customers can conduct their banking business using our banking center network, online and mobile banking services, ATMs, Telephone Banking, and online account opening services. COVID-19 infection rates currently are relatively low in our markets and theCDC has relaxed most restrictions that were previously in place. In some cases those restrictions have been replaced with recommendations. Also, states and local municipalities may restrict certain activities from time to time. Our business is currently operating normally, similar to operations prior to the onset of the 70 Table of Contents
COVID-19 pandemic. We continue to monitor infection rates and other health and economic indicators to ensure we are prepared to respond to future challenges, should they arise.
Paycheck Protection Program Loans
Great Southern actively participated in the Paycheck Protection Program ("PPP")
through the SBA. In total, we originated approximately 3,250 PPP loans, totaling
approximately $179 million . SBA forgiveness was approved and processed, and full
repayment proceeds were received by us, for virtually all of these PPP loans
during 2021 and early 2022.
Great Southern received fees from the SBA for originating PPP loans based on the
amount of each loan. At December 31, 2022 , there were no material remaining net
deferred fees related to PPP loans. The fees, net of origination costs, were
deferred in accordance with standard accounting practices and accreted to
interest income on loans over the contractual life of each loan. If loans are
repaid prior to their contractual maturity date, remaining deferred fees are
accreted to interest income at that time. In the years ended December 31, 2022
and 2021, Great Southern recorded approximately $502,000 and $5.5 million ,
respectively, of net deferred fees in interest income on PPP loans.
General
The profitability of the Company and, more specifically, the profitability of its primary subsidiary, the Bank, depend primarily on 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. In the year endedDecember 31, 2022 , Great Southern's total assets increased$230.8 million , or 4.2%, from$5.45 billion atDecember 31, 2021 , to$5.68 billion atDecember 31, 2022 . Full details of the current year changes in total assets are provided below, under "Comparison of Financial Condition atDecember 31, 2022 andDecember 31, 2021 ." Loans. In the year endedDecember 31, 2022 , Great Southern's net loans increased$499.3 million , or 12.5%, from$4.01 billion atDecember 31, 2021 , to$4.51 billion atDecember 31, 2022 . This increase was primarily in one- to four-family residential loans, construction loans, other residential (multi-family) loans, and commercial real estate loans. As loan demand is affected by a variety of factors, including general economic conditions, and because of the competition we face and our focus on pricing discipline and credit quality, we cannot be assured that our loan growth will match or exceed the average level of growth achieved in prior years. The Company's strategy continues to be focused on maintaining credit risk and interest rate risk at appropriate levels. Recent growth has occurred in some loan types, primarily other residential (multi-family), commercial real estate and one- to four family residential real estate, and in most of Great Southern's primary lending locations, includingSpringfield ,St. Louis ,Kansas City ,Des Moines andMinneapolis , as well as our loan production offices inAtlanta ,Charlotte ,Chicago ,Dallas ,Denver ,Omaha ,Phoenix andTulsa . 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 71
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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 atDecember 31, 2022 and 2021, 89.4% and 88.1%, respectively, was secured by real estate, as this is the Bank's primary focus in its lending efforts. AtDecember 31, 2022 and 2021, commercial real estate and commercial construction loans were 50.8% and 52.6% 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. AtDecember 31, 2022 , loans made in theSpringfield, Missouri metropolitan statistical area (Springfield MSA) comprised 7% of the Bank's total loan portfolio, compared to 8% atDecember 31, 2021 . The Company's headquarters are located inSpringfield and we have operated in this market since 1923. Loans made in theSt. Louis metropolitan statistical area (St. Louis MSA) comprised 18% of the Bank's total loan portfolio atDecember 31, 2022 , compared to 19% atDecember 31, 2021 . The Company's expansion into the St. Louis MSA beginning inMay 2009 has provided an opportunity to not only diversify from theSpringfield MSA, but also has provided access to a larger economy with increased lending opportunities despite higher levels of competition. Loans made in theSt. 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 44% in recent years and was 38% as ofDecember 31, 2022 . 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 ofDecember 31, 2022 , approximately 78% 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 ofDecember 31, 2022 , our interest rate risk models indicated a one-year interest rate earnings sensitivity position that is moderately 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. AtDecember 31, 2022 , 0.2% of our owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination. AtDecember 31, 2021 , 0.3% of our owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination. AtDecember 31, 2022 and 2021, an estimated 0.2% and 0.2%, respectively, of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination. AtDecember 31, 2022 , TDRs totaled$2.9 million , or 0.06% of total loans, a decrease of$902,000 from$3.9 million , or 0.1% of total loans, atDecember 31, 2021 . Concessions granted to borrowers experiencing financial difficulties may include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. For TDRs occurring during the year endedDecember 31, 2022 , none were restructured into multiple new loans. For TDRs occurring during the year endedDecember 31, 2021 , one loan totaling$45,000 was restructured into multiple new loans. For further information on TDRs, see Note 3 of the Notes to Consolidated Financial Statements contained in this report. The level of non-performing loans and foreclosed assets affects our net interest income and net income. We generally do not accrue interest income on these loans and do not recognize interest income until the loans are repaid or interest payments have been made for a period of time sufficient to provide evidence of performance on the loans. Generally, the higher the level of non-performing assets, the greater the negative impact on interest income and net income. 72
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The Company continues its preparation for discontinuation of use of interest rates such as LIBOR. LIBOR is a benchmark interest rate referenced in a variety of agreements used by the Company, but by far the most significant area impacted by LIBOR is related to commercial and residential mortgage loans. After 2021, certain LIBOR rates may no longer be published and it is expected to eventually be discontinued as a reference rate byJune 2023 . Other interest rates used globally could be discontinued for similar reasons. The Company has been regularly monitoring its portfolio of loans tied to LIBOR since 2019, with specific groups of loans identified. The Company implemented LIBOR fallback language for all commercial loan transactions near the end of 2018, with such language utilized for all commercial loan originations and renewals/modifications since that time. The Company is monitoring the remaining group of loans that were originated prior to the fourth quarter of 2018, and have not been renewed or modified since that time. AtDecember 31, 2022 , this represented approximately 29 commercial loans totaling approximately$49 million ; however, only 24 of those loans, totaling$40 million , mature afterJune 2023 (the date upon which the LIBOR indices used by the Company are expected to no longer be available). The Company also has a portfolio of residential mortgage loans tied to LIBOR indices with standard index replacement language included (approximately$359 million atDecember 31, 2022 ), and that portfolio is being monitored for potential changes that may be facilitated by the mortgage industry. The vast majority of the loan portfolio tied to LIBOR now includes LIBOR replacement language that identifies "trigger" events for the cessation of LIBOR and the steps that the Company will take upon the occurrence of one or more of those events, including adjustments to any rate margin to ensure that the replacement interest rate on the loan is substantially similar to the previous LIBOR-based rate.Available-for-sale Securities . In the year endedDecember 31, 2022 , available-for-sale securities decreased$10.4 million , or 2.1%, from$501.0 million atDecember 31, 2021 , to$490.6 million atDecember 31, 2022 . The decrease was primarily due to$226.5 million in available-for-sale securities being transferred to held-to-maturity during the year and calls of municipal securities and normal monthly payments received related to the portfolio ofU.S. Government agency mortgage-backed securities and collateralized mortgage obligations. In determining securities that were elected to be transferred to the held-to-maturity category, the Company reviewed all of its investment securities purchased prior to 2022 and determined that certain of those securities, for various reasons, would likely be held to their maturity or full repayment prior to contractual maturity. The decrease was mostly offset with purchases ofU.S. Government agency fixed-rate single-family and multi-family mortgage-backed securities and collateralized mortgage obligations. The Company used excess liquid funds and loan repayments to fund this increase in investment securities. For further information on investment securities, see Note 2 of the Notes to Consolidated Financial Statements contained in this report.Held-to-maturity Securities . In the year endedDecember 31, 2022 , as noted above, available-for-sale securities of$226.5 million were transferred to held-to-maturity. This transfer included$220.2 million of mortgage-backed securities and collateralized mortgage obligations and$6.3 million in municipal securities. AtDecember 31, 2022 the balance of held-to-maturity securities was$202.5 million . 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 endedDecember 31, 2022 , total deposit balances increased$132.8 million , or 2.9%. Transaction account balances decreased$338.9 million and retail certificates of deposit increased$127.6 million compared toDecember 31, 2021 . The decrease in transaction accounts were primarily a result of decreased balances in non-interest accounts, money market deposit accounts and certain NOW account types. Balance decreases occurred in both individual and small business accounts, and appear to be the result of a partial runoff of "pandemic deposits" that increased significantly during 2020 and 2021. In addition, 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 increased due to retail certificates generated through the banking center network. Time deposits initiated through internet channels experienced a planned decrease as part of the Company's balance sheet management between funding sources. Brokered deposits, including IntraFi program purchased funds, were$411.5 million atDecember 31, 2022 , an increase of$344.1 million from$67.4 million atDecember 31, 2021 . The Company uses brokered deposits of select maturities 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 73
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market share, particularly checking accounts, in our branch footprint. To accomplish this goal, increasing rates to attract deposits may be necessary, which could negatively impact the Company's net interest margin.
Our ability to fund growth in future periods may also depend on our ability to continue to access brokered deposits and FHLBank advances. In times when our loan demand has outpaced our generation of new deposits, we have utilized brokered deposits and FHLBank advances to fund these loans. These funding sources have been attractive to us because we can create either fixed or variable rate funding, as desired, which more closely matches the interest rate nature of much of our loan portfolio. It also gives us greater flexibility in increasing or decreasing the duration of our funding. While we do not currently anticipate that our ability to access these sources will be reduced or eliminated in future periods, if this should happen, the limitation on our ability to fund additional loans could have a material adverse effect on our business, financial condition and results of operations. Securities sold under reverse repurchase agreements with customers. Securities sold under reverse repurchase agreements with customers increased$39.7 million from$137.1 million atDecember 31, 2021 to$176.8 million atDecember 31, 2022 . These balances fluctuate over time based on customer demand for this product. Federal Home Loan Bank Advances and Short Term Borrowings. The Company's FHLBank term advances were$-0 - at bothDecember 31, 2022 andDecember 31, 2021 . AtDecember 31, 2022 there was$88.5 million in overnight borrowings from the FHLBank, which are included in short term borrowings. AtDecember 31, 2021 there were no overnight borrowings from the FHLBank. Short term borrowings and other interest-bearing liabilities increased$87.7 million from$1.8 million atDecember 31, 2021 to$89.6 million atDecember 31, 2022 . The Company may utilize both overnight borrowings and short-term FHLBank advances 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 LIBOR or SOFR, three-month LIBOR or 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% onDecember 16, 2015 , the FRB had last changed interest rates onDecember 16, 2008 . This was the first rate increase sinceSeptember 29, 2006 . The FRB also implemented rate change increases of 0.25% on eight additional occasions beginningDecember 14, 2016 and throughDecember 31, 2018 , with the Federal Funds rate reaching as high as 2.50%. AfterDecember 2018 , the FRB paused its rate increases and, in July, September andOctober 2019 , implemented rate decreases of 0.25% on each of those occasions. AtDecember 31, 2019 , the Federal Funds rate was 1.75%. In response to the COVID-19 pandemic, the FRB decreased interest rates on two occasions inMarch 2020 , a 0.50% decrease onMarch 3 and a 1.00% decrease onMarch 16 . AtDecember 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 andDecember 2022 , respectively. AtDecember 31, 2022 , the Federal Funds rate was 4.50%, and currently is 4.75%. Financial markets expect further increases in Federal Funds interest rates in the first half of 2023, with 0.50-1.00% of additional cumulative rate hikes currently anticipated. A substantial portion of Great Southern's loan portfolio ($958.8 million atDecember 31, 2022 ) is tied to the one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days afterDecember 31, 2022 . Of these loans,$958.4 million had interest rate floors. Great Southern's loan portfolio also includes loans ($501.2 million atDecember 31, 2022 ) tied to various SOFR indexes that will be subject to adjustment at least once within 90 days afterDecember 31, 2022 . Of these loans,$501.2 million had interest rate floors. Great Southern also has a portfolio of loans ($747.6 million atDecember 31, 2022 ) tied to a "prime rate" of interest that will adjust immediately or within 90 days of a change to the "prime rate" of interest. Of these loans,$734.6 million had interest rate floors at various rates. Great Southern also has a portfolio of loans ($6.7 million atDecember 31, 2022 ) 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. AtDecember 31, 2022 , nearly all of these LIBOR/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 one-month or three-month LIBOR index, SOFR indices or the
"prime rate" index and will
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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's 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 LIBOR-based, SOFR-based and prime-based loans.
As of December 31, 2022 , Great Southern's interest rate risk models indicate
that, generally, rising interest rates are expected to have a positive impact on
the Company's net interest income, while declining interest rates are expected
to have a negative impact on net interest income. We model various interest rate
scenarios for rising and falling rates, including both parallel and non-parallel
shifts in rates. The results of our modeling indicate that net interest income
is not likely to be significantly affected either positively or negatively in
the first twelve months following relatively minor changes in market interest
rates because our portfolios are relatively well-matched in a twelve-month
horizon. In a situation where market interest rates increase significantly in a
short period of time, our net interest margin increase may be more pronounced in
the very near term (first one to three months), due to fairly rapid increases in
LIBOR interest rates, 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 LIBOR interest rates, SOFR interest rates and "prime"
interest rates. In the subsequent months we expect that the net interest margin
would stabilize and begin to improve, as renewal interest rates on maturing time
deposits are expected to decrease compared to the current rates paid on those
products. During 2020, we did experience some compression of our net interest
margin percentage due to 2.25% of Federal 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 the net interest margin
remained lower than our historical average in 2021. LIBOR interest rates
decreased significantly in 2020 and remained very low in 2021, putting pressure
on loan yields, and strong pricing competition for loans and deposits remains in
most of our markets. Beginning in March 2022 , market interest rates, including
LIBOR interest rates, SOFR interest rates and "prime" interest rates, began to
increase rapidly. This has resulted in increasing loan yields and expansion of
our net interest income and net interest margin in 2022. 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, 2022 and 2021."
Business Initiatives
The Company's 92 banking centers and its loan production offices are consistently reviewed to measure performance and to 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 banking centers or even exit markets when conditions dictate.
Several banking center changes were initiated in 2022 and are planned for 2023:
In the
building at
commercial lending team continues to serve customers from the
location. Great Southern operates 17 banking centers in the
market.
In
centers in the Branson Tri-Lakes area of southwest
75
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In
office in
In
was razed in early 2023 to make way for a new Express Center, utilizing only
interactive teller machine (ITM) technology to serve customers. The modern
four-lane drive-up center is expected to open during the third quarter of 2023
and will be the first-of-its-kind in the
of a video screen that allows customers to speak directly to a service
representative in real time and in a highly personal manner. 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. Commercial loan production offices (LPOs) continue to play a significant role in developing the commercial loan portfolio, providing a wide variety of the Bank's commercial lending services, including commercial real estate loans for new and existing properties and commercial construction loans. Two LPOs were opened in 2022:
In
relationships in the
? In
a local commercial lending veteran.
The Company now operates eight commercial LPOs, with other offices in
Other corporate initiatives occurred in 2022 or are planned in 2023:
In
repurchase program, which will succeed the existing repurchase program
(authorized in
2022). The new stock repurchase program does not have an expiration date and
authorizes the purchase, from time to time, of up to one million additional
shares of the Company's common stock.
To ensure the Company meets, or preferably exceeds, the expectations of our
customers, it is imperative to have a modern and progressive information
technology platform. In 2021, after a thorough evaluation of industry-leading
core banking platforms and other information technology systems, the decision
was made to replace the Company's current core banking system and ancillary ? software with a more modern, futuristic and long-term solution. Since the end
of 2021, the Company has been heavily focused on preparing for the systems
conversion. This upgrade in the operational platform is expected to provide
customers with a superior banking experience, both in-person and digitally.
Great Southern associates will also benefit with the use of new and advanced
tools and better access to more meaningful information to serve our customers.
In 2023,
in 1923 with four employees and operated as a savings and loan association in
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."
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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 theBasel Committee on Banking Supervision . For the Company and the Bank, the general effective date of the rules wasJanuary 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 onJanuary 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. InMay 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.
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
During the year ended
Cash and cash equivalents were$168.5 million atDecember 31, 2022 , a decrease of$548.7 million , or 76.5%, from$717.3 million atDecember 31, 2021 . AtDecember 31, 2021 , the cash equivalents primarily related to excess funds held at theFederal Reserve Bank . The additional funds were primarily the result of increases in net loan repayments throughout 2021. In 2022, these excess funds were used to purchase new investment securities and originate loans. 77
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The Company's available-for-sale securities decreased$10.4 million , or 2.1%, compared toDecember 31, 2021 . The decrease was primarily related to the transfer of$226.5 million in available-for-sale securities to held-to-maturity during 2022 and by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities and collateralized mortgage obligations. This decrease was mostly offset by the purchase ofU.S. Government agency fixed-rate single-family or multi-family mortgage-backed securities and collateralized mortgage obligations. The available-for-sale securities portfolio was 8.6% and 9.2% of total assets atDecember 31, 2022 andDecember 31, 2021 , respectively. Held-to-maturity securities were$202.5 million atDecember 31, 2022 . As indicated above, during the year endedDecember 31, 2022 ,$226.5 million in available-for-sale securities were transferred to held-to-maturity. This included$220.2 million of mortgage-backed securities and collateralized mortgage obligations and$6.3 million in municipal securities. In determining securities that were elected to be transferred to the held-to-maturity category, the Company reviewed all of its investment securities purchased prior to 2022 and determined that certain of those securities, for various reasons, would likely be held to their maturity or full repayment prior to contractual maturity. The held-to-maturity securities portfolio was 3.6% of total assets atDecember 31, 2022 . Net loans increased$499.3 million fromDecember 31, 2021 , to$4.51 billion atDecember 31, 2022 . This increase was primarily in one- to four-family residential loans ($222 million increase), construction loans ($145 million increase), other residential (multi-family) loans ($84 million increase) and commercial real estate loans ($54 million increase). Loan origination volume in 2022 was similar to loan origination volume that occurred in 2020 and 2021; however, the pace of loan payoffs prior to maturity slowed in 2022 due to the increase in market rates of interest. Total liabilities increased$314.4 million from$4.83 billion atDecember 31, 2021 to$5.15 billion atDecember 31, 2022 . The increase was primarily due to increases in short-term borrowings from FHLBank, increases in brokered deposits and increases in reverse repurchase agreements with customers. Total deposits increased$132.8 million , or 2.9%, from$4.55 billion atDecember 31, 2021 to$4.68 billion atDecember 31, 2022 . Transaction account balances decreased$338.9 million , from$3.59 billion atDecember 31, 2021 to$3.25 billion atDecember 31, 2022 . Retail certificates of deposit increased$127.6 million compared toDecember 31, 2021 , to$1.02 billion atDecember 31, 2022 . Decreases in transaction account balances were primarily due to decreases in IntraFi Network Reciprocal Deposits and non-interest-bearing checking accounts. Total interest-bearing checking and demand deposit accounts decreased$192.8 million and$146.2 million , respectively. Customer retail time deposits initiated through our banking center network increased$308.9 million and time deposits initiated through our national internet network decreased$151.9 million . The increase in customer retail time deposits initiated through the banking center network was primarily due to targeted promotions that started in lateJune 2022 . Customer deposits atDecember 31, 2022 andDecember 31, 2021 totaling$12.4 million and$41.7 million , respectively, were part of the IntraFi Network Deposits program, which allows customers to maintain balances in an insured manner that would otherwise exceed theFDIC deposit insurance limit. Brokered deposits increased$344.1 million to$411.5 million atDecember 31, 2022 , compared to$67.4 million atDecember 31, 2021 . 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 atDecember 31, 2022 ,$150.0 million were floating rate deposits which adjust daily based on the effective federal funds rate index. The Company's termFederal Home Loan Bank advances were$-0 - at bothDecember 31, 2022 and 2021. AtDecember 31, 2022 there were no borrowings from the FHLBank, other than overnight borrowings, which are included in the short term borrowings category. AtDecember 31, 2021 there were no borrowings from the FHLBank. The Company may utilize both overnight borrowings and short-term FHLBank advances depending on relative interest rates. Short term borrowings and other interest-bearing liabilities increased$87.7 million from$1.8 million atDecember 31, 2021 to$89.6 million atDecember 31, 2022 . The short term borrowings included overnight FHLBank borrowings of$88.5 million atDecember 31, 2022 . The short term borrowings included no overnight FHLBank borrowings atDecember 31, 2021 .
Securities sold under reverse repurchase agreements with customers increased
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Total stockholders' equity decreased$83.7 million , from$616.8 million atDecember 31, 2021 to$533.1 million atDecember 31, 2022 . The Company recorded net income of$75.9 million for the year endedDecember 31, 2022 . In addition, total stockholders' equity increased$7.7 million due to issuance of the Company's common stock upon stock option exercises. Total stockholders' equity decreased$61.8 million due to repurchases of the Company's common stock. Accumulated other comprehensive income decreased$86.1 million due to decreases in the fair value of available-for-sale investment securities and the fair value of cash flow hedges, as a result of increased market interest rates. Dividends declared on common stock, which decreased total stockholders' equity, were$19.3 million .
Results of Operations and Comparison for the Years Ended
General Net income increased$1.3 million , or 1.8%, during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . Net income was$75.9 million for the year endedDecember 31, 2022 compared to$74.6 million for the year endedDecember 31, 2020 . 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 endedDecember 31, 2022 compared to the year endedDecember 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 endedDecember 31, 2022 compared to the same period in 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 endedDecember 31, 2022 compared to the same period in 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 endedDecember 31, 2022 compared to the year endedDecember 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 endedDecember 31, 2021 to 4.69% during the year endedDecember 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 endedDecember 31, 2021 , to$4.39 billion during the year endedDecember 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 PPP loans originated in 2020 and 2021. Net deferred fees recognized in interest income were$502,000 and$5.5 million in the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. InOctober 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 inOctober 2025 . As previously disclosed by the Company, inMarch 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 ofOctober 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 endedDecember 31, 2022 andDecember 31, 2021 . AtDecember 31, 2022 , the Company expected to have a sufficient amount of eligible variable rate loans to continue to accrete this 79
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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. InMarch 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 ofMarch 1, 2024 . Under the terms of the swap, the Company receives a fixed rate of interest of 1.6725% and pays a floating rate of interest equal to one-month USD-LIBOR (or the equivalent replacement rate if USD-LIBOR rate is not available). The floating rate resets monthly and net settlements of interest due to/from the counterparty also occur monthly. The initial floating rate of interest was set at 0.2414%. To the extent that the fixed rate of interest exceeds one-month USD-LIBOR, the Company will receive net interest settlements, which will be recorded as loan interest income. If one-month USD-LIBOR exceeds the fixed rate of interest, the Company will be required to pay net settlements to the counterparty and will record those net payments as a reduction of interest income on loans. The Company recorded a reduction of loan interest income related to this swap transaction of$941,000 in the year endedDecember 31, 2022 . InJuly 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 ofMay 1, 2023 and a termination date ofMay 1, 2028 . Under the terms of one swap, beginning inMay 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 inMay 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. AtDecember 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 endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . Interest income increased$6.4 million as a result of an increase in average balances from$447.9 million during the year endedDecember 31, 2021 , to$675.6 million during the year endedDecember 31, 2022 . Interest income increased$1.1 million due to an increase in average interest rates from 2.61% during the year endedDecember 31, 2021 to 2.84% during the year endedDecember 31, 2022 , due to higher market rates of interest on investment securities purchased during 2022 compared to securities already in the portfolio. AtDecember 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 endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . Interest income increased$1.5 million as a result of higher average interest rates from 0.13% during the year endedDecember 31, 2021 , to 1.05% during the year endedDecember 31, 2022 . Interest income decreased$134,000 as a result of a decrease in average balances from$552.1 million during the year endedDecember 31, 2021 , to$195.8 million during the year endedDecember 31, 2022 . The increase in the average interest rate was primarily due to the increase in the rate paid on funds held at theFederal 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 endedDecember 31, 2022 , when compared with the year endedDecember 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%. 80 Table of Contents Interest Expense - Deposits Interest expense on demand deposits increased$2.9 million due to an increase in average rates from 0.17% during the year endedDecember 31, 2021 , to 0.30% during the year endedDecember 31, 2022 . In addition, interest on demand deposits increased$52,000 due to an increase in average balances from$2.32 billion in the year endedDecember 31, 2021 , to$2.35 billion in the year endedDecember 31, 2022 . Interest rates paid on demand deposits increased due to significant increases in the federal funds rate of interest and other market interest rates during 2022. Interest expense on time deposits increased$5.0 million as a result of an increase in average rates of interest from 0.78% during the year endedDecember 31, 2021 , to 1.23% during the year endedDecember 31, 2022 . Partially offsetting that increase, interest expense on time deposits decreased$316,000 due to a decrease in the average balance of time deposits from$1.16 billion during the year endedDecember 31, 2021 , to$1.12 billion during the year endedDecember 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 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 -
FHLBank term advances were not utilized during the years ended
Interest expense on reverse repurchase agreements increased$290,000 due to an increase in average rates during the year endedDecember 31, 2022 when compared to the year endedDecember 31, 2021 . The average rate of interest was 0.24% for the year endedDecember 31, 2022 , compared to 0.03% during the year endedDecember 31, 2021 . The average balance of repurchase agreements decreased$11.2 million from$143.8 million in the year endedDecember 31, 2021 to$132.6 million in the year endedDecember 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 endedDecember 31, 2021 , to$48.5 million during the year endedDecember 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 0.00% in the year endedDecember 31, 2021 , to 2.20% in the year endedDecember 31, 2022 . 81
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During the year endedDecember 31, 2022 , compared to the year endedDecember 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 the 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. InAugust 2016 , the Company issued$75 million of 5.25% fixed-to-floating rate subordinated notes dueAugust 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 . InJune 2020 , the Company issued$75.0 million of 5.50% fixed-to-floating rate subordinated notes dueJune 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. InAugust 2021 , the Company completed the redemption of all of its 5.25% subordinated notes dueAugust 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 endedDecember 31, 2021 to$74.1 million during the year endedDecember 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 endedDecember 31, 2022 increased$21.7 million , or 12.2%, to$199.6 million , compared to$177.9 million for the year endedDecember 31, 2021 . Net interest margin was 3.80% for the year endedDecember 31, 2022 , compared to 3.37% for the year endedDecember 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 endedDecember 31, 2021 , to 3.59% during the year endedDecember 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 endedDecember 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 theFederal 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
The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effectiveJanuary 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. Upon adoption of the CECL accounting standard, we increased the balance of our allowance for credit losses related to outstanding loans by$11.6 million and created a liability for potential losses related to the unfunded portion of our loans and commitments of approximately$8.7 million . The after-tax effect 82
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reduced our retained earnings by approximately
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, such as changes in the national unemployment rate, commercial real estate price index, housing price index, consumer sentiment, gross domestic product (GDP) and construction spending. Worsening economic conditions from COVID-19 and subsequent variant outbreaks or similar events, higher inflation or interest rates, or other factors may lead to increased losses in the portfolio and/or requirements for an increase in provision expense. Management maintains various controls in an attempt to identify and limit future losses, such as a watch list of problem loans and potential problem loans, documented loan administration policies and loan review staff to review the quality and anticipated collectability of the portfolio. Additional procedures provide for frequent management review of the loan portfolio based on loan size, loan type, delinquencies, financial analysis, on-going correspondence with borrowers and problem loan work-outs. Management determines which loans are collateral-dependent, evaluates risk of loss and makes additional provisions to expense, if necessary, to maintain the allowance at a satisfactory level. During the year endedDecember 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 provision expense recorded for the year endedDecember 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 endedDecember 31, 2022 compared to net recoveries of$116,000 for the year endedDecember 31, 2021 . The provision for losses on unfunded commitments for the year endedDecember 31, 2022 was$3.2 million , compared to$939,000 for the year endedDecember 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% atDecember 31, 2022 and 2021, respectively. Management considers the allowance for credit losses adequate to cover losses inherent in the Bank's loan portfolio atDecember 31, 2022 , based on recent reviews of the Bank's loan portfolio and current economic conditions. If challenging economic conditions were to last longer than anticipated or deteriorate further or management's assessment of the loan portfolio were to change, additional 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 that occur from time to time, and other factors specific to a borrower's circumstances, the level of non-performing assets will fluctuate.
Non-performing assets atDecember 31, 2022 , were$3.7 million , a decrease of$2.3 million from$6.0 million atDecember 31, 2021 . Non-performing assets as a percentage of total assets were 0.07% atDecember 31, 2022 , compared to 0.11% atDecember 31, 2021 . Compared toDecember 31, 2021 , non-performing loans decreased$1.7 million to$3.7 million atDecember 31, 2022 , and foreclosed assets decreased$538,000 to$50,000 atDecember 31, 2022 . Non-performing commercial real estate loans were$1.6 million , or 43.0%, of total non-performing loans atDecember 31, 2022 . Non-performing one-to four-family residential loans were$722,000 , or 19.6%, of the total non-performing loans atDecember 31, 2022 . Non-performing commercial business loans were$586,000 , or 16.0%, of total non-performing loans atDecember 31, 2022 . Non-performing land development loans were$384,000 , or 10.5%, of total non-performing loans atDecember 31, 2022 . Non-performing consumer loans were$399,000 , or 10.9%, of the total non-performing loans atDecember 31, 2022 . 83 Table of Contents
Non-performing Loans. Activity in the non-performing loans category during the
year ended
Transfers to Transfers to
Beginning Additions Removed Potential Foreclosed Ending
Balance, to Non- from Non- Problem Assets and Charge- Balance,
January 1 Performing Performing Loans Repossessions Offs Payments December 31
(In Thousands)
One- to four-family construction $ - $ - $
- $ - $ - $ - $ - $ - Subdivision construction - - - - - - - - Land development 468 - - - - (84) - 384 Commercial construction - - - - - - - -
One- to four-family residential 2,216 519
(90) (279) - (37) (1,607) 722 Other residential - - - - - - - - Commercial real estate 2,006 238 - - - - (665) 1,579 Commercial business - 586 - - - - - 586 Consumer 733 168 - (74) (9) (92) (327) 399 Total non-performing loans$ 5,423 $ 1,511 $ (90) $ (353) $ (9)$ (213) $ (2,599) $ 3,670 FDIC -assisted acquired loans included above$ 1,736 $ 272 $ - $ - $ - $ -$ (1,580) $ 428 AtDecember 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 southernIllinois . 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
Activity in foreclosed assets and repossessions during the year endedDecember 31, 2022 , 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 315 - (300) - (15) - Commercial construction - - - - - -
One- to four-family residential 183 - (175)
- (8) -
Other residential - - - - - -
Commercial real estate - - - - - -
Commercial business - - - - - -
Consumer 90 344 (384) - - 50
Total foreclosed assets and
repossessions $ 588 $ 344 $ (859) $ - $ (23) $ 50
FDIC -assisted acquired assets
included above $ 498 $ - $ (475) $ - $ (23) $ -
84
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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 endedDecember 31, 2022 , from$2.0 million atDecember 31, 2021 to$1.6 million atDecember 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 endedDecember 31, 2022 , 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 15 - - - - - (15) -
Land development - - - - - - - -
Commercial construction - - - - - - - -One- to four-family residential 1,432 279
(275) - - - (88) 1,348
Other residential - - - - - - - -
Commercial real estate 210 - - - - (44) (166) -
Commercial business - - - - - - - -
Consumer 323 161 (58) (37) (27) (9) (123) 230
Total potential problem loans $ 1,980 $ 440 $ (333) $ (37) $ (27) $ (53) $ (392) $ 1,578
FDIC -assisted acquired loans included
above $ 1,004 $ - $ - $ - $ - $ (44) $ (217) $ 743
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 of 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
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 2020 85
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and 2021, and as market interest rates moved higher beginning in the second quarter of 2022, mortgage refinance volume has decreased and fixed rate loan originations and related gains on sales of these loans have decreased substantially. The lower level of originations is expected to continue as long as market rates remain elevated. 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 have increased and government stimulus payments received by consumers in 2020 and 2021 have been exhausted now. 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 endedDecember 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 endedDecember 31, 2021 , to$133.4 million in the year endedDecember 31, 2022 . The Company's efficiency ratio for the year endedDecember 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 inDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2022 compared to 2.32% for the year endedDecember 31, 2021 . Average assets for the year endedDecember 31, 2022 , increased$17.4 million , or 0.3%, from the year endedDecember 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
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 current 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, thePhoenix andCharlotte, 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 endedDecember 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. 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 is analyzed. Upon 86 Table of Contents filing its federal and various state income tax returns for 2021 in the fourth quarter of 2022, the Company updated its combined tax rate applied to deferred tax items and also adjusted its current income taxes receivable/payable balances as a result of carryback claims. These adjustments to current and deferred taxes resulted in a reduction in income tax expense of$1.1 million in the fourth quarter of 2022.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$6.3 million ,$11.2 million and$6.6 million for 2022, 2021 and 2020, respectively. Tax-exempt income was not calculated on a tax equivalent basis. The table does not reflect any effect of income taxes. Dec. 31, Year Ended Year Ended Year Ended 2022 December 31, 2022 December 31, 2021 December 31, 2020 Yield/ Average Yield/ Average Yield/ Average Yield/ Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate (Dollars In Thousands) Interest-earning assets: Loans receivable: One- to four-family residential 3.45 %$ 811,896 $ 27,853 3.43 %$ 678,900 $ 25,251 3.72 %$ 652,096 $ 29,099 4.46 % Other residential 6.18 837,582 43,174 5.15 922,739 40,998 4.44 930,529 43,902 4.72 Commercial real estate 5.54 1,551,541
73,164 4.72 1,541,095 65,811 4.27 1,526,618 69,437 4.55 Construction 6.37 679,524 37,370 5.50 616,899 27,696 4.49 665,546 32,443 4.87 Commercial business 5.72 292,825 14,615 4.99 279,232 15,403 5.52 325,397 14,070 4.32 Other loans 5.56 199,336 8,864 4.45 220,783 10,347 4.69 283,678 15,184 5.35
Industrial revenue bonds (1) 5.58 13,338
711 5.33 14,528 763 5.25 15,395 829 5.38 Total loans receivable 5.54 4,386,042 205,751 4.69 4,274,176 186,269 4.36 4,399,259 204,964 4.66 Investment securities (1) 2.74 675,571 19,170 2.84 447,943 11,689 2.61 426,383 12,262 2.88 Interest-earning deposits in other banks 4.34 195,817
2,056 1.05 552,094 715 0.13 246,110
477 0.19
Total interest-earning assets 5.19 5,257,430 226,977 4.32 5,274,213 198,673 3.77 5,071,752 217,703 4.29 Non-interest-earning assets: Cash and cash equivalents 96,353 96,989 93,832 Other non-earning assets 166,007 131,154 157,842 Total assets$ 5,519,790 $ 5,502,356 $ 5,323,426 Interest-bearing liabilities: Interest-bearing demand and savings 0.90$ 2,346,546 6,938 0.30$ 2,316,890 4,023 0.17$ 1,867,166 7,096 0.38 Time deposits 2.30 1,119,157 13,738 1.23 1,161,134 9,079 0.78 1,636,205 25,335 1.55 Total deposits 1.39 3,465,703 20,676 0.60 3,478,024 13,102 0.38 3,503,371 32,431 0.93 Securities sold under reverse repurchase agreements 0.94 132,595 324 0.24 143,757 37 0.03 140,938 31 0.02 Short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities 4.60 48,530 1,066 2.20 1,529 - - 42,560 644 1.51 Subordinated debentures issued to capital trust 6.04 25,774 875 3.40 25,774 448 1.74 25,774 628 2.44 Subordinated notes 5.95 74,131 4,422 5.97 119,780 7,165 5.98 115,335 6,831 5.92 Total interest-bearing liabilities 1.56 3,746,733 27,363 0.73 3,768,864 20,752 0.55 3,827,978 40,565 1.06 Non-interest-bearing liabilities: Demand deposits 1,141,660 1,061,716 826,900 Other liabilities 66,224 44,260 46,111 Total liabilities 4,954,617 4,874,840 4,700,989
Stockholders' equity 565,173 627,516 622,437 Total liabilities and stockholders' equity$ 5,519,790 $ 5,502,356 $ 5,323,426 Net interest income: Interest rate spread 3.63 %$ 199,614 3.59 %$ 177,921 3.22 %$ 177,138 3.23 % Net interest margin* 3.80 % 3.37 % 3.49 % Average interest-earning assets to average interest- bearing liabilities 140.3 % 139.9 % 132.5 %
* Defined as the Company's net interest income divided by total interest-earning assets.
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Of the total average balance of investment securities, average tax-exempt
investment securities were
2022, 2021 and 2020, respectively. In addition, average tax-exempt industrial
revenue bonds were
this table was
2020, respectively. Interest income net of disallowed interest expense
related to tax-exempt assets was
for 2022, 2021 and 2020, 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, 2022 vs. December 31, 2021 vs.
December 31, 2021 December 31, 2020
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 $ 14,512 $ 4,970 $ 19,482 $ (12,982) $ (5,713) $ (18,695)
Investment securities 1,098 6,383 7,481 (1,173) 600 (573) Interest-earning deposits in other banks
1,475 (134) 1,341 (200) 438 238
Total interest-earning assets 17,085 11,219 28,304 (14,355) (4,675) (19,030)
Interest-bearing liabilities:
Demand deposits 2,863 52 2,915 (4,497) 1,424 (3,073)
Time deposits 4,975 (316) 4,659 (10,246) (6,010) (16,256)
Total deposits 7,838 (264) 7,574 (14,743) (4,586) (19,329) Securities sold under reverse repurchase agreements
290 (3) 287 6 - 6
Short-term borrowings, overnight FHLBank
borrowings and other interest-bearing
liabilities 390 676 1,066 (326) (318) (644) Subordinated debentures issued to capital trust
427 - 427 (180) - (180)
Subordinated notes (20) (2,723) (2,743) 69 265 334
Total interest-bearing liabilities 8,925 (2,314)
6,611 (15,174) (4,639) (19,813)
Net interest income $ 8,160 $ 13,533 $ 21,693 $ 819 $ (36) $ 783 Results of Operations and Comparison for the Years Ended
General Net income increased$15.3 million , or 25.8%, during the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . Net income was$74.6 million for the year endedDecember 31, 2021 compared to$59.3 million for the year endedDecember 31, 2020 . This increase was due to a decrease in provision (credit) for credit losses and unfunded commitments of$21.6 million , or 136.3%, an increase in non-interest income of$3.3 million , or 9.3%, and an increase in net interest income of$783,000 , or 0.4%, partially offset by an increase in income tax expenses of$6.0 million , or 43.2%, and an increase in non-interest expenses of$4.4 million , or 3.6%.
Total Interest Income
Total interest income decreased$19.0 million , or 8.7%, during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The decrease was due to an$18.7 million , or 9.1%, decrease in interest income on loans and a$335,000 , or 2.6%, decrease in interest income on investment securities and other interest-earning assets. Interest income on loans decreased in 2021 compared to 2020 due to lower average rates of interest and lower average balances of loans. Interest income from investment securities and other interest-earning assets decreased during 2021 compared to 2020 due to lower average rates of interest, partially offset by higher average balances of investments and other interest-earning assets. 88 Table of Contents Interest Income - Loans
During the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , interest income on loans decreased due to lower average balances and lower average interest rates. Interest income decreased$13.0 million as the result of lower average interest rates on loans. The average yield on loans decreased from 4.66% during the year endedDecember 31, 2020 to 4.36% during the year endedDecember 31, 2021 . The decreased yields in most loan categories were primarily a result of decreased LIBOR and Federal Funds interest rates. In addition, interest income on loans decreased$5.7 million as a result of lower average loan balances, which decreased from$4.40 billion during the year endedDecember 31, 2020 , to$4.27 billion during the year endedDecember 31, 2021 . The lower average balances were primarily due to higher loan repayments during 2021. In 2020, the Company also originated$121 million of PPP loans, which have a much lower yield compared to the overall loan portfolio. These loans were largely repaid during 2021, contributing to the lower average balance in loans. On an on-going basis, the Company has estimated the cash flows expected to be collected from theFDIC -assisted acquired loan pools. For each of the loan portfolios acquired, the cash flow estimates have increased, based on the payment histories and the collection of certain loans, thereby reducing loss expectations of certain loan pools, resulting in adjustments to be spread on a level-yield basis over the remaining expected lives of the loan pools. The entire amount of the discount adjustment has been and will be accreted to interest income over time. For the years endedDecember 31, 2021 and 2020, the adjustments increased interest income and pre-tax income by$1.6 million and$5.6 million , respectively. As ofDecember 31, 2021 , the remaining accretable yield adjustment that will affect interest income was$429,000 . We recognized the remaining$429,000 of interest income during 2022. We adopted the new accounting standard related to accounting for credit losses as ofJanuary 1, 2021 . With the adoption of this standard, there is no reclassification of discounts from non-accretable to accretable subsequent toDecember 31, 2020 . All adjustments made prior toDecember 31, 2020 will continue to be accreted to interest income. Apart from the yield accretion, the average yield on loans was 4.32% during the year endedDecember 31, 2021 , compared to 4.53% during the year endedDecember 31, 2020 , as a result of lower current market rates on adjustable rate loans and new loans originated during the year. InOctober 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 ofOctober 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. InMarch 2020 , the Company and its swap counterparty mutually agreed to terminate the$400 million interest rate swap prior to its contractual maturity. The Company received a payment of$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, is reflected in the Company's stockholders' equity as Accumulated Other Comprehensive Income and a portion of it will be accreted to interest income on loans monthly through the original contractual termination date ofOctober 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 loan interest income of$8.1 million and$7.7 million during the years endingDecember 31, 2021 and 2020, respectively, related to this interest rate swap. The Company currently expects 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.
Interest Income - Investments and Other Interest-earning Assets
Interest income on investments decreased$573,000 in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Interest income decreased$1.2 million due to a decrease in average interest rates from 2.88% during the year endedDecember 31, 2020 to 2.61% during the year endedDecember 31, 2021 , due to lower market rates of interest on investment securities purchased during 2021 compared to securities already in the portfolio. Interest income increased$600,000 as a result of an increase in average balances from$426.4 million during the year endedDecember 31, 2020 , to$447.9 million during the year
endedDecember 31, 2021 . 89 Table of Contents
Interest income on other interest-earning assets increased$238,000 in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Interest income increased$438,000 as a result of an increase in average balances from$246.1 million during the year endedDecember 31, 2020 , to$552.1 million during the year endedDecember 31, 2021 . Average balances increased due to higher balances held at theFederal Reserve Bank as a result of the significant increase in deposits sinceMarch 31, 2020 and significant loan repayments in 2021. Interest income decreased$200,000 due to a decrease in average interest rates from 0.19% during the year endedDecember 31, 2020 , to 0.13% during the year endedDecember 31, 2021 . Market interest rates earned on balances held at theFederal Reserve Bank were significantly lower in 2020 due to significant reductions in the federal funds rate of interest and remained low in 2021.
Total Interest Expense
Total interest expense decreased$19.8 million , or 48.8%, during the year endedDecember 31, 2021 , when compared with the year endedDecember 31, 2020 , due to a decrease in interest expense on deposits of$19.3 million , or 59.6%, a decrease in interest expense on short-term borrowings and repurchase agreements of$638,000 , or 94.5%, and a decrease in interest expense on subordinated debentures issued to capital trust of$180,000 , or 28.7%. Partially offsetting these decreases, interest expense on subordinated notes increased$334,000 ,
or 4.9%. Interest Expense - Deposits Interest expense on demand deposits decreased$4.5 million due to a decrease in average rates from 0.38% during the year endedDecember 31, 2020 , to 0.17% during the year endedDecember 31, 2021 . Partially offsetting that decrease, interest on demand deposits increased$1.4 million due to an increase in average balances from$1.87 billion in the year endedDecember 31, 2020 , to$2.32 billion in the year endedDecember 31, 2021 . The decrease in average interest rates of interest-bearing demand deposits was primarily a result of decreased market interest rates on these types of accounts. Demand deposit balances increased substantially during the COVID-19 pandemic in 2020 and remained elevated during 2021. In 2020, many of our business and personal customers increased their average account balances with us (some through funds received from government entities) and we also added new accounts throughout the year. Much of these increased balances remained or grew in 2021; therefore, the average balances were higher in 2021 versus 2020. Interest expense on time deposits decreased$10.3 million as a result of a decrease in average rates of interest from 1.55% during the year endedDecember 31, 2020 , to 0.78% during the year endedDecember 31, 2021 . In addition, interest expense on time deposits decreased$6.0 million due to a decrease in average balance of time deposits from$1.64 billion during the year endedDecember 31, 2020 , to$1.16 billion during the year endedDecember 31, 2021 . A large portion of the Company's certificate of deposit portfolio matures within six to twelve months and therefore reprices fairly quickly; this is consistent with the portfolio over the past several years. Older certificates of deposit that renewed or were replaced with new deposits generally resulted in the Company paying a lower rate of interest due to market interest rate decreases during 2020 and 2021. The decrease in average balances of time deposits was a result of decreases in retail customer time deposits obtained through the banking center network, retail customer time deposits obtained through on-line channels and decreases in brokered deposits. Brokered and on-line channel 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.
Interest Expense -
FHLBank term advances were not utilized during the years endedDecember 31, 2021 and 2020. FHLBank overnight borrowings were utilized in the first quarter of 2020. Interest expense on repurchase agreements increased$6,000 due to an increase in average balances from$140.9 million during the year endedDecember 31, 2020 , to$143.8 million during the year endedDecember 31, 2021 . The increase in average balances was due to changes in customers' need for this product, which can fluctuate. There was only a very minor change in the average interest rate on the repurchase agreements between 2021 and 2020. Interest expense on short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities decreased$326,000 due to average rates that decreased from 1.51% in the year endedDecember 31, 2020 , to 0.02% in the year endedDecember 31, 2021 . 90 Table of Contents
In addition to this decrease, interest expense on short-term borrowings and other interest-bearing liabilities decreased$318,000 due to a decrease in average balances from$42.6 million during the year endedDecember 31, 2020 , to$1.5 million during the year endedDecember 31, 2021 . The decrease in average balances and rates was due to changes in the Company's funding needs and the mix of funding, which can fluctuate. During the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , interest expense on subordinated debentures issued to capital trusts decreased$180,000 due to lower average interest rates. The average interest rate was 2.44% in 2020, compared to 1.74% in 2021. 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 2021 and 2020. InAugust 2016 , the Company issued$75 million of 5.25% fixed-to-floating rate subordinated notes dueAugust 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 . InJune 2020 , the Company issued$75.0 million of 5.50% fixed-to-floating rate subordinated notes dueJune 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. InAugust 2021 , the Company completed the redemption of all of its 5.25% subordinated notes dueAugust 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 increased$265,000 due to an increase in average balances from$115.3 million during the year endedDecember 31, 2020 to$119.8 million during the year endedDecember 31, 2021 due to higher average balances resulting from the issuance of new notes inJune 2020 , slightly offset by the redemption of the subordinated notes maturing in 2026 duringAugust 2021 . Interest expense on the subordinated notes increased$69,000 due to average rates that increased from 5.92% in the year endedDecember 31, 2020 , to 5.98% in the year endedDecember 31, 2021 .
Net Interest Income
Net interest income for the year endedDecember 31, 2021 increased$783,000 , or 0.4%, to$177.9 million , compared to$177.1 million for the year endedDecember 31, 2020 . Net interest margin was 3.37% for the year endedDecember 31, 2021 , compared to 3.49% for the year endedDecember 31, 2020 , a decrease of 12 basis points. In both years, the Company's net interest income and margin were positively impacted by the increases in expected cash flows from theFDIC -assisted acquired loan pools and the resulting increase to accretable yield, which was discussed previously in "Interest Income - Loans" and is discussed in Note 3 of the accompanying audited financial statements, which are included in Item 8 of this Report. The positive impact of these changes on the years endedDecember 31, 2021 and 2020 were increases in interest income of$1.6 million and$5.6 million , respectively, and increases in net interest margin of three basis points and 11 basis points, respectively. Excluding the positive impact of the additional yield accretion, net interest margin decreased four basis points during the year endedDecember 31, 2021 . The decrease in net interest margin was due to significantly declining market interest rates, a change in asset mix with increases in lower-yielding investments and cash equivalents and the redemption of subordinated notes in 2021. The Company's overall interest rate spread decreased one basis point, or 0.5%, from 3.23% during the year endedDecember 31, 2020 , to 3.22% during the year endedDecember 31, 2021 . The decrease was due to a 52 basis point decrease in the weighted average yield on interest-earning assets, partially offset by a 51 basis point decrease in the weighted average rate paid on interest-bearing liabilities. In comparing the two years, the yield on loans decreased 30 basis points, the yield on investment securities decreased 27 basis points and the yield on other interest-earning assets decreased six basis points. The rate paid on deposits decreased 55 basis points, the rate paid on subordinated debentures issued to capital trust decreased 70 basis points, the rate paid on short-term borrowings decreased 34 basis points, and the rate paid on subordinated notes increased six basis points.
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 endedDecember 31, 2021 , the Company recorded a negative provision expense of$6.7 million on its portfolio of outstanding loans, compared to a$15.9 million provision expense recorded for the year endedDecember 31, 2020 . The negative provision for credit losses in 2021 reflected decreased outstanding total loans and continued positive trends in asset quality metrics, 91 Table of Contents 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 recoveries of$116,000 for the year endedDecember 31, 2021 compared to net charge offs of$422,000 for the year endedDecember 31, 2020 . The provision for losses on unfunded commitments for the year endedDecember 31, 2021 was$939,000 . 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. In 2020, due to the COVID-19 pandemic and its effects on the overall economy and unemployment, the Company increased its provision for credit losses and increased its allowance for credit losses, even though actual realized net charge-offs were very low. The Bank's allowance for credit losses as a percentage of total loans was 1.49% and 1.32% atDecember 31, 2021 and 2020, respectively. Prior toJanuary 1, 2021 , the ratio excluded theFDIC -assisted acquired loans.
Non-performing Assets
Prior to adoption of the CECL accounting standard onJanuary 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 fiveFDIC -assisted transactions has been better than expectations as of the acquisition dates; as a result,FDIC -assisted acquired assets are included in their particular collateral categories in the tables below and then the totalFDIC -assisted acquired assets are subtracted from the total balances. Non-performing assets, including allFDIC -assisted acquired assets, atDecember 31, 2021 , were$6.0 million , a decrease of$2.1 million from$8.1 million atDecember 31, 2020 . Non-performing assets, including allFDIC -assisted acquired assets, as a percentage of total assets were 0.11% atDecember 31, 2021 , compared to 0.15% atDecember 31, 2020 . Compared toDecember 31, 2020 , non-performing loans decreased$1.5 million to$5.4 million atDecember 31, 2021 , and foreclosed assets decreased$635,000 to$588,000 atDecember 31, 2021 . Non-performing one-to four-family residential loans comprised$2.2 million , or 40.9%, of the total non-performing loans atDecember 31, 2021 . Non-performing commercial real estate loans comprised$2.0 million , or 37.0%, of total non-performing loans atDecember 31, 2021 . Non-performing consumer loans comprised$733,000 , or 13.5%, of the total non-performing loans atDecember 31, 2021 . Non-performing land development loans comprised$468,000 , or 8.6%, of total non-performing loans atDecember 31, 2021 .
Non-performing Loans. Activity in the non-performing loans category during the
year ended
92
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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 - 622 - - - (154) - 468 Commercial construction - - - - - - - - One- to four-family residential 4,465 1,031 (1,236) - (183) (77) (1,784) 2,216 Other residential 190 - (185) - - - (5) - Commercial real estate 849 4,562 (330) - (191) - (2,884) 2,006 Commercial business 114 20 - - - - (134) - Consumer 1,268 330 (232) - (83) (191) (359) 733 Total non-performing loans 6,886 6,565 (1,983) - (457) (422) (5,166) 5,423 Less:FDIC -assisted acquired loans 3,843 144 (1,149) - (373) (94) (635) 1,736 Total non-performing loans net of FDIC-assisted acquired loans$ 3,043 $ 6,421 $ (834) $ - $ (84)$ (328) $ (4,531) $ 3,687 AtDecember 31, 2021 , the non-performing one- to four-family residential category included 40 loans, eight of which were added during 2021. The largest relationship in this category is anFDIC -assisted acquired loan totaling$326,000 , or 14.7% of the total category. The non-performing commercial real estate category included two loans, both of which were added during 2021. The largest relationship in this category, which totaled$1.7 million , or 86.0% of the total category, was transferred from potential problems and is collateralized by a mixed use commercial retail building. The previous largest non-performing commercial real estate relationship ($2.4 million ) was paid off in 2021. The non-performing consumer category included 30 loans, seven of which were added during 2021. The non-performing land development category consisted of one loan added during 2021, which totaled$468,000 and is collateralized by unimproved zoned vacant ground in southernIllinois . Loans that were modified under the guidance provided by the CARES Act are not included as non-performing loans in the table above as they were current under their modified terms.
Other Real Estate Owned and Repossessions. Of the total
Activity in foreclosed assets and repossessions during the year endedDecember 31, 2021 , was as follows: 93 Table of Contents Beginning Ending Balance, Capitalized Balance, January 1 Additions Sales Costs Write-Downs December 31 (In Thousands)
One- to four-family construction $ - $ - $
- $ - $ - $ -
Subdivision construction 263 - (169) - (94) -
Land development 682 - (250) - (117) 315
Commercial construction - - - - - -One- to four-family residential 125 183
(125) - - 183 Other residential - - - - - - Commercial real estate - 192 (192) - - - Commercial business - - - - - - Consumer 153 759 (822) - - 90 Total foreclosed assets and repossessions 1,223 1,134 (1,558) - (211) 588
Less: FDIC-assisted acquired assets 446 375 (206) - (117) 498 Total foreclosed assets and repossessions net ofFDIC -assisted acquired assets$ 777 $ 759 $ (1,352) $ -$ (94) $ 90 AtDecember 31, 2021 , the land development category of foreclosed assets consisted of one property in centralIowa (this was anFDIC -assisted acquired asset), which was added prior to 2021. The one- to four-family residential category of foreclosed assets consisted of two properties (both of which wereFDIC -assisted acquired assets), both of which were added during 2021. The amount of additions and sales in the consumer category are due to the volume of repossessions of automobiles, which generally are subject to a shorter repossession process. Potential Problem Loans. Potential problem loans decreased$3.8 million during the year endedDecember 31, 2021 , from$5.8 million atDecember 31, 2020 to$2.0 million atDecember 31, 2021 . As noted, we experienced an increased level of loan modifications in late March throughJune 2020 ; however, total loan modifications were much lower atDecember 31, 2020 , and decreased further throughDecember 31, 2021 . In accordance with the CARES Act and guidance from the banking regulatory agencies, we made certain short-term modifications to loan terms to help our customers navigate through the pandemic situation. Although loan modifications were made, they did not automatically result in these loans being classified as TDRs, potential problem loans or non-performing loans. 94 Table of Contents Activity in the potential problem loans category during the year endedDecember 31, 2021 , 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 21 - - - - - (6) 15 Land development - - - - - - - - Commercial construction - - - - - - - -
One- to four-family residential 2,157 -
(314) (52) - - (359) 1,432 Other residential - - - - - - - - Commercial real estate 3,080 - (1,070) (1,726) - - (74) 210 Commercial business - - - - - - - - Consumer 588 158 (21) (1) (95) (97) (209) 323 Total potential problem loans 5,846 158 (1,405) (1,779) (95) (97) (648)
1,980
Less:FDIC -assisted acquired loans 1,523 - (314) - - - (205)
1,004
Total potential problem loans net
of
AtDecember 31, 2021 , the commercial real estate category of potential problem loans included one loan, which was added in a prior year. During 2021, within the commercial real estate category of potential problem loans, one at$536,000 was upgraded after six months of consecutive payments and one at$534,000 was paid off and removed from the potential problem loans category; both of these loans had been added to potential problem loans in 2020. One loan totaling$1.7 million was moved to the non-performing category. The one- to four-family residential category of potential problem loans included 25 loans, none of which were added during 2021. The largest relationship in this category totaled$171,000 , or 12.0% of the category. The consumer category of potential problem loans included 27 loans, eight of which were added during 2021.
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. During 2021, loans classified as "Watch" decreased$34.0 million , from$64.8 million atDecember 31, 2020 to$30.7 million atDecember 31, 2021 . This decrease was primarily due to loans being upgraded out of the "watch" category, which primarily included one$14.3 million relationship collateralized by a shopping center, one$10.6 million relationship collateralized by recreational facilities and other real estate and business assets, and one$3.9 million relationship collateralized by a shopping center and other real estate and business assets. Also, one$11.6 million relationship collateralized by a healthcare facility was paid in full during 2021. Partially offsetting those decreases, one$10.3 million relationship collateralized by a healthcare facility was downgraded and added to the "Watch" category. See Note 3 of 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
Point-of-sale and ATM fees: Point-of-sale and ATM fees increased$2.8 million compared to the year endedDecember 31, 2020 . This increase was primarily due to a reduction in customer usage in 2020 as the COVID-19 pandemic caused many businesses to close or limit access for a period of time. In the year endedDecember 31, 2021 , debit card and ATM usage by customers was back to normal levels, and in some cases, increased levels of activity. 95
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Net gains on loan sales: Net gains on loan sales increased$1.4 million compared to the year endedDecember 31, 2020 . The increase was due to an increase in originations of fixed-rate single-family mortgage loans during 2021 compared to 2020. 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 the latter half of 2020 and the first half of 2021. As a result of the significant volume of refinance activity, and as market interest rates moved a bit higher in the latter half of 2021, mortgage refinance volume decreased and loan originations and related gains on sales of these loans returned to levels closer to historic averages. Gain (loss) on derivative interest rate products: In 2021, the Company recognized a gain of$312,000 on the change in fair value of its back-to-back interest rate swaps related to commercial loans. In 2020, the Company recognized a loss of$264,000 on the change in fair value of its back-to-back interest rate swaps related to commercial loans. Generally, as market interest rates increase, this creates a net increase in the fair value of these instruments. As market rates decrease, the opposite tends to occur. This is a non-cash item as there was no required settlement of this amount between the Company and its swap counterparties. Other income: Other income decreased$2.0 million compared to the year endedDecember 31, 2020 . In 2020, the Company recognized approximately$1.5 million of fee income related to newly-originated interest rate swaps in the Company's back-to-back swap program with loan customers and swap counterparties, with fewer of these transactions and related fee income generated in 2021.
Non-Interest Expense
Total non-interest expense increased$4.4 million , or 3.6%, from$123.2 million in the year endedDecember 31, 2020 , to$127.6 million in the year endedDecember 31, 2021 . The Company's efficiency ratio for the year endedDecember 31, 2021 was 59.03%, an increase from 58.07% for 2020. 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 inDecember 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 endedDecember 31, 2021 , the Company's efficiency ratio was negatively impacted by a decrease in interest income on loans and positively impacted by a decrease in interest expense on deposits. In the year endedDecember 31, 2020 , the Company's efficiency ratio was negatively impacted by an increase in salaries and employee benefits expense and positively impacted by an increase in income related to loan sales. The Company's ratio of non-interest expense to average assets was 2.32% for the year endedDecember 31, 2021 compared to 2.31% for the year endedDecember 31, 2020 . Average assets for the year endedDecember 31, 2021 , increased$178.9 million , or 3.4%, from the year endedDecember 31, 2020 , primarily due to increases in investment securities and interest-bearing cash equivalents, partially offset by a decrease in net loans receivable.
The following were key items related to the increase in non-interest expense for
the year ended
Legal, Audit and Other Professional Fees: Legal, audit and other professional fees increased$4.2 million in the year endedDecember 31, 2021 when compared to the year endedDecember 31, 2020 . In 2021, the Company expensed and paid$4.1 million in fees to consultants that were engaged to support the Company in its evaluation of core and ancillary software and information technology systems. The consultant's support included assisting the Company in identifying various software options, helping identify positive and negative attributes of those software options and assisting in negotiating contract terms and pricing. Net Occupancy and Equipment Expense: Net occupancy and Equipment expense increased$1.6 million , to$29.2 million atDecember 31, 2021 when compared to the year endedDecember 31, 2020 . In 2021, the Company expensed a$1.2 million contract termination fee related to the Company's current core software and information technology system. Insurance: Insurance expense increased$656,000 in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This increase was primarily due to an increase inFDIC deposit insurance premiums. In 2020, the Company had a$482,000 credit with theFDIC for a portion of premiums previously paid to the deposit insurance fund. The remaining deposit insurance fund credit was utilized in 2020 in addition to$870,000 in premiums being due for the year endedDecember 31, 2020 , while the premium expense was$1.4 million for the year
endedDecember 31, 2021 . 96 Table of Contents
Expense on other real estate owned and repossessions: Expense on other real estate owned and repossessions decreased$1.4 million in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to sales of most foreclosed assets and a smaller amount of repossessed automobiles in 2021, plus higher valuation write-downs of certain foreclosed assets during 2020. During 2020, sales and valuation write-downs of certain foreclosed assets totaled a net expense of$963,000 , while sales and valuation write-downs in 2021 totaled a net gain of$7,000 .
Salaries and employee benefits: Salaries and employee benefits decreased
Provision for Income Taxes
For the years ended
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. AtDecember 31, 2022 , the Company had commitments of approximately$114.0 million to fund loan originations,$2.01 billion of unused lines of credit and unadvanced loans, and$16.7 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,
2022 2021 2020 2019 2018Closed non-construction loans with unused available lines Secured by real estate (one- to four-family)
$ 199,182
- 23,752 22,273 19,512 11,063
Not secured by real estate - commercial business 104,452 91,786 77,411 83,782 87,480
Closed construction loans with unused available lines Secured by real estate (one-to four-family)
100,669 74,501 42,162 48,213 37,162
Secured by real estate (not one-to four-family) 1,444,450 1,092,029 823,106 798,810 906,006
Loan commitments not closed
Secured by real estate (one-to four-family) 16,819 53,529 85,917 69,295 24,253
Secured by real estate (not one-to four-family) 157,645 146,826 45,860 92,434 104,871
Not secured by real estate - commercial business 50,145
12,920 699 - 405
$ 2,073,362 $ 1,671,025 $ 1,261,908 $ 1,267,877 $ 1,322,188
97
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The following table summarizes the Company's fixed and determinable contractual
obligations by payment date as of December 31, 2022 . 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$ 3,402,123 $ - $ -$ 3,402,123 Time and brokered certificates of deposit 1,070,939 211,013 835 1,282,787 Short-term borrowings 266,426 - - 266,426 Subordinated debentures - - 25,774 25,774 Subordinated notes - - 74,281 74,281 Operating leases 1,199 4,323 3,206 8,728
Dividends declared but not paid 4,893
- - 4,893
$ 4,745,580 $ 215,336 $ 104,096 $ 5,065,012
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 particular
sources of funds based on the comparative costs and availability at the time.
The Company has from time to time chosen not to pay rates on deposits as high as
the rates paid by certain of its competitors and, when believed to be
appropriate, supplements deposits with less expensive alternative sources of
funds. 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, 2022 and 2021, the Company had these available secured lines and
on-balance sheet liquidity:
December 31, 2022 December 31, 2021
Federal Home Loan Bank line $ 1,005.1 million $ 756.5 million
Federal Reserve Bank line 397.0 million 352.4 million
Cash and cash equivalents 168.5 million 717.3 millionUnpledged securities - Available-for-sale 371.8 million 406.8 million Unpledged securities - Held-to-maturity 202.5 million - Statements of Cash Flows. During the years endedDecember 31, 2022 , 2021 and 2020, the Company had positive cash flows from operating activities. The Company experienced positive cash flows from investing activities during the year endedDecember 31, 2021 , and negative cash flows from investing activities during the years endedDecember 31, 2022 and 2020. The Company experienced negative cash flows from financing activities during the year endedDecember 31, 2021 , and positive cash flows from financing activities during the years endedDecember 31, 2022 and 2020. 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$66.6 million ,$85.0 million and$46.0 million during the years endedDecember 31, 2022 , 2021 and 2020, respectively. During the years endedDecember 31, 2022 , 2021 and 2020, investing activities used cash of$801.3 million , provided cash of$190.7 million and used cash of$131.3 million , respectively, primarily due to the net increases and purchases of loans (2022 and 2020) and investment securities (2022, 2021 and 2020), partially offset by cash received for the termination of interest rate derivatives (2020). During 2021, investing activities provided cash as net loan repayments exceeded the purchase of loans and investment securities. 98
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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, proceeds from the issuance of subordinated notes, redemption of subordinated notes, purchases of the Company's common stock and dividend payments to stockholders. Financing activities provided cash flows of$186.0 million and$428.9 million during the years endedDecember 31, 2022 and 2020, respectively, primarily due to increases in customer deposit balances, net increases or decreases in various borrowings and proceeds from the issuance of subordinated notes (2020), 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 endedDecember 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 ofDecember 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. As ofDecember 31, 2021 , total stockholders' equity and common stockholders' equity were each$616.8 million , or 11.3% of total assets, equivalent to a book value of$46.98 per common share. AtDecember 31, 2022 , the Company's tangible common equity to tangible assets ratio was 9.2%, compared to 11.2% atDecember 31, 2021 . Included in stockholders' equity atDecember 31, 2022 and 2021, were unrealized gains (losses) (net of taxes) on the Company's available-for-sale investment securities totaling$(47.2 million) and$9.1 million , respectively. This change from a net unrealized gain to a net unrealized loss during 2022 primarily resulted from increasing market interest rates throughout 2022, which decreased the fair value of investment securities. In addition, included in stockholders' equity atDecember 31, 2022 , were realized gains (net of taxes) on the Company's cash flow hedge (interest rate swap), which was terminated inMarch 2020 , totaling$17.4 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 inOctober 2025 . AtDecember 31, 2022 , the remaining pre-tax amount to be recorded in interest income was$22.5 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 atDecember 31, 2022 , was an unrealized loss (net of taxes) on the Company's three outstanding cash flow hedges (three interest rate swaps) totaling$23.6 million . Increases in market interest rates since the inception of these hedges have caused their fair values to decrease. Banks are required to maintain minimum risk-based capital ratios. These ratios compare capital, as defined by the risk-based regulations, to assets adjusted for their relative risk as defined by the regulations. Under current guidelines, which became effectiveJanuary 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%. OnDecember 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 ofDecember 31, 2022 , the Bank was well capitalized, with capital ratios in excess of those required to qualify as such. OnDecember 31, 2021 , the Bank's common equity Tier 1 capital ratio was 14.1%, its Tier 1 capital ratio was 14.1%, its total capital ratio was 15.4% and its Tier 1 leverage ratio was 11.9%. As a result, as ofDecember 31, 2021 , the Bank was well capitalized, with capital ratios in excess of those required to qualify as such. The FRB has established capital regulations for bank holding companies that generally parallel the capital regulations for banks. OnDecember 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%. To be considered well capitalized, a bank holding company must have a Tier 1 risk-based capital ratio of at least 6.00% and a total risk-based capital ratio of at least 10.00%. As ofDecember 31, 2022 , the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such. OnDecember 31, 2021 , the Company's common equity Tier 1 capital ratio was 12.9%, its Tier 1 capital ratio was 13.4%, its total capital ratio was 16.3% and its Tier 1 leverage ratio was 11.3%. As ofDecember 31, 2021 , the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such. 99 Table of Contents 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 atDecember 31, 2022 and 2021. OnAugust 15, 2021 , the Company completed the redemption, at par, of all$75.0 million aggregate principal amount of its 5.25% fixed to floating rate subordinated notes dueAugust 15, 2026 . The total redemption price was 100% of the aggregate principal balance of the subordinated notes plus accrued and unpaid interest. The Company utilized cash on hand for the redemption payment. These subordinated notes were included as capital in the Company's calculation of its total capital ratio. Dividends. During the year endedDecember 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. During the year endedDecember 31, 2021 , the Company declared common stock cash dividends of$1.40 per share (25.6% of net income per common share) and paid common stock cash dividends of$1.38 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 ofDecember 31, 2022 , was paid to stockholders inJanuary 2023 . Common Stock Repurchases and Issuances. The Company has been in various buy-back programs sinceMay 1990 . During the years endedDecember 31, 2022 and 2021, the Company repurchased 1,043,804 shares of its common stock at an average price of$59.25 per share and 715,397 shares of its common stock at an average price of$54.69 per share, respectively. During the years endedDecember 31, 2022 and 2021, the Company issued 146,601 shares of stock at an average price of$42.69 per share and 91,285 shares of stock at an average price of$40.53 per share, respectively, to cover stock option exercises. InJanuary 2022 , the Company's Board of Directors authorized management to purchase up to one million shares of the Company's outstanding common stock, under a program of open market purchases or privately negotiated transactions. AtDecember 31, 2022 , there were approximately 177,000 shares which could still be purchased under this authorization. InDecember 2022 , the Company's Board of Directors authorized the purchase of up to an additional one million shares of the Company's outstanding common stock, under a program of open market purchases or privately negotiated transactions, resulting in a total of approximately 1.2 million shares currently available in our stock repurchase authorization. Management has historically utilized stock buy-back programs from time to time as long as management believed that repurchasing the stock would contribute to the overall growth of shareholder value. The number of shares of stock 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, however, are the number of shares available in the market from sellers at any given time, the price of the stock within the market as determined by the market 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 GAAP. These non-GAAP financial measures includes the
efficiency ratio excluding consulting expense and related contract termination
liability and 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. 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
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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,
2022 2021 2020 2019 2018
(Dollars In Thousands)
Common equity at period end $ 533,087 $ 616,752 $ 629,741 $ 603,066 $ 531,977
Less: Intangible assets at period
end 10,813 6,081 6,944 8,098 9,288
Tangible common equity at period
end (a) $ 522,274 $ 610,671 $
622,797
Total assets at period end$ 5,680,702 $ 5,449,944 $ 5,526,420 $ 5,015,072 $ 4,676,200 Less: Intangible assets at period end 10,813 6,081 6,944 8,098 9,288
Tangible assets at period end (b)
5,519,476
Tangible common equity to tangible assets (a) / (b) 9.21 % 11.22 % 11.28 % 11.88 % 11.20 %
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