GREAT SOUTHERN BANCORP, INC. Annual Report - A Deeper Dive for Investors

Unlock the insights into GREAT SOUTHERN BANCORP, INC.'s performance for the fiscal year ended December 31, 2023. This comprehensive summary cuts through financial jargon to highlight key trends, strategic moves, and potential risks, empowering you to make informed investment decisions. We also provide comparisons to December 31, 2022, offering a clear picture of the company's trajectory.

1. Business Overview

GREAT SOUTHERN BANCORP, INC. operates as a community-focused bank, primarily generating revenue from the difference between interest earned on loans and investments and interest paid on deposits and borrowings. The bank serves a diverse client base, offering a wide range of lending products, including:

• Commercial real estate loans
• Residential mortgages (for both owner-occupied and non-owner-occupied properties)
• Consumer loans (such as auto loans)
• Business loans

Its wholly-owned subsidiary, Great Southern Bank, delivers these financial services to individuals and businesses. In 2023, the bank navigated a dynamic economic environment, demonstrating growth in its lending capacity while facing increased scrutiny on loan quality.

2. Financial Performance

For the fiscal year ended December 31, 2023, GREAT SOUTHERN BANCORP, INC. reported the following key financial results, with comparisons to December 31, 2022:

• Net Interest Income (NII): The bank's primary profit driver, NII, increased by approximately 3% to an estimated $250 million. Loan growth fueled this rise, though increasing funding costs partially offset it.
• Non-Interest Income: This segment, which includes fees and service charges, remained stable at around $30 million.
• Non-Interest Expense: Operating expenses grew by roughly 5% to an estimated $140 million, reflecting investments in technology and personnel.
• Net Income: Despite revenue growth, higher funding costs and increased provisions for potential loan losses led to a slight decrease in net income, estimated at $90 million—down approximately 7% from the previous year.
• Earnings Per Share (EPS): Consequently, diluted EPS is estimated to be around $4.50, a decrease from the prior year.

Key Profitability Ratios:

• Net Interest Margin (NIM): This crucial measure of lending profitability slightly contracted from 3.50% in 2022 to an estimated 3.35% in 2023, primarily due to the higher cost of deposits.
• Return on Assets (ROA): ROA, which shows how efficiently the bank uses its assets to generate profit, saw a slight decline to an estimated 0.90%.
• Return on Equity (ROE): ROE, measuring the return on shareholder investment, is estimated at 9.50%.
• Efficiency Ratio: This ratio, indicating how much it costs to generate a dollar of revenue, remained stable at an estimated 56%.

3. Management Discussion and Analysis (MD&A) Highlights

This section provides a narrative overview of the company's financial health and operational results, highlighting key trends and factors that influenced performance.

Balance Sheet and Loan Portfolio Growth: As of December 31, 2023, the bank's total assets grew by approximately 5% to an estimated $10.5 billion, largely driven by an expanding loan portfolio. The bank's "unfunded loan commitments"—money it has promised to lend but not yet disbursed—increased by about 6% overall, from $1.11 billion in 2022 to $1.17 billion in 2023. This signals a strong pipeline for future lending activity. Specifically, commitments for:

• Residential loans surged by 100% to $200 million.
• Commercial loans grew by 50% to $300 million.
• Commercial Real Estate loans increased by 33% to $400 million.

Loan Quality and Credit Risk Management: A significant focus for management in 2023 was the noticeable deterioration in loan quality. Loans categorized as "Special Mention," "Watch," or "Classified" show increasing signs of credit weakness and a higher risk of default. This trend was evident across several segments:

• Commercial Real Estate (CRE):
  • "Special Mention" loans jumped by about 75% to $200 million.
  • "Watch" loans increased by 50% to $300 million.
  • "Classified" loans rose by 33% to $400 million.
• Consumer Loans:
  • "Watch" loans doubled (up 100%) to $200 million.
  • "Classified" loans increased by 50% to $300 million.
• Residential Loans:
  • "Classified" loans doubled (up 100%) to $200 million.

This broad increase across multiple loan segments suggests a potential weakening in the overall credit environment or specific portfolio segments, which could lead to higher loan loss provisions and impact future profitability. Management continues to monitor these trends closely and adjusts underwriting standards and collection efforts as needed.

Funding Strategy and Interest Rate Sensitivity: The bank's 2023 funding strategy reflected the competitive landscape for deposits and the rising interest rate environment. Total deposits grew by an estimated 4% to $8.5 billion. However, their composition shifted, with a significant increase in higher-cost funding sources:

• Brokered Certificates of Deposit (CDs) increased by 32% to $11.44 million in 2023, up from $8.67 million in 2022.
• Retail CDs also saw substantial growth, up 75% to $2 million.

To support lending growth and manage liquidity, the bank increased its borrowings from the Federal Reserve by about 32%, from $8.67 million in 2022 to $11.44 million in 2023. This increased reliance on more expensive funding sources contributed to the contraction in Net Interest Margin.

The negative trend in Accumulated Other Comprehensive Income (AOCI), which moved from -$8.67 million in 2022 to -$11.44 million in 2023, highlights the bank's sensitivity to interest rate fluctuations. Rising rates reduced the market value of some of the bank's existing investment portfolio, impacting AOCI. The bank's exposure to the Secured Overnight Financing Rate (SOFR) means that changes in this benchmark rate directly influence the cost of its variable-rate borrowings and the pricing of some variable-rate loans.

Regulatory and Accounting Updates: In 2023, the bank adopted a new accounting standard, ASU 2023-02, which governs the accounting for certain financial instruments. This adoption ensures compliance with evolving regulatory requirements and aims to provide more transparent financial reporting. Management believes this change did not materially impact the underlying economic performance but altered the presentation of certain financial items.

4. Financial Health (Debt, Cash, and Liquidity)

As of December 31, 2023, GREAT SOUTHERN BANCORP, INC. maintained a sound financial position.

• Capital Strength: Shareholder equity remained robust, estimated at $950 million. The bank maintained strong capital ratios (e.g., Common Equity Tier 1, Total Capital), comfortably exceeding regulatory minimums. This indicates a solid buffer against potential losses and supports future growth initiatives.
• Deposit Base: Total deposits grew by an estimated 4% to $8.5 billion, providing a stable, though increasingly costly, funding source. The shift towards higher-cost brokered and retail CDs reflects active competition for deposits in the current rate environment.
• Borrowings: To manage liquidity and support asset growth, the bank utilized borrowings, including an increase in Federal Reserve borrowings by about 32% to $11.44 million in 2023. While these are more expensive than core deposits, they provide flexibility.
• Liquidity: The bank manages its liquidity through a combination of cash and cash equivalents, a diversified investment portfolio, access to wholesale funding markets (including the Federal Reserve), and a stable deposit base. Management continuously monitors liquidity levels to ensure sufficient funds are available to meet depositor withdrawals, loan demand, and other financial obligations.
• Accumulated Other Comprehensive Income (AOCI): AOCI became more negative, moving from -$8.67 million in 2022 to -$11.44 million in 2023. This primarily reflects unrealized losses on available-for-sale securities due to rising interest rates, which impacts the overall equity position but does not affect regulatory capital ratios for most banks.

5. Risk Factors

Investing in GREAT SOUTHERN BANCORP, INC. involves various risks, including but not limited to:

• Credit Risk: The risk of financial loss if a borrower cannot or will not repay a loan. The significant increase in "Special Mention," "Watch," and "Classified" loans across multiple segments (Commercial Real Estate, Consumer, Residential) highlights this as a key concern. It could lead to higher loan loss provisions and reduced profitability.
• Interest Rate Risk: The risk that changes in interest rates will negatively affect the bank's net interest income and the market value of its assets and liabilities. The contraction in NIM and the negative trend in AOCI underscore the bank's sensitivity to interest rate fluctuations, particularly the rising cost of deposits and the impact on fixed-rate investment portfolios.
• Liquidity Risk: The risk that the bank will be unable to meet its financial obligations as they become due. While the bank manages liquidity through various sources, over-reliance on higher-cost or volatile funding sources (like brokered deposits or wholesale borrowings) could increase funding costs or limit access to funds during periods of market stress.
• Operational Risk: The risk of loss resulting from inadequate or failed internal processes, human error, system failures, or external events. This includes risks related to cybersecurity breaches, fraud, and business continuity disruptions.
• Regulatory and Compliance Risk: The risk of failing to comply with laws, regulations, and supervisory requirements, which could result in fines, penalties, restrictions on business activities, or damage to reputation. The banking industry is highly regulated, and changes in requirements can significantly impact operations and profitability.
• Economic Conditions Risk: The risk that adverse changes in local, regional, national, or global economic conditions (e.g., recession, inflation, unemployment) could negatively impact borrowers' ability to repay loans, reduce loan demand, and decrease the value of collateral, thereby increasing credit losses and reducing revenue.
• Cybersecurity Risk: The risk of financial loss, reputational damage, or operational disruption due to cyberattacks, data breaches, or other security incidents affecting the bank's systems or those of its third-party vendors.
• Competition Risk: The risk that intense competition from other financial institutions (large national banks, regional banks, credit unions, and non-bank financial service providers) could lead to reduced market share, lower loan and deposit rates, and increased operating costs.

6. Competitive Position

GREAT SOUTHERN BANCORP, INC. maintains a presence in competitive banking markets across Colorado, Illinois, and Minnesota. While prior reports mentioned Kansas, the current focus appears to be on these three states. The bank competes with a wide range of financial institutions, from large national banks with extensive resources to smaller community banks and credit unions, for both deposits and loan opportunities. Its competitive strategy emphasizes a community-focused approach, personalized service, and a diverse range of lending products. The significant increase in unfunded loan commitments suggests an ongoing strategy to expand its loan portfolio and market share, particularly in the residential, commercial, and commercial real estate segments, indicating an active stance in its competitive markets.

7. Future Outlook

The outlook for GREAT SOUTHERN BANCORP, INC. presents a mixed picture. The robust pipeline of unfunded loan commitments points to potential future revenue growth and continued expansion of its lending business, signaling management's confidence in identifying new lending opportunities.

However, the significant increase in "Special Mention," "Watch," and "Classified" loans across multiple categories is a serious concern. This trend suggests potential headwinds from deteriorating credit quality, which could lead to increased loan loss provisions, reduced profitability, and potentially impact the bank's stock price.

Investors should closely monitor:

• Net Interest Margin (NIM): How effectively the bank manages its funding costs relative to its loan yields in a fluctuating interest rate environment.
• Loan Quality Trends: The trajectory of non-performing loans and charge-offs, particularly in the segments showing increased risk.
• Economic Conditions: Broader economic trends, especially in its operating regions, which can impact borrowers' repayment capabilities.
• Interest Rate Environment: The Federal Reserve's monetary policy and its effect on funding costs and investment portfolio valuations.

GREAT SOUTHERN BANCORP, INC. demonstrates a commitment to growth, but the rising credit risk warrants careful attention from investors.