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 byBKD, 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,
2021 2020 2019 2018 2017
(Dollars In Thousands)
Summary Statement of Financial
Condition Information:
Assets $ 5,449,944 $ 5,526,420 $ 5,015,072 $ 4,676,200 $ 4,414,521
Loans receivable, net 4,016,235 4,314,584 4,163,224 3,990,651 3,734,505
Allowance for credit losses on
loans 60,754 55,743 40,294 38,409 36,492
Available-for-sale securities 501,032 414,933 374,175 243,968 179,179
Other real estate and
repossessions, net 2,087 1,877 5,525 8,440 22,002
Deposits 4,552,101 4,516,903 3,960,106 3,725,007 3,597,144
Total borrowings and other
interest- bearing liabilities 238,713 339,863 412,374 397,594 324,097
Stockholders' equity (retained
earnings substantially
restricted) 616,752 629,741 603,066 531,977 471,662
Common stockholders' equity 616,752 629,741 603,066 531,977 471,662
Average loans receivable 4,274,176 4,399,259 4,155,780 3,910,819 3,814,560
Average total assets 5,502,356 5,323,426 4,855,007 4,503,326 4,460,196
Average deposits 4,539,740 4,330,271 3,889,910 3,556,240 3,598,579
Average stockholders' equity 627,516 622,437 571,637 498,508 455,704
Number of deposit accounts 229,942 229,470 228,247 227,240 230,456
Number of full-service offices 93 94 97
99 104
63
Table of Contents
For the Year Ended December 31,
2021 2020 2019 2018 2017
(In Thousands)
Summary Statement of Income Information:
Interest income:
Loans $ 186,269 $ 204,964 $ 223,047 $ 198,226 $ 176,654
Investment securities and other 12,404 12,739 11,947 7,723 6,407
198,673 217,703 234,994 205,949 183,061
Interest expense:
Deposits 13,102 32,431 45,570 27,957 20,595
Federal Home Loan Bank advances - - - 3,985 1,516
Short-term borrowings and repurchase
agreements 37 675 3,635 765 747
Subordinated debentures issued to
capital trust 448 628 1,019 953 949
Subordinated notes 7,165 6,831 4,378 4,097 4,098
20,752 40,565 54,602 37,757 27,905
Net interest income 177,921 177,138 180,392 168,192 155,156
Provision (credit) for credit losses on
loans (6,700) 15,871 6,150 7,150 9,100
Provision for unfunded commitments 939 - - - -
Net interest income after provision
(credit) for credit losses and provision
for unfunded commitments 183,682 161,267 174,242 161,042 146,056
Noninterest income:
Commissions 1,263 892 889 1,137 1,041
Overdraft and insufficient funds fees 6,686 6,481 8,249 8,688 8,946
Point-of-sale and ATM fee income and
service charges 15,029 12,203 12,649 13,007 12,682
Net gain on loan sales 9,463 8,089 2,607 1,788 3,150
Net realized gain (loss) on sales of
available-for-sale securities - 78 (62) 2 -
Late charges and fees on loans 1,434 1,419 1,432 1,622 2,231
Gain (loss) on derivative interest rate
products 312 (264) (104) 25 28
Gain recognized on sale of business
units - - - 7,414 -
Gain on termination of loss sharing
agreements - - - - 7,705
Amortization of income/expense related
to business acquisition - - - - (486)
Other income 4,130 6,152 5,297 2,535 3,230
38,317 35,050 30,957 36,218 38,527
Noninterest expense:
Salaries and employee benefits 70,290 70,810 63,224 60,215 60,034
Net occupancy and equipment expense 29,163 27,582 26,217 25,628 24,613
Postage 3,164 3,069 3,198 3,348 3,461
Insurance 3,061 2,405 2,015 2,674 2,959
Advertising 3,072 2,631 2,808 2,460 2,311
Office supplies and printing 848 1,016 1,077 1,047 1,446
Telephone 3,458 3,794 3,580 3,272 3,188
Legal, audit and other professional fees 6,555 2,378 2,624 3,423 2,862
Expense on other real estate and
repossessions 627 2,023 2,184 4,919 3,929
Acquired deposit intangible asset
amortization 863 1,154 1,190 1,562 1,650
Other operating expenses 6,534 6,363 7,021 6,762 7,808
127,635 123,225 115,138 115,310 114,261
Income before income taxes 94,364 73,092 90,061 81,950 70,322
Provision for income taxes 19,737 13,779 16,449 14,841 18,758
Net income and net income available to
common shareholders $ 74,627 $ 59,313 $ 73,612 $ 67,109 $ 51,564
64
Table of Contents
At or For the Year Ended December 31,
2021 2020 2019 2018 2017
(Number of Shares In Thousands)
Per Common Share Data:
Basic earnings per common share $ 5.50 $ 4.22 $ 5.18 $ 4.75 $ 3.67
Diluted earnings per common share 5.46 4.21 5.14 4.71 3.64
Cash dividends declared 1.40 2.36 2.07 1.20 0.94
Book value per common share 46.98 45.79 42.29 37.59 33.48
Average shares outstanding 13,558 14,043 14,201 14,132 14,032 Year-end actual shares outstanding 13,128 13,753 14,261 14,151 14,088 Average fully diluted shares outstanding 13,674 14,104
14,330 14,260 14,180
Earnings Performance Ratios: Return on average assets(1) 1.36 % 1.11 % 1.52 % 1.49 % 1.16 % Return on average stockholders' equity(2) 11.89 9.53 12.88 13.46 11.32 Non-interest income to average total assets 0.70 0.66 0.64 0.80 0.86 Non-interest expense to average total assets 2.32 2.31 2.37 2.56 2.56 Average interest rate spread(3) 3.22 3.23
3.62 3.75 3.59 Year-end interest rate spread 3.20 3.08 3.28 3.60 3.67 Net interest margin(4) 3.37 3.49 3.95 3.99 3.74 Efficiency ratio(5) 59.03 58.07 54.48 56.41 58.99 Net overhead ratio(6) 1.62 1.66 1.73 1.76 1.70 Common dividend pay-out ratio(7) 25.64 56.06
40.27 25.48 25.82
Asset Quality Ratios (8): Allowance for credit losses/year-end loans 1.49 % 1.32 % 1.00 % 0.98 % 1.01 % Non-performing assets/year-end loans and foreclosed assets 0.15 0.09 0.19 0.29 0.73 Allowance for credit losses/non-performing loans 1,120.31 1,831.86 891.66 609.67 324.23 Net charge-offs/average loans 0.00 0.01 0.10 0.13 0.26 Gross non-performing assets/year end assets 0.11 0.07 0.16 0.25 0.63 Non-performing loans/year-end loans 0.13 0.07
0.11 0.16 0.30 Balance Sheet Ratios: Loans to deposits 88.23 % 95.52 % 105.13 % 107.13 % 103.82 % Average interest-earning assets as a percentage of average interest-bearing liabilities 139.94 132.49
127.50 126.47 123.74
Capital Ratios: Average common stockholders' equity to average assets 11.4 % 11.7 % 11.8 % 11.1 % 10.2 % Year-end tangible common stockholders' equity to tangible assets(9) 11.2 11.3 11.9 11.2 10.5Great Southern Bancorp, Inc. : Tier 1 capital ratio 13.4 12.7 12.5 11.9 11.4 Total capital ratio 16.3 17.2 15.0 14.4 14.1 Tier 1 leverage ratio 11.3 10.9 11.8 11.7 10.9 Common equity Tier 1 ratio 12.9 12.2 12.0 11.4 10.9Great Southern Bank : Tier 1 capital ratio 14.1 13.7 13.1 12.4 12.3 Total capital ratio 15.4 14.9 14.0 13.3 13.2 Tier 1 leverage ratio 11.9 11.8 12.3 12.2 11.7 Common equity Tier 1 ratio 14.1 13.7 13.1 12.4 12.3
(1) Net income divided by average total assets.
(2) Net income divided by average stockholders' equity.
(3) Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(4) Net interest income divided by average interest-earning assets.
(5) Non-interest expense divided by the sum of net interest income plus
non-interest income.
(6) Non-interest expense less non-interest income divided by average total
assets.
(7) Cash dividends per common share divided by earnings per common share.
(8) Prior to
loans.
(9) Non-GAAP Financial Measure. For additional information, including a
reconciliation to GAAP, see "- Non-GAAP Financial Measures."
65
Table of Contents
Forward-looking Statements
When used in this Annual Report and in other documents filed or furnished by
Great Southern Bancorp, Inc. (the "Company") with the Securities and Exchange
Commission (the "SEC"), in the Company's press releases or other public or
stockholder communications, and in oral statements made with the approval of an
authorized executive officer, the words or phrases "may," "might," "could,"
"should," "will likely result," "are expected to," "will continue," "is
anticipated," "believe," "estimate," "project," "intends" or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
also include, but are not limited to, statements regarding plans, objectives,
expectations or consequences of announced transactions, known trends and
statements about future performance, operations, products and services of the
Company. The Company's ability to predict results or the actual effects of
future plans or strategies is inherently uncertain, and the Company's actual
results could differ materially from those contained in the forward-looking
statements. The novel coronavirus disease, or COVID-19, pandemic has adversely
affected the Company, its customers, counterparties, employees, and third-party
service providers, and the ultimate extent of the impacts on the Company's
business, financial position, results of operations, liquidity, and prospects is
uncertain. While general business and economic conditions have improved,
increases in unemployment rates, or turbulence in domestic or global financial
markets could adversely affect the Company's revenues and the values of its
assets and liabilities, reduce the availability of funding, lead to a tightening
of credit, and further increase stock price volatility. In addition, changes to
statutes, regulations, or regulatory policies or practices as a result of, or in
response to, COVID-19, could affect the Company in substantial and unpredictable
ways.
Other factors that could cause or contribute to such differences include, but
are not limited to: (i) expected revenues, cost savings, earnings accretion,
synergies and other benefits from the Company's merger and acquisition
activities might not be realized within the anticipated time frames or at all,
and costs or difficulties relating to integration matters, including but not
limited to customer and employee retention, might be greater than expected; (ii)
changes in economic conditions, either nationally or in the Company's market
areas; (iii) fluctuations in interest rates; (iv) the risks of lending and
investing activities, including changes in the level and direction of loan
delinquencies and write-offs and changes in estimates of the adequacy of the
allowance for credit losses; (v) the possibility of realized or unrealized
losses on securities held in the Company's investment portfolio; (vi) the
Company's ability to access cost-effective funding; (vii) fluctuations in real
estate values and both residential and commercial real estate market conditions;
(viii) the ability to adapt successfully to technological changes to meet
customers' needs and developments in the marketplace; (ix) the possibility that
security measures implemented might not be sufficient to mitigate the risk of a
cyber-attack or cyber theft, and that such security measures might not protect
against systems failures or interruptions; (x) legislative or regulatory changes
that adversely affect the Company's business; (xi) changes in accounting
policies and practices or accounting standards; (xiii) results of examinations
of the Company and Great Southern Bank by their regulators, including the
possibility that the regulators may, among other things, require the Company to
limit its business activities, change its business mix, increase its allowance
for credit losses, write-down assets or increase its capital levels, or affect
its ability to borrow funds or maintain or increase deposits, which could
adversely affect its liquidity and earnings; (xiv) costs and effects of
litigation, including settlements and judgments; (xv) competition; (xvi)
uncertainty regarding the future of LIBOR and potential replacement indexes; and
(xvii) natural disasters, war, terrorist activities or civil unrest and their
effects on economic and business environments in which the Company operates. The
Company wishes to advise readers that the factors listed above and other risks
described from time to time in documents filed or furnished by the Company with
the SEC could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake-and specifically declines any obligation- to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
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. 66
Table of Contents
Allowance for Credit Losses and Valuation of Foreclosed Assets
The Company believes that the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for credit losses is calculated with the objective of maintaining an allowance level believed by management to be sufficient to absorb estimated credit losses. The allowance for credit losses is measured using an average historical loss model which incorporates relevant information about past events (including historical credit loss experience on loans with similar risk characteristics), current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral and repayment types and expected credit loss patterns. Loans that do not share similar risk characteristics, primarily classified and/or TDR loans with a balance greater than or equal to$100,000 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 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
67
Table of Contents
below each of its operating segments for which there is discrete financial information that is regularly reviewed. As ofDecember 31, 2021 , 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, 2021 , 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. AtDecember 31, 2021 , the amortizable intangible assets consisted of core deposit intangibles of$685,000 which is related to the branch transaction inJanuary 2016 . 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, 2021 . While management believes no impairment existed atDecember 31, 2021 , 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 impact the Company's ability to meet regulatory capital requirements and maintain sufficient liquidity. Following the housing and mortgage crisis and correction beginning in mid-2007,the United States entered an economic downturn. Unemployment rose from 4.7% inNovember 2007 to peak at 10.0% inOctober 2009 . Economic conditions improved in the following 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 impact of the COVID 19 pandemic began to take its toll inMarch 2020 . WhileU.S. economic trends have rebounded, new COVID variants have emerged and the severity and extent of the coronavirus on the global, national and regional economies is still uncertain. Any long-term impact on the performance of the financial sector remains indeterminable. The economy plunged into recession in the first quarter of 2020, as efforts to contain the spread of the coronavirus forced all but essential business activity, or any work that could not be done from home, to stop, shuttering factories, restaurants, entertainment, sports events, retail shops, personal services, and more. More than 22 million jobs were lost in March andApril 2020 as businesses closed their doors or reduced their operations, sending employees home on furlough or layoffs. With uncertain incomes and limited buying opportunities, consumer spending plummeted. As a result, gross domestic product (GDP), the broadest measure of the nation's economic output, plunged. Since then, significant improvements in consumer spending, GDP, and employment have occurred, greatly supported by the actions described below. The CARES Act, a fiscal relief bill passed byCongress inMarch 2020 , injected approximately$3 trillion into the economy through direct payments to individuals and grants to small businesses that would keep employees on their payrolls, fueling a historic bounce-back in economic activity. 68
Table of Contents
To help our customers navigate through the pandemic situation, we offered and supplied Paycheck Protection Program (PPP) loans and short-term modifications to loan terms. PPP loans and modifications were made in accordance with guidance from banking regulatory authorities. These modifications did not result in loans being classified as troubled debt restructurings, potential problem loans or non-performing loans. More severely impacted industries in our loan portfolio included retail, hotel and restaurants. AtDecember 31, 2021 , nearly all modified loans have returned to their original terms. TheFederal Reserve acted decisively, employing a wide arsenal of tools including slashing its benchmark interest rate to near zero and ensuring credit availability to businesses, households, and municipal governments.The Fed's efforts largely insulated the financial system from the problems in the economy, a significant difference from the financial crisis of 2007-2008. Purchases ofTreasury and agency mortgage-backed securities totaling$120 billion each month by theFederal Reserve began shortly after the pandemic began. InNovember 2021 , theFederal Reserve made the decision to taper its quantitative easing (QE) and is expected to steadily reduce its bond purchases in coming months, winding down its QE byMarch 2022 . Additionally, Federal fund rates, which have been at zero lower bound since the pandemic began, are expected to increase in 2022. Financial markets are anticipating an aggressive increase in interest rates in 2022, with three to six hikes anticipated. Several factors prompting theFederal Reserve to possibly begin normalizing policy include: the strengthening economy, the recent surge in inflation, higher inflation expectations, upward trajectory of wages, reduced pandemic concerns and the strong housing market. However, the military hostilities inUkraine have now created uncertainty regarding the world economy and the path of market interest rates, including the aggressiveness ofFederal Reserve interest rate increases. The "American Rescue Plan," an economic relief fiscal measure of approximately$1.9 trillion with an emphasis on vaccination and individual and small business relief, was passed early in 2021. The "Build Back Better" recovery package continues to be pursued with an emphasis on infrastructure, research and development, education and green energy transition.
Employment
The national unemployment rate dropped from 4.2% inNovember 2021 to 3.9% inDecember 2021 or with 6.3 million unemployed individuals, compared toFebruary 2020 , prior to the COVID-19 pandemic, at which time the unemployment rate was 3.5% and the unemployed persons numbered 5.7 million. TheU.S. economy added 199,000 jobs inDecember 2021 down from 249,000 in November and was the smallest monthly gain during a year that nonetheless produced record job growth. Hiring slowed significantly at the end of 2021, indicating that employers are struggling to fill positions even asthe United States remains millions of jobs short of pre-pandemic levels. Wages have continued to surge, rising 0.6% inDecember 2021 and 4.7% for the 2021 year, reflecting intense competition among employers for workers. Across industries, the economic recovery remains uneven. Employment in the financial activities and transportation and warehousing sectors are now above pre-pandemic levels; however, employment in the leisure and hospitality industry, one of the largest major sectors in the country, continues to be more than 7% below where it was inFebruary 2020 . Most jobs in the leisure and hospitality industry cannot be done remotely, and many businesses closed or saw a sharp reduction in business at the onset of the health and economic crises. As ofDecember 2021 , the labor force participation rate (the share of working-age Americans employed or actively looking for a job) was at 61.9% and has remained within a narrow range of 61.4% to 61.9% sinceSeptember 2020 . The unemployment rate for the Midwest, where the Company conducts most of its business, has decreased from 5.7% inDecember 2020 to 4.0% inDecember 2021 . Unemployment rates forDecember 2021 in the states where the Company has branch or loan production offices wereArkansas at 3.1%,Colorado at 4.8%,Georgia at 2.6%,Illinois at 5.3%,Iowa at 3.5%,Kansas at 3.3%,Minnesota at 3.1%,Missouri at 3.3%,Nebraska at 1.7%,Oklahoma at 2.3%, andTexas at 5.0%. Of the metropolitan areas in which the Company does business, most are below the national unemployment rate of 3.9% forDecember 2021 .Chicago has a higher unemployment rate of 4.3%, along withDenver at 4.2% at the end ofDecember 2021 .
Sales of new single-family homes in
69
Table of Contents
The median sales price of new houses sold inDecember 2021 was$377,700 , up from$344,400 a year earlier, and the average sales price of$457,300 was up from$405,100 a year ago inDecember 2020 . The inventory of new homes for sale, at an estimated 403,000 at the end ofDecember 2021 , would support a 6 months' supply at the current sales rate, up from 3.5 months at the end ofDecember 2020 . The 2021 annual existing-home sales hit its highest level since 2006 with sales reaching a 6.18 million seasonally adjusted annual rate. December existing-home sales declined 4.6% fromNovember 2021 , after three consecutive months of increases. There were a record low of 910,000 previously owned homes on the market inDecember 2021 , supporting 1.8 months' supply at the current sales rate. The strongest home price appreciation recorded occurred in 2021, with the median existing-home sales price reaching$346,900 , a gain of$50,200 compared to 2020. TheDecember 2021 existing home sales price marks the 118th straight month of year-over-year increases, the longest running streak on record. Prices increased in every region of theU.S. , with the Midwest showing an increase of 10% with prices increasing from$233,500 inDecember 2020 to$256,900 inDecember 2021 . Homes are being quickly snapped up as demand remains elevated. Currently it takes approximately 19 days for a home to go from listing to contract compared to 21 days a year ago. Underbuilding over the last 15 years and a shrinking inventory of existing homes for sale has led to a significant housing shortage. Existing home sales are expected to slow slightly in the coming months due to higher mortgage rates; however, recent employment gains and stricter underwriting standards should prevent home sales from crashing.
First-time buyers accounted for 30% of sales in
According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage was 3.1% inDecember 2021 , up slightly from 2.90% inSeptember 2021 . The average commitment rate for all of 2021 was 2.96%, down from 3.10% for 2020.
CoStar indicates demand for apartments totaled roughly 700,000 units for 2021, nearly matching full-year totals for both 2020 and 2019 with the national apartment vacancy rate to a two-decade low 4.7%. Both suburban and downtown areas are recording strong gains across a wide range of diverse markets. The use of concessions has come back down to normal levels, although many downtown properties continue to utilize them to attract tenants. With demand and rent growth indicators surging, investors have renewed confidence in the sector, and sales volume has returned to more normal levels. Values are back on the rise with investors gravitating towardSun Belt markets and increased sales volume observed in metros likeDallas-Fort Worth ,Atlanta , andPhoenix . Our market areas reflected the following apartment vacancy levels as ofDecember 31, 2021 :Springfield, Missouri at 2.8%,St. Louis at 6.4%,Kansas City at 6.3%,Minneapolis at 6.0%,Tulsa, Oklahoma at 6.6%,Dallas-Fort Worth at 5.7%,Chicago at 5.6%,Atlanta at 5.8%, andDenver at 6.5%. Two of our market areas;Dallas-Fort Worth andAtlanta were in the top ten metropolitan areas for current construction and 2021 deliveries to market. The national office market took a first step toward recovery in 2021, but uncertainty still looms over the sector. Even before the disruption caused by the COVID 19 pandemic, the trend of slowing growth in the office industry was expected to continue in 2020 and linger throughout 2021. Office-using employment has bounced back quicker than the average for all employment sectors, and more office jobs could lead to stronger office leasing. Leasing volume improved in the second half of 2021, and net absorption was positive in the third and fourth quarters of 2021. With more sublet options available, office-users have increasingly turned to sublet leases for their space needs. The amount of sublet space on the market has leveled off over the past few quarters, but still remains at a record high of 11% of total office space available, well above the pre-pandemic average of about 7%. Remote and hybrid work structures instituted early on in the pandemic are expected to remain in place, at least to an extent, and it is likely that office-using companies will continue to reassess their physical footprints as their leases roll over. On a positive note, many office-using firms have committed to large physical space expansions, despite delaying return-to-office mandates. But even in an upside scenario, it will likely take years for the office market to work through all of the sublet and backfill space that's come on the market over the past few quarters, and uncertainty regarding the prevalence of remote and flex work arrangements will influence the office sector in the near term. 70
Table of Contents
As of the end ofDecember 2021 , national office vacancy rates remain about the same at 12.2% quarter-over-quarter while our market areas reflected the following vacancy levels:Springfield, Missouri at 3.3%,St. Louis at 8.7%,Kansas City at 9.4%,Minneapolis at 9.9%,Tulsa, Oklahoma at 12.0%,Dallas-Fort Worth at 17.7%,Chicago at 15.4%,Atlanta at 14% andDenver at 14.4%. The retail sector enjoyed a pronounced rebound in 2021. Fiscal support provided by theU.S. government throughout the pandemic provided consumers with trillions of extra dollars, while a tightening labor market and historical level of job openings have supported relatively robust wage growth, especially at the lower end of the income ladder. With additional funds at their disposal, American consumers pushed brick and mortar retail sales to record levels in 2021. Underpinning the strong retail environment has been a return to stores by many consumers as vaccination rates have grown and operations have normalized. Shopper foot traffic has returned to pre-pandemic levels at many open-air and lifestyle centers, while a majority of national retailers are reporting higher same-store sales relative to pre-pandemic levels. In addition, the number of retailers filing for bankruptcies has declined to a five-year low, while openings outpaced closures in 2021 for the first time since 2014. Leasing activity accelerated back to pre-pandemic levels in 2021. While activity continues to be dominated by discounters, grocers, and apparel retailers, numerous fitness tenants increased leasing activity during the quarter, including Planet Fitness andCrunch Fitness , which were both among the top-ten tenants in the nation for new retail space signed for in 2021. AtDecember 31, 2021 , national retail vacancy rates remained level at 4.6% while our market areas reflected the following vacancy levels:Springfield, Missouri at 3.2%,St. Louis at 6.0%,Kansas City at 5.1%,Minneapolis at 3.4%,Tulsa, Oklahoma at 3.7%,Dallas-Fort Worth at 5.4%,Chicago at 6.0%,Atlanta at 4.4% andDenver at 4.6%. American consumers are in the midst of a historic boom in household spending on retail goods (both online and in stores). Consumers are flush with cash from stimulus checks and savings accrued while social distancing. The unprecedented rise in online shopping and quick delivery demands brought on by the pandemic have propelled industrial demand to all-time highs. TheU.S. industrial market will face a record level of new logistics facilities delivering from late 2021 through 2022, but all indications are that tenants will be up to the task of filling them. Strong demand from a wide variety of business types and segments was enough to offset new supply and decreased vacancy rates. Persistent demand from e-commerce and third-party logistics (3PLs) companies continues to drive demand. Major markets across the country have seen record jumps in tenant demand that some metropolitan areas can barely accommodate. As a result, the fastest accelerations in industrial leasing are being recorded in smaller markets with open land for development that typically catch spillover demand from nearby population centers where developers are unable to build space fast enough. Today's strong labor market and the$4 trillion in savings thatU.S. households accrued during the pandemic should still support the record levels of goods spending and industrial leasing during 2022-23, particularly if lingering health risks from the pandemic continue to boost e-commerce's share of total consumer spending. Investors continue to aggressively pursue industrial acquisitions; with longer-term risk revolves around whether speculative development continues to increase as retail sales normalize. Additionally, land constraints and localized opposition to new construction may keep construction levels from rising much further in many topU.S. markets. AtDecember 31, 2021 , national industrial vacancy rates sit at a record low of 4.2% while our market areas reflected the following vacancy levels:Springfield, Missouri at 1.7%,St. Louis at 3.3%,Kansas City at 4.3%,Minneapolis at 3.3%,Tulsa, Oklahoma at 3.2%,Dallas-Fort Worth at 5.4%,Chicago at 5.2%,Atlanta at 3.4% andDenver at 5.6%. Our management will continue to monitor regional, national, and global economic indicators such as unemployment, GDP, housing starts and prices, commercial real estate occupancy, absorption and rental rates, as these could significantly affect customers in each of our market areas.
COVID-19 Impact to Our Business and Response
Great Southern is actively monitoring and responding to the effects of the COVID-19 pandemic, including the administration of vaccines in our local markets. As always, the health, safety and well-being of our customers, associates and communities, while
71
Table of Contents
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. The Company continues to work diligently with its more than 1,100 associates to enforce the most current health, hygiene and social distancing practices. Initially, teams in nearly every operational department were split, with part of each team working at an off-site disaster recovery facility to promote social distancing and to avoid service disruptions. To date, there have been no service disruptions or reductions in staffing. With the advent of COVID-19 vaccinations in the Company's markets, associates working from home or other sites began to return to their normal workplace during the fourth quarter of 2021. As always, customers can conduct their banking business using the banking center network, online and mobile banking services, ATMs, Telephone Banking, and online account opening services. As health conditions in local markets dictate, Great Southern banking center lobbies are open following social distancing and health protocols. Great Southern continues to work with customers experiencing hardships caused by the pandemic. As a resource to customers, a COVID-19 information center continues to be available on the Company's website, www.GreatSouthernBank.com. General information about the Company's pandemic response, how to receive assistance, and how to avoid COVID-19 scams and fraud are included. Impacts to Our Business Going Forward: The magnitude of the impact on the Company of the COVID-19 pandemic continues to evolve and will ultimately depend on the remaining length and severity of the economic downturn brought on by the pandemic. Some positive economic signs have occurred in 2021 and early 2022, such as lower unemployment rates, improving gross domestic product ("GDP") levels and other measures of the economy and increased vaccination rates. The Company expects that the COVID-19 pandemic could still impact our business in one or more of the following ways, among others. Each of these factors could, individually or collectively, result in reduced net income in future periods.
Consistently low market interest rates for a significant period of time may
? have a negative impact on our variable and fixed rate loans, resulting in
reduced net interest income
? Certain fees for deposit and loan products may be waived or reduced
Non-interest expenses may increase as we continue to deal with the effects of
? the COVID-19 pandemic, including cleaning costs, supplies, equipment and other
items
? Banking center lobbies have been closed at various times, and may close again
in future periods if the pandemic situation worsens again
Additional loan modifications may occur and borrowers may default on their
? loans, which may necessitate further increases to the allowance for credit
losses
? A contraction in economic activity may reduce demand for our loans and for our
other products and services
Paycheck Protection Program Loans
Great Southern has actively participated in the PPP through the SBA. The PPP has been met with very high demand throughout the country, resulting in a second round of funding in 2021 through an amendment to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In the first round of the PPP, we originated approximately 1,600 PPP loans, totaling approximately$121 million . As ofDecember 31, 2021 , SBA forgiveness has been approved and processed for all of these PPP loans. OnDecember 27, 2020 , the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act authorized the reopening of the PPP for eligible first-draw and second-draw borrowers which began onJanuary 19, 2021 , and had an original expiration date ofMarch 31, 2021 . OnMarch 30, 2021 , the PPP Extension Act of 2021 was signed, extending the PPP an additional two months toMay 31, 2021 , along with an additional 30-day period for the SBA to process applications that were still pending as ofMay 31, 2021 . In the second round of the PPP, we funded approximately 1,650 PPP loans, totaling approximately$58 million . As ofDecember 31, 2021 , full forgiveness proceeds have been received from the SBA for 1,415 of these PPP loans, totaling approximately$48 million . 72
Table of Contents
Great Southern received fees from the SBA for originating PPP loans based on the amount of each loan. AtDecember 31, 2021 , remaining net deferred fees related to PPP loans totaled$504,000 . The fees, net of origination costs, are deferred in accordance with standard accounting practices and accreted to interest income on loans over the contractual life of each loan. These loans generally have a contractual maturity of up to five years from origination date, but may be repaid or forgiven (by the SBA) sooner. If these loans are repaid or forgiven prior to their contractual maturity date, the remaining deferred fee for such loans will be accreted to interest income immediately. We expect a significant portion of these remaining net deferred fees will accrete to interest income during the first quarter of 2022. In the three months and year endedDecember 31, 2021 , Great Southern recorded approximately$1.6 million and$5.5 million , respectively, of net deferred fees in interest income on PPP loans.
Loan Modifications
AtDecember 31, 2021 , the Company had no remaining modified commercial loans and eight modified consumer and mortgage loans with an aggregate principal balance outstanding of$1.2 million . These balances have decreased from$232.4 million in commercial loans and$18.2 million in consumer and mortgage loans atDecember 31, 2020 . The loan modifications were within the guidance provided by the CARES Act, the federal banking regulatory agencies, theSecurities and Exchange Commission and theFinancial Accounting Standards Board (FASB); therefore, they have not been considered troubled debt restructurings.
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, 2021 , Great Southern's total assets decreased$76.5 million , or 1.4%, from$5.53 billion atDecember 31, 2020 , to$5.45 billion atDecember 31, 2021 . Full details of the current year changes in total assets are provided below, under "Comparison of Financial Condition atDecember 31, 2021 andDecember 31, 2020 ." Loans. In the year endedDecember 31, 2021 , Great Southern's net loans decreased$289.3 million , or 6.7%, from$4.30 billion atDecember 31, 2020 , to$4.01 billion atDecember 31, 2021 . This decrease was primarily in other residential (multi-family) loans, commercial real estate loans, commercial business loans and consumer auto loans. These decreases were partially offset by increases in construction loans and one- to four-family residential 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 in one- to four-family residential loans and construction loans and in most of Great Southern's primary lending locations, includingSpringfield ,St. Louis ,Kansas City ,Des Moines andMinneapolis , as well as the locations where it has loan production offices, includingAtlanta ,Chicago ,Dallas ,Denver ,Omaha 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, 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 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 73
Table of Contents
recommended terms relating to equity requirements, amortization, and maturity. Consumer loans, other than home equity loans, are primarily secured by new and used motor vehicles and these loans are also subject to certain minimum underwriting standards to assure portfolio quality. In 2019, the Company made the decision to discontinue indirect auto loan originations. Of the total loan portfolio atDecember 31, 2021 and 2020, 88.1% and 87.0%, respectively, was secured by real estate, as this is the Bank's primary focus in its lending efforts. AtDecember 31, 2021 and 2020, commercial real estate and commercial construction loans were 52.6% and 48.4% of the Bank's total loan portfolio, respectively. Commercial real estate and commercial construction loans generally afford the Bank an opportunity to increase the yield on, and the proportion of interest rate sensitive loans in, its portfolio. They do, however, present somewhat greater risk to the Bank because they may be more adversely affected by conditions in the real estate markets or in the economy generally. At bothDecember 31, 2021 and 2020, loans made in theSpringfield, Missouri metropolitan statistical area (Springfield MSA) comprised 8% of the Bank's total loan portfolio. The Company's headquarters are located inSpringfield and we have operated in this market since 1923. Because of our large presence and experience in the Springfield MSA, many lending opportunities exist. At bothDecember 31, 2021 and 2020, loans made in theSt. Louis metropolitan statistical area (St. Louis MSA) comprised 19% of the Bank's total loan portfolio. The Company's expansion into the St. Louis MSA beginning inMay 2009 has provided an opportunity to not only diversify from the Springfield MSA, but also has provided access to a larger economy with increased lending opportunities despite higher levels of competition. Loans made in the St. Louis MSA are primarily commercial real estate, commercial business and other residential (multi-family) loans, which are less likely to be impacted by the higher levels of unemployment rates, as mentioned above under "Current Economic Conditions," than if the focus were on one- to four-family residential and consumer loans. For further discussions of the Bank's loan portfolio, and specifically, commercial real estate and commercial construction loans, see "Item 1. Business - Lending Activities." The percentage of fixed-rate loans in our loan portfolio has been as much as 45% in recent years and was 39% as ofDecember 31, 2021 . 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, 2021 , approximately 75% 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, 2021 , 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, 2021 , 0.3% of our owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination. AtDecember 31, 2020 , none of our owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination. AtDecember 31, 2021 and 2020, an estimated 0.2% and 0.6%, respectively, of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination. AtDecember 31, 2021 , troubled debt restructurings totaled$3.9 million , or 0.1% of total loans, a decrease of$1.1 million from$5.0 million , or 0.1% of total loans, atDecember 31, 2020 . 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 troubled debt restructurings occurring during the year endedDecember 31, 2021 , one loan totaling$45,000 was restructured into multiple new loans. For troubled debt restructurings occurring during the year endedDecember 31, 2020 , five loans totaling$107,000 were restructured into multiple new loans. For further information on troubled debt restructurings, see Note 3 of the accompanying audited financial statements, which are included in Item 8 of this report. 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 current pandemic situation. Although loan modifications were made, they did not result in these loans being classified as troubled debt restructurings, potential problem loans or non-performing loans. As ofDecember 31, 2021 ,$1.2 million of residential and consumer loans were subject to such modifications and no commercial loans were subject to such modifications. If more severe lengthier negative impacts of the COVID-19 pandemic occur or the effects of the SBA loan programs and other loan and stimulus programs do not enable companies and individuals to completely recover financially, this could result in 74
Table of Contents
longer-term modifications, which may be deemed to be troubled debt restructurings, additional potential problem loans and/or additional non-performing loans.
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.Available-for-sale Securities . In the year endedDecember 31, 2021 , available-for-sale securities increased$86.1 million , or 20.8%, from$414.9 million atDecember 31, 2020 , to$501.0 million atDecember 31, 2021 . The increase was primarily due to the purchase ofFNMA and GNMA fixed-rate multi-family or single-family mortgage-backed securities andFNMA and GNMA fixed rate collateralized mortgage obligation securities, partially offset by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities. Deposits. The Company attracts deposit accounts through its retail branch network, correspondent banking and corporate services areas, and brokered deposits. The Company then utilizes these deposit funds, along with FHLBank advances and other borrowings, to meet loan demand or otherwise fund its activities. In the year endedDecember 31, 2021 , total deposit balances increased$35.2 million , or 0.8%. Transaction account balances increased$464.9 million and retail certificates of deposit decreased$338.4 million compared toDecember 31, 2020 . The increase in transaction accounts were primarily a result of increased balances in non-interest accounts, money market deposit accounts and certain NOW account types. Retail certificates of deposit decreased due to decreases in national CDs initiated through internet channels and retail certificates generated through the banking center network. CDs initiated through internet channels experienced a planned decrease due to increases in overall liquidity levels and in order to reduce the Company's cost of funds. Brokered deposits, including IntraFi program purchased funds, were$67.4 million atDecember 31, 2021 , a decrease of$91.3 million from$158.7 million atDecember 31, 2020 . The brokered deposits were allowed to mature without replacement as other deposit categories increased. Our deposit balances may fluctuate depending on customer preferences and our relative need for funding. We do not consider our retail certificates of deposit to be guaranteed long-term funding because customers can withdraw their funds at any time with minimal interest penalty. When loan demand trends upward, we can increase rates paid on deposits to attract more deposits and utilize brokered deposits to provide additional funding. The level of competition for deposits in our markets is high. It is our goal to gain deposit market share, particularly checking accounts, in our branch footprint. To accomplish this goal, increasing rates to attract deposits may be necessary, which could negatively impact the Company's net interest margin. Our ability to fund growth in future periods may also depend on our ability to continue to access brokered deposits and FHLBank advances. In times when our loan demand has outpaced our generation of new deposits, we have utilized brokered deposits and FHLBank advances to fund these loans. These funding sources have been attractive to us because we can create either fixed or variable rate funding, as desired, which more closely matches the interest rate nature of much of our loan portfolio. It also gives us greater flexibility in increasing or decreasing the duration of our funding. While we do not currently anticipate that our ability to access these sources will be reduced or eliminated in future periods, if this should happen, the limitation on our ability to fund additional loans could have a material adverse effect on our business, financial condition and results of operations. Securities sold under reverse repurchase agreements with customers. Securities sold under reverse repurchase agreements with customers decreased$27.1 million from$164.2 million atDecember 31, 2020 to$137.1 million atDecember 31, 2021 . These balances fluctuate over time based on customer demand for this product. Federal Home Loan Bank Advances and Short Term Borrowings. The Company's FHLBank term advances were$-0 - at bothDecember 31, 2021 andDecember 31, 2020 . At bothDecember 31, 2021 andDecember 31, 2020 , there also were no overnight borrowings from the FHLBank. Short term borrowings and other interest-bearing liabilities increased$321,000 from$1.5 million atDecember 31, 2020 to$1.8 million atDecember 31, 2021 . The short term borrowings included no overnight FHLBank borrowings atDecember 31, 2021 orDecember 31, 2020 . The Company may utilize both overnight borrowings and short-term FHLBank advances depending on relative interest rates. 75
Table of Contents
Subordinated notes. Subordinated notes decreased$74.4 million from$148.4 million atDecember 31, 2020 to$74.0 million atDecember 31, 2021 . The Company redeemed$75.0 million of its outstanding subordinated notes at par inAugust 2021 . Net Interest Income and Interest Rate Risk Management. Our net interest income may be affected positively or negatively by changes in market interest rates. A large portion of our loan portfolio is tied to one-month LIBOR, three-month LIBOR or the "prime rate" and adjusts immediately or shortly after the index rate adjusts (subject to the effect of contractual interest rate floors on some of the loans, which are discussed below). We monitor our sensitivity to interest rate changes on an ongoing basis (see "Quantitative and Qualitative Disclosures About Market Risk"). In addition, prior to 2021, our net interest income has been impacted by changes in the cash flows expected to be received from acquired loan pools. As described in Note 4 of the accompanying audited financial statements, included in Item 8 of this report, the Company's evaluation of cash flows expected to be received from acquired loan pools has been on-going and increases in cash flow expectations have been recognized as increases in accretable yield through interest income. Decreases in cash flow expectations have been recognized as impairments through the allowance for credit losses. These accretable yield adjustments no longer occur subsequent to 2020. 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 change decreases of 0.25% on each of those occasions. AtDecember 31, 2019 , the Federal Funds rate stood at 1.75%. In response to the COVID-19 pandemic, the FRB decreased interest rates on two occasions inMarch 2020 , a 0.50% decrease onMarch 3 and a 1.00% decrease onMarch 16 . AtDecember 31, 2021 , the Federal Funds rate stood at 0.25%. Financial markets are anticipating an aggressive increase in interest rates in 2022, with three to six hikes anticipated. A substantial portion of Great Southern's loan portfolio ($1.43 billion atDecember 31, 2021 ) 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, 2021 . Of these loans,$1.42 billion had interest rate floors. Great Southern also has a portfolio of loans ($598 million atDecember 31, 2021 ) tied to a "prime rate" of interest and will adjust at least once within 90 days afterDecember 31, 2021 . Of these loans,$592 million had interest rate floors at various rates. AtDecember 31, 2021 ,$1.2 billion in LIBOR and "prime rate" loans were at their floor rate. If interest rates were to increase 25 basis points, loans of$360.7 million would move above their floor rate. If interest rates were to increase 50 basis points, an additional$285.1 million in loans would move above their floor rate. A rate cut by the FRB generally would have an anticipated immediate negative impact on the Company's net interest income due to the large total balance of loans tied to the one-month or three-month LIBOR index or the "prime rate" index and will be subject to adjustment at least once within 90 days or loans which generally adjust immediately as the Federal Funds rate adjusts. Interest rate floors may at least partially mitigate the negative impact of interest rate decreases. Loans at their floor rates are, however, subject to the risk that borrowers will seek to refinance elsewhere at the lower market rate. Because the Federal Funds rate is again very low, there may also be a negative impact on the Company's net interest income due to the Company's inability to significantly lower its funding costs in the current competitive rate environment, although interest rates on assets may decline further. Conversely, interest rate increases would normally result in increased interest rates on our LIBOR-based and prime-based loans. As ofDecember 31, 2021 , 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 interest rates because our portfolios are relatively well matched in a twelve-month horizon. In a situation where market interest rates increase significantly in a short period of time, our net interest margin increase may be more pronounced in the very near term (first one to three months), due to fairly rapid increases in LIBOR interest rates and "prime" interest rates. In a situation where market interest rates decrease significantly in a short period of time, as they did inMarch 2020 , our net interest margin decrease may be more pronounced in the very near term (first one to three months), due to fairly rapid decreases in LIBOR interest rates and "prime" interest rates. In the subsequent months we expect that the net interest margin would stabilize and begin to improve, as renewal interest rates on maturing time deposits are expected to decrease 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% ofFederal Fund rate cuts during the nine month period ofJuly 2019 throughMarch 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
76
Table of Contents
decreased in 2020 and remained very low in 2021, putting pressure on loan
yields, and strong pricing competition for loans and deposits remains in most of
our markets. For further discussion of the processes used to manage our exposure
to interest rate risk, see "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, 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,
2021 and 2020."
Business Initiatives
In 2021 and continuing into 2022, Great Southern is actively monitoring and responding to the effects of the evolving 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. Please see "COVID-19 Impact to Our Business and Response" and "Paycheck Protection Program Loans" above for further information, including the Company's participation in the SBA's PPP for small businesses. The Company's 93 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 2021 and are planned for 2022:
In
banking center at
? new office provides customers more convenient access and has a fresh, modern
design facilitating an enhanced customer experience. The Company currently has
two banking centers serving the
After a thorough evaluation, in
banking center in the
? located at 8013 W. Florissant was consolidated into a nearby Great Southern
office at 10385 W. Florissant, less than three miles away. The Company operates
18 banking centers in the greater
During 2022, the banking center in
with a newly constructed building on the same property at
? Customers will be served in a temporary building on the property during
construction. The new office is expected to open in the fourth quarter of 2022.
Including this office, the Company operates three banking centers in the
Other corporate initiatives occurred in 2021 or are planned in 2022:
World's Best Banks 2021. The Bank was ranked first in the list of best banks in
? countries to rate banks they are involved with on general satisfaction and key
attributes like trust, terms and conditions, customer services, digital
services and financial advice. Some 500 banks around the world were featured on
the list and can be viewed on theForbes website. InAugust 2021 , the Company redeemed all of its outstanding 5.25%
Fixed-to-Floating Rate Subordinated Notes (due
? aggregate principal amount of
Subordinated Notes. The Company used excess cash on hand for the redemption
payment.
77
Table of Contents
During 2021, a consulting firm was engaged to support the Company in itsevaluation of core and ancillary software and information technology systems.
The Company's core systems software is provided by third parties. 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. In
core and ancillary software services, which are expected to commence in late
2023.
Two long-term executive team members retired from the Company in 2021. Both
? announced their retirements at least a year in advance to ensure an orderly
leadership transition.
Chief Operating OfficerDoug Marrs retired from the Company inJuly 2021 .Mr. Marrs joined Great Southern in 1996, with his banking career spanning 43 years. His successor,Mark Maples , is a banking veteran with 39 years of banking experience, 16 years of which have been with Great Southern. Chief Information OfficerLinton J. Thomason retired at the end of 2021. With more than 40 years in the banking industry,Mr. Thomason joined Great Southern in 1997. His successor,Eric Johnson , joined Great Southern in 2008 and has held various managerial roles related to the Company's information technology and data security. Prior to joining Great Southern,Mr. Johnson worked for 12 years in information technology at a regional healthcare provider.
In
? additional one million shares of the Company's common stock, resulting in a
total of nearly 1.2 million shares available in the stock repurchase authorization at that time.
Commercial loan production offices (LPOs) continue to play a significant role
in developing the commercial loan portfolio. In
opened a commercial loan production office in
? experienced commercial lenders were hired to develop commercial lending
relationships in the
Company's seventh LPO. Other LPOs are located 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." 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 requirement began phasing in onJanuary 1, 2016
when
a buffer greater
78
Table of Contents
than 0.625% of risk-weighted assets was required, which amount increased an
equal amount each year until the buffer requirement of greater than 2.5% of
risk-weighted assets became fully implemented on
EffectiveJanuary 1, 2015 , these rules also revised the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels show signs of weakness. Under the revised prompt corrective action requirements, insured depository institutions are required to meet the following in order to qualify as "well capitalized:" (i) a common equity Tier 1 risk-based capital ratio of at least 6.5%, (ii) a Tier 1 risk-based capital ratio of at least 8%, (iii) a total risk-based capital ratio of at least 10% and (iv) a Tier 1 leverage ratio of 5%, and must not be subject to an order, agreement or directive mandating a specific capital level. Economic Growth Act. 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" of between 8 and 10 percent. Any qualifying depository institution or its holding company that exceeds the "Community Bank Leverage Ratio" 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. EffectiveJanuary 1, 2020 , the Community Bank Leverage Ratio was 9.0%. InApril 2020 , pursuant to the CARES Act, the federal bank regulatory agencies announced the issuance of two interim final rules, effective immediately, to provide temporary relief to community banking organizations. Under the interim final rules, the Community Bank Leverage Ratio requirement is a minimum of 8.5% for calendar year 2021, and 9% thereafter. The Company and the Bank have chosen to not utilize the new Community Bank Leverage Ratio 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 endedDecember 31, 2021 , total assets decreased by$76.5 million to$5.45 billion . The decrease was primarily attributable to decreases in loans receivable, partially offset by increases in cash and cash equivalents and available-for-sale securities. Cash and cash equivalents were$717.3 million atDecember 31, 2021 , an increase of$153.6 million , or 27.2%, from$563.7 million atDecember 31, 2020 . During 2021, the increase was 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. The Company's available for sale securities increased$86.1 million , or 20.8%, compared toDecember 31, 2020 . The increase was primarily due to the purchase ofFNMA and GNMA fixed-rate multi-family and single-family mortgage-backed securities and agency collateralized mortgage obligation securities, partially offset by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities. The available-for-sale securities portfolio was 9.2% and 7.5% of total assets atDecember 31, 2021
and
2020, respectively.
79
Table of Contents
Net loans decreased$289.3 million fromDecember 31, 2020 , to$4.01 billion atDecember 31, 2021 . Decreases primarily occurred in other residential (multi-family) loans, commercial real estate loans, commercial business loans and consumer auto loans. Other residential (multi-family) loans decreased$307.4 million , or 30.8%, commercial real estate loans decreased$82.7 million , or 5.4%, commercial business loans decreased$39.4 million , or 12.4%, and consumer auto loans decreased$37.3 million , or 43.2%. Partially offsetting the decreases in these loans was an increase of$156.0 million , or 27.7%, in construction loans and an increase of$53.7 million , or 9.2%, in one- to four-family residential loans. In 2021, we experience significant early payoffs of multi-family loans and commercial real estate loans. We also received repayment of a large portion of our PPP loans. Construction loans increased as new loans were originated and draws were made on existing loans in 2021. A large portion of these construction loans were for multi-family projects. Other real estate owned and repossessions were$2.1 million atDecember 31, 2021 , an increase of$210,000 , or 11.2%, from$1.9 million atDecember 31, 2020 . The increase was primarily due to the addition of properties which were not acquired through foreclosure during the period, partially offset by sales of other real estate properties, and is discussed in more detail in the Non-performing Assets section below.
Total liabilities decreased
Total deposits increased$35.2 million , or 0.8%, from$4.52 billion atDecember 31, 2020 to$4.55 billion atDecember 31, 2021 . Transaction account balances increased$464.9 million compared toDecember 31, 2020 . Non-interest-bearing checking account balances increased$225.0 million and interest-bearing transaction accounts increased$239.9 million . The increase in transaction accounts were primarily a result of increased money market deposit accounts and certain NOW account types. Customer retail certificates initiated through our banking center network decreased by$140.4 million during the year endedDecember 31, 2021 . Market interest rates declined on both transaction accounts and retail time deposits. In many cases, customers chose to move funds from time deposit accounts to interest-bearing transaction accounts to retain flexibility with their funds and because time deposit rates were low. Customer retail certificates initiated through our internet channel network decreased by$200.3 million during the year endedDecember 31, 2021 . These deposits were less attractive to retain as other deposit categories' balances increased in 2021. Brokered deposits were$67.4 million atDecember 31, 2021 , a decrease of$91.3 million from$158.7 million atDecember 31, 2020 . In both 2020 and 2021, the brokered deposits were allowed to mature without replacement as other deposit categories increased. The Company'sFederal Home Loan Bank advances were$-0 - at bothDecember 31, 2021 and 2020. AtDecember 31, 2021 and 2020, 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$321,000 from$1.5 million atDecember 31, 2020 to$1.8 million atDecember 31, 2021 . The short term borrowings included no overnight FHLBank borrowings atDecember 31, 2021 and 2020.
Securities sold under reverse repurchase agreements with customers decreased
Total stockholders' equity decreased$13.0 million , from$629.7 million atDecember 31, 2020 to$616.8 million atDecember 31, 2021 . The Company recorded net income of$74.6 million for the year endedDecember 31, 2021 . In addition, total stockholders' equity increased$4.9 million due to stock option exercises. Total stockholders' equity decreased$39.1 million due to repurchases of the Company's common stock. Accumulated other comprehensive income decreased$20.4 million due to decreases in the fair value of available-for-sale investment securities and the fair value of cash flow hedges. Dividends declared on common stock, which decreased total stockholders' equity, were$18.9 million . In addition, the initial adoption of the CECL accounting standard for credit losses onJanuary 1, 2021 , resulted in a decrease in stockholders' equity of$14.2
million.
80
Table of Contents
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 and net income available to common shareholders 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.
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 expect to recognize 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. 81
Table of Contents
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. InFebruary 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 an effective date ofMarch 1, 2022 and a termination date ofMarch 1, 2024 . Under the terms of the swap, the Company will receive a fixed rate of interest of 1.6725% and will pay a floating rate of interest equal to one-month USD-LIBOR. The floating rate will be reset monthly and net settlements of interest due to/from the counterparty will also occur monthly. The initial floating rate of interest was set at 0.24143%. Therefore, in the near term, the Company will receive net interest settlements which will be recorded as loan interest income, to the extent that the fixed rate of interest continues to exceed one-month USD-LIBOR. If USD-LIBOR exceeds the fixed rate of interest in future periods, the Company will be required to pay net settlements to the counterparty and will record those net payments as a reduction of interest income on loans.
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 . 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 82
Table of Contents
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 . 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 .
83
Table of Contents
Net Interest Income
Net interest income for the year ended December 31, 2021 increased $783,000 , or
0.4%, to $177.9 million , compared to $177.1 million for the year ended December
31, 2020 . Net interest margin was 3.37% for the year ended December 31, 2021 ,
compared to 3.49% for the year ended December 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 the
FDIC -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 ended December 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 ended December 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 ended December 31, 2020 , to 3.22% during the year
ended December 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
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 replaces the incurred loss methodology with a lifetime "expected credit loss" measurement objective for loans, held-to-maturity debt securities and other receivables measured at amortized cost at the time the financial asset is originated or acquired. This standard requires the consideration of historical loss experience and current conditions adjusted for reasonable and supportable economic forecasts. Our 2020 financial statements were prepared under the incurred loss methodology standard. 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 reduced our retained earnings by approximately$14.2 million . The adjustment was based upon the Company's analysis of current conditions, assumptions and economic forecasts atJanuary 1, 2021 . ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company's portfolio. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, commercial real estate price index, housing price index and national retail sales index. Worsening economic conditions from the COVID-19 pandemic, 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 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 potentially uncollectible, or represent a greater risk of loss, and makes additional provisions to expense, if necessary, to maintain the allowance at a satisfactory level. 84 Table of Contents 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, 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. AllFDIC -acquired loans were grouped into pools based on common characteristics and were recorded at their estimated fair values, which incorporated estimated credit losses at the acquisition date. These loan pools have been systematically reviewed by the Company to determine the risk of losses that may exceed those identified at the time of the acquisition. Techniques used in determining risk of loss are similar to those used to determine the risk of loss for the legacyGreat Southern Bank portfolio, with most focus being placed on those loan pools which include larger loan relationships and those loan pools which exhibit higher risk characteristics. Review of the acquired loan portfolio also includes a review of financial information, collateral valuations and customer interaction to determine if additional reserves are warranted. The Bank's allowance for credit losses as a percentage of total loans was 1.49% and 1.32% atDecember 31, 2021 and 2020, respectively. Prior toJanuary 1, 2021 , the ratio excluded theFDIC -assisted acquired loans. Management considers the allowance for credit losses adequate to cover losses inherent in the Bank's loan portfolio atDecember 31, 2021 , 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.
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. In the tables below,FDIC -assisted acquired assets are included in their particular collateral categories 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.
85
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 - 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
At December 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 an FDIC -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 southern Illinois .
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 are current under
their modified terms. For additional information about these loan modifications,
see Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- "Loan Modifications."
Other Real Estate Owned and Repossessions. Of the total
86
Table of Contents
Activity in foreclosed assets and repossessions during the year endedDecember 31, 2021 , 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 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 . 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. Due to the impact on economic conditions from COVID-19, it is possible that we could experience an increase in potential problem loans in future periods. 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 current 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. If more severe or lengthier negative impacts of the COVID-19 pandemic occur or the effects of the SBA loan programs and other loan and stimulus programs do not enable companies and individuals to completely recover financially, this could result in longer-term modifications, which may be deemed to be TDRs, additional potential problem loans and/or additional non-performing loans. Further actions on our part, including additions to the allowance for credit losses, could result. 87
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 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 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 ofFDIC -assisted acquired loans$ 4,323 $ 158$ (1,091) $ (1,779) $ (95)$ (97) $ (443) $ 976 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. 88 Table of Contents 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 prior year. 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. Net gains on loan sales: Net gains on loan sales increased$1.4 million compared to the prior year. 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 recently, and as market interest rates moved a bit higher in the latter half of 2021, mortgage refinance volume has decreased and loan originations and related gains on sales of these loans have 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 prior year. 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 from the prior year, to$6.6 million . 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
89
Table of Contents
Insurance: Insurance expense increased$656,000 compared to the prior year. 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 . Expense on other real estate owned and repossessions: Expense on other real estate owned and repossessions decreased$1.4 million compared to the prior year 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 endedDecember 31, 2021 and 2020, the Company's effective tax rates were 20.9% and 18.9%, 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 to tax-exempt investments and tax-exempt loans, which reduced the Company's effective tax rate. The Company's effective tax rate may fluctuate in future periods as it is impacted by the level and timing of the Company's utilization of tax credits, the level of tax-exempt investments and loans, the amount of taxable income in various state jurisdictions and the overall level of pre-tax income. State tax expense estimates have evolved throughout 2020 and 2021 as taxable income and apportionment between states have been analyzed. The higher effective tax rate in 2021 was due to higher overall income, lower levels of low income housing tax credits and less tax-exempt interest income. 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
90
Table of Contents
Dec. 31, Year Ended Year Ended Year Ended
2021(2) December 31, 2021 December 31, 2020 December 31, 2019
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 3.29 % $ 678,900 $ 25,251 3.72 % $ 652,096 $ 29,099 4.46 % $ 532,051 $ 27,450 5.16 %
Other residential 4.29 922,739 40,998 4.44 930,529 43,902 4.72 812,412 43,931 5.41
Commercial real estate 4.06 1,541,095 65,811 4.27 1,526,618 69,437 4.55 1,443,435 74,256 5.14 Construction 3.98 616,899 27,696 4.49 665,546 32,443 4.87 706,581 41,767 5.91 Commercial business 4.02 279,232 15,403 5.52 325,397 14,070 4.32 258,606 13,234 5.12 Other loans 4.64 220,783 10,347 4.69 283,678 15,184 5.35 387,854 21,511 5.55 Industrial revenue bonds (1) 4.44 14,528 763 5.25 15,395 829 5.38 14,841 898 6.05 Total loans receivable 4.26 4,274,176
186,269 4.36 4,399,259 204,964 4.66 4,155,780
223,047 5.37
Investment securities (1) 2.42 447,943 11,689 2.61 426,383 12,262 2.88 326,450 10,066 3.08 Interest-earning deposits in other banks 0.15 552,094 715 0.13 246,110 477 0.19 87,767 1,881 2.14 Total interest-earning assets 3.58 5,274,213
198,673 3.77 5,071,752 217,703 4.29 4,569,997
234,994 5.14 Non-interest-earning assets: Cash and cash equivalents 96,989 93,832 92,315 Other non-earning assets 131,154 157,842 192,695 Total assets$ 5,502,356 $ 5,323,426 $ 4,855,007 Interest-bearing liabilities: Interest-bearing demand and savings 0.12$ 2,316,890 4,023 0.17$ 1,867,166 7,096 0.38$ 1,507,518 7,971 0.53 Time deposits 0.60 1,161,134 9,079 0.78 1,636,205 25,335 1.55 1,716,786 37,599 2.19 Total deposits 0.26 3,478,024 13,102 0.38 3,503,371 32,431 0.93 3,224,304 45,570 1.41 Securities sold under reverse repurchase agreements 0.02 143,757 37 0.03 140,938 31 0.02 102,615 19 0.02 Short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities 0.07 1,529 - 0.02 42,560 644 1.51 157,409 3,616 2.30 Subordinated debentures issued to capital trust 1.73 25,774 448 1.74 25,774 628 2.44 25,774 1,019 3.95 Subordinated notes 5.97 119,780 7,165 5.98 115,335 6,831 5.92 74,070 4,378 5.91 Total interest-bearing liabilities 0.38 3,768,864 20,752 0.55 3,827,978 40,565 1.06 3,584,172 54,602 1.52 Non-interest-bearing liabilities: Demand deposits 1,061,716 826,900 665,606 Other liabilities 44,260 46,111 33,592 Total liabilities 4,874,840 4,700,989 4,283,370 Stockholders' equity 627,516 622,437 571,637 Total liabilities and stockholders' equity$ 5,502,356 $ 5,323,426 $ 4,855,007 Net interest income: Interest rate spread 3.20 %$ 177,921 3.22 %$ 177,138 3.23 %$ 180,392 3.62 % Net interest margin* 3.37 % 3.49 % 3.95 % Average interest-earning assets to average interest- bearing liabilities 139.9 % 132.5 % 127.5 %
*Defined as the Company's net interest income divided by total interest-earning assets.
Of the total average balance of investment securities, average tax-exempt
investment securities were
2021, 2020 and 2019, respectively. In addition, average tax-exempt industrial
revenue bonds were
this table was
2019, respectively. Interest income net of disallowed interest expense
related to tax-exempt assets was
for 2021, 2020 and 2019, respectively.
The yield/rate on loans at
transactions. See "Net Interest Income" for a discussion of the effect on
2021 results of operations.
91
Table of Contents
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, 2021 vs. December 31, 2020 vs.
December 31, 2020 December 31, 2019
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 $ (12,982) $ (5,713) $ (18,695) $ (30,621) $ 12,538 $ (18,083)
Investment securities (1,173) 600 (573) (715) 2,911 2,196 Interest-earning deposits in other banks
(200) 438 238 (2,745) 1,341 (1,404) Total interest-earning assets
(14,355) (4,675) (19,030) (34,081) 16,790 (17,291)
Interest-bearing liabilities:
Demand deposits (4,497) 1,424 (3,073) (2,531) 1,656 (875)
Time deposits (10,246) (6,010) (16,256) (10,571) (1,693) (12,264)
Total deposits (14,743) (4,586) (19,329) (13,102) (37) (13,139) Securities sold under reverse repurchase agreements
6 - 6 4 8 12
Short-term borrowings, overnight FHLBank
borrowings and other interest-bearing
liabilities (326) (318) (644) (949) (2,023) (2,972) Subordinated debentures issued to capital trust
(180) - (180) (391) - (391)
Subordinated notes 69 265 334 9 2,444 2,453
Total interest-bearing liabilities (15,174) (4,639) (19,813) (14,429) 392 (14,037) Net interest income$ 819 $ (36) $ 783 $ (19,652) $ 16,398 $ (3,254)
Results of Operations and Comparison for the Years Ended
General Net income decreased$14.3 million , or 19.4%, during the year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 . Net income was$59.3 million for the year endedDecember 31, 2020 compared to$73.6 million for the year endedDecember 31, 2019 . This decrease was due to an increase in provision for credit losses of$9.7 million , or 158.1%, an increase in non-interest expenses of$8.1 million , or 7.0%, and a decrease in net interest income of$3.3 million , or 1.8%, partially offset by an increase in non-interest income of$4.1 million , or 13.2%, and a decrease in provision for income taxes of$2.7 million , or 16.2%. Net income available to common shareholders was$59.3 million for the year endedDecember 31, 2020 compared to$73.6 million for the year endedDecember 31, 2019 .
Total Interest Income
Total interest income decreased$17.3 million , or 7.4%, during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The decrease was due to an$18.1 million , or 8.1%, decrease in interest income on loans, offset by a$792,000 , or 6.6%, increase in interest income on investment securities and other interest-earning assets. Interest income on loans decreased in 2020 compared to 2019 due to lower average rates of interest, partially offset by higher average balances of loans. Interest income from investment securities and other interest-earning assets increased during 2020 compared to 2019 due to higher average balances of investments and other interest-earning assets, partially offset by lower average rates of interest.
Interest Income - Loans
During the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , interest income on loans decreased due to lower average interest rates, partially offset by higher average balances. Interest income decreased$30.6 million as the result of lower average interest rates on loans. The average yield on loans decreased from 5.37% during the year endedDecember 31, 2019 to 4.66% during the year endedDecember 31, 2020 . Offsetting this decrease was an increase of$12.5 million in interest income as a result of 92
Table of Contents
higher average loan balances, which increased from$4.16 billion during the year endedDecember 31, 2019 , to$4.40 billion during the year endedDecember 31, 2020 . The decreased yields in most loan categories was primarily a result of decreased LIBOR and Federal Funds interest rates. In 2020, the Company also originated$121 million of PPP loans, which have a much lower yield compared to the overall loan portfolio. On an on-going basis, the Company has estimated the cash flows expected to be collected from the 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, 2020 and 2019, the adjustments increased interest income and pre-tax income by$5.6 million and$7.4 million , respectively. As ofDecember 31, 2020 , the remaining accretable yield adjustment that will affect interest income was$2.0 million ;$1.6 million of this amount was recognized in interest income during 2021. Apart from the yield accretion, the average yield on loans was 4.53% during the year endedDecember 31, 2020 , compared to 5.19% during the year endedDecember 31, 2019 , as a result of lower market rates on adjustable rate loans and new loans originated during the year. As noted previously, 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 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 in future periods, the Company was required to pay net settlements to the counterparty and recorded 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 will have 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$7.7 million and$3.1 million during the years endingDecember 31, 2020 and 2019, respectively, related to this interest rate swap.
Interest Income - Investments and Other Interest-earning Assets
Interest income on investments increased$2.2 million in the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . Interest income increased$2.9 million as a result of an increase in average balances from$326.5 million during the year endedDecember 31, 2019 , to$426.4 million during the year endedDecember 31, 2020 . Interest income decreased$715,000 due to a decrease in average interest rates from 3.08% during the year endedDecember 31, 2019 to 2.88% during the year endedDecember 31, 2020 , due to lower market rates of interest on investment securities purchased during 2020 compared to securities already in the portfolio. In addition, some securities with higher yields matured or were called prior to their maturity dates. Interest income on other interest-earning assets decreased$1.4 million in the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . Interest income decreased$2.7 million due to a decrease in average interest rates from 2.14% during the year endedDecember 31, 2019 , to 0.19% during the year endedDecember 31, 2020 . 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. Interest income increased$1.3 million as a result of an increase in average balances from$87.8 million during the year endedDecember 31, 2019 , to$246.1 million during the year endedDecember 31, 2020 . Average balances increased due to higher balances held at theFederal Reserve Bank due to increases in customer deposit balances. 93 Table of Contents Total Interest Expense Total interest expense decreased$14.0 million , or 25.7%, during the year endedDecember 31, 2020 , when compared with the year endedDecember 31, 2019 , due to a decrease in interest expense on deposits of$13.1 million , or 28.8%, a decrease in interest expense on short-term borrowings and repurchase agreements of$3.0 million , or 81.4%, and a decrease in interest expense on subordinated debentures issued to capital trust of$391,000 , or 38.4%. Partially offsetting these decreases, interest expense on subordinated notes increased$2.5 million , or 56.0%, due to additional subordinated notes issued in 2020.
Interest Expense - Deposits
Interest on demand deposits decreased$2.5 million due to a decrease in average rates from 0.53% during the year endedDecember 31, 2019 , to 0.38% during the year endedDecember 31, 2020 . Partially offsetting that decrease, interest on demand deposits increased$1.7 million due to an increase in average balances from$1.51 billion in the year endedDecember 31, 2019 , to$1.87 billion in the year endedDecember 31, 2020 . 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. Both business and personal deposit balances increased during 2020. Interest expense on time deposits decreased$10.6 million as a result of a decrease in average rates of interest from 2.19% during the year endedDecember 31, 2019 , to 1.55% during the year endedDecember 31, 2020 . In addition, interest expense on time deposits decreased$1.7 million due to a decrease in average balances of time deposits from$1.72 billion during the year endedDecember 31, 2019 , to$1.64 billion during the year endedDecember 31, 2020 . A large portion of the Company's certificate of deposit portfolio matures within six to eighteen 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. Time deposit balances decreased due to maturity of retail and brokered time deposits during 2020. Due to the significant increases in non-time deposits, it was not necessary to replace the brokered deposits.
Interest Expense -
FHLBank term advances were not utilized during the years ended
Interest expense on repurchase agreements increased$4,000 due to average rates that increased from 0.019% in the year endedDecember 31, 2019 , to 0.022% in the year endedDecember 31, 2020 . In addition to this increase, interest expense on repurchase agreements increased$8,000 due to an increase in average balances from$102.6 million during the year endedDecember 31, 2019 , to$140.9 million during the year endedDecember 31, 2020 . The increase in average balances was due to changes in customers' need for this product, which can fluctuate. Interest expense on short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities decreased$949,000 due to average rates that decreased from 2.30% in the year endedDecember 31, 2019 , to 1.51% in the year endedDecember 31, 2020 . The decrease was due to decreases in market interest rates and a change in the mix of funding during the period, with more overnight borrowings from the FHLBank in 2019 than 2020. In addition to this decrease, interest expense on short-term borrowings and other interest-bearing liabilities decreased$2.0 million due to a decrease in average balances from$157.4 million during the year endedDecember 31, 2019 , to$42.6 million during the year endedDecember 31, 2020 . The decrease in average balances was due to fewer overnight borrowings from the FHLBank in 2020. During the year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 , interest expense on subordinated debentures issued to capital trusts decreased$391,000 due to lower average interest rates. The average interest rate was 3.95% in 2019, compared to 2.44% in 2020. 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 2020 and 2019. 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 94 Table of Contents$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. Interest expense on subordinated notes increased$2.4 million due to an increase in average balances from$74.1 million during the year endedDecember 31, 2019 to$115.3 million during the year endedDecember 31, 2020 . Interest expense on the subordinated notes increased$9,000 due to average rates that increased from 5.91% in the year endedDecember 31, 2019 , to 5.92% in
the year endedDecember 31, 2020 . Net Interest Income Net interest income for the year endedDecember 31, 2020 decreased$3.3 million , or 1.8%, to$177.1 million , compared to$180.4 million for the year endedDecember 31, 2019 . Net interest margin was 3.49% for the year endedDecember 31, 2020 , compared to 3.95% for the year endedDecember 31, 2019 , a decrease of 46 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, 2020 and 2019 were increases in interest income of$5.6 million and$7.4 million , respectively, and increases in net interest margin of 11 basis points and 16 basis points, respectively. Excluding the positive impact of the additional yield accretion, net interest margin decreased 41 basis points during the year endedDecember 31, 2020 . 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 issuance of additional subordinated notes in 2020. The Company's overall interest rate spread decreased 39 basis points, or 10.7%, from 3.62% during the year endedDecember 31, 2019 , to 3.23% during the year endedDecember 31, 2020 . The decrease was due to an 85 basis point decrease in the weighted average yield on interest-earning assets, partially offset by a 46 basis point decrease in the weighted average rate paid on interest-bearing liabilities. In comparing the two years, the yield on loans decreased 71 basis points, the yield on investment securities decreased 20 basis points and the yield on other interest-earning assets decreased 195 basis points. The rate paid on deposits decreased 48 basis points, the rate paid on subordinated debentures issued to capital trust decreased 151 basis points, the rate paid on short-term borrowings decreased 103 basis points, and the rate paid on subordinated notes increased one basis point.
For additional information on net interest income components, refer to the "Average Balances, Interest Rates and Yields" table in this Report.
Provision for Loan Losses and Allowance for Loan Losses
The provision for loan losses for the year endedDecember 31, 2020 increased$9.7 million , to$15.9 million , compared with$6.2 million for the year endedDecember 31, 2019 . AtDecember 31, 2020 andDecember 31, 2019 , the allowance for loan losses was$55.7 million and$40.3 million , respectively. Total net charge-offs were$422,000 and$4.3 million for the years endedDecember 31, 2020 and 2019, respectively. During the year endedDecember 31, 2020 , a substantial portion of net charge-offs were in the consumer auto category. The Company experienced net recoveries in some of the other loan categories. In response to a more challenging consumer credit environment, the Company tightened its underwriting guidelines on automobile lending beginning in the latter part of 2016. Management took this step in an effort to improve credit quality in the portfolio and lower delinquencies and charge-offs. InFebruary 2019 , the Company ceased providing indirect lending services to automobile dealerships. These actions also reduced origination volume and, as such, the outstanding balance of the Company's automobile loans declined approximately$66 million in the year endedDecember 31, 2020 . AtDecember 31, 2020 , indirect automobile loans totaled approximately$48 million . General market conditions and unique circumstances related to individual borrowers and projects contributed to the level of provisions and charge-offs. In 2020, due to the COVID-19 pandemic and its effects on the overall economy and unemployment, the Company increased its provisions for loan losses and increased its allowance for loan losses, even though actual realized net charge-offs were very low. 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 loan losses as a percentage of total loans, excludingFDIC -assisted acquired loans, was 1.32% and 1.00% atDecember 31, 2020 and
2019,
respectively.
95
Table of Contents
Non-performing Assets
Non-performing assets acquired through FDIC -assisted transactions, including
foreclosed assets and potential problem loans, are not included in the totals or
in the discussion of non-performing loans, potential problem loans and
foreclosed assets below. These assets were initially recorded at their estimated
fair values as of their acquisition dates and are accounted for in pools;
therefore, these loan pools were analyzed rather than the individual loans. The
overall performance of the loan pools acquired in each of the five FDIC -assisted
transactions has been better than original expectations as of the acquisition
dates.
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, excluding allFDIC -assisted acquired assets, atDecember 31, 2020 , were$3.8 million , a decrease of$4.4 million from$8.2 million atDecember 31, 2019 . Non-performing assets, excluding allFDIC -assisted acquired assets, as a percentage of total assets were 0.07% atDecember 31, 2020 , compared to 0.16% atDecember 31, 2019 . Compared toDecember 31, 2019 , non-performing loans decreased$1.5 million to$3.0 million atDecember 31, 2020 , and foreclosed assets decreased$2.9 million to$777,000 atDecember 31, 2020 . Non-performing one-to four-family residential loans comprised$1.6 million , or 51.6%, of the total non-performing loans atDecember 31, 2020 . Non-performing consumer loans comprised$771,000 , or 25.3%, of the total non-performing loans atDecember 31, 2020 . Non-performing commercial real estate loans comprised$587,000 , or 19.3%, of total non-performing loans atDecember 31, 2020 . Non-performing commercial business loans comprised$114,000 , or 3.8%, of total non-performing loans atDecember 31, 2020 .
Non-performing Loans. Activity in the non-performing loans category during the
year ended
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 - - - - - - - -
Commercial
construction - - - - - - - -
One- to four-family
residential 1,477 1,366 (283) (304) (134) (29) (522) 1,571
Other residential - - - - - - - -
Commercial real
estate 632 107 (94) - - - (58) 587
Other commercial 1,235 - - - - - (1,121) 114
Consumer 1,175 496 (39) (113) (96) (193) (459) 771
Total $ 4,519 $ 1,969 $ (416) $ (417) $ (230) $ (222) $ (2,160) $ 3,043
At December 31, 2020 , the non-performing one- to four-family residential
category included 23 loans, nine of which were added during 2020. The largest
relationship in this category was added in 2020 totaling $274,000 , or 17.5% of
the total category, which is collateralized by a residential home in the Kansas
City, Missouri area. Subsequent to December 31, 2020 this loan was paid off. The
non-performing consumer category included 65 loans, 24 of which were added
during 2020, and the majority of which are indirect and used automobile loans.
The non-performing commercial real estate category included two loans. One loan
was added and then removed from non-performing during 2020 after completing six
consecutive months of timely payments. The largest relationship in this category
was added in 2019 totaling $495,000 , or 84.4% of the total category, and was
collateralized by a multi-tenant building in Arkansas . The non-performing
commercial business category included two loans, neither of which was added
during 2020. The
96
Table of Contents
largest relationship in this category was added in 2018, and totaled $75,000 , or
65.6% of the total category. The previous largest relationship in this category
of $1.1 million paid off during 2020.
In the table above, loans that were modified under the guidance provided by the
CARES Act are not non-performing loans as they are current under their modified
terms. For additional information about these loan modifications, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- "Loan Modifications."
Other Real Estate Owned and Repossessions. Of the total $1.9 million of other
real estate owned and repossessions at December 31, 2020 , $446,000 represents
the fair value of foreclosed and repossessed assets related to loans acquired in
FDIC -assisted transactions and $654,000 represents properties which were not
acquired through foreclosure. The foreclosed and other assets acquired in the
FDIC -assisted transactions and the properties not acquired through foreclosure
are not included in the following table and discussion of other real estate
owned and repossessions. Because sales and write-downs of foreclosed and
repossessed properties exceeded additions, total foreclosed assets and
repossessions decreased.
Activity in foreclosed assets and repossessions during the year ended December
31, 2020 , was as follows:
Beginning ORE Ending
Balance, Proceeds Capitalized Expense Balance,
January 1 Additions from Sales Costs Write-Downs December 31
(In Thousands)
One- to four-family construction $ - $ - $
- $ - $ - $ -
Subdivision construction 689 - (464) 126 (88) 263
Land development 1,816 - (715) - (851) 250
Commercial construction - - - - - -One- to four-family residential 601 134
(624) - - 111 Other residential - - - - - - Commercial real estate - - - - - - Commercial business - - - - - - Consumer 545 1,144 (1,536) - - 153 Total$ 3,651 $ 1,278 $ (3,339) $ 126$ (939) $ 777 AtDecember 31, 2020 , the land development category of foreclosed assets consisted of one property in theCamdenton, Missouri area and had a balance of$250,000 after a valuation write-down and price reduction. During 2020, two of the three properties in the land development category were sold. The subdivision construction category of foreclosed assets consisted of one property in theBranson, Missouri area that had a balance of$263,000 after a valuation write-down. The one- to four-family category of foreclosed assets consisted of one property in westernMissouri , which was added during 2020 with a balance of$111,000 . The amount of additions and proceeds from sales under consumer loans are due to a higher volume of repossessions of automobiles, which generally are subject to a shorter repossession process. The Company experienced increased levels of delinquencies and repossessions in indirect and used automobile loans throughout 2016 and 2017. The level of delinquencies and repossessions in indirect and used automobile loans decreased in 2018 through 2020. Potential Problem Loans. Potential problem loans decreased$58,000 during the year endedDecember 31, 2020 , from$4.4 million atDecember 31, 2019 to$4.3 million atDecember 31, 2020 . This decrease was primarily due to$1.7 million in payments on potential problem loans,$124,000 in loan charge offs, and$123,000 in loans removed from potential problems and transferred to the non-performing category. Partially offsetting this decrease was the addition of$2.0 million of loans to potential problem loans. 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, but are considered in determining the adequacy of the allowance for
credit losses.
97
Table of Contents
Activity in the potential problem loans category during the year ended December
31, 2020 , was as follows:
Removed
Beginning from Transfers Transfers to Ending
Balance, Potential to Non- Foreclosed Balance,
January 1 Additions Problem Performing Assets Charge-Offs Payments December 31
(In Thousands)
One- to four-family
construction $ - $ - $ - $ - $ - $ - $ - $ -
Subdivision
construction - 24 - - - - (3) 21
Land development - - - - - - - -Commercial construction - - -
- - - - -
One- to four-family
residential 791 304 - (83) - - (149) 863
Other residential - - - - - - - -Commercial real estate 3,078 1,081 -
- - - (1,308) 2,851
Other commercial - - - - - - - -
Consumer 512 572 (34) (40) (70) (124) (228) 588
Total $ 4,381 $ 1,981 $ (34) $ (123) $ (70) $ (124) $ (1,688) $ 4,323
At December 31, 2020 , the commercial real estate category of potential problem
loans included three loans, two of which were added during 2020. The largest
relationship in this category (added during 2018), totaling $1.8 million , or
62.3% of the total category, is collateralized by a mixed use commercial retail
building. Payments were current on this relationship at December 31, 2020 . One
relationship, which totaled $1.2 million and was outstanding at December 31,
2019 , paid off in 2020. The one- to four-family residential category of
potential problem loans included 18 loans, five of which were added during 2020.
The consumer category of potential problem loans included 52 loans, 38 of which
were added during 2020, and the majority of which were indirect and used
automobile loans.
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 2020, loans classified as "Watch" increased$27.4 million , from$37.4 million atDecember 31, 2019 to$64.8 million atDecember 31, 2020 . This increase was primarily due to the addition of two unrelated loan relationships involving eight total loans. One relationship totaled$14.3 million and was collateralized by a shopping center project. The other relationship totaled$11.9 million and was collateralized by multiple indoor recreational facilities. See Note 3 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 increased$5.5 million compared to the year endedDecember 31, 2019 . The increase was due to an increase in originations of fixed-rate loans during 2020 compared to 2019. Fixed rate single-family mortgage loans originated are generally subsequently sold in the secondary market. Other income: Other income increased$855,000 compared to the prior year. In 2020, the Company recognized approximately$734,000 of additional fee income related to newly-originated interest rate swaps in the Company's back-to-back swap program with loan customers and swap counterparties when compared to 2019. The Company also recognized approximately$784,000 in income related to scheduled payments and exit fees of certain tax credit partnerships during 2020, compared to$525,000 during 2019. In 98
Table of Contents
2019, the Company recognized gains totaling
Service charges, debit card and ATM fees: Service charges, debit card and ATM fees decreased$2.2 million compared to the prior year. This decrease was primarily due to a decrease in overdraft and insufficient funds fees on customer accounts. This was due to both a reduction in usage by customers and a decision near the end of the first quarter of 2020 to waive (throughAugust 31, 2020 ) certain fees for customers in response to the COVID-19 pandemic. The effects of that decision were felt during the second and third quarters of 2020. In addition, the Company recorded less in debit card and ATM fees due to a reduction in debit card and ATM usage. Also during 2020,$200,000 in additional expenses were netted against ATM fee income due to the conversion to a new
debit card processing system. Non-Interest Expense Total non-interest expense increased$8.1 million , or 7.0%, from$115.1 million in the year endedDecember 31, 2019 , to$123.2 million in the year endedDecember 31, 2020 . The Company's efficiency ratio for the year endedDecember 31, 2020 was 58.07%, an increase from 54.48% for 2019. The higher efficiency ratio in 2020 was primarily due to an increase in non-interest expense, partially offset by an increase in total revenue. 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. In the year endedDecember 31, 2019 , the Company's efficiency ratio was positively impacted by a decrease in expense on other real estate and repossessions and negatively impacted by an increase in salaries and employee benefits expense. The Company's ratio of non-interest expense to average assets was 2.31% for the year endedDecember 31, 2020 compared to 2.37% for the year endedDecember 31, 2019 . This decrease was primarily due to an increase in average assets. Average assets for the year endedDecember 31, 2020 , increased$468.4 million , or 9.6%, from the year endedDecember 31, 2019 , primarily due to increases in loans receivable and cash and cash equivalents.
The following were key items related to the decrease in non-interest expense for
the year ended
Salaries and employee benefits: Salaries and employee benefits increased$7.6 million in the year endedDecember 31, 2020 compared to the prior year. The increase was primarily due to annual employee compensation merit increases and increased incentives in lending, including mortgage lending activities as noted above, and operations areas. Total salaries and benefits expense in the mortgage lending area increased$2.4 million compared to the previous year. Additionally, inMarch 2020 , the Company approved a special cash bonus to all employees totaling$1.1 million in response to the COVID-19 pandemic. InAugust 2020 , the Company paid a second special cash bonus to all employees totaling$1.1 million in response to the pandemic. Net occupancy expense: Net occupancy expense increased$1.4 million in the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . This was primarily related to increased depreciation on new ATM/ITMs and ATM operating software upgrades implemented during the fourth quarter of 2019. Also included in net occupancy expense for 2020 were COVID-19-related expenses for various items such as cleaning services, equipment, costs to set up remote work sites and other items. Insurance: Insurance expense increased$390,000 in 2020 compared to the prior year. This increase was primarily due to an increase inFDIC deposit insurance premiums. In 2019, the Bank had a credit with theFDIC for a portion of premiums previously paid to the deposit insurance fund. The deposit insurance fund balance was sufficient to cause no premium to be due for the last six months of 2019. Partnership tax credit: Partnership tax credit expense decreased$285,000 in the year endedDecember 31, 2020 compared to 2019. The Company periodically invests in certain tax credits and amortizes those investments over the period that the tax credits are used. The tax credit period for certain of these credits ended in 2020 and so the final amortization of the investment in those credits also ended in 2020. 99 Table of Contents Provision for Income Taxes
For the years endedDecember 31, 2020 and 2019, the Company's effective tax rate was 18.9% and 18.3%, respectively. These effective rates were lower than the statutory federal tax rate of 21%, due primarily to the utilization of certain investment tax credits and to tax-exempt investments and tax-exempt loans, which reduced the Company's effective tax rate.
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
customers' credit needs. At
100
Table of Contents
Loan commitments and the unfunded portion of loans at the dates indicated were
as follows (in thousands):
December December December December December
2021 2020 2019 2018 2017
Closed non-construction loans
with unused available lines
Secured by real estate (one-
to four-family) $ 175,682 $ 164,480 $ 155,831 $ 150,948 $ 133,587
Secured by real estate (not
one- to four-family) 23,752 22,273 19,512 11,063 10,836
Not secured by real estate -
commercial business 91,786 77,411 83,78287,480 113,317
Closed construction loans with unused available lines Secured by real estate (one-to four-family) 74,501 42,162 48,213 37,162 20,919 Secured by real estate (not one-to four-family) 1,092,029 823,106 798,810
906,006 718,277
Loan commitments not closed Secured by real estate (one-to four-family) 53,529 85,917 69,295 24,253 23,340 Secured by real estate (not one-to four-family) 146,826 45,860 92,434 104,871 156,658 Not secured by real estate - commercial business 12,920 699 -
405 4,870
$ 1,671,025 $ 1,261,908 $ 1,267,877 $ 1,322,188 $ 1,181,804
The following table summarizes the Company's fixed and determinable contractual
obligations by payment date as of December 31, 2021 . 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$ 3,591,032 $ - $ -$ 3,591,032 Time and brokered certificates of deposit 764,935 195,183 951 961,069 Short-term borrowings 138,955 - - 138,955 Subordinated debentures - - 25,774 25,774 Subordinated notes - - 73,984 73,984 Operating leases 1,116 3,984 4,015 9,115
Dividends declared but not paid 4,727
- - 4,727
$ 4,500,765 $ 199,167 $ 104,724 $ 4,804,656
The Company's primary sources of funds are customer 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.
101
Table of Contents
AtDecember 31, 2021 and 2020, the Company had these available secured lines and on-balance sheet liquidity: December 31, 2021 December 31, 2020 Federal Home Loan Bank line$ 756.5 million $ 1,069.3 million Federal Reserve Bank line 352.4 million 436.4 million Interest-Bearing and Non-Interest-Bearing Deposits 717.3 million 563.7 million Unpledged Securities 406.8 million 195.1 million Statements of Cash Flows. During the years endedDecember 31, 2021 , 2020 and 2019, 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, 2020 and 2019. 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, 2020 and 2019. 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$85.0 million ,$46.0 million and$86.4 million during the years endedDecember 31, 2021 , 2020 and 2019, respectively. During the years endedDecember 31, 2021 , 2020 and 2019, investing activities provided cash of$190.7 million and used cash of$131.3 million and$295.1 million , respectively, primarily due to the net increases and purchases of loans (2020 and 2019) and investment securities (2021, 2020 and 2019), partially offset by cash received for the termination of interest rate derivatives (2020) and the sales of investment securities (2019). During 2021, investing activities provided cash as net loan repayments exceeded the purchase of loans and investment securities. Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows are primarily due to changes in deposits after interest credited, changes in short-term borrowings, 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$428.9 million and$226.1 million during the years endedDecember 31, 2020 and 2019, respectively, primarily due to increases in customer deposit balances, net increases or decreases in various borrowings and proceeds from the issuance of subordinated notes, 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, 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. As ofDecember 31, 2020 , total stockholders' equity and common stockholders' equity were each$629.7 million , or 11.4% of total assets, equivalent to a book value of$45.79 per common share. AtDecember 31, 2021 , the Company's tangible common equity to tangible assets ratio was 11.2%, compared to 11.3% atDecember 31, 2020 . Included in stockholders' equity atDecember 31, 2021 and 2020, were unrealized gains (net of taxes) on the Company's available-for-sale investment securities totaling$9.1 million and$23.3 million , respectively. This decrease in unrealized gains during 2021 primarily resulted from increasing market interest rates during 2021, which decreased the fair value of the investment securities. Also included in stockholders' equity atDecember 31, 2021 , were realized gains (net of taxes) on the Company's cash flow hedge (interest rate swap), which was terminated inMarch 2020 , totaling$23.6 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, 2021 , the remaining pre-tax amount to be recorded in interest income was$30.6 million . The net 102
Table of Contents
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).
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, 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. OnDecember 31, 2020 , the Bank's common equity Tier 1 capital ratio was 13.7%, its Tier 1 capital ratio was 13.7%, its total capital ratio was 14.9% and its Tier 1 leverage ratio was 11.8%. As a result, as ofDecember 31, 2020 , 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, 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%. 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, 2021 , the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such. OnDecember 31, 2020 , the Company's common equity Tier 1 capital ratio was 12.2%, its Tier 1 capital ratio was 12.7%, its total capital ratio was 17.2% and its Tier 1 leverage ratio was 10.9%. As ofDecember 31, 2020 , the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such. 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. 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, 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. During the year endedDecember 31, 2020 , the Company declared common stock cash dividends of$2.36 per share (56.1% of net income per common share) and paid common stock cash dividends of$2.36 per share; this included a special cash dividend of$1.00 per common share declared inJanuary 2020 . The Board of Directors meets regularly to consider the level and the timing of dividend payments. The$0.36 per share dividend declared but unpaid as ofDecember 31, 2021 , was paid to stockholders inJanuary 2022 . Common Stock Repurchases and Issuances. The Company has been in various buy-back programs sinceMay 1990 . During the years endedDecember 31, 2021 and 2020, the Company repurchased 715,397 shares of its common stock at an average price of$54.69 per share and 529,883 shares of its common stock at an average price of$41.71 per share, respectively. During the years endedDecember 31, 2021 and 2020, the Company issued 91,285 shares of stock at an average price of$40.53 per share and 21,436 shares of stock at an average price of$30.81 per share, respectively, to cover stock option exercises.
In
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.
103
Table of Contents
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 include core net interest income, core net interest margin, efficiency ratio excluding one-time consulting expense and related contract termination liability, and the tangible common equity to tangible assets ratio. We calculate core net interest income and core net interest margin by subtracting the impact of adjustments regarding changes in expected cash flows related to pools of loans we acquired throughFDIC -assisted transactions from reported net interest income and net interest margin. Management believes that core net interest income and core net interest margin are useful in assessing the Company's core performance and trends, in light of the previous changes in estimates of the fair value of the loan pools acquired in the Company'sFDIC -assisted transactions. We calculate the efficiency ratio excluding the one-time consulting expense and the related contract termination liability by subtracting from the non-interest expense component of the ratio the one-time consulting expense and contract termination fee we incurred in connection with the evaluation of our core and ancillary software and information technology systems. Management believes the efficiency ratio calculated in this manner better reflects our core operating performance and makes this ratio more meaningful when comparing our operating results to different periods. In calculating the ratio of tangible common equity to tangible assets, we subtract period-end intangible assets from common equity and from total assets. Management believes that the presentation of this measure excluding the impact of intangible assets provides useful supplemental information that is helpful in understanding our financial condition and results of operations, as it provides a method to assess management's success in utilizing our tangible capital as well as our capital strength. Management also believes that providing a measure that excludes balances of intangible assets, which are subjective components of valuation, facilitates the comparison of our performance with the performance of our peers. In addition, management believes that this is a standard financial measure used in the banking industry to evaluate performance. These non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP financial measures. Because not all companies use the same calculation of non-GAAP measures, this presentation may not be comparable to other similarly titled measures as calculated by other companies. Non-GAAP Reconciliation: Core Net Interest Income and Core Net Interest Margin Year Ended December 31, 2021 2020 2019 (Dollars In Thousands) Reported net interest income/margin$ 177,921 3.37 %$ 177,138 3.49 %$ 180,392 3.95 % Less: Impact ofFDIC -assisted acquired loan accretion adjustments 1,576 0.03 5,574 0.11
7,433 0.16
Core net interest income/margin
104
Table of Contents
Non-GAAP Reconciliation: Efficiency Ratio Excluding One-time 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 2020 or 2019.
Non-GAAP Reconciliation: Ratio of Tangible Common Equity to Tangible Assets
December 31, December 31, December 31, December 31, December 31,
2021 2020 2019 2018 2017
(Dollars In Thousands)
Common equity at period
end $ 616,752 $ 629,741 $ 603,066 $ 531,977 $ 471,662
Less: Intangible assets at
period end 6,081 6,944 8,098 9,288 10,850
Tangible common equity at
period end (a) $ 610,671 $ 622,797 $ 594,968 $ 522,689 $ 460,812
Total assets at period end $ 5,449,944 $ 5,526,420 $ 5,015,072 $ 4,676,200 $ 4,414,521
Less: Intangible assets at
period end 6,081 6,944 8,098 9,288 10,850
Tangible assets at period
end (b) $ 5,443,863 $ 5,519,476 $ 5,006,974 $ 4,666,912 $ 4,403,671
Tangible common equity to
tangible assets (a) / (b) 11.22 % 11.28 % 11.88 % 11.20 % 10.46 %© Edgar Online, source
