What changed in this filing

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2024-04-30 compared with 2023-11-07 · 42 added, 32 removed, 74 unchanged (50% of the section changed)

14 unchanged sentences

The difference, or the interest rate repricing “gap,” provides an indication of the extent to which an institution’s interest rate spread will be affected by changes in interest rates.

A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities repricing during the same period, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets during the same period.

liabilities exceeds the amount of interest-rate sensitive assets during the same period.

Generally, during a period of rising interest rates, a negative gap within shorter repricing periods would adversely affect net interest income, while a positive gap within shorter repricing periods would result in an increase in net interest income.

During a period of falling interest rates, the opposite would be true.

As of September 30, 2023, 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 within the next twelve months, while declining interest rates are expected to have a slightly negative impact on net interest income within the next twelve months.

As of March 31, 2024, Great Southern’s interest rate risk models indicate that, generally, rising interest rates are expected to have a modestly positive impact on the Company’s net interest income, while declining interest rates are expected to have a modestly negative impact on net interest income.

The negative impact of a falling Federal Funds rate and other market interest rates also falling could be more pronounced if we are not able to decrease non-maturity deposit rates accordingly.

1 unchanged sentence

The results of our modeling indicate that net interest income is not likely to be significantly affected either positively or negatively in the first twelve months following relatively minor changes in interest rates because our portfolios are relatively well matched in a twelve-month horizon.

In a situation where market interest rates increase significantly in a short period of time, our net interest margin increase may be more pronounced in the very near term (first one to three months), due to fairly rapid increases in SOFR interest rates (or their replacement rates) and “prime” interest rates.

In a situation where market interest rates decrease significantly in a short period of time, as they did in March 2020, our net interest margin decrease may be more pronounced in the very near term (first one to three months), due to fairly rapid decreases in SOFR interest rates (or their replacement rates) and “prime” interest rates.

In the subsequent months we expect that net interest margin would stabilize and begin to improve, as renewal interest rates on maturing time deposits are expected to decrease compared to the then-current rates paid on those products.

During 2020, we did experience some compression of our net interest margin percentage due to the Federal Fund rate being cut by a total of 2.25% from July 2019 through March 2020.

Margin compression primarily resulted from changes in the asset mix, mainly the addition of lower-yielding assets and the issuance of subordinated notes during 2020 and net interest margin remained lower than our historical average in 2021.

In a situation where market interest rates increase significantly in a short period of time, our net interest margin increase may be more pronounced in the very near term (first one to three months), due to fairly rapid increases in SOFR interest rates (which replaced LIBOR interest rates) and “prime” interest rates.

In the subsequent months, we would expect that net interest margin would stabilize and begin to improve, as renewal interest rates on maturing time deposits decrease compared to the then-current rates paid on those products.

During 2020, we experienced some compression of our net interest margin percentage due to the Federal Fund rate being cut by 2.25% from July 2019 through March 2020.

Margin compression primarily resulted from changes in the asset mix;

mainly the addition of lower-yielding assets and the issuance of subordinated notes during 2020 and net interest margin remained lower than our historical average in 2021.

LIBOR/SOFR interest rates decreased significantly in 2020 and remained very low in 2021 and into the first three months of 2022, putting pressure on loan yields, and strong pricing competition for loans and deposits remained in most of our markets.

1 unchanged sentence

This increased loan yields and expanded our net interest income and net interest margin in the latter half of 2022 and the first three months of 2023.

While market interest rate increases are expected to result in increases to loan yields, we expect that much of this benefit will be offset by increased funding costs, including changes in the funding mix, as seen in the first nine months of 2023.

In the first nine months of 2023, competition for deposits was very intense, resulting in significant increases in rates paid on various deposit types.

In addition, the Company had over $500 million and $188 million of time deposits that matured and repriced to significantly higher rates in the three months ended June

30, 2023 and September 30, 2023, respectively.

Subsequent to September 30, 2023, time deposit maturities over the next 12 months are as follows:

As of March 31, 2024, time deposit maturities over the next 12 months were as follows:

within three months -- $368.5 million with a weighted-average rate of 4.31%;

1 unchanged sentence

and within six to twelve months -- $390.9 million with a weighted-average rate of 4.17%.

Based on time deposit market rates in October 2023, replacement rates for these maturing time deposits are likely to be approximately 4.25-4.75%.

Based on time deposit market rates in March 2024, replacement rates for these maturing time deposits are likely to be approximately 4.00-4.50%.

The current level and shape of the interest rate yield curve poses challenges for interest rate risk management.

4 unchanged sentences

At December 31, 2019, the Federal Funds rate stood at 1.75%.

In response to the COVID-19 pandemic, the FRB decreased interest rates on two occasions in March 2020, a 0.50% decrease on March 3 and a 1.00% decrease on March 16.

In response to the COVID-19 pandemic, the FRB decreased interest rates on two occasions in March 2020, a 0.50% decrease on March 3rd and a 1.00% decrease on March 16th.

At December 31, 2021, the Federal Funds rate was 0.25%.

2 unchanged sentences

In 2023, the FRB implemented rate increases of 0.25%, 0.25%, 0.25% and 0.25% in February, March, May and July 2023, respectively.

At September 30, 2023 the Federal Funds rate was 5.50%.

Financial markets now expect the possibility of significant further increases in Federal Funds interest rates in the latter months of 2023 and into 2024 to be less likely, with interest rate decisions being made at each FRB meeting based on economic data available at the time.

However, the FRB has further indicated, and financial markets now have begun to price in, that it is likely that the Federal Funds interest rate will remain near this peak level for many months before any rate cuts occur.

Great Southern’s loan portfolio includes loans ($1.27 billion at September 30, 2023) tied to various SOFR indices that will be subject to adjustment at least once within 90 days after September 30, 2023.

All of these loans had interest rate floors at various rates.

Great Southern also has a portfolio of loans ($790.9 million at September 30, 2023) tied to a “prime rate” of interest that will adjust immediately or within 90 days of a change to the “prime rate” of interest.

All of these loans had interest rate floors at various rates.

Great Southern also has a portfolio of loans ($6.7 million at September 30, 2023) tied to an AMERIBOR index that will adjust immediately or within 90 days of a change to the “prime rate” of interest.

All of these loans had interest rate floors at various rates.

At September 30, 2023, nearly all of these SOFR and “prime rate” loans had fully-indexed rates that were at or above their floor rate and so are expected to move fully with future market interest rate increases.

At March 31, 2024, the Federal Funds rate was 5.50%.

Financial markets now expect the possibility of significant further increases in Federal Funds interest rates in 2024 to be unlikely, with interest rate decisions being made at each FRB meeting based on economic data available at the time.

Great Southern’s loan portfolio includes loans ($1.28 billion at March 31, 2024) tied to various SOFR indices that will be subject to adjustment at least once within 90 days after March 31, 2024.

These loans had interest rate floors at various rates.

Great Southern also has a portfolio of loans ($826.7 million at March 31, 2024) tied to a “prime rate” of interest that will adjust immediately or within 90 days of a change to the “prime rate” of interest.

These loans had interest rate floors at various rates.

In addition, Great Southern has a portfolio of loans ($6.7 million at March 31, 2024) tied to an AMERIBOR index that will adjust immediately or within 90 days of a change to the “prime rate” of interest.

These loans had interest rate floors at various rates.

At March 31, 2024, nearly all of these SOFR and “prime rate” loans had fully indexed rates that were at or above their floor rate and so are expected to move fully if there are future market interest rate increases.

Interest rate risk exposure estimates (the sensitivity gap) are not exact measures of an institution’s actual interest rate risk.

1 unchanged sentence

They do not necessarily indicate the impact of general interest rate movements on the Bank’s net interest income because the repricing of certain categories of assets and liabilities is subject to competitive and other factors beyond the Bank’s control.

As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may in fact mature or reprice at different times and in different amounts and cause a change, which potentially could be material, in the Bank’s interest rate risk.

As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated

period may in fact mature or reprice at different times and in different amounts and cause a change, which could be material, in the Bank’s interest rate risk.

In order to minimize the potential for adverse effects of material and prolonged increases and decreases in interest rates on Great Southern’s results of operations, Great Southern has adopted asset and liability management policies to better match the maturities and repricing terms of Great Southern’s interest-earning assets and interest-bearing liabilities.

18 unchanged sentences

The notional amount of the swap was $400 million with a contractual termination date of October 6, 2025.

Under the terms of the swap, the Company received a fixed rate of interest of 3.018% and paid a floating rate of interest equal to one-month USD-LIBOR.

Under the terms of the swap, the Company received a fixed rate of interest of 3.018% and paid a floating rate of interest equal to one-month USD-LIBOR (now SOFR).

The floating rate reset monthly and net settlements of interest due to/from the counterparty also occurred monthly.

Due to lower market interest rates, the Company received net interest settlements which were recorded as loan interest income.

If USD-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.

If USD-SOFR exceeded the fixed rate of interest, the Company was required to pay net settlements to the counterparty and record those net payments as a reduction of interest income on loans.

The effective portion of the gain or loss on the derivative was reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affected earnings.

3 unchanged sentences

In March 2022, the Company entered into another interest rate swap transaction as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans.

The notional amount of the swap is $300 million with an effective date of March 1, 2022 and a termination date of March 1, 2024.

Under the terms of the swap, the Company receives a fixed rate of interest of 1.6725% and pays a floating rate of interest equal to one-month USD-LIBOR (now SOFR).

The floating rate resets monthly and net settlements of interest due to/from the counterparty also occur monthly.

The notional amount of the swap was $300 million with an effective date of

March 1, 2022 and a termination date of March 1, 2024.

Under the terms of the swap, the Company received a fixed rate of interest of 1.6725% and paid a floating rate of interest equal to one-month USD-LIBOR (now SOFR).

The floating rate reset monthly and net settlements of interest due to/from the counterparty also occurred monthly.

The initial floating rate of interest was set at 0.24143%.

The Company receives net interest settlements, which are recorded as loan interest income, to the extent that the fixed rate of interest exceeds one-month USD-SOFR.

If the USD-SOFR rate exceeds the fixed rate of interest (as it does currently), the Company pays net settlements to the counterparty and records those net payments as a reduction of interest income on loans.

The Company received net interest settlements, which were recorded as loan interest income, to the extent that the fixed rate of interest exceeded one-month USD-SOFR.

If the USD-SOFR rate exceeded the fixed rate of interest, the Company paid net settlements to the counterparty and recorded those net payments as a reduction of interest income on loans.

In July 2022, the Company entered into two interest rate swap transactions as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans.

5 unchanged sentences

If the floating rate of interest exceeds the fixed rate of interest (as it does currently), the Company pays net settlements to the counterparty and records those net payments as a reduction of interest income on loans.

In February 2023, the Company entered into interest rate swap transactions as part of its ongoing interest rate management strategies to hedge the risk of certain of its fixed rate brokered deposits.

The total notional amount of the swaps was $95 million with a termination date of February 28, 2025.

Under the terms of the swaps, the Company received a fixed rate of interest of 4.65% and paid a floating rate of interest equal to USD-SOFR-COMPOUND plus a spread.

The floating rate reset monthly and net settlements of interest due to/from the counterparty also occurred monthly.

To the extent that the fixed rate of interest exceeded USD-SOFR-COMPOUND plus the spread, the Company received net interest settlements, which were recorded as a reduction of deposit interest expense.

If USD-SOFR-COMPOUND plus the spread exceeded the fixed rate of interest, the Company was required to pay net settlements to the counterparty and record those net payments as interest expense on deposits.

In January 2024, the Company elected to terminate the swaps related to brokered deposits prior to their contractual termination date in 2025.

The Company received a net settlement payment from the swap counterparty totaling $26,500 upon termination.

At the time of the early termination, the Company recorded a market value adjustment to the brokered deposit of $163,000, which will be amortized as a reduction of interest expense from January 2024 through February 2025.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk