GSBC - NASDAQ

Good day, and thank you for standing by. Welcome to the Great Southern Bancorp Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kelly Polonus with Great Southern. Please go ahead.

Thank you, Victor. Good afternoon, and thank you for joining us for our second quarter 2023 earnings call. This is Kelly Polonus, Investor Relations for Great Southern. The purpose of this call is to discuss the Company's results for the quarter ending June 30, 2023. Before we begin, I need to remind you that during the course of this call, we may make forward-looking statements about future events and future financial performance. These statements are subject to a number of factors that could cause actual results to differ materially from the results anticipated or projected. For a list of some of these factors, please see the forward-looking statements disclosure in our second quarter earnings release and other public filings. President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland, are on the call with me. I'll now turn the meeting over to Joe Turner.

All right. Thanks, Kelly. Good afternoon to everybody. Thank you for joining us for our second quarter earnings call. Our second quarter performance was solid as we continue to navigate through a pretty challenging operating environment. Thanks to the hard work of our team, we earned $1.52 per common share or $18.3 million compared to $1.44 and $18.2 million during the second quarter 2022. Our earnings performance ratios were also good with annualized ROA of 1.28%, and annualized return on average equity of 13.11%. We had mentioned on our last call some anticipated headwinds that we would face in the second quarter related to net interest margin. Net interest margin did decline to 3.56% for the second quarter compared to 3.78% for the same period in 2022 and 3.99% for the first quarter in 2023. I know Rex is going to talk quite a bit more about that as well as deposit costs, and I may chime in a little bit on that, too. Also of note, we had ongoing significant professional fee expense totaling $1 million related to training and implementation cost of our upcoming core conversion. Liquidity and capital continue to be very strong. Our liquidity position was strong in the first quarter and got stronger actually in the second quarter. At the end of June 2023, our available secured funding lines through the Home Loan Bank and the Federal Reserve and on-balance sheet liquidity work totaled approximately $2.4 billion. As we noted last quarter, our company's deposit base is pretty diverse. We have about 14% uninsured deposits about $658 million. So over 3x coverage between on and off balance sheet liquidity compared to that uninsured deposit number. While we had a runoff of about $72 million in non-interest-bearing checking balances in the first quarter. From start to end, non-interest-bearing checking balances were fairly stable in the second quarter, being down just $11 million. Our total stockholders' equity increased by $13 million from the end of 2022, but we decreased a bit from March, and that had to do with a little bit worse AOCI marks for March as a result of interest rates going up. Of course, we continue to be substantially above well-capitalized thresholds and our tangible common equity ratio is now at 9.4%. In the second quarter, we did declare a $0.40 per share common dividend. In addition, we repurchased 170,200 shares at an average price of $50.70 per share. At June 30, we have 900,000 shares approximately remaining on our stock repurchase authorization. During the second quarter, new loan production, general activity was down compared to 2022, really pretty consistent with what we saw in the first quarter of 2023. Total outstanding loan balances grew modestly during the first six months of the year, up about $10 million. Growth came primarily in the multi-family segment, and it was really construction loans, being completed and when they are completed, they move into multi-family. So the offset from the multi-family growth was the reduction in construction and commercial real estate. Our pipeline of commitments in unfunded lines is – it declined a bit from the end of the first quarter, but it's still relatively strong at $1.6 billion, and that includes about $1.1 billion of unfunded construction loans. For more information about our loan portfolio, I'd remind you of our quarterly loan portfolio presentation. Hopefully, you've had a chance to download that and review it. Asset quality. Overall asset quality metrics remained very strong during the quarter. Non-performing assets, the period-end assets were 20 basis points at June 30, 2023. That was an increase of about 15 basis points. That's one project, an office project – the Missouri office project, that moved on to the non-performing list. But we feel very good about the status of our loan portfolio and the quality of our credit. That concludes my prepared remarks. I'll turn the call over to Rex at this time.

Thank you, Joe. I'll start off with, as Joe said, net interest income and margin, some commentary there. So net interest income for the second quarter decreased by about $693,000 to $48.1 million compared to $48.8 million in the second quarter of 2022. Net interest income was $53.2 million in the first quarter of this year. So we did have a decrease of about $5 million in the second quarter compared to the first quarter of this year. Just kind of looking at some of the items that made up that change between Q1 and Q2, interest expense increased by about $2.5 million on interest-bearing demand and savings accounts increased about $1.8 million on time deposits, and those are our retail time deposits, and then increased about $2.8 million on brokered deposits. So the increase in interest expense on those interest-bearing demand and savings accounts and time deposits was primarily due to higher market rates. The weighted average interest rate on interest-bearing demand and savings increased 44 basis points, while the weighted average interest rate on time deposits increased by about 78 basis points, and those are comparing Q2 to Q1 this year. The increase in interest expense for the broker deposits was really due both to an increase in average balances also coupled with a 44 basis point increase in the average interest rate on those. And then interest income on loans increased $2 million. So that partially offset some of the funding cost increases compared to the first quarter. But interest income on the loans were also reduced a little bit by $1.7 million in the second quarter by those initial net settlement on two interest rate swaps that we had put in place several months ago, nine or 12 months ago with forward start dates and in May of this year is when those kicked in to start in that settlement. So kind of working our way back through that a little bit further discussion. So the higher funding cost on those interest-bearing checking and savings accounts resulted from competition for those deposits and the higher market rates I mentioned. And then there was also some mix shift from non-interest-bearing and very low rate accounts to higher rate accounts. We currently don't really expect that we are going to see significant rate increases necessarily in those product types that we could be impacted by competitor rates and also further shifting of deposit mix. Higher funding costs on time deposits were significantly caused by a substantial amount of time deposits that matured at relatively low rates in the second quarter. We had put a lot of these deposits on several months ago, a few quarters ago, actually, and there was quite a bit that matured here in the second quarter. So the time deposit maturities in that second quarter were about $511 million with a weighted average rate – at maturity at 2.08%. So when we renewed these at higher rates or they left the company in turn that required the replacement with other funding sources at the then current market rates. So a lot of that stuff would have been replaced that 4% plus kind of rate. And if they had to go over to brokered or Home Loan Bank advances to backfill that those are going to be like 5% type rates. In the third quarter of this year, the time deposit maturities in this category are much less at $188 million with a weighted average rate of 2.36%. So again, we do expect renewal rates will probably be at or above 4% for those CDs that we are able to keep and renew to a new maturity. Besides the higher funding cost of deposits, net interest income was also negatively affected by the interest rate swaps, which I mentioned before, at $1.7 million in the second quarter. Based on where the interest rates were at June 30, and I don't think they've changed a whole lot since then to date, we expect the negative impact on all of the swaps, both current ones and ones that we've terminated to be about $3 million in the third quarter, there'll be a reduction of interest income in Q3. As Joe mentioned earlier, the net interest margin was 3.56% in the second quarter, that was down a little bit from 3.78% in the second quarter last year. And then also down from 43 basis points from 3.99% in the first quarter of 2023. And you may recall, we were – I believe our net interest margin was 3.99% in the fourth quarter of last year, we were able to maintain that in the first quarter of this year. But then as I just pointed out and listed a few things that happened in the second quarter that drove the margin down. Liquidity and deposits, Joe mentioned at a high level liquidity. We've got some more detailed information of what makes up that $2.4 billion of on-balance sheet and off-balance sheet funding we have. Home Loan Bank line availability is about $1.2 million, Federal Reserve Banks about $410 million, and then we've got securities of around $580 million that are not pledged anywhere and cash and cash equivalents of a couple of hundred million dollars. So we do have what we believe to be significant sources of liquidity to cover anything that would come our way from a funding standpoint. Deposits in the three months ended June 30, total deposits increased by about $25 million. Broker deposits were up $133 million in that time frame. Our time deposits that we generate through our retail banking sources was down about $50 million, and then Internet channels was down about $7 million. So interest-bearing checking balances decreased $40 million, about 1.8%, and then non-interest-bearing checking balances decreased $11 million, which is about 1.1%. As Joe mentioned, we do have a pretty low level of uninsured deposits, about 14% of our deposit total of $4.8 billion. Just to give you a little bit more granular information that $4.8 billion is broken down with $670 million approximately of brokered deposits of various types and then $4.2 billion are more core deposits of non-interest-bearing, interest-bearing checking and savings and retail time deposits. And that's spread over about 224,000 accounts. Non-interest income was a decrease of about $1.5 million compared to the year-ago second quarter. Much of that was related into other income. We did have some assets that we sold in the second quarter of last year for about a $1.1 million gain. We didn't have that replicated in the second quarter this year. And in point-of-sale and ATM fees were down about $325,000 compared to the prior year second quarter. That decrease is really kind of mostly made up of the fact that transactions are being now routed through some different channels that provide lower fees to us. There's been some changes in how merchants can route things and we've got to provide at least a couple of channels for them to do that. And so the merchants can choose which rails they want to send those through. Non-interest expense was up $1.7 million compared to the second quarter last year. Legal audit and professional fees increased about $451,000 from the prior year. Joe mentioned earlier, some costs related to professional fees around our core system conversion. Occupancy expenses increased about $600,000 from the prior year quarter. There were some various components of computer license and support, about $180,000 there, and then there were some various repairs and maintenance to a variety of buildings and grounds and equipment and things like that. That was about $446,000 more in this year period versus last year. And then finally, insurance – our FDI insurance premium – FDIC insurance premiums increased this year compared to the previous year quarter. The FDIC had announced this last year that they were going to raise insurance premium rates. And so we had about 223,000 more in expense related to insurance second quarter this year versus second quarter last year. The efficiency ratio for this year's second quarter was 62.10%, that compared to 56.76% in the second quarter last year. And I would also say comparing non-interest income and non-interest expense levels in the second quarter this year compared to the first quarter of this year, they were only slightly changed when you compare that to the first quarter. Provision for credit losses, as Joe mentioned, a little bit about our credit quality earlier. We did not have any provision expense on our outstanding loan portfolio in the second quarter. We did have negative provision in the second quarter related to unfunded commitments. The level of those commitments went down, as Joe mentioned earlier. And last year, we did have $2.2 million of provision expense related to the unfunded commitments in the second quarter. Our charge-offs were about $135,000 in the second quarter of this year, so pretty minimal charge-off amounts. And then the allowance for credit losses as a percentage of total loans was 1.41% at June 30. Income taxes. The effective tax rate for the quarter was 19.7%, and it was 20.5% in the second quarter last year. Year-to-date, I think our effective rate was little high in that 20.5% type range. So there's – again, we do utilize certain kind of investment tax credits and some tax investments and loans, which brings our rate down a little bit. But then there is some state tax requirements that we have where we have to file in various states, and there are some expenses related to that that bring the effective rate back up a bit. We think going forward, where we stand right now that the effective tax rate is going to be somewhere in the 20.0% to 21.5% range here in the next future periods. And then I'll mention one last item in the capital section. Joe talked about some of our capital earlier, and we did discover a typo and one of the bullet points on Page 1. The company’s – the holding company's common equity Tier 1 capital ratio on that page and the bullet points on Page 1 was shown as 10.4%. The ratio actually is 11.4%. That was shown on Page 7. So 11.4% is the correct number. There was just a typographical error on that first page as we pull that number over. So that concludes our prepared remarks. And at this time, we can entertain questions. And I'll ask our operator to once again remind those on the call how to queue in for questions.

[Operator Instructions] Our first question come from the line of Andrew Liesch from Piper Sandler. Your line is open.

Hey. Good afternoon, everyone.

Hi, Andrew.

I just want to talk about just sort of flowing the deposit costs through the margin here. And then also with the swaps being in a negative position. I mean is it possible to see another – with the full quarter effect of the repricing last quarter, another 40-plus basis point decline in the margin here in the third quarter?

Let me address that. I mean, I think to me, I mean, we don't give forward guidance, that seems unlikely to me. But let me put kind of the way I look at what happened in our margin compared to what went on in the first quarter. We obviously were down $5 million. Andrew, I think there's three components to that. The first Rex mentioned, we had the forward starting swap that was always going to be there. We've talked about numbers some time, that was $1.7 million of the $5 million. The second thing that happened is on our core CD portfolio, we have about $1 billion core CD portfolio that's kind of average duration about a year. So you would expect all other things being equal, that would mature about $250 million per quarter. Well, as Rex said, that's not what happened. In our case, we just – it just though happens, we had $500 million of that or a little more maybe mature in the second quarter. And in fact, most of what matured, matured in the month of April. And that information, I don't think I highlighted.

Okay. So full quarter effect has kind of already been captured there, yes. Okay.

Yes, a lot of it. Yes. Yes. So whereas you might have expected that to increased interest expense if it had been a more normal maturity thing. You might have expected that to increase interest expense, $800,000 or $1 million, it was more like $1.8 million. So that was probably between $800,000 and $1 million of what happened to us in the second quarter. And then the third thing, so that's about between $2.5 million and $2.7 million of the $5 million. The third thing that happened to us is just margin compression. I mean – and that's sort of what Rex talked about in our call last quarter that these late cycle betas are going to go up. And that's what happened. Our cost on our non-time accounts went up $2.8 million, 44 basis points in the quarter. And I think we more or less that 50 basis points of rate increases. So you were pretty close to 100% there. So those were the three factors. Now you've got to ask yourself going forward, what should we expect? Rex has mentioned that we didn't have a full quarter of that forward starting swap. So there's going to be another $800,000 of expense there. The...

More like $1.3 million. I mean...

Well, you're talking about total. I'm talking about additional expense with the...

Yes.

So that's going to be – that's going to add $800,000. The CDs repricing or – as Rex said, that's not going to be nearly as bad in the third quarter as it was in the second quarter. The non-time accounts, it's just who knows on those. It doesn't feel like they're going to reprice like they did in the second quarter, but that remains to be seen. Now at the same time, we're also having fixed rate loans repriced upwards. That's sort of the offset. So – and that's kind of the next two quarters you get into the first quarter of 2024. And then we – one of the swaps that we have been in a pay position on expires and the full quarter effect of that is between $2.5 million and $3 million improvement, starting the first full quarter that will be Q2 2024. So I think those are all the things you should take into account. I realized I didn't answer your question, but I try to give you everything that I know that you need to look at to try to draw your own conclusion.

No, makes sense. Certainly a lot of – thank you for giving those puts and takes. That's helpful. And then just a question here on the loan growth going forward. Pipeline is down a little bit, but still some optimism around the construction? And how should we be looking at net growth? I mean it seems like there was still some payoffs, just natural payoffs. So low single digits in this environment, the right pace to be thinking about?

Yes, flat to flattish. It's just hard to – we can't predict – the payoff activity still seems a little bit muted, certainly from where it was in 2021 and probably more like it was in the second part of 2022. And we've kind of adjusted our origination activity as well.

Got it. All right. That covers my questions. Thanks. I will step back.

Thank you. [Operator Instructions] And our next question will come from line of Damon DelMonte from KBW. Your line is open.

Hey. Good afternoon guys. Thanks for taking my questions here. Just to kind of circle back on the margin discussion. You noted that there was $1.7 million drag from the swaps this quarter. And if you look at the rates as of $630, it'd be $3 million for the next quarter. So that's just an incremental $1.3 million is kind of how we should look at that?

Yes.

Okay. All right. Thanks. And then as far as the provision and the reversal of the reserve on the unfunded commitments, are those loans that were closed and moved to permanent status or refinance the way to another institution? Or were those projects that were kind of signed a contract that weren't completed for one reason or another?

No. The negative provision is on the unfunded loan balance. So when we book a construction loan, initially, we don't fund anything but maybe we have $10 million sitting in the unfunded account. And in total, at the end of Q1, that number was like $1.3 billion. Well, at the end – and we have to have a reserve on that $1.3 billion. At the end of Q2, that number was $1.1 billion. So because there's less in the way of unfunded amount, you're going to have a lesser reserve on that, and that's where that number comes from.

Okay. And so if loan growth is going to be modest in the coming quarters, taking into account the potential for more relief from the unfunded side and lack of need to reserve for new growth, I mean do you expect to take any meaningful provision in the back half of the year?

I mean it's – it would be based on – obviously, we feel like we're adequately reserved right now. So all other things being equal, I would say no, if nothing changes from here.

If we have charge-offs – significant charge-offs that would change the calculus on that a little bit...

Or possibly if the economy changed that could...

We have to factor that outlook into our analysis when we set our loan loss reserves, our credit reserves. So...

Yes. But based on where we sit right now, obviously, we feel like our reserve is at the right number.

Okay. And then I guess, lastly, could you just provide a little bit more color on the office loan, it's in Missouri. I know you noted that. And no reserve was taken against that loan? Is that correct?

No, we do have. We have a reserve allocated to it. I mean, it's a well-located office building. It's occupied. I don't want to get to – I mean we have soft queue – I don't want to talk in a public forum about sort of borrower specific aspects. But it seems like it's going to be best to transition this asset to a new customer, a new customer going to be able to do better things with it. And I mean, we feel like there could be some charge-off Damon, but we think we've got that allocated in the reserve for it if there is that. And we don't feel like it's reflective of the rest of our office portfolio, certainly, kind of a one-off situation.

Got it. Okay. Great. That’s all I had. Thanks.

Thank you. And I'm not showing any further questions in the queue. I'd like to turn the call back over to Joe Turner, President and CEO, for closing remarks.

All right. Very good. We appreciate the questions. We appreciate everybody joining us today, and we'll look forward to talking to you after our third quarter earnings. Everybody, have a great day. Thank you.