Great Southern Bancorp Q2 2023 Earnings Call Transcript

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July 20, 2023

There are 5 speakers on the call.

Operator

Day and

Speaker 1

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. You will then hear an automated message advising your hand is raised.

Speaker 1

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kelly Polonis with Great Southern. Please go ahead.

Speaker 2

Thank you, Victor. Good afternoon, and thank you for joining us for our Q2 2023 earnings call. This is Kelly Pomonais, 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.

Speaker 2

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 Q2 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.

Operator

All right. Thanks, Kelly. Good afternoon, everybody. Thank you for joining us for our Q2 earnings call. Our Q2 performance was solid as we continue to navigate through a pretty challenging operating environment.

Operator

Thanks to the hard work of our team, we earned $1.52 per common share were $18,300,000 compared to $1.44 $18,200,000 during the Q2 of 2022. Our earnings performance ratios were also good with annualized ROA of 1.28 percent And annualized return on average equity of 13.11 percent. We had mentioned on our last call some anticipated headwinds that we would face in the 2nd quarter related to net interest margin. Net interest margin did decline to 3.56 for the 2nd quarter compared to 3.78 For the same period in 2022 and 3.99 for the Q1 in 2023, I'm sure 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 $1,000,000 related to training and implementation costs of our upcoming core conversion.

Operator

Liquidity and capital continue to be very strong. Our liquidity position Was strong in the Q1 and got stronger actually in the Q2. 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 were totaled approximately $2,400,000,000 As we noted last quarter, our company's deposit base is pretty diverse. We have about 14% uninsured deposits, About $658,000,000 so over 3 times coverage between on and off balance sheet liquidity compared to that uninsured deposit number. While we had runoff of about $72,000,000 And non interest bearing checking balances in the Q1, from start to end, non interest bearing checking balances were fairly stable in the second quarter being down just $11,000,000 Our total stockholders' equity increased by $13,000,000 from the end of 2022, but We decreased a bit from March and that had to do with a little bit worse AOCI March for March as a result of Interest rates going up.

Operator

Of course, we're 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 $50.70 per share. At June 30, we have 900,000 shares approximately remaining on our stock repurchase authorization. During the Q2, new loan production general activity was down compared to 2022, really pretty consistent with what we So on the Q1 of 2023, total outstanding loan balances grew modestly during the 1st 6 months of the year, up about $10,000,000 Growth came primarily in the multifamily segment and it was really construction loans Being completed and when they're completed, they move into multifamily.

Operator

So the offset from the multifamily growth was the reduction And Construction and Commercial Real Estate, our pipeline of commitments in unfunded lines It declined a bit from the end of the Q1, but it's still relatively strong at $1,600,000,000 and that includes about $1,100,000,000 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 nonperforming list.

Operator

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.

Operator

So net interest income for the 2nd quarter decreased by about $693,000 to $48,100,000 Compared to $48,800,000 in the Q2 of 2022, net interest income was $53,200,000 in the Q1 of this year. So we did have a decrease of about $5,000,000 in the Q2 compared to the Q1 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 $2,500,000 on interest bearing demand and savings accounts, Increased about $1,800,000 on time deposits and those are our retail time deposits and then increased about $2,800,000 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.

Operator

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 $2,000,000 So that partially offset some of the funding cost increases compared to the Q1. But interest income on the loans were also reduced a little bit by $1,700,000 In the Q2, by those initial net settlement on 2 interest rate swaps that we had put in place Several months ago, 9 or 12 months ago with forward start dates and in May of this year is when those kicked in to start net settlement. So kind of working our way back through that a little bit further discussion. So the higher funding costs on those interest bearing checking and savings accounts resulted from Competition for those deposits and the higher market rates I mentioned.

Operator

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're going to see significant rate increases necessarily in those product types, But we could be impacted by competitive 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 $511,000,000 with a weighted average rate at maturity of 2.08%.

Operator

So when we renewed these at higher rates or they left the company in turn that required a replacement with other funding sources at the then current market rates. So a lot of that stuff would have been replaced at 4% plus kind of rate. And if it had to go over to brokered or home loan bank advances Backfill that those are going to be like 5% type rates. In the Q3 of this year, the time deposit maturities In this category, are much less at $188,000,000 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.

Operator

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 $7,000,000 in the 2nd quarter. Based on where the interest rates were at June 30, 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 $3,000,000 in the 3rd quarter as there'll be a reduction of interest income in Q3. As Joe mentioned earlier, the net interest margin was 3.56% in the 2nd quarter. That was down a little bit from 3.78% in the 2nd quarter last year and then also down from 43 basis points from 3.99% in the Q1 of 2023.

Operator

And you may recall, we were I believe our net interest margin was 3.99% in the Q4 of last year. We were able to maintain that in the Q1 of this year, but then as I just pointed out and listed a few things that happened in the 2nd 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 $2,400,000,000 of on balance sheet and off balance sheet funding we have. Home Loan Bank line availability is about $1,200,000 Federal Reserve Bank is about 410,000,000 And then we've got securities of around $580,000,000 that are not pledged anywhere and cash and cash equivalents of a couple of $100,000,000 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 3 months ended June 30, total deposits increased by about 25,000,000 Broker deposits were up $133,000,000 in that timeframe.

Operator

Our time deposits that we generate through our retail banking sources was Down about $50,000,000 and then Internet channels was down about $7,000,000 The interest bearing checking balances decreased $40,000,000 is about 1.8 percent and then non interest bearing checking balances decreased $11,000,000 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 $4,800,000,000 Just to give you a little bit more granular information, that $4,800,000,000 is broken down with $670,000,000 approximately Broker deposits of various types and then $4,200,000,000 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 $1,500,000 compared to the year ago 2nd quarter. Much of that was related into other income.

Operator

We did have some assets that we sold in the Q2 of last year for About a $1,100,000 gain, we didn't have that replicated in the Q2 this year. And then point of sale ATM fees We're down about $325,000 compared to the prior year Q2. 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 reference 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 It was up $1,700,000 compared to the Q2 last year.

Operator

Legal audit and professional fees increased about 450 $1,000 from the prior year. Joe mentioned earlier, some costs related to professional fees around our core 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. It 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.

Operator

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, Q2 this year versus 2nd quarter last year. The efficiency ratio for this year's Q2 was 62.10 percent. That compared to 56.76 percent in the Q2 last year. And I would also say comparing Non interest income and non interest expense levels in the Q2 this year compared to the Q1 this year, They are only slightly changed when you compare that to the Q1. Provision for credit losses, Joe mentioned a little bit about our credit Earlier, we did not have any provision expense on our outstanding loan portfolio in the Q2.

Operator

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 $2,200,000 of provision expense related to the unfunded commitments in the 2nd quarter. Our charge offs were about $135,000 in the Q2 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 Q2 last year. Year to date, I think our effective rate was more like in that 20.5% type range.

Operator

So there's Again, we do utilize certain kind of investment tax credits and some tax exempt investments in loans, which brings our rate down a little bit. But then there are 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%.

Operator

It was shown on Page 7. So 11.4% is the correct number. There was just a typographical error on that first page when we pulled that number over. So That concludes our prepared remarks. And at this time, we can entertain questions.

Operator

And I'll ask our operator to once again remind those on the call how to queue in for questions.

Speaker 1

Please stand by, we'll compile the Q and A roster. One moment for our first question. Our first question comes from the line of Andrew Liesch from Piper Sandler. Your line is open.

Speaker 3

Hey, good afternoon, everyone. Hey, Brigham. I just want to talk about just sort of blowing 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 3rd quarter?

Operator

Let me address that. I mean, I think to me that I mean, we don't give forward guidance. That seems Unlikely to me. But let me tell you let me put kind of the way I look at what happened In our margin compared to what went on in the Q1, we obviously were down $5,000,000 Andrea, I think there's 3 components to that. The first, Rex mentioned, we had the forward starting swap That was always going to be there.

Operator

We talked about that for some time. That was $1,700,000 of the $5,000,000 The second thing that happened is on our core CD portfolio. We have about $1,000,000,000 core CD portfolio that's kind of average duration about a year. So you would expect, all other things being equal, that that would Mature about $250,000,000 per quarter. Well, as Rex said, that's not what happened.

Operator

In our case, we just it just so happens we had $500,000,000 of that or a little more maybe, mature in the second quarter. And in fact, most of what matured in the month of April. And that information, I don't think I got it. Got it. Okay.

Operator

So full quarter effects

Speaker 3

have already been captured there. Yes, okay.

Operator

Yes. A lot of it, Andrew. 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 the increased interest expense $800,000 or $1,000,000 it was more like $1,800,000 So that was probably between $800,000 $1,000,000 of What happened to us in the Q2? And then the third thing so that's about between $2,500,000 $2,700,000 of the $5,000,000 The third thing that happened to us is just margin compression.

Operator

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 $2,800,000 44 basis points in the quarter, and I think we more or less had 50 basis points The rate increases, though, you are pretty close to 100% there. So those were the 3 factors. Now you've got to ask yourself going forward, what should we expect?

Operator

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 $1,300,000 I mean, well, you're talking about total. I'm talking about additional expense with So that's going to be that's going to add $800,000 The CDs repricing are, as Rex said, that's not going to be nearly as bad in the 3rd quarter as it was in the 2nd quarter. The non time accounts, it's just who knows on those.

Operator

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 upward. That's sort of the offset. So and that's kind of the next few quarters. You get into the Q1 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 $2,500,000 $3,000,000 improvement.

Operator

Starting The first full quarter, that will be Q2 2024. So I think those are all the things you should take into account. I realize I didn't answer your question, but I tried to give you everything I know that you need to look at to try to draw your own conclusion.

Speaker 3

No, that makes sense. Certainly a lot of thank you for giving those 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 were still Some payoffs, just natural payoffs.

Speaker 3

So low single digits in this environment, the right pace to be thinking about?

Operator

Yes, flat to flattish. It's just hard to we can't predict necessarily the payoff Activity still seems a little bit muted, certainly from where it was in 2021 And probably more like it was in the 2nd part of 2022. And we've kind of adjusted our origination Activity as well.

Speaker 3

Got you. All right. That covers my questions. Thanks. I'll step back.

Speaker 1

Thank you. One moment for our next question. And our next question comes from the line of Damon DeMont from KBW. Your line is open.

Speaker 4

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 $1,700,000 drag from the swaps this quarter. And if You look at the rates as of 6.30, you'd be $3,000,000 for the next quarter. So that's just an incremental $1,300,000 is kind of how we should look at that?

Operator

Yes.

Speaker 4

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 refinanced away to another institution? Or were those projects that were Kind of signed a contract that weren't completed for one reason or another?

Operator

No. The negative provision is on The unfunded loan balance. So when we book a construction loan, initially, we don't fund anything, So maybe we have $10,000,000 sitting in the unfunded account. And in total, At the end of Q1, that number was like $1,300,000,000 Well, at the end and we have to have a reserve on that one point $3,000,000,000 At the end of Q2, that number was $1,100,000,000 So because there's less In the way of unfunded amounts, you're going to have a lesser reserve on that. And that's where that number comes from.

Speaker 4

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 Funded 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?

Operator

I mean, it would be based 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 off significant charge offs that would change The calculus on that a little bit. Well, possibly if the economy changed, that could change. We have to Factor that outlook into our analysis when we set our loan loss reserves our credit reserves.

Operator

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

Speaker 4

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

Speaker 4

Is that correct?

Operator

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 so few 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 is going to be able to do better things with it.

Operator

And I mean, we feel like there could be some charge offs, Damon, 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.

Speaker 4

Got it. Okay, great. That's all that I had. Thanks.

Speaker 1

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

Operator

All right. Very good. We appreciate We appreciate everybody joining us today and we'll look forward to talking to you after our Q3 earnings. Everybody have a great day. Thank you.

Speaker 1

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great

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Key Takeaways

  • Great Southern earned $1.52 per share in Q2, driving net income of $18.3 million and delivering a 1.28 % annualized ROA and 13.11 % ROAE.
  • Net interest margin fell to 3.56 % from 3.78 % a year ago and 3.99 % in Q1, pressured by higher deposit funding costs and a $1.7 million headwind from interest-rate swaps.
  • The bank’s liquidity position remains robust with approximately $2.4 billion in secured funding lines and on-balance-sheet liquidity, covering over three times its $658 million of uninsured deposits.
  • Outstanding loan balances rose modestly by $10 million in H1 2023, led by multifamily loan conversions, and the construction pipeline stands at a healthy $1.6 billion with $1.1 billion unfunded.
  • Asset quality stayed strong with nonperforming assets at 0.20 % (up 15 bp on one office project), and the allowance for credit losses at 1.41 % of total loans.
AI Generated. May Contain Errors.
Earnings Conference Call
Great Southern Bancorp Q2 2023
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