Great Southern Bancorp Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 17, 2024

There are 7 speakers on the call.

Operator

Hello. Thank you for standing by. Welcome to Great Southern Bancorp Inc. 2nd Quarter 20 24 Earnings Call. At this time, all participants are in a listen only mode.

Operator

After the speakers' presentation, there will be a question and answer session. I would now like to turn the call over to Kelly Polonis. You may begin.

Speaker 1

Thank you. Well, good afternoon, and thank you for joining us for our Q2 earnings call. The purpose of this call is to discuss the company's results for the quarter ending June 30, 2024. 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 financial performance. These statements are subject to a number of factors that could cause actual results to differ materially from projected results.

Speaker 1

For a list of some of these factors, please see the forward looking statements disclosure in our Q2 earnings release and our 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.

Speaker 2

All right. Thanks, Kelly, and good afternoon to everybody. Our second quarter results reflected improved earnings versus the Q1 of 2024, both on a reported basis and excluding the non recurring items as we continue to operate in a challenging economic environment. For the Q2, we earned $1.45 per diluted common share or $17,000,000 compared to 1 point 5 2 or $18,300,000 for the same period in 2023. Earnings were $1.13 per share or $13,400,000 in the Q1 20 $24 Excluding the non recurring items related to the terminated core banking system conversion project and some compliance matters, earnings per diluted common share were $1.37 for the Q2 of 0.24 Key drivers of our performance included modest increases in overall funding costs, continued significant competition for deposits and lower loan origination volume.

Speaker 2

The 2nd quarter was also the 1st full period without the negative impact of 1 of our interest rate swaps as we discussed in previous reports. Rex will provide more color on our results in his presentation. As far as capital liquidity, the company's capital and liquidity positions remain strong. Total stockholders' equity was $568,800,000 as of June 30, 2024, decreasing $3,000,000 from the end of 2023 due to increases in unrealized losses on our available for sale securities portfolio as well as our portfolio of interest rate swaps. Our capital remains substantially above regulatory well capitalized threshold.

Speaker 2

Our TCE ratio was 9.4% at the end of June. The company declared a $0.40 per common share dividend during the Q2 and continued to repurchase shares of common stock from time to time with approximately 237,000 shares repurchased so far in 2024. In terms of liquidity, the company had available secured funding lines through the Federal Home Loan Bank and Federal Reserve along with on balance sheet liquidity totaling approximately $2,000,000,000 Overall, our loan portfolio is diverse and performing well. We've seen some modest growth in our portfolio, with an increase of about $44,000,000 since the end of 2023. The increases are primarily in the multifamily category, which is really happening as a result of construction loans, multifamily construction loans finishing and being moved to the permanent multifamily category.

Speaker 2

At the end of 'twenty four, the pipeline of loan commitments and unfunded lines decreased to $1,100,000,000 including $571,000,000 in the unfunded portion of construction loans. Overall, credit quality metrics remained strong during the quarter with total non performing assets remaining generally unchanged from 2024. Non performing assets to total assets were 34 basis points at the end of June versus 20 basis points at the end of the year. Compared to the end of 'twenty three, non performing assets increased $8,600,000 to $20,400,000 at

Speaker 3

the end of

Speaker 2

June. Delinquencies in our loan portfolio remained at low levels and net charge offs were not significant in the second quarter or first half of twenty twenty four. For more information about our loan portfolio, you can find our quarterly portfolio presentation on our Investor Relations site under the Presentations link and it is also on file with the SEC. Our quarterly loan presentation provides a lot helpful information regarding our loan portfolio mix by type and geography. That concludes my prepared remarks.

Speaker 2

I'll turn the call over to our CFO, Rex Copeland at this time.

Speaker 4

All right. Thank you, Joe. Net interest income for the Q2 of 2024 was $46,800,000 compared to $48,100,000 for the Q2 of 2023 and versus $44,800,000 in the Q1 of 2024. As we highlighted in our news release, we did see improved net interest income in the Q2 of 2024 compared to the Q1 due to the contractual termination of an interest rate swap. This swap reduced interest income by $1,900,000 in the Q1 of 2024 with no financial impact from this swap in the Q2.

Speaker 4

And while deposit interest expenses have increased compared to a year ago, the pace of the increase has moderated over the last few quarters and only increased modestly compared to the Q1 of 2024. Higher funding costs in the Q2 of 2024 were particularly were partially caused by lower deposit balances with increased borrowings. We detailed our upcoming time deposit maturities over the next 12 months in our earnings release. Based on time deposit market rates in June 2024, replacement rates for these maturing time deposits are likely to be somewhere in the range of 4% to 4.35%. Net interest margin was 3.43 percent in the Q2 of 2024 compared to 3.56 percent in the same period of 2023, a decrease of 13 basis points.

Speaker 4

Net interest margin was 3.32% in the Q1 of 2024. And comparing the 2024 and 2023 second quarter periods, the average yield on loans increased 53 basis points, the average yield on investment securities increased 23 basis points and the average yield on other interest earning assets increased 38 basis points. The margin contraction primarily resulted from increasing interest rates on all deposit types as we discussed earlier. The average rate on interest bearing demand at savings deposits, time deposits and broker deposits increased 51 basis points 123 basis points and 28 basis points, respectively, in the 3 months ended June 30, 2024 compared to the 3 months ended June 30, 2023. Joe mentioned our liquidity position in his remarks, but I'll restate that we do have substantial liquidity with readily available funding sources at about $2,000,000,000 at the end of June 2024 and with $1,100,000,000 of this availability at the Home Loan Bank with secured lines there.

Speaker 4

At June 30, 2024, total deposits were about $4,600,000,000 During the 3 months ended June 30, 2024, the company's total deposits did decrease $158,000,000 Interest bearing checking balances decreased $104,000,000 or about 4.6 percent, primarily in certain money market and NOW accounts, while interest bearing checking balances decreased 6 I'm sorry, non interest bearing checking balances decreased $6,400,000 or about 0.7%. Time deposits generated through the company's banking center and corporate services networks decreased $24,000,000 or about 2.7 percent and time deposits generated through Internet channels decreased about $4,700,000 Total broker deposits decreased $15,500,000 or about 2.3 percent through a variety of different sources there. I'll talk for a minute about non interest income. So for the quarter ended June 30, 2024, non interest income increased $2,100,000 to $9,800,000 when compared to the quarter ended June 30, 2023. Really, it was in a few areas.

Speaker 4

So other income was the primary driver. Other income increased 2 point $6,000,000 compared to the prior year quarter. In the Q2 of 2024, the company recorded $2,700,000 of other income, net of expenses and write offs related to the termination of the master agreement between the company and the 3rd party software vendor for the conversion of the company's core banking platform. We previously disclosed this termination in our Q1 10 Q that was filed previously. The amounts represented the elimination of certain deferred credits and liabilities along with certain write off of certain capitalized hardware, software and other assets that previously had been recorded in preparation for the conversion to the new banking platform.

Speaker 4

Net gains on loan sales increased $418,000 compared to the prior year quarter. The increase was due to a couple of different things, a little bit of increase in originations and sales of loans, but also a bigger premium that we were able to generate on these loan sales in the 2024 period as interest rates had kind of settled in and were more stable versus 2023. Overdraft and insufficient funds decreased $759,000 compared to the prior year quarter. The decrease was primarily due to the continuation of what we've described before as a multiyear trend whereby our customers are choosing to forego authorizing payments of certain items to exceed their account balances, resulting in fewer overdrafts in the checking accounts and related fees. Non interest expense for the quarter ended June 30 increased $1,700,000 to $36,400,000 compared to the Q2 of 2023.

Speaker 4

Few items generated there. So other operating expenses, we did have an increase there of $466,000 from the prior year quarter to $2,600,000 In the 2024 period, the company recorded expenses totaling $600,000 related to ongoing compliance matters. The company continually monitors its compliance programs, including matters that may arise from time to time, which could result in additional compliance expenses in future periods. Net occupancy expense increased $432,000 from the prior year quarter. Various components of computer license and support expenses collectively increased by 476,000 in the 2024 period compared to the 2023 period.

Speaker 4

And then we had multiple other categories of non interest expense that in total increased about another $900,000 compared to the prior year. None of those were individually large, but there were multiple categories there. The company's efficiency ratio for the Q2 of 2024 was 64.27% compared to 62.10 percent for the same quarter in 2023. And the company's ratio of non interest expense to average assets was 2.50 percent and 2.43 percent for the 3 months ended June 30, 2024 and 2023 respectively. Provision for credit losses.

Speaker 4

So during the quarter, quarters ended June 30, 2024 and June 30, 2023, the company did not record a provision expense on its portfolio of outstanding loans. For the 3 months ended June 30, 2024, the company did record a negative provision for losses on unfunded commitments of $607,000 compared to a negative provision of $1,600,000 for the 3 months ended June 30, 2023. Total net recoveries were $168,000 for the 3 months ended June 30, 2024, compared to net charge offs of $135,000 in the 3 months ended June 30, 2023. And then at the end of the second quarter, the allowance for credit losses as a percentage of total loans was 1.39%. And then lastly, I'll mention income taxes.

Speaker 4

For the 3 months ended June 30, 20242023, the company's effective tax rate was 18.5% 19.7%, respectively. These effective rates were near, but in this case below the statutory federal tax rate of 21%, due primarily to the utilization of certain investment tax credits and the company's tax exempt investments and tax exempt loans, which reduced the company's effective tax rate. The company currently expects its effective tax rate, both combined federal and state, will be approximately 18.5% to 20.0% in future periods, primarily due to additional investment tax credits utilized beginning in 2024. That concludes our prepared remarks. And at this time, we will entertain questions.

Speaker 4

Let me ask the operator to once again remind our attendees how to queue in for questions.

Operator

Thank Our first question comes from the line of Andrew Liesch with Piper Sandler. Your line is open.

Speaker 5

Hey, guys. Good afternoon. Question on the securities book this quarter, it looked like you added to it. I'm just curious what you purchased as far as type and then duration and yield?

Speaker 4

Yes, I'll go ahead and take that one. We did add some securities probably around $80,000,000 to $85,000,000 of securities during May June. We were able to achieve in excess, we believe, at 5% yields on those securities. And it's going to be typically stuff like what we have. It's generally going to be there's some single family mortgage backed pass throughs, but there's also some multifamily product in there as well.

Speaker 4

So it's kind of a combination of

Speaker 3

a lot of things that

Speaker 4

we already have in the portfolio. All agency

Speaker 2

stuff, right, Rick? Correct, all agency. Got it.

Speaker 5

All right. That's helpful. Also short term borrowings were up, I suppose that kind of offset some of the deposit decline, but were those borrowings used to fund these purchases? I'm just curious on some of the dynamics on this balance sheet.

Speaker 4

Yes. So that was you're right on both counts there. So it was used some to fund the purchases and also just to make up for some shortfall in deposit runoff.

Speaker 5

Got it. All right. So I'm just going to so curious now if you roll this on the securities, some of these borrowings and then the loan growth or towards the margin. Do you think that there's that the margins got to come down from here taking on this leverage? How do you foresee it playing out here going forward?

Speaker 4

Well, the securities we added on are probably going to yield somewhere in the $520,000,000 to $540,000,000 kind of range. So there's probably a little bit of negative carry in the immediate future here.

Speaker 2

We funded them short, Andrew.

Speaker 5

We funded them

Speaker 2

short. Got it. But it should it breaks through what people are expecting, I guess, the margin should I mean, with respect to the securities transaction, the margin should improve.

Speaker 5

Got it. Okay. Especially then with rate cuts, it's kind of locks in some higher cost or higher yielding assets. Is that the right way to think about it?

Speaker 2

Yes. Correct.

Speaker 5

Got it. Okay. Very helpful.

Speaker 2

I think they were bought at a discount too. So if they pay fast, our yields should be better. Is that right, Rick? That's correct.

Speaker 5

Got it. Okay. That's helpful. And then you referenced a couple of times on the call some ongoing compliance matters, and then also that was referenced in the release. I'm just curious if there's any more detail you can provide on that.

Speaker 5

I recognize that it might be sensitive if you can't, but just curious what you might mean by that?

Speaker 2

No, we really can't say a lot more, Andrew, than is in the earnings release. We don't have this sort of activity very often and that's why we included it as nonrecurring. I think if you look back through our earnings releases, you'll see that we don't have this that often. So but I think we've given as much detail as we're comfortable giving.

Speaker 5

Got it. All right. Thanks for taking the questions. I will step back.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Damon DelMonte with KBW. Your line is open.

Speaker 3

Hey, good afternoon, everyone. Hope you're all doing well today and thanks for taking my questions. So first one, just wanted to circle back on the margin. With the swap that rolled off during the quarter, I guess, is the full benefit reflected this here in the second quarter? And kind of how does that play into the outlook for the margin over the back half of the year?

Speaker 4

Yes. The full benefit was in the 2nd quarter. That swap terminated on March 1. So we had 2 of 3 months of it in the Q1 and then we had 0 months of it in the 2nd quarter. So it was fully impacting in the Q2.

Speaker 3

Okay. And then can you remind us, do you have another one that's rolling off in 2024 or is it the spring of 2025?

Speaker 4

No, we don't have anything rolling off now for a little while, and they're further out. The there is the one that we terminated several years ago that is still providing income, that one goes, I think, through August of 'twenty five, something like that, I believe.

Speaker 2

Yes. It's either August of 'twenty five or October of

Speaker 3

25. Got you. Okay. So kind of from this quarter's level, I mean, do you think you can defend the margin over the back half of the year, just kind of given what you're seeing on loan pricing and kind of deposit pricing pressures?

Speaker 4

I'll take that and start. I think we can do a decent job of it. The like I was saying earlier, we think that what we have coming up, we've got fairly significant maturities of CDs coming due here in the next couple of quarters. And so we think that the new CDs that will go on to replace the maturing ones should be at and maybe they could be a little bit lower rate than some of the ones that are going to roll off. Kind of depends on obviously competition and where the Fed kind of starts to guide rates and things like that.

Speaker 4

So there'll be a little I mean, there's a little bit of sure uncertainty regarding that, but it appears right now that where we think we're going to put new CDs on would be at or below kind of where these are going to mature. And we do continue to have the fixed rate loans and just other loans that are in the portfolio that are repaying and we're able to go in and put those back to work at higher levels. As we were saying before, immediately the securities we put on the books are not providing much in the way of spread obviously. They if rates if rate cuts happen, they will start to provide some more spread there. But those are I mean, we've added balances to the denominator that really there's not a lot of net interest income generating from it just yet.

Speaker 4

So that will be a little bit kind of sideways on the margin probably.

Speaker 3

Got you. Okay. And looking at the like the period end securities, I think they were like $740,000,000 and then the average securities were a little bit less than $700,000,000 So kind of got put on towards the end of the quarter. So we should probably expect some impact from that here in the Q3?

Speaker 4

Yes, maybe a little bit. We put most of those on in late May early June, I believe. Okay.

Speaker 3

Okay. That's helpful. Thank you. And then on the expense side of things, you guys have been carrying kind of extra expenses related to the expected conversion with the software provider, the systems provider. And now that that's not happening and the agreement has been canceled, how do we think about kind of the expense run rate here from this quarter absent the 600,000 dollars related to the compliance stuff?

Speaker 2

Yes. What were the recs like $900,000 of expenses related specifically to the conversion?

Speaker 4

Yes. Yes. That kind of the ongoing stuff that we had there for several quarters, yes.

Speaker 3

So should we expect then to decline by almost $1,000,000 here in the next quarter?

Speaker 2

I mean, we do we call the I mean, the $900,000 is legal and professional non recurring that occurred as a result of the conversion. So those expenses should more or less be gone. There could be some trailing where we could have a few people associated with that still here, but those for the most part should be gone. And the compliance expense shouldn't be like that again either.

Speaker 3

Got it. Okay. That's helpful. And then I think you noted in the release that the final resolution here with the software provider was you're sticking with your current partner and they're going to be able to accommodate new products and services to help you guys. Is that correct?

Speaker 3

Right. Got it. Okay. That's all that I had for now. Thank you.

Speaker 4

Okay.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of John Rodis with Janney. Your line is open.

Speaker 4

Hey, guys. Good afternoon.

Speaker 2

Hey, John.

Speaker 6

Hope you guys are doing well. Just back to the conversation on the securities portfolio. I guess Rex, do you plan to add more to the securities portfolio right now?

Speaker 4

Generally, I'd say no. We felt like that there was a nice opportunity there. When rates had moved back a little higher, we could get some fairly attractive yields and we thought we would take advantage of that. I don't know that I could go out today and replace that yield profile. So I would say probably not too much.

Speaker 4

I mean, there's always the chance you might do a little bit of stuff here and there if the opportunity arises. But generally, I don't think we have a big plan to go do that now.

Speaker 5

Okay.

Speaker 6

And then the short term borrowings that were referred to earlier, were those FHLB advances or what were they and what sort of yield are you paying on that?

Speaker 4

Yes, those are mostly going to be overnight advances and those will be in the low 550s probably as a rate right now.

Speaker 6

And then I assume you would expect once those roll off to replace those with CDs or more core deposits or something like that?

Speaker 4

To the extent that we generate some growth in the core deposits, we would just pay back those advances. We may just continue to roll the advances over. I mean, they're just overnight and we can continue to roll. We've got plenty of capacity to do it. So we could just continue to roll it over in overnight.

Speaker 4

We could do some brokered as well, some short term brokered and we do that from time to time. So we got some options out there, just kind of depends on the pricing that we see and what we think makes the most sense. And now we kind of are maybe we are really close to a rate cut. I mean, we don't know, but it seems like the Fed is starting to send signals and they may send us some more robust signals at their July meeting, your notes. But it seems like we may be getting closer to the point where we do get the 1st rate cut.

Speaker 6

Yes. Just to circle back on expenses. So if we back out the compliance and the legal and consulting and stuff, that puts you around 35,000,000 dollars ish. Is the $35,000,000 area, is that sort of a good run rate?

Speaker 2

I would say pretty close, John. Like I said, there could be a few trailing people that from the legal and expense associated with the conversion line. So that maybe that doesn't all drop off. The other thing as we transition, we mentioned that there are new products and services that we'll be getting from our current provider. I mean that's probably going to cost us a little bit more money, which could be $100,000 or $125,000 a month.

Speaker 6

Yes. Remind me again who is your current core provider?

Speaker 2

Yes, Q3.

Speaker 6

Okay. That's what I thought. And just maybe, Joe, just one final question on the buyback. Obviously, stocks have bank stocks have obviously had a nice move. Your stock's north of $60 How do you feel about the buyback today versus levels you bought stock last quarter?

Speaker 2

I mean, we're sort of just rethinking it. We really liked it when we were able to buy our stock back in the low 50s. And so we'll just sort of rethink it as we what's the best thing to do at this point. We do have the sub debt coming due in June. And so it may make sense not to be as aggressive buying our stock back and use the money to pay that off when it comes to.

Speaker 2

So we would be in pretty good shape to be able to do that. So I mean there's other uses for the money too. So I mean we're just going to kind of rethink it.

Speaker 6

The sub debts next year, right?

Speaker 2

Yes, yes, June of 2025.

Speaker 6

Those are good problems to have. So

Speaker 5

thanks guys.

Speaker 2

All right. Thanks, John.

Operator

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Joe Turner for closing remarks.

Speaker 2

All right. Thanks again to everybody for joining our call, and we'll look forward talking to you at the end of the Q3. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Powered by Quartr

Key Takeaways

  • Earnings: Q2 2024 EPS was $1.45, up from $1.13 in Q1 but down from $1.52 year-over-year; excluding nonrecurring items, adjusted EPS was $1.37, pressured by modestly higher funding costs and lower loan origination.
  • Capital & Liquidity: Total shareholders’ equity was $568.8 million with a 9.4% tangible common equity ratio, well above regulatory thresholds; the bank has about $2 billion of secured funding lines, declared a $0.40 dividend and repurchased roughly 237,000 shares year-to-date.
  • Loan Portfolio & Credit Quality: Loan balances grew by $44 million since year-end 2023—primarily from permanent multifamily conversions—while the pipeline of unfunded commitments declined to $1.1 billion; nonperforming assets held at 0.34% of total assets and delinquencies remained low.
  • Net Interest Margin: NIM rose to 3.43% in Q2 from 3.32% in Q1 due to the termination of an interest rate swap but was down 13 basis points year-over-year as deposit costs increased; the bank added $80–85 million of agency MBS yielding over 5%.
  • Noninterest Income & Expense: Noninterest income increased to $9.8 million, driven by a $2.7 million gain from terminating a core banking conversion agreement, while noninterest expense rose to $36.4 million on compliance and technology costs, lifting the efficiency ratio to 64.3%.
AI Generated. May Contain Errors.
Earnings Conference Call
Great Southern Bancorp Q2 2024
00:00 / 00:00