GSBC 2024Q2

Hello. Thank you for standing by. Welcome to the Great Southern Bancorp, Inc. Second Quarter 2024 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. I would now like to turn the call over to Kelly Polonus. You may begin.

Thank you. Well, good afternoon, and thank you for joining us for our second quarter 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. For a list of some of these factors, please see the forward-looking statements disclosure in our second quarter 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.

All right. Thanks, Kelly, and good afternoon to everybody. Our second quarter results reflected improved earnings versus the first quarter 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 second quarter, we earned $1.45 per diluted common share or $17 million, compared to $1.52 or $18.3 million for the same period in 2023. Earnings were $1.13 per share or $13.4 million in the first quarter of ‘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 second quarter of ‘24. Key drivers of our performance included modest increases in overall funding costs, continued significant competition for deposits, and lower loan origination volume. The second quarter was also the first full period without the negative impact of one 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 and liquidity, the company's capital and liquidity positions remain strong. Total stockholders' equity was $568.8 million as of June 30 ‘24, decreasing $3 million from the end of ‘23 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 thresholds. Our TCE ratio was 9.4% at the end of June. The company declared a $0.40 per common share dividend during the second quarter 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 billion. Overall, our loan portfolio is diverse and performing well. We've seen some modest growth in our portfolio with an increase of about $44 million since the end of ‘23. The increases are primarily in the multifamily category, which is really happening as a result of multifamily construction loans finishing and being moved to the permanent multifamily category. At the end of '24, the pipeline of loan commitments and unfunded lines decreased to $1.1 billion, including $571 million 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 ‘23, non-performing assets increased $8.6 million to $20.4 million at the end of 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 ‘24. 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 of helpful information regarding our loan portfolio mix by type and geography. That concludes my prepared remarks. I'll turn the call over to our CFO, Rex Copeland, at this time.

All right. Thank you, Joe. Net interest income for the second quarter of 2024 was $46.8 million, compared to $48.1 million for the second quarter of 2023 and versus $44.8 million in the first quarter of 2024. As we highlighted in our news release, we did see improved net interest income in the second quarter of 2024, compared to the first quarter due to the contractual termination of an interest rate swap. This swap reduced interest income by $1.9 million in the first quarter of 2024, with no financial impact from the swap in the second quarter. 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 first quarter of 2024. Higher funding costs in the second quarter of 2024 were particularly or 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% in the second quarter of 2024, compared to 3.56% in the same period of 2023, a decrease of 13 basis points. Net interest margin was 3.32% in the first quarter of 2024. In 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 and savings deposits, time deposits, and broker deposits increased 51 basis points, 123 basis points, and 28 basis points respectively, in the three months ended June 30 ’24, compared to the three months ending June 30, 2023. As 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 billion at the end of June 2024, and with $1.1 billion of this availability at the home loan bank with secured lines there. At June 30, 2024 total deposits were about $4.6 billion. During the three months ended June 30, 2024, the company's total deposits did decrease by $158 million. Interest-bearing checking balances decreased to $104 million or about 4.6%, primarily in certain money market accounts. While non-interest-bearing checking balances decreased $6.4 million or about 0.7%, time deposits generated through the company's banking center and corporate services networks decreased $24 million or about 2.7%. And time deposits generated through Internet channels decreased about $4.7 million. Total broker deposits decreased $15.5 million or about 2.3%, through a variety of different sources. I'll talk for a minute about non-interest income. For the quarter ended June 30, 2024, non-interest income increased $2.1 million to $9.8 million compared to the quarter ended June 30, 2023. Really, it was in a few areas, so other income was the primary driver. Other income increased $2.6 million compared to the prior year quarter. In the second quarter of ‘24, the company reported $2.7 million of other income, net of expenses, and write-offs related to the termination of the master agreement between the company and the third-party software vendor for the conversion of the company's core banking platform. We previously disclosed this termination in our first-quarter 10-Q that was filed previously. The amounts represented the elimination of certain deferred credits and liabilities along with certain write-offs related to capitalized hardware, software, and other assets that were previously recorded in preparation for the conversion to the new banking platform. Net gains on loan sales increased $418,000 compared to the prior-year quarter. The increase was due to a couple of different reasons, 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 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 multi-year trend whereby our customers are choosing to forego authorizing payments of certain items to exceed their account balances, resulting in fewer overdrafts in checking accounts and related fees. Non-interest expense for the quarter ended June 30 increased $1.7 million to $36.4 million compared to the second quarter of 2023. A few items generated that, so other operating expenses we did have an increase there of $466,000 from the prior year quarter to $2.6 million. 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. The company's efficiency ratio for the second quarter of '24 was 64.27%, compared to 62.10% for the same quarter in '23, and the company's ratio of non-interest expense to average assets was 2.50% and 2.43% for the three months ended June 30, 2024 and 2023, respectively. Provision for credit losses: during the 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 three 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 $1.6 million for the three months ended June 30, 2023. Total net recoveries were $168,000 for the three months ended June 30, 2024, compared to net charge-offs of $135,000 in the three 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%. Lastly, I'll mention income taxes. For the three months ended June 30, 2024, and 2023, the company's effective tax rate was 18.5% and 19.7%, respectively. These effective rates were near the end, 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. Let me ask the operator to once again remind our attendees how to queue in for questions.

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

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

Yes, I'll go ahead and take that one. We did add some securities, probably around $80 million to $85 million of securities during May and June. We were able to achieve, in excess, we believe, a 5% yield 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. So it's kind of a combination of a lot of things that we already have in the portfolio.

All agency stuff, right, Rex?

Correct. All agency.

Got it. 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.

Yes, you are correct on both points. It was used partly to finance the purchases and also to cover some of the shortfall from the decline in deposits.

I understand. I'm curious if you believe that taking on this leverage with the borrowings and loan growth will lead to a decrease in the margin. How do you see this developing in the future?

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

We funded them short, Andrew. We funded them short.

Got it. Okay.

If rates move as people expect, the margin should improve, especially regarding this securities transaction.

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?

Yes.

Correct.

Got it. Okay. Very helpful.

I think they were bought at a discount too, so if they pay fast our yield should be better. Is that right, Rex?

That's correct.

Got it. Okay. That's helpful. And then, you referenced a couple of times on the call some ongoing compliance matters, and that was referenced in the release. Just curious if there's any more detail you can provide on that. I recognize that it might be sensitive if you can't, but just curious what you might mean by that?

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 non-recurring. I think if you look back through our earnings releases, you'll see that we don't have this that often, but I think we've given as much detail as we're comfortable giving.

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

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

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 here in the second quarter, and how does that play into the outlook for the margin over the back half of the year?

Yes, the full benefit was in the second quarter that swap terminated on March 1. So we had two of three months of it in the first quarter, and then we had zero months of it in the second quarter. So it was fully impacting in the second quarter.

Okay. And then can you remind us, do you have another one that's rolling off in '24 or is it the spring of '25?

No, we don't have anything rolling off now for a little while. They're further out. There is the one that we terminated several years ago that is still providing income. That one goes, I think, through August of '25, something like that, I believe.

Yes, it's either August of '25 or October of '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?

I'll start with that. I believe we can manage it reasonably well. As I mentioned earlier, we have significant maturing CDs due in the upcoming quarters. We expect that the new CDs replacing the maturing ones will have rates that are about the same or possibly slightly lower than those expiring. This will depend on competition and how the Federal Reserve guides interest rates, so there is some uncertainty involved. However, we currently anticipate that the new CDs will be issued at rates that are at or below the maturing ones. We also continue to have fixed-rate and other loans in our portfolio that are paying down, allowing us to reinvest those funds at higher rates. As mentioned previously, the securities we've added to our books are not contributing much to our spread right now. If we see rate cuts, they may begin to generate more spread, but at this point, the additional balances have not significantly increased our net interest income. Therefore, we might expect marginal stability in our margins for the time being.

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

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

Okay. 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. Now that that's not happening and the agreement's been canceled, how do we think about kind of the expense run rate here from this quarter, absent the $600,000 related to the compliance stuff?

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

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

So should we expect them to decline by almost a $1 million here in the next quarter?

The $900,000 represents legal and professional expenses that were one-time costs related to the conversion. These expenses should largely be eliminated moving forward. There may be some lingering costs with a few personnel still involved, but overall, these expenses should be minimal. Additionally, we do not expect compliance expenses to reach those levels again.

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?

Right.

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

Okay.

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.

Hey, guys. Good afternoon.

Hey, John.

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?

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. I mean, there's always the chance we 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.

Okay. 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?

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

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

If we see some growth in our core deposits, we would pay back those advances. We might also continue to roll them over since they are just overnight. We have the capacity to do this. We could keep rolling them over overnight or consider short-term brokered options, which we occasionally utilize. Our decisions will depend on the pricing we observe and what makes the most sense at the time. It appears we might be nearing a rate cut, as the Fed seems to be sending signals, and we could receive clearer indications at their July meeting, suggesting we're getting closer to the first rate cut.

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 million-ish. Is the $35 million area, is that sort of a good run rate?

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 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.

Yes, remind me again, who's your current core provider?

There might be some lingering costs related to legal and expenses from the conversion process, so it's possible not all of those will go away immediately. As we transition, we also mentioned that there are new products and services that we'll be receiving from our current provider, which will likely increase our costs by around $100,000 to $125,000 per month.

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

I mean, we're sort of just rethinking it. We really liked it when we were able to buy our stocks back in the low-50s. And so we'll just sort of rethink it, you know, as we, you know, what's the best thing to do at this point? You know, 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 it. 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.

The sub debts next year, right?

Yes, yes, June of '25.

Those are good problems to have. So thanks, guys.

All right, thanks, John.

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.

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

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