GSBC 2023Q2

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. 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 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 of 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 costs 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 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 we have 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 was due to a little 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 approximately 900,000 shares remaining on our stock repurchase authorization. During the second quarter, new loan production and general activity was down compared to 2022, 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, particularly from construction loans being completed and moving into multi-family. The offset from the multi-family growth was the reduction in construction and commercial real estate. Our pipeline of commitments in unfunded lines declined a bit from the end of the first quarter, but it's still relatively strong at $1.6 billion, which 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. Regarding asset quality, overall asset quality metrics remained very strong during the quarter. Non-performing assets ended at 20 basis points at June 30, 2023. That was an increase of about 15 basis points due to one project, an office project—the Missouri office project—that moved onto 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, and 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. 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 then increased about $2.8 million on brokered deposits. 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 by 44 basis points, while the weighted average interest rate on time deposits increased by about 78 basis points, comparing Q2 to Q1 this year. The increase in interest expense for the broker deposits was due to an increase in average balances coupled with a 44 basis point increase in the average interest rate on those. Interest income on loans increased by $2 million. So that partially offset some of the funding cost increases compared to the first quarter. However, interest income on the loans was reduced a little bit by $1.7 million in the second quarter due to the initial net settlement on two interest rate swaps that we had put in place several months ago. As I mentioned earlier, higher funding costs on those interest-bearing checking and savings accounts resulted from competition for those deposits and the higher market rates I mentioned. Currently, we do not expect to see significant rate increases in the product types that we could be impacted by competitor rates and further shifting of deposit mix. Higher funding costs on time deposits were significantly caused by a substantial amount of time deposits maturing at relatively low rates in the second quarter. The time deposit maturities in the second quarter were about $511 million with a weighted average rate at maturity of 2.08%. The maturity of these deposits means that they had to be replaced with other funding sources at the then-current market rates. In the third quarter, the time deposit maturities in this category are much less at $188 million with a weighted average rate of 2.36%. We expect renewal rates will probably be at or above 4% for those CDs that we can keep and renew to a new maturity. Besides the higher funding cost of deposits, net interest income was also negatively impacted 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, we expect the negative impact on all of the swaps, both current and terminated, to be about $3 million in the third quarter, resulting in a reduction of interest income in Q3. As Joe mentioned earlier, the net interest margin was 3.56% in the second quarter, down from 3.78% in the same quarter last year and 3.99% in the first quarter of 2023. On liquidity and deposits, Joe mentioned liquidity at a high level. We've got more detailed information about what makes up that $2.4 billion of on-balance sheet and off-balance sheet funding we have. The Home Loan Bank line availability is about $1.2 million, Federal Reserve Banks about $410 million, securities of around $580 million that are not pledged anywhere, and cash and cash equivalents of a couple of hundred million dollars. So we believe we have significant sources of liquidity to cover any funding needs that may arise. Deposits for the three months ended June 30 totaled a $25 million increase. Broker deposits were up $133 million during that time frame. Time deposits generated through our retail banking sources decreased by approximately $50 million, and Internet channels decreased by about $7 million. Interest-bearing checking balances decreased by $40 million, about 1.8%, and non-interest-bearing checking balances decreased by $11 million, which is about 1.1%. Overall, we maintain a low level of uninsured deposits, about 14% of our total deposits of $4.8 billion. To provide a clearer picture, that $4.8 billion is broken down to approximately $670 million in brokered deposits and $4.2 billion in core deposits, which consist of non-interest-bearing, interest-bearing checking and savings, and retail time deposits, spread over about 224,000 accounts. Non-interest income decreased by about $1.5 million compared to the year-ago second quarter, primarily due to a reduction in other income, where we had some assets sold in the second quarter of last year that provided a $1.1 million gain, which we didn’t replicate in the second quarter this year. Point-of-sale and ATM fees were down about $325,000 compared to the prior year second quarter due to lower fees as transactions are being routed through channels that offer reduced fees. Non-interest expense was up $1.7 million compared to the second quarter last year. Legal, audit, and professional fees increased by approximately $451,000 from the prior year due to costs related to our core system conversion. Overall, the efficiency ratio for this year's second quarter was 62.10%, compared to 56.76% in the second quarter last year. Provision for credit losses, as Joe mentioned earlier, we did not have any provision expense on our outstanding loan portfolio in the second quarter and experienced a negative provision related to unfunded commitments. Our charge-offs were about $135,000 in the second quarter of this year. So pretty minimal charge-off amounts. The allowance for credit losses as a percentage of total loans was 1.41% at June 30. The effective tax rate for the quarter was 19.7%, down from 20.5% in the second quarter last year. Year-to-date, we've utilized certain investment tax credits and some tax investments and loans, which brings our rate down a little. Lastly, I’ll mention one final item in the capital section. Joe talked about some of our capital earlier, and we did discover a typographical error in one of the bullet points on Page 1. The company’s holding common equity Tier 1 capital ratio on that page was shown as 10.4%. The ratio is actually 11.4%, as correctly shown on Page 7. That concludes our prepared remarks. At this time, we can entertain questions. I’ll ask our operator to once again remind those on the call how to queue in for questions.

Our first question comes 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 think, to me, we don't give forward guidance, so that seems unlikely to me. But let me explain what happened in our margin compared to the first quarter. We were down $5 million. Andrew, I think there are three components to that. The first, Rex mentioned, we had the forward-starting swap, which was $1.7 million of the $5 million. The second thing that happened is our core CD portfolio, which has about a $1 billion and an average duration of about a year. You would expect that to mature about $250 million per quarter. However, we had $500 million of it mature in the second quarter with most of it happening in April. The third thing that happened is just margin compression, and that's what Rex talked about last quarter—that these late cycle betas are going to go up.

Okay. So the full quarter's 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 increase interest expense if it had been a more normal maturity cycle, it was more like $1.8 million. So that accounts for about $2.5 million to $2.7 million of the $5 million decline. Those were the three factors to consider for the next quarter.

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? How should we be looking at net growth? I mean it seems like there were 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 hard to predict; the payoff activity still seems a little muted compared to 2021 and is more like the second half of 2022. We’ve adjusted our origination activity as well.

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

Thank you. Our next question comes from the 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 a $1.7 million drag from the swaps this quarter, and if you look at the rates as of June 30, it would 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 refinanced 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, we don't fund anything initially but might have $10 million sitting in the unfunded account. At the end of Q1, that number was around $1.3 billion. However, at the end of Q2, that number is $1.1 billion. As the unfunded amount decreases, the reserve amount decreases, and that's where that number comes from.

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

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 significant charge-offs, that would change that calculus a little bit.

Or possibly if the economy changes that could require us to reassess.

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

No, we do have a reserve allocated to it. It's located in a well-positioned area. It's occupied. I don’t want to get into borrower specifics. However, we feel it will be beneficial to transition this asset to a new customer who could optimize its use. We anticipate some charge-off, but we believe we've allocated reserves for that situation. This does not reflect the entirety of our office portfolio, which remains strong.

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

Thank you. I am 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 and everyone joining us today. We look forward to talking to you after our third quarter earnings. Have a great day. Thank you.

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