GSBC 2022Q2

Good day, and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. Second Quarter 2022 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Kelly Polonus with Investor Relations. Please go ahead.

Thank you, Carmen. Good afternoon, and welcome. The purpose of this call today is to discuss the company's results for the quarter ending June 30, 2022. Before we begin, I need to remind you that during this call, we may make forward-looking statements about future events and financial performance. Please do not place undue reliance on any forward-looking statements, which speak only as of the date they are made. Please use our forward-looking statements disclosure in our second quarter 2022 earnings release for more information. President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland, are on the call with me today. I'll now turn the call over to Joe Turner.

Okay. Thanks, Kelly, and good afternoon to everybody that's on the call. We certainly appreciate you joining us today for our second quarter earnings call. Hopefully, you've had a chance to review our release which came out last night. And if you have, you've seen that we had a very good quarter, continuing the momentum from the first quarter of '22. Our country's current economic landscape provides both opportunities and challenges for us, and I guess we're all participants in our industry. We're focused on ensuring that our company is properly positioned, especially in the wake of the changing interest rate environment. As always, we remain steadfast in adhering to our core tenets of providing our customers with world-class service while operating with a long-term mindset. I'm proud of our team of associates and appreciate their commitment to our customers and to our company. As usual, I'll provide some brief remarks about our company's performance and then turn the call over to Rex, who will get into more details about the financial results. Then we'll open it up for questions. In the second quarter of '22, we earned $18.2 million or $1.44 per share compared to $20.1 million or $1.46 per share in the same period of '21. Really, the big difference in the quarter was a $3.5 million swing in our provision expense. In the second quarter of '22, we had $2.2 million in provision expense that was exclusively for growth in our own side of loan commitments. There was obviously no provision expense related to charge-offs because we have net recoveries for the quarter. Our earnings performance ratios for the quarter were also strong with a return on assets of 1.34% and a return on equity of 12.72%. Our margin was 3.78%. We put our core margin at about 3.68%. We think we had 10 basis points of extra income from one security that paid off with additional interest flowing to us, and then we collected some nonperforming loans that had charge-off interest as well. During the second quarter, loan production was brisk as it was in the first quarter. Our total net loans grew about $250 million in the second quarter and increased $354 million from the beginning of the year. We saw increases in multifamily, one-to-four family, and commercial real estate as well. Our pipeline of loan commitments also increased during the quarter. I think about $170 million in the quarter and $270 million from the end of 2021, so strong loan production everywhere. We did open our newest loan production office during the quarter in Charlotte, North Carolina, which follows our opening of the Phoenix loan production office earlier in the year. Both of those offices are staffed with industry veterans, and we're excited about our prospects in both of those new locations. Asset quality continued to be at historically good levels. Our nonperforming assets were $4.3 million at the end of the quarter, which was a decrease of about $1.7 million from the end of the year. Nonperforming assets for the period-end are 8 basis points, and we had a one basis point recovery for the first half of the year. Our capital continues to be strong as of June 30. Total stockholders' equity and common stockholders' equity were $549.6 million, just under 10% of total assets. We had a book value per share of $44.50. I guess that total book value is at tangible book. That's total book value of $44.53. Our stockholders' equity did decrease during the first half of the year by $67.2 million. About $46 million of that was a swing in our AOCI related to our swaps in our securities. The rest of that came as a result of a fairly active repurchase program. I think we've spent $50 million in the first half of the year buying our stock back. In the second quarter, our company declared a $0.40 common share dividend, representing an 11% increase from our $0.36 per share dividend. We also, as I mentioned, continue to repurchase stock in an effort to enhance long-term shareholder value. We repurchased 849,000 shares of common stock at an average price of $59.32 during the first half of '22. At June 30, we had about 372,000 shares left in our current repurchase authorization. We'll continue to judiciously manage our capital levels in light of changing operating and economic circumstances. In the second quarter, we were also pleased to announce a $5.5 million agreement with Missouri State University for the naming rights of its indoor athletic arena, now called the Great Southern Bank Arena. This agreement further deepens our long-standing relationship with the university, which provides the Southwest Missouri region with significant recreational, educational, cultural, and economic opportunities. That concludes my prepared remarks. I'll turn the call over to Rex Copeland, our CFO, at this time.

All right. Thank you, Joe. I'll start off talking about net interest income and margin a little bit. The net interest income for the second quarter of this year increased by $4.1 million to $48.8 million compared with $44.7 million in the second quarter of 2021. Net interest income was also $43.3 million for the first quarter of 2022. Net interest income, as Joe mentioned earlier, was positively affected by some recoveries that we had during the quarter, both from one security and three larger loan interest recoveries that we had, which had previously been charged-off interest for us. The margin, as Joe mentioned, was 3.78%, excluding those sort of extra items that we had. We think that our margin was around 3.68%, which compares to 3.35% in the second quarter of 2021 and also compares to 3.43% in the first quarter of 2022. Part of the changes going on there were for the margin expansion related to the mix of our assets. Obviously, interest rates were moving a bit higher in the second quarter. We changed the asset mix, which was a piece of it, with our average cash equivalents decreasing about $399 million. Average loans were flattish, decreasing about $59 million from the previous year quarter while average investment securities increased about $281 million compared to the same quarter a year ago. We also reduced interest expense when we redeemed $75 million of our subordinated notes in August of 2021. As we've stated previously, the generally rising interest rate environment, particularly in short-term rates, should positively impact our net interest income as our floating rate loans reprice upward with increases in the market rates. We anticipate this will be the case as the Fed has indicated further rate increases in the very near term. We'll probably see further increases in our deposit rates as the Fed has been raising rates and market rates have gone up. Short-term rates have gone up pretty rapidly. We would anticipate that our deposit rates may lag a bit, but we'll start to see some increases there as well. We also had a similar situation in the six-month period concerning shifting asset mix. The funds that we previously had at the Federal Reserve Bank were utilized. We had our outstanding loans increase by $354 million this year. Investments increased by $234 million this year while our total cash and cash equivalents decreased from the beginning of the year by about $522 million. Non-interest income in the second quarter this year compared to the year-ago quarter decreased about $266,000 to $9.3 million. We had decreases of about just over $2 million in profit on loan sales. Last year, we originated and sold a lot more longer-term fixed-rate loans, sold those in the secondary market as we originated those. Obviously, we are originating much less of that this year due to rate changes, while what we are originating are loans that have a shorter fixed rate period and then become adjustable rate, with most of those being retained on our balance sheet, so we have not had the same level of profit on loan sales as we had a year ago. Also, the activity on our derivative interest rate products, back-to-back swaps that we have with our loan customers, we recognized $145,000 of income in the second quarter period this year versus recognizing a $179,000 loss in the change in fair value on that in the second quarter last year. So changes in market rates have impacted that somewhat. Additionally, other income increased by about $1 million compared to the prior year as we recognized some gains related to sales of some fixed assets. Non-interest expense for the quarter ended June 30 increased $2.8 million to $33.0 million, comparing to a $2.8 million increase versus the second quarter last year. The largest portion of the increase was in salary and employee benefits, with the most significant contributing factor being a special cash bonus that we paid out to all employees, totaling about $1.1 million in response to the rapid and significant increases in prices for many goods and services in the current economic environment. Also, a portion of the increase related to normal annual merit increases from this year versus last in various lending and operational areas, with some cases of 2022 increases being larger than they had been in previous years. Additionally, as Joe said, we've opened new loan production offices in Phoenix and Charlotte, incurring some additional expenses related there. Lastly, in this category, last year, we deferred some origination costs mainly related to the PPP loans that we originated last year, and we did not have those this year, resulting in fewer origination costs being deferred this time around. Legal professional fees, which are not purely legal but more professional, increased about $665,000 from the prior year quarter to a total of $1.2 million this quarter. In this period, we incurred expenses totaling about $580,000 related to training and implementation costs for the upcoming core systems conversion that we have also related to some professional fees from consultants engaged as we work through this transition to the new software platform. The efficiency ratio for the second quarter this year was 56.76% compared to 55.63% for the second quarter of 2021, and this was somewhat higher primarily due to the non-interest expense items I previously mentioned. Joe discussed the provision for credit losses earlier. We had a negative provision in the second quarter last year of $1 million. In this year's second quarter, we had a $2.2 million provision expense related entirely to the unfunded loan commitment balances that we had at the time. Joe mentioned that we had net recoveries in the first half of this year, and in the second quarter, it was about $261,000 of net recovery in the 2022 period. Lastly, I'll mention income taxes. Our effective tax rate was about 20.5% in the second quarter, which was comparable with the rate for the six months this year. I think the rate was slightly higher at 20.8% in the second quarter of 2021. We anticipate that our tax rate will run in the 20.5% to 21.5% range in future periods, affected by tax-exempt interest on investments and loans, utilization of tax credits, and the mix of various state taxing jurisdictions we engage in, along with total levels of pretax income. That concludes our prepared remarks today. At this time, we can entertain questions. Let me ask our operator to once again remind the attendees on the call that have questions to proceed.

We have a question from Andrew Liesch with Piper Sandler. Your line is open.

Thanks. Hi, everyone. I just want to talk about the loan growth here. Obviously, a couple of quarters now show really good trends. What are you seeing on the payoff front? Has the payoff slowed and that's contributing to the growth? Or is it really just on the production side that we're seeing in these numbers?

No, I think definitely payoffs have slowed, Andrew. I think it's hard to say what that's attributable to totally. We think maybe some of our multifamily developers were paying off their construction loans pretty quickly after they received their certificates of occupancy, refinancing those into the permanent market. Now, those permanent rates just aren't as attractive, so they're electing to maintain the balances with us for a little while longer. So yes, I think that's definitely a piece of the story, although production was certainly brisk during the quarter as well.

I think that we're a few weeks into the third quarter. Has that production continued? I'm hearing about a pullback from some investors just given rising rates and macro concerns, but how has production trended so far in the last three weeks?

I really don't see that. It is going to ebb and flow a little bit. So I don't think about it in terms of two or three weeks. I wouldn't say at this point there's anything that would lead me to believe that it's going to be significantly different than it has been in prior quarters, but yes, I guess it could be affected as even a quarter is a pretty short period of time.

Rex, how should we think about the size of the securities portfolio here? Has it reached a plateau and do you use cash flows on it to fund loan growth? Are there any outflows from all the liquidity that came in over the last couple of years? How should we use the securities portfolio?

Yes. I think our securities portfolio is not going to change a whole lot. Certainly, I don't anticipate that it's going to grow. We will likely have some repayment on it, but I don't think that our repayment level is going to be extreme either. So I think our portfolio is probably going to be somewhat stable at this point.

Got it. All right. And then just a question on the margin. Obviously, some good expansion here, but it sounds like you'll still get some benefit from rising rates and presumably another rate hike next week. But may the pace of expansion is going to slow just given some upward pressure on funding costs?

I would say somewhat yes. I mean we have been able through the end of June to lag some of those deposit cost increases. Some of it is going to be a little bit of a change in the funding mix. So deposits in total may be at a similar level, but some of the non-time balances may fluctuate and could trend down a little from the peak of where we were maybe a year ago or so. We will supplement that with maybe some broker deposits and also some advances from the home loan bank. Those are going to be at more current market rates than the rates that we pay on our non-maturity deposit portfolio. Retail CDs have been trending down a little, which may start to flatten out here. I'm not sure they're going to go a whole lot lower than they are as far as balance goes, but certainly, the rate on those will likely rise as we review balances or bring in new retail CDs. That rate is going to be higher than the existing portfolio rate just because the Fed has already raised 150 basis points and probably another 75 next week.

I think at a meeting earlier this week, the individual that tracks that for us told us that our new retail CD rates averaged around 1%, while the portfolio balance rates currently stand at 52 basis points. So you can expect those CDs to be higher in a year. It's sort of interesting. There's a countervailing force at play, Andrew. What Rex mentioned regarding beta factors tends to increase the further you get into the interest rate cycle. However, on our adjustable rate loan portfolio of about $1.9 billion, which is adjusted almost daily or monthly, we were in the money with floors early on. So that portfolio did not adjust or at least did not adjust fully. Now, as we are out of the money on all those floors, the more the Fed increases, almost all of that portfolio will increase, which is positive for us. The negative is, as Rex said, we've got $2.4 billion of non-maturity deposits where customers are likely to start expecting increased rates.

Makes sense. Thanks for taking all the questions. I'll step back.

We have a question from Damon DelMonte with KBW. Please go ahead.

Hi, good afternoon, guys. Hope you are doing well today. So first question, just to follow back up on the loan growth. It sounds like you guys remain pretty positive on your outlook. Just wondering, do you expect the pace to slow down here in the back half? And also the loan-to-deposit ratio is around 98% this quarter. How are you kind of thinking about that as you get close to that 100% level?

Yes. I mean, I do think we would expect loan growth to slow down in the second half of the year, either as a result of the market giving way or as we probably will want to see loan growth slow down a little. We don't want to grow another $400 million or $500 million in the second half of the year. So I think loan growth would certainly be down from where it's been in the first six months of the year.

Got it. Okay. And then on the expense side of things, the latest LPO just kind of came online late in the quarter. You have the system conversion project underway here. Rex, can we expect a bit of a lift off of this quarter's level when you back out some of the nonrecurring items? So, taking out $1.7 million of nonrecurring expenses this quarter puts you at about $31.3 million. Is it fair to assume you're going to kind of go up towards maybe that $32 million level just given those other expense headwinds?

Yes. I think we mentioned the $580,000 we had this quarter related to some of the systems conversion-related items. That's probably going to be around $1 million each quarter until we get to the third quarter next year. There are costs related to the implementation and training that, from an accounting perspective, you have to include now. We've also got third-party consulting folks that are working with us, so I think we're likely looking at a little higher than the $580,000, maybe more like $1 million or $1.5 million expense each quarter for the next four quarters or so.

So, Damon, the $1.1 million bonus would not be recurring, but the $580,000-plus is probably another $400,000 that would be recurring for the next few quarters.

Got it. Okay. All right, take that into account. Okay. And then I guess just lastly on capital management. Obviously, very active in the first half of the year. You still remain in a very strong position capitalized. What are your thoughts on continuing the buyback through the second half of this year?

I think we're going to continue to selectively buy back our stock. I agree with you; our capital is still strong. However, it is not where it was. So will we buy 800,000 shares during the second half of the year? I doubt that very seriously. I think our buyback will be more modest in the second part of the year, but we're still certainly in the market.

Okay. Got it. That's all I had. Thank you very much.

We have a question from John Rodis with Janney. Please go ahead.

Hi, good afternoon, everyone. I hope you are doing well. Rex, regarding the question about expenses, if we consider the total conversion cost of $1 million and exclude the one-time bonus, are the new LPOs and related expenses fully accounted for in the second quarter? Or should we expect to add more expenses for that?

There is a little bit of additional expense related to Charlotte since it just came online in the latter part of the quarter, but those expenses are not overly high on a quarterly basis. The Phoenix LPO, which we launched in the first quarter, would be mostly included in the second quarter.

It appears that expenses will be around $1 million per quarter for conversion costs. Looking ahead, you can expect to see expenses slightly exceeding $32 million for the next year, is that right?

Probably. That's probably how you should be thinking about it, I would assume. The other stuff during the quarter was fairly normalized, so you just assume that we've got to add a little more for the conversion-related expenses but we won't have that $1.1 million extra that we had from the bonus.

On the margin, Rex, you mentioned that the core margin was approximately 3.68%. If you exclude the one-time items, I'm interested in how that compares to the previous rate cycles in 2018 and 2019. The core margin, when you disregard yield accretion, was closer to 3.90% to 3.95%. Is there a structural reason that the margin shouldn't return to that level if the Fed continues to raise rates? Should it go back to that level or potentially exceed 3.90% or 3.95%? How should we consider that?

Probably could be similar. I have some information here in front of me that during 2017 and early '18, our core margin was in the 3.50% to 3.60% type range. The Fed started raising rates a little more in 2018, and we peaked around 3.90% to 3.95% at the end of '18, first quarter of '19. We started dropping back down into the 3.70% to 3.60% range later toward the end of '19 as the Fed cut rates. Directionally, I can't tell you exactly where we're going to get to, but we would anticipate third quarter, I would think our margin would be increasing again.

Would our level of securities and cash be proportionately higher or lower now than it was back at the quarter that John pointed out like Q4 '18?

Probably, generally similar. We would have had less securities then, I believe.

So if you have fewer securities, all else being equal, the mix would suggest you have more loans. Yes, that would imply a higher margin than back then. So that's the only thing to consider; is there anything structurally that would suggest this would be different? That would be the only thing I would say, John, as you might look at asset mix now.

Okay. Yes, that makes sense, Joe. Just one other question, Rex or even Joe. I noticed linked quarter goodwill increased from $5.9 million to $11.2 million. What drove that increase?

That was the naming rights for the arena at the university.

Okay, that’s a good reason. So that's pretty nice. Okay, guys. Thank you.

Thanks, John.

Thank you. And this concludes our Q&A and program for today. Thank you for participating, and you all may disconnect. Have a wonderful night.