Great Southern Bancorp, Inc. (GSBC) Q2 2022 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. Second Quarter 2022 Earnings Call. [Operator Instructions] 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 changing -- 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, I think, in provision expense that was there for almost what it was exclusively for growth in our own side of loan commitments. There was obviously no provision expense related charge-offs because we have net recoveries for the quarter. Our earnings performance for the ratios for the quarter were also strong with return on assets of 1.34% and 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 -- I think we had 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 in one-to four-family, and I think in commercial real estate as well. Our pipeline of loan commitments also increased during the quarter. I think about $170 million maybe 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 and opened -- that follows our opening of the Phoenix loan production office earlier in the year. And 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, the period-end assets 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. And 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 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 have -- 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 $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, like Joe said earlier, was affected positively by some recoveries that we had during the quarter, both one security and three larger loan interest recoveries that we had, which has 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%, and that 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 kind of the mix of our assets. Obviously, also, interest rates were moving a bit higher to range in the second quarter. We're changing the asset mix that 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 and an 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, 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 Feds 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 kind of had a similar situation in the six-month period as far as shifting asset mix. The funds that we previously had at the Federal Home Loan Bank -- I'm sorry, Federal Reserve Bank were utilized. We had our outstanding loans have increased $354 million this year. Investments increased $234 million this year while our total cash and cash equivalents decreased from the beginning of the year by about $522 million. Noninterest income in the second quarter this year compared to a 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, the rate changes so far this year, we're originating much less of that. What we are originating is loans that have a shorter period fixed rate and then become adjustable rate and much of those are 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 $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. Also other -- offsetting some of that other income increased by about $1 million compared to the prior year as we recognize some gains related to sales of some fixed assets. Non-interest expense. So for the quarter ended June 30, our non-interest expense total increased $2.8 million to $33.0 million, and that was comparing the $2.8 million increase as compared to the second quarter last year. The largest portion of the increase was in salary and employee benefits, and the most significant contributing factor to that was 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 that have been going on in the economic environment right now. Also a portion of the increase related to normal annual merit increases from this year versus last in various lending and operational areas, and in some cases, the 2022 increases were maybe a little bit larger than they had been in maybe the previous couple of years. In addition, we've -- as Joe said, we've opened the new loan production offices in Phoenix and Charlotte, and so we've got 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. So there were -- under GAAP accounting, you defer some of those origination costs and then amortize those later. We didn't have, obviously, PPP loans, and so the number of loans and the deferral on some of those loans was less in the 2022 period. Also, we'll mention legal professional fees. This is really not so much legal, but more professional fees. They increased about $665,000 from the prior year quarter to a total of $1.2 million this quarter. In this current period, we had expenses totaling about $580,000 that related to training and implementation costs for the upcoming core systems conversion that we have and also related -- some professional fees related to consultants that we've 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 a little bit higher efficiency ratio rate primarily to the non-interest expense items that I previously mentioned here. Joe talked a little bit about the provision for credit losses earlier. So we had a negative provision in the second quarter last year of $1 million. This year second quarter, we had $2.2 million provision expense and that related entirely to the unfunded loan commitment balances that we have at that time. Joe, I think also said, 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 and also, I believe, 20.5% for the six months this year, but fairly comparable with rate. I think the rate was a little bit higher, 20.8%, in the second quarter of 2021. We anticipate that our tax rate is going to run in the 20.5% to 21.5% range in future periods, but that obviously is affected by our tax-exempt interest on investments and loans and also the utilization that we have of tax credits. And then also further by the mix that we have between the various state taxing jurisdictions that we are involved in as well as just total levels of pretax income. So that concludes our prepared remarks today. At this time, we can entertain questions. So let me ask our operator to once again remind the attendees on the call that have a Q&A for questions.

[Operator Instructions] 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 really good trends. What are you seeing on the payoff front? Has 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 got certificate of occupancy, refinancing those into the permanent market. And now those permanent rates just aren't as attractive, and 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 certainly was brisk during the quarter as well.

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

I don't -- I really don't get that. It is going to ebb-and-flow a little bit. So I don't think about it in terms of two or three week period. 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's been in prior quarters, but yes, I guess it could be off as gosh, it's just even a quarter is a pretty short period of time.

Got you. Rex, how should we think about the size of the securities portfolio here? Has it reached a plateau and you use cash flows on it to fund loan growth? And 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, and probably, we'll 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 not roughly moving around a whole lot at this point.

Got it. All right. And then just a question on the margin. Obviously, some good expansion here, but -- and it sounds like you'll still get some benefit from rising rates and presumably another rate hike next week. But say that 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 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 bit from the peak of where we were maybe a year ago or so. And we will replace that with -- supplement that with maybe some broker deposits and also maybe some home loan bank advances. And so those are going to be at more current market rates than the rates that we're paying on our non-maturity deposit portfolio. And then also just our retail CDs have been trending down a little bit, that 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 is probably going to start. As we review balances there or bring in new retail CDs, the rate on that is going to be higher than the existing portfolio rate just because the Fed already raised 150 basis points and probably another 75.

I think a meeting earlier this week, the guy that track that for us told us that our new rig CD kind of our average rates was around 1% and the portfolio balance rate right now is 52 basis points. So in a year, you're going to see those CD be higher. It is sort of interesting. There's a countervailing force of drilling, Andrew, there's -- what Rex mentioned about beta factors just generally tend to increase the further you get into the interest rate further you get into the cycle of interest rate increases, beta factors tend to increase that's certainly right. The other thing is, though, on our adjustable rate loan portfolio, which we have about $1.9 billion, something like that. We're pretty much daily adjust or monthly adjusted loan portfolio. A lot of that was in -- we were in the money with floors early on, and so we didn't -- that portfolio did not adjust or at least didn't adjust fully. Well, now we're pretty much out of the money on all those floors. So that's when the Fed increases, whatever they do next week, most -- almost all of that portfolio will increase. So that's a positive for us. The negative is, as Rex said, we got $2.4 billion or so of non-maturity deposits that I think customers are going to start expecting increases those rate.

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

[Operator Instructions] We have a question from Damon DelMonte with KBW. Please go ahead.

Hi, good afternoon, guys. Hope you guys are doing well today. So first question, just kind of 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 kind of 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 selling out or will probably want to see loan growth slow down a little bit. We -- I mean, we don't want to grow another $400 million, $500 million in the second half of the year. So I think it would be -- 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 kind of expect a bit of a lift off of this quarter's level when you back out some of the nonrecurring items? So I took out $1.7 million of kind of nonrecurring expenses this quarter puts you at like $31.3 million. So is it fair to assume you're going to kind of go up towards maybe that $32 million level just given those other expense headwind?

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

So Damon, the $1.1 million or whatever we have for the special bonus that would not be recurring that the $580,000-plus 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 capitalize. What are your thoughts on continuing the buyback through the back half of this year?

I think we're going to continue to selectively buy back our stock. It's -- our capital, I agree with you, it's still strong. It's not where it was, though. And 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 modest -- 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.

[Operator Instructions] We have a question from John Rodis with Janney. Please go ahead.

Hi, good afternoon, guys. Hope you guys are doing well. Just -- I guess, Rex, maybe just back to the question on expenses. So if you take into account the full conversion cost you said of $1 million and then if you back out the onetime bonus. Maybe I missed this, but the new LPOs and stuff, are those pretty much fully recognized in the second quarter? Or do we have to add some additional expense for that?

There is little bit of additional expense related to [technical difficulty] Charlotte because it just came on in the latter part of the quarter, but those expenses are not overly high on a quarterly basis. The Phoenix LPO that we put on in the first quarter, that would be pretty much fully included in the second quarter there.

Okay. So it looks like expenses -- again, with that conversion cost around $1 million a quarter, so you're going to be a little bit north of $32 million for the next year, at least. Is that correct?

Probably.

Okay.

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

Okay. On the margin, Rex, you said the core margin was about 3.68%. if you back out the onetime items. And I'm just curious, if you go back prior increasing rate cycle 2018, '19, I think, you look at the core margin, if you exclude yield accretion was closer to 3.90%, 3.95%. Structurally, is there a reason why the margin shouldn't go back to that level, if the Fed continues to raise rates? Or should it -- yes, should it go back to that level or even go higher than that 3.90%, 3.95%? How should we think about that?

Probably could be similar. I mean I've got some information here in front of me that during 2017 and early '18, our kind of core margin was in the 3.50%, 3.60% type range. And then the Fed started raising rates a little more in 2018, and we kind of peaked at around 3.90%, 3.95% at the end of '18, first quarter of '19. And then we started dropping back down some into the 3.70%, 3.60% range later toward the end of '19 as the Fed cut some rate -- cut rate. And then, of course, first quarter, second quarter of '20, our margin dropped a lot. I mean directionally, I can't tell you exactly where we're going to get to, I don't think, John. But directionally, 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 --

That's all other things being equal.

But we wouldn't have had any extra cash or anything.

So if you have fewer securities, all other things being equal, the mix would say, you had more loans. Yes, it would be a little higher than higher margin back then right. So that's the only thing when you ask, is there anything structurally that would maybe point to this being dissimilar to that, 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 guess linked quarter goodwill increased from like $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.