Great Southern Bancorp, Inc. (NASDAQ:GSBC) Q2 2024 Earnings Conference Call July 17, 2024 3:00 PM ET

Company Participants

Kelly Polonus - Investor Relations
Joe Turner - President and Chief Executive Officer
Rex Copeland - Chief Financial Officer

Conference Call Participants

Andrew Liesch - Piper Sandler
Damon DelMonte - KBW
John Rodis - Janney

Operator

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. [Operator Instructions]

I would now like to turn the call over to Kelly Polonus. You may begin.

Kelly Polonus

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.

Joe Turner

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 construction loans -- 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.

Rex Copeland

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 to 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 end of 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 end of June 30 2024, the company's total deposits did decreased to $158 million. Interest-bearing checking balances decreased to $104 million or about 4.6%, primarily in certain money market now accounts. While interest bearing checking balances decreased -- I'm sorry, 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 there.

I'll talk for a minute about non-interest income. So for the quarter ended June 30 2024, non-interest income increased $2.1 million to $9.8 million, when compared to the quarter ended June 30, 2023. Really, it was in 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-off of certain capitalized hardware, software, and other assets that previously had been 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 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 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 the 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. 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.

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 ‘24 period, compared to the ‘23 period, 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 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, 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 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%.

And then 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.

Question-and-Answer Session

Operator

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

Andrew Liesch

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?

Rex Copeland

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% 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. So it's kind of a combination of a lot of things that we already have in the portfolio.

Joe Turner

All agency stuff, right, Rex?

Rex Copeland

Correct. All agency.

Andrew Liesch

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.

Rex Copeland

Yes, 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 the deposit runoff.

Andrew Liesch

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

Rex Copeland

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.

Joe Turner

We fund it up short, Andrew. We funded them short.

Andrew Liesch

Got it. Okay.

Joe Turner

So -- but it should -- if rates do what people are expecting, I guess, the margin should. I mean, with respect to this securities transaction, margin should improve.

Andrew Liesch

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?

Joe Turner

Yes.

Rex Copeland

Correct.

Andrew Liesch

Got it. Okay. Very helpful.

Joe Turner

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

Rex Copeland

That's correct.

Andrew Liesch

Got it. Okay. That's helpful. And then, you referenced a couple times on the call, some ongoing compliance matters, and then also 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?

Joe Turner

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.

Andrew Liesch

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

Operator

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.

Damon DelMonte

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?

Rex Copeland

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.

Damon DelMonte

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?

Rex Copeland

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.

Joe Turner

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

Damon DelMonte

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?

Rex Copeland

I'll take that one to start. I think we can do a decent job of it. 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 add 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. 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 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. 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. So that'll be a little bit kind of sideways on the margin probably.

Damon DelMonte

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?

Rex Copeland

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

Damon DelMonte

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. And 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 -- for the compliance stuff?

Joe Turner

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

Rex Copeland

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

Damon DelMonte

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

Joe Turner

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.

Damon DelMonte

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?

Joe Turner

Right.

Damon DelMonte

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

Joe Turner

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.

John Rodis

Hey, guys. Good afternoon.

Joe Turner

Hey, John.

John Rodis

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

Rex Copeland

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.

John Rodis

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?

Rex Copeland

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

John Rodis

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?

Rex Copeland

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. We can continue to roll them. We've got plenty of capacity to do it. So we could just continue to roll it over in overnight.

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. It 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 on those, but it seems like we may be getting closer to the point where we do get the first rate cut.

John Rodis

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?

Rex Copeland

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.

John Rodis

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

Rex Copeland

[Technical Difficulty]

John Rodis

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

Joe Turner

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.

John Rodis

The sub debts next year right?

Joe Turner

Yes, yes, June of ’25.

John Rodis

Those are good problems to have. So thanks guys.

Joe Turner

Alright 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.

Joe Turner

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.

Operator

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