Preliminary Q2 2022 Great Southern Bancorp Inc Earnings Call
Good day, and thank you for standing by and welcome to the Great Southern Bancorp, Inc. Second quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question.
During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded I would now like to hand, the conference over to Kelly polymers 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 30th 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. These are forward looking statements disclosure in our second quarter 2022 earnings release.
Our 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 had a.
Sure.
A review of our release, which came out last night.
And if you have seen that we had a very good quarter.
The momentum from the first quarter of 2000.
Our country's current economic landscape provides both opportunities and challenges for us.
For 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 steadfastly adhering to our core tenants of providing our customers with world class service.
Operating with a long term mindset I am 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 Rick who will get into more detail about the financial results.
We'll open it up for questions.
In the second quarter at 42, we earned $18 2 million or $1 44 per share compared to $20 1 million or $1 46 per share in the same period in 2001 really big difference in the quarter was a $3 5 million swing in our provision expense.
The second quarter of 2002, we have $2.2 million I've taken a provision expense that.
Was there for.
Almost well it was exclusively for growth in our outside of long commitment.
There was obviously no.
Provision expense related charge offs, because we have net recoveries.
For the quarter.
Earnings performance.
Ratios for the quarter.
Were also strong with return on assets of $1 34, and our return on equity of 12 72 R.
Our margin was 30 78, we put our core margin at about $3 68, and we think we had 10 basis points.
The extra income from I think we are.
Had one security that paid off with.
Actual interest flowing to us.
We collected some nonperforming loans that had charge off interest as well.
During the second quarter loan production was 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 I think in 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 for the end of 2021 saw strong loan production.
Everywhere, we did open our newest loan production office during the quarter end.
Our North Carolina.
And.
Open that followed our opening of the Phoenix loan production office.
Earlier in the year ago and both of those.
Our staff with.
Industry veterans and we're excited about our prospects in both of those new locations.
Asset quality continued to be.
Historically, good level, 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 to period end assets or eight 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%.
Total assets and.
We had a book value per share of <unk> $44 50, I guess that total book value of that tangible book is total <unk> 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 Aoc.
Related to our swaps and our.
And our securities.
The rest of that came as a result.
Fairly active repurchase program I think we spent.
$50 million in the first half of the year buying our stock back.
In the second quarter, our company declared a <unk> 40 common share dividend.
Representing an 11% increase.
From our 36.
Per share dividend.
We also as I mentioned continued to repurchase stock in an effort to enhance long term shareholder value. We have we repurchased 849000 shares of common stock at an average price of 50 930 <unk> during the first half of 'twenty two.
At June 30, we had about 372000 shares left in our current repurchase authorization.
We will continue the judicial 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 the various state University for the naming rights.
This indoor athletic Arena.
Now I'll call the great Southern Bank Arena.
Agreement further deepens, our longstanding relationship with the University, which provides the southwest Missouri region with significant recreational educational cultural and economic opportunities that concludes my prepared remarks, I will turn the call over to Rex Copeland our CFO at this time.
Alright, Thank you Joe I'll start off talking about net interest income and margin a little bit.
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 our three three larger loan interest recoveries that we had.
Which had previously been charged off interest for us the margin Joe mentioned was 378% excluding.
Excluding those sort of extra items that we had we think that our margin was around 368% and that compares to 335% in the second quarter of 2021 and also compares to 343% in the first quarter 2022.
Yes.
Part of the changes going on there.
Sure.
For the margin expansion related to the.
Mix of our assets, obviously also interest rates were moving a bit higher <unk>.
During the second quarter came from the asset mix that was a piece of that.
Our average cash equivalents decreasing about $399 million average loans were flat as 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 repriced upward with increases in the market rates.
We anticipate this will be the case as the fed's indicated further.
Rate increases in the very near term.
Sure.
We'll probably see further increases in our deposit rates.
Fed has been raising rates in market rates has gone up short term rates have gone up pretty rapidly.
We would anticipate our deposit rates may lag a bit, but we will start to see some increases there as well.
We also kind of had a similar situation in the six months period as far as shifting asset mix.
Funds that we previously had at the federal home loan Bank I'm, sorry, with the reserve Bank. We utilize we had outstanding loans has 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 five.
<unk>.
$2 million.
Okay.
Noninterest income.
The.
Second quarter of this year compared to a year ago quarter decreased about $266000 to $9 $3 million.
We had decreases of about just over $2 billion.
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 rate changes so far this year.
Originating much less is 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 had 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 recognize the 145000 of income in the second quarter period of this year versus recognizing a $179000 loss in the change in fair value on that in the second quarter last year, so changes in market rates and the impact that somewhat.
Also other kind of offsetting some of that other income increased by about $1 million compared to the prior year as we recognized some gains related to sales of some fixed assets.
Noninterest expense for the quarter ended June 30, our noninterest 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 salaries and employee benefits.
And the most significant.
<unk> factor to that was a special cash bonus that we paid out to all employees totaling about $1 1 billion.
In response to the rapid.
It increases and prices for many goods and services that have been going on.
In the in the economic environment right now.
Also a portion of the increase related to normal annual merit increases from.
This year versus last.
<unk> lending and operational areas.
In some cases 2022 increases were maybe a little bit.
They are larger than they had been in maybe the previous couple of years.
In addition, we have at <unk>.
Joe SAB is open.
New loan production offices in Phoenix, and Charlotte and so we've got some.
Additional.
Senses related there.
Lastly in this category last year, we did.
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 amortize later, we didn't have obviously PPP loans in <unk>.
So the <unk>.
Number of loans in the deferral on some of those loans.
Less than the 2020 few periods.
Also I will mentioned legal professional fees. This is really not so much legal but more professional fees increased about $665000 from the prior year quarter to a total of $1 $2 million this quarter.
In the current period, we had expenses totaling about $580000 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 engaged as we work through this transition to the new software platform.
The efficiency ratio for the second quarter of this year was 50, 676% as compared to $55 six 3% for the second quarter of 2021.
And this is a little bit higher efficiency ratio related primarily to the noninterest 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 billion.
Provision expense.
And that related entirely to be decided.
Loan commitment.
Balances that we have.
At that time.
Alright.
Joe I think also is that we had net recoveries in the in the first half.
Half of this year and in the second quarter was about 261.
$1000 of net recoveries.
Into 2022 periods.
Lastly, homage and income taxes, our effective tax rate was about 25% in the second quarter and also I believe 25% for the.
For the six months of this year.
But fairly comparable with the right I think the rate was a little bit higher 28% in the second quarter of 2021.
We anticipate that our tax rate is going to run.
The 25% to 21, 5%.
The range is.
Periods with that obviously is affected by our tax exempt interest on investments and loans and also the utilization that we have a tax.
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.
Pre tax 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 how to queue in for questions.
Absolutely. Thank you Ann as a reminder to simply press Star then one on your telephone.
One moment.
We have a question from Andrew Liesch with Piper Sandler Your line is open.
Thanks, everyone.
And I agree I just wanted to.
Talk about the loan growth here.
Obviously, a couple of quarters now really good trends what are you what are you seeing on the pay up front.
As Pam payoffs slowed and thats contributing to the growth or is it really just on the production side that we're that we're seeing 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.
Yes.
We're 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 theyre electing to.
Maintain the balances with us for a little while longer so I think that's definitely a piece of the story.
Although production.
Certainly was brisk during the quarter as well.
Okay.
A few weeks in the third quarter is that production continued keep hearing about a pullback from some investors just given rising rates.
Macro concerns, but how is production trying to so far in the last three weeks.
Yes.
I really don't get that.
It is going to ebb and flow a little bit. So I don't think about it as far as the two or three week period I want to say at this point. There is anything that would lead me to believe that it's going to be significantly different.
It's been in prior quarters.
Yes, I guess it could be office goes which is.
Even in a quarter is a pretty short period of time.
Gotcha.
Rex how should we think about the size of the securities portfolio here.
As it reached.
Has it reached a plateau and youre going to use cash flow to fund loan growth.
Outflows from.
The liquidity that came in over the last couple of years, how should we do the securities portfolio.
I think our securities portfolio is not going to change a whole lot certainly I don't anticipate that it's going to grow.
<unk>.
And probably it will 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 rapidly moving around a whole lot.
At this point.
Got it Alright, and then just a question on the margin obviously, some good expansion here, but it's been it sounds like you'll still get some benefit from rising rates and presumably other rate hikes 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 maybe a similar level, but.
Some of the.
The non time balances may fluctuate it could trend down a little bit from the peak of where we were maybe a year ago or so.
Looking at it we'll 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 were paid in our on our non maturity deposit portfolio and then also just our CES has been.
They have been trending down a little bit.
That may start to flatten out here I'm not sure we'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 renew balances there were bringing in new.
Retail Cds the rate on that is going to be higher than the existing portfolio rate just because the fed has already raised 150 basis points and probably 75, yes, I think in a meeting.
Earlier this week.
To kind of attract that Ford has told us that our new and re ACD kind of our average rate was around 1% and a portfolio balance rate right now 52 basis points. So.
And a year youre going to see.
Those PDP.
The higher it is sort of interesting there's countervailing forces really Andrew there is.
What <unk> mentioned about beta factors.
Generally tend to increase the further you get into the interest rate.
Further you get into the cycle of interest rate increases beta factors and the inquiry.
So 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 were actually pretty much daily.
Or monthly or monthly.
Well portfolio.
A lot of that was in we were in the money with floors early on and so we did that portfolio did not adjust or at least it adjust fully will now we're pretty much out of the money on all of those floors. So that when when the fed increases whatever they do next week.
Almost all of that for almost all of that portfolio will increase.
Yes.
That's a positive for us.
It is as Rick said, we've got $2 $4 billion or so.
Non maturity deposits.
I think customers are going to start.
The increases.
Yes.
Makes sense, thanks for taking all the questions I'll step back.
One moment for our next question.
We have a question from Damon Delmonte with <unk>. Please go ahead.
Hey, Good afternoon, guys Hope you guys are doing well today.
Hi, So first question just kind of follow back up on the loan growth. It sounds like you guys remain.
Pretty pretty positive on your outlook.
Just wondering do you expect the pace to kind of slowdown 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.
I do think we would expect loan growth to slow down in the second half of the.
Second half of the year.
Either as a result of the market.
Well without our we'll probably.
We'll probably.
Want to see loan growth slow down a little bit I mean, we don't want to grow.
Another $4 million to $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.
The latest <unk>, just kind of came online late in the quarter.
Do you have the system conversion project underway here.
Kevin can we kind of expect a bit of a lift off of this quarters 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, three so is it fair to assume you're going to kind of go up towards maybe that $32 million level, just given those out.
<unk> expense.
Expense headwinds.
Yes.
I think we mentioned in there that the 580000 that we had this quarter that related to some of the systems conversion related items, that's probably going to be.
Maybe a $1 million ish.
A quarter until we get to the third quarter next year. So there is some there is 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 some.
Also then just like I said, the third party consulting folks that are working with us to and so there is there is a monthly retainer type expense. There. So I think we'll be looking at.
Probably a little higher than the 580, <unk> more like a million Milligan one type.
Expense each quarter for the next whether that'd be four quarters or so.
David the one one or whatever we can.
<unk> for the special bonus that would not be recurring.
<unk> hundred 80, plus plus.
Probably another 400000 that would be recurring for the next.
Few quarters.
Got it okay alright.
Alright 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 may still remain in a very strong position to 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 buyback our stock.
It's.
Yes.
Capital I agree with you it's still strong if not.
It was though.
Sure.
Will we buy 800000 shares during the second half of the year I doubt that very seriously I think our I think our buyback will be modest more modest.
And the second part of the year, but.
We're still.
Certainly in the market.
Got it okay. That's all.
All that I had thank you very much.
In a moment for our next question.
We have a question from John Rogers with Janney. Please go ahead.
Hey, good afternoon guys.
Yes.
So if you guys are doing well.
Just I guess Rex maybe just back to the question on expenses. So if you.
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 did the new Lps and stuff are those pretty much fully recognized in the second quarter or do we have to add some additional expense for that.
There'll be a little bit.
So the additional expense related to the 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.
<unk> that we put out in the first quarter that would be pretty much fully included in the second quarter here.
Okay. So it looks like expenses again with the conversion cost around $1 million a quarter, so youre going to be a little bit north of $32 million for the next year at least is that correct.
Probably.
Okay.
<unk>.
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.
If you could just assume that we've got to add a little bit more for the for the conversion related stuff that we wont have that $1 1 million extra.
So we had some growth.
Okay.
On.
On the margin reps you said the core margin was about 368, if you back out.
So the one time items.
Just curious if you go back.
Prior increasing rate cycle 2018, 19, I think if you look at the core margin. If you exclude yield accretion was closer to $393 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 you go back to that level or we can go go higher than that $390 95, how should we think about that.
Okay.
Probably.
Could be similar.
I've got some information here in front of me that during 2017 in early 18, we are.
Just kind of core margin was in the $3 $53 60 type range and then the fed started raising rates a little more in 2018, and we kind of peaked at around $393 95.
At the end of 18 first quarter of 19, and then we started dropping back down into the $373 60 range later towards the end of 19 as the fed cut some rate cut rate and then of course first quarter second quarter of 'twenty, our margin dropped a lot.
I mean, directionally I can't tell you exactly where we're going to get to you I don't think John but but directionally, we would anticipate third quarter.
I would think our margin would be would be increasing again.
Yes.
Okay.
Or like what are the level of securities and cash.
Be proportionately higher lower now than it was back at the quarter that John pointed out like Q4 of 2018.
I don't think it will be probably generally similar.
It had less securities.
And then.
I believe all other things being equal that we would've had a extra cash or anything.
If you have fewer securities all other things being equal.
The mix would say he had more loan yes would be a little higher.
Power's margin back then right right. So that's the only thing when you ask is there anything structurally that would that would maybe point to this being.
This is similar to that that would be the only thing I would say John is you might look at asset mix.
Okay.
Yeah.
Yes that makes that makes sense, Joe just one other question Rex or even Joe.
I guess linked quarter goodwill increased from like five 9% to $11 $2 million what drove that increase.
That was the naming rights.
The arena at the University.
Oh, okay. Okay.
That's a good reason so that's that's yes.
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 Youll Mendes connect have a wonderful night.
Thank you.
The conference will begin shortly to raise your hand during Q&A you can dial stolen.
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Good day, and thank you for standing by and welcome to the Great Southern Bancorp, Inc. Second quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded I would now like to hand, the conference over to Kelly polymer 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 32022, 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 Andy.
Reliance on any forward looking statements, which speak only as of the date. They are made please. These are forward looking statements disclosure in our second quarter 2022 earnings release for more information President and CEO , Joe Turner, and Chief Financial Officer, Rex, California around the call with me today.
I'll now turn the call over to Joe Turner, Okay. Thanks Kelly.
Good afternoon to everybody that's on the call. We certainly appreciate you joining us today for our second quarter earnings call. Hopefully you 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 2000 to.
Our country's current economic landscape provides both opportunities and challenges for us.
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 tenants of providing our customers with world class service, while operating with a long term mindset I am proud of our team of associates and appreciate their commitment to our customers into our company.
As usual I'll provide some brief remarks.
About our company's performance and then turn the call over to Rick who will get into more detail about the financial results. Then we'll open it up for questions.
In the second quarter at 42, we earned $18 2 million or $1 44 per share compared to $20 1 million or $1 46 per share in the same period in 'twenty, one really the big difference in the quarter was $3 5 million swing in our provision expense.
The second quarter of 2002, we have $2.2 million I think of provision expense.
Was there for.
Almost all of it was exclusively for growth in our outside of loan commitments.
There was obviously no.
Provision expense related charge offs, because we have net recoveries.
For the quarter.
Earnings performance for.
Ratios for the quarter.
Were also strong with return on assets of $1 34, and our return on equity of 12 72 R.
Our margin was $3 78, we could our core margin at about 360, <unk>, We think we had 10 basis points.
The extra income from I think we had one security that paid off with.
Interest flowing to us.
We collected some nonperforming loans that had charged off interest as well.
During the second quarter loan production was 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.
Increases in multifamily and 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 80 in the quarter and $270 million from the end of 2021 strong loan production.
Everywhere, we did open our newest loan production office during the quarter and in Charlotte North Carolina.
And.
Opened that followed 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 level, while 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 to period end assets or eight 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%.
Total assets and we.
We had a book value per share of <unk> $44 50, I guess that total book value of that tangible book breakfast total debt total book value of.
$44 53.
Our stockholders' equity did decrease during the first half of the year by $67 $2 million.
With about $46 million of that was a swing in our ALC I related to our swaps and our.
And our securities the.
The rest of that came as a result.
Fairly active repurchase program I think we spent.
$50 million in the first half of the year buying our stock back.
In the second quarter, our company declared a <unk> 40 common share dividend.
Representing an 11% increase.
From our 36.
Per share dividend.
Okay.
Okay.
We also as I mentioned continue to repurchase stock in an effort to enhance long term shareholder value. We have we repurchased 849000 shares of common stock at an average price of 50 930 <unk> during the first half of 'twenty two.
At June 30, we had about 372000 shares left in our current repurchase authorization.
We will continue the judicial 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.
Indoor Athletic Arena.
Now called the Great Southern Bank Arena disagreement further deepens, our longstanding relationship with the University, which provides the southwest Missouri region with significant recreational educational cultural and economic opportunities that concludes my prepared remarks, I will turn the call over to.
Rex Copeland our CFO at this time.
Alright, 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 a three three larger loan interest recoveries that we had.
Which has previously been charged off interest for us the margin, Joe mentioned was $3, 7% to 8% excluding.
Excluding those sort of extra items that we had we think that our margin was around 368% and that compares to 335% in the second quarter of 2021 and also compares to 343% in the first quarter 2022.
Okay.
Part of the changes going on there.
Sure.
For the margin expansion related to the.
The mix of our assets, obviously also interest rates were moving a bit higher <unk>.
During the second quarter change in the asset mix that was a piece of that with our average cash equivalents decreasing about $399 million average loans were flat as 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 repriced upward with increases in the market rates.
We anticipate this will be the case as the fed's indicated further.
Rate increases in the very near term.
We will probably see further increases in our deposit rates.
That has been raising rates in market rates has 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.
<unk> as well.
We also kind of had a similar situation in the six month period as far as shifting asset mix.
Funds that we previously had at the federal home loan Bank I'm, sorry, because the reserve bank. We utilize we had outstanding loans have increased $354 million. This year investments increased $234 million. This year, while our total cash and cash equivalents a decrease from the beginning of the year by about five.
<unk>.
$2 million.
Okay.
Noninterest income.
The.
Second quarter of this year compared to a year ago quarter decreased about $266000 to $9 $3 million.
We had decreases of about just over $2 billion.
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 rate changes so far this year.
Originating much less is that what we are originating is low that have a shorter period.
<unk> fixed rate and then become adjustable rate and much of those are being retained on our balance sheet.
We had 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 with back to back swaps that we have with our loan customers.
We recognized 145000 of income in the second quarter period, this year versus recognizing a $179000 loss in the change in fair value on that in the second quarter of last year, so changes in market rates and the impact of that somewhat.
Also other kind of offsetting some of that other income increased by about $1 million compared to the prior year as we recognized some gains related to sales of some fixed assets.
Noninterest expense for the quarter ended June 30, our noninterest 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 salaries and employee benefits.
And the most significant.
Pivoting factor to that was a special cash bonus that we paid out to all employees totaling about $1 $1 billion.
In response to the rapid and significant.
Increases in prices for many goods and services that have been going on.
In the in the economic environment right now.
Also a portion of the increase related to normal annual merit increases from.
This year versus last at various lending in operational areas.
In some cases 2022 increases were maybe a little bit.
They are larger than they had been in maybe the previous couple of years.
In addition, we have at <unk>.
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.
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 amortize them later, we didn't have obviously PPP loans.
So the.
Number of loans in the deferral on some of those loans.
Glass into 2022 period.
Also I will mention legal professional fees. This is really not collect legal but more professional fees increased about $665000 from the prior year quarter to a total of $1 $2 million this quarter.
In the current period, we had expenses totaling about $580000 that related to.
Training and implementation costs for the upcoming core systems conversion that we have and also related to professional fees related to consultants that we engaged as we work through this transition to the new software platform.
The efficiency ratio for the second quarter. This year was 50, 676% as compared to $55 six 3% for the second quarter of 2021.
And this is a little bit higher efficiency ratio related primarily to the noninterest 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 billion.
Provision expense.
And that related entirely to the unfunded.
Loan commitment.
Balances that we have.
At that time.
But Joe I think also that we had net recoveries in the in the first half.
Half of this year in the second quarter was about 261.
$1000 of net recoveries.
Into 2022 period.
Lastly, homage and income taxes, our effective tax rate was about 25% in the second quarter and also I believe 25%.
For the six months of this year.
But fairly comparable with the right I think the rate was a little bit higher 28% in the second quarter of 2021.
We anticipate that our tax rate is going to run.
The 25% to 21, 5%.
Our range in future periods, but that obviously is affected by our tax exempt.
Just on investments and loans and also the utilization that we have tax credits and then also further by the mix that we have between the various state taxing jurisdictions that were that we are involved in as well as just total.
Levels of pretax income.
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 how to queue for questions.
Absolutely. Thank you and as a reminder to simply press Star then one on your telephone.
One moment.
We have a question from Andrew Liesch with Piper Sandler Your line is open.
Thanks, everyone.
I agree I just wanted to.
Talk about the loan growth here, obviously, a couple of quarters now really good trends. What are you what are you seeing on the pay upfront.
As Pam payoffs slowed and thats contributing to the growth or is it really just on the production side that we're that we're seeing 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 may be.
Some of our multifamily developers.
No.
We're 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 theyre electing to maintain the balances with us for a little while longer so I think thats definitely.
Piece of the story.
Though production.
Certainly was brisk during the quarter as well.
Now that we're a few weeks in the third quarter is that production continued keep hearing about a pullback from some investors just given rising rates.
Macro concerns, but how is production trended so far in the last three weeks.
Yes.
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.
At this point there is anything that would lead me to believe thats going to be significantly different than <unk>.
It's been in prior quarters.
Yes, I guess it could be office goes.
Even in a quarter is a pretty short period of time.
Gotcha.
How should we think about the size of the securities portfolio here.
It reached.
Has it reached a plateau and youre going to use cash flow to fund loan growth and any outflows from all the liquidity that came in over the last couple of years, how should we see the securities portfolio.
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 will have some repayment on it but I don't think that our repayment level are going to be.
Extreme either so I think our portfolio is probably going to be.
Not rapidly moving around a whole lot.
At this point.
Got it alright, and then just.
A question on the margin obviously, some good expansion here, but it sounds like Youll still get some benefit from rising rates and presumably other 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 maybe a similar level, but.
The non time balances may fluctuate it could trend down a little bit from the peak of where we were maybe a year ago or so.
We look at it we'll replace that with supplement that with maybe some broker deposits.
And also maybe some home loan bank advances until those are going to be at your current more current market rates than the rates that were paid in our on our non maturity deposit portfolio and then also just kind of.
These have been.
They 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 go but certainly the rate on those is probably going to start as we review balances there were bringing in new.
Retail Cds the rate on that is going to be higher than the existing portfolio rate just because the fed has already raised 150 basis points is probably 75, yes, I think you had a meeting.
Earlier this week.
The Guy that track that Ford has told us that our new and rig ACD kind of our average rate was around 1% and a portfolio of balance rate right now 52 basis points. So.
And a year youre going to see.
Those are the.
Yeah, it'll be higher it is sort of interesting there's countervailing forces really Andrew there is.
What <unk> mentioned about beta factors.
Generally tend to increase the further you get into the interest rate.
Further you get into the cycle of interest rate increases beta factors and the increases that certainly right. The other thing is though on our adjustable rate loan portfolio, which we have about $1 9 billion something like that were actually pretty much daily.
Or local or monthly adjust well portfolio.
A lot of that was in we were in the money with floors early on and so we did that portfolio did not adjust or at least didn't adjust fully well now we're pretty much out of the money on all of those floors, so that when when the fed increases or.
Whatever they do next week most of almost all of that for almost all of that portfolio will increase.
No.
That's a positive for us.
The negative is as Rick said, we got $2 4 billion or so.
Non maturity deposits.
I think customers are going to start.
The increases.
Yes.
Makes sense, thanks for taking all the questions I'll step back.
One moment for our next question.
We have a question from Damon Delmonte with <unk>. Please go ahead.
Hey, Good afternoon, guys Hope you guys are doing well today.
Hi, David.
Hi, So first question just kind of follow back up on the loan growth. It sounds like you guys remain.
Pretty 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.
I do think we would expect loan growth to slow down in the second half of the.
Half of the year.
Either as a result of.
The market.
Without our we'll probably.
That will probably.
Want to see loan growth slow down a little bit I mean, we don't want to grow.
Another $4 million to $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 <unk> just kind of came online late in the quarter.
Do you have the system conversion project underway here.
Can we kind of expect a bit of a lift off of this quarters 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, three so is it fair to assume you're going to kind of go off towards maybe that $32 million level just given those.
Other.
Expense headwind, yes.
Yes so.
I think we mentioned in there that the 580000 that we had this quarter that related to some of the systems conversion related items, that's probably going to be.
Maybe a $1 million ish.
Quarter.
Till we get to the third quarter next year. So there is some there is 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 some.
Also then just like I said, the third party consulting folks that are working with us to and so there is there is.
The retailer.
Since there so I think we'll be looking at.
Probably a little higher than the $5 $80 more like a $1 million million one type.
Each quarter for the next whether that'd be four quarters or so.
David the one one or whatever we have for the special bonus that would not be right.
Recurring <unk>.
<unk> hundred 80, plus plus probably another 400000 that would be recurring for the next.
A few quarters.
Got it okay, alright, well 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 back half of this year.
I think we're going to continue to selectively buyback our stock.
It.
Yes.
Capital I agree with you it's still strong if not.
It was though.
Sure.
Will we buy 800000 shares during the second half of the year I doubt that very seriously I think our I think our buyback will be modest more modest.
And the second part of the year, but.
We're still.
We're still certainly in the market.
Got it okay. That's all I had thank you very much.
In a moment for our next question.
We have a question from John Rogers with Janney. Please go ahead.
Hey, good afternoon guys.
Yes.
So if you guys are doing well.
Just I guess Rex maybe just back to the question on expenses. So if you.
If you take into account the full conversion costs to set up a $1 million and then if you back out the onetime bonus.
Maybe I missed this but the new Lps and stuff are those pretty much fully recognized in the second quarter or do we have to add some additional expense for that.
There'll be a little bit of additional expense.
Related to the Charlotte because it just came on in the latter part of the quarter, but those expenses are not overly high.
On a quarterly basis.
Yes.
Phoenix LP.
<unk> that we put out in the first quarter that would be pretty much fully included in the second quarter there.
Okay. So it looks like expenses again with the conversion cost around $1 million a quarter, so youre going to be a little bit north of $32 million for the next year at least is that correct.
Probably.
Okay.
In.
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.
Just assume that we've got to add a little bit more for the for the conversion related stuff that we wont have that $1 1 million.
Okay.
On the margin racks, you said the core margin was about 368, if you back out so.
So the one time 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 $93 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 we can go go higher than that $390 95, how should we think about that.
Okay.
Probably could.
Should be similar.
I've got some information here in front of me.
<unk> 2017 in early 18, we are kind of core margin was in the $3 $53 60 type range and then the fed started raising rates a little more in 2018, and we kind of peaked at around 390 <unk> hundred 95 at.
At the end of 18 first quarter at 19, and then we started dropping back down into the $373 60 range later towards the end of <unk> 19, as the fed cut them rate cut rate and then of course first quarter second quarter of 2000, and 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 but directionally, we would anticipate third quarter.
I would think our margin would be would be increasing again.
Yes.
Okay.
Like what are the level of securities and cash.
Be proportionately higher lower now than it was back at the quarter that John pointed out like Q4 of 2018.
I don't want to get a good.
Generally similar we would've had less securities.
And then.
I believe all of them.
Things being equal that we wouldn't have had any extra cash or anything.
So you had fewer securities all other things being equal.
The mix would say he had more loan, yes would be a little higher or lower higher margin back then right right. So that's the only thing.
You ask is there anything structurally that would.
That would maybe point to that as being.
This similar to that that would be the only thing I would say John is you might look at asset mix.
Okay now because this is Ben.
Yes that makes that makes sense, Joe just one other question Rex or even Joe.
I guess linked quarter goodwill increased five 9% to $11 2 million.
Drove that increase.
That was the naming rights.
Arena at the University.
Oh, okay.
Yes.
That's a good reason.
That's pretty.
Pretty nice.
Okay guys. Thank you.
Thanks, John .
Thank you Andy.
This concludes our Q&A and program for today, Thank you for participating.
Disconnect have a wonderful night.