Q2 2023 Great Southern Bancorp Inc Earnings Call
Okay.
Okay.
Good day, and thank you for standing by walking to the great Southern Bancorp second quarter 2023 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question of intercession ask a question. During the session you will need to press star one on your telephone.
You will then hear an automated message.
It was raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded and went out again the conference over to your speaker today Kellie Planus lichen great. Southern Please go ahead.
Thank you Victor.
Good afternoon, and thank you for joining us for our second quarter 2023 earnings call. This is Kelly homeowners Investor relations for great. Southern the purpose of this call is to discuss the company's results for the quarter ending June 30th 2023, before we begin I need to remind you that during the course of this call we may make.
Forward looking statements about future events and future financial performance. These statements are subject to a number of factors that could cause actual results to differ materially from the results anticipated or projected.
These factors. Please see the forward looking statements disclosure in our second quarter earnings release and other public filings.
Didn't and CEO , Joe Turner, and Chief Financial Officer, Rex Copeland are on the call with me I'll now turn the meeting over to Joe Turner, Alright, Thanks, Kelly and good afternoon to everybody. Thank you for joining us for our second quarter earnings call. Our second quarter performance was solid as we continue to navigate through a pretty challenging operating environment.
Thanks to the hard work of our team we earned $1 52 per common share were $18 $3 million compared to $1 44, and $18 $2 million during the second quarter 2022.
Earnings performance ratios were also good with annualized our away at one point to 8%.
Annualized return on average equity of 13.11%.
We had mentioned on our last call some anticipated headwinds that we would face in the second quarter related to net interest margin net interest margin did decline to 356 for the second quarter compared to three 7% for the same period in 2022 and $3 99 for the first quarter in 2023 I'm sure.
Sure I know Rex is going to talk quite a bit more about that as well as deposit cost and I may chime in a little bit on that too.
Also of note, we had ongoing significant professional fee expense totaling $1 million related to training and implementation costs of our upcoming core conversion.
Liquidity and capital continues to be very strong our liquidity position.
We're strong in the first quarter and it got stronger actually in the second quarter at the end of June 2023 are available secured funding lines through the home loan bank and the federal reserve and on balance sheet liquidity were totaled approximately $2 $4 billion as.
As we noted last quarter, our company's deposit base is pretty diverse.
We have about 14% uninsured deposits about $658 million so over three times coverage between.
On and off balance sheet.
Liquidity compared to that uninsured deposit number.
While we had run off of about $72 million and noninterest bearing checking balances in the first quarter.
From start to end noninterest bearing checking balances were fairly stable in the second quarter being down just $11 million.
Our total stockholders equity increased by $13 million from the end of 2022, but we decreased a bit from March and that had to do with a little bit worse.
<unk> marks for March as a result.
Interest rates going up.
Of course, we are continue to be substantially above well capitalized thresholds and our tangible common equity ratio is now at nine 4%.
In the second quarter, we did declare a <unk> 47 per share common dividend. In addition, we.
We repurchased 170200 shares at an average price of $50.70.
Per share at June 30, we have 900000 shares approximately remaining on our stock repurchase authorization.
During the second quarter, New loan production general activity was down compared to 2022 really pretty consistent with what we saw in the first quarter.
2023 total outstanding loan balances grew modestly during the first six months of the year up about $10 million.
Both came primarily in the multifamily segment and it was really construction loans.
Being completed and when they're completed they move into multifamily. So the offset from the multifamily growth was the reduction and construction and commercial real estate and our pipeline.
Commitments and unfunded lines is it declined a bit from the end of the first quarter, but it's still relatively strong at $1 6 billion and that includes about $1 1 billion of unfunded construction levels.
For more information about our loan portfolio I would remind you of our quarterly.
Loan portfolio presentation, hopefully you've had a chance to download that and.
And review it.
Asset quality overall asset quality metrics remained very strong during the quarter non performing assets the period end assets were.
20 basis points at June 32023 that was an increase of about 15 basis points.
One projected office project in Missouri Office project.
That moved out of the nonperforming list, but we feel very good about the SaaS of our loan portfolio and the quality of our credits.
That concludes my prepared remarks, I will turn the call over to Rex.
At this time.
Alright, Thank you Joe I'll start off with as Joe said net interest income and margin some commentary there.
So net interest income for the second quarter decreased by about 693000 to $48 1 million compared to $48 8 million in the second quarter of 2022 net interest income was $53 2 million in the first quarter of this year. So we did have.
A decrease of about $5 million in the second quarter compared to the first quarter of this year.
Just kind of looking at some of the items that made up that that change between Q1 and Q2.
<unk> expense.
Increased by about $2 $5 million on interest bearing demand and savings accounts increased about $1 $8 million in time deposits and those of our retail time deposits and increased about $2 8 million on brokered deposits. So the increase in interest expense on those interest bearing demand and savings accounts and time.
This was primarily due to higher market rates.
The weighted average interest rate on.
Interest bearing demand and savings increased 44 basis points.
While the weighted average interest rate on time deposits increased by about 78 basis points and those are comparing Q2 to Q1 this year.
The increase in interest expense for the broker deposits was really due.
Both to an increase in average balances also coupled with a 44 basis point increase in the average interest rate on those.
And then interest income on loans.
Increased $2 million that partially offset some of the of the funding cost increases.
Compared to the first quarter, but interest income on the loans were also reduced a little bit by $1 7 million in the second quarter by those initial net settlement on two interest rate swaps that we had put.
Put in place.
Several months ago 12 months ago with forward start date in May of this year as windows kicked in to start net settlement.
Okay kind of working our way back through that a little bit further discussion. So the higher funding cost on those interest bearing checking and savings accounts resulted from competition for those deposits into higher market rates I mentioned and then there was also some mixed shift from noninterest bearing a very low rate accounts to higher rate accounts.
We currently don't really expect that we're going to see significant rate increases necessary in those product types that we could be impacted by my competitor rates and also further shifting our deposit mix.
Higher funding cost our time deposits were significantly caused by a substantial amount of time deposits that matured at relatively low rates in the second quarter, we put a lot of these deposits on.
Months ago, a few quarters ago actually and there was quite a bit that mature here in the second quarter. So the time deposit maturity in that second quarter were about $511 million with a weighted average rate of maturity of two 8%.
So when we renew these at higher rates or are they left the company and turned net debt required they replace it with other funding sources.
Current market rates, so a lot of that stuff would have it replace that 4% plus.
Right and if it had to go over to brokered or home loan bank advances.
Backfill that those are going to be up 5% type rates.
In the third quarter of this year the time deposit maturities in this category are much less at $188 million with a weighted average rate of 236%.
So again, we do expect renewal rates will probably be at or.
Or above 4% for those Cds that we are able to keep and renew.
A new maturity.
Besides the higher funding cost of deposits net interest income was also negatively affected by the interest rate swaps, which I mentioned before at $1.7 million in the second quarter.
Based on where the interest rates were at June 30th Alright, I don't think they've changed a whole lot. Since then to date and we expect a negative impact on all of the swaps both current ones and.
Ones that we've terminated.
To be about $3 billion in the third quarter there'll be a reduction of interest income.
In Q3.
As Joe mentioned earlier, the net interest margin was 356% in the second quarter that was down a little bit from three 7% to 8% in the second quarter last year.
Also down from 43 basis points from 399% in the first quarter of 2023 and you May recall, we were I believe our net interest margin was 399% in the fourth quarter of last year, we were able to maintain that in the first quarter of this year, but there is.
You just pointed out and listed a few things that happened in the second quarter that drove the margin down.
Liquidity and deposits.
Joe mentioned it at a high level of liquidity we've got.
More detailed information of what makes up that $2 $4 billion of.
On balance sheet and off balance sheet funding, we have home loan bank line availability is about $1 $2 billion.
Federal Reserve banks about $410 million and then we've got securities that are around $580 million that are not pledged anywhere and cash and cash equivalents of a couple of hundred million dollars. So we do have what we believe to be significant sources of liquidity to cover.
Anything that would come.
Come our way from a funding standpoint.
Deposits in the three months ended June 30, total deposits increased by about $25 million broker deposits were up $133 million in that time frame.
Our time deposits that we generate through our retail.
Banking sources was down about $50 million.
Internet channels was down about $7 million the.
Interest bearing checking balances decreased $40 million, it's about one 8% and in noninterest bearing checking balances decreased $11 million, which is about one 1%.
As Joe mentioned, we do have a pretty low level of uninsured deposits about 14% of our deposit total of $4 8 billion.
Just to give you a little bit more granular information.
At $4 8 billion is broken down with $670 million approximately of brokered deposits of various types and a $4 2 billion or are more core deposits.
Noninterest bearing interest bearing checking savings and retail time deposits net spread over about 224000 accounts.
Noninterest income was a decrease of about $1 5 million compared to the year ago second quarter.
That was related into other income we did have some assets that we sold in the second quarter last year for about $1 million gain.
We didn't have that replicated in the second quarter of this year and at point of sale ATM fees were down about 325000 compared to the prior year second quarter that decrease is really kind of.
Mostly made up of.
The fact that <unk>.
Transactions are being now rapid through some different channels that provide lower fees to us.
There is there has been some changes in how brokers route things.
And we've got to provide at least a couple of.
Channels for them to do that and so the merchants.
Use.
Which rails they understand those through.
Noninterest expense.
It was up $1 7 million compared to the second quarter last year legal audit and professional fees increased about 450.
1000 from the prior year, Joe mentioned earlier.
Some costs related to professional fees around our core system conversion occupancy expenses increased about $600000 from the prior year quarter. There were some various components of computer license and support about $180000. There and then there were some various repairs and maintenance.
A variety of buildings and grounds equipment and things like that there was about $446000 more in this year period versus last year, and then finally insurance, our FDI insurance premium FDIC insurance premiums.
Increased this year compared to previous year quarter.
The FDIC it announced this last year that they were going to raise.
Insurance premium rates and so we had about 223000 more in expense related to insurance second quarter this year versus second quarter last year.
Efficiency ratio for for this year's second quarter was 62, 1% that compared to <unk> 50, 676% in the second quarter last year.
Also say comparing noninterest income and noninterest expense levels in the second quarter of this year compared to the first quarter of this year.
Only slightly change when you compare that to the to the first quarter.
Provision for credit losses, as Joe mentioned, a little bit about our credit.
The earlier, we did not have any provision expense on our outstanding loan portfolio in the second quarter.
We did have.
Negative provision in.
In the second quarter related to unfunded commitments.
Level of those commitments were down.
As Joe mentioned earlier.
And last year, we did have $2 $2 million of provision expense related to the unfunded commitments in the second quarter. Our charge offs were about 135000 in the second quarter of this year.
So pretty minimal charge offs.
<unk>.
And then the allowance for credit losses, as a percentage of total loans was 141%.
At June 30.
Income taxes.
The effective tax rate for the for the quarter was 19, 7% as it was 25% in the second quarter of last year.
Year to date, I think our effective rate was more in that 25% type range.
So there is again, we do utilize certain kind of investment tax credits.
As in tax exempt investments and loans, which brings our rate down a little bit, but then there are some state tax.
We think going forward, where we stand right now.
The tax rate is going to be somewhere in the 20.0 to 21, 5% range here in the next future periods.
And then I'll, let John one last item.
In the capital section, Joe talked about some of our capital earlier.
Did discover typo in one of the.
Points on page one the companies the holding company's common equity tier one capital ratio on that page in the bullet points on page. One was shown is 10, 4%. The ratio actually is 11, 4% that was shown on page seven. So 11, 4% is the correct number there was just a typographical error.
Here on that first page really pulled that number over so that concludes our prepared remarks and at this time, we can entertain questions and I'll ask our operator to once again remind.
Those on the call how to queue in for questions.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question Press Star One again please.
Please standby, we compile the Q&A roster.
One moment for our first question.
Our first question comes from the line of Andrew Liesch from Piper Sandler Your line is open.
Hey, good afternoon, everyone.
Brian just I just.
Just wanted to talk about sort of slowing the deposit costs through the margin here.
And then also with the.
The swaps being in a negative position I mean is it.
Possible to see another.
The full quarter effect of the repricing last quarter, another 40, plus basis point decline in the margin here in the third quarter.
Let me address that.
To me that I mean, we don't give forward guidance that themes.
Yeah.
But let me.
Let me put.
Kind of the way I look at what happened.
And our margin compared to the.
What went on in the first quarter, we obviously were down $5 million.
Andrew I think there's three components to that.
The first Rex mentioned, we have the forward starting swap.
That was always going to be there.
We've talked about for some time.
That was $1 7 million.
The $5 million.
Second thing that happened is our core CD portfolio, we have about $1 billion core CD portfolio.
That kind of average duration of about a year. So you would expect all.
All other things being equal that.
Yes that would that would mature about $250 million per quarter.
That's not what happened in our case, we just it just so happens we had $500 million of that or a little more maybe.
Mature in the second quarter and in fact, most of what matured matured and the end of month of April .
That information I don't think got it got it.
I know a quarter affects kind of already been captured there yes, okay.
A lot of it yes, yes, yes, so so whereas you might have expected that to increase interest expense if it had been a more normal.
Maturity thing you might have expected that to increase interest expense 800000 or $1 million. It was more like a $1 million. So that was probably between 800000 to $1 million.
What happened to us in the second quarter and then the third thing. So that's about $2 five to seven of the $5 million. The third thing that happened to us is just.
Margin compression, I mean, and that sort of what Rick talked about.
In our call last quarter that these late cycle beta betas are going to go up and that's what happened or our cost on our.
Non time accounts went up to $8 million.
44 basis points in the quarter and I think we more or less at 50 basis points of rate increases you were pretty close to a 100%. There. So those were those were the three those were the three factors.
Now you've got to ask yourself going forward.
What should we expect.
Rex has mentioned that we didn't have a full quarter of that forward starting swaps, so theres going to be another 800000 of expense there.
The mark of $1 three.
Youre talking about total I'm talking about additional expense with it.
So that's going to be that's going to add $800000.
The Cds repricing or as Rex said, thats not going to be nearly as bad in the third third quarter as it was in the second quarter.
Non time accounts.
It's just who knows on those.
It doesn't feel.
Theyre going to reprice like they did in the us.
Second quarter, but that remains to be seen now at the same time, we're also having fixed rate loans repriced upward.
That's sort of the offset.
So and Thats kind of the next two quarters you get into the first quarter of 2004, and then we one of the one of the swaps that we have been in a pay position on expires.
And the full quarter effect of that is between two five and $3 million improvement starting the.
The first full quarter that will be Q2, 2024. So I think those are all the things you should take into account.
Yes, I realize I didn't answer your question, but I'll try to give you everything.
Jose do you need to look at too.
Try to draw your own conclusion.
Got it that makes sense and certainly thank you for given those puts and takes.
Uh huh.
And then just a.
A question here on the loan growth going forward pipeline is down a little bit, but still some optimism around the construction or how should we be looking at.
Net growth I mean, it seems like there was still some some pay offs.
Natural pay offs so.
Low single digits in this environment the right place.
Just to be thinking about.
Yes flat to.
Flattish, it's just hard to we can't predict necessarily the payoff activity still.
It seems a little bit muted certainly from where it was in 'twenty one.
And probably more like it wasn't in the second part of <unk>.
And we've kind of adjusted our origination activity as well.
Gotcha.
Alright.
Taking my questions. Thanks, I'll step back.
Right.
Thank you one moment for our next question.
And our next question comes from the line.
Damon Delmonte from <unk> Your line is open.
Hey, good afternoon, guys. Thanks for taking my questions here.
Just to kind of circle back on the margin discussion.
You noted that there was $1 7 million dollar drag from the swaps this quarter.
If you look at the rates as of 630 you'd be $3 million for the next quarter. So.
So thats just an incremental $1 3 million is kind of how we should look at that.
Yes.
Okay Alright.
Alright, Thanks, and then as far as the provision and the reversal of the reserve on the unfunded commitments are those loans that were closed and moved to permanent status or refinance the way to another institution or.
Are those projects that were kind of signed the contract that Werent completed for one reason or another.
No.
The negative provision is on the unfunded loan balance so when we book when we book a construction loan initially we don't find anything that maybe we have $10 million sitting in the end funded account.
And in total at the at the end of Q1 that number was like $1 3 billion.
At the end and we have to have a reserve on that $1 3 billion at the end of Q2 that number was $1 1 billion. So because there is less in the way of unfunded amount youre going to have a lesser reserve on that.
And that's where that number comes from.
<unk>.
And so if loan growth is going to be modest in the coming quarters.
Taking into account the potential for more relief from the unfunded side.
The lack of need to reserve for new growth.
Do you expect to take any meaningful provision in the back half of the year.
You know I mean it is.
Yes.
It would be based on.
Yes.
Obviously, we feel like we're adequately reserve right now so all other things being equal I would say no.
If nothing changes from here.
If we have charge off significant charge offs that would change the calculus on that a little bit, possibly if the economy if the egg.
Economists changed.
That could that could yes, it's a factor of that outlook into our analysis when we set our loan loss reserves our credit reserve so.
Yes, but based on where we sit right now obviously, we feel like our reserve is is that the right number.
Okay.
And then I guess lastly, could you just provide a little bit more.
Color on that that office loan.
It's in Missouri, I know you noted that.
No reserve was taken taken against that loan.
We do have we have a reserve allocated to it.
Sure.
I mean is.
It's a well located office building.
It's occupied.
The.
I don't want to get too I mean, we have so few.
I don't want to talk on in a public forum about.
Sort of borrower specific aspects, but.
It seems like.
It's going to be best.
To transition this asset too.
New customer new customer is going to be able to do.
Better things with it and I mean, we feel like there could be some charge offs Damon.
Think we've got that allocated in the reserve for it if there is that in.
We don't feel like it's.
Reflective of the rest of our office portfolio, certainly kind of a one off situation.
Got it okay, great. That's all I had thanks.
Thank you.
Not showing any further questions in the queue I will turn the call back over to Joe Turner, President and CEO for closing remarks.
Alright, very good we appreciate the questions and we appreciate everybody joining us today, and we'll look forward to talking to you.
After our third quarter earnings everybody have a great day. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
[music].
Okay.
[music].
Thanks.
Okay.