Great Southern Bancorp, Inc.

Good day and thank you for standing by. Welcome to the Grace 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 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Kelly Palamas 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 use our forward-looking statements disclosure in our second quarter 2022 earnings release for more information. President and CEO Joe Turner and Chief Financial Officer Rex Copeland are on the call with me today. I'll now turn the call over to Joe Turner.

Okay. Thanks, Kelly. And good afternoon to everybody that's on the call. We certainly appreciate you joining us today for our second quarter earnings call. Hopefully, you've had a chance to review our release, which came out last night. And if you have, you've seen that we had a very good quarter, continuing the momentum from the first quarter of 22. Our country's current economic landscape provides both opportunities and challenges for us, and I guess for all participants in our industry. We're focused on ensuring that our company is properly positioned, especially in the wake of the changing interest rate environment. As always, we remain steadfast in adhering to our core tenets and providing our customers with world-class service while operating with a long-term mindset. I'm proud of our team of associates and appreciate their commitment to our customers and to our company. As usual, I'll provide some brief remarks about our company's performance and then turn the call over to Rex, who will get into more detail about the financial results. Then we'll open it up for questions. In the second quarter of 22, we earned $18.2 million or $1.44 per share compared to $20.1 million or $1.46 per share in the same period in 21. Really, the big difference in the quarter was the $3.5 million swing in our provision expense. In the second quarter of 22, we had $2.2 million, I think, in provision expense that was there for almost what it was exclusively for growth in our unfunded loan commitments. There was obviously no provision expense related charge-offs because we had net recoveries for the quarter. Our earnings performance ratios for the quarter were also strong with return on assets of 134 and return on equity of 1,272. Our margin was 378. We put our core margin at about 368. We think we had 10 basis points of extra income from, I think we had one security that paid off with, you know, additional interest flowing to us. And then, you know, we collected some nonperforming loans that had charged off interest as well. During the second quarter, loan production was brisk as it was in the first quarter. Our total net loans grew about $250 million. in the second quarter and increased $354 million from the beginning of the year. We saw increases in multifamily 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 maybe in the quarter and 270 million from the end of 2021. So strong loan production. everywhere. We did open our newest Lung Production Office during the quarter in Charlotte, North Carolina. That follows our opening of the Phoenix Lung Production Office earlier in the year. Both of those offices are staffed with industry veterans and we're excited about our prospects in both of those new locations. Apptech quality continued to be at historically good levels. Our non-performing 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. Non-performing assets, the period end assets, are 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 $44.50. I guess that's total book value or that tangible book? That's total. That's total book value of $44.53. Our stockholders' equity did decrease during the first half of the year by $67.2 million. About $46 million of that was a swing in our AOCI, you know, related to our swaps and our securities. The rest of that came as a result of, you know, a 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 40-cent common share dividend, representing an 11% increase from our 36-cent per share dividend. We also, as I mentioned, continue to repurchase stock in an effort to enhance long-term shareholder value. We repurchased 849,000 shares of common stock at an average price of 59.32 during the first half of 22. At June 30, we had about 372,000 shares left in our current repurchase authorization. We'll continue to judiciously manage our capital levels in light of changing operating and economic circumstances. In the second quarter, we were also pleased to announce a $5.5 million agreement with Missouri State University for the naming rights of its indoor athletic arena, now called the Great Southern Bank Arena. This agreement further deepens our 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'll turn the call over to Rex Copeland, our CFO, at this time. All right. Thank you, Joe. I'll start off talking about net interest income and margin a little bit. The net interest income for the second quarter of this year increased $4.1 million to $48.8 million, compared with $44.7 million in the second quarter of 2021. Net interest income was also $43.3 million for the first quarter of 2022. Net interest income, like Joe said earlier, was affected positively by some recoveries that we had during the quarter, both one security and three larger loan interest recoveries that we had, which had previously been charged off interest for us. The margin, Joe mentioned, was 3.78%, excluding those sort of extra items that we had. We think that our margin was around 3.68% and that compares to 3.35% in the second quarter of 2021 and also compares to 3.43% in the first quarter of 2022. Part of the changes going on there were for the margin expansion related to kind of the mix of our assets. Obviously, also interest rates were moving a bit higher. during the second quarter. We changed the asset mix so it was a piece of it with our average cash equivalents decreasing about $399 million. Average loans were plattish, decreasing about $59 million from the previous year quarter. And then 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 you stated previously, generally rising interest rate environment, particularly in short-term rates, should positively impact our net interest income as our floating rate loans reprice upward with increases in the market rates. We anticipate this will be the case, as the feds indicated, further rate increases in the very near term. We'll probably see further increases in our deposit rates. As the Fed has been raising rates and market rates have gone up, short-term rates have gone up pretty rapidly. You know, we would anticipate that our deposit rates may lag a bit, but we'll start to see some increases there as well. We also kind of had a similar situation in the six-month period as far as shifting asset mix. funds that we previously had at the Federal Reserve Bank were utilized. We had outstanding loans have increased $354 million this year. Investments increased $234 million this year, while our total cash and cash equivalents decreased from the beginning of the year by about $522 million. Non-interest income in the Second quarter this year compared to a year ago quarter decreased about $266,000 to $9.3 million. We had decreases of about just over $2 million in profit on loan sales. Last year, we originated and sold a lot more longer-term fixed rate loans, sold those in the secondary market as we originated those. Obviously, the rate changes so far this year. We're originating much less of that. What we are originating is loans that have a shorter period fixed rate and then become adjustable rate. And much of those are being retained on our balance sheet. So we have not had the same level of profit on loan sales as we had a year ago. Also, the activity on our derivative interest rate products, the back to back swaps that we have with our loan customers, we recognized $145,000 of income in the second quarter period this year versus recognizing $179,000 loss in the change in fair value on that in the second quarter last year. So changes in market rates have impacted that somewhat. Also, offsetting some of that other income increased by about a million dollars compared to the prior year as we recognize some gains related to sales of some fixed assets. Non-interest expense. So for the quarter into June 30th, our non-interest expense total increased $2.8 million to $33.0 million. And that was comparing the $2.8 million increase was compared to the second quarter last year. The largest portion of the increase was in salary and employee benefits. And the most significant contributing factor to that was a special cash bonus that we paid out to all employees, totaling about $1.1 million in response to the rapid and significant increases in prices for many goods and services that have been going on in the economic environment right now. Also, a portion of the increase related to normal annual merit increases from this year versus last in various lending and operational areas. In some cases, the 2022 increases were maybe a little bit larger than they had been in maybe the previous couple of years. In addition, 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 We deferred some origination costs, mainly related to the PPP loans that we originated last year. So there were under GAAP accounting, you defer some of those origination costs and then amortize those later. We didn't have, you know, obviously PPP loans. And so the number of loans and the deferral on some of those loans was less in the 2022 period. Also, I will mention legal professional fees. This is really not so much legal, but more professional fees. They increased about $665,000 from the prior year quarter to a total of $1.2 million this quarter. In this current period, we had expenses totaling about $580,000 that related to training and implementation costs for the upcoming core systems conversion that we have, and also related some professional fees related to consultants that we've engaged as we work through this transition to the new software platform. Efficiency ratio for the second quarter this year was 56.76% compared to 55.63% for the second quarter of 2021. And this little bit higher efficiency ratio we rated primarily to the non-interest expense items that I previously mentioned here. Joe talked a little bit about the provision for credit losses earlier. We had a negative provision in the second quarter last year of $1 million. This year, second quarter, we had $2.2 million provision expense. And that related entirely to the unfunded loan and commitment balances that we have at that time. Joe, I think, also said we had net recoveries in the first quarter. half of this year and the second quarter was about $261,000 of net recoveries in the 2022 period. Lastly, I'll mention income taxes. Our effective tax rate was about 20.5% in the second quarter and also, I believe, 20.5% for the six months this year. That's fairly comparable with the rate. I think the rate was a little bit higher, 20.8% in the second quarter of 2021. We anticipate that our tax rate is going to run in the 20.5 to 21.5% range in future periods, but that, you know, obviously is affected by our tax exempt interest on investments and loans, and also the utilization that we have of tax credits, and then also further by the mix that we have between the various state taxing jurisdictions that we are involved in, as well as just total levels of 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.