Good day, and thank you for standing by. 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 Polonus with Investor Relations. Please go ahead.
Thank you, Carmen. Good afternoon, and welcome. The purpose of this call today is to discuss the company's results for the quarter ending June 30, 2022. Before we begin, I need to remind you that during this call, we may make forward-looking statements about future events and financial performance. Please do not place undue reliance on any forward-looking statements which speak only as of the date they are made. Please use our forward-looking statements disclosure in our second quarter 2022 earnings release for more information. President and CEO, Joe Turner, and Chief Financial Officer, Rex Copeland, are on the call with me today. I'll now turn the call over to Joe Turner.
Okay, thanks, Kelly, and good afternoon to everybody that's on the call. We certainly appreciate you joining us today for our second quarter earnings call. Hopefully, you've had a chance to review our release, which came out last night. If you have, you've seen that we had a very good quarter, continuing the momentum from the first quarter of 2022. 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 of providing our customers with world-class service while operating with a long-term mindset. I'm proud of our team of associates and appreciate their commitment to our customers and to our company.
As usual, I'll provide some brief remarks about our company's performance and then turn the call over to Rex, who will get into more detail about the financial results. We'll open it up for questions. In the second quarter of 2022, 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 2021. Really, the big difference in the quarter was a $3.5 million swing in our provision expense. In the second quarter of 2022, we had $2.2 million, I think, in provision expense that was there for almost, well, it was exclusively for growth in our unfunded loan commitments.
There was obviously no provision expense related to charge-offs because we had net recoveries for the quarter. Our earnings performance for ratios for the quarter were also strong with return on assets of 1.34% and return on equity of 12.72%. Our margin was 3.78%. We put our core margin at about 3.68%. We think we had ten basis points of extra income from, I think we had one security that paid off with some, you know, additional interest flowing to us. You know, we collected some non-performing loans that had charge-off interest as well. During the second quarter, loan production was brisk, as it was in the first quarter.
Our total net loans grew about $250 million in the second quarter and increased $354 million from the beginning of the year. We saw increases in multifamily, in one to four family, and I think in commercial real estate as well. Our pipeline of loan commitments also increased during the quarter. I think about $170 million maybe in the quarter, and $270 million from the end of 2021. Strong loan production everywhere. We did open our newest loan production office during the quarter in Charlotte, North Carolina, and that followed our opening of the Phoenix loan production office earlier in the year.
Both of those offices are staffed with, you know, industry veterans, and we're excited about our prospects in both of those new locations. Asset quality continued to be, you know, 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 to period-end assets are 8 basis points, and we had a 1 basis point recovery for the first half of the year. Our capital continues to be strong. As of June 30, total stockholders' equity and common stockholders' equity were $549.6 million, just under 10% of total assets. We had a book value per share of $44.50.
I guess that's total book value or is that tangible book, Rex?
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 $0.40 common share dividend, representing an 11% increase from our $0.36 per share dividend. We also, as I mentioned, continue to repurchase stock in an effort to enhance long-term shareholder value.
We repurchased 849,000 shares of common stock at an average price of $59.32 during the first half of 2022. 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 and a half million dollar agreement with Missouri State University for the naming rights of its indoor athletic arena, now called the Great Southern Bank Arena. This agreement further deepens our long-standing relationship with the university, which provides the Southwest Missouri region with significant recreational, educational, cultural, and economic opportunities. That concludes my prepared remarks. I'll turn the call over to Rex Copeland, our CFO, at this time.
All right. Thank you, Joe. I'll start off talking about net interest income and margin a little bit. The net interest income for the second quarter of this year increased $4.1 million to $48.8 million, compared with $44.7 million in the second quarter of 2021. Net interest income was also $43.3 million for the first quarter of 2022. Net interest income, like Joe said earlier, was affected positively by some recoveries that we had during the quarter, both one security and three larger loan interest recoveries that we had, which had previously been charged-off interest for us. The margin, as Joe mentioned, was 3.78%.
Excluding those sort of extra items that we had, we think that our margin was around 3.68%, and that compares to 3.35% in the second quarter of 2021, and also compares to 3.43% in the first quarter of 2022. Part of the changes going on there were for the margin expansion related to kind of the mix of our assets. Obviously, also, interest rates were moving a bit higher during the second quarter. We changed in the asset mix, that was a piece of it, with our average cash equivalents decreasing about $399 million. Average loans were flat.
It's decreasing about $59 million from the previous year quarter, and on 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, the 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, you know, this will be the case as the Fed's 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. The funds that we previously had at the Federal Home Loan Bank, or I'm sorry, the Federal Reserve Bank, were utilized. Outstanding loans have increased $354 million this year. Investments increased $234 million this year, while our total cash and cash equivalents decreased from the beginning of the year by about $522 million. Noninterest income in the second quarter this year compared to a year ago quarter decreased about $266,000 to $9.3 million.
We had decreases of about just over $2 million in profit on loan sales. Last year, we originated and sold a lot more longer-term fixed rate loans, sold those in the secondary market as we originated those. Obviously, the rate changes, so far this year, we're originating much less of that. What we are originating is loans that have a shorter period fixed rate and then become adjustable rate, and much of those are being retained on our balance sheet. So we have not had the same level of profit on loan sales as we had a year ago.
The activity on our derivative interest rate products, back-to-back swaps that we have with our loan customers, we recognized $145,000 of income in the second quarter period this year versus recognizing a $179,000 loss in the change in fair value on that in the second quarter last year. Changes in market rates have impacted that somewhat. Other income, offsetting some of that, increased by about $1 million compared to the prior year as we recognized some gains related to sales of some fixed assets. Non-interest expense. For the quarter ended June 30, our non-interest expense total increased $2.8 million to $33.0 million. 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. 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, you know, 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, we've, as Joe said, we've opened the new loan production offices in Phoenix and Charlotte, and so we've got some additional expenses related there. You know, lastly, in this category, last year, we deferred some origination costs, mainly related to the PPP loans that we originated last year, so there were under GAAP accounting, you defer some of those origination costs and then amortize those later. We didn't have, 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 thousand from the prior year quarter to a total of $1.2 million this quarter. In this current period, we had expenses totaling about $580 thousand that related to training and implementation costs for our upcoming core systems conversion that we have, and also related to some professional fees related to consultants that we've engaged as we work through this transition to the new software platform. The efficiency ratio for the second quarter this year was 56.76% compared to 55.63% for the second quarter of 2021. This little bit higher efficiency ratio related 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, you know, had a negative provision in the second quarter last year of $1 million. This year's second quarter, we had $2.2 million provision expense, and that related entirely to the unfunded, you know, loan and commitment balances that we have at that time. Joe, I think, also said we had net recoveries in the first half of this year and 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. 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 gonna 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. That concludes our prepared remarks today. At this time, we can entertain questions. Let me ask our operator to once again remind the attendees on the call on how to queue in for questions.
Absolutely. Thank you. As a reminder to queue up, 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. Hey, everyone.
Hey, Andrew.
Just wanna talk about the loan growth here. Obviously a couple quarters now, really good trends. What are you seeing on the payoff front? Has payoffs slowed, and that's contributing to the growth? Or is it really just on the production side that we're seeing these numbers?
No, I think definitely payoffs have slowed, Andrew. I think, you know, it's hard to say what that's attributable to totally. We think maybe, you know, some of our multifamily developers, you know, were paying off their construction loans, you know, pretty quickly after, you know, they got certificate of occupancy, refinancing those into the permanent market. You know, now those permanent rates just aren't as attractive, and so, you know, they're electing to, you know, maintain the balances with us for a little while longer. I, you know, I think that's definitely a piece of the story. Although, you know, production certainly was brisk during the quarter as well.
I guess now that we're a few weeks into the third quarter, has that production continued? Keep hearing about a pullback from some investors just given rising rates and macro concerns. How's production trended so far in the last three weeks?
You know, I don't really get that. You know, it is gonna ebb and flow a little bit, so I don't think about it in terms of, you know, two or three-week periods. I wouldn't say at this point there's anything that would, you know, lead me to believe that it's gonna be significantly different than, you know, it's been in prior quarters. Yeah, I guess it could be off of scope, you know, it's just. You know, even a quarter is a pretty short period of time.
Gotcha. Rex, how should we think about the size of the securities portfolio here? Has it reached a plateau, and you're just gonna use cash flows on it to fund loan growth and any outflows from all the liquidity that came in over the last couple years? How should we view the securities portfolio?
Yeah, I think our securities portfolio is not gonna change a whole lot. Certainly I don't anticipate that it's gonna grow. And probably, you know, we'll have some repayment on it, but I don't think that our repayment level is going to be extreme either. I think our portfolio's probably gonna be, you know, not really moving around a whole lot at this point.
Got it. All right. Just a question on the margin. Obviously some good expansion here, but it sounds like you'll still get some benefit from rising rates and presumably another rate hike next week. Would you say that the pace of expansion's gonna 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 you know some of those deposit cost increases. Some of it is gonna be a little bit of change in the funding mix. So you know deposits in total may be at a similar level, but some of the non-time balances may fluctuate and could trend down a little bit from the peak of where we were maybe a year ago or so. We can replace that with you know supplement that with maybe some broker deposits and also maybe some home loan bank advances.
You know, those are gonna be at, you know, more current market rates than, you know, the rates that we're paying on our non-maturity deposit portfolio.
Got it.
also just our retail.
Got it.
CDs has been, you know, they've been trending down a little bit. That may start to flatten out here. I'm not sure they're gonna go a whole lot lower than they are as far as balance goes. Certainly, you know, the rate on those is probably gonna start, as we renew balances there or bring in new retail CDs, the rate on that is gonna be higher than the existing portfolio rate, just because the Fed's already raised 150 basis points and probably another 75.
Yeah, I think in a meeting earlier this week, our you know, the guy that tracks that for us told us that our new and renewed CD, kinda our average rate was around 1%, and the portfolio balance rate right now is 52 basis points. You know, in a year you're gonna see those CDs be higher. It is sort of interesting. There's countervailing forces really, Andrew. There's you know, what Rex mentioned about you know, beta factors just generally tend to increase the further you get into the interest rate further you get into the cycle of interest rate increases, beta factors tend to increase. That's certainly right.
The other thing is though, on our adjustable rate loan portfolio, which is, you know, we have about $1.9 billion, something like that, Rex, in pretty much daily adjust.
Four monthly
our monthly adjustable loan portfolio. You know, a lot of that was, we were in the money with floors early on, and so we didn't. That portfolio did not adjust, or at least didn't adjust fully. Well, now we're pretty much out of the money on all those floors. When the Fed increases whatever they do next week, almost all of that portfolio will increase. You know, that's a positive for us. You know, the negative is, as Rex said, you know, we got $2.4 billion or so of non-maturity deposits that, you know, I think customers are gonna start expecting increases on those rates.
Yeah. 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 KBW. Please go ahead.
Hey, good afternoon, guys. Hope you guys are doing well today.
Hi, Damon.
All right, first question, just to kind of follow back up on the loan growth. You know, it sounds like you guys remain, you know, pretty positive on your outlook. Just wondering, you know, do you expect the pace to kind of slow down here in the back half? Also, you know, the loan-to-deposit ratio is around 98% this quarter. You know, how are you kind of thinking about that as you get close to that 100% level?
Yeah, I mean, I do think we would expect loan growth to slow down in the second half of the year, you know, either as a result of, you know, the market slowing down, or we'll probably want to see loan growth slow down a little bit. I mean, we don't wanna grow.
Another $400 to 500 million in the second half of the year. You know, I think loan growth would certainly be down from where it's been in the first six months of the year.
Got it. Okay. On the expense side of things, you know, the latest LPO just kind of came online late in the quarter. You have the system conversion project underway here. You know, Rex, can we kind of expect, you know, a bit of a lift off of this quarter's level when you back out some of the non-recurring items? You know, I took out $1.7 million of kind of non-recurring expenses this quarter, puts you at like $31.3 million. Is it fair to assume you're gonna kind of go up towards maybe that $32 million level just given those other, you know, expense headwinds?
Yeah. I think we mentioned in there that the $580,000 that we had this quarter that related to some of the systems conversion related items, that's probably gonna be, you know, maybe a $1 million-ish a quarter until we get to the third quarter next year. There's some costs that are related to the implementation and training that from an accounting perspective, you have to include those costs now. You know, we've got some also then just like I said, the third party consulting folks that are working with us too, and so there's a you know, monthly retainer type expense there.
I think that we'll be looking at probably a little higher than the $580, probably more like $1 to 1.1 million type expense each quarter for the next, whether that be four quarters or so.
Yeah. Dave, in the $1.1 or whatever we had for the, you know, special bonus, that would not be recurring. The $580
Plus
Plus, you know, and probably another $400,000, that would be recurring for the next, you know, few quarters.
Got it. Okay. All right. Take that into account. Okay. I guess just lastly on capital management, obviously very active the first half of the year. You may still remain in a very strong position capital-wise. What are your thoughts on continuing the buyback through the back half of this year?
I think we're gonna continue to selectively buy back our stock. You know, it's you know our capital, I agree with you, it's still strong. It's not where it was though. You know, will we buy 800,000 shares during the second half of the year? I doubt that very seriously. You know, I think our buyback will be modest, more modest you know in the second part of the year. You know, we're still certainly in the market.
Got it. Okay. That's all that I had. Thank you very much.
All right. One moment for our next question. We have a question from John Rodis with Janney. Please go ahead.
Hey, good afternoon, guys.
Hi, John.
John.
Hope you guys are doing well. Just, I guess, Rex, maybe just back to the question on expenses. If you know, if you take into account, you know, the full conversion cost you said of $1 million, and then if you back out the one-time bonus, maybe I missed this, but the new LPOs and stuff, are those pretty much fully recognized in the second quarter? Or do we have to, you know, add some additional expense for that?
There'd be a little bit of additional expense related to Charlotte because it just came on in the latter part of the quarter. Those expenses are not any overly high, you know, on a quarterly basis. The Phoenix LPO that we put on in the first quarter, that was pretty much, you know, fully included in the second quarter there.
Okay. It looks like expenses, again with that conversion cost around $1 million a quarter, so you're gonna be a little bit north of $32 million for the next year at least. Is that correct?
Probably.
Okay. Okay.
Yeah.
And-
That's probably how you should be thinking about it, I would think. I mean, the other stuff I think was that during the quarter was fairly normalized. You know, if you could just assume that we gotta add a little bit more for the conversion-related stuff, but we won't have that $1.1 million extra that we had for the-
On the margin, Rex, you said the core margin was about 3.68% if you back out the one-time items. I'm just curious, if you go back, you know, prior increasing rate cycle, 2018, 2019, I think, you look at the core margin, if you exclude yield accretion was closer to 3.90%, 3.95%. Structurally, is there a reason why the margin shouldn't go back to that level if the Fed continues to raise rates? Or you know, should it go back to that level or even go higher than that 3.90%, 3.95%? How should we think about that?
Probably could be similar. I mean, I've got some information here in front of me that, you know, during 2017 and early 2018, our kinda core margin was in the 3.50% to 3.60% type range, and then the Fed started raising rates a little more in 2018, and we kind of peaked at around 3.90% to 3.95%. At the end of 2018, first quarter of 2019, and then we started dropping back down some into the 3.70% to 3.60% range later toward the end of 2019 as the Fed cut some rates. Of course, first quarter, second quarter of 2020, our margin dropped a lot.
I mean, directionally, I can't tell you exactly where we're gonna get to, I don't think, John, but directionally, we would anticipate, you know, third quarter, I would think our margin would be increasing again.
The only thing I can see, would our level of securities and cash be proportionally higher or lower now than it was back at the quarter that John Rodis pointed out, like Q4 of 2018?
I don't think it'd be lower. Probably generally similar. Well, we would've had less securities.
Then.
Then, then. Uh, I believe-
With all other things being equal.
We wouldn't have had any extra cash or anything.
If you had fewer securities, all other things being equal.
The mix would say if you had more loans.
Yeah.
The mix would be a little higher.
A little higher margin back then.
Right. Right.
That's the only thing, you know, when you ask, is there anything structurally that would maybe point to this being, you know, dissimilar to that would be the only thing I would see, John, is you might look at asset mix, you know.
Okay.
now versus then.
Yeah, that makes sense, Joe. Thanks. Just one other question, Rex or even Joe. I guess linked quarter goodwill increased from like $5.9 to 11.2 million. What drove that increase?
That was the naming rights for the arena at the university.
Oh, okay. That's a good reason. That's yeah, that's pretty nice. Okay, guys, thank you.
Great. Thanks, John.
Thank you. This concludes our Q&A and program for today. Thank you for participating, and you all may disconnect. Have a wonderful night.
Thank you.
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