Good day. Thank you for standing by. Welcome to the Great Southern Bancorp Q2 2023 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 one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I want to hand the conference over to speaker today, Kelly Polonus, with Great Southern. Please go ahead.
Thank you, Victor. Good afternoon, and thank you for joining us for our Q2 2023 earnings call. This is Kelly Polonus, Investor Relations for Great Southern. The purpose of this call is to discuss the company's results for the quarter ending 30 June 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. For a list of some of these factors, please see the forward-looking statements disclosure in our Q2 earnings release and other public filings. President and CEO, Joe Turner, and Chief Financial Officer, Rex Copeland, are on the call with me. I'll now turn the meeting over to Joe Turner.
All right. Thanks, Kelly. Good afternoon to everybody. Thank you for joining us for our Q2 earnings call. Our Q2 performance was solid as we continued to navigate through a pretty challenging operating environment. Thanks to the hard work of our team, we earned $1.52 per common share, or $18.3 million, compared to $1.44 and $18.2 million during the Q2 of 2022. Our earnings performance ratios were also good, with annualized ROA of 1.28% and annualized return on average equity of 13.11%. We had mentioned on our last call, some anticipated headwinds that we would face in the Q2 related to net interest margin.
Net interest margin did decline to 3.56% for the Q2, compared to 3.78% for the same period in 2022, and 3.99% for the Q1 in 2023. I know Rex is going to talk quite a bit more about that, as well as, you know, deposit costs, 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 continue to be very strong. Our liquidity position was strong in the Q1 and got stronger actually in the Q2.
At the end of June 2023, our available secured funding lines through the Home Loan Bank and the Federal Reserve and on-balance sheet liquidity totaled approximately $2.4 billion. As we noted last quarter, our company's deposit base is pretty diverse. We have about 14% uninsured deposits, about $658 million. You know, 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 in non-interest-bearing checking balances in the Q1, from start to end, non-interest-bearing checking balances were fairly stable in the Q2, being down just $11 million.
Our total stockholders' equity increased by $13 million from the end of 2022, you know, we decreased a bit from March, and that had to do with a little bit worse AOCI marks for March as a result of interest rates going up. Of course, we're continuing to be substantially above well-capitalized thresholds. Our tangible common equity ratio is now at 9.4%. In the Q2, we did declare a $0.40 per share common dividend. In addition, we repurchased 170,200 shares at an average price of $50.70 per share. At 30 June , we have 900,000 shares approximately remaining on our stock repurchase authorization.
During the Q2, new loan production, general activity was down compared to 2022, really pretty consistent with what we saw in the Q1 of 2023. Total outstanding loan balances grew modestly during the first six months of the year, up about $10 million. Growth came primarily in the multifamily segment, and it was really construction loans being completed, and when they're completed, they move into multifamily. The offset from the multifamily growth was the reduction in construction and commercial real estate. Our pipeline of commitments and unfunded lines is, you know, it declined a bit from the end of the Q1, but it's still relatively strong at $1.6 billion, and that includes about $1.1 billion of unfunded construction loans.
For, for more information about our loan portfolio, I'd remind you of our quarterly loan portfolio presentation. Hopefully, you've had a chance to download that 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 30 June 2023. That was an increase of about 15 basis points. That's one project, an office project, a Missouri office project that moves onto the non-performing list. We feel very good about the status of our loan portfolio and the quality of our credit. That concludes my prepared remarks. I'll turn the call over to Rex at this time.
Thank you, Joe. I'll start off with, as Joe said, net interest income and margin, some commentary there. Net interest income for the Q2 decreased by about $693,000 to $48.1 million, compared to $48.8 million in the Q2 of 2022. Net interest income was $53.2 million in the Q1 of this year, we did have a decrease of about $5 million in the Q2 compared to the Q1 of this year.
Just in kind of looking at some of the items that made up that change between Q1 and Q2, interest expense increased by about $2.5 million on interest-bearing demand and savings accounts, increased about $1.8 million on time deposits, and those are our retail time deposits, and then increased about $2.8 million on brokered deposits. The increase in interest expense on those interest-bearing demand and savings accounts and time deposits 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 brokered 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. Interest income on loans increased $2 million. That partially offset some of the funding cost increases, you know, compared to the Q1. Interest income on the loans were also reduced a little bit by $1.7 million in the Q2 by those initial net settlement on two interest rate swaps that we had put in place several months ago, nine or twelve months ago, with forward start dates, and in May of this year is when those kicked in to start net settlement.
Kind of working our way back through that a little bit further discussion. The higher funding costs on those interest-bearing checking and savings accounts resulted from competition for those deposits and the higher market rates I mentioned. There was also some mix shift from non-interest bearing and very low rate accounts to higher rate accounts. We currently don't really expect that we're going to see significant rate increases necessarily in those product types, but we could be impacted, you know, by competitor rates and also further shifting of deposit mix. Higher funding costs on time deposits were significantly caused by a substantial amount of time deposits that matured at relatively low rates in the Q2.
We had put a lot of these deposits on, you know, several months ago, a few quarters ago, actually, and there was quite a bit that matured here in the Q2. The time deposit maturities in that Q2 were about $511 million with a weighted average rate at maturity of 2.08%. When we renewed these at higher rates or they left the company, in turn, that required their replacement with other funding sources at the then current market rates. A lot of that stuff would have been replaced at, you know, 4%+ kind of rates. If it had to go over to brokered or Home Loan Bank advances to backfill it, those are going to be like 5% type rates.
In the Q3 of this year, the time deposit maturities in this category are much less at $188 million, with a weighted average rate of 2.36%. Again, we do expect renewal rates will probably, you know, be at or above 4% for those CDs that we are able to keep and renew to 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 Q2.
Based on where the interest rates were at 30 June , and I don't think they've changed a whole lot since then to date, we expect the negative impact on all of the swaps, both current ones and ones that we've terminated, to be about $3 million in the Q3, as there'll be a reduction of interest income in Q3. As Joe mentioned earlier, the net interest margin was 3.56% in the Q2. That was down a little bit from 3.78% in the Q2 last year, and then also down from 43 basis points from 3.99% in the Q1 of 2023.
You may recall, I believe our net interest margin was 3.99% in the Q4 of last year. We were able to maintain that in the Q1 of this year. As Joe just pointed out and listed a few things that happened in the Q2 that drove the margin down. Liquidity and deposits, you know, Joe mentioned at a high level liquidity. We've got some 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 million.
Federal Reserve Bank's about $410 million. We've got securities of around $580 million that are not pledged anywhere. Cash and cash equivalents of a couple hundred million dollars. We do have what we believe to be, you know, significant sources of liquidity to cover, you know, anything that would, you know, come our way from a funding standpoint. Deposits in the three months ended June 30, total deposits increased by about $25 million. Brokered 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, about 1.8%, and then non-interest-bearing checking balances decreased $11 million, which is about 1.1%. As Joe mentioned, you know, we do have a pretty low level of uninsured deposits, about 14% of our deposit total of $4.8 billion. You know, just to give you a little bit more granular information, that $4.8 billion is broken down with $670 million, approximately, of brokered deposits of various types, and then $4.2 billion are more core deposits of non-interest bearing, interest-bearing checking and savings and retail time deposits. That's spread over about 224,000 accounts. Non-interest income was a decrease of about $1.5 million compared to the year-ago Q2.
Much of that was related into other income. We did have some assets that we sold in the Q2 of last year for about a $1.1 million gain. We didn't have that replicated in the Q2 this year. Point-of-sale ATM fees were down about $325,000 compared to the prior year Q2. That decrease is really kind of mostly made up of the fact that transactions are being now routed through some different channels that provide lower fees to us. There's been some changes in how merchants can route things, we've got to provide at least a couple of channels for them to do that, the merchants can choose which rails they want to send those through.
Non-interest expense was up $1.7 million compared to the Q2 last year. Legal, audit, and professional fees increased about $451,000 from the prior year. Joe mentioned earlier the some costs related to professional fees around our core system conversion. Occupancy expenses increased about $600,000 from the prior year quarter. There were some various components of computer license and support, about $180,000 there, and then there were some various repairs and maintenance to a variety of buildings and grounds and equipment and things like that. It was about $446,000 more in this year period versus last year. Finally, insurance. Our FDIC insurance premiums increased this year compared to the previous year quarter.
you know, the FDIC had announced this last year that they were going to raise insurance premium rates, and so we had about $223,000 more in expense related to insurance Q2 this year versus Q2 last year. The efficiency ratio for this year's Q2 was 62.10%. That compared to 56.76% in the Q2 last year. I would also say comparing non-interest income and non-interest expense levels in the Q2 this year compared to the Q1 this year, they were only slightly changed when you compare that to the Q1. Provision for credit losses, Joe mentioned, you know, a little bit about our credit quality earlier.
We did not have any provision expense on our outstanding loan portfolio in the Q2. We did have a negative provision in the Q2 related to unfunded commitments. The level of those commitments went down as Joe mentioned earlier. Last year, we did have $2.2 million of provision expense related to the unfunded commitments in the Q2. Our charge-offs were about $135,000 in the Q2 this year. You know, pretty minimal charge-off amounts. The allowance for credit losses as a percentage of total loans was 1.41% at 30 June. Income taxes, the effective tax rate for the quarter was 19.7%, and it was 20.5% in the Q2 of last year.
You know, year to date, I think our effective rate was more like in that 20.5% type range. There's, again, we do utilize certain kinds of investment tax credits, and some tax-exempt investments and loans, which brings our rate down a little bit. There's some state tax, requirements that we have, where we have to file in various states and, you know, there are some expenses related to that bring the effective rate back up a bit. We think going forward, you know, where we stand right now, that the effective tax rate is going to be somewhere in the 20.0%-21.5% range here in the next future periods. I'll mention one last item, in the capital section.
Joe talked about some of our capital earlier, we did discover a typo in one of the bullet points on page one. The holding company's Common Equity Tier 1 capital ratio on that page, in the bullet points on page one, was shown as 10.4%. The ratio actually is 11.4%. It was shown on page seven. 11.4% is the correct number. There was just a typographical error on that first page when we pulled that number over.
That concludes our prepared remarks, and at this time, we can entertain questions. 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 one on your telephone and wait for a name to be announced. To withdraw your question, just press star one one again. Please stand by while 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.
Hey, Andrew.
I just want to talk about just sort of blowing the deposit costs through the margin here, and then also with the swaps being in a negative position. I mean, is it possible to see another, with the full quarter effect of the repricing last quarter, another 40 plus basis point decline in the margin here in the Q3?
Let me address that. I mean, I think to me, that, I mean, we don't give forward guidance. That seems unlikely to me.
Mm-hmm.
Let me tell you, let me put, kind of the way I look at what happened, you know, in our margin compared to the, what went on in the Q1. We obviously were down $5 million. You know, Andrew, I think there's three components to that. The first, Rex mentioned, you know, we had the forward starting swap, that was always going to be there.
Mm-hmm
we talked about that for some time. That was $1.7 million of the $5 million. Second thing that happened is on our core CD portfolio, you know, we have about a billion-dollar core CD portfolio, that's, you know, kind of average duration about a year. You would expect, you know, all of the things being equal, that, you know, that would mature about $250 million per quarter. Well, as Rex said, that's not what happened in our case. You know, it just so happens we had $500 million of that, or a little more maybe, mature in the Q2. In fact, most of what matured in the month of April. That information, I don't think I highlighted-
Got it. Okay. The full quarter effect had kind of already been captured there. Yeah. Okay.
Yeah. A lot of it. Yes.
Yeah. Yeah. 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, $800,000 or $1 million, it was more like $1.8 million. You know.
Mm-hmm
That was probably between $800,000 and $1 million of what happened to us in the Q2. The third thing, so that's about between $2.5 million and $2.7 million of the $5 million. The third thing that happened to us is just margin compression. I mean, and that's sort of what Rex talked about in our call last quarter, that these late cycle betas are going to go up. You know, that's what happened. Our cost on our non-time accounts went up $2.8 million, 44 basis points in the quarter, and I think we more or less had 50 basis points of rate increases, so you were pretty close to 100% there. Those were the three factors.
You've got to ask yourself, going forward, what should we expect? You know, Rex has mentioned that we didn't have a full quarter of that forward starting swap, so there's going to be another $800,000 of expense there.
More like $1.3 million. I mean.
Well, you're talking about total.
Yeah.
I'm talking about additional-
Yeah
expense with the- So, that's going to add $800,000. The CDs repricing are, as Rex said, that's not going to be nearly as bad in the Q3 as it was in the Q2 . The non-time accounts, it's just who knows on those? It doesn't feel like they're going to reprice like they did in the Q2, but, you know, that remains to be seen. At the same time, we're also having fixed rate loans reprice upward. You know, that's sort of the offset. That's kind of the next 2 quarters.
You get into the Q1 of 2024, we, you know, one of the swaps that we have been in a pay position on expires, you know, the full quarter effect of that is between two and a half and three million dollars improvement, you know, starting the first full quarter, that will be Q2 2024. I think those are all the things you should take into account. Yeah, I realize I didn't answer your question, but, you know, I tried to give you everything that I know that you need to look at to try to draw your own conclusion.
No, it makes sense. There's certainly thank you for giving those puts and takes. That's helpful. Just a question here on the loan growth going forward. Pipeline's down a little bit, but still some optimism around the construction. How should we be looking at net growth? I mean, it seems like there was still some payoffs, just natural payoffs. Low single digits in this environment, the right pace to be thinking about?
Yeah, flat to, you know, flattish. It's just hard to predict necessarily. The payoff activity still, you know, seems a little bit muted, certainly from where it was in 21, and probably more like it was in the second part of 22. you know, we've kind of adjusted our origination activity as well.
Gotcha. All right, that covers my questions. Thanks. I'll step back.
Thank you. One moment for our next question. Our next question comes from the line of Damon DelMonte from KBW. 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, what, $1.7 million drag from the swaps this quarter, and if you look at the rates as of 6/30, it'd be $3 million for the next quarter. That's just an incremental $1.3 million, is kind of how we should look at that?
Yes.
Okay. All right, thanks. 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 refinanced away to another institution? Were those projects that were kind of signed a contract that weren't completed for one reason or another?
The negative provision is on the unfunded loan balance. When we book a construction loan, you know, initially, we don't fund anything, but maybe we have $10 million sitting in the unfunded account. In total, at the end of Q1, that number was like $1.3 billion.
Mm-hmm.
At the end, we have to have a reserve on that $1.3 billion. At the end of Q2, that number was $1.1 billion. Because there's less in the way of unfunded amounts, you're going to have a lesser reserve on that, and that's where that number comes from.
Okay. If loan growth is going to be, you know, modest in the coming quarters, taking into account the potential for more relief from the unfunded side and lack of need to reserve for new growth, I mean, do you expect to take any meaningful provision in the back half of the year?
You know, I mean, it would be based on, you know, obviously, we feel like we're adequately reserved right now. You know, all other things being equal, I would say no, if nothing changes from here.
If we have charge-off, you know, significant charge-offs, that would change the calculus on that a little bit.
Well, possibly if the economy, if the-
Yep. Yeah
economy changed, that could change.
We have to factor that outlook into our analysis when we set our loan loss reserves, our credit reserves.
Yeah, based on where we sit right now, obviously, we feel like our reserve is at the right number.
Okay. I guess, lastly, could you just provide a little bit more color on that office loan? It's in Missouri. I know you noted that.
Mm-hmm.
You know, no reserve was taken against that loan. Is that correct?
We have a reserve allocated to it. You know, I mean, it's a well-located office building. You know, it's occupied. I mean, You know, I don't want to talk on, in a public forum about, you know, sort of borrower-specific aspects.
Mm-hmm.
You know, it seems like it's going to be best to transition this asset to a new customer. A new customer is going to be able to do, you know, better things with it. I mean, we feel like there could be some charge-off, Damon, but we think we've got that allocated in the reserve for it, if there is that. 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 that I had. Thanks.
Thank you. I'm not showing any further questions in the queue. I would turn the call back over to Joe Turner, President and CEO, for closing remarks.
All right. Very good. We appreciate the questions, and we appreciate everybody joining us today. We'll look forward to talking to you after our Q3 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.