Great Southern Bancorp - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 EPS was $1.72, up 18.6% YoY; materially above Wall Street consensus of $1.34*, driven by stronger net interest margin (NIM) and lower deposit costs. Values retrieved from S&P Global.
• Revenue was $59.3M vs consensus $56.0M*, a beat, with net interest income rising 8.9% YoY to $51.0M; NIM expanded to 3.68% (+25 bps YoY, +11 bps QoQ). Values retrieved from S&P Global.
• Credit quality remained strong: non-performing assets fell to $8.1M (0.14% of assets), allowance for credit losses (ACL) rose to 1.41% of loans; net recoveries were $111K.
• Loan balances contracted $156M QoQ on higher payoffs (including a $30M payoff on the last day of the quarter); brokered deposits decreased $62M QoQ; capital ratios and liquidity remained robust (TCE 10.5%; $1.22B FHLB and $338.9M Fed capacity).
• Near-term watch items: the ~$2.0M quarterly benefit from a terminated swap ends after Q3 2025; management expects generally stable margins excluding that headwind and slightly lower renewal rates on maturing time deposits.

What Went Well and What Went Wrong

What Went Well

• Net interest income up 8.9% YoY to $51.0M; annualized NIM improved to 3.68% on disciplined funding cost management and modest asset yield stability. “Our annualized net interest margin improved to 3.68%,… underpinned by healthy loan yield and prudent funding cost management.” — CFO Rex Copeland.
• Expense discipline: efficiency ratio improved to 59.16% (from 64.27% LY); legal/professional fees fell 50% YoY; OREO generated $445K rental income vs minimal LY.
• Asset quality resilience: NPAs down to $8.1M (0.14% of assets), NPLs 0.04% of loans; ACL increased to 1.41% of loans; net recoveries of $111K. “We did not record a provision for credit losses… These results highlight the strength of our portfolio.” — CEO Joe Turner.

What Went Wrong

• Non-interest income declined $1.6M YoY to $8.2M due to lapping a $2.7M vendor termination gain in Q2 2024; 2025 included a nonrecurring $1.1M tax credit partnership gain.
• Loan balances contracted $156M QoQ on lumpier-than-usual payoffs; originations remain constrained in a competitive market, limiting near-term growth.
• The terminated swap benefit (~$2.0M per quarter) ends after Q3 2025, creating a Q4 headwind to NIM and net interest income absent offsetting actions.

Transcript

Speaker 3

Day and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. Second Quarter 2025 Earnings Conference 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Tryka, Investor Relations. Please go ahead.

Speaker 1

Thank you, Daniel. Good afternoon and thank you for joining Great Southern Bancorp, Inc.'s Second Quarter 2025 Earnings Call. Today, we will be discussing the company's results for the quarter ended June 30, 2025. Before we begin, I'd like to remind everyone that during this call, forward-looking statements may be made regarding the company's future events and financial performance. These statements are subject to various factors that could cause actual results to differ materially from those anticipated or projected. For a list of these factors, please refer to the forward-looking statements disclosure in the second quarter earnings release and other public filings. Joining me today are President and CEO Joseph Turner and Chief Financial Officer Rex Copeland. I'll now turn the call over to Joseph.

Speaker 0

Okay, thanks, Jeff, and good afternoon. I want to thank everyone for joining us today. Our second quarter results reflect the continued strength of our core banking fundamentals and solid earnings despite a dynamic operating environment. Credit and operating metrics remain sound, supported by our disciplined expense management and relationship-based approach to lending. We reported net income of $19.8 million for the quarter, or $1.72 per common share, up from $17 million and $1.45 per share in the same quarter a year ago. The improvement in net income this quarter, compared to the year ago quarter, was primarily driven by higher net interest income, supported by consistent loan and investment yields alongside lower funding costs. In addition to the net interest income growth, we also benefited from unusually large tax credit partnership income in the quarter.

We recorded a negative provision for losses on unfunded commitments of $110,000 in the quarter, compared to a negative provision of $607,000 in the year ago quarter. These results reflect the quality of our loan portfolio. Our disciplined expense management and stable, diversified deposit base have further strengthened our financial position, underscoring the resilience of our business model and supporting long-term shareholder value. We remain focused on prudent risk management. Net interest income totaled $51 million and improved to about 8.9% compared to the $46.8 million in the year ago quarter. Our annualized net interest margin improved to 3.68%, which is 25 basis points above the level from a year ago and 11 basis points higher than the first quarter of 2025. This improvement in net interest margin was underpinned by healthy loan yield and prudent funding cost management.

Our loan portfolio continues to reflect our conservative credit posture and commitment to relationship-based banking. In terms of lending, gross loans totaled $4.6 billion, a decline of $157 million, or 3.3% from the $4.76 billion at the end of the year. Given our emphasis on balancing loan growth with appropriate pricing and loan structure, we saw a net loan reduction in the quarter. Large loan payoffs tend to fluctuate, but we did experience a higher level of such payoffs in the second quarter of 2025, including a $30 million payoff on the last day of the quarter. Within our portfolio, the largest loan categories continue to be multifamily and commercial real estate lending, which were $1.58 billion and $1.49 billion, respectively.

We have also remained focused on construction lending with a total outstanding balance of $367 million at June 30, 2025, and an unfunded portion of construction loans of $644 million. On the funding side, total deposits decreased $73.9 million, or 1.6% from the end of the first quarter of 2025, to $4.68 billion. The decrease was mainly attributable to a $62.1 million reduction in broker deposits. Compared to December 31, 2024, total deposits increased $78.6 million, with increases in broker deposits and checking deposits. We continue to manage total deposit costs while maintaining focus on customer retention. Our broker deposit levels continue to vary based on funding needs and our approach to managing the overall funding mix in light of relative pricing and targeted duration. At June 30, 2025, non-performing assets were $8.1 million, representing 0.14% of total assets and a $1.5 million decrease from March 31, 2025.

We experienced net recoveries on loans of $111,000 in the second quarter of 2025. We did not record a provision for credit losses on outstanding loans in the second quarter of 2025. These results highlight the strength of our portfolio and our prudent risk management practices. Expense management remains a top priority for us as well. Non-interest expenses for the second quarter of 2025 were $35 million, down $1.4 million from the $36.4 million in the year ago quarter, despite continued investments in infrastructure and personnel. This non-interest expense decline was led by a $935,000 reduction in legal and professional expenses, which were at an elevated level last year related to training and implementation costs for the intended core systems conversion. Expenses on the other real estate owned also decreased $453,000, partially offset by a modest increase in technology investment.

In the second quarter of 2025, we had a favorable efficiency ratio of just over 59%, reflecting our disciplined focus on costs. As we enter the second half of 2025, we remain focused on maintaining strong credit quality and pursuing consistent relationship-driven loan growth that supports longer-term stability. Even amidst ongoing market uncertainty, we are committed to maintaining strong capital levels and delivering consistent value for our shareholders. Let me now turn the call over to Rex Copeland for a detailed discussion of the financials.

Speaker 5

All right, thank you, Joe, and good afternoon, everyone. I'll now provide a little more detail on our second quarter financial performance and how it compares to both Q2 of last year and Q1 of 2025. For the quarter ended June 30, 2025, we reported net income of $19.8 million, or $1.72 per diluted common share, compared to $17.0 million, or $1.45 per diluted common share in the 2024 second quarter, and also compared to $17.2 million, or $1.47 per diluted common share in the first quarter of 2025. Our annualized net interest margin for the second quarter of this year increased to 3.68%, compared to 3.43% in the second quarter last year and 3.57% in the first quarter of 2025. Despite the challenges of a competitive deposit pricing environment, our margin improvement reflects disciplined balance sheet strategy and proactive funding cost management of both deposits and borrowings.

Net interest income for the quarter increased to $51.0 million, reflecting marginally higher interest income and reduced interest expense. Interest income increased to $81.0 million, representing a 0.1% increase compared to the prior year's second quarter, supported by improved yields on investment securities and continued growth in average interest-earning assets. We did note some additional interest recoveries on non-accrual loans and other cash-basis assets during the quarter of $434,000, which added about three basis points to our net interest margin. It's important to note that though interest income recoveries such as this may occur in future periods, we cannot anticipate the amount or timing of this income with certainty. Interest expense declined to $30.0 million, down 12% from the year ago quarter, primarily due to a $3.4 million or 12.3% reduction in deposit-related costs, reflecting lower market interest rates and our disciplined management of funding strategies.

The average rate paid on total interest-bearing liabilities decreased to 2.75% in the 2025 second quarter, down from 3.17% in the 2024 second quarter. As a reminder, once again, we will lose the benefit of the terminated interest rate swap after the third quarter of 2025. We expect to continue realizing approximately $2 million in interest income from the terminated swap in the third quarter of 2025, after which that benefit of interest income will cease. Non-interest income for the quarter totaled $8.2 million, a decrease of $1.6 million, or 16.5% compared to the second quarter last year. Non-interest income was primarily impacted by two unusual items, one occurring in the second quarter of 2025 and the other occurring in the year ago quarter. Included in the 2024 second quarter was $2.7 million in income from termination of the master agreement with the third-party software vendor.

The 2025 second quarter's non-interest income included $1.1 million in gains from exits and other activities associated with tax credit partnership investments. This type of tax credit partnership income cannot be anticipated with certainty in terms of amount or timing. Compared to the first quarter of 2025, non-interest income increased $1.6 million, primarily driven by the previously discussed tax credit partnership investment activities and higher net gains from mortgage loan sales and debit card fees. Total non-interest expense for the quarter remained relatively consistent at $35.0 million, a decrease of $1.4 million, or 3.9% from the second quarter of last year, and an increase of $183,000 from the first quarter of 2025. The improvement compared to the prior year's second quarter was primarily driven by reductions in legal, audit, and other professional fees, other operating expenses, and expenses related to other real estate owned.

Legal, audit, and other professional fees totaled $929,000, a decrease of $935,000 or 50%, reflecting the absence of last year's training and implementation costs, as mentioned before. Expenses on other real estate owned also decreased as a result of rental income generated from these assets in the 2025 period. Total salary and employee benefits expense remained generally unchanged. These reductions were partially offset by increases in net occupancy and equipment expense. Net occupancy and equipment expense for the second quarter rose $594,000, or 7.6% to $8.4 million, reflecting various components of computer license and support and hardware costs related to upgrades of core system capabilities. As a result, our efficiency ratio for the quarter ended June 30, 2025, was 59.16%, an improvement from 64.27% in the second quarter of 2024 and 62.27% in the first quarter of 2025.

We are focused on maintaining strong cost discipline by continually refining our operations and carefully controlling expenses. At the same time, we're allocating resources strategically to priority initiatives designed to support sustainable growth and strengthen our market position over the long term. Now I'll make a few comments about the balance sheet. Total assets ended the quarter at $5.85 billion, down from $5.98 billion at the end of 2024 and $5.99 billion at March 31, 2025. Net loans, excluding mortgage loans held for sale, decreased to $4.53 billion at June 30, 2025, compared to $4.69 billion at both December 31, 2024, and March 31, 2025. Loan demand has been somewhat constrained in the current economic environment, and we remain committed to balancing loan growth with appropriate pricing and loan structure. As mentioned, we did experience a bit higher level of loan payoffs in the second quarter of 2025.

Cash and cash equivalents totaled $245.9 million at June 30, 2025. The company also has access to additional funding lines through the Federal Home Loan Bank and the Federal Reserve, totaling $1.55 billion, reflecting enhanced liquidity management and prudent positioning in response to evolving market conditions and funding dynamics. Total deposits were $4.68 billion as of June 30, 2025, reflecting an increase of $78.6 million, or 1.7% compared to December 31, 2024. This increase was primarily driven by a $61.2 million increase in broker deposits, a $35.5 million increase in checking accounts, and an $18.0 million decline in retail CDs. As of June quarter end, we estimated that uninsured deposits, excluding those of our consolidated subsidiaries, totaled approximately $703 million, representing about 15% of our total deposits. Asset quality also remained strong this quarter, with non-performing assets of 0.14% of total assets at quarter end.

Non-performing loans to period end loans were 0.04%. During the quarter ended June 30, 2025, the company did not record a provision for credit losses on its outstanding loan portfolio, consistent with last year's second quarter. The company recorded a negative provision for losses on unfunded commitments of $110,000 in the June 2025 quarter, compared to a negative provision of $607,000 recorded during the second quarter last year and a negative provision of $348,000 recorded in the first quarter of 2025. The allowance for credit losses as a percentage of total loans stood at 1.41% as of June 30, 2025, a slight increase from 1.36% at March 31. Our capital position remains healthy, with total stockholders' equity increasing to $622.4 million, up from $613.3 million at March 31, 2025, and $599.6 million at December 31, 2024.

At June 30, 2025, this represents 10.6% of total assets and a book value of $54.61 per common share. The increase from March 31, 2025, was primarily driven by $19.8 million in net income and a $0.8 million increase from stock option exercises, partially offset by cash dividends declared on the company's common stock of $4.6 million and common stock repurchases of $9.8 million. Our total capital also increased $2.8 million in the second quarter of 2025 as a result of increased market value of our available for sale investment securities and interest rate swaps. Tangible common equity stands at approximately 10.5% of total assets, and we continue to operate well above all regulatory capital requirements.

In June 2025, we redeemed all of the company's outstanding 5.5% fixed-to-floating rate subordinated notes at par, with an aggregate principal balance of $75 million in advance of a step-up in rate that saved considerable future interest costs. I'd also note that last quarter, our Board of Directors approved a new stock repurchase authorization for an additional 1 million shares, which will take effect once the current authorization is fully utilized. During the 2025 second quarter, we repurchased nearly 176,000 shares of our common stock, reducing the remaining balance under the existing program to approximately 94,000 shares as of June 30, 2025. Through the first six months of 2025, we have repurchased nearly 350,000 shares of our common stock. Additionally, we declared cash dividends on our common stock of $0.40 per share in each of the first two quarters of 2025.

More broadly, we remain confident in the strength and resilience of our balance sheet, supported by solid capital levels, ample liquidity, disciplined credit quality, and a deposit strategy that remains responsive to a competitive rate environment. With that, we are now ready to open up requests.

Speaker 3

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Damon Del Monte with Keefe, Bruyette & Woods. Your line is open.

Speaker 2

Hey, good afternoon, guys. Hope everybody's doing well today, and thanks for taking my questions. First question, just on the loan growth outlook here in the back half of the year. You know, Joe, just wondering if you have a little bit more optimism at this point than you did 90 days ago. You know, do you feel like the origination activities can kind of pick up, you know, some of those unfunded construction loans maybe hitting the books, or kind of just what your broader thoughts are on the outlook for loan growth?

Speaker 0

I am optimistic over the long term. I would say right now, though, you know, it's a pretty competitive environment. Damon, there's not a lot of opportunity out there, less opportunity maybe than we've seen in bigger years. The landscape is the loan market is pretty competitive for the fewer deals that there are. You know, I wouldn't expect from an origination standpoint anything, you know, in the near term. I wouldn't expect it to be too much different than, you know, what we've seen in the first six months of 2025.

Speaker 2

How about from a payoff perspective? Do you guys have any line of sight on expected payoffs? I know you noted there was a $30 million loan that paid off on the last day of the month. Do you have any others that are scheduled to pay off that you're kind of aware of?

Speaker 0

Payoffs with the kind of lending we do, Damon, are lumpy and are hard to predict. I don't know that we have a lot of visibility on that. We like to try to keep track of it as best we can. What we find is that maybe payoffs that customers are expecting to have get pushed, and maybe there's a payoff that comes in that wasn't expected. I'm sure we're going to continue to have some payoff activity, but trying to pin it down is pretty tough.

Speaker 2

Got it. Okay. On the expense front, Rex, you know, good quarter of expense control. I mean, anything going to disrupt that trend? You know, do you think you can hold expenses on the limited growth here in the back half of the year, or do you see some additional expense spend creeping in?

Speaker 5

I think generally, it's going to be fairly consistent. There may be a little bit of stuff in the back half, some additional technology things that will come online that will have a little bit more expense related to it. I don't think it's going to be anything truly significant. We do have, I think, there may be some compensation costs that will be adjusted a little bit. There are some, in a couple of our states, I think there are some minimum wage requirement things and things of that nature. I think there could be some slight adjustments on some of that kind of stuff. I don't think of anything really large that I can think of right now that would change the numbers dramatically.

Speaker 0

Right. It's not that we necessarily have a lot of employees at minimum wage, but once those salaries start getting adjusted, it can affect you up the line.

Speaker 2

Got it. Okay, that's all very helpful. Thank you very much.

Speaker 0

All right. Thanks, Damon.

Speaker 3

Thank you. Again, to ask a question, please press star 11 on your telephone. Again, that is star 11 to ask a question. Our next question comes from John Rodis with Janney Montgomery Scott LLC. Your line is open.

Speaker 4

Hey, good afternoon, guys.

Speaker 0

Hi, John.

Speaker 4

Hey, just back to your comment on expenses, the rental income this quarter was up, but it's a function of the larger OREO balance. All things equal, would you expect that rental income number, was there any catch-up or anything in the quarter, or if that property is still around, should we expect that level in the third and fourth quarter?

Speaker 5

I don't think there's anything catching up in there. When you compare it to the year-ago quarter, though, we didn't have that property in OREO. We had some expenses related maybe to it and some other things. I think we had net expense in Q2 2024, and I believe we had a little bit of, you know, negative expense or income related to OREO in the second quarter of this year. That was kind of the big difference. We had expense last year and a little bit of income this year. I don't think that in Q2, I don't remember anything being a catch-up or anything. I think it was fairly consistent with what's in there.

Speaker 4

If that property stays on the balance sheet for a little while, then you'll continue to see that level of rental income, correct?

Speaker 0

The only hesitation I have, John, I don't know that Rex and I are fully aware of the rent roll and when leases might be expiring or whatever. That could affect that number some.

Speaker 4

Okay.

Speaker 0

I don't have that in my head. Yeah, I mean, I think generally the income we had in the second quarter was from that building. As long as we have that building, we should have similar rental income unless we would have a lease roll-off or something.

Speaker 4

Okay. Makes sense. One other question, just on the margin, you saw a nice expansion. If you back out the interest recoveries from the first and second quarter, I sort of get a core margin this quarter of around 3.65%. You should have, what, maybe $100,000, $200,000 net benefit from the sub-debt redemption, so maybe a little bit of improvement there in the third quarter and then termination of the swap in the fourth quarter. All things equal, do you think you can sort of hold this level of the margin excluding the swap termination?

Speaker 0

I think you've identified the variables there, John. I mean, I can't think of necessarily anything else. You know, we are going to continue to have some fixed-rate loans that are, you know, are pretty low rates, mature and probably get redone at a little higher rates. I don't know, Rex.

Speaker 5

Yeah, we've got a little bit of that. There's just normal repayment on some of those loans, and then there are some that pay off periodically. We can redeploy those funds, hopefully, into higher-yielding assets. We do have, and we mentioned it, I think, in the release, a fairly substantial amount of time deposits that are going to mature in the next quarter to six months. It's hard to know exactly because of the mix of how that's all going to play out. We're hopeful that we'll be able to renew that at a, it won't be a lot less, but maybe a little bit less rate than we currently have to pay on what's on the books right now. There may be a little bit of positive that comes from that.

Speaker 0

Yeah, I guess the way to characterize it, John, is probably pretty neutral as to what's happening with maybe a slight tailwind, but it wouldn't be a real, real brisk one.

Speaker 5

Until Q4, we got a headwind.

Speaker 0

Yeah, that's the guess.

Speaker 5

With the swap termination going on.

Speaker 0

Right.

Speaker 5

We’ve talked about that, and you guys were aware of it, but I think Q4, obviously, we're going to lose some interest income from that, all things being equal.

Speaker 4

Yep. Okay, thanks, guys.

Speaker 3

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Joseph Turner for closing remarks.

Speaker 0

All right. We appreciate everybody for joining us today, and we'll look forward to talking to you in October. Thank you.

Speaker 3

This concludes today's conference call. Thank you for participating. You may now disconnect.