8-K: Great Southern Bancorp Reports Mixed Second Quarter Results Amidst Core System Transition Challenges

Great Southern Bancorp's second quarter earnings were $1.45 per diluted share, down from $1.52 year-over-year, while navigating core system conversion issues and a competitive deposit environment.

Summary

• Great Southern Bancorp reported preliminary second quarter earnings of $1.45 per diluted common share, compared to $1.52 in the same quarter last year.
• Net income for the quarter was $17.0 million, down from $18.3 million year-over-year.
• The company experienced a decrease in net interest income by $1.3 million, or 2.7%, to $46.8 million compared to the second quarter of 2023.
• Net interest margin decreased to 3.43% from 3.56% year-over-year.
• Total outstanding loans increased by $44.0 million, or 1.0%, to $4.63 billion since the end of 2023.
• Non-performing assets increased to $20.4 million, or 0.34% of total assets, up from $11.8 million at the end of 2023.
• The company terminated a Master Agreement with a third-party software vendor for a core banking platform conversion, incurring $902,000 in expenses and recognizing $2.7 million in income related to the termination.
• The company's Tier 1 Leverage Ratio was 11.0%, Common Equity Tier 1 Capital Ratio was 12.0%, Tier 1 Capital Ratio was 12.5%, and Total Capital Ratio was 15.2% as of June 30, 2024.
• Total stockholders equity decreased by $3.0 million in the first six months of 2024, while retained earnings increased by $8.9 million during the same period.
• The company repurchased approximately 237,000 shares at an average price of $51.67 during the first six months of 2024.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative due to decreased earnings and increased non-performing assets, offset by strong capital and liquidity positions. The core system issues and legal action add uncertainty.

Positives

• The company's capital position remains strong, exceeding regulatory thresholds.
• The company has ample liquidity sources, including secured borrowing lines and unpledged securities.
• The company experienced net recoveries of $85,000 in the six months ended June 30, 2024.
• The company saw improved net interest income in the second quarter of 2024 compared to the first quarter of 2024 due to the contractual termination of an interest rate swap.
• Total non-interest income, excluding one non-recurring item, was slightly higher compared to the first quarter of 2024, mainly driven by increased gains on loan sales and better debit card transaction fee income.
• The pace of deposit interest expense increases has moderated over the last few quarters.
• The company's deposit base remains diverse with a relatively low level of uninsured deposits at approximately 14% of total deposits.

Negatives

• Second quarter earnings decreased to $1.45 per diluted share from $1.52 in the same quarter of the previous year.
• Net interest income decreased by $1.3 million, or 2.7%, year-over-year.
• Net interest margin decreased to 3.43% from 3.56% year-over-year.
• Non-performing assets increased to $20.4 million, or 0.34% of total assets, up from $11.8 million at the end of 2023.
• Total stockholders equity decreased by $3.0 million in the first six months of 2024.
• The company incurred $902,000 in expenses related to core system conversion training and implementation costs.
• The company experienced a decrease in deposits of $158.1 million during the three months ended June 30, 2024.
• The company's efficiency ratio increased to 64.27% for the quarter ended June 30, 2024, compared to 62.10% for the same quarter in 2023.

Risks

• The company faces increased funding costs due to competition for deposits and higher market interest rates.
• The company is exposed to potential losses from non-performing assets, particularly in the multi-family loan category.
• The company's core system conversion issues have led to legal action and additional expenses.
• The company's net interest income is being negatively impacted by the high level of competition for deposits and the lingering effects of liquidity events at several banks in March and April 2023.
• The company's effective tax rate may fluctuate in future periods due to the level and timing of the company's utilization of tax credits, the level of tax-exempt investments and loans, the amount of taxable income in various state jurisdictions and the overall level of pre-tax income.
• The company has unrealized losses on its portfolio of held-to-maturity investment securities, which totaled $26.1 million at June 30, 2024, that were not included in its total capital balance.

Future Outlook

The company expects its effective tax rate to remain below the statutory federal tax rate and anticipates it will be approximately 18.5% to 20.0% in future periods due to additional investment tax credits.

Management Comments

• Great Southern President and CEO Joseph W. Turner said, 'Our second quarter results reflected improved earnings, both on a reported basis and excluding certain significant or non-recurring items, as we continue to operate in a challenging economic environment.'
• Turner added, 'Total outstanding loan balances have increased about $44 million since the end of 2023.'

Industry Context

The results reflect a challenging environment for banks, with increased competition for deposits and higher funding costs due to rising interest rates. The company's experience with a failed core system conversion is not unique in the industry, highlighting the risks associated with large-scale technology projects.

Comparison to Industry Standards

• The company's net interest margin of 3.43% is lower than the 3.56% reported in the same quarter last year, indicating pressure on profitability. This is a common trend in the banking industry as interest rates rise and competition for deposits increases.
• The increase in non-performing assets to 0.34% of total assets from 0.20% at the end of 2023 suggests a potential weakening in asset quality, which is a concern for investors. This metric should be compared to peers such as regional banks like Commerce Bancshares (CBSH) or UMB Financial Corporation (UMBF) to assess relative performance.
• The company's Tier 1 Leverage Ratio of 11.0% and Total Capital Ratio of 15.2% are strong and exceed regulatory thresholds, which is a positive sign. These ratios are generally higher than the minimum requirements set by regulators, such as the Federal Reserve, and should be compared to other banks of similar size and risk profile.
• The company's efficiency ratio of 64.27% is higher than the 62.10% reported in the same quarter last year, indicating increased operating expenses. This should be compared to the efficiency ratios of other regional banks to assess the company's cost management effectiveness. For example, banks like First Horizon (FHN) or Regions Financial (RF) could be used as benchmarks.
• The company's loan growth of 1.0% since the end of 2023 is modest and should be compared to the loan growth rates of other banks in the same region and with similar loan portfolios. Banks like Simmons First National Corporation (SFNC) or Bank OZK (OZK) could be used as comparables.

Legal Proceedings

• The company initiated legal action against a third-party software vendor by filing a complaint in the U.S. District Court for the Western District of Missouri, Southern Division, seeking to recover damages caused by the vendor's material breach of contract.

Stakeholder Impact

• Shareholders may be concerned about the decrease in earnings and the increase in non-performing assets.
• Customers may be affected by the ongoing core system issues, although the company states it will continue to offer its full array of products and services.
• Employees may be impacted by the ongoing core system issues and the legal action.
• Creditors may be concerned about the increase in non-performing assets and the decrease in total stockholders equity.

Next Steps

• The company will continue operations with its current core banking provider.
• The company will host a conference call on July 17, 2024, to discuss second quarter 2024 preliminary earnings.
• The company will continue to monitor its compliance programs, which could result in additional compliance expenses in future periods.

Key Dates

Keywords

earnings, net interest income, non-performing assets, core system conversion, liquidity, capital, loans, deposits, interest rates, banking