Prepared remarks
Good day, and thank you for standing by. Welcome to the Great Southern Bancorp second quarter 26 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press *11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker for today, Christina Maldonado. Please go ahead.
Good afternoon, and thank you for joining Great Southern Bank second quarter 26 earnings call. Today, we will be discussing the company's results for the quarter ended 06/30/2026. Before we begin, I would 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 earnings release and other public filings. Joining me today are President and CEO, Joe Turner, and Chief Financial Officer, Rex A. Copeland. I will now turn the call over to Joe.
Okay. Thanks, Christina, and good afternoon to everyone on the call. We appreciate you joining us today. Our second quarter 26 results reflect the strength and resilience of our core banking franchise despite what remains a highly competitive operating environment. Our operating metrics remain sound, supported by disciplined expense management, careful balance sheet positioning, and our ongoing emphasis on relationship-based banking. In the second quarter of 2026, we reported preliminary net income of $15.8 million, or $1.43 per diluted common share, compared to $19.8 million, or $1.72 per diluted common share, in the prior year quarter. These results were negatively impacted by several one-time expenses related to the planned consolidation of nine banking centers and staffing reductions in other operational areas, which Rex and I will discuss further. For the first half of 2026, preliminary net income totaled $33.3 million, or $2.99 per diluted common share, compared to $36.9 million, or $3.18 per share, in the first half of 2025. Net interest income in the second quarter totaled $49.5 million, down from $51.0 million in the year-ago quarter. This change from the prior year period was driven primarily by the absence in 2026 of $2.0 million of interest income from a previously terminated swap. Despite this headwind, disciplined funding cost management allowed for the expansion of our margin to 3.76% from the year-ago quarter when it was 3.68%. In terms of lending, net loan balances decreased $149 million in the second quarter of 2026. This decline is largely reflective of elevated loan payoff activity. The decline was most pronounced in the commercial real estate and construction categories compared to December 31. Net loan balances decreased $49.1 million to $4.31 billion. As emphasized in previous communications, period-to-period loan trends are heavily influenced by borrower repayment and remain difficult to forecast. Our focus remains on disciplined originations and conservative underwriting standards. Our broader lending pipeline remains robust, with total commitments standing at $1.07 billion at June 30, including $532 million in the unfunded portion of closed construction loans. On the funding side, total deposits decreased $181 million in the first six months of 2026. The majority of this decline, about $88 million, was within broker deposits, reflecting a strategic choice to utilize FHLB borrowing given the pricing pressures within the brokered market. Interest-bearing checking balances decreased about $92 million in the first six months of the year, with most of this being in the higher end of the rate tiers of those types of accounts. Increases in noninterest-bearing checking balances roughly offset decreases in our retail time deposit portfolio. From a credit quality standpoint, our metrics remain excellent. Total nonperforming assets at the end of the second quarter were 0.17% of total assets compared to 0.15% at the end of the year. We did have a charge-off of $909 thousand on a multifamily loan transferred to foreclosed assets in the second quarter, which Rex will discuss further. We view this as an idiosyncratic situation. The borrower had certain circumstances related just to them, and we do not view it as a migration of any portion of our portfolio. Expense management remains a top priority for our bank. This focus is evident in our decision to consolidate nine banking centers and eliminate a total of 66 positions across various divisions. Ultimately, we believe this will allow for better alignment with our customers' banking preferences along with our pursuit of operational efficiencies as technology services evolve. Noninterest expense for the quarter was $38.2 million. However, when excluding the one-time costs associated with the branch consolidation and workforce reduction, noninterest expense was $36.1 million. These one-time costs consist of $1.4 million in asset valuation allowance on four owned locations, $561 thousand in severance cost, and $163 thousand in remaining lease expense for a loan production office, which will close at the end of July. As we move through the balance of 2026, we remain focused on protecting asset quality, executing thoughtful operational improvements, and consistently building long-term value for our stockholders. The lending and funding environments remain competitive, but we are navigating this landscape from a position of strength. With that, I will turn the call over to Rex for a more detailed discussion of the financials.
All right. Thank you, Joe, and good afternoon, everyone. I will now provide a little more detail on our second quarter 26 financial performance and how it compares to both the prior year quarter and the previous linked quarter. As we mentioned, for the quarter ended 06/30/2026, we reported preliminary net income of $15.8 million, or $1.43 per diluted common share, compared to $19.8 million, or $1.72 per diluted common share, in the second quarter of 2025 and $17.5 million, or $1.58 per diluted common share, in the first quarter of 2026. Net interest income for the quarter totaled $49.5 million compared to $51.0 million in the second quarter of 2025 and $48.3 million in the first quarter of 2026. The $1.5 million, or 2.9%, decline from the second quarter of 2025 was driven primarily by the $2.0 million reduction in quarterly interest income associated with the previously terminated interest rate swap, whose amortization ended in October 2025. Compared to the prior year quarter, interest income was also affected by lower loan balances and lower market interest rates, which primarily impacted variable-rate loans and newer fixed-rate originations. Those items were partially offset by lower interest expense on deposit accounts and borrowings due to disciplined funding cost management and the ongoing downward repricing of rates on liabilities. In addition, there was no interest expense on subordinated notes in the quarter ended 06/30/2026 as those notes were redeemed in June 2025. Compared to the first quarter of 2026, net interest income increased $1.2 million. A portion of the increase was due to one additional calendar day in the second quarter along with modest increases in interest income on loans and investments. Interest expense was nearly unchanged compared to the 2026 first quarter. Also during this 26 second quarter, we did record approximately $393 thousand of interest income related to the collection of previously unbooked interest on a single relationship. Though this relationship has recently provided interest payments semiannually, the timing and amount of this income may vary going forward. Our annualized net interest margin for the second quarter of 26 expanded to 3.76% compared to 3.68% in the second quarter of 25 and 3.71% in the first quarter of 26. Noninterest income for the quarter was $7.4 million compared to $8.2 million in the second quarter of 25 and $7.0 million in the first quarter of 26. The year-over-year decrease of $837 thousand was driven by an $897 thousand decline in other income, primarily due to $1.1 million in one-time income relating to our tax credit partnership investments that we recorded in the 2025 period. Partially offsetting the decline in other income was a $230 thousand increase in commissions income compared to the prior year quarter. Favorable yields on annuity offerings have increased demand from our customer base for this product. Total noninterest expense for the quarter was $38.2 million compared to $35.0 million in the second quarter 25 and $34.8 million in the first quarter of 26. And just as a reminder, in the first quarter of 26, we did have about $700 thousand of items that reduced expense in that first quarter. As Joe mentioned, our noninterest expense in the quarter is impacted significantly by one-time expenses related to the consolidation of the nine branches and severance costs related to workforce reductions in those branches and other operational areas. Excluding these one-time costs, noninterest expense was $36.1 million, or $1.1 million higher than the year-ago quarter. This increase was partially due to a $333 thousand increase in computer license and support costs given the company's continued investment in core system enhancements and data security projects, along with smaller increases in various other expense categories such as postage and advertising. The one-time branch consolidation and severance costs totaled $2.1 million. Specifically, they include a $1.4 million valuation allowance, $561 thousand in severance costs representing the 66 planned position eliminations, and $163 thousand in lease expense obligations for the closing loan production office. Accounting rules require that certain costs and expected losses be recorded immediately, while any expected gains are not recorded until realized. The $1.4 million valuation allowance is based upon our evaluation of the estimated market value of each affected location relative to their carrying values. We believe four of the nine owned locations may result in a loss on sale, though we do not expect to realize losses on the sale of the other five properties. Further, we expect the eventual aggregate selling price of all affected properties will exceed the combined carrying value of the affected locations. The banking center consolidations and the workforce reductions are expected to result in approximately $4.4 to $4.8 million in noninterest expense savings beginning in the fourth quarter of 26. This savings is expected to be partially offset by a projected amount of customer deposit attrition in the affected locations over time which will likely be replaced by higher-cost alternative funding. These actions combined are expected to result in approximately $2.3 to $2.7 million in annual pre-tax income improvement, again beginning in Q4 of this year. For income taxes, the company's effective tax rate for the three months ended 06/30/2026 was approximately 15.3% compared to 18.5% in the same period for 2025. For the six months ended 06/30/2026, the effective tax rate was 17.1% compared to 19.2% in the prior year period. The lower effective tax rate in the second quarter 26 was driven by our usual tax credits and tax-exempt income sources, and also by higher allowable tax deductions resulting from increased levels of employee stock option exercises. Going forward, we continue to expect our combined federal and state effective tax rate to range from approximately 18% to 19.5% in future periods. Turning to the balance sheet. Total assets ended the quarter at approximately $5.52 billion compared to $5.6 billion at the end of December 25. Gross loans receivable stood at $4.38 billion. Over the first six months of the year, net loans decreased by $49.1 million, or 1.1%, driven by repayments in commercial real estate, which was down $73.3 million, and multifamily, which was down $39.9 million, partially offset by a $53.2 million expansion in construction balances. Compared to the linked quarter, net loans contracted by $149 million from March 31 due to elevated repayments. As Joe highlighted, these repayments are difficult to predict and may continue to drive volatility in our loan balances in future quarters. On the funding side, total deposits ended the quarter at approximately $4.3 billion, down $143 million from 03/31/2026. Given the loan balance decline, we electively allowed higher-cost brokerage balances to mature without replacement. Our deposit mix consisted of $2.2 billion in interest-bearing checking, $877 million in noninterest-bearing checking, $152 million in time deposits, and $576 million in brokered deposits at June 30. Uninsured deposits are estimated at $665 million, or 15.5% of total deposits. At 06/30/2026, secured borrowing line availability of Federal Home Loan Bank and Federal Reserve Bank was $1.23 billion and $320 million, respectively, alongside cash equivalents of $180 million. From an asset-quality perspective, overall performance remained strong. Nonperforming assets and potential problem loans combined were $10.6 million. Nonperforming assets decreased sequentially by $700 thousand to $9.4 million, or 0.17% of total assets, compared to $10.1 million, or 0.18%, in the first quarter of 26, but were up from $8.1 million, or 0.15% of total assets, at 12/31/2025. Potential problem loans were $1.16 million at the end of the 2026 second quarter. During the quarter, we moved a single $1.8 million multifamily nonperforming loan through transfer to foreclosed assets with a charge-off on this loan of $909 thousand, bringing our net charge-offs in the second quarter to $819 thousand. During both the three and six months ended 06/30/2026, we did not record a provision expense for our outstanding loan portfolio but recognized the provision for unfunded commitments of $8 thousand in the second quarter of 26. The bank's allowance for credit losses was stable at 1.46% of total loans. Overall, our core credit metrics continue to reflect our long-standing focus on disciplined risk management and a portfolio that is performing well. Our capital position remained a key strength. Total stockholders' equity at 06/30/2026 was $642 million, representing 11.6% of total assets and a book value of $58.95 per common share, up from $636.1 million, or $57.50 per common share, at 12/31/2025. Capital increased in the six-month period by $33.3 million of net income and $11.9 million from stock issued for option exercises, which was mostly offset by $9.4 million in dividends declared on common stock, $24.8 million in common stock buybacks, and a $5.5 million increase in unrealized AOCI losses, which reduced capital. In the second quarter, we increased capital by $7.3 million from 125 thousand option exercises at an average price of $54.17 while decreasing capital by $7.8 million by repurchasing 114 thousand shares of common stock at an average price of $68.39, leaving approximately 304 thousand shares remaining available under our current repurchase authorization. Overall, our second quarter results reflect solid execution throughout our business. Our net interest margin expanded, our core deposit mix remained stable, our asset quality trends remain solid, and our capital benchmarks sit at strong levels. We are well positioned for continued operational success and meaningful growth in tangible book value per share. That concludes my remarks, and we are now ready to take your questions.
Questions and answers
Thank you. Please wait for your name to be announced. To withdraw your question, please press *11 again. First question comes from the line of Damon Paul Del Monte with KBW. Your line is open.
Hey. Good afternoon, guys. Hope everybody's doing well. First question, just wanted to talk a little bit about the margin, Rex, kind of how you think about the back half of the year. I know you called out some CDs that are repricing in the next three months. Kind of just wondering, do you expect that kind of benefit on the lower repricing to help keep margin stable at the current level? Or how are you feeling about it directionally from this point?
Yeah. So when you look at the first quarter and the second quarter this year, we did expand the margin a little bit. I think we do have some more CD maturities coming up here in the third quarter, a fairly sizable amount. Those are at rates, though, that are probably not where we are going to see a lot of benefit. They have repriced multiple times since the last rate cut. So maybe some benefit there, but it is not going to be substantial, I would not think. I think we are going to continue to see repayment in different loan categories, potentially some of our fixed-rate one-to-four family that may be at a lower rate, and we can redeploy that into higher yielding assets. But that is not a large volume typically of monthly payments coming back in. So I would characterize what we have done in the first half of the year generally as something that I think is going to continue to flow through. I do not really see anything too different at the moment on that.
Got it. Okay, that is helpful. Thanks. And then on the outlook for loans, if you look at the average balances versus the end of period, it appears that a lot of these payoffs came in late in the quarter. Joe, I heard the comment on the size of the pipeline and the unfunded commitments that have yet to fund on the construction side. As you look out into the back half of the year, do you foresee the pace of the payoffs slowing and do you think you can get to a positive growth rate like we saw in the first quarter?
It is just hard to — that is why we do not give guidance statements. It is hard to project. We have a high-quality loan portfolio and customers do have other options, and we will compete to keep a lot of it and have been competing for new business as well. But it is really difficult to predict, and that is why we just do not do that.
Got it. Okay. And if I could just squeeze one more in: the announcement to consolidate the nine locations and have some headcount reduction, what was the thought there? Was there an evaluation done on these branches and they were kind of underperforming? Or was this just a way to manage the overall earnings outlook for the company with growth being slower, and you found some areas where you can maybe make cost saves? Do we expect additional closures going forward at some point?
Maybe I can kind of answer both those at the same time, Damon. We have ongoing programs for operational improvement, and we are constantly evaluating our system of banking centers. Banking centers are a highly important delivery channel for us but are also very expensive. We constantly analyze costs and customer traffic patterns. Historically, over the last 15 years, we have closed 50 or more banking centers, maybe 30% or 40% of our portfolio. As customer patterns change, we will continue to evaluate and, when appropriate, close locations. This will be ongoing, and as technology affects other parts of our business, we will continue to evaluate and try to make our operation as efficient as possible.
Got it. Okay, that is helpful. Thank you very much.
Thank you. Please stand by for our next question. Our next question comes from the line of John Rodis with Brean Capital. Your line is open.
Hey. Rex, just following back up on your margin discussion with Damon. Were you implying that you think you can grow the margin from here, or do you think it is sort of stable at the second-quarter level? If I look at the second quarter and back out that interest recovery, it looks like the margin may be closer to 3.73. Were you implying you think you could maybe hold margins stable or still grow them a little bit?
I would probably lean more towards stable. We are going to do what we can to reduce some of our funding cost, but competition on both loans and funding is pretty significant right now. We are continuing to see it both in local markets and in more national brokered markets where you can get funding, but there is a lot of competition on pricing to get it.
Yeah. If you hold the margin steady but loans continue to decline, net interest income dollars probably trend down from the second-quarter level. Is that correct?
If we have a net reduction in loan balances, that would probably be the case. We have a lot of wholesale funding through brokered deposits and Home Loan Bank advances, so if loans decline, we would reduce our borrowings there, which still provides some spread. We'll keep trying to manage the funding mix, but, yes, if loan balances continue to trend down, we would have some pressure on the dollar amount of net interest income in the quarter. Also, note there is one more calendar day in the second quarter versus the first quarter, so that provides a day of additional net interest income from a dollar standpoint.
Joe, on loans: I know it is hard to predict and there's a lot of volatility, but can you talk a little bit about origination activity this quarter versus payoff activity and how that compares to recent past quarters?
I think origination activity in the second quarter was maybe a little lower than the last year and certainly lower than the first quarter. We are continuing to get looks at opportunities and we are pursuing them. It is highly competitive out there for the types of loans and customers we are competing for. We are still out there, but a lot of other lenders are doing the same thing.
On mix, in the first quarter this year we had more loans that funded day one. In the second quarter, we had more loans that were construction deals that are not going to fund for a while because the customer is putting their equity in the deal first. So there was a difference in the mix of funded loans between quarters.
So if origination activity was down this quarter versus the first quarter, how would you characterize the level of payoffs this quarter? I think payoffs were substantially higher this quarter than last quarter.
I would say payoffs were somewhat higher than the trend we have seen over the last year.
Did anything unusual happen this quarter to make them a lot higher, or is this just general volatility?
We did not feel any materially different on 01/01/2026 than we did on 04/01/2026. The results were different, which is why I say it's difficult to predict payoffs and originations.
Rex, shifting gears to expenses: if you back out the $2.1 million, you are roughly $36.1 million for the quarter. With the benefits of the consolidation beginning in the fourth quarter, is that the right way to think about a core number? And backing out the cost saves of a little over $1 million, are you looking at a $35 million run rate in expenses starting in the fourth quarter?
Somewhat. That is how that part should flow through. $36.1 million in the quarter is in line with a core operating number, and we will start to see benefits in the fourth quarter. In the third quarter, we will not really see benefit from it. We are continuing to add some costs related to technology initiatives and other projects. So I do not know that we will save the entire amount immediately, but there will be some portion of the savings that we should see.
So said another way, that $35 million plus added tech expenses is sort of what you are saying?
Right. Yeah.
Just on buybacks: you guys were not as active and you have roughly 300 thousand shares remaining. All things equal, with the stock having a nice move, at this level does it make sense to continue buybacks or are you sort of on pause?
I do not know that we want to say exactly what we will pay, but it still makes sense. It probably does not make as good a sense as it did at $70 or $65. It is something we are still considering for sure.
We have a fairly conservative window. Our window will open Monday and close the last day of August, so about half the quarter we are only buying back under a 10b5 plan. We set our numbers when stock prices were a lot lower and did not get a lot bought back, really. Capital allocation will be an important topic at the board level because we are generating a fair amount of capital and have high capital ratios already. There are different ways we can deploy it; we will try to make the best use of it we can.
If you bought back the remaining 300 thousand shares at the current level, your TCE remains well above 11%. Other than increasing the common dividend, what other alternatives might you consider?
We are not going to do an acquisition that would leverage us excessively. The most likely alternatives are continued share repurchases, increasing the quarterly dividend, or doing a special dividend, or some combination of those three.
Okay. Makes sense, guys. Thank you.
Thank you. Alright. Ladies and gentlemen, I am showing no further questions in the queue. I would now like to turn the call back over to Joe for closing remarks.
Okay. Thanks, everybody. We appreciate your attendance today, and we look forward to talking to you in the fall. Thank you.
This concludes today's conference call. Thank you for your participation. You may now disconnect.