Great Southern Bancorp Inc 2026 Q3 Earnings Call

Good afternoon, and thank you for joining Great Southern Bancorp's third quarter 2026 earnings call. Today we will be discussing the company's results for the quarter ended September 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 Copeland. I will now turn the call over to Joe.

Okay, thanks, Christina, and good afternoon to everyone on the call. We appreciate you being with us today. Our third quarter results demonstrate the durability of our core banking franchise and the consistency of our operating model. During the quarter, we remained focused on our core disciplines, prioritizing prudent balance sheet management, maintaining strict credit standards, and controlling non-interest expense. In the third quarter of 2026, we reported net income of $14 million or $1.27 per common share. The results this quarter were impacted by a non-cash hedge accounting adjustment, which Rex will discuss further. Excluding this hedge accounting adjustment, our operating net income was $16.5 million, or $1.50 per diluted common share. Net interest income in the third quarter remains solid at $50.3 million, down slightly from the $50.8 million in the year ago quarter.

This comparison reflects the absence in 2026 of the approximately $2 million of quarterly interest income from a previously terminated swap that concluded in October of 2025. Despite this headwind, disciplined asset management and active pricing on deposits and earning assets allowed for the expansion of our margin to 3.75% from 3.72% in the third quarter of 2025. During the quarter, we also took advantage of higher market yields, adding approximately $400 million of fixed rate agency mortgage-backed securities and collateralized mortgage obligations. These purchases were funded primarily through variable rate FHLB borrowings, helping mitigate downside risks from potential future interest rate reductions. While the narrower spread on this balance sheet trade will modestly reduce our overall net interest margin percentage going forward, it is accretive to our net interest income.

Net interest income generation remains an ongoing priority, but credit and pricing discipline will continue to govern our approach to growing long-term stockholder value. Turning to our loan portfolio, period-end balances continued to be heavily influenced by borrower repayments and refinancing activity. Elevated payoff activity in commercial real estate and multifamily loans led to a $59.3 million decline in net loans compared to June 30, 2026. Compared to December 31, 2025, net loan balances decreased $108.4 million to $4.25 billion. Despite these payoffs, our broader lending pipeline remains robust, with total commitments expanding to $1.2 billion at September 30, including $641 million of unfunded commitments related to closed construction loans.

On the funding side, total deposits decreased $232.1 million during the quarter, primarily reflecting the intentional runoff of $211.8 million in brokered deposits. Our core customer relationships remain strong, with non-interest bearing checking expanding by $29.3 million year to date. As loan balances have moderated, we intentionally allowed higher cost brokered deposits to run off without replacement, utilizing lower cost FHLB borrowings instead, allowing for reduced interest expense and overall balance sheet flexibility. From a credit quality standpoint, our metrics remain excellent. Total non-performing assets at the end of the third quarter represented 0.18% of total assets compared to 0.17% at June 30, and non-performing loans were 0.03% of total loans.

Net charge-offs were $397,000 for the quarter, and we did not record a provision for credit losses on our outstanding portfolio. The provision you saw in our income statement related to our unfunded commitments. Other real estate owned increased $20.4 million, primarily reflecting the reclassification of $11.1 million in closed banking center properties held for sale following our branch consolidations, rather than credit related foreclosures. For our foreclosed properties, independent appraisals continue to support our carrying values, and we do not anticipate any aggregate loss upon their ultimate disposition. Similarly, we do not expect an aggregate loss on the disposition of our former banking centers facilities either at this time.

Expense discipline remains a priority for our bank, with non-interest expense decreasing to $36.3 million compared to the $38.2 million in the second quarter of 2026. The second quarter expense amount was more than normal due to the charge for the banking center closures. As of October 1, we completed the consolidation of the 9 banking centers and the elimination of 66 positions across various divisions in our company. As affected employees remain in their roles through the end of the third quarter, the associated cost savings will begin to be realized in the fourth quarter. Ultimately, we believe this will allow for better alignment with our customers' banking preferences, along with our continued pursuit of operational efficiencies as technology and delivery channels evolve.

As we move through the remainder 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'll turn the call over to Rex for a more detailed discussion of the financials.

All right. Thank you, Joe, and good afternoon, everyone. I'll provide a little more detail on our third quarter 2026 financial performance and how it compares to both prior year quarter and the linked second quarter. As we mentioned, for the quarter ended September 30, 2026, we reported preliminary net income of $14.0 million, or $1.27 per diluted common share, compared to $17.8 million, or $1.56 per diluted common share in the third quarter of 2025, and $15.8 million or $1.43 per diluted common share in the linked second quarter 2026. Excluding the non-cash hedge accounting adjustment, non-GAAP net income was $16.5 million or $1.50 per diluted common share. During the third quarter of 2026, the company identified historical periods in which variable rate loan balances meeting the original cash flow hedge designation criteria were insufficient to support the full designated notional amount of its interest rate swaps.

Accordingly, portions of the swaps were not eligible to receive hedge accounting during those periods. Consequently, historical fair value changes and settlements previously recorded in accumulated other comprehensive income were reclassified to earnings. These historical adjustments resulted in a one-time non-cash charge to the income statement of approximately $3.5 million pre-tax, comprised of a $4.1 million reduction in non-interest income and a $504,000 increase in interest income. Including a benefit to interest income described below, the net pre-tax impact of $3.3 million, approximately $2.5 million after tax, or $0.23 per diluted share, had zero impact on total stockholders' equity or cash balances in the third quarter of 2026. Subsequent to the $3.5 million earnings reclassification that we just talked about, the company adopted ASU 2025-09, allowing for the redesignation of its two existing interest rate swaps.

This redesignation resulted in an offsetting increase in interest income of $279,000 in the third quarter of 2026, and approximately $170,000 per month increase in interest income will be realized through April 2028. Consequently, the $3.5 million charge to income in the third quarter of 2026 will be entirely recovered through interest income over the remaining life of the redesignated interest rate swaps. Net interest income for the quarter totaled $50.3 million, compared to $50.8 million in the third quarter of 2025 and $49.5 million in the second quarter of 2026. Compared to the prior year quarter, net interest income declined by $504,000, driven primarily by the absence in 2026 of approximately $2 million of quarterly interest income from a previously terminated swap that concluded in October 2025.

Additionally, lower average loan balances and lower market interest rates, which impacted yields on variable rate loans, were mostly offset by lower interest expense on deposits, disciplined funding cost management, and additional interest income from investment securities purchased during the quarter. As Joe mentioned, we purchased approximately $400 million of fixed rate agency mortgage-backed securities and collateralized mortgage obligations in the third quarter. These securities have an expected effective duration of approximately five to six years, with final maturities primarily in 2032 and 2033 for about $150 million of these securities, and in 2028 for about $100 million of these securities. These securities have an expected weighted average yield between 4.80% and 5%.

While this leverage trade generated positive net interest income, the spread is narrower than our core earning assets and is expected to modestly reduce our overall reported net interest margin percentage in future quarters, while providing meaningful downside protection should market interest rates decline significantly. Compared to the linked second quarter of 2026, net interest income increased $776,000. A portion of this increase was aided by one additional calendar day in the third quarter and investment portfolio additions, alongside the initial interest income accretion recognized from our redesignated interest rate swaps. Net interest margin was 3.75% for the third quarter, compared to 3.72% in the prior year quarter and 3.76% in the second quarter of 2026. Non-interest income for the quarter was $3.4 million, compared to $7.1 million in the third quarter of 2025 and $7.4 million in the second quarter of 2026.