GSBC - NASDAQ

Hello and welcome to Great Southern Bancorp, Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Kelly Polonus. You may begin.

Thank you. Good afternoon, and thank you for joining us for our third quarter 2023 earnings call. The purpose of this call today is to discuss the company's results for the quarter ending September 30, 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 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 third quarter 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 call over to Joe.

All right. Thanks, Kelly and good afternoon, everybody. We appreciate you joining us today for our third quarter earnings call. Our third quarter performance was solid, but down a bit as you saw, as we continue to navigate through a challenging operating environment. We earned $1.33 per diluted common share or $15.9 million compared to $1.46 per diluted common share or $18.1 million during Q3 of 2022. Earnings performance ratios were again solid with an annualized return on assets of 1.11% and an annualized return on equity of 11.47%. We mentioned on our last couple of calls some anticipated headwinds that we would face related to net interest margin. Net interest margin did decline to 3.43% for the third quarter compared to 3.96% for the same period in '22, and 3.56% for the second quarter of '23. The margin contraction primarily resulted from increasing interest rates on all deposit types during the third quarter and a full quarter's impact from net settlements related to two interest rate swaps. Like many banks in 2023, we have experienced much higher deposit costs compared to 2022 reflective of increasing market interest rates and significant competition for deposits. Deposit costs again moved higher in the third quarter of '23 but the pace of increases moderated compared to the second quarter. Rex will provide some color around our funding costs and deposit mix during his presentation. Also as you know, we had an ongoing significant professional fee expense item, totaling about $900,000 related to training, and implementation costs of the upcoming core systems conversion. As far as liquidity and capital, our liquidity and capital positions continue to be strong. At the end of September '23 available secured funding lines through the Home Loan Bank and the Federal Reserve Bank and on-balance sheet liquidity were approximately $2.2 billion. As noted last quarter, our company's deposit base is diverse, and by customer type and geography and have a low level of uninsured deposits, approximately 16% of our total deposits are uninsured, excluding internal subsidiary account. Total stockholder's equity decreased by $1.4 million from the end of '22 and decreased more substantially by about $14.6 million from June of '23 as a result of increased unrealized AOCI losses due to market interest rate increases in the third quarter of '23. Importantly though the retained earnings component of our stockholder's equity has increased $20.8 million, during the nine months ended September 30, 2023. Our capital remains substantially above regulatory well-capitalized thresholds, and our tangible common equity ratio was 9.1% at September 30, '23. In the third quarter, the company declared a $0.40 per share common dividend in addition in our effort to enhance long-term stockholder value, the company continued to repurchase shares of common stock during the quarter. We bought back almost 107,000 shares at an average price of $50.52. The dividend and stock repurchases combined reduced stockholder -- stockholder's equity by about $10.1 million during the third quarter. At September 30, 2023 about 801,000 shares were available in our stock repurchase authorization. During the third quarter, new loan production and general activity was down compared to 2022 as expected. Total outstanding loan balances modestly grew by about $58 million since the end of 2022. Growth primarily came from the multi-family loan segment, much of this from projects completed and moved from the construction category to multifamily and commercial business loans, partially offset by a reduction in the commercial real estate category. At the end of September 2023, the pipeline of loan commitments and unfunded lines declined to about $1.4 billion, including $922 million in the unfunded portion of construction loans. For comparison, at the beginning of 2023, loan commitments and unfunded lines totaled about $2.1 billion with $1.4 billion in unfunded construction lines. For more information about our loan portfolio, I'll remind you of our quarterly loan portfolio presentation that we have on file with the SEC and is available on our Investor Relation site under the Presentations link. Our quarterly loan presentation provides helpful information regarding our loan portfolio mix, by type and geography. Overall, our commercial portfolio is strong, diverse and performing well. As expected, we are experiencing some payoff activity. Overall, credit quality metrics remained strong during the quarter, non-performing assets to total assets were 0.19% at September 30, 2023 decreasing by 1 basis point from June 30, 2023. Delinquencies in our loan portfolio continue to be at historically low levels, more information about our non-performing and potential problem loans are included in our earnings release. That concludes my prepared remarks. At this time, I will turn it over to our CFO, Rex Copeland.

All right. Thank you, Joe. Appreciate that. I'll just start with the discussion about net interest income and margin. And I'll begin with just a general comment that not maybe unlike others, our net interest income comparisons in the third, and probably the fourth quarters this year will show declines from the same periods in 2022. Market interest rates obviously increased pretty significantly in 2022 and we were able to increase rates on assets quicker than liabilities last year, and so we achieved for us peak net interest income and net interest margin in the second half of 2022 and spilled over little bit into the first quarter of 2023. But since that time some of our net interest income and margins have come down for rate as we've talked about a little bit last quarter and I'll discuss a little bit today. Net interest income for the third quarter of 2023 decreased $6.2 million or approximately 11% to $46.7 million compared to $52.9 million for the third quarter of 2022. And that was really driven by increasing interest rates on deposit, various deposit types during the third quarter of '23, and also the negative impacts of interest rate swaps which began settling in the second quarter of 2023, and would not have been affecting the quarters in 2022. Those swaps in particular had a negative impact of $2.7 million in the third quarter of '23. Net interest income was $48.1 million for the second quarter of 2023, so we had a decrease in net interest income between Q2 and Q3 this year of about $1.4 million. The negative impact of those newly settling interest rate swaps was about $1 million more in the third quarter of this year versus the second quarter of this year. The company's net interest income was negatively impacted in the third quarter by high level of competition for deposits across the industry and in our local markets. The company also had a substantial amount of time deposits maturing at relatively low rates in the second quarter of 2023, as we discussed before and now these time deposits were renewed at higher rates or we had to replace without external funds and the impact of that was fully there for the all of Q3 versus a portion in Q2. In addition, we had -- in the first quarter of 2023, we experienced higher than normal reduction in balances of non-interest bearing deposits. That outflow of non-interest bearing deposits moderated in the second quarter, but increased a bit again in Q3 of 2023. Customer balances in both non-interest bearing checking and interest-bearing checking accounts have fluctuated in the first nine months of this year. As market interest rates for certain checking account types and time deposit accounts have increased, some customers have chosen to reallocate funds into relatively higher rate accounts. The company has more low rate time deposits maturing in the fourth quarter of this year, a little bit more than what matured in the third quarter, but not as much as what we had maturing and repricing in the second quarter of 2023. The difference in the rate being paid on those time deposits maturing in the fourth quarter of '23 versus the expected rate that will be paid on renewal of those is not as great as it was in the, earlier in the second quarter of this year, but there should be some increase, most likely. Just to give you an idea and we noted this in our release, but subsequent to September 30, we've got time deposit maturities over the next 12 months to kind of break down as follows. Within three months about $354 million with a weighted average rate of 3.16%, within three to six months another $352 million with a weighted average rate of about 3.88%. And then within six months to 12 months about $350 million with a weighted average rate of 3.93%. So we kind of think that based on the current replacement rates that we envision on that, they'll probably be replacing at rates between maybe 4.25% to 4.75%. Besides the higher funding costs on deposits, net interest income was also negatively affected by the company's interest rate swaps, as I mentioned and as described in our earnings release. If market interest rates remain near with their current levels, the company's interest rate swaps will continue to have a negative impact on net interest income. Based on the interest rates on these swaps at September 30, the negative impact of all the interest rate swaps that we have combined in the fourth quarter of '23 is expected to be approximately $3.7 million. The negative impact of all of the swaps combined in the third quarter of '23 was about $3.5 million. And then as a reminder, again one of those swaps will terminate March 1, 2024, that interest rate swap itself had a negative impact on net interest income of $2.8 million, and a negative impact on net interest margin of 21 basis points in the third quarter of 2023. It's expected that again rates being where they are, it will have a negative impact to net interest income of about $2.9 million in the fourth quarter of '23, and then $1.9 million in the first quarter of '24, and then subsequent to the first quarter, no impact in subsequent periods. As Joe mentioned earlier, net interest margin was 3.43% in the third quarter of '23 compared to 3.96% in the same period in 2022, which was a decrease of about 53 basis points. And it also decreased about 13 basis points compared to net interest margin of 3.56% in the second quarter of 2023. In comparing the couple of yield items in there and rates, between the '23 and '22 third quarter periods, the average loan yield increased about 113 basis points, while the average rate on interest-bearing deposits increased about 203 basis points. Joe mentioned liquidity briefly earlier, and I'll just say a couple of more things about that. Our liquidity levels are -- continue to be resilient, we have readily available funding sources, totaling about $2.2 billion at the end of September of '23 with about $1.1 billion almost availability at Home Loan Bank. So we have those funds readily available, should we need anything there. We also have some unpledged securities that we have -- that we could pledge if we chose to do that, and that's over $500 million worth of those. At September 30, '23 total deposits were nearly $4.9 billion, during the three months ended September 30, '23 the company's total deposits increased about $27 million. Total brokered deposits decreased less than $1 million in that time frame. Time deposits generated through our banking centers and corporate services networks increased $21 million and time deposits generated through internet channels decreased $5 million in the third quarter. And then interest bearing checking balances increased $49 million or about 2.3% and non-interest bearing checking balances decreased $38 million or about 3.9% during the third quarter of 2023. Non-interest income items in the quarter, we really didn't have any variance items there. The total decrease was about $132,000 compared to the third quarter of 2022, no real large component changes in the quarter comparisons. For the year-to-date, we did have a few things that changed or I'm sorry, for the quarter for non-interest expense, we did have expense overall increased about $799,000 to $35.6 million. Some of the components in there that had a little bit larger variances from a year ago quarter. Salaries and employee benefits increased about $697,000 from the previous year quarter. Portion of this is just normal annual merit increases in -- in various lending operations areas. In 2023, some of those were a little bit larger than maybe they were in previous periods. In addition, compensation costs related to originated loans which we defer under accounting rules, a portion of those and that decreased by $233,000 in comparing the two periods. So that resulted in higher expense levels in the 2023 period as loan volume originations were lower this year compared to 2022. Occupancy expense, we did have an increase there this year's quarter versus previous year quarter of about $531,000. We had various components of computer license and support expenses which we had implemented during this period that maybe we had kind of got to end of life last year, and didn't have the same level of expense. That increased our cost by about $333,000 comparing the two periods and then we also had some just various repairs and maintenance expenses throughout our network that added about 106,000 more than the previous year. The next two items, there's a couple of things. I'll mention on those, and then a little bit of additional clarification on some things on that. So total insurance expense increased $498,000 from the prior year quarter. This was primarily due to the previously announced increases in deposit insurance rates for FDIC deposit insurance fund coverage. We will continue to have a little bit extra probably in the fourth quarter, we estimate that there'll be a little higher than normal expense again of about $180,000 that was really in Q3 and probably will continue in Q4 but after that, there shouldn't be that extra level in there, so starting in Q1, we should be caught up with the deposit insurance fund increase level. So going forward, it should just be a normal amounts after Q4. Legal audit professional fees, we did have a higher -- I'm sorry, those decreased by $390,000 from the prior year. In the previous year, we had $372,000 of one-time fee expenses related to the origination of some interest rate swaps that we did there. And then one other thing I'll point out, it really wasn't a large amount. But probably in the third quarter, there was about $150,000 maybe of non -- what I call non-recurring type expenses that we didn't necessarily call out in the release. But there were just some fees in there for some services that were provided to us that we do periodically but not certainly every quarter. So, the efficiency ratio then for the third quarter was 65.13% compared to 57.09% for the same quarter in 2022 as expenses increased a bit, and net interest income and the denominator decreased. Provision for credit losses. During the third quarter '23, we didn't record any provision expense on our outstanding loan portfolio. And that compared to $2 million of provision expense during the same period in 2022. Also for the three months ended September 30, '23, the company did record a negative provision for losses on unfunded commitments of $1.2 million compared to a provision expense of $1.3 million for the three months ended September 30, 2022. As we mentioned before, our level of -- total level of unfunded commitments has come down from the previous quarter as we were able to relieve some of the reserve on that. Total net charge-offs were $99,000 for the three months ended September 30, '23, that compared to $297,000 of net charge-offs in the three months ended September 30, 2022. And at the end of the third quarter of '23, the allowance for credit losses, as a percentage of total loans was 1.40%. Income taxes in the period for the three months ended September 30, '23 and '22, the company's effective tax rate was 21.5% this year, and 20.5% in the quarter last year. These effective rates were near or below the statutory federal rate of 21% due primarily to utilization of investment tax credits, and certain tax-exempt investments and loans, which reduced our effective tax rate a bit. The company expects its effective tax rate both combined federal and state will be about 20.5% to 22.0% in future periods and will be affected by the overall level of earnings and the utilization of these tax credits and tax exempt income and then also it is affected a bit by state tax expenses. We estimate those continually and they do evolve over time. And so those can affect the overall effective tax rate, as well as we -- as we look through some of those various state taxing authority expenses. So that concludes the prepared remarks that we have today. And at this time, we will entertain questions and I'll ask our operator please to once again remind the attendees of how to queue in for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Andrew Liesch with Piper Sandler. Your line is open.

Hey. Good afternoon, everyone. Just want to drill in on the margin here, it sounds like you had more CD repricing here and based on the commentary in the release and you're in today, it seems like maybe 13 basis points might be a little too steep further -- for the fourth quarter. But I'm just curious, how you guys are thinking about the margin this quarter and then should it stabilize beyond that, I know you have some more CD repricing but as the Fed seemingly done with raising rates, we see some stabilization in the margin as well.

Yeah. I mean, I'll take a shot and then Rex can jump in. Andrew, I mean I think, we are getting -- it's a little bit hard to say, because every time you think things are going to stabilize, then you see more deposit specials and those kinds of things. But you see with our CD repricing, this is kind of the last point at which the deposits that we're repricing, the CDs that we are repricing are substantially below market rate. So I mean, the other -- the stuff that we repriced that's three to six months out, six to 12 months out, maybe slightly below, but it's not as far below. So it won't be as impacting. Of course, we think the interest bearing checking or non-time interest bearings to should kind of reprice continually. So you shouldn't see that and we do have fixed rate assets that are repricing that -- that should help. But it's hard to -- it's hard to zero in on that exactly.

Yeah. I mean we are seeing, it kind of calmed down for a while, but we are seeing some banks in different locations that we compete with that are showing rates above 5%. I mean it's just kind of a base rate on certain products, CDs primarily, certain term CDs and things like that. So kind of -- that kind of comes and goes. And so we do see some heightened competition in some ways in some places. I think that like I said it in the next, in the fourth quarter of this year, those $350 million-ish of CDs are going to reprice. Those are sitting there at overall rate of about 3.16%. So there is -- there is some space to go there. We will probably be repricing those in the low 4s maybe or something like that. But like Joe said beyond that and those rates are in the high threes, almost to 4%. So it does seem like after the fourth quarter that the difference in rate, all things staying like they are today would be less than what we saw, so like in the second quarter this year, I mean we were repricing stuff that was in the twos back up into the 4% range.

So the -- I mean, I would say, it feels better, Andrew, but it's just hard to zero in on it exactly.

Got it. Well certainly that repricing gap is narrowing. You mentioned that the fixed rate assets that are repricing now, I guess. Do you have handy that percentage of or the dollar amount of fixed rate assets that have yet to benefit from the Fed's rate hikes since the beginning of last year?

We don't -- I don't have it and I don't think Rex does either, Andrew, but we have good disclosures in our K and that we have in our Qs as well about repricing, Rex?

The 10-K that we filed at the end of the year, Andrew, would have a -- there's a table -- at the end of the MD&A section, there's a -- there's two tables, one it's the maturity table by year for the first five years and then beyond and then there's a repricing table in there. So, and we do have fixed rate loans and variable-rate loans broken out in two separate lines in there. So you can get an idea. I mean, I don't have the number in my head, but I mean, it's a few hundred million dollars that hasn't repriced yet I'm sure especially the mortgages in particular.

That will reprice in the next year or so.

Well they won't. That [indiscernible] next year. But…

Yeah. Okay

I'm just thinking about some of our hybrid ARM product.

Yeah.

It's going to be fixed for a few years and then…

Yeah.

And then repriced.

I would point you to that -- that 10-K table, Andrew, I think that will give you good information.

Got it. Very helpful. I will do so. Thanks so much, and I will step back.

Thank you. Please standby for our next question. Our next question comes from the line of Damon DelMonte with KBW. Your line is open.

Hey. Good afternoon, guys. Hope you're both doing well today. Just wanted to kind of keep on the margin topic here. Could you give a little color as to like the rates at which these construction loans are funding that are in the pipeline right now? And then possibly like what new production is coming on?

I would say, generally, and this would be the rates that the loans are funding at, and the new production would probably be somewhat similar. I would say anywhere from 250 over SOFR to 300 would be kind of the rate.

Yeah, I mean our -- at the end of September point in time on that day in our press release, it's back in the -- towards the back, there is a couple of tables in there, that show average balances and rates in there, that, that portfolio of construction loans had a rate of 7.89%.

Yeah.

Assuming that that sort of…

Yeah.

Indicative of what will become.

Yeah. I mean, I would say new production is a little higher than that, but that would be about 250 over SOFR or something. And there might out -- there might be some lower rate stuff in there. I would think that the kind of general rate might be a little higher than that. But right around in there.

Got it. Okay. Thank you. And then how would you characterize the positioning of the balance sheet, should the Fed start to cut rates in the back half of 2024?

I think we're fairly well balanced. We tend to think of ourselves as asset sensitive. But we took that asset sensitivity off the table with those swaps that we began net settlements on in May. And so, I think we're reasonably neutral, would you say that, Rex?

Yeah. It just depends on how aggressive the cuts are. So if the cuts are pretty gradual, pretty well balanced, I think, if they're really fast like they were in 2020, that's probably going to sting a little bit. Because when they go down 200 basis or 300 basis -- I mean, we're at a level now, they can go down pretty far, pretty fast and if we go off the cliff here on the economy.

Yeah. So the speed of rate cuts would be what would probably factor in a lot to that for us, but assuming that the Fed cuts in 25 or 50 increments, and does it in a fairly, non-dramatic way that probably is not overly bad for us.

Got it, okay. And then with respect to your outlook for loan growth. How do you feel about like non-construction related CRE. Are you originating loans that don't go through the construction process and kind of, I know, you gave some color on the construction pipeline and kind of where it is today versus like a year ago, I think it was. But how do we kind of think about overall loan growth and the drivers of that?

I mean, I think, loan growth will continue to be fairly modest, Damon, because, that I think that us taken a hard look at it, but I think it's also our customers taken a hard look at it. We had a meeting yesterday and one of our senior lenders that he thought that our customers to a large extent had their pencils down right now. I mean that they're struggling to make sense out of these rates and so they're just going to wait for a little while. So I think in light of that loan growth is going to be pretty tepid.

Got it. Okay. And then just lastly if I could squeeze one more in, I mean, you did buy back some shares this quarter and you've kind of been doing that consistently in previous quarters. Is it fair to kind of assume that given current pricing levels, you will continue to be opportunistic since you have some dry powder left on your current authorization?

I think so, yeah. I mean, I think we'll continue to be strategic about it, but yeah, I think we are, we continue to be interested in that.

Great. Okay. That's all that I had. Thank you very much.

[Operator Instructions] Our next question comes from the line of John Rodis with Janney. Your line is open.

Hey, guys. Good afternoon.

Hey, John.

Hope you guys are doing well. Rex, just wanted to circle back to your comments on expenses were helpful. As far as the system's conversion, is that -- is that still slated to take place the middle of next year? So the $900,000 to $1 million in added expense, so keep going through roughly the second quarter next year?

Yes. That should continue on.

Okay. And as far as in the press release, you had some comments about some disagreements and stuff, is there -- I mean are there financial damages that could be unwound there or something like that or I'm just trying to understand that text.

Yeah, John. I mean we don't have a lot of color to provide beyond what was in the press release. We're just, as we said, we're -- we have some contract disputes and we're in the process of trying to work through those.

Okay. Rex, if we -- you kind of went through some line items. And if I heard you correctly, I think you said sort of non-reoccurring expenses in the quarter were roughly $150,000. And then I think you said occupancy should stay at this higher level and then insurance, a little bit higher at this current level for the fourth quarter and then start to come back down. So if we -- if we look at the third quarter expenses, if you back out that $150,000 to maybe $200,000, is that the right way to think of expenses at least for the fourth quarter?

I would say, like I said, the deposit insurance is going to stay elevated in Q4 by I think roughly around $180,000 and then that should come back down in Q1. The $150,000 in legal and professional fees that -- that was some extra stuff, so that really should come down in Q4.

Okay. So, but other than that the other items are sort of as is and sort of a good run rate going forward, is that right?

Yeah. I don't think there's anything else that I noted in there that was sort of a one-off or unusual.

Okay. Just two more questions, just securities portfolio was down or maybe a little bit more than I would have expected. Should we expect some continued run-off going forward in the securities portfolio?

I think, I mean what was down in there probably, John, is just the unrealized loss being higher. I don't think, I mean we've got a little bit of cash flow coming off of it, but it's not big cash flow. So I would think that the securities portfolio is not going to change a lot in the next quarter or two.

Okay. But you are not putting new money to work in there either right now. Correct?

We have not so far much this year. No.

Okay. And just one final question, guys and whether Joe or Rex both of you. If you look at the level of net charge-offs for you guys and really for the industry over the last few years, maybe even more. I mean it's been -- it's been less than 10 basis points. I mean for you guys what last year was like 1 basis point, the year before 0 basis point. I mean, you've had net recoveries. And my question -- and my question is in the current environment based on what you currently see in your portfolio, I mean do you see a situation where net charge-offs could be above 20 basis points or 30 basis points based on what you currently see.

I mean we feel awfully good about our credit portfolio, John. So I'm really not talking so much about what I see now. I guess, I've just -- I've been at it long enough that I'm somewhat skeptical to think that we've just all figured it out. And there aren't going to be net charge-offs anymore. I mean, in the history of banking, this seems like, very unusual that we would have net charge-offs this low. So, I don't see anything in our portfolio right now that makes me think that we're going to have large levels of net charge-offs. But just when you look back historically and think about the business, I can't think that we necessarily figured it out. Although I will say, I do think underwriting is substantially better than it has been in my career, which is over 30 years. So I mean that is a positive.

So you're saying, a lot of people learn from '08, '09, I guess.

I think so, us included.

I hear you. No. I just wanted to throw that out there. I mean, that's a good shot. So I appreciate, guys. Take care. Thank you.

Okay. Thanks, John.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Joe Turner for closing remarks.

All right. Thanks everybody for joining us on our call, and we'll look forward to talking to you for our Q4 earnings release in January. Thank you.