GSBC - NASDAQ

Good day and thank you for standing by. Welcome to the Great Southern Bancorp, Fourth Quarter 2023 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. [Operator Instructions] Please be advice that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kelly Polonus. Please go ahead.

Thank you, Victor. Good afternoon, and thank you for joining us for our fourth quarter 2023 earnings call. The purpose of this call is to discuss the company's results for the quarter ending December 31, 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 fourth 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.

Okay. Thanks, Kelly and good afternoon, everybody. We appreciate you joining us today for our fourth quarter earnings call. As we anticipated, our fourth quarter results reflected the challenging operating environment that the banking industry is experiencing right now. While our earnings were down this quarter and we continue to expect significant competition for deposits in a challenging environment for noninterest income. We are steadfast in our long-term view of running the company like we have for decades in the cyclical industry. For the fourth quarter, we earned $1.11 per share or $13.1 million compared to $1.84 or $22.6 million in the fourth quarter of '22. Earnings per diluted common share were $1.33 in the third quarter of '23. In light of the current interest rate environment, key performance drivers included continued increase in deposit costs and significant competition for deposits as well as expected continuation of lower loan origination volume. As we pointed out in our release, lower noninterest income and higher expenses also contributed to reduced earnings during the quarter. However, we did note that there were a few nonrecurring additional expenses, which decreased our fourth quarter earnings. On a positive note, the company's capital strengthened with stockholders' equity increasing by approximately $40 million from the end of the third quarter of '23. We had a book, at the end of the quarter, we had or end of the year, we had a book value of $48.44 per common share, which was an increase of $3.63, I think, during the fourth quarter. We mentioned on our last couple of calls some anticipated headwinds that we would face related to net interest margin. Our NIM did decline to 3.30 for the fourth quarter compared to 399 for the same period in ‘22 and 3.43 for the Q3 of ‘23. The margin contraction primarily resulted from continuing changes in deposit and other funding mixes, increasing interest rates on all deposit stock during the fourth quarter, and impact from net settlements related to our interest rate swaps. Rex will provide a little bit more color on this in his comments. As I mentioned, our capital and liquidity positioning continues to be strong. Total stockholder’s equity increased by 40.1 million from the end of the third quarter ‘23, and increased 38.7 million from the end of ‘22. As a result of decreased AOCI losses on investment and interest rate swaps and continued growth in our retained earnings. The retained earnings component of our stockholders' equity increased 26 million during the 12-month end of December 31, ‘23. Our capital remains substantially above regulatory well capitalized threshold, and our TCE ratio was 9.7% at 12.31 ‘23 up from 9.2% at the end of ‘22. In the fourth quarter of ‘23, the company declared a $0.40 per common share dividend, and for all of 2023 our dividends declared worth a $1.60 per common share. We also continued to repurchase our shares during or continued to repurchase our shares during 2023. We repurchased approximately 450,000 shares at an average price of $51.38 per share in 2023. As for liquidity, our borrowing capacity at home loan bank was approximately 919 million at the end of ‘23. At the end of ‘23, we had available secured funding line through the home loan bank and Federal Reserve Bank, and on balance sheet liquidity totaling in approximately $2.1 billion. As we've noted for the last few quarters, our company's deposit base is diverse by customer type and geography and has a very low level of uninsured deposits about 15% of total deposits excluding internal sub subsidiary accounts. Overall, our loan portfolio is strong, diverse, and performing well. During the fourth quarter, new loan production and general activity was down compared to ‘22 as expected. Total outstanding loan balances grew by nearly 83 million since the end of ‘22. Growth primarily came from the multifamily loan segment much of this movement from unfunded construction line availability to construction projects and commercial business loans partially offset by a reduction in construction loans and one to four family residential loans. Our pipeline of loan commitments and the unfunded portion of construction loans remain strong, totaling 1.2 billion in the fourth quarter, but that has to decreased significantly compared to the end of ‘22. As construction projects were completed, the related loans were either paid off or moved from the construction category to the appropriate permanent loan category. The unfunded portion of construction loans was 719 million at 12.31 ‘23, down from 1.4 billion at the end of ‘22. I would remind you that we have a lot of information that we filed yesterday in our loan portfolio. You can find that at the FDC side. Overall, our credit quality metrics remain extremely strong during the quarter. Non-performing assets to total assets were 0.2% at the end of the year increasing by one basis point from September 30, ‘23, as delinquencies in our loan portfolio continue to be at historically low levels. More information about our number forming and potential problem loans is included in the earnings release. This concludes my prepared remarks. At this time, I'll turn the call over to our CFO, Rex Copeland.

Thank you Joe, and thank you all for being on the call today. I'll start off with net interest income and margin. I mentioned this last quarter and I'll just mention it again that just a general comment about net interest income comparisons for the third and fourth quarters this year versus same periods last year. With the fed funds and market increase in rates in ‘22, we were again able to increase rates on assets more quickly than liabilities last in ‘22. So we achieved for us peak net interest income and margin in the second half of 2022. We're comparing the latter part of ‘23 to those numbers. Net interest income for the fourth quarter of 2023 decreased $9.5 million to 45.1 million compared to 54.6 million in the fourth quarter of 2022 driven by some negative changes in funding, mix of deposits and borrowings, increasing interest rates on pretty much all deposit types during the fourth quarter of ‘23. And also due to negative impacts of the interest rate swaps, which we've mentioned before. Net interest income was $46.7 million in the third quarter of 2023. We did have a decrease least quarter on net interest income of about $1.6 million when you compare Q4 versus Q3 of 2023. We look at it and say if the SOFR and prime interest rates remain pretty much at their current levels, the company's interest rate swaps will continue to have a negative impact on our net interest income. And based on the interest rates that we had on the swaps that December 31st of ‘23, the negative impact of all those interest rates swaps combined in the first quarter of 2024 is expected to be approximately $2.7 million. The negative impact of all these swaps combined in the fourth quarter of ‘23 was about 3.6 million. So as we noted in the earnings released, one of these swaps will terminate on March one of ‘24. That swap had a negative impact interest income of 2.9 million in the fourth quarter of ‘23. It's expected to have a negative impact of 1.9 million approximately in the first quarter of ‘24, and then after the first quarter, there'll be no impact in subsequent periods. The companies that interest income was also negatively impacted in the fourth quarter by the high level of competition for deposits across the industry and in our local markets. The company also had a portion of time deposits maturing at somewhat lower than current rates in the late third and fourth quarters of ‘23. And so those time deposit renewals were either at rates that were higher, probably at somewhat higher or they left the company in turn, requiring us to replace those funds with other funding sources that would be at current market rates. And lastly and importantly, sporadically throughout 2023, the company experienced a higher-than-normal reduction in balances of non-interest-bearing deposits. Customer balances in both non-interest-bearing checking and interest-bearing checking accounts have fluctuated throughout 2023. As market interest rates for certain checking account types and time deposit accounts have increased. Some customers have chosen to reallocate funds into higher rate accounts. So during the full year of 2023, the company's interest bearing checking balances increased about $28 million or about 1.3%, but noninterest bearing checking balances decreased about $168 million or about 15.8%. Those are point in time balances and not average balances. However, if you do look at the Q4 average balances of noninterest bearing demand deposits, it was $1.07 billion in the fourth quarter of '22 and it was $900 million in the fourth quarter of 2023. So, looking ahead subsequent to the end of the year into 2024, our time deposit maturities over the next 12 months as they stood at December 31 of '23 were within three months, we have $394 million of maturities with a weighted average rate of 3.82%. Within three to six months, we have $324 million of maturities with a weighted average rate of 4.32% and then within 6 to 12 months, we have $371 million of maturities with a weighted average rate of 4.08% currently. So, based on the time deposit market rates that we have in place or that we're seeing now in January of this year, replacement rates we think on those are going to be somewhere in the range of 4% to 4.5% generally. As Joe mentioned earlier, our net interest margin was 3.30% in the fourth quarter. That compared to 3.99% in the fourth quarter of 2022 and then also compared to 3.43% in the third quarter of 2023. I'll shift over a little bit here to liquidity and deposits. Joe mentioned liquidity earlier, but I'll just talk a little bit more about that. So, we continue to have substantial liquidity and readily available funding sources totaling about $2.1 billion at the end of December. About over $900 million of that is availability at the home loan bank. We also have substantial amount of unpledged securities and $450 million or so available line with the Federal Reserve Bank, should we need to look at that. So, we do have, we think ample sources of liquidity. At December 31, 2023, I will talk a little more about deposits here. The total deposits were over $4.7 billion. During the three months ended December 31, '23, the total deposits decreased about $130 million. Interest bearing checking balances decreased about $27 million or 1.2% and noninterest bearing checking balances decreased $46.7 million or about 5% in the fourth quarter. Time deposits generated through the company's banking center network and our corporate services networks decreased about $43 million and time deposits generated through Internet channels decreased another $3 million. Total brokered deposits decreased by about $8 million in the fourth quarter. So, talk for a minute here about noninterest income. Our total noninterest income in the fourth quarter of '23 compared to the fourth quarter of '22 decreased by about $1.1 million to $6.6 million. Primary reasons for that decline included point of sale and ATM fees that decreased about $621,000 compared to that prior year fourth quarter period. Some of the reasons for the decrease is, we do have now some of the transactions are now being routed through different channels than they were a year ago and those channels have lower fees to us, which we expect that's going to continue in future periods. We also had some increases in certain related processing costs during the transition from our old debit card processor to the new debit card processor, and that included a couple hundred thousand dollars as we kind of made that transition and finalized some things, a couple hundred thousand dollars that we anticipate would be a non-recurring item. Other income decreased 399,000 compared to the fourth quarter of ‘22. During 2022, we did receive some payments that were from a third-party servicer related to some old acquired loans which was not repeated in the 2023 period. And then finally, overdraft and insufficient fund fees, those decreased by about 327,000 compared to the fourth quarter of 2022. We continue to see a little bit of shifting going on there. It appears that we've got where people are using their debit cards for point-of-sale transactions and overdrawing their accounts in some cases with that, it seems that the usage has shifted more to credit cards resulting in fewer overdrafts and fees that we have generated on those. Non-interest expense, we'll talk about that for a moment here. In the fourth quarter of ‘23 versus ‘22 non-interest expense increased $1.9 million to $36.3 million. And so, when you kind of look at the reasons for that, we've broken it into a few different places. Salary and employee benefits are part of it. That was up about 1.2 million from the fourth quarter of ‘22. Portion of this is just normal merit increases in some of our various operational and lending areas. And we also had a little bit less of a negative expense in the fourth quarter of ‘23 versus ‘22 related to compensation costs that you defer and take over time for originated loan volumes. Our volumes were lower in ‘23 versus ‘22, and then also, and one of the major items in the higher expense and the non-recurring type item was we mentioned it in the fourth quarter of ‘23. We did have some discretionary bonuses that were awarded to various associates that have been involved significantly in the software and systems transition that we've been going through. And that was about $441,000 of expense in Q4 of ‘23. Additional expense related to insurance, that increased 550,000 from the prior year fourth quarter. That increase was really due to previously announced increases in the FDIC deposit insurance fund rates. We noted that previously. And then we did have some as a result of some of that, we did record some additional expenses in the fourth quarter of this year, which we don't believe will be recurring in as we go into 2024. Net occupancy expense increased about 389,000 fourth quarter this year, or fourth quarter ‘23 versus fourth quarter ‘22. A lot of that's related to some computer license and support expenses that we had -- that we did not have in the prior year that we've had to add here in 2023. And then lastly, legal audit other professional fees decreased about $481,000 from the prior year quarter. In the 2022 period, we expensed about $1.4 million related to training and implementation costs for the core system conversion and professional fees to consultants that were engaged to support that transition. In 2023, that expense was $918,000 still a little bit lower than it was in the fourth quarter a year ago. So efficiency ratio for the fourth quarter of 2023 was 70.17% that compared to 55.13% for the same quarter in 2022. And the increase in that ratio is mainly due to the decrease in that interest income and non-interest income. And then also a little bit related to increases in expenses as well, provision for credit losses. We did record a provision expense of $750,000 in the fourth quarter of ‘23 on the outstanding loan portfolio, the funded loan portfolio that compared to a $1 million provision in the fourth quarter of 2022. For the three months into December 31, ‘23, we also recorded a negative provision for losses on the unfunded commitments of $1.7 million. So a reduction of expense for that compared to a negative provision of $159,000 for the three months into December 31st, 2022. Our net charge offs in the fourth quarter of 23 were $833,000. That compared to $281,000 in the fourth quarter of 2022. And those current period charge offs primarily related to two relationships that are kind of long-term relationships that we've had for quite some time. At the end of the fourth quarter, the allowance for credit losses at the percentage of total loans was 1.39%. And lastly, I'll talk a little bit about income taxes. So our effective tax rate for the fourth quarter of ‘23 was 19.7%, and for the fourth quarter of ‘22 it was 16.6%. For the full year, which is probably more indicative of really kind of going forward. The company's effective tax rate for ‘23 was 20.6% and for 2022 was 19.4%. We do continue to have some tax credit items and some tax-exempt investments and loans which reduce our effective tax rate. We think that the effective tax rate going forward is probably going to be something in the 20.5% to 21.5% range in 2024. That can vary a little bit just depending on the level and utilization of tax credits. And also, state income tax expense estimates evolve. We're constantly reviewing those and so that can affect the overall effective tax rate from time to time. So those are the items I wanted to discuss and that concludes our remarks that we prepared so far today. At this time, we'll entertain questions and I'll ask our operator to once again remind the attendees on the call how to queue in for questions.

[Operator Instructions] And our first question will come from line of Andrew Liesch from Piper Sandler.

Really my question just revolve around the margin outlook here. So if the swap hit here in the first quarter is going to be less than it was in the fourth, could we see the margin and NII increase here this quarter? Or do you think there's other funding costs that might be upsetting?

I mean, all things being equal that should be somewhat of an improvement. I mean, although we'll still have two months of it in the first quarter, so the more improvement will be in the beginning of the second quarter. It's going to depend a little bit on what we see as far as any further migration from noninterest bearing accounts into other interest-bearing types of funds. It doesn't feel like the costs are going up on other borrowings. I mean the rates on those are pretty much kind of where they are. CDs, we do have some CDs as I mentioned they are going to mature in the first quarter of 2024, but I think the bulk of those is probably later in the quarter. So, I mean, I don't know that the first quarter is going to be terribly affected by it all. So, it just depends on kind of where competition goes. And I think the biggest driver is going to be kind of where noninterest bearing balances shake out.

Yes. I agree with that, Andrew. I mean, there is, what happens to noninterest bearing accounts. And our CD portfolio is relatively short, probably a year or so. So, most of those have repriced up to close to current market rates. I mean, there could be a little bit of movement there, but not a lot. And then, of course, our interest-bearing checking, that sort of keeps up with market as it goes, but it does seem to continue to slide up and that maybe people moving from lower tiers to higher tiers. So there could be a little bit of slide up in the cost of funds. I wouldn't expected to be dramatic. But again, the thing to watch there is the migration from noninterest bearing into interest bearing accounts. Generally speaking though, our liabilities should be price pretty close to market. We still have a fair amount of loans and we have got disclosures on that in our annual report. We have a fair amount of loans to reprice up. That's not going to necessarily all happen and it's not going to all happen in '24. It's going to happen over a period of time, but that's going to be helpful to margins certainly. And as you mentioned, the $3 million a quarter swap that rolls off completely starting in the second quarter will help as well.

The loan repricing and I'm sure it will be in the 10-k when you file that in a couple of months. But do you have the balance right now of loans that are going to reprice this year?

I don't have the balance. I mean as of last year, the balance was a couple of $100 million maybe of repricing loans, but that may have changed in the last year.

And that's in addition to give or take $1.8 billion or $2 billion of loans that are repriced quickly because they are tied to sulfur or tied to clients.

Yes. But you're talking --

The new stuff that hasn't moved yet. Yes.

Yes.

And then just if you have it handy, do you know what the average yield on the new loan production was in the last quarter?

I don't have that number.

Is it trending higher? Do you think it's sort of stabilized at a certain level?

I think it's probably stabilized as rates have stabilized here. I think it's probably going to be stabilized. It depends a little bit on the nature of which type of loans too. So, as construction loans fund, they're coming on at, I don't know, somewhere in the 250 to 300 over, so we're not -- we're probably not originating a lot of just new loans that go immediately on the books necessarily, but that's sort of what you can kind of think of from a construction standpoint as far as what's funding. And there's a little bit of commercial, other commercial stuff and some consumer stuff, but there's -- they're not usually real big balances on those right now.

Our next question will come from the line of Damon DelMonte from KBW.

Just had a question here on expenses. You guys called out some kind of one-time items. If you look at the 440,000 of the bonuses, the 320 and the other operating expenses and the 240, let's call it 900,000 to a million. So is it fair then to kind of take those out of this quarter's level and you're kind of put you in the $35 million range as a starting point for 2024? Is that reasonable?

Yes, I think so. I mean, so definitely the bonuses are -- I mean, that's not something that we're contemplating on a quarterly basis, obviously. The other -- we did have some additional fraud loss stuff that we had in the fourth quarter that's above kind of what we've normally been running. And so, we hope that that's not going to be a new trend. It was definitely higher than the general trend that we've had. And so, I think those are all things. Now remember though that in the first quarter we will have, I mean, a lot of people get raises at the end of the year, so we've got merit increases and things like that, plus payroll taxes will be higher, a little higher again to start off the year. So there's a few of those type of things out there. But those, I mean, that's usually something that's every first quarter of every year.

Got it. Thanks. And then the fee income, you kind of called out the lower debit card and ATM fees, I believe because you had changed vendors. If you look at third quarter to fourth quarter, that was a pretty decent drop. So is this a good run rate going forward, or do you expect to see that kind of recapture some of that lost revenue?

I think we had -- it's a couple hundred thousand dollars in there that was sort of just some transition stuff going on that reduced it. But I mean, we definitely saw less usage, I think and gross income in the fourth quarter of this year of ‘23. I don't know if that's a bit of a new trend there or not, but it definitely, the top line went down a little bit and the expenses were higher, like I mentioned too. I don't think there's a couple hundred thousand of expenses in there that we don't think will carry forward, but it's hard to know for sure what that's going to look like in the first quarter.

Yes, I think that's exactly right.

Okay. That's helpful. Thank you. And then I guess just lastly on kind of the outlook for loan growth, you got the commentary on the pipeline and it's being lower, but yet still being somewhat healthy. How do you kind of frame out growth for the upcoming year? Do you think kind of low to mid-single digits is doable? Do you think you could actually get to a solid mid-single digit level? What are your thoughts on that?

It's just really hard to say Damon. We're subject to levels of competition, also customer interest and moving forward with projects. We're not seeing a ton of projects that really sort of fit what we're trying to do. Either people are trying to do it, do their projects with too low equity or unguaranteed or those sorts of things. And we're not willing to stretch to put stuff on the books, it's just hard to say at this point.

Our next question will come from line of John Rodis from Janney.

Just back to the expense topic, can you just give us an update on the systems conversion? I know in the text you said mid-2024, but so how should we think about expenses there in the first and second quarter and I guess, if any in the third quarter?

I mean, I don't know, John, that we can really update you. Much past what we've got in the earnings release, we've just sort of -- we're in discussion with the third-party vendor. As we said, we have some disputes with them and we're trying to make progress on those. But we really haven't made much to date. I really can't -- we're going to have that level of expenses until we ultimately do something. And so, I think you're going to have to kind of model those probably here for the time being

Joe, is worse case though mid this year, or could it be stretched out even farther than that? Is that what you're saying?

Well, it is hard to say. I just wouldn't want to -- I couldn't tell you beyond that, I can't comment much past what --

Just one other question. Credit quality remains very solid for you guys, but I did notice in the one table potential problem loans, you had a new addition of roughly 7.2 million and it was other residential. Can you maybe just add a little detail or color on that?

That's a modest size multi-family project in Oklahoma. And to be honest with you, John, I mean we expect that to resolve relatively quickly, hopefully in ‘24. At this point, we don't expect a loss on it.

I'm not showing any no further questions at this time. I would now like to turn it back to Joe Turner for closing remarks.

All right, everybody, we appreciate you being with us, here in January and we'll look forward to talking to you in April. Thank you.