Great Southern Bancorp Q4 2023 Earnings Call Transcript

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January 23, 2024

There are 6 speakers on the call.

Operator

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 Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kelly Poulonis.

Operator

Please go ahead.

Speaker 1

Thank you, Victor. Good afternoon, and thank you for joining us for our Q4 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.

Speaker 1

For a list of some of these factors, please see the forward looking statements disclosure in our Q4 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.

Speaker 2

Thanks, Kelly. Good afternoon, everybody. We appreciate you joining us today for our Q4 earnings call. As we anticipated, our 4th Results reflected the challenging operating environment that the banking industry is experiencing right now. While our earnings were down this quarter and we expect We continue to expect significant competition for deposits in a challenging environment for non interest income.

Speaker 2

We are steadfast in our long term view of running company like we have for decades in the cyclical industry. For the Q4, we earned $1.11 per share or $13,100,000 compared to $1.84 or $22,600,000 in the Q4 of 'twenty 2. Earnings per diluted common share were $1.33 in the Q3 of 'twenty 3. 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 non interest income and higher expenses also contributed to reduced earnings during the quarter.

Speaker 2

However, we did note that there were a few non recurring additional expenses, which decreased our 4th quarter earnings. On a positive note, the company's capital strengthened With stockholders' equity increasing by approximately $40,000,000 from the end of the Q3 of 'twenty three, 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 Q4. 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 4th quarter compared to $3.99 for the same period in 'twenty two and $3.43 for the Q3 of 'twenty 3, the margin contraction primarily resulted from continuing changes in deposit and other funding mixes, increasing interest rates on all deposit types during the Q4 and impact from net settlements related to our interest rate swaps. Rex will provide a little bit more color on this in his comments.

Speaker 2

As I mentioned, our capital and liquidity position continues to be strong. Total stockholders' equity increased by $40,100,000 from the end of the Q3 of 'twenty 3 and increased $38,700,000 from the end of 2022 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 $26,000,000 during the 12 months ended December 31, 'twenty three. Our capital remains substantially above regulatory well capitalized threshold and our TCE ratio was 9.7% at twelvethirty onetwenty 3, up from 9.2% at the end of 'twenty 2. In the Q4 of 'twenty three, the company declared a $0.40 per common share dividend.

Speaker 2

And for all of 23, our dividends declared were 1.60 per common share. We also continue to repurchase our shares during or continue to repurchase our shares during 2023. We've repurchased approximately 450,000 shares at an average price of $51.38 per share in 2023. As for liquidity, our borrowing capacity of Home Loan Bank was approximately 919,000,000 At the end of 'twenty three, we had available secured funding lines through the Home Loan Bank and Federal Reserve Bank and on balance sheet liquidity totaling approximately $2,100,000,000 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 deposit, about 15% of total deposits, excluding internal subsidiary accounts. Overall, our loan portfolio is strong, diverse and performing well.

Speaker 2

During the Q4, new loan production and general activity was down compared to 22 as expected. Total outstanding loan balances grew by nearly $83,000,000 since the end 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 1 to 4 family residential loans. Our pipeline of loan commitments in the unfunded portion of construction loans remained strong, totaling $1,200,000,000 in the 4th quarter, but that has decreased significantly compared to the end of 'twenty two. As construction projects were completed, the related loans were either paid off or moved from the construction category to the appropriate permanent loan category.

Speaker 2

The unfunded portion of construction loans was $719,000,000 at twelvethirty onetwenty 3, down from $1,400,000,000 at the end of 'twenty 2. I would remind you We have a lot of information that we filed yesterday in our loan portfolio. You can find that at the SEC site. 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 1 basis point from September 30, 23.

Speaker 2

Delinquencies in our loan portfolio continue to be at historically low levels. More information about our non performing 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. All right.

Speaker 2

Thank you, Joe, and thank you all for being on the call today. I'll start off with net interest income and margin. Just I mentioned this last quarter and I'll just mention it again that just a general comment about net interest income comparisons for the 3rd and 4th quarters this year versus same periods last year, with the Fed funds and market increase in rates in 2022, we were Again, able to increase rates on assets more quickly than liabilities last in 2022. And so we achieved for us peak net interest income and margin in the second half of twenty twenty two. So we're comparing the latter part of 'twenty three to those numbers.

Speaker 2

Net interest income for the Q4 of 2023 decreased $9,500,000 to $45,100,000 compared to $54,600,000 in the Q4 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 Q4 of 'twenty three and also due to negative impacts of the interest rate swaps, which we've mentioned before. Net interest income was $46,700,000 in the Q3 of 2023. So we did have a decrease, late quarter on net interest income of about $1,600,000 when you compare Q4 versus Q3 of 2023. So 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. Based on the interest rates that we had on the swaps at December 31, 'twenty three.

Speaker 2

The negative impact of all of those interest rate swaps combined in the Q1 of 2024 is expected to be approximately $2,700,000 The negative impact of all these swaps Combined in the Q4 of 'twenty three, it was about $3,600,000 So as we noted in the earnings release, one of these swaps will terminate on March 1, 'twenty four. And that swap had a negative impact to interest income of $2,900,000 in the Q4 of 'twenty 3. It's expected to have a negative impact of $1,900,000 approximately in the Q1 of 'twenty four. And then after the Q1, there will be no impact in subsequent periods. So the company's net interest Income was also negatively impacted in the 4th quarter by the high level of competition for deposits across the industry and in our local markets.

Speaker 2

The company also had a portion of time deposits maturing at somewhat lower than current rates in the 3rd in the late 3rd 4th quarters of 2023. And so those time deposit renewals were either at rates that were higher, probably somewhat higher, or they left the company and in turn requiring us to replace those funds with other funding sources that would be at current market rates. And then 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.

Speaker 2

So during the full year of 2023, the company's interest bearing checking balances increased about $28,000,000 or about 1.3%, But non interest bearing checking balances decreased about $168,000,000 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 non interest bearing demand deposits, it was $1,070,000,000 in the Q4 of 'twenty two and it was $900,000,000 in the Q4 of 2023. So looking ahead, subsequent to the end of the year in the first Into 2024, our time deposit maturities over the next 12 months as they stood at December 31, 'twenty 3 were within 3 months. We have $394,000,000 of maturities with a weighted average rate of 3.82 percent.

Speaker 2

Within 3 to 6 months, we have $324,000,000 of maturities with a weighted average rate of 4.32 percent. And then within 6 months to 12 months, we have $371,000,000 of maturities with a weighted average rate of 4.08 percent 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 point 5 percent generally. As Joe mentioned earlier, our net interest margin was 3.30% in the 4th quarter. That compared to 3.99% in the Q4 of 2022 and then also compared to 3.43% in the Q3 of 2023.

Speaker 2

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 $2,100,000,000 at the end of this number. About over $900,000,000 of that is availability at the home loan bank. We also have substantial amount of unpledged securities and $450,000,000 or so available line with the Federal Reserve Bank should we need to look at that.

Speaker 2

So we do have, we think, ample sources of liquidity. At December 31, 2023, I'll talk a little more about deposits here. The total deposits were over $4,700,000,000 During the 3 months ended December 31, 23, the total deposits decreased about $130,000,000 Interest bearing checking balances decreased about 27,000,000 or 1.2% and non interest bearing checking balances decreased $46,700,000 or about 5% in the 4th quarter. Time deposits generated through the company's banking center network and our corporate services networks decreased about $43,000,000 And time deposits generated through Internet channels decreased another $3,000,000 Total brokered deposits decreased by about $8,000,000 in the 4th quarter. So talk for a minute here about non interest income.

Speaker 2

Our total non interest income in the Q4 of 2023 compared to the Q4 of 'twenty two decreased by about $1,100,000 to $6,600,000 Primary reasons for that decline included Point of sale and ATM fees decreased about $621,000 compared to that prior year Q4 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 of $100,000 as we kind of made that transition and finalized some things, a couple of $100,000 that we anticipate would be a non recurring item. Other income decreased $399,000 compared to the Q4 of 2022. 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.

Speaker 2

And then finally, overdraft and insufficient fund fees, those decreased by about $327,000 compared to the Q4 of 2022. We continue to see a little bit of shifting going on there. It appears that we've got people were 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.

Speaker 2

So in the Q4 of 'twenty three versus 'twenty two, Non interest expense increased $1,900,000 to $36,300,000 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 $1,200,000 from the Q4 of 2022. 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 Q4 of 'twenty three versus 'twenty two related to compensation costs that you defer and take over time for originated loan volumes.

Speaker 2

Our volumes were lower in 'twenty three versus 'twenty two. And then also one of the major items in the higher expense And this non recurring type item was, we mentioned it in the Q4 of 'twenty three, 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. That was about $441,000 of expense in Q4 of 2023. Additional expense related to insurance, that increased $550,000 from the prior year 4th 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 Q4 of this year, which we don't believe will be recurring as we go into 2024.

Speaker 2

Net occupancy expense increased about $389,000 Q4 of this year or Q4 'twenty three versus Q4 'twenty two. 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 $1,400,000 related to training and implementation costs for the core system conversion and professional fees to consultants that are engaged to support that transition. In 2023, that expense was $918,000 still a little bit lower than it was in the Q4 a year ago.

Speaker 2

So efficiency ratio for the Q4 of 2023 was 70.17 percent that compared to 55.13% for the same quarter in 2022. And the increase in that ratio is mainly due to the decrease in net 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 $750,000 in the Q4 of 'twenty three on the outstanding loan portfolio, the funded loan portfolio. That compared to a $1,000,000 provision in the Q4 of 2022. For the 3 months ended December 31, 'twenty three, we also recorded a negative provision for losses on the unfunded commitments of $1,700,000 so a reduction of expense for that compared to a negative provision of $159,000 for the 3 months ended December 31, 2022.

Speaker 2

Our net charge offs in the Q4 of 'twenty three were $833,000 that compared to $281,000 in the Q4 of 2022 and those current period charge offs primarily related to 2 relationships that are kind of long term relationships that we've had for quite some time. At the end of the third quarter, I'm sorry, the end of Q4, the allowance for credit losses as a 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 Q4 of 'twenty three was 19.7 percent. For the Q4 of 2022, it was 16.6%.

Speaker 2

For the full year, which is probably more indicative of really kind of going forward, the company's effective tax rate for 2023 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 of 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.

Speaker 2

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 have to queue in for questions.

Operator

Thank you. And at this time, we will conduct a question and answer session. And our first question comes from the line of Andrew Liesch from Piper Sandler. Your line is open.

Speaker 3

Hi, good afternoon, everyone. Thanks for taking the time today. Really my question just revolve around the margin outlook here. So If the swap hit here in the Q1 is going to be less than it was in the 4th, could we see the margin and NII increase here this quarter, or do you think there's other funding costs that might be offsetting?

Speaker 2

I mean, all things being equal, that should be somewhat of an improvement. I mean, although we'll still have 2 months of it in the Q1, so the more improvement will be in the beginning of the second quarter. The It's going to depend a little bit on what we see as far as any further migration from non interest bearing accounts into to 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're going to mature in the Q1 of 2024, but I think the bulk those, it's probably later in the quarter.

Speaker 2

So I mean, I don't know that the Q1 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 non interest bearing balances shake out. Yes, I agree with that, Andrew. I mean, there's what happens to non interest bearing accounts And our CD portfolio is relatively short, probably a year or so.

Speaker 2

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 may be people moving from lower tiers to higher tiers. And So there could be a little bit of slide up in the cost of funds. I wouldn't expect it to be dramatic.

Speaker 2

But again, the thing to watch there is the migration from non interest bearing into interest bearing accounts. Generally speaking though, our liabilities should be priced pretty close to market. We still have a fair amount of loans and we've 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%.

Speaker 2

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 $3,000,000 a quarter swap that rolls off completely Starting in the second quarter will help as well.

Speaker 3

Got it. The loan repricing and I'm sure it will be in the 10 ks 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?

Speaker 2

I don't have the balance. I mean, as of last year, the balance was a couple of $100,000,000 maybe re pricing loans, but that may have changed in the last year. And that's in addition to Give or take $2,000,000,000 $1,800,000,000 or $2,000,000,000 of loans that are repriced quickly because they're tied to sulfur type of clients. Yes. But you're talking The new

Speaker 4

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

Speaker 2

Got it.

Speaker 3

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

Speaker 2

I don't have that number.

Speaker 3

We could Is it trending higher or do you think it's sort of stabilized at a certain level?

Speaker 2

I think it's probably stabilized as rates have stabilized here. I think it's probably going to be stabilized. Okay. It depends a little bit on the nature of which type of loans too. So as construction loans They're coming on at, I don't know, somewhere in the 250 to 300 over.

Speaker 2

So, so, so, so, so, so, so, so, so, so, so, yeah. Yeah. So we're not we're probably not originating a lot of just new loans that go immediately on the books necessarily. So, yeah, 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 not usually real big balances on those right now.

Speaker 3

Got it. Got it. That covers my questions there. Thanks so much. I'll step back.

Operator

Thank you. One moment for our next question. And our next question will come from the line of Damon DelMonte from KBW. Your line is open.

Speaker 4

Hey, good afternoon guys. Hope everybody is doing well today.

Speaker 2

Hi, David.

Speaker 4

Hi. So I just had a question here on expenses. You guys called out So kind of one time items, if you look at the $440,000 of the bonuses, the 320,000 And the other operating expenses in the $240,000 that's call it $900,000 to $1,000,000 So is it fair then to kind of take those out of this quarter's level and you're kind of puts you in the $35,000,000 range as a starting point for 2024. Is that reasonable?

Speaker 2

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 Q4 that's above 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.

Speaker 2

So, yes, I think those are all things. Now remember though that in the Q1, 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 a little higher at the end of 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 Q1 of every year.

Speaker 4

Got it. Okay. Thanks. And then, on the fee income, you kind of called out the lower debit card and ATM fees, I believe, because you had changed vendors. So if you look at Q3 to Q4, that was a pretty decent drop.

Speaker 4

So is this a good run rate going forward? Or do you expect to See that kind of recapture some of that lost revenue?

Speaker 2

I think we had a it's a couple of $100,000 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 Q4 of this year of 2023. So 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 to you. So, I don't think there's a couple of 100,000 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 Q1.

Speaker 2

Yes. I think that's exactly right.

Speaker 4

Okay, that's helpful. Thank you. And then I guess just lastly on kind of the outlook for loan growth. Got the commentary on the pipeline and it being lower, but yet still being somewhat healthy. How do you kind of frame out growth for the upcoming year?

Speaker 4

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?

Speaker 2

It's just really hard to say, Damon. The We're subject to levels of competition, also customer interest in 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 the projects with too low of equity or unguaranteed or those sorts of things and we're not willing to stretch to put stuff on the books. So, it's just hard to say at this point.

Speaker 4

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

Operator

Thank you. One moment for our next question. And our next question will come from the line of John Rodis from Janney. Your line is open.

Speaker 2

Good afternoon, guys. Hey, John.

Speaker 5

Hey. 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-twenty 24, but so how should we think about expenses there in the 1st and second quarter and I guess if any in the 3rd quarter?

Speaker 2

Yes. I mean, I don't know, John, that we can really update Much past what we've got in the earnings release. We've just sort of we're in discussions With the 3rd party vendor, as we said, we have some disputes with them And we're trying to make progress on those, but we really have made much today. So 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.

Speaker 5

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

Speaker 2

Well, it's just it's hard to say. I just wouldn't want to I couldn't tell you Okay. Beyond that, I really can't comment much past what.

Speaker 5

Okay, fair enough. Just one other question. I mean 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 $7,200,000 and it was other residential. Can you maybe just add a little detail or color on that?

Speaker 2

Yes. That's a modest size multifamily project in Oklahoma. And To be honest with you, John, I mean, we expect that to resolve relatively quickly, hopefully, in 2024. And we don't expect at this point, we don't expect a loss on it. Okay.

Speaker 2

Thank you, guys.

Operator

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

Speaker 2

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.

Operator

Thank you for your participation in today's conference.

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Key Takeaways

  • In Q4, the company reported EPS of $1.11, down from $1.84 a year ago, as net interest margin contracted to 3.30% from 3.99% and non-interest income fell due to lower loan origination and competitive deposit costs.
  • Stockholders’ equity rose by approximately $40M since Q3, boosting book value to $48.44 per share and maintaining a TCE ratio of 9.7%, well above regulatory well-capitalized thresholds.
  • Liquidity remained strong with about $2.1B of available funding through Federal Reserve and Home Loan Bank facilities, supported by a deposit base that is 85% insured and geographically diversified.
  • The loan portfolio grew by $83M in 2023 led by multifamily exposures, while the unfunded construction pipeline decreased from $1.4B to $719M as projects transitioned to permanent loans, and credit metrics stayed robust with NPAs at 0.2%.
  • Hedging costs from interest rate swaps reduced net interest income by $3.6M in Q4, with one major swap ending in March expected to lessen the quarterly drag to $2.7M in Q1 2024.
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Earnings Conference Call
Great Southern Bancorp Q4 2023
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