Great Southern Bancorp Q3 2024 Earnings Call Transcript

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October 17, 2024

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Great Southern Bank Third Quarter 2024 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. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Zack Mukaiwa, Investor Relations. Please go ahead.

Speaker 1

Thank you. Good afternoon and thank you for joining Red Talbot Bank's 3rd quarter 2024 earnings call. Today, we will be discussing the company's results for the quarter ending September 30, 2024. Before we begin, I'd 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.

Speaker 1

For a list of these factors, please refer to the forward looking statements disclosure in the Q3 earnings release and other public filings. Joining me today are President and Chief Executive Officer, Joe Hanna and Chief Financial Officer, Rex Hoffman. I'll now turn the call over to Joe.

Speaker 2

Okay. Thanks, Zach, and good afternoon, everyone. We appreciate you joining us today for our Q3 earnings call. Our financial results reflect solid performance and the continued resilience of our operations despite the challenges in today's economic environment, particularly with fluctuating interest rates and broader macroeconomic pressures. We earned $1.41 per diluted common share or $16,500,000 in net income for the Q3 of 2024.

Speaker 2

This compares to $1.33 per diluted common share last year in the same quarter and $1.45 in the Q2 of 2024. We also surpassed the $6,000,000,000 in asset mark during this quarter. These results, I think, demonstrate our ability to maintain solid earnings and a strong balance sheet. Regarding earnings performance, our annualized return on average assets was 1.11 percent during the quarter and our annualized return on average equity was 11.1 percent during the quarter. Net interest income increased by $1,200,000 or 2.6 percent to $48,000,000 compared to $46,700,000 in the year ago quarter.

Speaker 2

Our net interest margin remained steady at 3.42% compared to 3.43% in the Q3 last year. The continued pressure on our margins is primarily due to elevated deposit costs, reflecting the competitive landscape for deposits and higher interest rate environment we've been operating in. We have seen some relief from the Fed's recent rate cut, but I think it's important to note that changes to our deposit costs will likely take time or this rate cut will likely take time to fully impact our funding costs. As we move forward, we will closely monitor how these rate adjustments influence deposit pricing and loan demand in the broader economy. Though we expect these macroeconomic factors to present challenges, we are well prepared to navigate the current environment by focusing on disciplined asset and liability management.

Speaker 2

We maintained moderate loan growth during the quarter, up $121,700,000 for the year. I think we're up over $70,000,000 in the quarter. This increase was primarily driven by expansion in our other residential loan segment, which was driven by completion of construction projects that transitioned into the permanent financing category. While we've seen some declines in construction and commercial loans, which is reflective of ongoing economic uncertainties, our pipeline of loan commitments and unfunded lines remained solid at $1,040,000,000 at the end of September 2024. I think this positions us well to continue supporting our customers and pursuing selective lending opportunities.

Speaker 2

For more information about our loan portfolio, you can find our quarterly loan portfolio presentation on our Investor Relations site under the Presentations link and is also on file with the SEC. From a credit quality perspective, nothing really different than what we said in the past about as good a credit quality as we've ever had. We actually did make significant strides to even improve it this quarter. Nonperforming assets decreased by 12,700,000 dollars bringing our total non performing assets down to $7,700,000 or 0.13 percent of total assets. That's down from 0.34% at June 30 and 0.20 percent December 31, 2023.

Speaker 2

The decline was largely due to the resolution of 2 significant non performing assets. Net charge offs for the quarter were $1,500,000 compared to $99,000 in the same period a year ago. A provision for credit losses of $1,200,000 was recorded in the quarter as a result of the charge offs and growth in the loan portfolio. 1 of our charge offs related to a loan collateralized by an office building in the St. Louis, Missouri suburb of Clayton, Missouri, which we've discussed in previous filings.

Speaker 2

Our outlook on the broader portfolio, including the office portfolio remains positive and we continue to view the commercial real estate market as a key area for potential growth, especially as economic conditions stabilize. Our capital position continues to be strong. Stockholders' equity has increased by $40,300,000 since December 31, 2023, bringing our TCE ratio to 10% from 9.7%. This increase reflects both strong earnings and our disciplined approach to capital management. We remain committed to returning capital to shareholders through share repurchases and dividends while growing book value per share.

Speaker 2

During the quarter, we repurchased 2,971 shares at an average price of $53.04 and we declared a quarterly dividend of $0.40 per share. For the 9 months ended September 30, 2024, we've repurchased nearly 240,000 shares at an average price of $51.69 and we declared quarterly dividends totaling over the 3 quarters $1.20 per common share. These actions align with our long term strategy of delivering value to our shareholders while maintaining a strong capital base to support future growth. As far as the economic environment, the economic environment remains complex with inflationary pressures easing but still above target impacting consumer behavior and deposit growth. Recent interest rate cuts by the Federal Reserve are expected to provide some relief on deposit costs, though the full benefits may take time to materialize.

Speaker 2

Competition for deposits, I think, has softened slightly. And while loan demand remains stable, we are closely monitoring credit quality as economic uncertainty continues. We remain focused on prudent risk management and disciplined capital allocation as we navigate these conditions. To wrap up, I'd like to thank our team for their continued dedication and our customers for their ongoing trust in Great Southern. Despite the current challenges, we remain confident in executing our long term strategy, managing risk prudently and delivering value to our shareholders.

Speaker 2

I'm confident that as we move through the remainder of the year, we are well positioned to build on the momentum we've achieved and continue delivering strong consistent results. That concludes my prepared remarks. I'll turn the call over to our CFO, Rex Copeland at this time. All right. Thank you, Joe, and good afternoon, everyone.

Speaker 2

I'll reiterate some of our financial results for the Q3 of 2024 and also provide more detail on performance and operational metrics. As mentioned before, net interest income for the Q3 of 2024 was $48,000,000 up $1,200,000 or 2.6 percent from the same period last year. This increase was driven primarily by higher loan yields, which rose by 52 basis points year over year and increased average interest earning assets. The total interest earned on loans and investment securities improved during the quarter, offsetting the continued upward pressure on our deposit costs due to higher rates and changes in deposit mix compared to the prior year period. Our net interest margin, as mentioned, remained stable at 3.42%.

Speaker 2

That was compared to 3.43 percent in both the Q2 of 2024 and the Q3 of 2023. The stability of our margin, despite the challenging deposit rate environment, reflects our disciplined approach to balance sheet management and proactive steps to manage the cost of funds. However, we continue to feel the impact of higher rates on interest bearing liabilities with a 34 basis point increase in interest bearing demand deposit costs compared to the Q3 of 2023. Time deposit costs also increased by 65 basis points compared to the prior year quarter. Year to date, net interest income totaled $139,600,000 down from $148,100,000 in the same period in 2023.

Speaker 2

This reflects the gradual compression in margins across the year as deposit and other funding costs rose faster than asset yields in the second half of twenty twenty three and the first half of twenty twenty four. We anticipate this trend to moderate slightly as the Federal Reserve's recent rate cuts take effect, although the full impact will be felt over time. We have noted that since the Fed funds rate cut last month, our daily net interest income and margin so far have not been negatively affected. Turning now to deposits. Our total deposits at the end of September 2024 were $4,700,000,000 up from the previous quarter.

Speaker 2

The growth was primarily in broker deposits and interest bearing demand deposits, which helped offset some of the decrease in retail time deposit accounts. During the quarter, we renewed several large time deposits at rates that remain high, although we are seeing signs of stabilization in recent months. And $300,000,000 of our broker deposits are floating rate tied to effective Fed funds. So those funding rates increase or decrease in line with changes to the Fed funds rate. Looking forward, we have $537,000,000 in time deposits maturing within the next 3 months with an average rate of 4.53%.

Speaker 2

As market rates have decreased after the Federal Reserve rate cut, we expect to replace those deposits at lower rates, possibly between 3.50 percent and 4.20 percent. Our liquidity position remains robust with cash and equivalents of $208,400,000 and access to additional funding lines through the Federal Home Loan Bank and the Federal Reserve, totaling $1,420,000,000 we are well prepared to meet both current and future funding needs. From a liquidity perspective, we are in a strong position with available secured funding lines through the Home Loan Bank and Fed as mentioned. And we also in total all those with including our on balance sheet liquidity would equal about $2,000,000,000 as of September 30. Our deposit base remains diverse by customer type and geography and uninsured deposits account for roughly 14% of total deposits, excluding internal subsidiary accounts.

Speaker 2

While deposit costs remain elevated, the pace of these increases has moderated compared to earlier in the year. We expect this trend to continue as market conditions evolve, particularly with the recent shift in the interest rate environment. Non interest income for the Q3 was $7,000,000 down $860,000 from the same period in 2023. The decline was largely due to reduced overdraft and insufficient fund fees, which reflect the broader industry trend of customers choosing to forego authorizing payments of certain items, which exceed their account balances, resulting in fewer overdrafts in checking accounts and related fees. We also saw a drop in debit card fee income.

Speaker 2

On the positive side, gains on loan sales were up by about $292,000 compared to last year's quarter, reflecting higher premiums on single family mortgage loans, which

Operator

we've originated for sale.

Speaker 2

On non interest expense, that total was $33,700,000 down $1,800,000 compared to the prior year quarter. The decrease was mainly due to lower professional fees and gains from selling foreclosed assets. Legal audit and other professional fees decreased $1,000,000 from the prior year quarter as costs related to the proposed core systems conversion are no longer being incurred. We realized $459,000 in gains from selling foreclosed assets during the quarter compared to just $22,000 in gains in the same quarter last year. We also did experience though on the other side an increase in occupancy expense of about $409,000 primarily due to technology related costs as we continue to invest in our digital infrastructure and online security.

Speaker 2

Our efficiency ratio improved during the quarter coming in at 61.34%, down from 65.13% in Q3 2023. This improvement reflects our continued efforts to manage expenses while investing in key business areas. For the 3 months ended September 30, 20242023, the company's effective tax rate was 18.0% and 21.5%, respectively. These effective rates were near or below the statutory federal rate of 21%, primarily due to the utilization of certain investment tax credits and the company's tax exempt investments and tax exempt loans, which reduced the company's effective tax rate. The company's current effective tax rate, both combined federal and state, is expected to be approximately 18.0% to 20.0% in future periods, primarily due to the additional investment tax credits being utilized beginning in 2024.

Speaker 2

And finally, talk a little bit about capital again. We ended the quarter with stockholders' equity of $612,100,000 an increase of $40,300,000 since the end of 2023. This brings our tangible common equity ratio to 10.0 percent, up from 9.7% at the end of 2023. We're also pleased to report a strong increase in our book value per share, which rose to over $52 up from about $49 in the previous quarter and $44.81 in the Q3 of last year. This increase in book value resulted from both increased retained earnings and improvement in unrealized losses on our available for sale investment portfolio and interest rate swaps.

Speaker 2

This growth underscores our commitment to enhancing shareholder value through both earnings performance and disciplined capital management. Despite the challenges posed by the competitive deposit environment and higher funding costs, we have continued to deliver solid financial results. Our focus on managing credit risk, controlling costs and maintaining strong capital levels has positioned us well as we navigate the remainder of this year. As we move forward, we remain committed to generating sustainable long term value for our shareholders through prudent financial management and strategic capital deployment. That concludes my remarks for today and we're now ready to take any questions we may have.

Operator

Our first question comes from Andrew Liesch with Piper Sandler. Your line is open.

Speaker 3

Hey, everyone. Good afternoon. Hi, Andrew. I just wanted to touch on the margin here. So it sounds like you're getting some stabilization on the funding side.

Speaker 3

And I know in the past, it's maybe it's taken a quarter or 2 for rate changes to flow through to your margin. But the tone sounds like NII and the margin are pretty stable since the rate cuts. Do you think there's an opportunity for expansion here in the Q4? Or do you think we got to wait until 2025 for that?

Speaker 2

I think we worked pretty hard throughout the year to try to get our maybe a little bit asset sensitive position moderated to be in more neutral. We looked at what we knew we had as far as variable rate loans that would reprice with cuts. And we have on our on the other side of the balance sheet, we've got quite a bit of we've some interest rate swaps. We've got some as I mentioned some floating rate broker deposits and we've got some short term home loan bank advances, overnight advances, that kind of thing. In addition to that, we've got some shorter maturing broker deposits.

Speaker 2

And as I mentioned, a little over $500,000,000 of combined retail and brokered CDs that will mature in the next 3 months. And so we feel like we've gotten things sort of matched off there, Andrew, more than we had before. I don't know that we're going to say we're going to get to a point where we can reprice the liabilities faster than the assets by much. So I think fairly neutral is kind of how we see it in the near term at least.

Speaker 3

Got it. Got it. That's very helpful. On the expense front, it's kind of add back the gains that you had on the foreclosed assets and then take up some of the other one timers in the prior quarter. It looks like expenses were down by about $1,000,000 to $34,250,000 Is that a good run rate going forward?

Speaker 3

Or do you think maybe they rise a little bit from there? This seems a little bit low to me.

Speaker 2

Yes. I mean, it was lower probably than what the expectations were. For sure, the cost that we have been incurring in previous quarters related to the proposed system conversion. That was about 900,000 or so a quarter and those are not in there and shouldn't be going forward. We probably had I mean, in other categories, we might have had 200,000 or 300,000 of other kind of good news kind of things that happened in the quarter.

Speaker 2

They were all pretty small individually. I mean, not to give total guidance, but I think that we were pretty much on the low side on expenses in Q3 probably.

Speaker 3

Got it. Very helpful. Thanks for taking the questions. I'll step back.

Operator

Thank you. Our next question comes from Damon DelMonte with KBW. Your line is open.

Speaker 4

Hey, good afternoon guys. Hope you're all doing well today. Hi, Damon. So first question good afternoon. The first question just regarding credit.

Speaker 4

Nice to see the cleanup of a couple of credits and you're down to NPAs of call it 16 basis points of loans in OREO. How do we think about the reserve at this point? There was some release this quarter, but that was probably tied directly to those couple of loans that you moved off the books. Do you feel like kind of a reserve in the mid-130s is good or do you feel like you still have adequate excess reserves there that could kind of bleed out over the coming quarters?

Speaker 2

I mean, I feel like the ratios we're looking at are pretty good ratios for us. I wouldn't expect to see a lot of bleed out over the coming quarters. And some of it will also depend on the level of loan growth that we have as well as we've got a reserve if we grow, we've got a reserve for that upfront as it happens. So, I'm like Joe, I think our reserve ratio has been fairly consistent and probably going to remain somewhat in that area.

Speaker 4

Okay, great. And that kind of ties into the next question there about loan growth that you just mentioned there. The last couple of quarters were, I think this quarter was 6.5%, maybe 4% linked quarter annualized in the 2nd quarter. The year started off kind of slow. Do you think that you finished the year kind of in the range of what we saw the last couple of quarters based on your pipelines?

Speaker 4

Or do you think you just had some pent up demand that kind of hit the books in the middle part of the year and it's going to kind of be a minimal growth here to end the

Speaker 2

year? Again, we don't give guidance as to what loan growth or is going to be just because a lot of it's beyond our control. We don't completely we have a projection of what payoffs are going to be, but they can always surprise you a little bit, Damon. I mean, I think probably something that if you just look at the 9 months and kind of look at how we've grown thus far, that would probably be the best projection of what we might do to end up the year.

Speaker 4

Got it. Okay. That's helpful. That's all that I had. Thank you.

Speaker 2

Okay. Thanks, Damon.

Operator

Thank you. And our next question comes from John Rodis with Janney. Your line is now open.

Speaker 2

Hey guys, good afternoon.

Speaker 1

Hi John.

Speaker 2

Joe, a question I guess on the buyback, you only bought back roughly 3,000 shares this quarter. Was that more a function of price or I mean capital continues to I think the price for the most part this quarter was a little higher. So I think that's probably it although our book value now has moved up and so there may be opportunity to buy back more here as we go forward. Good problems to have there. Yes.

Speaker 2

We also thought it made some sense to take the opportunity to build up our capital a little bit to just have a little stronger capital position. Right. Okay. That makes sense. As we mentioned, we have the sub debt that's repricing in June and we're going to be in a cash position to just pay that off if we want to.

Speaker 2

So kind of like we said last quarter, John, we've got good uses for capital in lots of ways. Joe, maybe just sort of big picture, your thoughts, any new markets that could be on the horizon for loan offices or your thoughts on M and A in the current environment? You guys obviously haven't done anything in a while. Yes. I mean, as far as loan production offices, we don't have anything necessarily on the drawing board.

Speaker 2

But we're our guys are in contact with banks and good lenders kind of across the country. And so if we saw a situation that made sense in a market that we were interested in, we could do that fairly easily. M and A, we're just not big open bank M and A people. I mean, we see the struggle in when banks buy other banks, maintaining the revenue producers and it seems like you sort of wind up competing to keep the business that you pay for. And so never say never.

Speaker 2

If the right situation came up, we would be interested that we're going to be pretty selective about it, I would say. Okay. That makes sense, Joe. I hear you. So thanks, guys.

Speaker 2

Thanks, John.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Joe Turner, Chief Executive Officer, for closing remarks.

Speaker 2

All right. Well, thanks everybody for joining our call today, and we'll look forward to talking to you after the end of the year. Thank you.

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Key Takeaways

  • Great Southern Bank reported Q3 net income of $16.5 million or $1.41 per diluted share, up from $1.33 a year ago, and surpassed the $6 billion asset milestone.
  • Net interest income rose 2.6% year-over-year to $48 million with a stable net interest margin of 3.42%, though elevated deposit costs continue to pressure margins and Fed rate cuts will take time to feed through.
  • Loan balances grew by $121.7 million year-to-date (over $70 million in Q3) driven by residential lending, and the pipeline of unfunded commitments remained robust at $1.04 billion.
  • Credit quality strengthened as nonperforming assets declined to $7.7 million (0.13% of assets) and a $1.2 million provision for credit losses was recorded amid solid reserve coverage.
  • Capital metrics improved with tangible common equity rising to 10.0%, shareholders’ equity up $40.3 million since year-end, and ongoing share repurchases alongside a $0.40 quarterly dividend.
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Earnings Conference Call
Great Southern Bancorp Q3 2024
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