Great Southern Bancorp Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 18, 2024

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Great Southern Bancorp Inc. First Quarter 20 24 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

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 Pinoza, Investor Relations. Please go ahead.

Speaker 1

Thank you, Marvin. Good afternoon, and thank you for joining us for our Q1 2024 earnings call. The purpose of this call is to discuss the company's results for the quarter ending March 31, 2024. 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 Q1 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 meeting over to Joe Turner.

Speaker 2

All right. Thanks, Kelly, and good afternoon, everybody. We appreciate you joining us today for our Q1 earnings call. I would characterize our Q1 performance as steady as we continue to operate in uncertain and challenging times. For the Q1, we earned $1.13 a share or $13,400,000 Key drivers of our performance included continued moderate increases in deposit costs.

Speaker 2

Of course, there continues to be significant deposit competition and an expected continuation of lower loan origination volume. Additionally, generally unchanged non interest expense compared to the year ago quarter, but substantially down from the 4th quarter were also parts of our Q1 performance. Rex will provide more color on our results in his presentation. The company's capital and liquidity positions continue to be strong. Total stockholders' equity was $565,200,000 as of March 31, 2024.

Speaker 2

That was a $6,700,000 decrease from the end of 2023, which was totally attributable to decreases in our mark to markets on swaps and available for sale securities. We also declared a $0.40 per share common dividend and repurchased 112,000 shares during the quarter at $51.44 average price. Overall, our loan portfolio continues to perform well, very diverse both by geography and by product type. As anticipated in the current operating environment, our total outstanding loan balances essentially were flat, just slightly down actually $3,400,000 At the end of March 2024, the pipeline of loan commitments and unfunded lines increased slightly to $1,200,000,000 and that included $680,000,000 of unfunded construction loans. Overall credit quality metrics remained strong during the quarter, although non performing assets did increase slightly.

Speaker 2

Our non performing asset ratio to total assets was 0.37 at the end of March compared to 0.20 at the end of the year. Nonperforming, that's an increase of $9,500,000 That was really attributable to 1 multifamily project. Since the end of the quarter, we have foreclosed that project. It's now in other real estate, and we don't anticipate any significant charge off from that asset. Additionally, subsequent to the end of the foreclosure, we have resolved $17,200,000 relationship that was in the potential problem loan relationship and that was resolved with no charge offs.

Speaker 2

Of course, for more information about our loan portfolio, I encourage you to look at our loan portfolio presentation that's on file with the SEC that has helpful information regarding our loan portfolio by type and geography. That concludes my prepared remarks. I'll turn the call over to Rex at this time. All right. Thank you, Joe.

Speaker 2

I'll start with net interest income and margin information on that. So net interest income for the Q1 of 2020 4 was $44,800,000 That compares to $53,200,000 for the Q1 of 2023. I'd say like several banks, many banks in the industry, we experienced overall higher deposit costs during the Q1 of 2024, primarily due to current market interest rates and, as Joe mentioned before, competitive pressures. While our deposit interest expense increased, the pace of that increase has moderated compared to the previous few quarters. The higher funding costs contributed to a decrease in net interest income approximately $8,400,000 lower in the Q1 of 2024 compared to the Q1 of 2020 3 and about 331,000 dollars lower compared to the Q4 of 2023.

Speaker 2

Higher funding costs in the Q1 were partially caused by a moderate amount time deposits with lower rates maturing and being replaced at the current market rates and due to mix of some deposits shifting from non interest bearing accounts to interest bearing products. We detailed our upcoming time deposit maturities over the next 12 months in our earnings release. And then based on the current market rates that we see in March early April, replacement rates for these maturing time deposits will likely be in the 4% to 4.5% range. Besides the higher funding costs on our deposits, net income net interest income was also negatively affected compared to the year ago quarter by the company's interest rate swaps, 2 of which began net settlements in May of 2023. During the Q1 of 2024 Q4 of 2023, these two interest rate swaps combined to reduce interest income by $2,800,000 in each of those two quarters.

Speaker 2

These swaps had no impact in quarters prior to the Q2 of 2023. Another interest rate swap contractually terminated on March 1, 2024, which reduced interest income by 1,900,000 dollars in the Q1 of 2024 compared to $2,200,000 reduction in the same period in 2023. So with this termination now during the Q1, there will be no further financial impact from that swap. Net interest margin in the Q1 of 2024 was 3.32 percent. That compared to 3.99% in the Q1 of 2023 and also compares to net interest margin of 3.30% in the Q4 of 2023.

Speaker 2

In comparing those two periods, the Q1 of 2024 and 2023, the average yield on loans increased 37 basis points, the yield on investment securities increased 14 basis points and the average yield on other interest earning assets, interest bearing cash basically increased 71 basis points. The margin contraction primarily resulted from increasing interest rates on all deposit types compared to a year ago as we discussed. Average rate on interest bearing demand and savings deposits, time deposits and brokerage deposits increased by 90 basis points, 186 basis points and 72 basis points respectively in the Q1 of 2020 4 compared to the Q1 of 2023. Just a couple of comments about liquidity and deposits. Our liquidity position remains strong, we think.

Speaker 2

We've got funding sources available to us of about $2,100,000,000 at the end of March with about $1,200,000,000 of that available from Home Loan Bank advances or borrowings that we can utilize if needed. We've also got a borrowing line at the Federal Reserve and additional cash on unpledged securities. At the end of March 2024, total deposits were nearly $4,800,000,000 During the 3 months ended March 31, 'twenty four, the company's total deposits increased 51.7 $1,000,000 Interest bearing checking balances increased almost $80,000,000 and non interest bearing checking balances decreased about $19,000,000 Time deposits generated through the company's banking center and corporate services networks decreased about $30,000,000 during the Q1 and total broker deposits increased $24,000,000 Couple of things on net sorry, on non interest income for the quarter. Compared to the Q1 last year, net non interest income decreased $1,100,000 and it was $6,800,000 at the Q1 this year. Couple of things that led to that, overdraft and insufficient fund fees were down $607,000 compared to the Q1 last year.

Speaker 2

The decrease is really just a continuation of what we've been seeing for a while now where customers are choosing to opt out of authorizing the payment of overdrafts in their account balances. And we just continue to see that as well as just the fact that we just overall, I think, we've seen a smaller utilization of overdrafts by our customers. 2nd thing is point of sale and ATM fees. Those fees decreased $518,000 compared to the prior year quarter. A lot of that decrease is related to transactions that are now being routed through channels that provide lower fees to us.

Speaker 2

We expect that's going to remain in place. We also have had probably a little bit slightly lower usage. I think generally in the Q1 as we have a little lower usage than perhaps in the rest of the year, point of sale and ATM cards I'm sorry, debit cards. And then lastly, other income decreased 400 and $65,000 compared to the prior year Q1. In the Q1 of this year, we recorded 404,000 dollars related to activity incentives for debit card usage.

Speaker 2

There are some incentive income that we did generate based on volumes in the year before Q1 that was almost $800,000 So there was about a $400,000 difference in that. Non interest expense actually decreased $41,000 both about $34,000,000 compared to the Q1 last year. Some changes that occurred within categories in our advertising and marketing expense, those fees decreased about $297,000 compared to the prior year quarter. We do have again with our debit card brand provider, we have some incentives for some qualifying expenditures that we get reimbursed for. That was about $423,000 in the Q1 this year.

Speaker 2

We mentioned it in the earnings release, just to point it out that that's an annual thing, it will be every quarter. And in the previous year Q1, that was a $321,000 reduction in marketing and advertising expenses. Legal audit and professional fees decreased about $256,000 from the prior year quarter to $1,700,000 We did have expenses related to legal training implementation costs for core system conversion. 2023 Q1 period that was $1,300,000 in the Q1 period. This year it was 929,000 dollars Salary employee benefits increased about $453,000 this Q1 versus last year first quarter just really normal annual merit increases in general operations.

Speaker 2

And then lastly, insurance expense increased $277,000 from the prior year quarter. That was really due to increases in FDIC deposit insurance rate that took effect during 2023 and the full impact of that was included in the Q1 of 2024. We Joe mentioned before, I think that total non interest expense decreased fairly significantly from the Q4 of 2023. And as we highlighted last quarter, there were some significant non recurring expenses that were recorded in that Q4 of 2023. The efficiency ratio for the Q1 this year was 66.68 percent.

Speaker 2

That compares to 56.42 percent in the Q1 of last year. Joe talked about credit quality before. I'll just mention some things about provision for credit losses. So during the Q1 of 'twenty four, we did record a provision expense of $500,000 on the outstanding loan portfolio portion that compared to a $1,500,000 provision expense during the Q1 last year. Also during the Q1 this year, we recorded a provision for losses on unfunded commitments of around $130,000 That compared to a negative provision of $826,000 for the 3 months ended March 31, 2023.

Speaker 2

So our unfunded commitment levels were about they decreased a lot during 2023. And so we were able to reduce some of the reserve we needed against that. They were fairly flat in the Q1, so not a significant change there Q1 of this year. Net charge offs in the Q1 were $83,000 so not a significant amount. And at the end of the Q1 this 2024, the allowance for credit losses as a percentage of total loans was 1.40%.

Speaker 2

And then lastly, I'll mention a little bit about income taxes. So for the 3 months ended March 31, 2024 and 2023, the company's effective tax rate was 19.1% 21.2%, respectively, so a little lower rate in the Q1 this year. The majority of what occurs with our tax rate being below the statutory federal rate is we do have utilization of certain investment tax credits and also some tax exempt investments and loans. And during 2024, we kind of look for the rest of this year to have effective tax rate, maybe combined federal and state maybe around the level of 18.5% to 20.5%. And really that's lower rate is primarily due to additional investment tax credit utilization that we're going to be able to do in 2024, so higher levels that we'll be able to incorporate in our taxes this year.

Speaker 2

So that concludes the prepared remarks that we have. So at this time, we'll entertain questions and let me ask our operator to once again remind the attendees how to queue in for questions.

Operator

Thank you. At this time, we'll conduct a question and answer Our first question comes from the line of Andrew Liesch of Piper Sandler. Your line is now open.

Speaker 3

Good afternoon. Hey, Rick. Rex, on the margin here, you got the 1 swap dropping off and the CD re pricing looks like it's pretty comparable to what's rolling off. So do you think we've seen the bottom of the margin here and there's more room for to move higher here in the Q2?

Speaker 2

Well, I mean, it's hard to predict that with total certainty. But the one thing that I will say too is we had 2 months inclusion of the negative income on that one swap that rolled off. We'll have 0 months of inclusion of that. So that for sure is going to increase our interest income from that perspective. Another $2,000,000 a quarter.

Speaker 2

Yes. Roughly so, yes. Yes. So, we do have a moderate amount of time deposits that are maturing. And like I said, I mean, we I think those average rates are probably north of 4% or somewhere thereabouts that are going to be maturing and we'll probably be replacing it somewhere in the 4% to 4.5 range.

Speaker 2

I'm not sure where it will fall in there exactly. So I mean, there could be some additional little bit of additional rate increase on that. The thing that is more of a wildcard really is kind of mix shift if there is more on the non time accounts. And so we don't I mean, we don't necessarily anticipate that we're going to be raising any rates on those products, but it just depends on how the balance is shift around if they move from a lower rate products to higher rate products or 0 rate products to interest rate products. So I'm kind of I'm not answering your question too directly, but I'm trying to kind of give you some of the pieces of how we look at it.

Speaker 3

That's really helpful. The

Speaker 2

other part of that, Andrew, is our loan portfolio. The fixed rate loan portfolio repricing. And I think there's some good disclosure about that and relatively recent disclosure about that in the annual report. Yes. So you would be able to look at that and that's the other piece of it.

Speaker 2

I mean, there does seem to be as we alluded to earlier, there does seem to be still be some with quantitative tightening, the deposit market is still pretty competitive.

Speaker 3

Got it. All right. That's really helpful. I'll check out

Speaker 2

as well.

Speaker 3

Then are you going to continue to have some of these non recurring items related to the core conversion? And then I guess like what sort of update can you provide on that? And what other expenses might come ahead of that?

Speaker 2

Really not much update other than what we provided in the press release, Andrew. And yes, until that's finally resolved, yes, we could continue to have expenses at this level.

Speaker 3

Got it. All right. Thanks for taking the question. All right.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Damon DelMonte of KBW. Your line is now open.

Speaker 4

Hey, good afternoon guys. Hope you guys are doing well today. I just wanted to follow-up on the line of question with expenses. Is it fair to kind of directionally point to something closer to the $35,000,000 level, Rex, given that the advertising benefit this quarter isn't repeated here in the next quarter?

Speaker 2

Yes, for sure that's not going to be repeated in the next quarter. And that was really the only thing that we called out in the Q1 of any size, I mean, there could be some little things here and there. I would say you can kind of use that as your guide from where you start from.

Speaker 3

Okay. All right.

Speaker 4

That's good. And then with respect to the outlook for loan growth, you commented last quarter that you expect things to be slower. This quarter pretty flat, slowed down a little bit. Do you think that's more indicative of what to expect for the remainder of the year? Or would you say there was some seasonality contributing to the slownessness here in the Q1 and we should expect to see some positive growth over the next quarter or 2?

Speaker 2

No, I don't think Damon that that's seasonal necessarily. I would say growth will continue to be sort of flattish.

Speaker 4

Okay. And is there any particular asset class that's seeing lower demand that's kind of driving this or is it kind of broad based across the portfolio?

Speaker 2

I think it's more broad based.

Speaker 4

Okay. So if the demand is down, are you seeing any signs of softening in those economies or is it just more of a demand function?

Speaker 2

I think it's more demand function. I think it's higher interest rate and people just aren't pulling the trigger on deposits. I mean, we don't see like much deterioration other than what you read a lot about like office and particularly high rise office, urban

Speaker 4

kind of

Speaker 2

office and we just don't have a lot of that.

Speaker 3

Got it.

Speaker 2

But I think the asset class are holding up pretty well. We had the multifamily project in Oklahoma that was a potential problem loan that we were paid off with no loss. So I think the asset classes from a credit standpoint are holding up pretty well. It's just that there's not a lot of new entrants into those markets. I think a lot of people probably too were expecting that by now that they could see the rates at least near term see, okay, rates are going to start coming down, but now with the Q1 that really changed the complexion I think people from where they thought they were in December to where they are now.

Speaker 2

We may be having higher rates for a while, so maybe we just hold off a little bit longer before we start putting project in place.

Speaker 4

Got it. Okay. Great. And then just lastly, Rex, could you just repeat what you had said about the tax rate? I missed what you were saying.

Speaker 4

I know that this quarter was 19.1%, but what was your commentary regarding the forward quarters?

Speaker 2

Yes. So we think it will be somewhere in the range of 18.5% to 20.5%. It will depend a little bit on our earnings overall, but we do have some additional investment tax credit utilization that's coming online here in 2024. So we think that will bring our tax rate down a little below 21 where it's kind of been somewhat in the past.

Speaker 4

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

Operator

Thank you. This concludes the question and answer session. I'd now like to turn it back to Joe Turner for closing remarks.

Speaker 2

All right. Thanks, Marvin, and thanks everybody for being on the call with us today. We will talk to you at the end of the Q2. Thank you.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Powered by Quartr

Key Takeaways

  • EPS of $1.13 with net interest margin compressing to 3.32% (down from 3.99% a year ago), driven by higher deposit funding costs and continued low loan origination volumes.
  • Strong capital and liquidity: shareholders’ equity of $565.2 M, approximately $2.1 B in available funding sources, a $0.40 common dividend declared, and 112,000 shares repurchased at an average of $51.44.
  • Loan balances were essentially flat (down $3.4 M), with a $1.2 B pipeline of unfunded commitments (including $680 M in construction loans), and a nonperforming asset ratio of 0.37% after foreclosing and resolving a multifamily project with no significant charge‐off.
  • Net non‐interest income fell on lower overdraft and ATM fees, while non‐interest expense held steady year-over-year and was substantially lower than Q4 2023 due to fewer one-time implementation costs.
  • Credit costs remained modest: provision for loan losses of $500 K, allowance at 1.40% of loans, net charge‐offs of $83 K, and an effective tax rate of 19.1%, with annual guidance of 18.5–20.5%.
AI Generated. May Contain Errors.
Earnings Conference Call
Great Southern Bancorp Q1 2024
00:00 / 00:00