Q3 2022 Great Southern Bancorp Inc Earnings Call

October 20, 2022

Good day, ladies and gentlemen, and thank you for standing by walking to the great Southern Bancorp incorporated third quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star.

One one on your telephone keypad at this time I would like to turn the conference over to MS. Kelly Polonius.

Ma'am please begin.

Thank you Howard.

Afternoon, and welcome the purpose of this call is to discuss the company's results for the quarter ending September 30th 2022, before we begin I need to remind you that during this call. We may make statements about future events and financial performance. Please do not place undue reliance on any forward looking statements.

Speak only as of the date they are made.

Please see our forward looking statements disclosure in our third quarter 2022 earnings release for more information.

Didn't and CEO , Joe Turner, and Chief Financial Officer, Rex Copeland are on the call with me today I will now turn the call over to Joe.

Thanks Kelly.

Good afternoon, everyone. We appreciate you joining us today for our third quarter earnings call. Our third quarter earnings continued to be strong continuing our momentum from the second quarter. We're focused on ensuring that our company is properly positioned especially in light of the changing interest rate environment that we're in.

As always we are concentrating on building lasting relationships with our customers in making decisions that are in the best interest.

All of our vigilant over the long term our great team of associates understands this and is working hard every day to fulfill this mission I'm really proud of our team.

As usual I'll provide some brief remarks about the company's performance and then turn the call over to Rex Copeland.

I'll go into more detail on our financial results then we'll open it up for questions.

In the third quarter of 2022, we earned $18 1 million or $1 46 per diluted common share compared to $24 million or $1 49 per diluted common share for the same period in 2021.

It was a decrease of $2 $3 million from the prior year quarter, but how we got there was significantly different in both quarters. So a.

A little bit more detail.

First of all in the end.

Third quarter of 2002, we earned $8 million more in net interest income than we did in the same quarter a year ago and this was even after <unk>.

Earnings at $1 $6 million in PPP fee accretion in 2021 quarter.

Another big driver the biggest driver really is the change between the quarters was the.

Change in provision expense, which was we had $3 $3 million and provision expense in this year's quarter versus a negative provision of $2 $4 million in the year ago quarter as Bill explained.

$5 million to $7 million there.

Noninterest income was about $1 $8 million lower than the third quarter of this year, mainly as a result of lower gain on.

Loan sales gain on loans.

Operating expenses were $3 $4 million higher.

Third quarter this year than they were in the third quarter last year about $1 $1 million of that.

Related to professional fees regarding our.

Conversion that we have data that is servicing conversion that we've talked about the last couple of quarters. We also had 300 almost $400000 of professional.

Professional fees related to our swap that we entered into in the third quarter of 2000 exceeded our salaries salaries and employee benefits increased about $1 $1 million.

In the third quarter of 2002 over the third quarter of 'twenty, one about 300000 of the increase related to the loan production offices. We opened so about 800000 is related to.

Maybe some additional staffing as well as probably higher comp levels, given the kind of employment environment.

We are in so if we look at at reported pre tax pre provision earnings.

Our pretax pre provision earnings were $26 $1 million in Q3 of 22 versus 23 4 million in Q3 of 'twenty. One so we were up $2 $7 million.

This was worth about 9% lower share count I think our fully diluted share.

The 21 quarter were $13 6 million versus $12 4 million.

In this year's quarter, our earnings ratios were strong 13% return on equity 130 return on the asset I'm talking about this quarter now obviously, our margin was 396% versus 336%.

A year in the year ago quarter, and three points to seven 8% and the <unk>.

Second quarter of 2002.

The Federal reserve continues to signal that there will be additional rate increases.

Maybe 75 basis points coming soon maybe another 50 basis points after that maybe another quarter I think as with as is typical in rate increase cycle, probably most of the benefit we still consider ourselves to be maybe moderately maybe slightly to moderately asset sensitive.

So we would anticipate anticipate that we might see some.

Benefits to our margin from continue.

Continued increases, but I think.

Definitely the lion's share of the benefit that.

We will see from we will see from the.

Rate increases has already appeared in our market.

As far as loans go during the quarter loan production and activity in our markets continued to be strong in all our markets, including our newest markets.

Our net loans have grown about $490 million.

Since the beginning of the year, our pipeline has also grown over $400 million.

At the beginning of the year, so a very strong loan origination market for us.

You'd probably expect things to slow as interest rates are coming up cap rates are coming up.

So we expect.

The loan origination activity too.

Slow we're in a pretty good position, though because we have $1 $4 billion.

Really $2 billion in unfunded commitments of $1 4 billion.

Construction commitments that will continue to fund probably over the next 15 months or so.

Our asset quality, our credit quality metrics continue to be a historically good level for us nonperforming assets were $3 4 million at the end of the quarter, which is a decrease of $2 6 million.

From the end of the year.

<unk>.

Point out was 6%.

Asset.

Yes, very low or.

Levels of past dues that our charge offs are also at very low levels.

Great credit metrics.

Capital, we began the year in an extremely strong capital position and I think continue to be in a very strong capital position.

Our.

Tangible common equity to tangible asset ratio was eight 8%.

So down a little bit from the year from the end of the year.

But still very strong in the third quarter.

<unk> declared a <unk> 40 cents.

Per share common dividend and through the first nine months we've declared.

Dollars 16 in dividends.

<unk>.

We've purchased approximately 1 million shares of stock this year of $59 28.

And at September 32022, we have 222000.

Sure still available in our stock repurchase authorization.

That concludes my prepared remark.

Well I might just go for it.

Capital lease that we did are.

TCE the dollar amount is down pretty significantly from the beginning of the year, we started with $616 million.

<unk> capital.

January one of two.

2022.

We basically.

Spent about.

As much.

In buying stock back as we.

Pat and net income so our capital has reduced by the amount of our dividend, which is about <unk> 14 or $10 million $14 million.

And then there has been a pretty significant change about $91 million.

The change in our <unk>.

Mark to market on our on our swaps and our available for sale portfolio. Our loan portfolio. The portfolio is largely very short so the securities we buy in the swaps we enter into are.

Supposed to be longer to balance our portfolio, so that our company will be able to perform.

Better as rates decline and we get into the lower interest rate environment. So that's the purpose of that.

Now I'll turn it over to our CFO Ray Douglas.

Thank you Joe.

I've mentioned a few of these things already but I'll just try to add a little more information on some things I'll start with looking at net interest income and margin and as Joe said.

Our net interest income for this quarter increased about $8 million at $52 9 million compared to $44 $9 million in the third quarter last year.

Net interest income in the second quarter of 2022 was $48 8 million and then Joe already mentioned that we had $1 $6 million or accretion of deferred fees for PPP loans in the 2021 third quarter numbers.

Net interest margin again with 396% for the third quarter that compared as we said 233, 6%.

In the third quarter last year. So we had a significant increase from where we were a year ago.

That was really a result of obviously interest rates, becoming being a lot higher than they were but also.

We've said and you've seen our.

Loan portfolio has grown fairly significantly from a year ago as well as our investment securities, where we put some funds to work so.

Two things are <unk>.

Happening right now in increasing our net interest income.

The average yield on loans increased about 44 basis points from the previous year quarter, and our cost of deposits was up 23 basis points.

On the quarter a year ago.

And as I mentioned.

We've seen.

The cash and cash equivalents that we had some excess liquidity, we utilize that to put it.

Into loans and investments.

Joe mentioned I think before and we've said before.

We're still.

Looking at would be generally positive for us in a rising interest rate environment.

We'll continue to monitor.

Where we are in that position they like Joe said, we've tried to do some things.

To help <unk>.

<unk> mitigate the downside risk of win rates turnaround and start going back down. So we do take that very very seriously look at it very strongly all the time trying to make sure. We're getting the best we can the right balance there.

During the nine months, we talked about our.

Our asset mix has shifted.

We've talked about that we've also had here during the year our liability mix has shifted somewhat.

So.

We were.

More float we had more <unk>.

Non time accounts at December 31, we were still had a lot of the deposits that came through through the pandemic and we've seen throughout 2022 and that kind of a mix change a little bit.

We've seen some of those excess funds flow out as we knew they would with a few of our customers that we do have some kind of upfront funds. There that we can do that they would.

Time.

Draw those funds out.

We've seen some of that we've also seen some of our.

Small business.

<unk> and some of our corporate checking balances come down a bit as they have used those funds for their business operations in 2022.

So.

The summation of that is our <unk>.

Transaction type accounts that decreased about $212 million from December 31, while retail time accounts or Cds have increased about $105 million debt and then we've added some broker deposits those have increased about $290 million.

Throughout the year since since the beginning of 2022.

So a little bit of shift in the liabilities that we have from time to time, we do utilize.

Home loan bank advances as well so we've got a variety of sources that we do.

And we try to do that and used very tight in terms of some of those are going to be very short.

Daily repricing type funding, it's maybe a little bit longer.

There are a couple of years or something like that tight funding. So we do a variety of things to try to.

Manage the balance sheet through that side as well.

Noninterest income I'll talk about for a minute.

That decreased about $1 8 million to $88 million, even when compared to last year's third quarter again, as Joe said before.

And I'm sure you all are seeing everywhere.

Loan originations fixed rate loans, we typically sell in the secondary market. Those originations are much lower this year than they were in the past.

So the profit on those sales.

Has slowed considerably.

We are making some loans that are hybrid arm type so fixed for a period of time, and then become variable rate and those typically we're keeping on our balance sheet. So we've seen some increase in our one to four family portfolio as well.

Noninterest expense talk about that for just a little bit and again, we've touched on some of these already but for the quarter, we our noninterest expense increased about $3 $5 million.

Compared to the year ago quarter.

<unk> expense was $34 8 million.

This year's quarter.

We talked about salary employee benefits information already.

As Joe went through some of those things.

The.

Some of the overall increases that we as Kevin mentioned earlier in more general terms again, we have merit increases that like Joe said too.

We are.

Pain, some existing employees with bigger increases maybe than we have in the in the past and also then adding people and replacing people and so there are some costs that go along with all of that.

Mentioned the professional fees that we had the fiserv conversion system conversion information that we've already talked about in the past.

And then also.

Swaps that we put on in the third quarter. Some upfront fees, we had to pay on that and then the other operating expenses that category just kind of miscellaneous expenses was up about $570000 from the prior year quarter.

We mentioned in our earnings release that that related primarily to.

Some deposit account fraud losses.

Some additional business development and some additional charitable contributions that we made in the third quarter that are sort of one off type things at least with the contributions.

The efficiency ratio.

For the third quarter. This year was 57, 9% compared to 57, 7% in the same quarter last year.

And the increase.

I'm sorry, the decreasing that ratio was primarily because of increased income mostly net interest income obviously.

Mainly offset or partially offset by the increased noninterest expenses.

Provision for credit losses go really already talked about that.

The difference that we had this year, where we had provision expense versus a year ago quarter, where we had negative provision expense.

In the quarter.

Net charge offs again as Joe said, our credit has been very good we had net charge offs in the three months ended September 30 of 297000.

A lot of that is related to overdrafts, we've not.

Had a couple of small.

<unk>.

Commercial charge offs in there, but the vast majority of that is is that related to overdrafts.

And then finally I'll wrap up with talking about income taxes, our effective tax rate this quarter was 25% compared to 29%.

Arago quarter.

We continue to <unk>.

Utilized some tax exempt.

Securities and loans and also.

Low income housing tax credits and things of that nature to help reduce some of our tax liability through through those means.

Continue to do that we expect we will continue to do that.

Generally the same kind of levels, probably and so we think that our effective tax rate in the upcoming future periods is going to be somewhere in the 25% to 21, 5%.

<unk> range and that will vary a little bit depending on.

The overall level of income.

And the income as we have to allocate it between the various states where we operate so there are some different things that come into play depending on kind of where some of the incumbents is sourced from but we think that that generally is going to be in a range where it will be.

So that concludes the remarks I had prepared and at this time I think we can entertain questions and let me remind or go back to our operator to remind you all how to Q&A for those questions.

Ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.

Again to ask a question press Star one one please standby, while we compile the Q&A roster.

Our first question or comment comes from the line of.

Andrew Liesch from Piper Sandler Company Mr. <unk> Your line is open.

Thank you good afternoon, everyone.

Great question.

On the margin here.

Diving into some of the deposit beta question here, you that maybe theres a little bit more expansion ahead, but at what point do you think how many more.

That increase in that.

Do we need do you think that will finally see maybe some stabilization in the margin with some catch up on the funding side.

I'll start on that one I guess I mean I think.

Like we were saying I think we will see a little bit.

We did see benefit on the loan side for sure.

And then it becomes a matter of how we have to fund.

<unk>.

The existing balance sheet at any growth to the balance sheet and how much the mix continues to change towards time deposits. So I mean, assuming that that we still continue to see a little bit more of that shift out of non time deposits, which I'm not sure we will but.

I would think that to fund growth in particular.

It's going to be probably more it.

It would be more time deposit type products as opposed to non time some of that we can structure to be floating rate. So it would just be like.

More like fed funds type floating.

Some of it may be.

A little more term, where we'll have to pay maybe a little bit more of a premium rate for something like that at least initially.

So.

I think we're still going to see maybe some benefit but I don't think there is going to I mean, when you think back the first couple of rate hikes were small and we didn't really move our.

Cost of funds much at all.

First 75 honestly, probably didn't move very much in the second 75, we started to have to move rates and so we got the first 150 basis points or so.

For free.

Then after that just marginally it just gifts.

Probably a higher paid as you move forward.

I think there is probably.

Substantially more competition for deposits than now than we probably anticipated there would be a year ago I think we all thought a year ago.

The industry was pretty awash with liquidity and there wouldn't be much competition, but I think there is you see a loss.

<unk>.

Uh huh.

Hi, CD rate offers around so there is there.

<unk> and.

Deposits are seeing hungry for.

Higher rate for obvious reasons.

And Theres, probably there probably is a lot of liquidity, Washington around when Youre talking about the largest banks.

But when youre talking about community banks, not so manav as much problem.

Right right, Alright, Thats really helpful color. Thanks, so much for that.

And then just on the provision that you guys recorded in the quarter I guess, how should we look at that.

Balancing loan growth or any change in the <unk> model or your own conservatism.

Curious like water from the puts and takes that went into that $3 $3 million or so.

Well I think I mean, I'll start and then Rex and then Rick can correct me.

Yes.

The life of seasonal model works at least in so far as we're concerned.

The first step is to make an arithmetic calculation and this is based on historical levels.

Charge off an arithmetic calculation of what your lifetime.

Losses should be on your loan portfolio, and frankly, Andrew for us and probably for a lot of that both in the banking industry that number keeps going down that part of it.

As we are just adding quarter after quarter.

Effectively zero charge offs.

That's a good thing, but that that's taking that number down but we're also looking out there and we're seeing a fed that is sort of indicating and.

We used Moody's Moody's is thinking.

And others I've heard others say, we're probably headed for a recession.

So I guess as you see increases.

And our reserve level I guess it would be more.

And aligned with us trying to.

<unk>.

The worst economy.

And then anything else I mean, it's definitely it's obviously not anything having to do with our portfolio I mean, we keep having quarter after quarter of low or no loan charge offs. We had I think about 300000 of charge offs. This quarter, but I think most of that was on.

Deposits.

<unk> capsules.

Thanks.

The loan portfolio strong yeah, we're just trying to.

We're trying to as best we can to.

<unk>.

Estimated what losses could be if the economy turns down a little bit and there is part of it to growth because we've got we've got growth on the balance sheet of the funded portion, but we also have growth in the unfunded portion or have been so far this year and so that that liability has increased fairly substantially.

Julie as well so.

To the extent that.

Either the on balance sheet or off balance sheet loans and commitments continue to grow I mean, I think we're going to have to continue to fund our reserves for that growth.

So that.

It's a combination of both but certainly as you see us.

Us grow.

Those line items will have to probably provide for that now we have a situation where our.

Where we weren't originating a lot of new deal but.

Loans were moving from unfunded to funded.

That's not really going to result in much increase in provision expense because.

Essentially you're.

Our allowance for unfunded commitments will probably drop so youll have a credit on that line and Youll have a debit on your provision for allowance.

Allowance for funds funded.

Yes that could happen.

Right right alright.

That's helpful color.

I appreciate it both cover that cover the question. Thanks, so much.

Alright, Thank you Andrew.

Thank you our next question or comment comes from the line of.

Damon Delmonte from <unk> standby Mr. Delmonte Your line is open.

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

Dave just a question on the.

Hi, a question on the deposit growth this quarter.

I don't think you guys breakout the.

The composition of the end of period basis, So could you just.

You do on the average side, but could you just talk a little bit about.

What the rough <unk>.

I'll start on the end of period basis, you referenced an increase in Cds and brokered Cds can you just kind of wondering how much of the growth was driven by that.

Yes, I mean, I can give you that by the end of September .

Balanced information and we will have it obviously in our 10-Q filing but I can break that out a little bit so the total of.

Interest bearing and noninterest bearing checking is about $3 $4 million to 1 billion excuse me.

The total of.

Kind of what we call retail Cds is about nine.

At $1 billion.

And the brokered total combination of various things that fall under the brokered umbrella is about $360 million.

Okay.

Alright thats helpful. Thanks.

And then kind of just on the expense outlook.

I know you guys have you spoke last quarter about it.

This quarter again about the professional fees and that's going to be sticking around for a little while but as we kind of think about.

The base for the next three or four quarters do you think it kind of trends up a little higher from this.

Like the $34 $5 million range, when you exclude the swap fees.

Well I mean that one one or 2 million of the systems, that's going to be in there until the third quarter next year, So that's going to stay.

The other thing that we that we mentioned.

We had about 300000.

When you compare Q3 to Q2, we had about 300000.

Higher.

Occupancy expense and about half of that or maybe a little more than half 60% of it related to just iron and utility bills.

So that's going to bounce around a little bit compensation expense Q3 to Q2, if you eliminate the special bonus we paid in Q2 compensation expense was up about about a half a million dollars.

In the third quarter and probably I.

I mean, I think I think all of you know that.

There is this fab 91 concept, where we can defer origination costs compensation related to origination of loans and that that deferral was about 300000 higher in the second quarter than it was in the third quarter.

So yes that was 300000 of the $500000 increase in compensation a little bit of it I think we had.

Just one quarter of the Charlotte <unk> being open so that was probably another 50000 out of it.

Sure.

The 600 that we had 600000 higher.

Other expense.

And that was we had a $150000 donation and St. Louis.

It is not really a recurring type thing we had some higher levels of fraud loss, which we've been seeing a little bit higher levels of prop off I don't know if it's because people are hurting or exactly what the situation is but we've been seeing higher levels of that.

So.

I do think on the compensation line.

Yes.

The employment market continues to be high we are in a environment, where there is 7% to 8% inflation. So you are going to see some growth in comp costs.

Like as you say if you if you strip out the.

The things that we would say our for sure ultimately nonrecurring the $34 six or whatever we were at is probably more like.

33, and then the other items with the occupancy costs and other expenses.

Just kind of.

They kind of bounce around a little bit from quarter to quarter.

And then David you said looking out a few quarters. So we get to the first quarter of.

Next year, I mean, a lot of I mean, most of our salaried employees get their annual adjustments in January so there'll be there'll be some adjustments there the non salaried here throughout the year, but yes, it's salary folks are going to be in that first quarter number so theres going to be some level of increase there.

Correspond.

Got it okay. That's helpful. I appreciate that color.

And then I guess, just lastly on loan growth.

It sounds like you have.

Relatively healthy pipelines you have a bunch of.

Closed, but unfunded commitments that are closed, but unfunded yet so that's going to be a good source for growth.

But also it sounds like you guys are.

Shying away from the growing reality that we could be kind of dipping into a more meaningful recession later on in 'twenty. Three so as you kind of like blend all that stuff together.

Do you still think you can.

<unk> kind of mid single digit growth for the next few quarters or do you think it kind of slows down quicker than that.

Yes, I mean, we know.

We don't really give guidance as to what our loan growth is going to be but.

I mean as I.

Look out David I do think I do think originations.

New.

Loans, particularly particularly on the commercial side will slow down and I think Thats, a result of us being a tougher economy and we deal with really good customers and I think they see the same thing.

That $1 billion for of construction commitments that will fund over the next 15 months or so.

<unk> million dollars a month.

A bit of it has to do with ore.

It has had to do with lower levels of payoffs and I think.

Think that's in the environment, that's going to stick around for a while.

With the longer term interest rates being up.

We were really getting paid off either from our customer putting a longer term perm mortgage on a project.

Project or selling the project and that's still going to happen.

It may not happen as frequently era or as quickly as it did before.

Those things could come together and result in loan growth for us.

Got it okay.

That's very helpful. That's all that I had thank you.

Thanks Damon.

Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone again that is star one one.

Standby. Our next question or comment comes from the line of John Rogers from Janney. Mr. Roberts. Your line is open.

Hey, good afternoon everybody.

John and Joe.

I guess, Joe maybe just a question for you on <unk> lending are there any areas or markets that you are maybe starting to.

Get more cautious on some sort of pullback Simpson.

As far as loan types or geographically.

I guess book.

I don't think geographically we're necessarily.

Pulling back any more from.

Any market than we are from the others I mean, I think we are equally conservative across our footprint.

As far as loan types.

I think.

Office continues to be something that you would be.

Worried about.

Possibly industrial warehouse that sort of thing you are starting to see reports that there may be some overbuilding in those areas.

So those would be maybe two product types, we might be a little more conservative in the geographically I think we're equally open or or maybe better said equally conservative in all of our markets.

Okay makes sense and then just one other question on the buyback you lever a little bit over 200000 shares would you expect to complete that or it sounds like maybe you're getting a little bit more cautious on capital just given the current environment.

Yes.

<unk>.

John Yes, I think at some point, we will complete it.

I think our buyback will slowdown from what you've seen.

We repurchased about 1 million shares through the first nine months I don't think we'll keep going at that kind of a cliff.

We'll probably we may from time to time feedback in the market.

It's going to be it's going to be a slower go.

On buyback shares.

Okay makes sense, thanks, guys have a good day.

Thanks, John .

Thank you.

Im showing no additional questions in the queue at this time I would like to turn the conference back over to Mr. Turner for any closing remarks.

No closing remarks, we appreciate everybody joining us today, and we will look forward to.

Talking to you in January thank you.

<unk>.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Good day, ladies and gentlemen, and thank you for standing by and welcome to the Great Southern Bancorp incorporated third quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one one on your telephone keypad at this time I would like to turn the conference over to MS. Kelly <unk>.

Ma'am please begin.

Thank you Howard.

Afternoon, and welcome the purpose of this call is to discuss the company's results for the quarter ending September 32022, before we begin I need to remind you that during this call. We may make statements about future events and financial performance. Please do not place undue reliance on any forward looking statements.

Which speak only as of the date there may.

Please see our forward looking statements disclosure in our third quarter 2022 earnings release for more information.

<unk> CEO , Joe Turner, and Chief Financial Officer, Rex Copeland are on the call with me today I will now turn the call over to Joe.

Thanks, Kelly and good afternoon, everyone. We appreciate you joining us today for our third quarter earnings call. Our third quarter earnings continued to be strong continuing our momentum from the second quarter. We're focused on ensuring that our company is properly positioned especially in light of the changing interest rate.

Environment that we're in.

As always we are concentrating on building lasting relationships with our customers in making decisions that are in the best interest of.

All of our constituents over the long term our great team of associates understands this and is working hard every day to fulfill this mission I'm really proud of our team.

As usual I'll provide some brief remarks about the company's performance and then turn the call over to Rex Copeland, who.

It will go into more detail on our financial results. Then we'll open it up for questions and the third quarter of 2022, we earned $18 1 million or $1 46 per diluted common share compared to $24 million or $1 49 per diluted common share for the same period in 2021.

It was a decrease of $2 $3 million from the prior year quarter by how we got there was significantly different in both quarters are they want to go into a little bit more detail.

First of all in the end.

Third quarter of 2002, we earned $8 million more in net interest income than we did in the same quarter a year ago and this was even after.

Earning $1 $6 million in PPP fee accretion and the 2021 quarter.

Another big driver the biggest driver really of the change between the quarters was the <unk>.

And your provision expense, which was we had $3 $3 million and provision expense in this year's quarter versus a negative provision of $2 $4 million in the year ago quarter, So a swing of $5 $7 million there.

Non interest income was about $1 $8 million lower than the third quarter of this year, mainly as a result of lower gain on.

Loan sales gain on loans.

Operating expenses were $3 $4 million higher.

In the third quarter this year than they were in the third quarter last year about $1 $1 million of that related to professional fees regarding our.

Conversion that we have data that is servicing conversion that we've talked about.

Last couple of quarters. We also had 300 almost $400000 of professional fees related to a swap that we entered into in the third quarter of 2002, our salaries in salary and employee benefits increased about $1 $1 million.

In the third quarter 'twenty two over the third quarter of 'twenty, one about 300000 of that increase related to the loan production offices, we opened.

About 800000 is related to.

Maybe some additional staffing as well as probably higher comp levels, given the kind of employment environment.

We are in so we look at at reported pre tax pre provision earnings.

Our pretax pre provision earnings.

Were $26 $1 million in Q3 of 22 versus $23 4 million in Q3 of 'twenty. One so we were up $2 $7 million.

This was with a about a 9% lower share I think our fully diluted shares in the 'twenty, one quarter were $13 6 million versus $12 4 million.

In this year's quarter, our earnings ratios were strong 13% return on equity 130 return on the asset I'm talking about this quarter now obviously, our margin was 396% versus 336%.

A year and the year ago quarter, and 378% and the <unk>.

Second quarter of 2002.

The Federal reserve continues to signal that there will be additional rate increases.

So we would anticipate anticipate that we might see some.

Benefits to our margin from continue.

Continued increases, but I think.

Definitely the lion's share of the benefit that.

We will see from we will see from the.

Rate increases has already appeared in our margin.

As far as loans go during the quarter loan production and activity in our markets continued to be strong in all our markets, including our newest markets.

Our net loans have grown about $490 million.

Since the beginning of the year, our pipeline has also grown over $400 million.

The beginning of the year, but still a very strong loan origination market for us.

We do probably expect things to slow as interest rates are coming up cap rates are coming up.

So we expect.

The loan origination activity to.

Slow we're in a pretty good position, though because we have $1 $4 billion or.

Really $2 billion in unfunded commitments $1 4 billion.

Construction commitment that we'll continue to fund probably over the next 15 months or so.

Our asset quality, our credit quality metrics continue to be a historically good level for us nonperforming assets were $3 4 million at the end of the quarter, which is a decrease of $2 6 million from the end of the year.

Sure.

Point out was 6%.

Total asset.

Very low or.

Levels of past dues that our charge offs are also at very low levels.

Great credit metrics.

Capital, we began the year in an extremely strong capital position and I think continue to be in a very strong capital position.

<unk>.

Our.

Tangible common equity to tangible asset ratio was eight 8% so down a little bit from the year from the end of the year.

But still very strong in the third quarter.

<unk> declared a <unk> 40 said.

Per share common dividend and through the first nine months we've declared.

Dollars 16 in dividends.

<unk>.

We purchased approximately 1 million shares of stock this year at $59 28.

And at September 32022, we have 222000.

Sure still available in our stock repurchase authorization.

That concludes my prepared remark.

Well I might just go through.

Capital lease that we did are.

TCE the dollar amount is down pretty significantly from the beginning of the year, we started with $616 million.

<unk> capital.

January one.

2022.

<unk>.

Spent about.

As much in <unk>.

Buying stock back as we've.

Pat and net income so our capital has reduced by the amount of our dividend, which is about <unk> 14 or $10 million of $14 million.

And then there has been a pretty significant change about $91 million I think change in our.

Mark to market on our on our swaps and our available for sale portfolio. Our loan portfolio portfolio is largely very short so the securities we buy and the swap we enter into are.

So both to be longer to balance our portfolio. So that our company will be able to perform.

Better as rates decline and we get into the lower interest rate environment. So that's the purpose of that.

Now I'll turn it over to our CFO risk carefully.

Alright, Thank you Joe.

Joe had mentioned a few of these things already but I'll just try to add a little more information on some things I'll start with looking at net interest income and margin as Joe said.

Our net interest income for this quarter increased about $8 million at $52 9 million compared to $44 9 million in the third quarter last year net.

Net interest income in the second quarter of 2022 was $48 8 million.

And then Joe already mentioned that we had $1 $6 million or accretion of deferred fees for PPP loans in the 2021 third quarter numbers.

Net interest margin again with 396%.

For the third quarter compared as we said 233, 6%.

In the third quarter last year. So we had a significant increase from where you were a year ago.

That was really <unk>.

<unk>, obviously interest rates, becoming being a lot higher than they were but also.

We've said and you've seen our.

Loan portfolio has grown fairly significantly from a year ago as well as our investment securities, where we put some funds to work so.

Those two things are.

Happening right now in increasing our net interest income.

The average yield on loans increased about 44 basis points from the previous year quarter, and our cost of deposits was up 43 basis points from the quarter a year ago.

And as I mentioned.

No.

We've seen.

The cash and cash equivalents that we had some excess liquidity, we utilize that to put it.

Into loans and investments.

Joe mentioned I think before and we've said before.

We're still.

Looking at would be generally positive for us in a rising interest rate environment.

We will continue to.

Monitor.

Where we are in that position they like Joe said we.

Try to do some things.

To help.

Mitigate the downside risk of win rates turnaround and start going back down. So we do take that very very seriously look at it very strongly all the time trying to make sure. We're getting the best we can the right balance there.

Yeah.

During the nine months.

Talk about our asset mix has shifted.

We've talked about that we've also had here during the year our liability mix has shifted somewhat.

No.

We were.

More we had more <unk>.

Non time accounts at December 31, we were still had a lot of the deposits that came through through the pandemic and we've seen throughout 2022 and that kind of a mix change a little bit.

We've seen some of those excess funds flow out as we knew they would with few of our customers that we do have some kind of upfront funds. There that we can do that they would.

Time.

Draw those funds out.

We've seen some of that we've also seen some of our.

Small business.

Checking and some of our corporate checking balances come down a bit as they've use those funds for their business operations in 2022.

So.

The summation of that is our <unk>.

Throughout the year since since the beginning of 2022.

So a little bit of shift in the liabilities that we have from time to time, we do utilize.

Home loan bank advances as well so we've got a variety of sources that we do.

<unk>.

We try to do that and used varying types in terms of some of those are going to be very short.

Daily repricing type funding and some may be a little bit longer.

A couple of years or something like that type funding. So we do a variety of things to try to.

Manage the balance sheet through that side as well.

Noninterest income I'll talk about for a minute.

That decreased about $1 8 million to $88 million, even when compared to last year's third quarter.

And as Joe said before.

And I'm sure you all are seeing everywhere.

Loan originations fixed rate levels, we typically sell into the secondary market. Those originations are much lower this year than they were in the past.

So the profit on those sales.

Slowed considerably.

We are making some loans that are hybrid arm type so fixed for a period of time, and then become variable rate and those typically we're keeping it on our balance sheet. So we've seen some increase in our one to four family portfolio as well.

Noninterest expense talk about that for just a little bit and again, we touched on some of these already but for the quarter, we our noninterest expense increased about $3 $5 million.

Compared to the year ago quarter.

<unk> expense was $34 8 million.

This year's quarter.

We talked about salary employee benefits information already.

As Joe went through some of those things.

The.

Some of the overall increases that we as Kelly mentioned earlier in more general terms again, we have merit increases that like Joe said too.

We are.

Pain, some existing employees with bigger increases maybe than we have in the in the past and also they are adding people and replacing people and so there is some costs that go along with all of that.

Mentioned the professional fees that we had the fiserv conversion system conversion information that we've already talked about in the past.

And then also the swaps that we put on in the third quarter. Some upfront fees, we had to pay on that.

And then the other operating expenses that category, just kind of miscellaneous expenses was up about $570000 from the prior year quarter.

We mentioned in our earnings release that that related primarily to.

Deposit account fraud losses.

Some additional business development.

Some additional charitable contributions that we made in the third quarter that are sort of one off type things at least with the contributions.

The efficiency ratio for the third quarter. This year was 57, 9% compared to 57, 7% in the same quarter last year.

And the increased.

Im sorry, the decreasing that ratio was primarily because of increased income mostly net interest income obviously.

Mainly offset or partially offset by the increased noninterest expenses.

Provision for credit losses, Joe really already talked about that.

The difference that we had this year, where we had provision expense versus a year ago quarter.

We had negative provision expense.

In the quarter.

Net charge offs again as Joe said, our credit has been very good that we had net charge offs in the three months ended September 30 of 297000.

A lot of that is related to overdrafts, we've not.

Had a couple of small.

<unk>.

Commercial charge offs in there, but the vast majority of that is is related to overdrafts.

And then finally I'll wrap up with talking about income taxes, our effective tax rate this quarter was 25% compared to 29%.

Our ago quarter.

We continue to.

Utilize the tax exempt.

Securities and loans and also.

Low income housing tax credits and things of that nature too.

<unk> reduced some of our tax liability through through those means.

We continue to do that we expect we will continue to do that.

Generally the same kind of levels, probably and so we think that our effective tax rate in the upcoming future periods is going to be somewhere in the 25% to 21 five.

<unk> percent range and that will vary a little bit depending on.

The overall level of income.

So that concludes the remarks I had prepared and at this time I think we can entertain questions. Let me remind or go back to our operator to remind you all have the Q&A for those questions.

Ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.

Again to ask a question press Star one one please standby, while we compile the Q&A roster.

Our first question or comment comes from the line of.

Andrew Liesch from Piper Sandler Company Mr. Weisz Your line is open.

Thank you good luck.

Everyone.

Great question.

On the margin here.

Diving into some of the deposit beta question here, you that maybe theres a little bit more expansion ahead, but at what point do you think how many more.

Fed increases.

Or do we need do you think that will finally see maybe some stabilization in the margin with some catch up on the funding side.

I'll start on that one I guess.

Thank you.

You were saying I think we will see a little bit.

We're going to see benefit on the loan side for sure.

And and then then it becomes a matter of how we have to fund.

The existing balance sheet at any growth to the balance sheet.

And how much the mix continues to change toward time deposits. So I mean, assuming that that we still continue to be a little bit more of that shift out of non time deposits, which I'm not sure we will but.

I would think that to fund growth in particular.

It's going to be probably more.

More time deposit type products as opposed to non time some of that we construct here to be floating rate. So it would just be like.

More like fed funds type floating.

Some of it may be.

A little more term, where we'll have to pay maybe a little bit more of a premium rate for something like that at least initially.

So.

I think we're still going to see maybe some benefit but I don't think theres going to be I mean, when you think back. The first couple of rate hikes were small and we didn't really move our.

Cost of funds much at all.

First 75 honestly, probably didn't move very much in the second 75, we started to have to move rates and so we got the first 150 basis points or so.

For free.

Then after that just marginally it just gets.

Probably a higher paid as you may have.

I think there is probably.

Substantially more competition for deposits than now than we probably anticipated there would be a year ago I think we all thought a year ago.

The industry was pretty awash with liquidity and there wouldn't be much competition, but I think there is you see a loss.

<unk>.

Hi, CD rate offers around so there's and deposits are seeing hungry for.

Higher rate for obvious reasons.

There is probably there probably is a lot of liquidity, Washington around when you were talking about the largest banks, but when youre talking about community banks, not so manav as much probably.

Right right, Alright, Thats really helpful color. Thanks, so much for that.

And then just on the provision that you guys recorded in the quarter I guess, how should we look at that.

Balancing loan growth or any change in the see some model or your own conservatism.

Here, it's like what are some of the puts and takes that went into that $3 $3 million or so.

Well I think I'll start and then Rex and then Rex correctly.

Yes.

But seasonal model works.

And so far as we're concerned is.

The first step is to make it a risk <unk> calculation and this is based on historical levels.

Charge offs and arithmetic.

Calculation of what your lifetime.

Losses should be on your loan portfolio, and frankly, Andrew for us and probably for a lot of that both in the banking industry that number keeps going down that part of it.

We are just adding quarter after quarter.

Effectively zero charge offs.

That's a good thing, but that that's taking that number down but we're also looking out there and we're seeing a fed that is sort of indicating and.

We used Moody's Moody's is thinking and others I've heard others say, we're probably headed for a recession.

So I guess as you.

<unk> increases.

And our reserve level I guess it would be more.

And aligned with us trying to prepare for.

The worst economy.

Than anything else I mean, it's definitely it's obviously not anything having to do with our portfolio I mean, we keep having quarter after quarter.

Low or no longer charge offs, we had I think about 300000 of charge offs. This quarter, but I think most of that was on <unk>.

Deposits checking accounts.

So.

The loan portfolio strong yeah, we're just trying to yes.

We're trying as best we can do.

Estimate what losses could be if the economy turns down a little bit.

And there is part of it to the growth because we've got we've got growth on the balance sheet of the funded portion of it but we also have growth in the unfunded portion or have been so far this year and so that that liability has increased fairly substantially as well so.

To the extent that.

Either the on balance sheet or off balance sheet.

Loans and commitments continue to grow I mean, I think we're going to have to continue to fund our reserves for that growth so that.

It's a combination of both but certainly as you see us.

Us grow.

Those line items will have to probably provide for that now we have a situation where our.

Where we weren't originating a lot of new deal but.

Loans were moving from unfunded to funded.

That's not really going to result in much increase in provision expense because.

Essentially you're.

Our allowance for unfunded commitments will probably drop so youll have a credit on that line and Youll have a debit on your provision for allowance.

Allowance for funds funded.

Yes that could happen.

Right right alright.

That's helpful color.

I appreciate it those covers that covered the questions. Thanks, so much.

Alright, Thank you Andrew.

Thank you our next question or comment comes from the line of.

Damon Delmonte from <unk> standby Mr. Delmonte Your line is open.

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

Dave just a question on the.

Hi, a question on the deposit growth this quarter.

I don't think you guys breakout the.

The composition and the period basis, So could you just.

You do on the average side, but could you just talk a little bit about.

What the rough <unk>.

I'll start on the end of period basis, you referenced an increase in Cds and brokered Cds can you just kind of wondering how much of the growth was driven by that.

Yes, I mean, I can give you that by the end of September .

Balanced information and we will have it obviously in our 10-Q filing but I can break that out a little bit so the total of.

Interest bearing and non interest bearing checking is about $3 $4 million to 1 billion excuse me.

The total of.

Yeah.

Kind of what we call retail Cds is about nine.

I'd add $1 billion.

And the brokered total combination of various things that fall under the brokered umbrella is about $360 million.

Okay.

Alright thats helpful. Thanks.

And then Kevin just on the expense outlook.

I know you guys have you spoke last quarter about it.

This quarter again about the professional fees and that's going to be sticking around for a little while but as we kind of think about the base for the next three or four quarters do you think it kind of trends up a little higher from this.

Like the $34 $5 million range, when you exclude the swap fees.

Well, I mean that one one or $2 million.

<unk>, that's going to be in there until the third quarter next year, So that's going to stay right.

The other thing that we that we mentioned.

We had about 300000.

When you compare Q3 to Q2, we had about 300000.

Higher.

Occupancy expense and about half of that or maybe a little more than half 60% of it related to just higher utility bills.

So that's going to bounce around a little bit compensation expense Q3 to Q2, if you eliminate the special bonus we paid in Q2 compensation expense was up about about a half a million dollars in the third quarter and probably I mean I think.

Thank all of you know that.

This fast 91 concept, where we can defer origination cost compensation related to origination of loans and that that deferral was about 300000 higher in the second quarter than it was in the third quarter.

So that was 300000 of the $500000 increase in compensation a little bit of it I think we had.

One quarter of the Charlotte <unk> being open so.

That was probably another 50000 out of that.

The 600 that we had 600000 higher.

Other expense.

And that was we had a $150000 donation and St. Louis.

That is not really a recurring type thing we had some higher levels of fraud loss, which we've been staying a little bit higher levels of fraud loss I don't know if thats because people are hurting or exactly what the situation is but we've been seeing higher levels of that.

So.

So I do think CL.

On the compensation line.

The employment market continues to be high we are in an environment, where there's seven or 8% inflation. So you are going to see some growth in comp costs.

Like as you say if you if you strip out the.

The things that we would say our for sure ultimately nonrecurring the $34 six or whatever we were at is probably more like.

33, and then the.

Other items with the occupancy costs and other expenses.

Kind of.

Sure.

They kind of bounce around a little bit from quarter to quarter.

And then David you said looking out a few quarters. So we can get to the first quarter of next year I mean, a lot of I mean, most of our salaried employees get their annual adjustments in January so there will be there will be some adjustments there the non salaried here throughout the year, but yes, it's salary folks are.

Are going to be in that first quarter number so theres going to be some level of increase there of.

Correspond.

Got it okay. That's helpful. I appreciate that color.

And then I guess, just lastly on loan growth.

It.

Sounds like you have.

Relatively healthy pipelines you have a bunch of.

Close, but yet unfunded commitments that are closed, but unfunded yet so that's going to be a good source for growth.

But also it sounds like you guys are.

Shying away from the growing reality that we could be kind of dipping into a more meaningful recession later on in 'twenty. Three so as you kind of like blend all that stuff together.

Do you still think you can.

<unk> kind of mid single digit growth for the next few quarters or do you think it kind of slows down quicker than that.

Yes.

We don't really give guidance as to what our loan growth is going to be but.

I mean as I look out David I do think I do think originations.

New.

Loans, particularly particularly on the commercial side will slow down and I think Thats a result of.

It's a tougher economy and we deal with really good customers and I think they see the same thing.

That $1 billion for of construction commitments that will fund over the next 15 months or so.

<unk> million dollars a month.

A bit of it has to do with or have.

<unk> had to do with lower levels of pay offs and I think.

I think that in an environment, that's going to stick around for a while.

With the longer term interest rates being up.

We were really getting paid off either from our customer putting a longer term perm mortgage on it.

Project or selling the project and that's still going to happen.

It may not happen as frequently era or as quickly as it did before.

Those things could come together and result in loan growth for us.

Got it okay.

That's very helpful. That's all I had thank you.

Thanks Damon.

Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone again that is star one one.

Standby. Our next question or comment comes from the line of John Rogers from Janney. Mr. Robison. Your line is open.

Hey, good afternoon everybody.

Hi, John and Joe.

I guess, Joe maybe just a question for you on <unk> lending are there any areas or markets that you are maybe starting to.

Get more cautious on some sort of pullback.

As far as loan types or geographically.

I guess book.

I don't think geographically we're necessarily.

Pulling back any more from.

Any market than we are from the others I mean, I think we are equally conservative across our footprint.

As far as loan types.

<unk>.

I think.

Office continues to be something that you would be.

Worried about.

Possibly industrial warehouse.

The thing you are starting to see reports that there may be some overbuilding in those areas.

So those would be maybe two product types, we might be a little more conservative in the geographically I think we're equally open or or maybe better said equally conservative in all of our markets.

Okay makes sense and then just one other question on the buyback you leave a little bit over 200000 shares would you expect to complete that or it sounds like maybe youre getting a little bit more cautious on capital just given the current environment too.

Yes.

I think John Yes, I think at some point, we will complete it.

I think our buyback will slowdown from what you've seen.

I said, we repurchased about 1 million shares through the first nine months I don't think we'll keep going at that kind of a cliff.

We'll probably we may from time to time feedback in the market.

It's going to be it's going to be a slower go.

On buyback shares.

Okay makes sense, thanks, guys have a good day.

Thanks, John .

Thank you.

Im showing no additional questions in the queue at this time I would like to turn the conference back over to Mr. Turner for any closing remarks.

No closing remarks, we appreciate everybody joining us today, and we'll look forward to.

Talking to you in January thank you.

<unk>.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.

Q3 2022 Great Southern Bancorp Inc Earnings Call

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