Preliminary Q4 2022 Great Southern Bancorp Inc Earnings Call

Thank you for standing by and welcome to the Great Southern baked Corp's fourth 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 the session you will need to press star one one on your telephone.

As a reminder, today's program is being recorded and now I'd like to introduce your host for today's program Kelly politics Investor Relations. Please go ahead.

Thank you Jonathan good afternoon, and welcome the purpose of this call is to discuss the company's results for the quarter ending December 31, 2022, before we begin today I need to remind you that during this call. We may make forward looking statements about future events and financial performance.

Not place undue reliance on any forward looking statements, which speak only as of the day. They are made please use our forward looking statements disclosure in our first quarter 2022 earnings release for more information.

And C O, Joe Turner, and Chief Financial Officer, Rex Copeland are on this.

With me today I'll now turn the call over to Joe Alright, Thanks, Kelly and good afternoon to everybody. We appreciate you joining us today for our earnings call. Our fourth quarter results reflected another strong quarter for great. Southern we benefited of course from rising market interest rate.

And our 2022 net income and earnings per share were exceptional.

On a macro basis 2023 appears to be a year that will be marked by a great deal of uncertainty we're focused on ensuring that our company is positioned for this uncertain uncertainty as we move forward in light of the changing interest rate environment and other macro headwinds that are forecasted for 2023.

Usual I'll provide some brief remarks about the company's performance and then turn the call over to Rex Copeland, who will get into more detail.

On our financial results the airports, we will open it up for questions.

In the fourth quarter of 2022, we earned $22 $6 million or $1 84 per diluted common share compared to $15 3 million or $1 14 per diluted common share in the same period in 2021.

The 2021 period did include some large nonrecurring interest noninterest expense items, which reduced our net income and EPS.

We had a few significant income and expense items during the fourth quarter of 'twenty, two as well first of all legal and professional fees.

We told you.

For the remainder of 2022, and then probably the first three quarters of 2023, we would be having between $1 1 million and $1 $3 million of quarterly expense related to.

Professional services for.

Who are helping us with our conversion and we did have actually a little more than that $1 4 million of those expenses during the quarter.

We had an investment loss of $168000 during.

During the quarter and we had an income tax adjustment, which reduced income tax expense by $1 $1 million. Although we expect going forward our income tax expense or income tax rate will be more similar to what it's been in previous quarters.

Earnings ratios were all strong our return on assets was $1 58, our return on equity was $17 three for our data first margin was 399 that improved from $3 37 in the year ago quarter and $3 96 in the third quarter of 2022.

It does look like.

At least a couple of more times in 2023.

The federal reserve will raise interest rates.

That may help us slightly although.

This late in the rate rising cycle, I think any benefit from rising interest rates is going to be pretty muted.

As far as long ago.

From the end of 'twenty, one our loans grew almost $500 million 12.

12, 5%.

The growth slowed in the fourth quarter to about $10 million our pipeline of loan commitments was basically flat from the end of the third quarter to the end of the fourth quarter.

Significantly yes.

From the beginning of the year, so good lending volume, although probably flowing.

Loan volume in the fourth quarter, our credit quality metrics remained extremely strong.

Very low levels of nonperforming assets $3 $7 million at the end of the year.

Loan delinquencies are very low our capital did pick up a little bit.

In the fourth quarter, our TCE ratio went from.

Eight eight to nine 2%, we paid 45th dividend in the quarter total dividends during the year of $1 56.

And in addition in our efforts to enhance shareholder value. We did repurchase about one point of 4 million shares of our stock during.

2022 at an average price of $59 25, I think are our repurchase activity did slow down in the fourth quarter.

Maybe about 50000 shares repurchased.

That concludes my prepared remarks, I will turn the call over to Rex at this time. Thank you Joe.

Talk first a little bit about net interest income and margin Joe mentioned some of the highlights there and I'll just give a little bit more detail. Our net interest income for the fourth quarter of 2022 increased about $10 4 million or 23, 5%.

Compared to the previous year quarter, it was $54 $6 million in fourth quarter 'twenty, two versus $44 2 million in the fourth quarter of 2021.

And then net interest income for the third quarter of 2002 was $52 9 million. So we can increase a bit from that as well as Joe mentioned, increasing market interest rates and some loan growth throughout.

2022, and some investment balances growing as well contributed to the higher level of net interest income in 'twenty two.

The net interest margin of 399% as we said earlier compared favorably to a year ago at 337%.

And then third quarter it was 396%.

The average yield on loans increased about 98 basis points. When you look at Q4 22 versus Q4 2021, and then the rate on our interest bearing deposits. The average rate on that increased about 89 basis points in that same time frame, so looking back to the year ago quarter.

And again margin expansion it was really kind of based on the increasing market rates and also changes in the asset mix, where we had more cash and cash equivalents at the beginning of the year and change those over into loans and investments throughout the year.

Okay.

We've stated before and as you've seen through the numbers generally a rising interest rate environment, particularly in the short term rates should have a positive impact on net interest income as those are floating rate loans repriced upward.

We anticipate this would still be the case that the federal reserve rate raises rates further like Joe mentioned, we think that perhaps we've obviously seen significant interest rate increases throughout 2022, and the expectation at this point at least is that we may have some more rate hikes, but not generally nearly to the magnitude that we have.

In 2022, so we think that there may be some benefits there, but we also will have some.

Some.

Time deposits.

<unk> that are going to mature it will reprice higher that may offset some of that as we move through that throughout the first half of 2023 and beyond.

As I mentioned 2022 assets shifted away from cash equivalents to loans.

In the latter half of 2022, we also saw some changes somewhat in our deposit mix with non time account balances trending lower and time deposit balances trending higher.

The increase in time deposits are generally a mix of shorter term retail within 12 months maturities and less some fixed rate broker deposits, which are maybe a little longer to get a little more intermediate term to have some callable features.

And there is some variable rate brokered deposits as well. So we've added from time to time, we also utilized <unk>.

Generally overnight home loan Bank bar.

Borrowings.

So just kind of.

To say 2022 again supported by <unk>.

Rising rates loan growth and as we've said 2023, we expect that our net interest net interest income will remain solid but.

Assuming no rate cuts, but we also think that.

It may not grow tremendously, even if the fed raises by another 50 or 75 basis points.

We do have some deposits that will start to reprice.

As we get into 2023 here and we also just a reminder, we do have a couple of interest rate swaps that were forward starting that are not impacting anything right now that will impact our numbers beginning I believe in may of 2023.

Just on where rates are today, we would be in a position to where we would be making a net settlement payments to the counterparties. So.

We've reduced our net interest income.

Debt on that so those those will change obviously as interest rates change, but they are tied to prime and stouffer rates. So based on where they are today, we would have a payment that we would add on that.

I'll move on to noninterest income.

For the quarter noninterest income was down about $1 $5 million compared to the year ago quarter really the majority almost all of that could be attributed to the reduced amount of gain on sale of our mortgage loans.

Obviously 2020 in 2021, and we had big.

Big years of mortgage originations of fixed rate loans, which we typically sell in the secondary market 2022, obviously rates once rates started moving higher after the first quarter that slowed down quite a bit.

Refinancing slowed down if not very much at all.

Purchase was still going on but to probably a lesser extent than what we were seeing in the previous couple of years. So those are some things that.

That impacted the fourth quarter of this year versus fourth quarter last year and really that's impacted the entire year of 2022 for the most part.

Okay.

One other thing I'll mention on noninterest income that.

Its not hasnt minutes.

Real material at this point.

We're not sure it's going to be a big thing it seems like it's it's a little bit of a headwind that's fairly minor relates to our point of sale income. There is there are some changes we started seeing this in the latter half of 2022.

Seeing some of this change happening there is some changes at a network settlement routing process due to some expiring agreements that we had and so there's different places now that merchants can can route their transactions and some of those.

May provide a little smaller amount of.

<unk> revenue to us on those and then also we noticed in the last half of the year of 'twenty two as well.

Just a slight decline in overall debit card usage with our customer base.

So we're looking to see if that's going to continue we feel like perhaps some of the.

Debit card usage that we were seeing has shifted over to credit card usage with our customers and so we're monitoring that as well.

Noninterest expense for the quarter, our noninterest expense decreased about $1 4 million compared to the prior year quarter.

As Joe mentioned, though we had the biggest decrease was $2 7 million net decrease from a year ago, and the legal audit and professional fees.

Again, we had about $4 1 million of Av.

Kind of one time fees related to our conversion activities in the fourth quarter last year, we had $1 4 million.

Related to the conversion, but not the same type of activity, but but related to that again. This year. So we did see a decline in the expense for that however, we did see increased <unk>.

Salary and employee benefits of about $1 4 million from the prior year same quarter.

Some of that is related just to normal merit increases a lot of folks are and our company are.

They do their merit increases at the beginning of the year and Theres others that are throughout the year.

Some of those because of the job market, particularly in that kind of thing some of those.

Increases were maybe a little bit larger in 2022 than they have been in some previous years that also we did add during the year that the Phoenix and Charlotte.

Loan production offices and that added some expense.

<unk> 2020, two's numbers that were not in 2021.

Efficiency ratio for the fourth quarter was 55, 3% compared to $66 nine 8% for the same quarter a year ago I remember there was that extra expense in there a year ago and if you exclude that the efficiency ratio would have been just a little over 57%.

In the fourth quarter of 'twenty one.

So just kind of conclude on noninterest expenses as we as we saw in 'twenty two.

While we remain in an environment with higher inflation that we've seen in quite some time, the salaries and benefit cost may continue to increase a bit due to the tight labor market.

You've also got changes happening in various states minimum wage laws, where we operate and then again annual merit increases a lot of which happened at the beginning of the year. So as we especially move forward throughout 2023 with this core system conversion, we need to make sure that we retain.

Our seasoned people.

To provide assistance and a lot of these roles.

Talk a little bit about provision for credit losses.

We've continued to have some loan growth and we recorded a.

Provision expense the net was about $8 million in the fourth quarter of $1 million of that was an expense related to our outstanding portfolio of about 159000 was.

That reduction in provision expense related to unfunded loan commitments.

And then we had a negative provision of $1 7 million in the fourth quarter last year 3 million negative provision on outstanding loan portfolio, and a $1 3 million provision expense related to unfunded and that fourth quarter of 2021.

Net charge offs were 281000 in the fourth quarter 'twenty two.

Compared to recoveries of 125000 in the fourth quarter of 2021.

For the full year I think our net charge offs were around 274000 or something like that so again pretty pretty low charge off year while.

While we do.

Have pretty low levels of problem assets and.

In delinquencies, we are mindful of of higher market interest rates and the uncertain economy as we do begin to go into 2023 here.

Last thing I wanted to touch on is income taxes.

The three months ended December 31, 2022, our effective tax rate was 16, 6% in the fourth quarter last year. It was 21, 1%.

Our effective tax rate is typically lower or at or below the federal statutory rate of 21%.

Due to some tax credits that we have some tax exempt interest that we have another and other things that produced that.

Our tax expense of liability is also affected by the liabilities we have in various states, where we operate and driven by the level of income or specific tax rates in those states. So those do tend to bump our overall tax rate up a little bit.

So Joe mentioned earlier, we had a bit of an unusual adjustment in the fourth quarter of 2022. So when we finished up our federal and various state income tax returns for the 2021 tax year in the fourth quarter of 'twenty two that the company updated its combined tax rate.

Hi to deferred tax items, and we also made some adjustments in our taxes receivable payable balances related to some carryback claims that were.

Put it into place and filed in 2022, so those adjustments.

Made a final reduction we reduced our tax expense for $1 1 million in the fourth quarter as Joe said that that's not something to expect all the time, we think our effective tax rate is probably going to be somewhere in that around that 21% level give or take a little bit on either side, but overall, we think that going forward.

1% somewhere in that ballpark would be.

Good good.

A good number to think about.

That concludes the prepared remarks that we have I think today. So at this time I will turn it over for questions and ask our operator to once again remind the attendees how to queue in for questions.

Certainly and as a reminder, if you do have a question at this time. Please press star one one on your telephone one moment for our first question.

And our first question comes from the line of Andrew Liesch from Piper Sandler Your question. Please.

Hey, everyone. Good afternoon.

Clemson here on the margin.

Okay.

It sounds like the.

Certainly some upward pressure on funding costs. So do you think.

The margin has topped out here at 399 or do you think there might be a little more opportunities for expansion before the swaps kick in.

I'd say, it's pretty close to tapped out would be my guess.

Obviously, the when the swaps kick in.

As Rex mentioned, they'll tell you that tick down.

No.

It's kind of top down.

Gotcha.

And then on the.

Just my back of the envelope numbers, maybe I'm off here by pre direct me otherwise I am coming up with maybe 12 basis points of reduction to the margin on these swaps or am I calculating this wrong.

Is it about is it.

600000, a month something like that so that would be seven 2 million and our margin was $220 million.

That sounds good.

You are saying.

12 that probably is about right.

Okay.

Our interest bearing assets are correct.

Correct.

Sure.

Five five point.

In the fourth quarter, they were $5 4 million, so $7 million or low low low low 12 basis points something like that yes got you.

Alright, Thank you and then.

Just on your comment in the release about net interest income.

Plateauing or possibly declining that sounded like the fourth quarter run rate is that correct not in the full year 2022 number right. Yes, yes in the first half of 2022, obviously, our net interest income was lower than it was in the second half because rates didn't rise immediately in the year and so we got a lot more benefit.

And the third and fourth quarters last year. So that's what we're talking about compared to fourth quarter.

Got you.

Alright that covered my questions. Thanks, so much I'll step back.

Thanks, Andrew.

Thank you and one moment for our next question.

And our next question comes from the line of Damon Delmonte from <unk>. Your question. Please.

Good afternoon, guys hope, you're both doing well today.

So just a quick question on loan growth can you just give a little perspective on kind of how you're feeling about your pipelines and the early part of this year and kind of what your expectations might be in the coming quarters.

For.

I think I would say David.

Thanks.

Sort of.

The first part of our loan growth comes from.

Our unfunded construction commitments, which I think were like.

144 billion or something at the end of the at the end of the.

Year, so and that's substantially higher than they were at the end of the year. So.

We're going to continue to fund and Thats going to be some.

That's going to be some loan growth now I will tell you loan origination.

<unk> has definitely slowed down I think.

What the fed has done well.

At least as far as commercial real estate goes there is not nearly as much activity as there were there was so.

That's probably a little bit more of an issue.

For as far I mean, I think what we could see it as we can see the.

The.

Unfunded commitment line through our App.

We're not booking new construction loans and adding to that unfunded commitment line, but we are we are going to be funding loans.

After commitment line.

But.

Again, we don't forecast I mean, you guys have to sort of come up with your own numbers, but.

I would say that it's not going to be loan growth year like we had in 2022.

Got it okay.

Okay.

You got to factor in I mean, I do think pay off the <unk>.

No.

Yes.

Projects are staying with us.

Longer which is a positive thing.

Got it okay.

Helpful. Thank you.

And then with respect to two.

Credit.

Kind of trying to figure out the provision here, obviously very strong underlying credit trends minimal net charge offs.

You had a couple of quarters in the middle of 2022.

Yes, like $2 2 million in two point to $3 3 million for <unk>, and <unk> and that kind of tailed off here in the fourth quarter. How do we how do we kind of think about like where the reserve level is today at $1 39, and how are you viewing kind of the more macro picture and maybe they need to build reserves or do you feel like you are comfortable at this level.

Well I mean, I think we're comfortable at this level.

If the economy were to take a turn we would have to address that.

But based on based on what we're seeing right now.

We're comfortable now I need to provision the provisioning that you saw.

Lastly in 2022 early on like the second and third quarter type timeframe was a lot of based on loan growth.

Going on so we were adding to our reserves at that point.

And now we're like Joe said, we didn't grow as much our outstanding balances in the fourth quarter.

But we're looking at economic factors now as we kind of move forward into 2023 to see.

If it.

Starts to look like.

Recession.

So how bad and how that might impact.

Got it okay.

And then just to circle back on the margin and the impact of the swaps.

Could you just repeat when do those that I know you said, therefore swaps, but when do those kick in in.

In May I believe may of 'twenty three I believe is the first month that we would have a settlement on those.

And if those were to happen like today right. Then the margin would get hit by 12 basis points based on the math that was being thrown around.

Yes, I think Thats I think thats pretty close I think.

When we calculated it in a few weeks ago I think it was about 600000 mark with us.

Somewhere in that ballpark.

And what's the duration of those swaps.

After 2028.

Okay. Okay. That's all I had thank you.

Thank you one moment for our next question.

And our next question comes from the line of John Rogers from Janney. Your question. Please.

Hey, guys good afternoon.

Okay.

Hope Youre doing well just Joe maybe just one quick question on the buyback you guys were obviously.

Fairly active.

22, and you announced a new plan, but you did slow the pace in the fourth quarter, how should we sort of think about buyback activity through 'twenty three.

It sort of depends on the price.

<unk>.

Obviously a bit.

Product at a higher price than where we're trading right now so we kind of like it we think it makes sense.

I don't think we will probably be.

Maybe quite as aggressive.

Certainly I don't think it make sense.

Okay, but not as aggressive, but you still think youll probably be solid activity aggressiveness.

We were in the during the full year 2022.

We definitely still think buyback makes sense and we feel like we're well capitalized.

Plenty able to handle it.

Yes.

So.

It depends a little bit on.

What kind of turn the economy takes obviously too so we got to factor that into yet.

As we look at it.

Just as far as capital management, Joe any Rex any other.

Other than the dividend any other thoughts on.

Sito redeploying your capital and so forth.

No not really I mean, it would be it would be dividend or stock buyback.

Okay, I guess, where I'm going is just M&A or anything like that your thoughts today.

Nothing really on the horizon.

Okay.

Okay. Thank you.

Thank you all right. Thanks Chuck.

This does conclude the question and answer session of today's program I'd like to hand, the program back to Joe Turner for any further remarks.

Alright, well, we appreciate everybody being on the call and we'll look forward to.

Talking to you in April .

Have a good day. Thank you.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

The conference will begin shortly two.

Two reasons lower Johan during Q&A, you can dial star one one.

[music].

Okay.