Q3 2023 Great Southern Bancorp Inc Earnings Call
Hello, and welcome to Great Southern Bancorp, Inc. Third quarter 2023 earnings Conference call.
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I would now like to hand, the conference over to Kelly Pillows, you may begin.
Thank you.
Afternoon, and thank you for joining us for our third quarter 2023 earnings call. The purpose of this call today is to discuss the company's results for the quarter ending September 32023, 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.
A list of some of these factors. Please see the forward looking statements disclosure in our third quarter earnings release, and other public filings President and CEO , Joe Turner, and Chief Financial Officer Rex Copeland are on the call with me I'll now turn the call over to Joe.
Alright, Thanks, Kelly and good afternoon, everybody. We appreciate you joining us today for our third quarter earnings call. Our third quarter performance was solid but down a bit as you saw as we continue to navigate through a challenging operating environment. We earned $1 33 per diluted common share or $15 $9 million compared to a dog.
46 critical per diluted common share or $18 1 million during Q3 of 2022.
Earnings performance ratios were again solid with an annualized return on assets of.
111, and an annualized return on equity of $11 47.
Mentioned on our last couple of calls some anticipated headwinds that we would face related to net interest margin.
This margin did decline to $3 43 for the third quarter compared to $3 96 for the same period in 'twenty, two and $3 56 for the.
Second quarter of 'twenty three.
The margin contraction, primarily resulted from increasing interest rates on all deposit types during the third quarter and a full quarter's impact from that settlement was related to interest rate swaps.
[laughter].
Like many banks in 2023, we have experienced much higher deposit costs compared to 2020 reflected the increase in market interest rates and significant competition for deposits.
Deposit costs again moved higher in the third quarter, three but the pace of increase has moderated compared to the second quarter.
<unk> will provide some color around our funding costs and deposit mix during his presentation.
Also of note, we had an ongoing significant professional fee expense items totaling about 900000 related to training and implementation costs.
Upcoming core systems conversion.
As far as liquidity and capital our liquidity liquidity and capital positions continue to be strong.
At the end of September 23 available secured funding lines did the home loan bank.
Federal Reserve Bank and on balance sheet liquidity were approximately $2 2 billion as noted last quarter, our company's deposit base is diverse.
By customer type and geography, and has a low level of uninsured deposits approximately 16% of our total deposits are uninsured, excluding internal subsidiary accounts.
Total stockholders equity decreased by $1 4 million from the end of 'twenty, two and decrease more substantially by about 14 6 million from June of 'twenty three as a result of increased <unk>.
Realized a OCI losses due to market interest rate increases in the third quarter of 2003.
Importantly, though the retained earnings component of our stockholders equity has increased 28 million. During the nine months ended September 32023, our capital remains substantially above regulatory well capitalized thresholds.
Our tangible common equity ratio was nine 1% at September 32003.
In the third quarter the company declared a <unk> 47 per share common dividend dividend. In addition in our effort to enhance long term.
Stockholder value the company continued to repurchase shares of common stock during the quarter, we bought back almost 107000 shares at an average price of $50 52 soon.
The dividend and stock repurchases combined reduced stockholder stockholders' equity by about $10 $1 million during the third quarter.
At September 32023, about 801000 shares were available or available in our stock repurchase authorization.
During the third quarter.
New loan production of general activity was down compared to two.
<unk> 2022 as expected.
Outstanding loan balances modestly grew by about $58 million since the end of 2022 growth primarily came from the multifamily loan segment much of this from projects completed and moved from the construction category to multifamily and commercial business lines, partially offset by a reduction in the commercial real estate category.
At the end of September 2023, the pipeline of loan commitments and unfunded lines declined to about $1 4 billion, including $922 million and the unfunded portion of construction loans for comparison at the beginning of 2023 loan commitments and unfunded lines totaled about $2 1 billion.
With $1 4 billion in unfunded construction lines.
For more information about our loan portfolio I'll remind you of our quarterly loan portfolio presentation that we have on file with the SEC and is available on our Investor Relations.
Under the presentations link our.
Our quarterly loan presentation provides helpful information regarding our loan portfolio mix.
Type angiography overall, our commercial portfolio, a strong diverse and performing well as expected we are experiencing some payoff activity.
Overall credit quality.
<unk> remained strong during the quarter nonperforming assets to total assets were one 9% at September 32003, decreasing by one basis point from June 32023, delinquencies in our loan portfolio continued to be at historically low levels more information about our nonperforming and potential problem loans are included.
In our earnings release.
That concludes my prepared remarks at this time I will turn it over to our CFO Rex Copeland.
Alright, Thank you Joe appreciate that.
Start with a.
Discussion about net interest income and margin and I'll begin with just a general comment that.
Not maybe unlike others arent interest income comparisons in the third and probably the fourth quarters. This year will show declines from the same periods in 2022.
Market interest rates, obviously increased pretty significantly in 2022, and we were able to increase rates on assets quicker than liabilities last year and so we achieved for us.
Net interest income and net interest margin in the second half of 2022 and spilled over it will be into the first quarter of 2023.
But.
That time sort of our net interest income and margins have come down for <unk> as we've talked about a little bit last quarter and I'll discuss a little bit today.
Noninterest income for the third quarter of 2023 decreased $6 $2 million.
Approximately 11% to $46 7 million compared to $52 9 million for the third quarter of 2022.
And that was really driven by increasing interest rates on deposit various deposit types. During the third quarter of 2003 and also the negative impacts of interest rate swaps, which began settling in the second quarter of 2023 and would not have been affecting the quarters in 2022.
Those swaps in particular had a negative impact of $2 7 million in the third quarter of 2003.
Our net interest income was $48 1 million unit for the second quarter of 2023. So we had a decrease in net interest income between Q2 and Q3 this year of about $1.4 million.
The negative impact of those newly settling interest rate swaps was about $1 million more in the third quarter of this year versus the second quarter of this year.
The company's net interest income was negatively impacted in the third quarter by a high level of competition for deposits across the industry and in our local markets or.
The company also had a substantial amount of time deposits maturing at relatively low rates in the second quarter of 2023, as we discussed before and now these time deposits.
Were renewed at higher rates or we had to replace without external funds.
And the impact of that was fully there for all of Q3 versus a portion in Q2.
In addition, we had in the first quarter of 2023, we experienced higher than normal reduction in balances of noninterest bearing deposits.
That outflow of noninterest bearing deposits moderated in the second quarter, they increased a bit again in Q3 of 2023.
Customer balances in both non interest bearing checking and interest bearing checking accounts have fluctuated in the first nine months of this year.
As market interest rates for certain checking account types and time deposit accounts have increased some customers have chosen to reallocate funds into relatively higher rate accounts.
The company has more low rate time deposits maturing in the fourth quarter of this year.
A little bit more than what.
Matured in the third quarter, but not as much as what we had maturing and repricing in the second quarter of 2023.
A difference in the rate being paid on those time deposits maturing in the fourth quarter of <unk> 23 versus the expected rate that will be paid on renewal does is not as great as it was in.
Earlier in the second quarter of.
This year that there should be some increase most likely.
Just to give you an idea we noted this in our release, but subsequent to September 30, we've got.
Time deposit maturities over the next 12 months that kind of breakdown as follows within three months, it's about $354 million with a weighted average rate of three 6% within three to six months, another $352 million with a weighted average rate of about 388%.
Within six to 12 months about $350 million with a weighted average rate of 393%.
So we kind of think that based on.
The current replacement rates that we envision on that there'll probably be replacing at rates between maybe for the quarter to $4 seven 5%.
Besides the higher funding cost of our deposits net interest income was also negatively affected by the Companys interest rate swaps as I mentioned and as described in our earnings release.
Interest rates remain near where their current levels. The companys interest rate swaps will continue to have a negative impact on net interest income based on the interest rates on these swaps at September 30, the negative impact of all of the interest rate swaps that we are combined in the fourth quarter of 'twenty three is expected to be approximately $3 $7 million.
The negative impact of all the swaps combined in the third quarter at 23 was about $3 5 million.
And then as a reminder, again one of those swaps will terminate March one 2024.
Interest rate swap itself had a negative impact on net interest income of $2 $8 million.
And a negative impact on net interest margin of 41 basis points in the third quarter of 2023, and it's expected that began rates being where they are we will have a negative impact to net interest income of about $2 9 million in the fourth quarter of 2003, and a $1 9 million in the first quarter of 'twenty four.
And then subsequent to the first quarter no impact in subsequent periods.
As Joe mentioned earlier net interest margin was 343% in the third quarter of 2003 compared to 396% in the same period of 2022, which was a decrease of about 53 basis points and then it also decreased about 13 basis points compared to net interest margin of $3 56 in the second quarter of 2023.
And comparing a couple of yield items in their in rates between the 'twenty, three and 'twenty two third quarter periods.
The average loan yield increased about 113 basis points, while the average rate on interest bearing deposits increased about 203 basis points.
Joe mentioned liquidity briefly earlier and I'll, just say a couple of more things about that.
Our liquidity levels are to continue to be resilient and we have readily available funding sources totaling about $2 $2 billion at the end of September .
'twenty three with about $1 1 billion almost of availability at home loan bank. So we have those firms readily available should we need anything there. We also have some unpledged securities.
That we have that we could pledge if we chose to do that and that's over $500 million worth of dose.
At September 30, 23, total deposits were nearly $4 9 billion.
During the three months ended September 32003, the company's total deposits increased about $27 million.
Total brokered deposits decreased less than $1 million in that time frame time deposits generated through our banking centers and corporate services networks increased $21 million in time deposits generated through internet channels decreased $5 million in the third quarter, and then interest bearing checking balances increased $49 million or about two 3%.
And noninterest bearing checking balances decreased 38 million or about three 9%.
During the third quarter 2023.
Noninterest income items in the quarter, we really didn't have any variance items. There. The total decrease was about $132000 compared to the third quarter of 2022.
No real large component of changes in the quarter comparisons for the year to date, we did have a few things.
Changed Erik I'm, sorry for the quarter for noninterest expense, we did have expense overall increased about $799000 to $35 6 million.
Some of the components in there that had a little bit larger variances from the year ago quarter.
Salaries and employee benefits.
Increased about $697000 from the previous year quarter portion of this is just normal annual merit increases and various lending and operations areas.
In 2023, some of those were a little bit larger than maybe they were in previous periods. In addition compensation costs related to originated loans, which we differ under accounting rules a portion of those and that decreased by $233000 in comparing the two periods. So that resulted in higher.
Experience expense levels into 2023 period as low volume originations were lower this year compared to 2022.
Occupancy expense, we did have an increase there this year's quarter versus previous year quarter, but about $531000 we had.
Various components of computer license and support expenses, which.
We had implemented during this period that maybe.
Maybe we have kind of gotten to end of life last year and didn't have the same level of expense that increased our cost by about 333000 compared to two periods and then we also had some just various repairs and maintenance expenses throughout our network that added about 106000 more than the previous year.
The next two items, there's a couple of things I'll mentioned on those a.
A little bit of additional.
Clarification on some things on that so total insurance expense increased 498000 from the prior year quarter. This was primarily due to the previously announced increases in deposit or.
Deposit insurance rates for FDIC deposit insurance fund coverage.
We will continue to have a little bit extra probably in the fourth quarter.
We estimate that there'll be a little higher than normal expense again of about $180000.
That was really in Q3, and probably will continue in Q4, but after that.
There shouldn't be that extra level of near start starting in Q1, we should be caught up with the with.
With the deposit insurance fund increase level, so going forward it should just be a normal amounts.
After after Q4.
Legal audit professional fees, we did have a higher or I'm sorry, those decreased by 390000 from the prior year.
The previous year, we had $372000 of one time fee expenses related to the origination of some interest rate swaps that we did there.
One other thing I'll point out it really wasn't a large amount, but but probably in.
In the third quarter, there was about $150000 maybe of non what I call nonrecurring type expenses that we didn't necessarily call out in the release, but there were just some some fees in there for some.
Services that were provided to us that we do periodically but not certainly every quarter.
So the efficiency ratio for the third quarter was $65, one 3% compared to 57, 9% for the same quarter in 2020 to you is as expenses increased a bit in net interest income in the denominator decreased.
Provision for credit losses.
During the third quarter 33, we didn't record any provision expense on our outstanding loan portfolio.
That compared to $2 million.
<unk> expense during the same period in 2022.
Also for the three months ended September 30, 23, the company did record a negative provision for losses on unfunded commitments of $1 $2 billion.
Compared to a provision expense of $1 3 million for the three months ended September 32022, as we mentioned before our level total level of unfunded commitments has come down from the previous quarter as we were able to relieve some of the reserve on that.
Total net charge offs were $99000 for the three months ended September 32003 that compared to $297000 of net charge offs in the three months ended September 32022.
At the end of the third quarter of 23, the allowance for credit losses as a percentage of total loans was one 4%.
Income taxes in the period for the three months ended September 30, 'twenty, three and 'twenty two the company's effective tax rate was 21, 5% this year in 2025% in the quarter last year.
The rates were near or below the statutory federal rate of 21%.
Due primarily to utilization of investment tax credits and certain tax exempt investments and loans.
Which reduced our effective tax rate a bit.
The company expects its effective tax rate, both combined federal and state will be about 25% to 22, 8% in future periods and will be affected by the overall level of earnings and the utilization of these tax credits and tax exempt income and then also.
It has affected a bit by state tax expenses.
We estimate those continually and they do evolve overtime and so those can affect the overall effective tax rate as well as we as we look through through some of those various state taxing authority expenses. So.
So that concludes the prepared remarks that we have today and at this time, we will entertain questions and I'll ask our operator pleased to once again remind the attendees how to queue in for questions. Thank you.
Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and then wait to hear your name announced to withdraw your question. Please press star one again please.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Andrew Leisch with Piper Sandler Your line is open.
Hey, good afternoon, everyone.
Good morning.
Drill in on the margin here.
It sounds like more two DRAM pricing gear.
And based on the commentary in the release and Youre in today. It seems like maybe 30 basis points might be a little too.
<unk> Steve.
In the fourth quarter, but I'm kind of curious how are you guys thinking about the margin this quarter and then stabilize beyond that and I guess, you guys CD repricing, but.
And dependent seemingly done.
<unk>.
We were raising rates and you see some stabilization.
Well.
Yes.
I'll take a start and then rich can jump in Andrew I mean I think.
Yes, I think we are getting.
It's a little bit hard to say because every time you think things are going to stabilize then you would see more deposit specials.
And those kinds of things, but you see with our CD repricing.
This is kind of the the last point at which the deposit we're repricing of the Cds that were repricing are substantially below market rates I mean, the other.
The stuff that we reprice that three to six months out six to 12 months.
Maybe slightly below but it's not as far below so it won't be as impacting of course, we think.
<unk>.
The interest bearing checking our non time interest bearing.
Should kind of repricing.
Annually. So you shouldn't see that as we do have fixed rate assets that are re pricing.
Good health, but it's it's.
It's hard to.
It's hard to zero in on that exactly.
Yes, I mean, we're seeing it kind of come down for a while but we're seeing some banks in different locations that we compete with that are showing rates above 5%. I mean, it's just kind of a base rate on certain products.
CD, primarily certain term Cds and things like that.
So it kind.
Is that kind of comes and goes and so we do see some some heightened competition in some ways in some places.
Sure.
I think that like I said it in the next in the fourth quarter of this year those $358 million of Cds are going to reprice. Those are sitting there at overall rate of about three 6%. So there is there is some space to go there will probably be repricing those in the <unk>.
Low fours, maybe or something like that.
Like Joe said beyond that and those those rates are in the high threes almost at 4%. So it does seem like after the fourth quarter.
That the difference in rate all things stay like they are today it would be would be less than what we saw in the second quarter. This year.
Were repriced and stuff that was in the twos backup.
Back up into the 4% range.
So it does.
I'd say it feels better Andrew, but it's just hard to zero in on it exactly.
Got it will certainly have that repricing gap is narrowing and Tom you mentioned fixed rate assets.
Repricing I guess do you have handy the percentage or the <unk>.
Amount of fixed rate assets that have yet to benefit from.
The rate.
Rate hikes since beginning of last year.
We don't I don't have it and I don't think Rex does either Andrew but we have good disclosures in our K and do we have in our Qs as well about repricing route.
The 10-K that we filed.
At the end of the year, Andrew would have it there is a table.
At the end of the MD&A section there is theres two tables, one that's had maturity table by year for the first five years and then beyond and then there is a repricing table in there so and we do have fixed rate loans and variable rate loans broken out in two separate lines in there. So you can get an idea I mean.
I don't have the number in my head but.
I mean, it's a few hundred million dollars that Hasnt reprice Gen Im sure.
Just in particular that will reprice in the next year or so well they will build out.
Next year, but I'm, just thinking about some of our hybrid arm product.
It's going to be fixed or a few years in new gas again, reprice I would point you to that.
That 10-K table, Andrew I think that gives you good.
Got it very helpful. Thanks, so much and I will step back.
Thank you.
Please standby for our next question.
Our next question comes from the line of Damon Delmonte with <unk>. Your line is open.
Hey, good afternoon, guys hope, you're both doing well today.
Just wanted to kind of keep on the margin topic here.
Yeah.
Could you give a little color as to like.
The rates at which these construction loans are funding that are in the pipeline right now and then possibly like what new production is coming on at.
You know I would say.
Generally and this would be the rate.
The loans are funding App and new production.
Probably be somewhat similar I would say anywhere from $2 50, oversell further to 300.
Would be kind of the rates are at.
At the end of September point in time on that day in our press release it back in towards the back there.
Couple of tables in there that show average balances and rates in that portfolio of construction loans at a rate of 789%.
Assuming that that sort of.
What I mean.
Let's say new productions, although higher than that.
That'd be about 350 hours, so far or something.
And.
There might there might be some lower rates stuff in there.
I would think that the.
Kind of a general rate might be a little higher than that but right around in there.
Got it okay. Thank you and then.
How would you characterize the positioning of the balance sheet should the fed start to cut rates in the back half of 2024.
I think we're fairly well balanced.
We you know we tend to think of ourselves as asset sensitive, but we took.
That asset sensitivity off the table with those.
What's that.
We began net settlements on in May and so I think we're reasonably neutral would you say that correct yes.
And it just depends on how aggressive the cuts are so if the cuts are pretty gradual.
Pretty well balanced I think if they are really fast, but they were in 2020, that's probably get staying a little bit.
Because when they when they go down.
Two or 300 basis I mean, we're at a level now that could go down pretty far pretty fast and.
If we could go off a cliff here on the economy.
So the speed of rate cuts would be what we'd probably factor in a lot to do that for us but.
Assuming that the fed cut.
Cuts in 25, or 50 increments and does it in a fairly.
Non dramatic way that probably is not overly bad for us.
Got it okay.
Then with respect to your outlook for loan growth.
How do you feel about.
Like non construction related CRE are you originating.
Loans that don't go through the construction process and kind of I know you gave some color on the construction pipeline and kind of where it is today versus a year ago I think it was.
But how do we kind of think about overall loan growth and the drivers of that.
I mean, I think loan growth will continue to be fairly modest.
Damian.
That.
I think thats.
<unk> taken a hard look at it but I think it's also our customers taking a hard look at it.
We had a meeting yesterday and one of our senior lenders that.
He thought that are.
Customers to a large extent have their pencils down right now I mean that there they are struggling to make sense.
Out of these rates and so they're just going to wait for a little while so.
In light of that loan growth is going to be pretty tepid.
Got it Okay, and then just lastly, if I could squeeze one more in.
You did buy back some shares this quarter and you've kind of been doing that consistently and <unk>.
This quarters is it fair to kind of assume that given current pricing levels.
We'll continue to be opportunistic since you have some dry powder left on your current authorization.
I think yes, I mean, I think we will continue to be strategic about it but yeah I think.
We continue to be interested in that.
Great. Okay. That's all I had thank you very much.
Thank you.
As a reminder, ladies and gentlemen.
I wanted to ask a question.
Please standby for our next question.
Our next question comes from the line of John Rogers with Janney. Your line is open.
Hey, guys good afternoon.
Hey, Donna.
Guys are doing well.
Rich just wanted to circle back to your comments on expenses were helpful.
As far as the systems conversion is that is that still slated to take place the middle of next year. So the 900.
<unk> thousand to $1 million and added expense, so keep going through roughly the second quarter next year.
Yes that should continue on.
And as far as.
In the press release, you had some comments about some disagreements and stuff.
Is there I mean are there financial damages that could be.
And while there or something like that or I'm, just trying to understand that text.
Yeah, John I mean, we don't have a lot of color to provide beyond what was in the press release.
We're just as we said where we.
We have some contractual dispute and we're in the process of trying to work through those okay. Okay.
Okay.
Yes.
Rex.
You kind of went through some line items, if I heard you correctly.
I think you said sort of non reoccurring expenses in the quarter were roughly $150000 and then I think you said occupancy should stay at this higher level, and then insurance a little bit higher at this current level for the fourth quarter, and then start to come back down so.
If we if we look at the third quarter expenses, if you back out that 150000, maybe 200000.
Is that the right way to think of of expenses.
At least for the fourth quarter.
I would say like I said, the deposit insurance is going to stay elevated in Q4.
I think roughly around $180000 and that should come back down in Q1.
The 150000 legal and professional fees.
That was some extra stuff.
That really should come down in Q4.
Okay.
Okay, so but other than that.
The other items are sort of as is in sort of a good run rate going forward does that rate.
I don't think Theres anything else that I noted in there that.
Was sort of a one off or unusual okay.
Just two more questions just securities portfolio was down or maybe a little bit more than I would've expected should we continue should we expect some continued run off going forward in the securities portfolio.
I think I mean, what was down in there probably John is just the <unk>.
Unrealized loss being higher I don't think we've got a little bit of cash flow coming off of it but it's not.
Big cash flow.
So I would think that the securities portfolio is not going to change.
A lot in the next quarter or two.
Thank you.
Youre not putting new money to work in there either right now correct.
We have not.
So far much this year no.
Okay.
Just one final question, guys, whether Joe or Rex both of you.
If you look at the level of net charge offs for you guys and really for the industry over the last few years, maybe even more I mean, it's been it's been less than 10 basis points. I mean for you guys to what last year was like one basis point a year before zero I mean, <unk> had net recoveries.
My question. My question is in the current environment based on what you currently see in your portfolio.
Do you see a situation where net charge offs could be above 20 or 30 basis points.
Based on what you currently see.
Yes.
I mean, we feel awfully good about our credit portfolio John .
So I'm really not talking so much about what I see now I guess.
I've been at it long enough that.
Im somewhat skeptical to think that we've just all figured it out.
And there aren't going to be net charge offs anymore I mean.
Yes in the history of banking this things like.
Very unusual that we would have net charge offs. This low so.
I don't see anything in our portfolio right now that makes me think.
That we're going to have large levels of net charge offs, but.
Just when you look back historically and think about the business.
Can't think that we'd necessarily figured it out although I will say.
Do think underwriting.
Is substantially better than it had been in my career, which is over 30 years. So I mean.
<unk>.
That is a positive.
So youre seeing a lot of people learn for low <unk> and I guess.
Thanks.
<unk>.
I hear you.
Wanted to throw that out there I mean, that's a good shot so I appreciate guys take care. Thank you.
Okay. Thanks, John .
Thank you.
I am showing no further questions in the queue I would now like to turn the call back over to Joe Turner for closing remarks.
Alright, thanks to everybody for joining us on our call and we'll look forward to talking to you.
For our Q4 earnings release in January Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
[music].
Okay.