Great Southern Bancorp, Inc. (GSBC) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. Third Quarter 2022 Earnings Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Kelly Polonus. Ma'am, please begin.

Thank you, Howard. Good afternoon, and welcome. The purpose of this call today is to discuss the company's results for the quarter ending September 30, 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, which speak only as of the date they are made. Please see our forward-looking statements disclosures in our third quarter 2022 earnings release for more information. President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland, are on the call with me today. I'll now turn the call over to Joe.

Okay. Thanks, Kelly. Good afternoon, everyone. We appreciate you joining us today for our third quarter earnings call. Our third quarter earnings continue 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 and making decisions that are in the best interest of all 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 will 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 $20.4 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 I do want to go into a little bit more detail. First of all, in the third quarter of '22, 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 a $1.6 million in PPP fee accretion in the 2021 quarter. Another big driver -- the biggest driver really of the change between the quarters was the change in provision expense, which was we had $3.3 million in provision expense in this year's quarter versus the negative provision of $2.4 million in the year ago quarter. So a swing of $5.7 million there. Noninterest income was about $1.8 million lower in 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've data servicing conversion that we've talked about the last couple of quarters. We also had 300 -- almost $400,000 of professional fees related to a swap that we entered into in the third quarter of '22. Our salary and employee benefits increased about $1.1 million in the third quarter of '22 over the third quarter of '21. About $300,000 of that increase related to the loan production offices we opened -- so about $800,000 just related to maybe some additional staffing as well as probably higher comp levels given the kind of employment environment we're in. So if we look at reported pretax pre-provision earnings, our pretax pre-provision earnings were $26.1 million in Q3 of '22 versus $23.4 million in Q3 of '21. So we were up $2.7 million. And this was -- would have been about a 9% lower share. I think our fully diluted shares in 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 assets. I'm talking about this quarter now, obviously, our margin was 3.96% versus 3.36% in the year ago quarter and 3.78% in the second quarter of '22. 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 that we might see some benefits to our margins from continued increases. But I think definitely the lion's share of the benefit that we'll see from the rate increase that has already appeared in our margin. As far as loans go during the quarter, loan production and activity in our markets continue 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 this the beginning of the year. So 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 flow 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 of construction commitments that will continue to fund probably over the next 15 months or so. Our asset quality or credit quality metrics continue to be at historically good levels 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. 0.06% of total assets, very low our levels of past due, et cetera, charge-offs are also at very low levels. So 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 assets ratio is 8.8%. So down a little bit from the year -- from the end of the year, but still very strong. In the third quarter, we declared a $0.40 per share common dividend. And through the first 9 months, we've declared $1.16 in dividends. We've purchased approximately 1 million shares of stock this year at $59.28. And at September 30, 2022, we had 222,000 shares still available in our stock repurchase authorization. That concludes my prepared remarks. Well, I might just go through capital. We did -- our TCE, the dollar amount is down pretty significantly from the beginning of the year. We started with $616 million in capital at January 1 of 2022. We basically spent about as much in buying stock back as we've had in net income. So our capital has reduced by the amount of our dividend, which is about $14 million. And then there has been a pretty significant change, about $91 million, I think, change in our mark-to-market on our swaps and our available for sale portfolio. Our loan portfolio is largely very short. So the securities we buy and 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 a lower interest rate environment. So that's the purpose of that. Now I'll turn it over to our CFO, Rex Copeland.

All right. Thank you, Joe. Joe has 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 to $52.9 million compared to the $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 of accretion of deferred fees for PPP loans in the 2021 third quarter numbers. Net interest margin, again, was 3.96% for the third quarter. That compared, as we said, to 3.36% 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 as 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 2 things are happening right now and 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 from the quarter a year ago. And as I mentioned, we've seen the cash and cash equivalents that we had, some excess liquidity. We've utilized that to put into loans and investments. As Joe mentioned, I think, before, and we've said before, we're still looking at being generally positive for us in the rising interest rate environment. We'll continue to monitor where we are in that position. And like Joe said, we tried to do some things to help mitigate the downside risk of when rates turn around and start going back down. So we do take that very seriously and 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 9 months, we talked about our asset mix has shifted. We talked about that. We've also had here during the year, our liability mix has shifted somewhat. So we were more -- we had more 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, 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 knew had some kind of upfront funds there that we knew that they would, over time, draw those funds out. And 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 used those funds for their business operations in 2022. So kind of the summation of that is our transaction-type accounts have decreased about $212 million from December 31, while retail time accounts or CDs have increased about $105 million net. And then we've added some broker deposits. Those have increased about $209 million throughout the year since the beginning of 2022. So a little bit of shift in the liabilities that we have. And from time to time, if you utilize home loan bank advances as well. So we've got a variety of sources that we do use. And we try to do that and use varying types and terms. So some of those are going to be very short daily repricing type funding and some may be a little bit longer after 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 $8 million even when compared to the 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. And 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 1 to 4 family portfolio as well. Noninterest expense, I'll 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. The expense was $34.8 million in this year's quarter. We talked about salary employee benefits information already that, as Joe went through some of those things. The -- some of the overall increases that we just kind of mentioned earlier in more general terms, again, we had merit increases. And like Joe said, too, we are paying some existing employees with bigger increases maybe than we have in the past and also then adding people and replacing people. And so there's some costs that go along with all of that. Mentioned the professional fees that we had, the Fiserv conversion or 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 $570,000 from the prior year quarter. And 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 57.09% compared to 57.27% in the same quarter last year. And the increase -- I'm sorry, the decrease in 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 the 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, and we had net charge-offs in the 3 months ended September 30 of $297,000. A lot of that is related to overdrafts. We might have had a couple of small commercial charge-offs in there, but the vast majority of that is our rate of overdrafts. And then finally, I'll wrap up with talking about income taxes. Our effective tax rate this quarter was 20.5% compared to 20.9% in the year ago quarter. We continue to utilize 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 those means. We continue to do that. We expect we'll continue to do that at 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 20.5% to 21.5% 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 income is sourced from. But we think that, that generally is going to be the range where we'll 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 queue in for those questions.

[Operator Instructions]. Our first question or comment comes from the line of Andrew Liesch from Piper Sandler Company.

Question on the margin here. Just kind of diving into some of the deposit beta questions. I hear you that maybe there's a little bit more expansion ahead. But at what point do you think -- how many more Fed increases what do we need do you think that we'll 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'll see a little bit -- I mean, we're going to see a benefit on the loan side for sure. And then it becomes a matter of how we have to fund the existing balance sheet and any growth to the balance sheet and how much the mix continues to change toward time deposits. So I mean, assuming 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 the fund growth in particular, is going to be probably more, 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 and some of it may be a little more term where we'll have to pay maybe a little bit more of a premium rate or something like that, at least initially. So I think we're still going to see maybe some benefit, but I don't think it's 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. The first 75, we honestly probably didn't move very much then. The second 75, we started to have to move rates. And so we got the first 150 basis points or so, sort of for free -- but then after that, just marginally, it just gets probably a higher beta 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 lot of high CD rate offers around. So there's been depositors seem hungry for higher rates for obvious reasons. And there probably is a lot of liquidity washing around when you're talking about the largest banks. But when you're talking about community banks, not so much -- not as much probably.

Right, right. All right. That's really helpful color. 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 CECL model or your own conservatism? I'm just curious like what are some of the puts and takes that went into that $3.3 million or so.

Well, I think -- I mean, I'll start and then Rex can correct me. But -- the way the CECL model works, at least in so far as we're concerned, is the first step is to make an arithmetic calculation, and this is based on historical levels of 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 the folks in the banking industry, that number keeps going down. That part of it because we're just adding quarter-after-quarter of effectively 0 charge-offs. -- which that's a good thing, but 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 use 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 in our reserve levels, I guess it would be more in line with us trying to prepare for a worse 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 of low or no loan charge-offs we had, I think, about $300,000 of charge-offs this quarter, but I think most of that was on deposits, checking accounts and things. So the loan portfolio is strong, yes, we're just trying to -- we're trying as best we can to estimate what losses could be, if the economy turns down a little bit.

And there's part of it to the growth we've got growth on the balance sheet of the funded portion, but we also have growth in the unfunded portion or have had so far this year -- and so 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, if you see us grow those line items, we'll have to probably provide for that.

Now if we had a situation where we weren't originating a lot of new deals, but loans were moving from unfunded to funded. That's not really going to result in much increase in provision expense because essentially your allowance for unfunded commitments will probably drop. So you'll have a credit on that line, and you'll have a debit on your provision for -- or your allowance for funded. So that could happen, too.

Our next question comment comes from the line of Damon DelMonte from KBW.

A question on the deposit growth this quarter. I don't think you guys break out the composition on 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 breakouts are on an end-of-period basis? You referenced an increase in CDs and brokered CDs. So just kind of wondering how much of the growth was driven by that.

Yes. I mean I can give you that like the into September balance information, and we'll 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 -- $3.4 billion, excuse me. The total of kind of what we call retail CDs is about -- just might add $1 billion and the brokered total combination of various things that fall under the brokered umbrella is about $360 million.

Okay. All right. That's helpful. And then kind of just on the expense outlook. I know you guys have -- you spoke last quarter about it in 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 3 or 4 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?