Q4 2023 Great Southern Bancorp Inc Earnings Call

Participants

Kelly Polonus; Investor Relations; Great Southern Bancorp Inc

Rex Copeland; Senior Vice President, Chief Financial Officer of Great Southern and Treasurer of Bancorp; Great Southern Bancorp Inc

Presentation

Operator

Good day, and thank you for standing by, and welcome to the Great Southern Bancorp fourth-quarter 2023 earnings call. (Operator Instructions)
Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your first speaker today, Kelly Polonus. Please go ahead.

Kelly Polonus

Thank you, Victor. Good afternoon, and thank you for joining us for our fourth-quarter 2023 earnings call. The purpose of this call is to discuss the company's results for the quarter ending December 31, 2023.
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.
For a list of some of these factors, please see the forward-looking statements disclosure in our fourth-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.

Okay. Thanks, Kelly, and good afternoon to everybody. We appreciate you joining us today for our fourth-quarter earnings call. As we anticipated, our fourth-quarter results reflected the challenging operating environment that the banking industry is experiencing right now. While our earnings were down this quarter, we continue to expect significant competition for deposits in a challenging environment for non-interest income.
We are steadfast in our long-term view of running the company like we have for decades in the cyclical industry. For the fourth quarter, we earned $1.11 per share or $13.1 million compared to $1.84 for $22.6 million in the fourth quarter of '22. Earnings per diluted common share were $1.33 in the third quarter of '23.
In light of the current interest rate environment, key performance drivers included continued increase in deposit costs and significant competition for deposits as well as expected continuation of lower loan origination volume. As we pointed out in our release, lower noninterest income and higher expenses also contributed to reduced earnings during the quarter.
However, we did note that there were a few nonrecurring additional expenses, which decreased our fourth-quarter earnings. On a positive note, the company's capital strengthened with stockholders' equity increasing by approximately $40 million from the end of the third-quarter '23. At the end of the quarter, we had -- or end of the year, we had a book value of $48.44 per common share, which was an increase of $3.63 during the fourth quarter.
We mentioned on our last couple of calls some anticipated headwinds that we would face related to net interest margin. Our NIM did decline to 3.30% for the fourth quarter compared to 3.99% for the same period in '22 and 3.43% for the Q3 of '23. The margin contraction primarily resulted from continuing changes in deposit and other funding mixes, increasing interest rates on all deposit types during the fourth quarter, and impact from net settlements related to our interest rate swaps. Rex will provide a little bit more color on this in his comments.
As I mentioned, our capital and liquidity position continues to be strong. Total stockholders' equity increased by $40.1 million from the end of the third-quarter '23 and increased $38.7 million from the end of '22 as a result of decreased AOCI losses on investment and interest rate swaps and continued growth in our retained earnings.
The retained earnings component of our stockholders' equity increased $26 million during the 12 months ended December 31, '23. Our capital remains substantially above regulatory well-capitalized thresholds and our TCE ratio was 9.7% at 1231 23, up nine, up from 9.2% at the end of 22. In the fourth quarter of 23, the Company declared a $0.4 per common share dividend and for all points was 43. Our dividends declared were $1.60 per common share. We also continued to repurchase our shares during our continued to repurchase our shares. During 2023, we've repurchased approximately 450,000 shares at an average price of $51.38 per share in 2023. As for liquidity, our borrowing that the Home Loan Bank was approximately 919 million at the end of 23. At the end of 23, we had available secured funding lines through the home loan bank and Federal Reserve Bank and on-balance sheet liquidity totaling approximately 2.1 billion. As we noted for the last few quarters, our company's deposit deposit base is diverse by customer type and geography. It has a very low level of uninsured deposits, about 15% of total deposits, excluding internal sub subsidiary accounts.
Overall, our loan portfolio is strong, diverse and performing well. During the fourth quarter, new loan production and general activity was down compared to 22. As expected, total outstanding loan balances grew by nearly 83 million since the end of 22. Growth primarily came from the multi-family loan segment. Most of this movement from unfunded construction line, availability to construction projects and commercial business loans, partially offset by a reduction in construction loans and one to four-family residential loans. Our pipeline of Lonmin has been the unfunded portion of construction loans remained strong totaling $1.2 billion in the fourth quarter, but that has decreased significantly compared to the end of 22 has some construction projects were completed. The related loans were either paid off or moved from the construction category through the appropriate permanent loan category. The unfunded portion of construction loans was $719 million at 12 31.3, down from $1.4 billion at the end of 22. I would remind you that we have a lot a lot of information that we filed yesterday and our low loan portfolio. You can find that at the FDC. side, overall, our credit quality metrics remained extremely strong. During the quarter. Nonperforming assets to total assets on assets, 4.2% at the end of the year, increasing by one basis points from September 30th, 23. Delinquencies in our loan portfolio continued to be at historically low levels. More information about our nonperforming and potential problem loans is included in the earnings release.
This concludes my prepared remarks at this time, I'll turn the call over to our CFO, Rex Copeland, are I thank you, Joe, and thank you all for being on the call today.

Rex Copeland

And I'll start off with net interest income and margin.
And just I mentioned this last quarter, and I'll just mention it again that just a general comment about net interest income comparisons for the third and fourth quarters this year versus same periods last year. And with the Fed funds and market increase in rates in 22, we were again able to increase rates on assets more quickly than liabilities last in 22. And so we achieved for us pre peak net interest income and margin in the second half of 2022. So we're comparing, you know, the latter part of 23 to those numbers.
Net interest income for the fourth quarter of 2020 23 decreased 9.5 million to $45.1 million compared to 54.6 million in the fourth quarter of 2022, driven by some negative changes in funding mix of deposits and borrowings, increasing interest rates on pretty much all deposit types during the fourth quarter of 23 and also due to negative impacts of the interest rate swaps, which we've mentioned before.
Net interest income was 46.7 million in the third quarter of 2023. So we did have a decrease from last quarter on net interest income of about 1.6 million when you compare Q4 versus Q3 of 2023. So we look at it and say if the silver and prime interest rates remain pretty much at their current levels and the Company's interest rate swaps will continue to have a negative impact on our net interest income based on the interest rate that we had on the swaps at December 31st of 23. The negative impact of all of those interest rate swaps combined in the first quarter of 2024 is expected to be approximately 2.7 million. The negative impact of all these Sloss combined in the fourth quarter of 23, it was about $3.6 million or so. As we noted in the earnings release, one of these swaps will terminate on March one and 24 for that swap had a negative impact to interest income of $2.9 million in the fourth quarter of 23, it's expected to have a negative impact of 1.9 million approximately in the first quarter of 24. And then after the first quarter, there will be no impact in subsequent periods. So the Company's net interest income was also negatively impacted in the fourth quarter by the high level of competition for deposits across the industry and in our local markets. The Company also had a portion of time deposits maturing at somewhat lower than current rates in the third and the late third and fourth quarters of 23. And so those time deposit renewals were either at rates that were higher, probably somewhat higher or they left the Company in turn requiring us to replace those funds with other funding sources that would be at current market rates.
And then lastly, and importantly, as sporadically, throughout 2023, the company experienced a higher than normal reduction in balances of non-interest-bearing deposits, customer balances in both non-interest bearing checking and interest-bearing checking accounts have fluctuated throughout 2023 as market interest rates for certain checking account types and time deposit accounts have increased some customers have chosen to reallocate funds into higher rate accounts. So during the full year of 2023, the company's interest-bearing checking balances increased about 28 million or about 1.3%, but non-interest bearing checking balances decreased about 168 million or about 15.8%. Those are point in time balances and not average balances. However, if you if you do look at the Q4 average balances of non-interest-bearing demand deposits, it was $1.07 billion in the fourth quarter of 22. And it was $900 million in the fourth quarter of 2023. So looking ahead, subsequent to the end of the year in the first quarter and into 2024 our time deposit maturities over the next 12 months as they stood at December 31st of 23 were within three months. We have $394 million of maturities with a weighted average rate of 3.82% within three to six months, we have 324 million of maturities with a weighted average rate of 4.32%. And then within six to 12 months, we have $371 million of maturities with a weighted average rate of 4.08% currently. So based on the time deposit market rates that we have in place that are that we're seeing now in January of this year, replacement rates, we think on those are going to be somewhere in the range of 4% to 4.5%. Generally, as Joe mentioned earlier, our net interest margin was 3.30% in the fourth quarter net compared to 3.99% in the fourth quarter of 2022 and then also compared to 3.43% in the third quarter of 2023.
I'll shift over a little bit here to liquidity and deposits. Joe mentioned liquidity earlier, but I'll just talk a little bit more about that so we continue to have substantial liquidity and readily available funding sources totaling about 2.1 billion at the end of December. With that now over $900 million of assets availability at the Home Loan Bank. We also have a substantial amount of unpledged securities and a 450 million or so available line with the Federal Reserve Bank should we need to look at that. So we do have, we think, ample sources of liquidity at December 31st, 2023. I'll talk a little more about deposits here. That total deposits were over $4.7 billion during the three months ended December 31st, 23, that the total deposits decreased about 130 million interest-bearing checking balances decreased about $27 million or 1.2%, and non-interest bearing checking balances decreased $46.7 million or about 5% in the fourth quarter time, deposits generated through the Company's banking center network and our corporate services networks decreased about 43 million and time deposits generated through Internet channels decreased another $3 million total brokered deposits decreased by about 8 million in the fourth quarter.
So talk for a minute here about noninterest income. Our total noninterest income in the fourth quarter of 23 compared to the fourth quarter of 22 decreased by about 1.1 million to 6.6 million. Primary reasons for that decline included some point of sale and ATM fees decreased about $621,000 compared to that prior year Q4 period. Some of the reasons for those those decreases, we do have now some of the transactions are now being routed through different channels than they were a year ago. And those channels have lower fees to us, which we expect that's going to continue in future periods.
We also had some increases in certain related processing costs during the transition from our old debit card processor to the new debit card processor. And that included a couple of hundred thousand dollars as we kind of made that transition and finalize some things, a couple of hundred thousand dollars that we anticipate would be a non recurring item.
Other income decreased 399,000 compared to the fourth quarter of 22. During 2020 2022, we did receive some payments that were from a third party servicer related to some old acquired loans, which was not repeated in the 2023 period. And then finally, an overdraft and insufficient fund fees, those decreased by about 327,000 compared to the fourth quarter of 2022. We continue to see a little bit of shifting going on there from the it appears that we've got four people using their debit cards for point-of-sale transactions and overdrawn their accounts. In some cases with that, it seems that the usage is shifting more to credit cards resulting in fewer overdrafts and fees that we have generated on those noninterest expense. I will talk about that for a moment here. So in the fourth quarter of 23 versus 22, noninterest expense increased 1.9 million to $36.3 million. And so when you kind of look at the reasons for that, we've broken it into a few different places, salary and employee benefits are part of it. That was up about $1.2 million from the fourth quarter of 22. Fortunately, this is just normal merit increases and some of our various operational and lending areas. And we also had a little bit less of a negative expense in the fourth quarter of 23 versus 22 related to compensation costs you defer and take overtime for originated loan volumes. Our volumes were lower in 23 versus 22. And then also one of the major items in the higher expense in a nonrecurring type item was we mentioned that in the fourth quarter of 23, we did have some discretionary bonuses that were awarded the various associates that have been involved significantly in the software and systems transition that we've been going through. And that was about $441,000 of expense in Q4 of 23. Additional expense related to our insurance debt increased 550,000 from the prior year fourth quarter. That increase was really due to previously announced increases in the FDIC deposit insurance fund rates. We've noted that previously and then we did have. So as a result of some of that, we did record some additional expenses in the fourth quarter of this year, which we don't believe will be recurring. And as we go into 2024, net occupancy expense increased about 389000 fourth quarter this year or Q4 23 versus fourth quarter 22. A lot of that's related to some computer licenses support expenses that we had that we did not have in the prior year that we've had to add here in 2023.
And then lastly, legal audit and other professional fees decreased about four $81,000 from the prior year quarter in the 2022 period, we expensed about 1.4 million related to training and implementation costs for that's the core system conversion and professional fees to consultants. They're engaged to support that transition in 2023, that extra expense was $918,000, so a little bit lower than it was in the fourth quarter a year ago. So our efficiency ratio for the fourth quarter of 2023 was 70.17% compared to 55.13% for the same quarter in 2022. And the increase in that ratio is mainly due to the decrease in net interest income and noninterest income, and then also a little bit related to increases in expenses as well.
Provision for credit losses. We did record a provision expense of $750,000 in the fourth quarter of 23. On the outstanding loan portfolio, the funded loan portfolio that compared to a $1 million provision in the fourth quarter of 2022 in it for the year three months ended December 31st, 23, we also recorded a negative provision for losses on unfunded commitments of $1.7 million, so a reduction of expense for that compared to a negative provision of $159,000 for the three months ended December 31st, 2022. Our net charge-offs in the fourth quarter of 23 were $833,000. That compared to $281,000 in the fourth quarter of 2022. And those current period charge-offs primarily related to two relationships that are kind of long-term relationships that we've had for quite some time at the end of the third quarter. The I'm sorry, in the fourth quarter, the allowance for credit losses as a percentage of total loans was 1.39%.
And lastly, I'll talk about income taxes. So our effective tax rate for the fourth quarter of 23 was 19.7% and for the fourth quarter of 22, it was 16.6% for the full year, which is probably more indicative of really kind of going forward. The Company's effective tax rate, but for 23 was 20.6% and for 2022 was 19.4%.
We do continue to have some tax credit items, some tax-exempt investments and loans, which reduce our effective tax rate. We think that the effective tax rate going forward is going to be something in the 20 20.5% to 21.5% range in 2024. That can vary a little bit just depending on the level of utilization of tax credits and also state income tax expense estimates evolve. We're constantly reviewing those. And so that can affect the overall effective tax rate and on it from time to time. So those are the items I wanted to discuss.
And that concludes our remarks that we prepared so far today. And at this time, we'll entertain questions and I'll ask our operator to once again remind the attendees on the call how to queue in for Quest.

Question and Answer Session

Operator

(Operator Instructions)
Andrew Liesch, Piper Sandler.

Hi.
Good afternoon, everyone. Thanks for taking my time today on really My questions revolve around the margin outlook here. So if the swap hit here in the first quarter is going to be less than it was in the fourth, could we see the margin and I increase here this quarter, or do you think there's other funding costs that might be upsetting and you mean all things being equal, that should be somewhat of an improvement. I mean, although we'll still have two, two months of it in the first quarter. So the more improvement will be in the beginning in the second quarter, the video is going to depend a little bit on what we see as far as any further migration from non-interest bearing accounts into other interest bearing types of funds. It doesn't feel like the costs are going up on other borrowings. That mean the rates on those are pretty much kind of where they are on CDs. We do have and some CDs as I mentioned, they're going to mature in the first quarter of 2024. But I think the bulk of those is probably later in the quarter. So I mean, I don't know that the first quarter is going to be terribly affected by it all. So it just depends on kind of where competition goes. And I think the biggest driver is going to be kind of where non-interest bearing balances shakeout?

Yes, I agree with that, Andrew. I mean, there's what happens to non-interest bearing accounts and our CDs. Our CD portfolio is relatively short probably a year or so. So most of those have repriced up to close to current market rates. I mean there could be a little bit of movement there, but but not a lot. And then, of course, our interest-bearing checking, yes, that sort of keeps up with market as it goes, but it does seem to continue to slide up and that may be people moving from lower tiers to higher tiers. And so there could be a little bit a slight up I know in the cost of funds. I wouldn't expect it to be dramatic. But again, the thing to watch there is the migration from 100 interest bearing into interest-bearing accounts. Generally speaking, though, our liabilities should be price up pretty close to market. We still have a fair amount of loans on the year and we've got disclosures on that in our annual report. We have a fair amount of loans to reprice up that's not going to necessarily all happen. It's not going to all happen in 24. It's going to happen over a period of time, but that's going to be helpful to margins, certainly. And as you as you mentioned, the $3 million a quarter swap that rolls off completely starting in the second quarter will help as well.

Could it be that the loan repricing, and I'm sure it will be in the 10 K when you file that in a couple of months. But you have the balance right now of loans that we're going to reprice this year.

I don't have the balance. I mean, as of last year, the balance was a couple hundred million dollars, maybe of repricing loans, but that may have changed in the last year.

And that's in addition to give or take 2 billion, 1.8 or 2 billion of loans that will reprice quickly and because they're tied to.
So for type.

Yes, you have a you're talking going on, right? You're talking about the new stuff that hasn't moved yet?

Yes, yes, that's right.

Yes, yes.

And yes, got it. And then just if you have it handy, do you know what the average yield on the new loan production was?

Nice quarter?
I don't have that number.

We get the trending higher? Do you think it sort of stabilize at a certain level?

I think it's probably I think it's probably stabilized as, as you know, rates have stabilized here.
Yes, I think it's programs stabilize.

It is still a little bit on on the nature of which type of loans to. So as construction loans on, you know, they're coming on at I don't know somewhere in that we added a few 50 to 300 over those over.

Yes, yes.

And so we're not we're probably not originating a lot of just new loans it goes immediately on the books necessarily. So yes, but that that's sort of what you can kind of take it from a construction standpoint in stores was funding and there's a little bit of and commercial other commercial stuff and some consumer stuff, but there's they're not usually real big balances on those right now.

Got it. Scott, on that, that covers my questions, I think so much, I'll step back.

Operator

Damon DelMonte, KBW.

Hey, good afternoon, guys. Hope everybody's doing well today day. And so I just had a question here on expenses. You guys called out some of some kind of onetime items. If you looked at the the 440,000 are the bonuses, the three 20 and the other operating expenses and the two 40, call it, 900,000 to 1 million on. So is it fair then to kind of take those out of the this quarter's level and your kind of puts you in the 35 million range as a starting point for 2020 for that. Is that reasonable?
Yes, I think so.

I mean so So definitely the bonuses are I mean, that's not something that we're contemplating on a quarterly basis, obviously, on the other cat that we did have some additional fraud loss stuff that we had in the fourth quarter. That's above kind of what we've normally been running and so we hope that that's not going to be a new trend or it was definitely higher than the general trend that we've had. So yes, I think those are all things. Now remember, though that in the first quarter we will have I mean a lot people get raises at the end of the year. So we got merit increases and things like that plus payroll taxes of higher payroll, a little higher, you have to start start off the year. So there's a few of those type of things out there, but does it mean that that's usually something every first first quarter of every year.
Got it.
Okay, thanks. And then on the fee income, you kind of called out the lower debit card and ATM fees, I believe because you changed vendors. So, you know, if you look at Q3 to Q4, that was a pretty pretty decent drop.

So is this a good run rate going forward?
Or do you expect to see that kind of recapture some of that lost revenue?

I think we had a couple of hundred thousand dollars in there that was sort of just some transition stuff going on that reduced it. But I mean, we definitely saw some less usage at Vega and gross income in the fourth quarter of this year. Of 23. So I don't know if that's a bit of a new trend there or not, but it definitely the top top line went down a little bit and the expenses were higher, like I mentioned to. So I don't think there's a couple hundred thousand of expenses in there that we don't think we will we carry forward. But Adam, it's hard to know for sure what that's going to look like in the first quarter.
Yes, I think that's exactly right.

Okay.
That's helpful.
Thank you. And then I guess just lastly, and kind of the outlook for loan growth, got the commentary on the pipeline and being lower, but yet still being somewhat healthy on how do you kind of frame our growth for the upcoming year, do you think kind of low to mid-single digits is doable? Do you think you could actually get to a solid mid-single digit level? What are your thoughts on that. It's just really hard to say that even the were subject to levels of competition and also customer interest in moving forward with project, we're not seeing a ton of projects that really sort of sale what we're trying to do, either people are trying to do it, do their projects with Tullow equity or yes, unguaranteed or those sorts of things and we're not willing to stretch to put stuff on the books. So it's just hard to say at this point.
Cash and cash are going on.
I thought I had thank you very much.

Operator

John Rodis, Janney.

Good afternoon, guys.
Take RJ I'll come back to the expense a topic. The can you just give us an update on the systems conversion? I know in the text you said mid 2024, but so how should we think about expenses there in the in the second quarter and I guess, if any, in the third quarter?

Yes. I mean, I don't know, John, that we can really update you on how much past what we've got in the earnings release.
Yes, we this quarter, we're in discussions with the with the third party vendor. As we said, now we have some disputes with them and we're trying to make progress on those. But we really haven't made much today. So I really can't you know, we're going to we're going to have that level of expenses until we ultimately he'll do something. And so I think you're going to have to kind of model those out probably here for the time being it shows is worst case though, mid this year or could it be stretched out even further? And that is that what you're saying floated in part to say I just wouldn't want to.
I couldn't tell you beyond that. I really can't I can't comment my passport.

Okay, fair. Fair enough.
Just one other question. I mean, credit quality remains very, very solid for you guys, but I did notice in the one table potential problem loans, you had a new addition of roughly 7.2 million and it was other residential. Can you maybe just add a little detail or color on that?

Yes, that looks at the rate that the modest side multifamily project in Oklahoma. And so to be honest with you John, I mean, we expect that to resolve relatively quickly, hopefully at some point for them and we own spec at this point, we don't expect a loss on it.

Okay. Okay.
Thank you, guys.

Operator

And here, I'm showing no further questions at this time. I would now like to turn it back to Joe Turner for closing remarks.

Not everybody. We appreciate you being with us here January, and we'll look forward to talking to you in April. Thank you.

Operator

Thank you for your participation in today's conference. That does conclude the program. You may now disconnect. Everyone, have a great day.