Great Southern Bancorp Inc

NASDAQ:GSBC

Earnings Call Analysis

Margin Relief and Solid Credit Quality

The company anticipates margin benefits as a $3 million quarter swap rolls off in the second quarter. A significant number of loans subject to repricing may also boost margins, though exact figures from last year's couple of hundred million might have changed. Expense estimates for 2024 start reasonably at around $35 million following one-time adjustments. While new potential problem loans emerged, amounting to $7.2 million in residential, the credit quality remains strong, and these issues are expected to resolve quickly in 2024 with no expected losses.

Navigating Through a Year of Adjustments

The past year saw a company facing a mix of both challenges and opportunities. Interest-bearing checking balances showed nominal growth of 1.3% or $28 million, while noninterest-bearing checking balances dropped by 15.8%, a significant decline of approximately $168 million. The average balance of noninterest-bearing demand deposits also decreased from $1.07 billion in Q4 of 2022 to $900 million in Q4 of 2023, representing a shift in customer preferences that management will need to address moving forward.

Marginal Deposits Slump and Fee Revenue Dips

The fourth quarter of 2023 saw a decrease in total deposits of about $130 million, with interest-bearing checking and noninterest-bearing balances contributing to this decline. A significant downturn in point-of-sale and ATM fees further compounded challenges, falling by roughly $621,000 as compared to the previous year. Changes in routing transactions through cheaper channels and transitioning to a new debit card processor contributed to this drop. A decrease in overdraft and insufficient fund fees also signaled a potential change in customer behavior towards credit card usage.

Higher Expenses Obscure Profit Picture

Noninterest expenses rose by $1.9 million, largely due to increased salary and employee benefits, FDIC deposit insurance fund rate hikes, and additional net occupancy expenses. Discretionary bonuses and costs from transitioning to a new software and systems added to the financial burden, although some of these expenses may not recur in 2024. However, the efficiency ratio escalated to 71.7% in Q4 of 2023 from 55.3% in the same quarter the previous year, indicating that the company's expense management may be losing steam.

Credit Quality Remains Robust Despite New Challenges

While credit quality remained generally healthy, the fourth quarter provision for credit losses saw an expenditure of $750,000 on funded loan portfolios, with net charge-offs related primarily to two longstanding customer relationships. Nonetheless, the allowance for credit losses was fairly conservative at 1.39% of total loans. There were also potential issues highlighted with a new $7.2 million multifamily project, although management expressed confidence in resolving it without incurring losses.

Tax Considerations and Interest Margin Pressures

The effective tax rate for the fourth quarter of 2023 increased to 19.7% from 16.6% the previous year. The full-year tax rate also surged slightly from 19.4% in 2022 to 20.6% in 2023. A possible range of 20.5% to 21.5% was projected for 2024. As for net interest margin, a decline was reported from 3.99% in Q4 of 2022 to 3.30% in Q4 of 2023. The company indicated replacement rates for maturing time deposits may range from 4% to 4.5%, which could further influence net interest margins.

Investing Amidst Uncertainty in Loan Growth

The outlook for loan growth remains ambiguous, with company executives signaling that low to mid-single-digit growth could be feasible. However, customer reluctance to engage in projects with adequate equity and competition in the market could hinder significant portfolio expansion. The company's systems conversion is an additional wildcard, as ongoing disputes with a third-party vendor might lead to sustained elevated expenses without a definitive timeline for resolution.

Earnings Call Transcript 2023-Q4

[Operator]

Good day and thank you for standing by. 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, executive]

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 of management 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.

[Joseph Turner, executive]

Thanks, Kelly, and good afternoon, 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 noninterest 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 or $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, 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 of '23. At the end of the quarter or end of the year, we got a book value of $48.44, per common share, which was an increase of $3.63, I think, 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 2012 and 3.43% for the Q3 of '23. The margin contraction primarily resulted from continuing changes in deposits and other funding mixes, increasing interest rates on all deposit tax during the fourth quarter and an 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 12/31 23%, up from 9.2% at the end of '22. In the fourth quarter of '23, the company declared a $0.40 per common share dividend and for all of ‘23; our dividends declared were $1.60 per common share. We also continued to repurchase our shares or continue 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 capacity at Common 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 of Federal Reserve Bank and on balance sheet liquidity totaling approximately $2.1 billion. As we've noted for the last few quarters, our company's deposit base is diverse by customer type and geography and have a very low level of uninsured deposits, about 15% of total deposits, excluding internal 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 growth primarily came from the multifamily 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 1 to 4 family residential loans. Our pipeline of loan commitments and the unfunded portion of construction loans remain strong, totaling $1.2 billion in the fourth quarter, but that has decreased significantly compared to the end of '22. As construction projects were completed, the related loans were either paid off or moved from the construction category to the appropriate permanent loan category. The unfunded portion of construction loans was $719 million at 12/31 23%, down from $1.4 billion at the end of ‘22. I would remind you that we have a lot of information that we filed yesterday in our loan portfolio. You can find that at the FDIC side. Overall, our credit quality metrics remained extremely strong during the quarter. Nonperforming assets to total assets were 0.2% at the end of the year, increasing by 1 basis point from September 30, ‘23. Delinquency in our loan portfolio continues 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.

[Rex Copeland, executive]

Thank you, Joe, and thank you all for being on the call today. I'll start off with net interest income and margins. 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 the same periods last year. With the Fed funds and market increase in rates in '22, we were again able to increase rates on assets more quickly than liabilities in '22. And so we achieved for us peak net interest income and margin in the second half of 2022. So we're comparing the latter part of '23 to those numbers. Net interest income for the fourth quarter of 2023 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 the 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 linked 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 SOFR and prime interest rates remain pretty much at their current levels. The company's interest rate swaps will continue to have a negative impact on our net interest income. Based on the interest rates that we had on these swaps at December 31 of 23, the negative impact of all 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 swaps combined in the fourth quarter of 23 was about $3.6 million. So as we noted in the earnings release, one of these swaps will terminate on March 1 of 24, 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 late third and fourth quarters of '23. And so those time deposit renewals were either at rates that were higher, probably at 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, sporadically throughout 2023, the company experienced a higher-than-normal reduction in balances of noninterest-bearing deposits. Customer balances in both noninterest-bearing checking and interest-bearing checking accounts are 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 noninterest-bearing checking balances decreased about $168 million or about 15.8%. Those are point in time balances and not average balances. However, if you do look at the Q4 average balances of noninterest-bearing demand deposits, it was $1.07 billion in the fourth quarter of $22 million, and it was $900 million in the fourth quarter of 2023. So looking ahead, subsequent to the end of the year into 2024, our time deposit maturities over the next 12 months as they stood at December 31 of 23 were within 3 months. We have $394 million of maturities with a weighted average rate of 3.82%. And within 3 to 6 months, we have $324 million of maturities with a weighted average rate of 4.32%. And then within 6 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 or 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. That 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. Over $900 million of that is 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 31, 2023, I'll talk a little more about deposits here. The total deposits were over $4.7 billion. During the 3 months ended December 31, 23, the total deposits decreased about $130 million. Interest-bearing checking balances decreased about $27 million or 1.2% and noninterest-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 point-of-sale and ATM fees that decreased about $621,000 compared to that prior year fourth quarter period. Some of the reasons for the decrease is 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 made that transition and finalize some things, a couple of hundred thousand dollars that we anticipate would be a nonrecurring item. Other income decreased $399,000 compared to the fourth quarter of '22. During 2022, we did receive some payments that were from a third-party service related to some old acquired lines, which was not repeated in the 2023 period. And then finally, 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. It appears that we've got -- where people are using their debit cards for point-of-sale transactions and overdrawing their accounts in some cases with that, it seems that the usage has shifted more to credit cards, resulting in fewer overdrafts and fees that we have generated on those. Noninterest expense. We'll 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 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. A portion of this is just normal merit increases in 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 that you defer and take over time for originated loan volumes. Our volumes were lower in '23 versus '22. And then also one of the major items in the higher expense and nonrecurring type item was -- we mentioned it 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 insurance, that 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 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 as we go into 2024. Net occupancy expense increased about $389,000 fourth quarter '23 versus fourth quarter '22. A lot of that is related to some computer license and support expenses that we did not have in the prior year that we've had to add here in 2023. And then lastly, legal audit, other professional fees decreased about $481,000 from the prior year quarter. In the 2022 period, we expensed about $1.4 million related to training and implementation costs for the core system conversion and professional fees to consultants that are engaged to support that transition. In 2023, that expense was $918,000 so a little bit lower than it was in the fourth quarter a year ago. So efficiency ratio for the fourth quarter of 2023 was 7.17%. That compared to 55.3% 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 report a provision expense of $750,000 in the fourth quarter of '23 on the outstanding loan portfolio, the funded loan portfolio. That compares to a $1 million provision in the fourth quarter of 2022. And for the three months ended December 31, '23, we also recorded a negative provision for losses on the unfunded commitments of $1.7 million, so a reduction of expense for that compared to a negative provision of $159,000 for the 3 months ended December 31, 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 2 relationships that are long-term relationships that we've had for quite some time. At the end of the end of the fourth quarter, the allowance for credit losses as a percentage of total loans was 1.39%. And lastly, I'll talk a little bit about income taxes. So our effective tax rate for the fourth quarter of ‘23 was 19.7% for the fourth quarter of '22, it was 16.6%. For the full year, which is probably more indicative of really going forward, the company's effective tax rate for '23 was 20.6% and for 2022 was 19.4%. We do continue to have some tax credit items and some tax-exempt investments and loans, which reduced our effective tax rate. We think that the effective tax rate going forward is probably going to be something in the 20.5% to 21.5% range in 2024. That can vary a little bit just depending on the level and 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 from time to time. So those are the items I wanted to discuss, and that concludes our remarks that we prepared so far today. 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 questions.

[Operator]

[Operator Instructions]. And our first question will come from the line of Andrew Liesch from Piper Sandler.

[Andrew Liesch, analyst]

Really my question has revolved around the margin outlook here. So 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 NII increase here this quarter? Or do you think there's other funding costs that might be offsetting?

[Joseph Turner, executive]

All things being equal, that should be somewhat of an improvement. Although we'll still have 2 months of it in the first quarter, so the more improvement will be in the beginning of the second quarter. It's going to depend a little bit on what we see as far as any further migration from noninterest-bearing accounts into other interest-bearing types of funds. It doesn't feel like the costs are going up on other borrowings. The rates on those are pretty much where they are. We do have 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 don't know that the first quarter is going to be terribly affected by at all. So it just depends on where competition goes. And I think the biggest driver is going to be where noninterest-bearing balances shake out.

[Rex Copeland, executive]

Yes, I agree with that, Andrew. There's what happens to noninterest-bearing accounts. And our CD portfolio is relatively short, probably a year or so. So most of those have repriced up to close to current market rates. There could be a little bit of movement there, but not a lot. And then, of course, our interest-bearing checking, that 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 of slide up in the cost of funds. I wouldn't expect it to be dramatic. But again, the thing to watch there is the migration from noninterest-bearing into interest-bearing accounts. Generally speaking, though, our liabilities should be priced pretty close to market. We still have a fair amount of loans 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 and 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 margin certainly. And as you mentioned, the $3 million quarter swap that rolls off completely starting in the second quarter will help as well.

[Andrew Liesch, analyst]

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

[Joseph Turner, executive]

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

[Rex Copeland, executive]

And that's in addition to, give or take, $1.8 billion or $2 billion of loans that are repriced quickly because they're tied to SOFR type of...

[Joseph Turner, executive]

Yes, you're talking...

[Rex Copeland, executive]

The new that hasn't moved yet.

[Joseph Turner, executive]

That's it, yes.

[Andrew Liesch, analyst]

And then just if you have it handy, do you know what the average yield on the new loan production was in the last quarter?

[Joseph Turner, executive]

I don't have that number. We can…

[Andrew Liesch, analyst]

Is it trending higher? Or do you think it's stabilized at a certain level?

[Joseph Turner, executive]

I think it's probably stabilized as rates have stabilized here. I think it's probably going to stabilize.

[Rex Copeland, executive]

It depends a little bit on the nature of which type of loans too. So as construction loans, they're coming on it, I don't know, somewhere... [indiscernible] $250 to $300 million over offer. So we're probably not originating a lot of just new loans that go immediately on the books necessarily. That's what you can think of from a construction standpoint as far as what's funding. And there's a little bit of commercial other commercial stuff and some consumer stuff, but they're not usually real big balances on those right now.

[Operator]

And our next question will come from the line of Damon DelMonte from KBW.

[Damon Del Monte, analyst]

So I just had a question here on expenses. You guys called out some onetime items. If you look at the 440,000 of the bonuses, the $320 million and the other operating expenses in the $240 million, that's, call it, $900,000 to $1 million. So is it fair then to take those out of this quarter's level and you're put in the $35 million range as a starting point for 2024. Is that reasonable?

[Joseph Turner, executive]

I think so. Definitely, the bonuses are -- that's not something that we're contemplating on a quarterly basis, obviously. We did have some additional fraud loss stuff that we had in the fourth quarter that's above what we've normally been running. And so we hope that, that's not going to be a new trend. 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, a lot of people get raises at the end of the year, so we've got merit increases and things like that, plus payroll taxes will be…

[Rex Copeland, executive]

Higher payroll [indiscernible].

[Joseph Turner, executive]

It's a little higher you start off the year. So there's a few of those types of things out there. But that's usually something that's every first quarter and every year.

[Damon Del Monte, analyst]

And then in the fee income, you called out the lower debit card and ATM fees, I believe, because you had changed vendors. So if you look at third quarter to fourth quarter that was a pretty decent drop. So is this a good run rate going forward? Or do you expect to see that recapture some of that lost revenue?

[Joseph Turner, executive]

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

[Rex Copeland, executive]

I think that's exactly right.

[Damon Del Monte, analyst]

And then, just lastly on the outlook for loan growth. I got the commentary on the pipeline and is being lower, but yet still being somewhat healthy. How do you frame out growth for the upcoming year? Do you think 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?

[Joseph Turner, executive]

It's just really hard to say, Damon. We're subject to levels of competition also customer interest in moving forward with projects. We're not seeing a ton of projects that really fit what we're trying to do, either people are trying to do it, do their projects with too low equity or unguaranteed or those sorts of things. And we're not willing to stretch to put stuff on the book. So it's just hard to say at this point.

[Operator]

And our next question will come from the line of John Rodis from Janney.

[John Rodis, analyst]

Just back to the expense topic, can you just give us an update on the systems conversion? I know in the text, you said mid-2024, so how should we think about expenses there in the first and second quarter and if any, in the third quarter?

[Joseph Turner, executive]

I don't know, John that we can really update you much past what we've got in the earnings release. We're in discussions with the third-party vendor. As we said, 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 -- we're going to have that level of expenses until we ultimately do something. And so I think you're going to have to model those probably here for the time being.

[John Rodis, analyst]

Joe, is worst case though mid this year? Or could it be stretched out even further than that? Is that what you're saying?

[Joseph Turner, executive]

Well, it's hard to say. I couldn't tell you beyond that. I really can't. I can't comment on my pathway.

[John Rodis, analyst]

Just one other question. Credit quality remains 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?

[Joseph Turner, executive]

That's a modest size multifamily project in Oklahoma. And to be honest with you, John, we expect that to resolve relatively quickly, hopefully, in '24. At this point, we don't expect a loss on it.

[Operator]

I'm not showing no further questions at this time. I would now like to turn it back to Joe Turner for closing remarks.

[Joseph Turner, executive]

All right, everybody. We appreciate you being with us here in January, and we'll look forward to talking to you in April. Thank you.

[Operator]

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