GSBC 2024Q4

Good day, and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Zack Mukewa. Please go ahead.

Good afternoon, and thank you for joining Great Southern Bank's fourth quarter 2024 earnings call. Today, we'll be discussing the Company's results for the quarter and full year ending December 31, 2024. Before we begin, I'd like to remind everyone that during this call, forward-looking statements may be made regarding the Company's future events and financial performance. These statements are subject to various factors that could cause actual results to differ materially from those anticipated or projected filings of these refer to the forward-looking statements assessments disclosure in the fourth quarter earnings release and other public filings. Joining me today are President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland. I'll now turn the call over to Joe.

All right. Thanks, Zack, and good afternoon, everyone. We appreciate you joining us today for our fourth quarter earnings call. 2024 was a year of resilience and progress for Great Southern Bancorp. Despite facing a dynamic economic and banking environment, our team delivered solid results, reinforcing the strength of our business model and our long-term commitment to execution. For the year, we reported $61.8 million or $5.26 a share. While this represents a slight decline from the prior year, it reflects our proactive management during a period marked by rising funding costs and heightened competition for deposits. These results underscore our ability to adapt, prioritize profitability and continue creating value for our shareholders. In the fourth quarter, we reported net income of $14.9 million or $1.27 per diluted common share. Net interest margin was 3.49% for the quarter, reflecting an improvement from 3.3% in the fourth quarter of last year and 3.42% in the quarter ended September 30, 2024. Annualized return on average assets for the quarter was 1%, which is up slightly from the prior year's quarter, while annualized ROE or return on average common equity was 9.76%. As we did note in the earnings release, fourth quarter financial results were negatively impacted by a nonrecurring noninterest expense item. This expense reduced annualized return on average common equity by 103 basis points and annualized return on average assets by 10 basis points. Looking ahead, we are confident in our long-term strategy and our ability to drive shareholder value and increase book value per share while continuing to deliver strong consistent results. Our loan portfolio growth was driven by sustained demand in key segments with gross loans for the year increasing $100.5 million. Multifamily residential loans led the way reflecting robust growth, while the loan pipeline for construction loans remains strong. Loan payoffs due to borrowers selling projects or refinancing debt were sporadic and somewhat muted in 2024 compared to previous years, given the interest rate environment. For more information about our loan portfolio, please refer to our quarterly loan portfolio presentation available on our Investor Relations site under the Presentations link. The presentation provides helpful insights regarding our loan portfolio mix by type and geography. Our asset quality remained very strong with nonperforming assets of 0.16% of total assets at the end of the year, and nonperforming loans to period-end loans fell to 0.07%. During the quarter ended December 31, 2024, our provision for credit loss expense was $2.5 million higher than during the same quarter last year. In the 2024 fourth quarter, the Company did not record a provision expense on its portfolio of outstanding loans compared to the $750,000 provision expense in the same period of 2023. In the 2024 fourth quarter, the Company recorded a provision expense of $1.6 million on its unfunded loans compared to a negative provision expense of $1.7 million during Q4 of 2023. Our total net charge-offs for the fourth quarter fell to $155,000, down from $833,000 in the prior year quarter. The allowance for credit losses as a percentage of total loans stood at 1.36% at December 31, 2024. It was the same as at the end of the third quarter and 1.39% at the end of 2023. We strengthened our capital position, increasing stockholders' equity by $27.7 million, while strategically repurchasing our stock. I think we spent maybe $15 million or so repurchasing our stock and about $18 million on our dividend. And of course, we also had a change to the downside in our mark-to-market by about $12 million, I think. So, our continued capital management enabled us to return significant value to our shareholders through dividends and share repurchases. As we look ahead to 2025, our focus remains on disciplined growth, proven balance sheet management, and sustainable value delivery for our shareholders. At Great Southern, we have consistently taken a long-term view of everything we do. As a result, we are excited about the opportunities ahead. We are also confident in our ability to navigate any challenges that may arise. Lastly, I'd like to thank our team members for their dedication and our shareholders for their continued trust. Now, I'll turn it over to Rex to provide more detail on our financial results.

Thank you, Joe, and good afternoon, everyone. I'll provide a little deeper dive into some of our financial performance metrics here for the fourth quarter and the full year. I'll start with net interest income and margin. For the fourth quarter, we delivered net interest income of $49.5 million, a 9.7% increase compared to $45.1 million in the same quarter of 2023 and a 3.2% increase from $47.9 million in the third quarter of 2024. This improvement was primarily driven by higher loan income and yields as well as strategic management of funding costs. For the full year, our net interest income totaled $189.1 million, reflecting a slight decline of 2.1% compared to the previous year. This decline reflects the impact of ongoing elevated deposit costs which continued increasing until the latter part of 2024 but have now begun to decline. Our net interest margin for the fourth quarter increased to 3.49% compared to 3.30% in the same period last year and 3.42% in the third quarter of 2024. Our margin stability despite the challenging deposit rate environment underscores our disciplined approach to balance sheet management and strategic actions to effectively manage funding costs. For the full year, the margin stood at 3.42%, down from 3.57% in 2023, reflecting the impact of elevated funding costs. Average loan yields rose to 6.30% for the year, while the cost of interest-bearing liabilities increased to 3.11%. We do not currently see any significant catalyst to drive the net interest margin significantly higher or lower from the fourth quarter level in the coming two to three quarters. We have a significant amount of time deposits maturing in the first quarter of 2025, which we expect will renew at slightly lower rates than their current rate. However, as a reminder, we will lose the benefit of the terminated interest rate swap after the third quarter of 2025. We expect to continue realizing approximately $2 million per quarter in interest income from the terminated swap through the first three quarters of 2025, after which the benefit to interest income will cease. Total deposits at December 31, 2024, were $4.61 billion, down $91.9 million from the previous quarter. The decline was driven by reductions across multiple deposit categories, including interest-bearing checking, brokered deposits, and retail time deposits. These changes reflect the ongoing competitive environment for deposits, which we monitor closely to ensure stability and growth. Our liquidity position remains strong. With $195.8 million in cash and cash equivalents and access to additional funding lines through the Federal Home Loan Bank and the Federal Reserve totaling $1.60 billion, we remain well positioned to address both current and future funding needs. We have successfully replaced brokered deposits as they mature and expect this trend to continue for upcoming maturities. We've actively managed our funding sources to optimize costs and support long-term stability. Earlier in the rate cycle, as interest rates were rising, we replaced maturing lower rate time deposits with higher rate time deposits to remain competitive. However, with recent rate cuts in 2024, we are now replacing maturing higher rate time deposits with funding at comparatively lower rates. This transition reflects an important shift in the interest rate environment, allowing us to reduce overall funding costs. Time deposit market rates have begun to decline following the Federal Reserve's rate cut in late 2024, which we anticipate will ease funding cost pressures somewhat moving forward. As mentioned before, loan growth remained strong with total net loans increasing over $100 million or 2.2% year-over-year to $4.69 billion at year-end. This growth was driven by a $607.2 million increase in multifamily residential loans, which offset declines in other categories, including a $358.7 million decrease in outstanding construction loan balances as primarily multifamily projects and construction transition to completion. Importantly, our loan pipeline expanded in the fourth quarter, particularly in construction, signaling continued future demand. Asset quality mentioned somewhat previously before, but nonperforming assets declined $2.2 million during the year to $9.6 million or 0.16% of total assets at year-end 2024. We mentioned the net charge-off levels already. For the quarter and then for the year, net charge-offs in 2024 were $1.6 million, up a little bit from $1.1 million in 2023. We also mentioned the allowance for credit losses was 1.36% of total loans. Foreclosed assets increased $6 million from the end of 2023 as a single office real estate asset accounted for 100% of the total foreclosed real estate asset balance at December 31, 2024. A little bit more on noninterest income and expenses. For the full year, noninterest income totaled $30.6 million largely unchanged from the prior year. In the fourth quarter, noninterest income was $6.9 million, up $371,000 compared to the prior year's fourth quarter. This increase was primarily driven by increased net gains on loan sales and other income, partially offset by decreased overdraft fees. On the expense side, noninterest expenses for the year were $141.5 million, which was consistent with 2023. For the fourth quarter, noninterest expenses totaled $36.9 million which included the $2.0 million expense that was mentioned previously. Excluding that item, our expenses reflected disciplined cost management and continued investment in technology and operational areas. For the years ended December 31, 2024 and 2023, the Company's effective tax rate was 18.1% and 20.6%, respectively. These effective rates were below the statutory federal rate of 21%, primarily due to the utilization of certain investment tax credits and the Company's tax-exempt investments and loans, which reduced the Company's effective tax rate. The Company's current effective tax rate, both combined federal and state are expected to range from approximately 18% to 20% in future periods, primarily due to the aforementioned investment tax credits that we began utilizing additional portions of in 2024. And I'll conclude with capital and stockholders' return. From a capital perspective, our stockholders' equity increased by $27.7 million to $599.6 million at year-end, which represents 10% of our total assets. This increase was primarily driven by net income of $61.8 million and stock option exercises adding $11.9 million to equity, partially offset by $18.7 million in declared cash dividends and $15.2 million in share repurchases. Our realized losses on investment securities and interest rate swaps decreased stockholders' equity by another $11.9 million in 2024. Our tangible common equity ratio at the end of the year was 9.9%. That concludes my remarks. At this time, we are now ready for questions.

Our first question today will be coming from the line of Andrew Liesch.

Just want to talk on the margin commentary here. Kind of surprised that it's not a little more optimistic just given that we had a couple of rate cuts, and it's not just the CDs where you saw improvement in cost of funding. So, do you think maybe the bias could be slightly higher for the next couple of quarters before the swap benefit rolls away?

There are a few factors at play here. As mentioned earlier, we don't anticipate a significant change from the fourth quarter numbers. We expect to see some advantages from CD maturities, and while not a large amount, a few fixed-rate loans may reprice slightly higher. Much will depend on our deposit and funding mix, as well as any reduction in noninterest-bearing checking accounts. Overall, I don't foresee a significant shift in the numbers in either direction, to be honest.

Got it. I guess what are you seeing locally in deposit competition for interest-bearing like demand and savings and money market accounts because the rates on those accounts came down nicely this last quarter and with some more cuts in the fourth quarter. I was curious if there's any market improvement there with demand?

I think most of our markets remain quite competitive. Not every bank is active, but there are enough banks in each market that are either adjusting rates slightly or maintaining higher rates. We have been able to lower some of those rates prudently, and with any additional rate cuts from the Fed, we have negotiated rates that we can reduce. Without those cuts, we might be able to lower rates a little, but not significantly, and some of our other products have more standard rates. We have made slight reductions in those rates, but competition is causing us to be cautious in our approach.

Got you. All right. That's helpful. And then just a quick question on expenses here, if I take out that $2 million or right around $35 million for the quarter. Is that a good jumping off point for the first quarter and maybe with some seasonally higher payroll taxes and bonus accruals than an uptick in the second quarter for merit increases. Is that the right way to look at the overall expense base?

Yes, there wasn't anything else highlighted in the earnings release, which seems reasonable. We can expect normal seasonal payroll tax issues along with some incentives and bonuses. Additionally, many employees are due for annual merit increases, most of which take place at the beginning of the year. Therefore, there will be some related expenses in the first quarter as well.

And our next question will be coming from the line of Damon DelMonte.

I hope you're all doing well. Just I wanted to start off a little bit about loan growth. There was no provision for loans this quarter, it was for unfunded commitments. So just wondering if you could talk a little bit about the closing activity during the quarter and kind of how you see that funding over the next four quarters or so?

You're talking about how the unfunded will fund?

Yes. Yes, exactly.

I think, generally, our unfunded funds may be between $50 million and $70 million a month. So, there will be $150 million or so of that fund, but we generally will have repayments at that level or pretty close to it. So, I don't know that our loan portfolio will necessarily grow a ton in 2025. Some of the more recent loans that we've closed that are construction deals or things like that, they won't start funding for a little while. But Joe, we've got stuff in the pipeline that is funding at some clip every month, but the more recent stuff may take a couple of quarters, or maybe at least one or one and a half years.

Yes. I mean, like the borrowers have to fund their equity first. So, on most construction deals, we're getting enough equity that it takes maybe seven to nine months of borrowers funding their equity before we'll fund anything on our loan.

Got it. Okay. So, I mean, this last year, you guys had around 2% annualized growth. Do you think you could at least get to that level in '25 of net...

Yes. We don't provide forward guidance on loan growth. However, we're not conveying anything different this year regarding the growth in our loan portfolio compared to last year.

It will depend on whether there is a significant increase in early repayments and similar activities, such as people refinancing or selling projects. As we mentioned before, 2024 was not particularly strong; it was somewhat slow for repayments. However, if individuals are optimistic about 2025 and want to progress with their projects, there might be an increase in activity. But at this moment, we don’t have any clarity on that.

Got you. Okay. And then, as far as kind of circling back to the margin. I think you had mentioned, Rex, about some fixed rate loans that would be repricing during the course of the year. Roughly, how much in the way of fixed rate loans would be repricing? And what's kind of the pickup between current yields on those and then the reprice levels?

Some of it will be repriced. I don't really have a good breakdown of the dollar amount on that off the top of my head.

Damon, we do have a good table on that. And I know in the 10-K, and do we have it in the Qs as well. Okay, it's not in it. But there should be a good table with exactly what you're looking for coming out at the beginning of March.

And if you look at last year's 10-K, there's two tables, there's a maturity table and a repricing table in there. The repricing table is probably what you want to look at mostly because that will show you what is projected to reprice in each of these coming years.

And it tells you what the current rate is on it and you can sort of estimate what will reprice.

Some of the loans will remain on the books and simply reprice. Other loans will be paid off or reduced, and we will reinvest those funds into new fixed-rate loans at a higher rate or into variable-rate loans. Therefore, it's difficult to specify the exact net rate change since it depends on how we allocate those funds. However, I believe the overall rate for the fixed-rate portfolio is likely just above 4%.

It should definitely be positive.

And our next question will be coming from the line of John Rodis.

I guess most of my questions have been asked and answered. But just on the fee income side, the other line item was up, I guess, $200,000, $300,000 linked quarter. Anything unusual in that other line item?

Yes, John, we mentioned that we have a program with back-to-back swaps involving loan customers. In some instances, when a customer requests a swap that we initiate, we collect an upfront fee. This accounted for the majority of the increase in the fourth quarter, which was approximately $268,000, I believe.

Okay. I see that in the text now. Sorry about that.

That's a part of our business, but it's not something that happens all the time.

And then either Joe or Rex, just can you add any more color the one property here in Missouri that went to other real estate OREO, what market, anything like that?

Yes. We've covered that before, haven't we?

I can't remember for sure if we have, but...

Yes, it's an office property in Clayton. Although office properties generally aren't performing well, Clayton is likely the strongest market in St. Louis. It's a decent property, but I think it will take us some time to sell it.

Okay. Okay. Have you marketed it yet or probably not?

Yes, we are beginning to market it. We are getting a better understanding of the property and assessing the optimal timing for a sale. We are not in a rush to sell, as it is currently generating a reasonable cash flow for us. Therefore, it's not a significant issue. We are evaluating whether now is the right moment to proceed or if we should wait for conditions in the office market to improve slightly.

Yes. No, you're right. Clayton is obviously a good market, so it makes sense.

There are no more questions in the queue, and I would like to go ahead and turn the call back over to Joseph Turner for closing remarks. Please go ahead.

All right. Well, thanks very much for joining us, and we look forward to talking to you after our first quarter 2015 results come out. Thank you.

Thank you all for joining today's conference call. You may now disconnect.