GSBC 2023Q4

Good day and thank you for standing by. Welcome to the Great Southern Bancorp, Fourth Quarter 2023 Earnings 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 hand the conference over to your first speaker today, Kelly Polonus. Please go ahead.

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, 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 and 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 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 of '23. We had a book, 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 impacts from net settlements related to our interest rate swaps. Rex will provide a little bit more detail on this in his comments. As I mentioned, our capital and liquidity positioning 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-month period ending December 31, '23. Our capital remains substantially above regulatory well-capitalized threshold, 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 2023 our dividends declared were $1.60 per common share. We also continued to repurchase our shares during 2023. We repurchased approximately 450,000 shares at an average price of $51.38 per share in 2023. As for liquidity, our borrowing capacity at 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've noted for the last few quarters, our company's deposit base is diverse by customer type and geography and has 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 were 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 multifamily loan segment, much 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 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 FDC side. Overall, our credit quality metrics remain extremely strong during the quarter. Non-performing assets to total assets were 0.2% at the end of the year, increasing by one basis point from September 30, '23, as delinquencies in our loan portfolio continue to be at historically low levels. More information about our non-performing 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.

Thank you, Joe, and thank you all for joining the call today. I'll begin with net interest income and margin. I reiterated this last quarter, but it's worth mentioning again that net interest income comparisons for the third and fourth quarters this year versus the same periods last year reflect the impact of rate increases from the Federal Reserve in 2022. We were able to raise asset rates faster than liabilities last year, achieving peak net interest income and margin in the second half of 2022. Therefore, we are comparing the latter part of 2023 to those figures. In the fourth quarter of 2023, net interest income decreased by $9.5 million to $45.1 million from $54.6 million in the fourth quarter of 2022, primarily due to negative changes in the funding mix of deposits and borrowings, as well as rising interest rates on nearly all types of deposits during the fourth quarter of 2023. Additionally, there were negative effects from the interest rate swaps we previously discussed. Net interest income was $46.7 million in the third quarter of 2023, indicating a decrease of about $1.6 million when comparing Q4 to Q3 of 2023. If SOFR and prime interest rates remain stable, the company's interest rate swaps will likely continue to adversely affect our net interest income. Based on the swap rates at December 31, 2023, we expect the negative impact of these swaps to reach approximately $2.7 million in the first quarter of 2024. The cumulative negative impact from these swaps in the fourth quarter of 2023 amounted to about $3.6 million. As mentioned in the earnings release, one of the swaps will terminate on March 1, 2024, having had a negative impact on interest income of $2.9 million in the fourth quarter of 2023. It's projected to negatively impact around $1.9 million in the first quarter of 2024, after which there will be no further impact. The company's interest income in the fourth quarter was also negatively influenced by intense competition for deposits within the industry and local markets. We also had some time deposits maturing at lower rates than current ones in late third and fourth quarters of 2023. Time deposit renewals were at somewhat higher rates or left the company, leading to the need to replace those funds at current market rates. Importantly, throughout 2023, we noted a significant decrease in non-interest-bearing deposits. Customer balances in non-interest-bearing checking and interest-bearing checking accounts fluctuated throughout 2023. As interest rates for certain checking and time deposit accounts rose, some customers opted to move their funds into higher-rate accounts. For the full year of 2023, interest-bearing checking balances increased by approximately $28 million or 1.3%, while non-interest-bearing checking balances dropped by about $168 million or 15.8%. These are point-in-time balances, not averages. However, the average balance for non-interest-bearing demand deposits in Q4 was $1.07 billion in the fourth quarter of 2022 compared to $900 million in the fourth quarter of 2023. Looking forward into 2024, as of December 31, 2023, we have $394 million in time deposit maturities within three months at a weighted average rate of 3.82%. Between three to six months, there are $324 million in maturities at a weighted average rate of 4.32%, and $371 million within six to twelve months at a weighted average rate of 4.08%. Based on current time deposit market rates observed in January, we anticipate replacement rates in the range of 4% to 4.5%. As Joe previously mentioned, our net interest margin for the fourth quarter was 3.30%, compared to 3.99% in the fourth quarter of 2022 and 3.43% in the third quarter of 2023. Now, turning to liquidity and deposits, we continue to maintain substantial liquidity with available funding sources totaling around $2.1 billion at the end of December. More than $900 million of this is available from the home loan bank. We also have a significant amount of unpledged securities and about $450 million in a line with the Federal Reserve Bank if needed. By December 31, 2023, total deposits amounted to over $4.7 billion. During the three months ended December 31, 2023, total deposits dropped by about $130 million. Interest-bearing checking balances decreased by approximately $27 million or 1.2%, and non-interest-bearing checking balances decreased by $46.7 million or about 5% in the fourth quarter. Time deposits generated from our banking center network and corporate services networks fell by about $43 million, and those coming from Internet channels saw a decrease of $3 million. Total brokered deposits decreased by about $8 million in the fourth quarter. Regarding non-interest income, our total for the fourth quarter of 2023 decreased by about $1.1 million to $6.6 million compared to the fourth quarter of 2022. This decline was mainly due to a drop of about $621,000 in point-of-sale and ATM fees relative to the prior year's fourth quarter. Changes in transaction routing to lower-fee channels contributed to this decrease, and we expect this trend to continue. We also faced increases in processing costs as we transitioned from our old to new debit card processor, totaling a couple hundred thousand dollars, which we expect will be a non-recurring expense. Other income fell by $399,000 compared to the fourth quarter of 2022, primarily because we received one-time payments from a third-party servicer related to older acquired loans in 2022 that did not recur in 2023. Additionally, overdraft and insufficient funds fees dropped by about $327,000 compared to the previous year's fourth quarter. We are observing a trend where customers are increasingly using debit cards for point-of-sale transactions, leading to fewer overdrafts and related fees. Turning to non-interest expense, in the fourth quarter of 2023, total non-interest expense rose by $1.9 million to $36.3 million compared to the same quarter last year. The increase can be attributed to several factors. Salary and employee benefits increased by about $1.2 million from the fourth quarter of 2022, largely due to normal merit increases across various operational and lending sectors. There was a reduced negative expense in Q4 2023 regarding deferred compensation costs for loan origination volumes, which were lower this year. A significant factor in the rise was non-recurring discretionary bonuses given to associates significantly involved in our ongoing software and systems transition, amounting to about $441,000 in Q4 2023. Furthermore, insurance-related expenses climbed by $550,000 from the fourth quarter of the previous year, driven by previously announced increases in FDIC deposit insurance fund rates, which resulted in additional costs that we don't expect to continue into 2024. Net occupancy expenses also went up by about $389,000 in comparisons of Q4 2023 with Q4 2022, primarily linked to new computer license and support expenses that were absent in the prior year. Meanwhile, legal, audit, and other professional fees dropped by about $481,000 year-over-year, with the 2022 period including training and implementation costs for our core system conversion that were lower in 2023. Consequently, the efficiency ratio for the fourth quarter of 2023 was 70.17%, up from 55.13% for the same quarter in 2022. This increase is mainly due to a reduction in interest and non-interest income combined with rising expenses. Regarding credit losses, we recorded a provision expense of $750,000 in Q4 2023 for the loan portfolio, compared to $1 million in Q4 2022. For the three months ending December 31, 2023, we recognized a negative provision for losses on unfunded commitments of $1.7 million, versus a negative provision of $159,000 for the same period in 2022. Net charge-offs for Q4 2023 were $833,000 compared to $281,000 in Q4 2022, primarily related to two longstanding relationships. At the end of the fourth quarter, the allowance for credit losses as a percentage of total loans stood at 1.39%. Finally, regarding income taxes, our effective tax rate for Q4 2023 was 19.7%, up from 16.6% in Q4 2022. For the full year, our effective tax rate for 2023 was 20.6%, compared to 19.4% in 2022. We continue to benefit from tax credits and tax-exempt investments which lower our effective tax rate. Looking ahead, we estimate the effective tax rate in 2024 to be in the range of 20.5% to 21.5%, which may fluctuate based on tax credits utilization and state income tax estimates. We continually review these aspects, so they can occasionally affect the overall effective tax rate. These are the points I wanted to cover, and that concludes our prepared remarks for today. We are now ready to take questions, and I'll ask our operator to remind attendees on how to queue for questions.

And our first question will come from Andrew Liesch from Piper Sandler.

Really my question just revolves 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 NII increase here this quarter? Or do you think there's other funding costs that might be upsetting?

I mean, all things being equal that should be somewhat of an improvement. I mean, although we'll still have two 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 regarding 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. I mean the rates on those are pretty much where they are. CDs, we do have some CDs as I mentioned, they are 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. The biggest driver is going to be kind of where noninterest-bearing balances shake out.

Yes. I agree with that, Andrew. I mean, there is what happens to noninterest-bearing accounts. 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. Of course, our interest-bearing checking keeps up with the market as it goes, but it does seem to continue to slide up, and maybe people are moving from lower tiers to higher tiers. 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 have disclosures on that in our annual report. There are a fair amount of loans to reprice up; that's not going to necessarily all happen in 2024. It's going to happen over a period of time, but that's going to be helpful to margins certainly. As you mentioned, the $3 million a quarter swap that rolls off completely starting in the second quarter will help as well.

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?

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

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

Yes. But you're talking.

The new stuff that hasn't moved yet. Yes.

Yes.

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?

I don't have that number.

Is it trending higher? Do you think it's sort of stabilized at a certain level?

I believe it has likely stabilized as rates have stabilized. Its stability will partly depend on the types of loans. For instance, as construction loans get funded, they are coming in around 250 to 300 over. Therefore, we are not originating many new loans that immediately get added to the books. This is what you can consider from a construction perspective in terms of funding. There is also a bit of commercial and consumer lending, but those typically do not involve significant balances at this time.

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

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

Yes, I think so. The bonuses are not something we consider on a quarterly basis. Additionally, we experienced some extra fraud losses in the fourth quarter that exceeded our usual levels. We hope this won't become a new trend, as it was significantly higher than our general trend. It's important to note that in the first quarter, we will implement merit increases and payroll taxes will also rise at the start of the year. These are typical occurrences every first quarter.

Got it. Thanks. And then the fee income, you kind of called out the lower debit card and ATM fees, I believe because you had changed vendors. If you look at the 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 kind of recapture some of that lost revenue?

I think we had a couple hundred thousand dollars in there due to some transition issues that contributed to the reduction. We definitely noticed a decrease in usage and gross income in the fourth quarter of '23. I'm not sure if this is a new trend, but the top line did drop slightly while expenses increased. I don't believe there are a couple hundred thousand in expenses that will carry forward, but it's difficult to predict what the first quarter will look like.

Yes, I think that's exactly right.

Okay. That's helpful. Thank you. And then I guess just lastly on the outlook for loan growth, you got the commentary on the pipeline and it's 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?

It's just really hard to say, Damon. We're subject to levels of competition, also customer interest and 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 their projects with too low equity or unguaranteed or those sorts of things. We're not willing to stretch to put stuff on the books, it's just hard to say at this point.

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

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, but how should we think about expenses there in the first and second quarter and I guess, if any in the third quarter?

I’m not sure we can provide an update beyond what was mentioned in the earnings release. We are currently in discussions with the third-party vendor and have some disputes to resolve but haven't made significant progress so far. We will continue to incur those expenses until we reach a resolution. You might need to factor those into your models for now.

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

Well, it is hard to say. I just wouldn't want to speculate beyond that. I can't comment much further.

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?

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

I'm not showing any further questions at this time. I would now like to turn it back to Joe Turner for closing remarks.

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.

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