Great Southern Bancorp, Inc. (NASDAQ:GSBC) Q3 2022 Earnings Conference Call October 20, 2022 3:00 PM ET
Company Participants
Kelly Polonus – IR
Joe Turner – President and CEO
Rex Copeland – CFO
Conference Call Participants
Andrew Liesch – Piper Sandler
Damon DelMonte – KBW
John Rodis – Janney
Operator
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Great Southern Bancorp Incorporated Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]
At this time, I would like to turn the conference over to Ms. Kelly Polonus. Ma’am, please begin.
Kelly Polonus
Thank you, Howard. Good afternoon and welcome. The purpose of this call is to discuss the company’s results for the quarter ending September 30, 2022.
Before we begin, I need to remind you that during this call, we may make statements about future events and financial performance. Please do not place undue reliance on any forward-looking statements, which speak only as of the date they are made. Please see our forward-looking statements disclosure in our third quarter 2022 earnings release for more information. President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland, are on the call with me today.
I’ll now turn the call over to Joe.
Joe Turner
Okay. Thanks, Kelly. Good afternoon, everyone. We appreciate you joining us today for our third quarter earnings call. Our third quarter earnings continued to be strong, continuing our momentum from the second quarter. We’re focused on ensuring that our company is properly positioned, especially in light of the changing interest rate environment that we’re in.
As always, we are concentrating on building lasting relationships with our customers and making decisions that are in the best interest of all our constituents over the long term. Our great team of associates understands this and is working hard every day to fulfill this mission. I’m really proud of our team.
As usual, I’ll provide some brief remarks about the company’s performances and then turn the call over to Rex Copeland, who will go into more detail on our financial results. Then we’ll open it up for questions.
In the third quarter of 2022, we earned $18.1 million or $1.46 per diluted common share compared to $20.4 million or $1.49 per diluted common share for the same period in 2021. It was a decrease of $2.3 million from the prior year quarter. But how we got there was significantly different in both quarters. So, I do want to go into a little bit more detail. First of all, in the third quarter of 2022, we earned $8 million more in net interest income than we did in the same quarter a year ago. And this was even after earning $1.6 million in PPP fee accretion in the 2021 quarter.
Another big driver, the biggest driver really — the change between the quarters was the change in provision expense, which was — we had $3.3 million in provision expense in this year’s quarter versus the negative provision of $2.4 million in the year ago quarter. So a swing of $5.7 million there. Noninterest income was about $1.8 million, lower in the third quarter of this year, mainly as a result of lower gain on loan sales — gain on loans.
Operating expenses were $3.4 million higher in the third quarter this year than they were in the third quarter last year. About $1.1 million of that related to professional fees regarding our conversion that we’ve — data service and conversion that we’ve talked about the last couple of quarters. We also had $300,000 — almost $400,000 of professional fees related to the swap that we entered into in the third quarter of 2022.
Our salaries — salary and employee benefits increased about $1.1 million in the third quarter 2022 over the third quarter of 2021. About $300,000 of that increase related to the loan production offices we opened. So, about $800,000 is related to, maybe some additional staffing, as well as probably higher comp levels given the kind of employment environment we’re in.
So, if we look at reported pretax, pre-provision earnings, our pretax, pre-provision earnings were $26.1 million in Q3 of 2022 versus $23.4 million in Q3 of 2021. So, we were up $2.7 million and this was with a — about a 9% lower share count, I think our fully diluted shares in the 2021 quarter were 13.6 million versus 12.4 million in this year’s quarter. Our earnings ratios were strong, 13% return on equity, 1.30% return on assets. I’m talking about this quarter now, obviously. Our margin was 3.96% versus 3.36% in the year ago quarter and 3.78% in the second quarter of 2022.
The Federal Reserve continues to signal that there will be additional rate increases, maybe 75 basis points coming soon, maybe another 50 basis points after that, maybe another quarter. I think as with — as is typical in rate increase cycle, probably most of the benefit — we still consider ourselves to be maybe moderately — maybe slightly to moderately asset sensitive. So we would anticipate that we might see some benefits to our margin from continued increases. But I think definitely the lion’s share of the benefit we’ll see from the rate increase, it has already appeared in our margin.
As far as loans go during the quarter, loan production and activity in our markets continue to be strong in all our markets, including our newest markets. Our net loans have grown about $490 million since the beginning of the year. Our pipeline has also grown over $400 million since the beginning of the year. So very strong loan origination market for us.
We do probably expect things to slow as interest rates are coming up, cap rates are coming up. So, we expect the loan origination activity to slow. We’re in a pretty good position though because we have $1.4 billion or really $2 billion in unfunded commitments, $1.4 billion of construction commitments that we’ll continue to fund probably over the next 15 months or so.
Our asset quality, our credit quality metrics continue to be at historically good levels for us. Nonperforming assets were $3.4 million at the end of the quarter, which is a decrease of $2.6 million from the end of the year, 0.06% of total assets, so very low our levels of past due, et cetera, charge-offs are also at very low levels. So, great credit metrics.
Capital, we began the year in an extremely strong capital position. And I think continue to be in a very strong capital position. Our tangible common equity to tangible asset ratio was 8.8%, so down a little bit from the year — from the end of the year, but still very strong. In the third quarter, we declared a $0.40 per share common dividend and through the first nine months, we declared $1.16 in dividends.
We’ve purchased approximately 1 million shares of stock this year at $59.28 and at September 30, 2022, we had 222,000 shares still available in our stock repurchase authorization.
That concludes my prepared remarks. Well, I might just go through capital. We did — our TCE, the dollar amount is down pretty significantly from the beginning of the year. We started with $616 million in capital at January 1 of 2022. We basically spent about as much in buying stock back as we’ve had in net income. So our capital has reduced by the amount of our dividend which is about, Rex?
Rex Copeland
$14 million.
Joe Turner
$14 million. And then, there have been a pretty significant change, about $91 million, I think, change in our mark-to-market, on our swaps in our available for sale portfolio.
Our loan portfolio is largely very short. So the securities we buy and the swaps we enter into are — so both will be longer to balance our portfolio so that our company will be able to perform better as rates decline and we get into the lower interest rate environment. So that’s the purpose of that.
Now, I’ll turn it over to our CFO, Rex Copeland.
Rex Copeland
All right. Thank you, Joe. Joe has mentioned a few of these things already, but I’ll just try to add a little more information on some things. I’ll start with looking at net interest income and margin. And as Joe said, our net interest income for this quarter increased about $8 million, that’s $52.9 million compared to the $44.9 million in the third quarter last year. Net interest income in the second quarter of 2022 was $48.8 million. And as Joe already mentioned that we have $1.6 million of accretion of deferred fees for PPP loans in the 2021 third quarter numbers.
Net interest margin, again, was 3.96% for the third quarter. That compared, as we said to 3.36% in the third quarter last year. So we had a significant increase from where we were year ago. That was really a result of, obviously, interest rate being a lot higher than they were, but also as we’ve said and you’ve seen, our loan portfolio has grown fairly significantly from a year ago, as well as our investment securities, we put some funds to work. So, those two things are happening right now and increasing our net interest income.
The average yield on loans increased about 44 basis points from the previous-year quarter, and our cost of deposits was up 23 basis points from the quarter a year ago. And as I mentioned, we’ve seen the cash and cash equivalents that we had, some excess liquidity, we utilized that to put into loans and investments.
As Joe mentioned, I think before, and we’ve said before, we’re still looking at being generally positive for us in a rising interest rate environment. We will continue to monitor where we are in that position. And like Joe said, we try to do some things to help mitigate the downside risk of win rates turn around and start going back down. So, we do take that very, very seriously and look at it very strongly all the time, trying to make sure we’re getting the best we can, the right balance there.
During the nine months, we talked about our asset mix that shifted. We talked about that. We’ve also had during the year, our liability mix has shifted somewhat. So we were more — we had more non-time accounts at December 31, we still had a lot of the deposits that came through, through the pandemic, and we’ve seen throughout 2022 that kind of a mix change a little bit. We’ve seen some of those excess funds flow out as we knew they would. Few of our customers that we knew had some kind of upfront funds there that we knew that they would over time draw those funds out and we’ve seen some of that. We’ve also seen some of our small business check-in and some of our corporate check-in balances come down a bit as they’ve used those funds for their business operations in 2022.
So, kind of the summation of that is, our transaction type accounts have decreased about $212 million from December 31, while retail time accounts or CDs have increased about $105 million there. And then we’ve added some broker deposits. Those have increased about $290 million throughout the year since the beginning of 2022. So a little bit of shift in the liabilities that we have and from time-to-time we do utilize home loan bank advances as well.
So we’ve got a variety of sources that we do use and we try to do that and use varying types in terms, so some of those are going to be very short daily repricing type funding and some may be a little bit longer, up to a couple of years or something like that type funding. So we do a variety of things to try to manage the balance sheet through that side as well.
Noninterest income. I will talk about for a minute. That decreased about $1.8 million to $8 million even when compared to last year’s third quarter. Again, as Joe said before, and I’m sure you all are seeing everywhere, loan originations, fixed-rate loans, we typically sell in the secondary market. Those originations are much lower this year than they were in the past. So the profit on those sales has slowed considerably.
We are making some loans that are hybrid ARM type, so fixed for a period of time and then become variable rate and those typically we’re keeping on our balance sheet. So we’ve seen some increase in our one-to-four family portfolio as well.
Non-interest expense. I’ll talk about that for just a little bit. And again, we’ve touched on some of these already, but for the quarter, we — our noninterest expense increased about $3.5 million compared to the year-ago quarter. The expense was $34.8 million in this year’s quarter. We talked about salary employee benefits information already that, as Joe went through some of those things. The — some of the overall increases that we just kind of mentioned earlier in more general terms, again, we have merit increases. Like Joe said too, we are paying some existing employees with bigger increases maybe than we have in the past and also then adding people and replacing people. And so there is some costs that go along with all of that.
Mentioned the professional fees that we had, the Fiserv, conversion or system conversion information that we’ve already talked about in the past. And then also the swaps that we put on in the third quarter, some upfront fees we had to pay on that.
And then the other operating expenses, that category, just to kind of miscellaneous expenses was up about $570,000 from the prior year quarter, and we mentioned in our earnings release that related primarily to some deposit account fraud losses, some additional business development and some additional charitable contributions that we made in the third quarter that are sort of one-off type things at least for the contributions.
The efficiency ratio for the third quarter this year was 57.09% compared to 57.27% in the same quarter last year. And the increase — I’m sorry, the decrease in that ratio was primarily because of increased income, mostly net interest income, obviously, mainly offset or partially offset by the increased noninterest expenses.
Provision for credit losses, Joe really already talked about that, the difference that we had this year where we had provision expense versus the year-ago quarter where we had negative provision expense in the quarter. Net charge-offs. Again, as Joe said, our credit has been very good. We had net charge-offs in the three months ended September 30 of $297,000. A lot of that is related to overdrafts. We not had a couple of small commercial charge-offs in there, but the vast majority of that is related to overdrafts.
And then finally, I’ll wrap up with talking about income taxes. Our effective tax rate this quarter was 20.5% compared to 20.9% the year-ago quarter. We continue to utilize and tax-exempt securities and loans, and also low-income housing tax credits and things of that nature to help reduce some of our tax liability through those means. We continue to do that. We expect will continue to do that at generally the same kind of levels probably.
And so we think that our effective tax rate in the upcoming future periods is going to be somewhere in the 20.5% to 21.5% range, and that will vary a little bit depending on the overall level of income and the income as we have to allocate it between the various states where we operate. So, there are some different things that come into play depending on kind of where some of the income is sourced from. But we think that, that generally is going to be in a range where we will be.
So that concludes the remarks I had prepared. And at this time, I think we can entertain questions. And let me remind or go back to our operator to remind you all how to queue in for those questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Andrew Liesch from Piper Sandler Company. Mr. Liesch, your line is open.
Andrew Liesch
Thank you. Good afternoon, everyone.
Joe Turner
Hi, Andrew.
Andrew Liesch
Question on the margin here, just kind of diving into some of the deposit beta question here you that maybe there’s a little bit more expansion ahead. But at what point do you think or how many more Fed increases or what do we need do you think that will finally see maybe some stabilization in the margin with some catch-up on the funding side.
Rex Copeland
I’ll start on that one, I guess. I mean, I think, like we were saying, I think we’ll see a little bit. I mean, we’re going to see benefit on the loan side, for sure. And then just — then it becomes a matter of how we have to fund the existing balance sheet or any growth to the balance sheet and how much the mix continues to change towards time deposits.
So, I mean, assuming that we still continue to see a little bit more of that shift out of non-time deposits, which I’m not sure we will, but I would think that to fund growth, in particular, it’s going to be probably more — not be more time deposit type products as opposed to non-time.
Some of that we can structure to be floating rate. So it would just be like more like Fed funds type floating. And some of it may be a little more term where we’ll have to pay maybe a little bit more of a premium rate for something like that at least initially.
So, I think we’re still going to see maybe some benefit. But I don’t think it’s going to be — I mean, when you think back, the first couple of rate hikes were small and we didn’t really move our cost of funds much at all. The first 75 basis points, we honestly probably didn’t move very much then. The second 75 basis points, we started to have to move rates and so we got the first 150 basis points or so, sort of for free.
Andrew Liesch
Yeah.
Rex Copeland
Then add to that, just marginally, it just gives probably a higher beta as you move forward.
Joe Turner
I think there is a probably, substantially more competition for deposits then, now than we probably anticipated that there would be a year ago. I think we all thought a year ago. The industry was pretty awash with liquidity and there wouldn’t be much competition, but I think there is, you see a lot of high CD rate offers around. So there is — and depositors are seeing hungry for higher rates for obvious reasons.
Rex Copeland
And there’s probably — there probably is a lot of liquidity washing around when you’re talking about the largest banks, but when you’re talking about community banks not as much probably.
Joe Turner
Not so much.
Andrew Liesch
Right, right. All right. That’s really helpful color. Thanks so much for that. And then just on the provision that you guys recorded in the quarter. I guess, how should we look at that balancing loan growth or any change in the CECL model or your own conservatism? I’m assuming, just curious like what are some of the puts and takes that went into that $3.3 million or so?
Joe Turner
I think, I mean I’ll start and then Rex can — and then Rex can correct me. The way the CECL model works, at least in so far as we’re concerned is, the first step is to make an arithmetic calculation. And this is based on historical levels of charge-offs and arithmetic calculation of what your lifetime losses should be on your loan portfolio.
And frankly, Andrew, for us, and probably for a lot of folks in the banking industry, that number keeps going down, that part of it, because we are just adding quarter after quarter of effectively zero charge-offs, which — that’s a good thing, but that’s taking that number down.
So, we’re also looking out there and we’re seeing at Fed, that is sort of indicating and we used Moody’s, Moody’s is thinking and others. I’ve heard others say we’re probably headed for recession. So I guess as you see increases in our reserve levels, I guess it would be more in line with us trying to prepare for the worst economy than anything else.
I mean, it’s definitely — it’s obviously not anything having to do with our portfolio. I mean we keep having quarter-after-quarter of low or no loan charge-offs. We had, I think, about $300,000 of charge-offs this quarter. But I think most of that was on deposits, check-in accounts and things. So the loan portfolio is strong. Yeah, we’re just trying to do — you know, we’re trying as best we can to estimate what losses could be if the economy turns down a little bit.
Andrew Liesch
Got it.
Rex Copeland
And there is part of it too, it’s the growth. We’ve got growth on the balance sheet of the funded portion. But we also have growth in the unfunded portion or happened so far this year. And so, that liability has increased fairly substantially as well. So to the extent that either the on-balance sheet or off-balance sheet, loans commitments continue to grow. I mean, I think, we’re going to have to continue to fund our reserves for that growth.
Andrew Liesch
Right.
Rex Copeland
So that — it’s a combination of both. But certainly as you see us — if you see us grow, those line items will have to probably provide for that.
Joe Turner
Yeah. We have a situation where our — where we weren’t originating a lot of new deals, but loans were moving from unfunded to funded. That’s not really going to result in much increase in provision expense because essentially your allowance for unfunded commitments will probably drop. So you’ll have a credit on that line and you will have a debit on your provision for — or your allowance for funding. So that could happen too.
Andrew Liesch
Right, right. All right. No, that’s helpful color. I appreciate it. Those covers — that covers the questions. Thanks so much all.
Joe Turner
Right. Thank you.
Rex Copeland
Thank you, Andrew.
Operator
Thank you. Our next question or comment comes from the line of Damon DelMonte from KBW standby. Mr. DelMonte. Your line is open.
Damon DelMonte
Hey, good afternoon, guys. Hope everybody is doing well today.
Joe Turner
[indiscernible]
Damon DelMonte
A question on the — hi, a question on the deposit growth this quarter. I don’t think you guys break out the composition on a period basis. So could you just — you do on the average side, but could you just talk a little bit about what the rough breakout are on the end-of-period basis? You referenced an increase in CDs and brokered CDs. So just kind of wondering how much of the growth was driven by that?
Rex Copeland
Yeah, I mean, I can give you that, like, in the September balance information and we’ll have and obviously in our 10-Q filing. But I can’t break that out a little bit. So the total of interest bearing and noninterest bearing check-in is about $3.4 million or $1 billion, excuse me. The total, kind of what we call retail CDs is about 9 — right at $1 billion. And the brokered total combination of various things that fall under the brokered umbrella is about $360 million.
Damon DelMonte
Okay. Right, that’s helpful. Thanks. And then kind of just on the expense outlook. I know you guys have — you spoke last quarter about it. In this quarter again about the professional fees and that’s going to be sticking around for a little while. But as we kind of think about the base for the next three or four quarters, do you think it kind of trends up a little higher from this — like the $34.5 million range when you exclude the swap fees?
Rex Copeland
Well, I mean that $1.1 or $2 million of the systems, that’s going to be in there until the third quarter next year. So, that’s going to stay.
Damon DelMonte
Right. Yeah.
Joe Turner
The other thing that we mentioned, Damon, we had about $300,000 — when you compare Q3 to Q2, we had about $300,000 higher occupancy expense and about half of that or maybe a little more than half, 60% of it related to just higher utility bills. So, that’s going to bounce around a little bit.
Compensation expense Q3 to Q2, if you eliminate the special bonus we paid in Q2, compensation expense was up about $0.5 million in the third quarter. And probably, I mean, I think all of you know that there is FAS 91 concept where we can defer origination compensation related to origination of loans and that deferral was about $300,000 higher in the second quarter than it was in the third quarter. So that was $300,000 of the $500,000 increase in compensation. A little bit of it, I think, we had just one quarter of the Charlotte LPO being open. So that was probably another $50,000 of it.
The 600 — we had $600,000 higher other expense. And that was — we had a $150,000 donation in [indiscernible] that is not really a recurring type thing. We had some higher levels of fraud loss, which we’ve been staying a little bit higher levels of fraud loss. I don’t know if it’s, because people are hurting or exactly what the situation is. But we’ve been seeing higher levels of that.
So, I do think on the compensation line, the employment market continues to be high. We are an environment where there is 7% or 8% inflation. So you are going to see some growth in comp costs. Like, as you say, if you strip out the things that we would say are for sure ultimately nonrecurring, the $34.6 million or whatever we were at, is probably more likely $33 million and then the other items would be occupancy costs and other expenses, just kind of a — they kind of bounce around a little bit from quarter-to-quarter.
Rex Copeland
And then, Damon, you said looking out a few quarters though, we get to the first quarter of next year, I mean a lot — I mean, most of our salaried employees get their annual adjustments in January. So there’ll be some adjustments there. The non-salaried are throughout the year, but the salary folks are going to be in our first quarter numbers. So, there’s going to be some level of increase there that will correspond.
Damon DelMonte
Got it. Okay, that’s helpful. I appreciate that color. And then I guess just lastly like on loan growth. It sounds like you have relatively healthy pipelines. You have a bunch of closed, but yet unfunded — commitments that are closed, but unfunded yet, so that’s going to be a good source for growth. But also it sounds like you guys are shying away from the growing reality that we could be kind of dipping into a more meaningful recession later on in ’23. So as we kind of like blend all that stuff together, do you still think you can produce kind of mid-single-digit growth for the next few quarters or do you think it kind of slows down quicker than that?
Joe Turner
Yeah, I mean, we know — we don’t really give guidance as to what our loan growth is going to be, but, I mean, as I look out, Damon, I do think originations of new loans, particularly on the commercial side, will slow down and I think that’s a result of a tougher economy and we deal with really good customers. And I think they see the same thing.
That $1.4 billion of construction commitments, that we’ll fund over the next 15 months or so. A $100 million a month, a bit of it still has to do with or have had to do with lower levels of payoffs. And I think that’s an environment that’s going to stick around for a while. With the longer-term interest rates being up, we were really getting paid off either from our customer putting a longer-term firm mortgage on the project or selling the project. And that’s still going to happen. But it may not happen as frequently or as quickly as it did before. So those things could come together and result in loan growth for us.
Damon DelMonte
Got it. Okay, that’s very helpful. That’s all that I had. Thank you.
Joe Turner
Okay. Thanks, Damon.
Operator
Thank you. [Operator Instructions] Our next question or comment comes from the line of John Rodis from Janney. Mr. Rodis. Your line is open.
John Rodis
Hey, good afternoon, everybody.
Joe Turner
Hi, John.
Rex Copeland
Hi, John.
John Rodis
I guess, Joe, maybe just a question for you on the back-to-lending. Are there any areas or markets that you’re may be starting to get more cautious on sort of pull back, so to say?
Joe Turner
As far as loan type or geographically?
John Rodis
I guess, both.
Joe Turner
No, I don’t think geographically we’re necessarily pulling back anymore from any market than we are from the others. I mean, I think we’re equally conservative across our footprint. As far as loan types. I think office continues to be something that you would be worried about, possibly industrial warehouse, that sort of thing, you are starting to see reports that there may be some overbuilding in those areas. So those would be maybe two product types we might be a little more conservative in. But geographically, I think we’re equally open or maybe better said, equally conservative in all our markets.
John Rodis
Okay. Makes sense. And then just one other question on the buyback. You leave a little bit over 200,000 shares. Would you expect to complete that or it sounds like maybe you’re getting a little bit more cautious on capital, just given the current environment too.
Joe Turner
Yeah, I mean, I think — I think, John, yeah, I think at some point we will complete it. I think our buyback will slow down from what you’ve seen. As I have said, we repurchased about 1 million shares through the first nine months. I don’t think we’ll keep going at that kind of eclipse. We’ll probably — we may from time-to-time feedback in the market. But it’s going to be a lower go on buying back shares.
John Rodis
Okay. Makes sense. Thanks, guys. Have a good day.
Joe Turner
Thanks.
Rex Copeland
Thanks, John.
Operator
Thank you. I’m showing no additional questions in the queue at this time. I’d like to turn the conference back over to Mr. Turner for any closing remarks.
Joe Turner
No closing remarks. We appreciate everybody joining us today and we’ll look forward to talking to you in January. Thank you.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.
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