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spk01: 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. To ask a question during the session, you will need to press star 1 1 on your telephone keypad. At this time, I would like to turn the conference over to Ms. Kelly Polonis. Ma'am, please begin.
spk00: Thank you, Howard. Good afternoon and welcome. The purpose of this call is to discuss the company's results for the quarter ending September 30th, 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 disclosures and 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.
spk05: Okay. Thanks, Kelly. Good afternoon, everyone. We appreciate you joining us today for our third quarter earnings call. Our third quarter earnings continue 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 performance 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 for diluted common share, compared to $20.4 million, or $1.49 for diluted common share for the same period in 2021. With 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 22, 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 2000-21 quarter. Another big driver, the biggest driver really, of the change between the quarters was the change of provision expense, which was, you know, 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. Non-interest 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 data servicing conversion that we've talked about the last couple of quarters. We also had almost $400,000 of professional fees related to a swap that we entered into in the third quarter of 22. Our salary and employee benefits increased about $1.1 million in the third quarter of 22 over the third quarter of 21. About $300,000 of that increased 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 pre-tax, pre-provision earnings, our pre-tax, pre-provision earnings were $26.1 million. in Q3 of 22 versus $23.4 million in Q3 of 21. So we were up $2.7 million. And this was with about a 9% lower share. I think our fully diluted shares in the 21 quarter were 13.6 million versus 12.4 million in this year's quarter. Our earnings ratios were strong, 13% return on equity. 130 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 22. 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, you know, rate increase cycles, 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 that we'll see from the rate increases 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 a 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 and credit quality metrics continue to be at historically good levels for us. Non-performing 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 are levels of past dues, 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 is 8.8%, so down a little bit from the end of the year, but still very strong. In the third quarter, we declared a $0.40 per share of common dividend, and through the first nine months, we've 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 have 222,000 shares still available in our stock repurchase authorization. That concludes my prepared remarks. Well, I might just go through capital. 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, $14 million. And then there has been a pretty significant change, about $91 million, I think, change in our mark-to-market on our swaps and our available-for-sale portfolio. Our loan portfolio is largely very short. So the securities we buy and the swaps we enter into are supposed to be longer to balance our portfolio so that our company will be able to perform better as rates decline and we get into lower interest rate environments. So that's the purpose of that. Now I'll turn it over to our CFO, Rex Copeland.
spk06: 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. As Joe said, our net interest income for this quarter increased about $8 million to $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. Joe already mentioned that we had $1.6 million of accretion of deferred fees for PPP loans in the 2021 third quarter numbers. The 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 a year ago. That was really a result of Obviously interest rates 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 where 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 order 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've utilized that to put into loans and investments. Joe mentioned I think before, and we've said before, we're still looking at being generally positive for us in the rising interest rate environment. We'll 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 when rates turn around and start going back down. So we do take that very seriously and look at it very strongly all the time. trying to make sure we're getting, as best we can, the right balance there. During that nine months, we talked about our asset mix has shifted. We talked about that. We've also had, here during the year, our liability mix has shifted somewhat. So we were more, we had more non-time accounts At December 31st, we still had a lot of the deposits that came through for the pandemic. And we've seen throughout 2022 that kind of a mixed change a little bit. We've seen some of those excess funds flow out as we knew they would with a 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 checking and some of our corporate checking balances come down a bit as they've used those funds for their business operations in 2022. So, you know, kind of the summation of that is our transaction type accounts have decreased about $212 million from December 31st, while retail time accounts or CDs have increased about $105 million. 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 and 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. Non-interest income I'll 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 it 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. And 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, talk about that for just a little bit, and again, we've touched on some of these already, but for the quarter, our non-interest 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 the salary employee benefits information already. as Joe went through some of those things. Some of the overall increases that we just kind of mentioned earlier in more general terms, again, you know, 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's some costs that go along with all that. I 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 kind of miscellaneous expenses, was up about $570,000 from the prior year quarter. And we mentioned in our earnings release that 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 with 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 decrease in that ratio was primarily because of increased income, mostly net interest income, obviously, mainly offset or partially offset by the increased non-interest 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 into September 30 of $297,000. A lot of that is related to overdrafts. We might have had a couple of small commercial charge-offs in there, but the vast majority of that is 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 some 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 through those means. We continue to do that. We expect we'll continue to do that at generally the same kind of levels probably. We think that our effective tax rate in the upcoming future periods is going to be somewhere in the 20.5 to 21.5 percent range. That'll 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. 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 the range where we'll be. So that concludes the remarks I had prepared. And at this time, I think we can entertain questions. And let me go back to our operator to remind you all how to cue in for those questions.
spk01: Ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. Again, to ask a question, press star 1-1. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Andrew Leisch from Piper Sandler Company. Mr. Leisch, your line is open.
spk03: Thank you. Good afternoon, everyone. Question on... The margin here is kind of diving into some of the deposit beta questions here that maybe there's a bit more expansion ahead. But at what point do you think and how many more Fed increases that what do we need do you think that we'll finally see maybe some stabilization in the margin with some catch up on the funding side?
spk06: 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 it becomes a matter of how we have to fund the existing balance sheet and any growth to the balance sheet and how much the mix continues to change toward 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 time deposit type products as opposed to non-time. Some of that we can structure to be floating rates, so it would just be more like Fed funds type floating. 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. I think we're still going to see maybe some benefit, but I don't think it's going to... 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, we honestly probably didn't move very much then. The second 75, we started to have to move rates, and so we got the first 150 basis points or so sort of for free. But then after that, just marginally, it just gets... probably a higher beta as you move forward.
spk05: I think there is, you know, probably substantially more competition for deposits than now than we probably anticipated there would be a year ago. I think we all thought a year ago, you know, the industry was pretty awash with liquidity and there wouldn't be much competition. But I think there is, you see a lot of you know, high CD rate offers around. So there's, and, you know, depositors seem hungry for, you know, higher rates for obvious reasons.
spk06: 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 so much. Not as much, probably.
spk03: Right, right. All right. That's really helpful, Collar. Thanks so much for that. And then just on the provision that you guys recorded in the quarter, how should we look at that balancing loan growth or any change in the CECL model or your own conservatism? I'm just kind of curious, like what are some of the puts and takes that went into that $3.3 million or so?
spk05: Well, I think, I mean, I'll start and then Rex can correct me. But, you know, the way the CECL model works, at least insofar as we're concerned, is the first step is to make an arithmetic calculation, and this is based on historical levels of charge-off, an arithmetic calculation of what your lifetime losses should be on your loan portfolio. Andrew, for us and probably for a lot of the folks in the banking industry, that number keeps going down, that part of it, because we're just adding quarter after quarter of effectively zero charge-offs, which that's a good thing, but that's taking that number down. But we're also looking out there and we're seeing a Fed that is sort of indicating and we use Moody's. Moody's is thinking and and others, I've heard others say, we're probably headed for a recession. So I guess, you know, as you see increases, you know, in our reserve level, I guess it would be more in line with us trying to, you know, prepare for a worse 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, checking accounts and things. The loan portfolio is strong. We're trying as best we can to estimate what losses could be if the economy turns down a little bit.
spk06: And there's part of it too, the growth. We've got growth on the balance sheet of the funded portion, but we also have growth in the unfunded portion or have had 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 and commitments continue to grow, I think we're going to have to continue to fund our reserves for that growth. It's a combination of both, but certainly if you see us grow, those line items, we'll have to probably provide for that.
spk05: Now, if we had a situation 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, you know, essentially your allowance for unfunded commitments will probably drop, so you'll have a credit on that line and you'll have a debit on your, you know, provision for or your, you know, allowance for funded. So, you know, that could happen too. Right.
spk03: Right. All right. No, that's helpful, caller. I appreciate it. That covers the questions. Thanks so much.
spk05: All right. Thank you, Andrew.
spk01: Thank you. Our next question or comment comes from the line of Damon Del Monte from KBW. Stand by. Mr. Del Monte, your line is open.
spk02: Hey, good afternoon, guys. Hope everybody's doing well today.
spk01: Hi.
spk02: A question on the deposit growth this quarter. I don't think you guys break out the composition on an end-of-period basis. You do on the average side, but could you just talk a little bit about what the rough breakouts are on the end-of-period basis? You referenced an increase in CDs and brokered CDs. I'm just kind of wondering how much of the growth was driven by that.
spk06: Yeah, I mean, I can give you that, like, the end of September period, balance information, and we'll have it obviously in our 10Q filing, but I can break that out a little bit. So the total of interest-bearing and non-interest-bearing checking is about $3.4 million, or billion dollars, excuse me. The total of kind of what we call retail CDs is about nine, just right at a billion dollars. And the broker total,
spk02: combination of various things that fall under the brokered umbrella is about 360 million okay all right that's helpful thanks um and then kind of just um on the expense outlook um you know i know you guys have you spoke last quarter about it um 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 you know the 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?
spk06: Well, I mean, that $1.1 or $2 million of the system stuff is going to be in there until the third quarter next year. So that's going to stay.
spk05: The other thing that we mentioned, Damon, that 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 a half a million dollars in the third quarter. And probably, I mean, I think all of you know that there's this FAS 91 concept where we can defer 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 LTO being open. So that was probably another $50,000 of it. We had $600,000 higher other expense. We had a $150,000 donation in St. Louis, but it's not really a recurring type thing. We had some higher levels of fraud loss, which we've been seeing 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. I do think on the compensation line, the employment market continues to be tight. We are in an environment where there's 7% or 8% inflation, so you are going to see some growth in comp costs. As you say, if you strip out the things that we would say are for sure ultimately non-recurring, the 34.6 or whatever we were at is probably more like 33. And then the other items with the occupancy costs and the other expenses, they kind of bounce around a little bit from quarter to quarter.
spk06: And then, Damon, you said looking out a few quarters. So when you get to the first quarter of next year, I mean, most of our salaried employees get their annual adjustments in January. So there will be some adjustments there. The non-salaried are throughout the year, but the salaried folks are going to be in that first quarter number. So there's going to be some level of increase there that will correspond.
spk02: Got it. Okay. That's helpful. I appreciate that color. And then I guess just lastly, like on loan growth, you know, it sounds like you have relatively healthy pipelines. You have a bunch of closed but yet unfunded or, you know, commitments that are closed but unfunded yet. So that's going to be a good source for growth. But it also sounds like you guys aren't, you know, 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, you know, produce kind of mid-single-digit growth for the next few quarters, or do you think it kind of slows down quicker than that?
spk05: You know, I mean, we don't really give guidance as to what our loan growth is going to be, but, you know, I mean, as I look out, Damon, I do think originations of new, you know, loans, particularly on the commercial side, will slow down, and I think that's a result of, you know, us seeing a tougher economy, and we deal with really good customers, and I think they see the same thing. You know, that billion four of construction commitment, that will fund over the next 15 months or so, you know, $100 million a month. A bit of it, too, has to do with, or it has had to do with lower levels of payoffs. 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 term mortgage on a project or selling the project. That's still going to happen, but it may not happen as frequently or as quickly as it did before. you know, those things could come together and result in loan growth for us.
spk02: Got it. Okay. That's all very helpful. That's all that I had. Thank you.
spk05: Okay. Thanks, Damon.
spk01: Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone. Again, that is star 1-1. Stand by. Our next question or comment comes from the line of John Roddice from Jannie. Mr. Roddice, your line is open.
spk04: Hey, good afternoon, everybody.
spk06: Hi, John. Hi, John.
spk04: Hey. I guess, Joe, maybe just a question for you on, you know, back to lending. Are there any areas or markets that you're maybe starting to get more cautious on, sort of pull back, so to say?
spk05: As far as loan types or geographically?
spk04: I guess both.
spk05: You know, I don't think geographically we're necessarily pulling back any more from any market than we are from the others. I mean, I think we're equally conservative across our footprint. You know, as far as loan types, you know, 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.
spk04: 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.
spk05: Yeah, I mean, I think, John, yeah, I think at some point we will complete it. You know, I think our buyback will slow down from what you've seen. You know, as I said, we repurchased about a million shares through the first nine months I don't think we'll keep going at that kind of a clip. We may from time to time be back in the market, but it's going to be a slower go on buyback shares.
spk04: Okay. Makes sense. Thanks, guys. Have a good day.
spk05: Thanks, John.
spk01: Thank you. I'm sure 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.
spk05: No closing remarks. We appreciate everybody joining us today, and we'll look forward to talking to you in January. Thank you.
spk01: 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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