Great Southern Bancorp, Inc. (NASDAQ:GSBC) Q4 2022 Earnings Conference Call January 24, 2023 3:00 PM ET
Company Participants
Kelly Polonus – IR
Joe Turner – President & CEO
Rex Copeland – CFO
Conference Call Participants
Andrew Liesch – Piper Sandler
Damon DelMonte – KBW
John Rodis – Janney
Operator
Thank you for standing by, and welcome to the Great Southern Bancorp’s Fourth Quarter 2022 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. [Operator Instructions] As a reminder, today’s program is being recorded.
And now, I’d like to introduce your host for today’s program Kelly Polonus, Investor Relations. Please go ahead.
Kelly Polonus
Thank you, Jonathan. Good afternoon and welcome. The purpose of this call is to discuss the company’s results for the quarter ending December 31, 2022. Before we begin today, I need to remind you that during this call, we may make forward-looking 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 use our forward-looking statements disclosure in our fourth quarter 2022 earnings release for more information. President and CEO, Joe Turner; and Chief Financial Officer. Rex Copeland are on the phone — are on the call with me today.
I’ll now turn the call over to, Joe.
Joe Turner
All right. Thanks, Kelly. Good afternoon to everybody. We appreciate you joining us today for earnings call. Our fourth quarter results reflected another strong quarter for Great Southern. We benefited of course from rising market interest rates and our 2022 net income and earnings per share were exceptional.
On a macro basis, 2023 appears to be a year that will be marked by a great deal of uncertainty. We’re focused on ensuring that our company is positioned for this uncertainty as we move forward in light of the changing interest rate environment and other macro headwinds that are forecasted for 2023.
As usual, I’ll provide some brief remarks about the company’s performance and then turn the call over to Rex Copeland, who will get into more detail on our financial results. Then of course, we’ll open it up for questions.
In the fourth quarter 2022, we earned $22.6 million or $1.84 per diluted common share, compared to $15.3 million or $1.14 per diluted common share in the same period in 2021. The 2021 period did include some large non-recurring interest — non-interest expense items, which reduced our net income and EPS.
We had a few significant income and expense items during the fourth quarter of ’22 as well. First of all, Legal and Professional fees, we told you that for the remainder of 2022, and then probably the first-three quarters of 2023, we would be having between, the $21.1 million and $1.3 million of quarterly expense related to professional services for helping us with our conversion and we did have actually a little more than that $1.4 million of those expenses during the quarter.
We had an investment sale loss of $168,000 during the quarter and we had an income tax adjustment, which reduced income tax expense by $1.1 million, although, we expect going forward our income tax expense or income tax rate will be more similar to what it’s been in previous quarters. Our earnings ratios were all strong. Our return on assets was 1.58%, our return on equity was 17.34%, our net interest margin was 3.99% that improved from 3.37% in the year ago quarter and 3.96% in the third quarter of 2022.
It does look like at least a couple more times in 2023, the Federal Reserve will raise interest rates that may help us slightly although, I think this late in the rate rising cycle, I think any benefit from rising interest rates it’s going to be pretty muted. As far as loans go, from the end of ’21, our loans grew almost $500 million, 12.5%. The growth slowed in the fourth quarter to about $10 million.
Our pipeline of loan commitments was basically flat from the end of the third quarter to the end of the fourth quarter, but was up significantly from the beginning of the year. So, good lending volume although, probably flowing loan volume in the fourth quarter. Our credit quality metrics remained extremely strong, very low levels of non-performing assets, $3.7 million at the end of the year, loan delinquencies are very low.
Our capital did pick up a little bit in the fourth quarter. Our TCE ratio went from 8.8% to 9.2%. We paid a 45th dividend in the quarter. Total dividends during the year of $1.56. And in addition, in our efforts to enhance shareholder value, we did repurchase about 1.04 million shares of our stock during 2022 at an average price of $59.25. I think our repurchase activity did slowdown in the fourth quarter maybe about 50,000 shares repurchased.
That concludes my prepared remarks, I’ll turn the call over to Rex at this time.
Rex Copeland
Thank you, Joe. I will talk first little bit about net interest income and margin. Joe mentioned some of the highlights there and I’ll just give a little bit more detail. Our net interest income for the fourth quarter of 2022 increased about $10.4 million or 23.5% compared to the previous year quarter, it was $54.6 million in fourth quarter ’22 versus $44.2 million in the fourth quarter of 2021.
And then, net interest income for the third quarter of ’22 was $52.9 million, so we increased a bit from that as well. As Joe mentioned, increasing market interest rates and some loan growth throughout 2022 and some investment balances growing as well, contributed to the higher level of net interest income in ’22.
The net interest margin of 3.99% as we said earlier compared favorably to a year ago at 3.37% and then third quarter it was 3.96%. The average yield on loans increased about 98 basis points when you look at Q4 ’22 versus Q4 2021. And then the rate on our interest-bearing deposits, the average rate on that increased about 89 basis points in that same timeframe, so looking back to the year ago quarter.
And, again, margin expansion was really kind of based on the increasing market rates and also changes in the asset mix, where we had more cash and cash equivalents at the beginning of the year and changed those over into loans and investments throughout the year. As we’ve stated before and as you’ve seen through the numbers, generally a rising interest rate environment, particularly in the short-term rates should have a positive impact on net interest income as those are floating-rate loans repriced upwards.
We anticipate this will still be the case if the Federal Reserve rate raises rates further. But like Joe mentioned, we think that perhaps we’ve obviously seen significant interest rate increases throughout 2022 and the expectation at this point at least is that we may have some more rate hikes, but not generally nearly to the magnitude that we saw in 2022. So we think that there may be some benefits there, but we also will have some time deposits that are going to mature and reprice higher that may offset some of that as we move through that throughout the first half of 2023 and beyond.
As I mentioned, 2022 the assets shifted away from cash equivalents to loans. In the latter half of 2022, we also saw some changes somewhat in our deposit mix with non-time account balances trending lower and time deposit balances trending higher. The increased time deposits are generally a mix of shorter term retail within 12 month maturities and less — some fixed rate broker deposits, which are maybe a little longer to little bit more intermediate-term they have some callable features and there’s some variable rate broker deposits as well. So, and then from time-to-time, we also utilized generally overnight home loan bank borrowings.
So just kind of to say 2022, again, supported by rising rates, loan growth. And as we said, 2023, we expect that our net interest income will remain solid, but assuming no rate cuts, but we also think that it may not grow tremendously even if the Fed raises by another 50 basis points or 75 basis points. We do have some deposits that will start to reprice as we head into 2023 here.
And we also just a reminder, we do have a couple of interest rate swaps that were forward starting that are not impacting anything right now that will impact our numbers beginning I believe, in May of 2023. And based on where rates are today, we would be in a position where we would be making a net settlement payments to the counterparty so that will reduce our net interest income a bit on that. So those will change, obviously, as interest rates change, but they are tied to Prime and SOFR rate. So based on where they are today, we would have a payment that we would have owe on that.
I’ll move on to non-interest income. For the quarter, non-interest income was down about $1.5 million compared to the year ago quarter. Really the majority, almost all of that could be attributed to the reduced amount of gain on sale of our mortgage loans. Obviously 2020 and 2021, we had big years of mortgage origination of fixed rate loans, which we typically sell in the secondary market. 2022, obviously, rates — once rates started moving higher after the first quarter that slowed down quite a bit, refinancing slowed down if not very much at all, and purchase was still going on but to probably a lesser extent than what we were seeing in the previous couple of years. So, those are some things that, that impacted the fourth quarter this year versus fourth quarter last year and really that’s impacted the entire year of 2022 for the most part.
One other thing I’ll mention on non-interest income that it’s not — hasn’t been real material at this point and we’re not sure it’s going to be a big thing it seems like it’s a little bit of a headwind, but fairly minor relates to our point and sale income. There are some changes. We started seeing this in the latter half of 2022, seeing some of this change happening. There is some changes in the network settlement routing process due to some expiring agreements that we had and so there’s different places now that merchants can route their transactions and some of those may provide a little smaller amount of fee revenue to us on those.
And then also we noticed in the last half of the year of ’22 as well that just a slight decline in overall debit card usage with our customer base. So we’re looking to see if that’s going to continue, we feel like perhaps that some of the debit card usage that we were seeing has shifted over to credit card usage with our customers and so we’re monitoring that as well.
Non-interest expense for the quarter, our non-interest expense decreased about $1.4 million compared to the prior year quarter. As Joe mentioned though, we had the biggest decrease was $2.7 million net decrease from a year ago in the legal audit and professional fees. Again, we had about $4.1 million kind of one-time fees related to our conversion activities in the fourth quarter last year. We had $1.4 million related to the conversion, but not the same type of activity, but related to that again this year. So, we did see a decline in the expense for that.
However, we did see an increase in salary and employee benefits of about $1.4 million from the prior year same quarter, some of that’s related just the normal merit increases, a lot of folks are in our company are — they do their merit increases at the beginning of the year, there’s others that are throughout the year. Some of those because of the job market, particularly in that kind of thing, some of those increases were maybe a little bit larger in 2022 than they had been in some previous years.
Then also we did add during the year the Phoenix and Charlotte loan production offices and that added some expense to 2022’s numbers that were not in 2021. The efficiency ratio for the fourth quarter was 55.13%, compared to 66.98% for the same quarter a year ago. Remember there was — that extra expense in there a year ago and if you exclude that, the efficiency ratio would have been just a little over 57% in the fourth quarter of ’21.
So, just to conclude on non-interest expenses, as we saw in ’22, while we remain in an environment with higher inflation that we’ve seen in quite some time, the salaries and benefit costs may continue to increase a bit due to the tight labor market and we’ve also got changes happening in various states minimum wage laws where we operate. And then again an annual merit increases, a lot of which happen at the beginning of the year. So as we especially move forward throughout 2023 with this core system conversion, we need to make sure that we retain our seasoned people to provide assistance in a lot of these roles.
Talk a little bit provision for credit losses, we continued to have some loan growth and we recorded a provision expense. The net was about $0.8 million in the fourth quarter, $1 million of that was an expense related to our outstanding portfolio and about $159,000 was a net reduction in provision expense related to unfunded loan commitments. And then we had a negative provision of $1.7 million in the fourth quarter last year, $3 million negative provision on outstanding loan portfolio and the $1.3 million provision expense related to unfunded in that fourth quarter of 2021.
Net charge-offs were $281,000 in the fourth quarter ’22 compared to recoveries of $125,000 in the fourth quarter of 2021. For the full year, I think, our net charge-offs were around $274,000 or something like that. So, again, pretty low charge-off year. While we do have pretty low levels of problem assets and delinquencies, we are mindful of higher market interest rates and the uncertain economy as we do begin to go into 2023 year.
Last thing I wanted to touch on is, income taxes. For the three months ended December 31, 2022, our effective tax rate was 16.6%. In the fourth quarter last year, it was 21.1%. Our effective tax rate is typically lower or at or below the Federal statutory rate of 21% due to some tax credits that we have some tax-exempt interest that we have and other things that produce that. Our tax expense and liability is also affected by the liabilities we have in various states where we operate and driven by the level of income or specific tax rates in those states. So those do tend to bump our overall tax rate up a little bit.
So, Joe mentioned earlier, we had a bit of an unusual adjustment in the fourth quarter of 2022. So, when we finished up our Federal and various state income tax returns for the 2021 tax year in the fourth quarter of ’22, the company updated its combined tax rate applied to deferred tax items and we also made some adjustments in our taxes receivable, payable balances related to some carryback claims that were put into place and filed in 2022. So those adjustments made a final reduction, we reduced our tax expense for $1.1 million in the fourth quarter.
As Joe said, that’s not something to expect all the time. We think our effective tax rates probably going to be somewhere in that around that 21% level, give or take a little bit on either side. But overall we think that going forward 21%, somewhere in that ballpark will be a good number to think about.
That concludes the prepared remarks that we have, I think, today. So at this time, we’ll turn it over for questions and ask our operator to once again reminding attendees how to queue in for questions.
Question-and-Answer Session
Operator
Certainly. [Operator Instructions] And our first question comes from the line of Andrew Liesch from Piper Sandler. Your question please.
Andrew Liesch
Hey, everyone. Good afternoon. Question on the margin. It sounds like the certainly some upward pressure on funding costs. So do you think the margin is topped out here at 3.99% or do you think there might be a little more opportunities for expansion before the flaps (ph) kick in?
Joe Turner
I’d say, it’s pretty close to the topped out, so be my guest. I mean, obviously, when the swaps kick in, as Rex mentioned though well they get tick down. So, no I think it’s kind of out topped out.
Andrew Liesch
Got you. And then on the — just my back of the envelope numbers, maybe I’m off here but please direct me otherwise, I’m coming up with maybe 12 basis points of reduction to the margin on the swaps or am I calculating this wrong?
Joe Turner
I think, is it about $600,000 a month?
Rex Copeland
Yeah. Something like that.
Joe Turner
So, that leaves $7.2 million and our margin was $220 million. That sounds — now you are saying 12 basis points — that probably is about right. Our interest-bearing assets are how much, Rex?
Rex Copeland
5 points. In the fourth quarter, they were $5.4 million.
Joe Turner
Yeah. So $7 million would be a little over 12 basis points, something like that. Yeah.
Andrew Liesch
Got you. All right. Thank you. And then Joe, just on your comment in the release about net interest income plateauing or possibly declining that sounds like the fourth quarter run rate, is that correct not the full year 2022 number.
Joe Turner
Right.
Rex Copeland
Yeah. And in the half of 2022, obviously, our net interest income was lower than it was in the second half, because rates didn’t rise immediately in the year. And so we got a lot more benefit in the third and fourth quarters last year. So, that’s what we’re talking about compared to fourth quarter.
Andrew Liesch
Got you. All right. That covers my questions. Thanks so much. I’ll step back.
Joe Turner
Thanks, Andrew.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Damon DelMonte from KBW. Your question please?
Damon DelMonte
Hey. Good afternoon, guys. Hope you’re both doing well today. So just a quick question on loan growth. Can you just give a little perspective on kind of how you’re feeling about your pipelines in the early part of this year and kind of what your expectations might be in the coming quarters for the like-for-like growth.
Rex Copeland
Well, I mean I think — I think, Damon, the thing to — the first part of our loan growth comes from our un-funded construction commitments, which I think we’re like $1.44 billion or something at the end of the year. So, and that’s substantially higher than they were at the end of the year, so that’s going to continue to fund and that’s going to be some that’s going to be some loan growth now.
I will tell you loan origination have definitely slowed down, I think what the Fed has done, at least as far as commercial real estate goes, there is not nearly as much activity as there was. So, that’s probably a little bit more of an issue for as far as — I mean I think what we could see is, is we could see the unfunded commitment line drop, because we’re not booking new construction loans and adding to that unfunded commitment line, but we are going to be funding loans off the commitment line.
But again, we don’t forecast I mean you guys have to sort of come up with your own numbers, but I would say this, it’s not going to be loan growth in year like we had in 2022.
Damon DelMonte
Got it. Okay.
Joe Turner
The other thing that you got to factor in, I mean, I do think payouts have slowed the projects are staying with us longer, which is positive thing.
Damon DelMonte
Got it. Okay. That’s helpful. Thank you. And then with respect to credit in kind of trying to figure out the provision here, obviously very strong underlying credit trends minimal net charge-offs. You had a couple of quarters in the middle of 2022, where you had like $2.2 million and $3.3 million for 2Q and 3Q and then it kind of tailed off here in the fourth quarter. How do we kind of think about like where the reserve level is today at 1.39 and how are you viewing kind of the more macro picture and maybe they need to build reserves or do you feel like you’re comfortable at this level?
Joe Turner
Well, I mean I think we’re comfortable at this level if the economy were to take a turn, we would have to address that. But based on what we’re seeing right now, we’re comfortable.
Damon DelMonte
Okay.
Rex Copeland
I think the provision — the provisioning that you saw last in 2022 early on like the second and third quarter timeframe was a lot of based on loan growth that was going on. So we were adding to our reserves at that point and now we’re — like Joe said we didn’t grow as much our outstanding balances in the fourth quarter, but we’re looking at economic factors now as we kind of move forward into 2023 to see if it starts to look like recession. And if so how bad and how that might impact.
Damon DelMonte
Got it. Okay. And then, just to circle back on the margin and the impact of the swaps. Could you just repeat when do those — I know you said they are forward swaps, but when do those kick in, in May or June?
Rex Copeland
I believe it’s — May of ’23, I believe is the first month that we would have a settlement on those.
Damon DelMonte
Okay. And if those were to happen like today, right? Then the margin would get hit by 12 basis points, based on the math that was being thrown around?
Joe Turner
Yeah. I think that’s — I think that’s pretty close. I think when we calculated it then a few weeks ago, I think it was about 600,000 a month.
Rex Copeland
Somewhere in that ballpark.
Damon DelMonte
Okay. And what’s the duration of those swaps?
Rex Copeland
Out to 2028.
Damon DelMonte
Okay. That’s all that I had. Thank you.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of John Rodis from Janney. Your question please?
John Rodis
Hey, guys. Good afternoon.
Joe Turner
Hi, John.
John Rodis
Hope you’re doing well. Just, Joe, maybe just one quick question on the buyback. You guys were obviously fairly active in 2022 and you announced a new plan, but you did slow the pace in the fourth quarter. How should we sort of think about buyback activity for ’23?
Joe Turner
It sort of depends on the price. We obviously have been — I mean, we bought at a higher price than where we’re trading right now, so we kind of like it, we think it makes sense, I don’t think will probably be — may be quite as aggressive, certainly don’t think it makes sense.
John Rodis
Okay. But not as aggressive, but you still think you’ll probably be somewhat active?
Joe Turner
Not as aggressive as we were in the — during the full year 2022. So, we definitely still buyback makes sense and we feel like we’re well capitalized and plenty able to handle it.
Rex Copeland
It depends a little bit on what kind of turn the economy takes, obviously, too. So we got to factor that into.
Joe Turner
Yeah.
Rex Copeland
As we look at it.
John Rodis
Just as far as you know, capital management, Joe any — or Rex. Any other than the dividend, any other thoughts on sort of read redeploying our capital and so forth?
Joe Turner
No, not really, I mean, it would be dividend or stock buyback.
John Rodis
Okay. I guess where I’m going is just M&A or anything like that your thoughts today.
Joe Turner
Nothing really on the horizon.
John Rodis
Okay. Thank you.
Joe Turner
All right. Thanks, John.
Operator
Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Joe Turner for any further remarks.
Joe Turner
All right. Well, we appreciate everybody being on the call and we’ll look forward to talking to you in April. Have a good day. Thank you.
Operator
Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
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