Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. Q3 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 one one on your telephone keypad. At this time, I would like to turn the conference over to Ms. Kelly Polonus. Ma'am, please begin.
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 disclosures in our Q3 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.
Okay, thanks, Kelly. Good afternoon, everyone. We appreciate you joining us today for our Q3 earnings call. Our Q3 earnings continue to be strong, continuing our momentum from the Q2. 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 Q3 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, you know, was significantly different in both quarters, so I do want to go into a little bit more detail. First of all, in the Q3 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 a $1.6 million in PPP fee accretion in the 2021 quarter.
Another big driver, the biggest driver really of the change between the quarters was the change in 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. A swing of $5.7 million there. Non-interest income was about $1.8 million lower in the Q3 of this year, mainly as a result of lower gain on loans. Operating expenses were $3.4 million higher in the Q3 this year than they were in the Q3 last year. About $1.1 million of that related to professional fees regarding our conversion that we've.
Data servicing conversion that we've talked about the last couple of quarters. We also had $300,000, almost $400,000 of professional fees related to a swap that we entered into in the Q3 of 2022. Our salaries and salary and employee benefits increased about $1.1 million in the Q3 of 2022 over the Q3 of 2021. About $300,000 of that increase related to the loan production offices we opened. You know, about $800,000 is related to, you know, maybe some additional staffing, you know, as well as probably higher comp levels, you know, given the kind of employment environment we're in.
If we look at reported pre-tax, pre-provision earnings, our pre-tax, pre-provision earnings were $26.1 million in Q3 of 2022 versus $23.4 million in Q3 of 2021. We were up $2.7 million, and this was with 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 Q2 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 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. You know, continued increases, but I think, you know, 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 continued 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. 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. We expect the loan origination activity to slow. We're in a pretty good position though, because we have, you know, $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. You know, very low, our levels of past dues, et cetera, charge-offs are also at very low levels. 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%. Down a little bit from the end of the year, but still very strong.
In the Q3, we declared a $0.40 per share 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. 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, you know, capital. We did, you know, our TCE, the dollar amount is down, you know, pretty significantly from the beginning of the year. We started with $616 million in capital at, you know, January 1, 2022.
We basically spent about as much in buying stock back as we've had in net income. Our capital has reduced by the amount of our dividend, which is about, Rex?
$14 million.
$14 million. Then, you know, 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. The securities we buy and the swaps we enter into are, you know, supposed to be longer to balance our portfolio so that then our company will be able to perform better as rates decline, and we get into lower interest rate environments. That's the purpose of that. Now I'll turn it over to our CFO, Rex A. 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. As Joe said, you know, our net interest income for this quarter increased about $8 million to 52.9 million, compared to the $44.9 million in the Q3 last year. Net interest income in the Q2 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 Q3 numbers. Net interest margin, again, with 3.96%, for the Q3.
That compared, as we said, to 3.36% in the Q3 last year. We had a significant increase from where we were a year ago. That was really, you know, 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. You know, 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.
As I mentioned, you know, 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, you know, we're still looking at being generally positive for us in a rising interest rate environment. We'll continue to monitor where we are in that position. 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. We do take that very very seriously and look at it very strongly all the time, trying to make sure we're getting the right balance as best we can there.
During that, the nine months, we talked about, you know, our asset mix has shifted. We talked about that. We've also had, here during the year, our liability mix has shifted somewhat. We had more non-time accounts at December 31. We still had a lot of the deposits that came through for the pandemic. We've seen throughout 2022 a kind of mix 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. 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. You know, 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 net. Then we've added some broker deposits. Those have increased about $290 million throughout the year since the beginning of 2022. A little bit of a shift in the liabilities that we have. From time to time, we do utilize Federal Home Loan Bank advances as well.
We've got a variety of sources that we do use, and we try to do that and use varying types and terms. Some of those are gonna 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. 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 Q3.
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. The profit on those sales has slowed considerably. We are making some loans that are, you know, 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. We've seen some increase in our one-four family portfolio as well. Noninterest expense, talk about that for just a little bit. And again, we touched on some of these already. For the quarter, 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. Some of the overall increases that we just kind of mentioned earlier in more general terms, again, you know, we had 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. There's some costs that go along with all that. Mentioned the professional fees that we had, the Fiserv conversion or system conversion information that we've already talked about in the past.
Also the swaps that we put on in the Q3, some upfront fees we had to pay on that. The other operating expenses, that category, just kind of miscellaneous expenses, was up about $570,000 from the prior year quarter. 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 Q3 that are sort of, you know, one-off type things, at least with the contributions. The efficiency ratio for the Q3 this year was 57.09% compared to 57.27% in the same quarter last year.
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 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, you know, commercial charge-offs in there, but the vast majority of that is related to overdrafts.
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 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, you know, periods is gonna be somewhere in the 20.5%-21.5% 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. We think that that generally is gonna be the range where we'll be. That concludes the remarks I had prepared, and at this time, I think we can entertain questions. Let me remind or go back to our operator to remind you all how to queue in for those questions.
Ladies and gentlemen, if you have a question or comment at this time, please press star one one on your telephone keypad. Again, to ask a question, press star one one. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Andrew Liesch from Piper Sandler Companies. Mr. Liesch, your line is open.
Thank you. Good afternoon, everyone. Question on the margin here, just kind of diving into some of the deposit beta questions here that maybe there's a bit more expansion ahead. At what point do you think, at how many more Fed increases, at 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?
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 gonna see benefit on the loan side for sure. 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. 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 gonna be probably it'll be 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 like, you know, 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.
Mm-hmm.
You know, rate for something like that, at least initially. I think we're still gonna see maybe some benefit, but I don't think it's gonna I mean, when you think back, the first couple of rate hikes were small, and we didn't really move our, you know, 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 we got the first 150 basis points or so sort of for free.
Yeah.
After that, just marginally, it just gets probably a higher beta as you move forward.
Yeah.
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. I think there is. You see a lot of, you know, high CD rate offers around. There's depositors seem hungry for, you know, higher rates for obvious reasons. There's probably a lot of liquidity washing around when you're talking about the largest banks. When you're talking about community banks.
Not so much.
Not as much, probably.
All right. No, that's a really helpful color. Thanks so much for that. 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 just curious, like, what are some of the puts and takes that went into that $3.3 million or so?
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 you know, 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. You know, frankly, Andrew, for us, and probably for a lot of the folks in the banking industry, that number keeps going down, that part of it. You know, because
We're just adding quarter after quarter of effectively zero charge-offs, which, you know, that's a good thing, but that's taking that number down. We're also looking out there, and we're seeing a Fed that is sort of indicating and, you know, we use Moody's. Moody's is thinking and others. I've heard others say we're probably headed for a recession. I guess, you know, as you see increases, you know, in our reserve levels, 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, you know, 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, you know, deposits, checking accounts and things. The loan portfolio is strong. Yeah, we're trying as best we can to, you know, estimate what losses could be if the economy turns down a little bit.
There's part of it too.
Got it.
This is the growth.
Yeah.
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.
Yeah.
you know, that liability has increased fairly substantially as well. you know, to the extent that, either the on-balance sheet or off-balance sheet, you know, loans and commitments continue to grow, I mean, I think we're gonna have to continue to fund, you know, our reserves for that growth.
Mm-hmm.
So that-
Right.
It's a combination of both. Certainly as you see us, if you see us grow, those line items will have to probably provide for that.
Now, if we had a situation where our, you know, where we weren't originating a lot of new deals, but loans were moving from unfunded to funded, that's not really gonna 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, allowance for funded. So, you know, that could happen too.
All right. No, that's helpful, Collier. I appreciate it. That covers the questions. Thanks so much.
All right. Thank you, Andrew.
Thank you. Our next question or comment comes from the line of Damon DelMonte from KBW. Stand by. Mr. DelMonte, your line is open.
Hey, good afternoon guys. Hope everybody's doing well today.
Hi, Damon.
A question on the-
Thank you.
Hi. A question on the deposit growth this quarter. I don't think you guys break out the composition on end-of-period basis. You do on the average side, but could you just talk a little bit about, you know, what the rough breakouts are on the end-of-period basis? You know, you referenced an increase in CDs and brokered CDs. Just kind of wondering how much of the growth was driven by that.
Yeah, I mean, I can give you the, like, end of September balance information, and we'll have it obviously in our 10-Q filing, but I can break that out a little bit. The total of interest-bearing and non-interest-bearing checking is about $3.4 billion, excuse me. The total of what we call retail CDs is just right at $1 billion. The brokered total combination of various things that fall under the brokered umbrella is about $360 million.
Okay. All right. That's helpful. Thanks. Then kind of just on the expense outlook, you know, and I know you spoke last quarter about it, and this quarter again about the professional fees, and that's gonna be sticking around for a little while. As we kind of think about, you know, 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?
Well, I mean that $1.1-2 million of the system stuff's gonna be in there until the Q3 next year.
Right. Right.
That's gonna stay.
Right.
Um-
Yep.
You know, the other things that we mentioned, Damon. You know, when you compare Q3 to Q2, we had about $300,000 higher occupancy expense and about, you know, half of that, or maybe a little more than half, 60% of it related to just higher utility bills. You know, that's gonna 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 half a million dollars in the Q3. Probably, I mean, I think all of you know that, you know, there's this FAS 91 concept where we can defer origination cost, you know, compensation related to origination of loans.
That deferral was about $300,000 higher in the Q2 than it was in the Q3. You know, 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. You know, that was probably another $50,000 of it. You know, the six hundred, we had $600,000 higher other expense, and that was, we had a $150,000 donation in St. Louis, you know, that is 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. So, you know, I do think, you know, on the compensation line, you know, the employment market continues to be tight. You know, we are in an environment where there's, you know, 7%-8% inflation, so you are gonna see some growth in comp costs. You know, like as you say, if you strip out the, you know, the things that we would say are for sure ultimately non-recurring, you know, the 34.6 or whatever we were at is probably more like, you know, 33.
You know, the other items with the occupancy costs and the other expenses, you know, just kind of, they kind of bounce around a little bit from quarter to quarter.
Damon, you said, you know, looking out a few quarters, though, when you get to the Q1 of next year, I mean, most of our salaried employees get their annual adjustments in January.
Mm-hmm.
there'll be, you know, there will be some adjustments there. The non-salaried are throughout the year, but
Yeah.
The salaried folks are gonna be in that Q1 number. There's gonna be, you know, some level of increase there that will correspond.
Got it. Okay. That's helpful. I appreciate that color. And then I guess just lastly, like on loan growth, it sounds like, you know, 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 gonna be a good source for growth. 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 2023. 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?
You know, I mean, we don't really give guidance as to what our loan growth's gonna be. 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. 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 $1.4 billion of construction commitments, that will fund over the next 15 months or so, you know, $100 million a month. A bit of it, too, has had to do with lower levels of payoffs. I think that's an environment that's gonna stick around for a while.
You know, with the longer term interest rates being up, you know, we were really getting paid off either from our customer putting a longer term perm mortgage on a project or selling the project. That's still gonna 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.
Got it. Okay. That's all very helpful. That's all that I had. Thank you.
Okay, thanks, Damon.
Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star one one on your telephone. Again, that is star one one. Standby. Our next question or comment comes from the line of John Rodis from Janney. Mr. Rodis, your line is open.
Hey, good afternoon, everybody.
Hi, John.
Hi, John.
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 speak?
As far as loan types or geographically?
I guess both.
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. You know, 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. You know, geographically, I think we're, you know, equally open or maybe better said, equally conservative in all our markets.
Okay. Makes sense. 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?
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 1 million shares through the first nine months. I don't think we'll keep going at that kind of a clip. You know, we'll probably, we may from time to time be back in the market, but, you know, it's gonna be a slower go on buyback shares.
Okay. Makes sense. Thanks, guys. Have a good day.
Okay, thanks, John.
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.
No closing remarks. We appreciate everybody joining us today, and we'll look forward to talking to you in January. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.