GSBC 2024Q1

Good day, and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. First Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kelly Polonus, Investor Relations. Please go ahead.

Thank you, Marvin. Good afternoon, and thank you for joining us for our first quarter 2024 earnings call. The purpose of this call is to discuss the company's results for the quarter ending March 31, 2024. Before we begin, I need to remind you that during the course of this call, we may make forward-looking statements about future events and financial performance. These statements are subject to a number of factors that could cause actual results to differ materially from the results anticipated or projected. For a list of some of these factors, please see the forward-looking statements disclosure in our first quarter earnings release and other public filings. President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland, are on the call with me. I'll now turn the meeting over to Joe Turner.

All right. Thanks, Kelly, and good afternoon, everybody. We appreciate you joining us today for our first quarter earnings call. I would characterize our first quarter performance as steady as we continue to operate in uncertain and challenging times. For the first quarter, we earned $1.13 a share or $13.4 million. Key drivers of our performance included continued moderate increases in deposit costs. Of course, there continues to be significant deposit competition and an expected continuation of lower loan origination volume. Additionally, generally unchanged noninterest expense compared to the year-ago quarter, but substantially down from the fourth quarter were also parts of our first quarter performance. Rex will provide more color on our results in his presentation. The company's capital and liquidity positions continue to be strong. Total stockholders' equity was $565.2 million as of March 31, 2024. That was a $6.7 million decrease from the end of 2023, which was totally attributable to decreases in our mark-to-market on swaps and available-for-sale securities. We also declared a $0.40 per share common dividend and repurchased 112,000 shares during the quarter at $51.44 average price. Overall, our loan portfolio continues to perform well. It's very diverse, both by geography and by product type. As anticipated in the current operating environment, our total outstanding loan balances essentially were flat, just slightly down actually $3.4 million. At the end of March 2024, the pipeline of loan commitments and unfunded lines increased slightly to $1.2 billion, and that included $680 million of unfunded construction loans. Overall credit quality metrics remained strong during the quarter, although non-performing assets did increase slightly. Our non-performing asset ratio to total assets was $0.37 at the end of March compared to $0.20 at the end of the year. Non-performing assets increased by $9.5 million, which was really attributable to one multifamily project. Since the end of the quarter, we have foreclosed that project. It's now in other real estate, and we don't anticipate any significant charge-offs from that asset. Additionally, subsequent to the end of the foreclosure, we have resolved one $7.2 million relationship that was in the potential problem loan relationship, and that was resolved with no charge-offs. For more information about our loan portfolio, I encourage you to look at our loan portfolio presentation that's on file with the SEC that has helpful information regarding our loan portfolio by type and geography. That concludes my prepared remarks. So I'll turn the call over to Rex at this time.

All right. Thank you, Joe. I'll start with net interest income and margin information on that. So net interest income for the first quarter of 2024 was $44.8 million. That compares to $53.2 million for the first quarter of 2023. Like several banks in the industry, we experienced overall higher deposit costs during the first quarter of 2024, primarily due to current market interest rate and, as Joe mentioned before, competitive pressures. While our deposit interest expense increased, the pace of that increase has moderated compared to the previous few quarters. The higher funding costs contributed to a decrease in net interest income, approximately $8.4 million lower in the first quarter of '24 compared to the first quarter of '23, about $331,000 lower compared to the fourth quarter of 2023. Higher funding costs in the first quarter were partially caused by a moderate amount of time deposits with lower rates maturing and being replaced at the current market rates and due to a shift of some deposits from non-interest bearing accounts to interest-bearing products. We detailed our upcoming time deposit maturities over the next 12 months in our earnings release. Based on the current market rates that we see in March and early April, replacement rates for these maturing time deposits will likely be in the 4% to 4.5% range. Besides the higher funding costs on our deposits, net interest income was also negatively affected compared to the year-ago quarter by the company's interest rate swaps, two of which began net settlements in May of 2023. During the first quarter of 2024 and fourth quarter of 2023, these two interest rate swaps combined to reduce interest income by $2.8 million in each of those two quarters. These swaps had no impact in quarters prior to the second quarter of 2023. Another interest rate swap contractually terminated on March 1, 2024, which reduced interest income by $1.9 million in the first quarter of 2024 compared to a $2.2 million reduction in the same period in 2023. So with this termination now during the first quarter, there will be no further financial impact from that swap. Net interest margin in the first quarter of '24 was 3.32%. That compared to 3.99% in the first quarter of '23 and also compares to net interest margin of 3.30% in the fourth quarter of 2023. Comparing those two periods, the first quarter of '24 and '23, the average yield on loans increased 37 basis points. The yield on investment securities increased 14 basis points and the average yield on other interest-earning assets, basically interest-bearing cash, increased 71 basis points. The margin contraction primarily resulted from increasing interest rates on all deposit types compared to a year ago. Our average rate on interest-bearing demand and savings deposits, time deposits, and brokered deposits increased by 90 basis points, 186 basis points, and 72 basis points, respectively, in the first quarter of '24 compared to the first quarter of '23. A couple of comments about liquidity and deposits. Our liquidity position remains strong, and we think we've got funding sources available to us of about $2.1 billion at the end of March, with about $1.2 billion of that available from home loan bank advances or borrowings that we can utilize if needed. We've also got a borrowing line at the Federal Reserve and additional cash and unpledged securities. At the end of March 2024, total deposits were nearly $4.8 million. During the three months ended March 31, '24, the company's total deposits increased $51.7 million. Interest-bearing checking balances increased almost $80 million, while non-interest bearing checking balances decreased about $19 million. Time deposits generated through the company's banking center and corporate services networks decreased about $30 million during the first quarter, and total brokered deposits increased $24 million. A couple of things on non-interest income for the quarter: compared to the first quarter last year, non-interest income decreased $1.1 million, which was $6.8 million in the first quarter this year. Overdraft and insufficient fund fees were down $607,000 compared to the first quarter last year. The decrease is really just a continuation of what we've been seeing for a while now where customers are choosing to opt out of authorizing the payment of overdrafts and their account balances. We continue to see this along with the fact that overall we've seen a smaller utilization of overdraft by our customers. Secondly, point of sale and ATM fees decreased $518,000 compared to the prior year quarter. Much of that decrease is related to transactions now being routed through channels that provide lower fees to us. We expect that to remain in place. We’ve also seen slightly lower usage. Lastly, other income decreased $465,000 compared to the prior year first quarter. This year, we recorded $404,000 related to activity incentives for debit card usage, which generated some incentive income based on volumes, while the prior year's first quarter had almost $800,000. So there was about a $400,000 difference. Non-interest expense actually decreased $41,000, about $34 million compared to the first quarter last year. Changes occurred within categories in our advertising and marketing expenses, which decreased about $297,000 compared to the prior year quarter. We also had some incentives with our debit card brand provider, about $423,000 in the first quarter this year. We mentioned it in the earnings release. Just to clarify, that won't be a recurring figure every quarter. Legal audit and professional fees decreased about $256,000 from the prior year quarter to $1.7 million. There were also expenses related to legal training implementation costs for core system conversion. In the first quarter last year, that was $1.3 million, while in the current quarter, it was $929,000. Salary employee benefits increased about $453,000 this first quarter versus last year’s first quarter due to normal annual merit increases in general operations. Lastly, insurance expenses increased $277,000 from the prior year quarter, due to increases in FDIC deposit insurance rates that took effect during 2023, as we fully included that in the first quarter of 2024. Total noninterest expense decreased significantly from the fourth quarter of 2023. The efficiency ratio for the first quarter this year was 66.68%, compared to 56.42% in the first quarter of last year. Joe talked about credit quality before, and I'll just mention some things about the provision for credit losses. During the first quarter of '24, we recorded a provision expense of $500,000 on the outstanding loan portfolio portion, compared to a $1.5 million provision expense during the first quarter last year. We also recorded a provision for losses on unfunded commitments of about $130,000, compared to a negative provision of $826,000 for the three months ended March 31, 2023. Our unfunded commitment levels decreased significantly during 2023, allowing us to reduce some of the reserve we needed against those. They were fairly flat in the first quarter, so not a significant change there this quarter. Net charge-offs in the first quarter were $83,000, a minimal amount. At the end of the first quarter of 2024, the allowance for credit losses as a percentage of total loans was 1.40%. Lastly, regarding income taxes, for the three months ended March 31, '24 and '23, the company's effective tax rate was 19.1% and 21.2%, respectively, resulting in a lower rate in the first quarter this year. The majority of our tax rate being below the statutory federal rate is due to the utilization of certain investment tax credits and some tax-exempt investments and loans. For 2024, we expect the effective tax rate, combined federal and state, to be around 18.5% to 20.5%. The lower rate is primarily due to additional investment tax credit utilization this year. So that concludes the prepared remarks we have. At this time, we'll entertain questions. Let me ask our operator to once again remind the attendees how to queue for questions.

Thank you. At this time, we'll conduct a question-and-answer session. Our first question comes from the line of Andrew Liesch of Piper Sandler. Your line is now open.

Good afternoon. Rex, hi. On the margin here, you got the one swap dropping off and the CD repricing looks pretty comparable to what's rolling off. So, do you think we've seen the bottom of the margin here and there's more room for it to move higher in the second quarter?

Well, I mean it's hard to predict that with total certainty, but the one thing that I will say is we had two months of inclusion of the negative income on that one swap that rolled off. We'll have zero months of inclusion of that. So that for sure is going to increase our interest income from that perspective.

Another $2 million a quarter.

Yeah, roughly so, yes. So we do have a moderate amount of time deposits that are maturing, and like I said, I think those average rates are probably north of 4% or somewhere thereabouts will be maturing and we'll probably be replacing it somewhere in the 4% to 4.5% range. I'm not sure we'll fall in there exactly. So there could be some additional rate increase on that. But the thing that is more of a wild card is kind of the mix shift if there are more on the non-time accounts. So we don’t necessarily anticipate that we're going to be raising any rates on those products, but it just depends on how the balances shift around if they move from lower rate products to higher rate products or zero rate products to interest rate products. So I'm not directly answering your question, but I'm trying to give you some of the pieces of how we look at it.

That’s really helpful.

The other part of that, Andrew, is our loan portfolio, the fixed rate loan portfolio — repricing, and I think there's some good disclosure about that and relatively recent disclosure about that in the annual report. So you would be able to look at that as well. There does seem to be, as we alluded to earlier, some... with quantitative tightening, the deposit market's still pretty competitive.

Got it, all right, that's really helpful. I'll check out as well. Then, are you going to continue to have some of these non-recurring items related to the core conversion? And then I guess, what sort of update can you provide on that? And what other expenses might come ahead of that?

Really, not much update other than what we provided in the press release, Andrew. Until that's finally resolved, we could continue to have expenses at this level.

Got it. All right. Thanks for taking the question.

All right.

Thank you. One moment for our next question. Our next question comes from the line of Damon DelMonte of KBW. Your line is now open.

Hey, good afternoon guys. Hope you are doing well today. I just wanted to follow up on the line of question with expenses. Is it fair to kind of directionally point to something closer to the $35 million level, Rex, given that the advertising benefit this quarter isn't repeated in the next quarter?

Yeah, for sure that's not going to be repeated in the next quarter. That was really the only thing that we called out in the first quarter of any size. I would say you can use that as your guide from where you start from.

Okay, that's good. And then with respect to the outlook for loan growth, you commented last quarter that you expect things to be slower this quarter, pretty flat to just a little down. Do you think that's more indicative of what to expect for the remainder of the year, or would you say there was some seasonality contributing to the slowness this year in the first quarter and we should expect to see some positive growth over the next quarter or two?

No, I don't think, Damon, that that's seasonal necessarily. I would say growth will continue to be sort of flattish.

Okay. And is there any particular asset class that's seeing lower demand that's driving this, or is it broad-based across the portfolio?

I think it's more broad-based.

Okay. So if the demand is down, are you seeing any signs of softening in those economies, or is it just more of a demand function?

I think it's more of a demand function. I think it's higher interest rates and people just aren't pulling the trigger on deposits. We don't see much deterioration other than what you read about, like office, particularly high-rise office, urban kind of office, and we just don't have a lot of that.

Got it.

But I think the asset classes are holding up pretty well. We had the multifamily project in Oklahoma that was a potential problem loan that we were paid off with no loss. So I think the asset classes from a credit standpoint are holding up pretty well. It's just that there are not many new entrants into those markets.

I think a lot of people probably too were expecting that by now they could see the rates, at least near term, see that rates are going to start coming down, but with the first quarter, that really changed the complexion for people from where they thought they were in December to where they are now. We may be having higher rates for a while, so maybe we just hold off a little bit longer before we start putting the project in place.

Got it. Okay, great. And then just lastly, Rex, could you repeat what you had said about the tax rate? I missed what you were saying. I know this quarter was 19.1%, but what was your commentary regarding the forward quarters?

Yeah, so we think it'll be somewhere in the range of 18.5% to 20.5%. It'll depend a little bit on our earnings overall, but we do have some additional investment tax credit utilization that's coming online here in 2024. So we think that will bring our tax rate down to a little below 21%, where it's been somewhat in the past.

Great. That's all I had. Thank you very much.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to Joe Turner for closing remarks.

All right. Thanks, Marvin, and thanks, everybody, for being on the call with us today. We will talk to you at the end of the second quarter. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.