GSBC 2023Q1

Good day, and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the 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 speaker, Kelly Polonus from Investor Relations. Please go ahead.

Thank you, Carmen. Good afternoon, and thank you for joining us for our first quarter 2023 earnings call. This is Kelly Polonus, Investor Relations for Great Southern. The purpose of this call is to discuss the company's results for the quarter ending March 31, 2023. 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 future 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 or 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.

All right, thanks Kelly. We appreciate everybody joining us today for our first quarter earnings call. Hopefully, you've had a chance to review our earnings release, and if you did, you saw that we had a very solid quarter through a pretty tumultuous time in the banking industry, especially during the last month of the quarter. The bank failures that occurred on the East and West Coast created lots of turmoil and understandably focused attention on certain operational situations at the banks that failed and others as well. During the intense media focus on these failures, our operating conditions here at Great Southern were very stable, and we believe that's true of most of the other banks in our market areas as well. The strength of our company's deposit base was underscored in terms of diversification by customer type and geography, and the low level of uninsured deposits we have, which is currently about 14% of total deposits. From February 28, 2023, to March 31, 2023, our total deposits increased by nearly $75 million, primarily in retail time deposits and interest-bearing checking accounts. Rex will provide more detail on deposits as well as liquidity during his presentation. During the first quarter, we remained focused on taking care of our customers and worked diligently to fight the many headwinds of the current economic climate. I'm proud of the Great Southern team and appreciate their efforts, which resulted in our first quarter earnings of $20.5 million or $1.67 per common share compared to $17 million or $1.30 in the year-ago quarter. We did have one significant expense item in the quarter that relates to our conversion to the Fiserv system. Our earnings performance ratios in the first quarter were again very strong, with a return on assets of 1.43% and a return on equity of 14.88%. Our net interest income and net interest margin increased by $9.9 million to $53.2 million and increased by 56 basis points over the year-ago quarter. In the fourth quarter of 2022, our margin was $54.6 million, with a percentage margin of 3.99%. The two fewer calendar days in the first quarter really contributed to the reduction from the fourth quarter number. During the first quarter, new loan production and general activity were down compared to the 2022 quarter. Our net loans did increase by $62.5 million or 1.4%. Our pipeline of loan commitments decreased by $111 million but still was pretty strong at $1.3 billion. For more information about our loan portfolio, I'll remind you of our quarterly loan portfolio presentation that was filed last night and is available on our Investor Relations site. We understand that there's a lot of concern about the office sector right now, and so we did want to talk about our office sector just very briefly. For our company, the office sector represents about 5% of our total outstanding loan portfolio and about 15% of the CRE book, which consists of about 140 loans. Geographically, more than half of the portfolio is in Missouri, primarily in St. Louis and Springfield. Most of the remaining loans are in other places within our franchise footprint. The average rentable square footage is 47,500 square feet, and the median is 7,200 square feet. As of March, all the loans in our office portfolio were performing, supported by strong equity and strong guarantees. Our credit quality remained excellent during the first quarter. At March 31, 2023, our non-performing assets were $3 million or 0.05% of assets and other loan delinquencies were at historically low levels as well. Our capital position remains extremely strong, and we continue to be substantially above regulatory, well-capitalized thresholds. Our tangible common equity ratio was 9.5% at the end of the first quarter, which was an increase from 9.2% at the end of 2022. We will continue to judiciously manage our capital levels in light of the changing operating and economic circumstances. Our total stockholders' equity increased by $22.4 million in the first quarter, with retained earnings increasing by $10 million, and our AOCI improving by almost $12 million. At March 31, 2023, our AOCI loss was about 6.9% of our total gross stockholders' equity. If the held-to-maturity unrealized losses were also included in stockholders' equity, it would have decreased stockholders' equity by another $15.5 million. This amount was about 2.8% of our total stockholders' equity as of the end of the first quarter. In the first quarter, we declared a $0.40 per share dividend. In addition, in our effort to enhance long-term shareholder value, the company continued to repurchase shares of our common stock during the first quarter, buying back almost 100,000 shares at an average price of $55.70. At March 31, 2023, about 1.1 million shares remain available in our stock repurchase authorization. The combined stock repurchases and dividends reduced stockholders' equity by $10.5 million. That concludes my prepared remarks. Now I'll turn the call over to our CFO, Rex Copeland.

Thank you, Joe. I’d like to begin by discussing net interest income and reiterate a few points Joe already covered. Compared to the same quarter last year, our net interest income increased by approximately $9.9 million, slightly down from the previous quarter. The reduction from the fourth quarter was primarily due to having two fewer calendar days this quarter compared to last year’s fourth quarter. Our net interest margin was 3.99% in the first quarter, up from 3.43% in the same quarter last year, remaining consistent with the fourth quarter of 2022. When comparing the first quarters of 2023 and 2022, the average yield on loans rose about 153 basis points, and the average rate on interest-bearing deposits increased by about 135 basis points. The growth in margin from a year ago was mainly due to our asset mix, with average loans and investment securities both increasing. As we have previously mentioned, in a generally rising interest rate environment, particularly for short-term rates like fed funds and prime, we expect to benefit from increased interest income. We anticipate continued benefits should the Fed raise rates again soon. However, we also expect some of those advantages will be negated by rising funding costs, which have noticeably increased this year, especially since March and continuing into April. We expect further increases in deposit and funding costs throughout the first half of 2023, and possibly beyond, depending on the direction of market rates at that time. This year, we have several factors at play beyond just adjusting maturing time deposits. We will also start some net interest settlements from forward-starting interest rate swaps disclosed in previous communications. These will not have net settlements due until now and we expect to begin experiencing some negative interest income starting in May, assuming rates remain stable. Now, I’ll shift to discussing liquidity and deposits. Our liquidity position, which reflects our capacity to generate cash for current and future obligations, remains robust. We have readily available funding sources, which we typically highlight in our quarterly reports. As of the end of March, our total funding capacity and on-balance sheet liquidity amounted to approximately $1.8 billion, derived from various sources, with significant contributions from home loan bank and Federal Reserve lines. Alongside this, we have over $550 million in unpledged securities that can be used for pledging at either the home loan bank or Federal Reserve. This gives us considerable liquidity capacity from both our existing assets and secured lines. During the three months ending March 31, our total deposits rose by about $114 million. Brokerage deposits increased by approximately $125 million, sourced from several channels. Time deposits from our banking center network and corporate services group rose by about $37 million, while those gathered through our internet channels dipped by about $20 million. Interest-bearing checking balances grew by about $46 million, or about 2.1%, primarily in money market accounts, whereas non-interest bearing checking balances reduced by approximately $72 million, a 6.8% drop from the end of the previous year. As Joe noted, our deposit base is well-diversified across customer types and regions, without significant concentrations in any specific industry or demographic sector. To reiterate Joe’s statement, our level of uninsured deposits is fairly low, at around 14% of our total deposits as of the end of March. Our overall deposits were $4.8 million, with about $537 million in broker deposits and approximately $4.3 million in core deposits distributed across around 224,000 active accounts. Non-interest income in the first quarter of this year fell by about $1.3 million compared to the same quarter last year. The primary reason for this decline was a reduced net gain from the sale of fixed-rate loans we originate and sell in the secondary market, reflecting fewer originations this quarter compared to last year. Additionally, a loss related to our derivative interest rate products contributed to the decrease, as we recognized a loss of $291,000 this quarter compared to a gain of $152,000 last year. These factors will eventually balance out, but the timing does rely on market rates. In terms of non-interest expenses, we saw an increase of $3.2 million compared to the first quarter of last year, largely driven by an increase in professional fees by about $1.3 million and an increase in salary employee benefits of about $1.1 million, attributed to normal merit increases and the new Charlotte LPO, which wasn’t open during the same period last year. Additionally, we deferred fewer loan origination costs this quarter compared to last, accounting for a difference of about $350,000. Occupancy expenses also rose, being around $840,000 higher than the previous year, with roughly $500,000 attributed to various computer license renewals and preparations for a system conversion, along with increased repairs and maintenance costs on our properties. Our efficiency ratio for the first quarter stood at 56.42%, an improvement from 59.62% in the same quarter last year, primarily driven by the rise in interest income, though this was partially offset by higher non-interest expenses. Regarding provisions for credit losses, our credit quality remains strong. We recorded a provision expense of $1.5 million on our outstanding loan portfolio in the first quarter, in contrast to no such expense in the first quarter of 2022. We also recorded a negative provision on our unfunded commitments, which saw a slight reduction this quarter, costing us $826,000 compared to $193,000 last year, alongside net recoveries of $7,000 in the first three months of this year. Our allowance for credit losses on the loan portfolio stood at about 1.40% as of March 31. Lastly, concerning income taxes, our effective tax rate for the three months was 21.2%, up from 20.5% in the first quarter of last year. Various factors impact our effective tax rate, primarily our use of investment tax credits, tax-exempt interest, and state tax expenses across the states where we operate. We anticipate a normal tax expense rate within the range of 20.5% to 21.5% for the remainder of the year. That wraps up my prepared comments, and we will now take questions. Please let our operator remind attendees how to queue for questions.

And this comes from the line of Andrew Liesch with Piper Sandler. Please proceed.

Hey, good afternoon. I just want to talk about here on the loan pipeline, obviously came in a little bit, but it still seems like you have a good backlog of unfunded construction commitments. Any sense on the pace of how they fund up? And I guess on the other hand, do you see any loans that are maturing coming forward that might weigh on the growth?

Well, as far as the funding, Andrew, I think we fund about $80 million a month roughly on our construction loans. Sometimes it could be a little higher, sometimes it could be a little lower, but that's probably roughly the number. As far as payoffs, we are seeing some payoffs. We had a larger payoff just yesterday or the day before. So that's going to happen too. It's not like it was in 2021 though, but we got a pretty high quality portfolio and people are still able to do some things with it.

So take some of these examples like were they refinancing elsewhere at terms that just don't make sense for others, or…

Yeah, I think the one that paid off yesterday was refinancing longer-term fixed rate. I think non-recourse, just terms that didn't make sense to us.

Got it. Maybe not, I'm just trying to gauge how much economic sensitivity of these folks may have, or if it's really just taking longer-term funding or if they're concerned with the economy. I guess, what's the tone been from your borrowers?

I think it's looking pretty positive. Our borrowers are optimistic about their projects. We review all our loans of $1 million and above every quarter, and just recently, we looked at our loans, especially in the Southeast and the Atlanta area, where there are many multi-family projects, and things are going very well for them. Rents are exceeding their expectations, and many of these projects are being sold rather than refinanced, so they are filling up and preparing to enter the market. They seem to have high hopes for the kind of cap rate they can achieve when selling, but the outcome is yet to be determined.

And then just on the trend of non-interest bearing deposits and just saying industry wide, we're seeing them decline. I guess how much more remixing do you think you have on the deposit side, or any thoughts on where the non-interest bearing might flatten out?

Yeah. Where the bottom is on it? I don't think we know that, Andrew. We were down quite a bit in '22. We were down 7% this quarter. I think we'll just have to kind of wait and see.

And it comes from the line of Damon DelMonte with KBW. Please proceed.

Hey, good afternoon, guys. Hope everybody's doing well today. Just a couple of questions on the margin and the outlook there. Your deposit betas have held in relatively strong versus some of the others that we've seen this quarter and even last quarter. Can you give a little sense for kind of where pricing is at the end of the quarter going into the beginning of the second quarter here and what kind of pressures you might be seeing on the funding side?

Yeah, I think we do a pretty good job of that, Damon with our point in time numbers in our average rates and spread table. We do have a March 31 point in time, which is sort of where we are right at the end of the quarter, but I would point out the swap Rex mentioned is going to impact net interest margin by probably $2.5 million based on where rates are right now, I think close to $2.5 million. Is that right, Rex for the quarter? Yeah, for the quarter.

2.31% was the margin rate we had on time deposits. And so, again, that's a competitive thing that's sort of anybody's guess that but it's going to reprice up from there.

Got it. Okay. All right, that's helpful. And then with respect to kind of provisioning and credit outlook, you're obviously very strong credit quality metrics doesn't appear to be any issues on the near-term horizon. I guess, how should we think about the provision in kind of in concert with where the loan loss reserve is right now? Do you feel you need to kind of build the reserve any higher or do you feel like you're just basically matching loan growth and net charge offs?

I think more the latter to me right now. If the forecast for the economy got gloomier, then that answer might change, but assuming sort of the same sort of economic forecast, I think we'll probably stay sort of in the range we're at here, Rex?

Yeah, I think so. We're definitely going to be looking at a couple of pieces of it, the outstanding loan balances, what happens with those, and the unfunded portion as well. So there's two pieces that are going to be going on there, in addition to just what we have as far as an economic forecast. So we will look at balances of both outstanding and unfunded and then place all that into the context. That's kind of how we see the economic factors compared to where we saw them in March. Okay. And then I guess lastly on the expense front, Rex, any updated outlook there? Do you feel that there's opportunities to lower expenses or do you feel that there's still some investments that are taking place across the organization, which will kind of keep expenses moving up a bit?

I don't know that there's going to be a whole lot of stuff that we foresee right now as far as ways to cut things. The one expense that the million to a quarter we have, Damon, that will go away, our conversion date's now scheduled for May of '24. So that will go away in May of '24. But other than that, I think, I don't know that there will be a lot of cutting. I think we're in a position where we can grow without a maybe commensurate growth in expenses. But, I don't know, there will be a lot of cutting. There's obviously been a lot of inflation, and so, net of the accounting issue that or the accounting thing that Rex talked about with respect to comp expense, our comp expense was up about 4%, which I think is pretty well constrained, based on the kind of environment we're in. So, I would say expenses will continue on the path that they're on now.

Okay. Great. That's all I have for now. I'll step back. Thank you.

Thank you. And ladies and gentlemen, with that, we'll conclude the Q&A session and program for today. On behalf of Great Southern Bancorp, thank you for participating, and you may now disconnect. Good day.