GSBC 2022Q1

Good day and thank you for standing by. Welcome to the Great Southern Bancorp Incorporated First Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to our speaker today, Ms. Kelly Polonus. You may begin.

Thank you, Tanya. Good afternoon. And welcome to our call. The purpose of this call today is to discuss the company’s results for the quarter ending March 31, 2022. Before we begin, 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 any undue reliance on any of these forward-looking statements which speak only as the date they are made. Please see our forward-looking statements disclosure in our first 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 Turner.

Okay. Thanks, Kelly. Good afternoon, and as Kelly said, we really appreciate all of you joining us for our call today. Overall, our first quarter earnings were very solid. They get us off to a great start for what we expect to be another productive year. We certainly recognize that there are continued economic and societal uncertainty, and we are going to remain focused on our customer's needs, and as always, operate with a long view mindset. As is typical, I’ll provide some brief remarks on the company’s performance and then turn the call over to Rex Copeland, our CFO, to go into more detail about the financial results, then we’ll open it up for questions. In the first quarter of 2022, we earned $17 million or $1.30 per diluted share, compared to $18.9 million or $1.36 per diluted share. I think our pretax earnings were down Q1 2022 from Q1 2021 about $2.5 million, and that’s almost entirely the result of lower PPP fees by about $800,000, and I think our profit on loan sales was down by about $1.5 million. Our performance ratios were very solid. During the quarter, we had a $1.27 per share, or sorry, 1.27% return on average assets and an 11.14% return on equity. Our margin was 3.43% for the quarter. The Federal Reserve is obviously talking about significantly raising rates in 2022, which should be positive for us, assuming the LIBOR rates follow suit, which there's no reason to believe they wouldn't. Our loans increased in the first quarter by about $100 million. Our pipeline of commitments continues to be strong, with an increase of about $98 million from the end of 2021. We opened a new commercial loan production office in Phoenix midway through the quarter and we are expecting to open at least one more loan production office during 2022. Our model is to hire an experienced lender for the market we’re entering, sometimes following up with a number two from within our organization. In the case of Phoenix, we hired a number of team members in that market as well. Asset quality metrics continue to be extremely strong, with non-performing assets at $5.2 million, a decrease of $821,000 from the end of 2021. The ratio of non-performing assets to period-end assets was 10 basis points at the end of the first quarter, which is negligible. We’re almost completely out of ORE, which will be the first time I remember that happening in a long, long time. Our capital continues to be very strong. From the end of 2021, our total common stockholders’ equity decreased by about $34 million. Rex may go over this, but I’ll just give you the brief snapshot. We had increases in capital of $70 million from earnings and $3 million from ops and exercises. The total increase in capital during the quarter was $20 million, with decreases of about $25 million or $26 million from stock purchases and decreases in our mark-to-market of securities and swaps of about $23 million. The additional decrease was the result of large dividends. Our capital ratios are still extremely strong, which affords us the opportunity to do whatever we want. So with that, I’ll turn the call over to Rex.

Okay. Thanks, Joe. I’ll just add on to what Joe said. We did buy back a fair amount of stock in the first quarter, almost 420,000 shares of our stock, and we still have about 750,000 shares yet available under our authorized repurchase program. I’ll talk briefly about net interest income and net interest margin. Joe gave a couple of highlights on that. The net interest margin in the first quarter of 2022 decreased by about $823,000 compared to the first quarter of 2021. The total was $43.3 million in this first quarter versus $44.1 million in the first quarter last year. We also had net interest income of $44.2 million in the fourth quarter of 2021. So comparing those, Joe mentioned that our net deferred fees related to PPP loans dropped significantly this first quarter of this year. We had $416,000 of net deferred fees accretive to income this quarter. The previous year’s first quarter was $1.2 million of income, and the fourth quarter last year was $1.6 million. So, obviously, it was much less positive help from the PPP fees, and we’re down to about $88 million of net deferred fees. There will be very little that flows into income now going forward. Our net interest margin, as Joe noted, was 3.43% in the first quarter of this year compared to 3.41% in the first quarter last year, and 3.37% in the fourth quarter of 2021. During the three months ended March 31, 2022, we had some shifts in our asset mix that helped us. I mentioned before that net loans grew about $104 million in the period, and investments grew just under $200 million during the same period. We were able to take a significant amount of the funds we had in account at the Federal Reserve Bank and put those to work in loans and investment securities, most of those securities being purchased in March, as rates have moved higher. The yield on what we expect from those purchases is around 2.80%, well in excess of what we were earning as the Federal Reserve. We also entered into an interest rate swap agreement, which is a short-term agreement where we receive a fixed rate of about 1.67% and we pay a floating rate of one-month LIBOR. In the month of March, that was a net increase in interest income of $369,000 for us, and we expect to see some increases in the second quarter as well. As mentioned earlier, if the one-month LIBOR exceeds 1.67%, we would owe settlements. Non-interest income was down $560,000 compared to the first quarter last year, mostly related to gain on sale of loans. We typically sell longer-term fixed-rate loans in the secondary market as we originate those, and the origination volume of those longer-term fixed-rate loans was down significantly from where it was a year ago, resulting in a profit decline of about $1.6 million. However, we have been originating loans that are fixed for a period of time and then become variable, contributing to a net increase of about $53 million in single-family residential loans in the first quarter. We also saw an increase in point-of-sale and ATM fees, up about $606,000 compared to the first quarter last year, primarily due to debit card transaction activity. We’ve seen significant increases in the usage of debit cards by our customers, leading to additional transaction fees. Other income was up about $250,000 compared to the previous year quarter, including a one-time $500,000 bonus for benchmark levels we achieved with debit card activity. Non-interest expense was up about $947,000 first quarter this year versus last year. That was primarily related to salaried employee benefits, which increased by about $960,000 due to various reasons, including the opening of the Phoenix LPO and higher costs related to the employment market. The efficiency ratio for the quarter was 59.62%, compared to 56.33% in the first quarter last year. Provision for credit losses showed no significant changes in the first quarter, with no change in our outstanding loan portfolio. Our income tax effective rate for the first quarter was 20.5%, down from 21% in the first quarter last year. We forecast our effective tax rates will range between 20.5% and 21.5% moving forward through the year. That concludes our prepared remarks. Now we will entertain some questions.

Certainly. And our first question comes from Andrew Liesch of Piper Sandler. Your line is open.

Hey. Good afternoon, everyone.

Hi, Andrew.

Question on the margin here and just the cadence of it following rate hikes. Can you just remind us how your margin has behaved in prior rate upcycles? Has there been a lag effect at all, or have you seen margin benefits right away? How do you see that playing out based on historical trends?

It depends on how fast the Fed moves and how much market rates change. The first rate hike, the 25-basis-point increase in March, happened late in the quarter. We didn’t see a tremendous impact from that. If the Fed starts moving in 50-basis-point increments, though, we would expect some positive activity there on the loan side. We’ve got prime-based loans and also one-month LIBOR resetting loans. The prime-based loans would move immediately as they cross their floor rates, while the one-month LIBOR loans would adjust within that first 30-day period. LIBOR rates have been moving in anticipation of federal rate hikes. On the funding side, we primarily fund through deposits, with some non-interest-bearing and interest-bearing checking accounts and less than $1 billion of CDs. Those will likely increase at a slower rate.

Got it.

Yeah. I think we have about $1.8 billion of adjustable-rate loans that adjust reasonably frequently, likely monthly or more often. We also have about $700 million of market foods that might not adjust immediately.

Yes, they’re going to be constrained.

Certainly. Okay. Thanks for that. On the securities purchases made in March, what's the thought process moving forward? Are you looking to do more, or do you feel what you've done is enough? How should we look at the securities book going forward?

I would say we've probably done the lion's share of what we’re going to do. There could be a bit more in the second quarter, but generally, we have likely completed most of what we anticipated on that. We should see the full benefit in the second quarter now.

Good to know. All right. Thanks so much for taking the questions. I’ll step back.

Thanks, Andrew.

And our next question comes from Damon DelMonte of KBW. Your line is open.

Hey. Good afternoon, everyone. Hope everybody’s doing well today.

Hi, Damon.

Hi.

So first question is, I want to talk about loan growth and maybe a little about your outlook. I know one of the challenges for you guys has been the prolonged acceleration of prepayments, particularly in commercial real estate loans. It seems like that’s slowed a bit, and you’ve been able to keep a strong pace of origination resulting in positive growth. Can you discuss those dynamics and how the rest of the year is shaping up for you?

It’s just hard to have visibility on that, Damon. We do make larger commercial real estate loans, about $15 million loans in many cases, and repayment can be a little bit lumpy. You may have five or six in one quarter, then not many in the next, but then they could happen in the first month of the following quarter. I’m not ready to say that repayment activity has permanently slowed, though. As we’ve mentioned before, we feel like our deals are attractive to multiple lenders, which contributes to repayment headwinds. However, as rates increase, our clients may be less interested in moving into bigger deals.

We do have customers that complete projects, get them up and running, and then sell, which contributes to payoffs, and that will likely continue regardless of interest rates.

Got it. Okay. But absent an acceleration of paybacks, do you feel good that you should show growth in the coming quarters?

It’s hard to say. That’s why we don’t forecast loan growth, as it’s dependent on competition and other factors. We will continue to do what has led to our substantial origination volume over the years and try to improve our origination engine by adding more LPOs, as I mentioned.

Got it. Fair enough. Regarding expenses, Rex, do you believe you’ve captured wage inflation and the higher salary costs in this first quarter, or do you expect it to continue rising?

I believe we captured a lot of it. Many of our employees get their annual raises at the beginning of the year, and others receive raises throughout the year. So while we may see some inflation in wages continue, we’ve addressed a significant part of it this quarter.

I agree with Rex. It’s a tough market for employers, and there could definitely be additional employee expenses. We are going through a systems conversion that will begin in August 2023, which may incur additional costs of about $300,000 a quarter. However, after the conversion, those expenses should drop off.

So that's happening next August or this one?

That’s happening next August, but we might see a $300,000 increase in expenses leading up to that due to the preparations.

Yes, we’ve started the preparation work for that conversion already.

Got it. And one final question, credits are very strong for you, and you maintain a healthy reserve at around 148% of loans. Where do you see that reserve level trending over time? Are you likely to grow into it, or do you forecast another reserve release similar to previous quarters?

I believe our reserve is appropriately set for the size and composition of our loan portfolio. If we see significant loan portfolio increases, it would be fair to assume there would be increases in the allowance as well.

We've adopted CECL, which factors in various elements such as the size and quality of our loan portfolio and economic outlook. We monitor various factors including employment levels. Although there is talk of a potential recession, we are focused on how it will affect our portfolio. We've had low net charge-offs for the past three years, and if that trend continues, it would likely suggest stability in our allowance.

Got it. Okay. That’s helpful. That’s all I had. Thank you very much.

All right. Thank you.

I would now like to turn the conference back to Kelly Polonus for closing remarks.

Okay. Well, we appreciate everyone joining us today, and we look forward to our call next quarter. Everyone take care.

This concludes today’s conference call. Thank you for participating. You may now disconnect.