Q1 2023 Great Southern Bancorp Inc Earnings Call

Okay.

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 to ask a question. During the session you will need to press star one.

One on your telephone to withdraw your question. Please press star one again, please be advised that today's conference is being recorded.

I'd like to hand, the conference over to your Speaker Kelly per lungs 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 Pomona Investor Relations for great. Southern the purpose of this call is to discuss the company's results for the quarter ending March 31st 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 Alright. Thanks, Kelly, we appreciate everybody joining us today for our first quarter earnings call hopefully you've had a chance to review our earn.

<unk> released 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 coasts 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.

We are operating conditions here were a great start and we're very stable and we believe that's true up most of the other banks in our market areas as well.

<unk> of our company's deposit base was underscored in terms of diversification by customer type and geography and the law.

So level of uninsured deposits, we have which is currently about 14%.

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.

We will provide more detail on deposits as well as liquidity during his presentation.

During the first quarter, we remain focused on taking care of our customers and work 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.

It resulted in us, earning $25 million during the first quarter of $1 67 per common share.

Compared to $17 million or $1 30 in the year ago quarter.

We did have one significant item.

First item in the quarter.

The expenses related to our conversion to the <unk> system, our earnings performance ratios in the first quarter were again very strong with return on assets of $1 43, and return on equity of $14 88.

Our net interest income and net interest margin increased by $9 9 million to $53 two.

And an increased by 56 basis points over the year ago quarter.

In the fourth quarter of 2022 are our margin was $54 $6 million with a percentage margin of 399%.

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 in general activity was down compared to the 2022 quarter. Our net loans did increase by $62 5 million or one 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 it is available on our Investor Relations site.

We understand what we understand that there is a lot of industry a lot of concern.

The office sector right now and so we did want to talk about our office set.

They're 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 about 140 loans geographically more than half of the portfolio is in Missouri, primarily in St. Louis Springfield, most of the remaining.

The loans are in our other places in our franchise footprint.

The average rentable square footage is 47500 square feet and the median is 7200 square feet.

As of March all the loans in our office portfolio were performing supported by strong equity and strong guarantors.

Our credit quality remains excellent our remained excellent during the first quarter.

At March 31, 2023, our nonperforming assets were $3 million or point out 5% 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 are tangible common equity ratio was nine 5% at the end of the first quarter.

It was an increase from nine 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 $22 $4 million.

In the first quarter with retained earnings increasing $10 million NRA OCI, improving by almost $12 million.

At March 31, 2023, our <unk> loss was about six 9% of our total growth stockholders' equity if the held to maturity unrealized losses were also included in stockholders equity net of taxes. It would've decreased stockholders' equity by another $15 5 million. This amount was about two 8%.

Total stockholders equity as of the end of the first quarter.

In the first quarter, we declared a <unk> 40 per share dividend. In addition in our effort to enhance long term shareholder value of the company continued to repurchase shares of our common stock during the first quarter buying back almost a 100000 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 dividends reduced stockholders equity by $10 $5 million.

That concludes my prepared remarks, now I will turn the call over to our CFO Rex Copeland.

Alright, Thank you Joe I'm going to start off with net interest income and and really just echo a couple of things Joe already mentioned some of the highlights of that debt compared to the year ago quarter. Our noninterest income was up about $9 $9 million down just a little bit from the fourth quarter as Joe mentioned.

Two less.

Calendar days.

A big part of that.

The fourth quarter last year versus first quarter. This year net interest margin was 390, 399% in the first quarter compared to 343% in the first quarter in 2022.

Net interest margin was 399% also in the fourth quarter 2022.

Comparing those two first quarter of 'twenty three versus first quarter of 'twenty two period average.

Yield on loans increased about 153 basis points, while the average rate on interest bearing deposits increased about 135 basis points the margin expansion from a year ago.

Really kind of related a lot to asset mix with average loans, increasing and investments average effort investment securities increasing as well.

As we stated before and as you have seen generally rising interest rate environment, particularly short term rates fed funds and prime.

Our beneficial to us.

From an increasing net interest income standpoint.

We would anticipate we would still get if the fed continues raising rates here shortly we'll get some benefit from that.

We expect a lot of those positive impacts will be significantly offset by increases in funding costs, which.

We have started ramping up obviously.

This year, it, particularly beginning in March.

<unk>.

Continuing now into April so we expect further.

Happy to.

Deposit and funding costs as we go through the first half of 2023, and then potentially beyond depending on kind of where market rates starting to trend at that point.

And the remainder of 2023, we do have a few things going on in addition to just repricing maturing time deposits, which are going to happen throughout the remainder of the year. We also have some net interest settlements, which are going to begin we have some forward starting interest rate swaps that we have disclosed.

In previous filings and discussions on calls those.

We're not there are no net settlements were due on those but now we're going to begin those I believe starting in may so.

So we are going to we're going to have some negative interest income from those as we start into here into the second quarter.

Assuming that rates stay where they are currently.

So I'll talk now a little bit about liquidity and deposits our liquidity.

<unk> position, which is just a measurement of our ability to generate cash to meet present and future obligations as very resilient. We've got readily available funding sources, we usually highlight those in our quarterly file.

<unk> filings and we pointed out in our earnings release. This time. So at the end of March we got about $1 8 billion or more total funding capacity.

Or and or on balance sheet liquidity breaks down into different components, but the biggest pieces of it our home loan bank line availability, those and federal reserve line ability and Thats the old Federal Reserve line not the new temporary.

Your line that they put into place recently, so we've got substantial amounts.

Secured funding availability there in addition to that we have over $550 million of.

Unpledged securities that are available to you.

Actually pledge if he chose to at the home loan bank or.

The reserve under their new.

Funding program or the old one either one so quite a bit of capacity from a liquidity standpoint that we have both on the books and unsecured lines.

During the three months ended March 31, our total deposits increased about $114 million brokered deposits increased about $125 million in that time period, and that's through a variety of sources that we've utilized from time to time.

Time deposits through our banking Center network and corporate services group increased about $37 million.

Deposits that we originated.

Previously through our Internet channels decreased about $20 million and in interest bearing checking balances increased by about $46 million or about two 1% primarily in money market type accounts and non interest bearing checking balances decreased by about $72 million in the first quarter that's about $6.

8%.

Those balances as of the end of the year.

As Joe mentioned, our deposit base is well diversified by customer type and geography, we don't have significantly high concentrations of deposits tied to any particular industry or demographic sector.

I'll reiterate what Joe said that we do have a low level of uninsured deposits, which about 14% of our total deposit base at the end of March.

Our total deposits were $4 8 billion, we've got a little more granular information here so.

<unk>.

In the deposit base at the end of March we had about $537 million, which was broker deposits and then $4 3 billion, our core deposit spread through about roughly 224000.

Active accounts.

Noninterest income was down.

First quarter this year compared to first quarter of 2022 by about $1 3 million.

The same type of things that we kind of experienced through last year the biggest cost.

Cost of the decrease was.

Net gain on sale of loans, the fixed rate loans that we originate and sell in the secondary market.

We had quite a bit fewer originations obviously in the first quarter. This year compared to first quarter last year and then also another component of it that accounted for the remainder primarily of the decrease was a gain or loss on our derivative interest rate products. So these are going to be.

Products that are back to back loan swaps or swaps that we've initiated on broker time deposits and we had.

Recognized loss of $291000 and the.

The first quarter this year versus a gain of $152000 in the first quarter last year. So those things are all going to work their way over time back out to zero, but the timing. There is some things have been recorded based on timing and market rates.

Noninterest expenses.

In the quarter, we did have an increase of $3 2 million compared to the first quarter of 2022.

Larger items, as Joe mentioned legal and professional legal and professional fees.

We're up about $1 3 billion.

Compared to the first quarter last year.

Salary and employee benefits increased about $1 1 million compared to first quarter last year.

A few components in there just normal merit increases things of that nature.

We did have the Charlotte <unk>.

Which was not open at that time, a year ago, and then another kind of a larger piece of it was about $350000 related to the.

Accounting function, where you have to defer.

Loan origination cost and fees.

About $840000 higher than first quarter, a year ago about 500000 of that is various types of computer license and support.

Something is getting prepared for system conversion and other things just renewals of previous things that we had things of that nature. So that was the larger piece of it and then there was just some additional repairs and maintenance on a variety of our of our buildings and ATM fleet and things of that nature of that is about $250000 on it.

<unk> ratio in the first quarter was $56 four 2% as compared to $59 six 2% in the first quarter last year.

And really the improvement in the efficiency ratio was just mainly the interest income net interest income increase partially offset by the increase in noninterest expense.

Provision for credit losses, Joe mentioned.

Our credit quality remains good.

We recorded provision expense of $1 $5 million on our outstanding loan portfolio in the first quarter.

We did not have any provision expense in the first quarter of 2022.

For the three months. This year. We did also have a negative provision on our unfunded commitments, which have come down a bit in the first quarter and that was a negative.

Provision expense of 826000 as compared to a negative provision expense of 193000 in the first quarter of 2022.

We actually experienced net recoveries of $7000 in the first three months this year.

And our allowance for credit losses on the outstanding loan portfolio equaled about one 4% of that portfolio at March 31, and then finally, how mentioned income taxes for the three months.

This year, our effective tax rate was 21, 2% compared to 25% in the first quarter 2022.

<unk> tax rate is.

Impacted by a variety of things the biggest things are our utilization of investment tax credits tax exempt interest things of that nature and then also the state tax.

Expenses that we have in the variety of states, where we where we do business and so those are all things that impact that we currently think that our.

Normal.

Can you kind of run rate on tax expense will be in that 25% to 21, 5%.

Range as we move through the remainder of this year.

That concludes the prepared remarks that we had and at this time, we will entertain questions. So let me ask our operator to once again remind our attendees how to queue in for questions.

Thank you and to ask a question simply press star one on your telephone.

Withdraw the question simply press Star one again, one moment for our first question. Please.

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

Hey, good afternoon.

I just wanted to talk about here.

The loan pipeline.

It came in a little bit, but still seems like you have a good backlog of unfunded construction commitments.

Any sense on the pace of hobby fund up and I guess, another hand do you see any loans that are maturing coming forward that going 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 can be a little higher sometimes they can be a little lower but that's probably roughly the number.

As far as pay offs.

We are seeing some pay off we had a larger payoff just yet.

Yesterday or the day before so I mean.

That's going to happen.

Okay.

Yes.

Like it was in 2021, though.

Yes, we've got pretty high quality portfolio and the people are still able to.

Do some things with it.

Let me take some of these examples like were they.

Finding elsewhere.

Just don't make sense for Greg.

Perfect.

Yes, I think the one that paid off.

Yesterday was refi in longer term fixed rate.

I think non recourse just terms that that makes sense to us.

Got it maybe not.

I'm just trying to gauge how much economic sensitivities to these folks may have or if it's really just taking.

Taking a longer term funding or if they are concerned with the economy.

I guess whats the delta from your borrowers.

I think pretty positive.

Growers are pretty positive operationally on their projects.

Went through.

About every quarter, we go through all our loans.

$1 billion and over and we went through.

The day before yesterday our loans.

Particularly in the southeast in the Atlanta region for Us.

And a lot of multifamily we talked about a lot of multifamily project down there and things are going very well for them.

Rents are coming in above their projections and their.

A lot of those don't get refi they get sold and so they are filling up.

And kind of ready to test the market.

They have I guess high hopes for what kind of cap rate they will be able to sell those for but it sort of remains to be thin.

Okay.

And then just on the trend in non interest bearing deposits.

Industry wide standard.

Client.

Much more Remixing do you think you have on the deposit side or any thoughts on where the noninterest bearing market.

Flattened out.

Where the bottom is on it.

Yes.

I don't think we know that Andrew I mean.

<unk>.

Yes, we.

We're down quite a bit in 0.2, we were down 7% this quarter.

I think we will just have to kind of wait and see.

Got it yes.

Alright, thanks for taking the questions here I will step back.

Alright. Thanks.

Thank you one moment for our next question. Please.

And it comes from the line of Damon Delmonte with <unk>. Please proceed.

Hey, good afternoon, guys hope everybody is doing well today.

Hi, just a couple of questions on the margin and the outlook. There your deposit betas have have held in <unk>.

Relatively strong versus some of the others that we've seen this.

This quarter and even last quarter.

Can you give a little sense for kind of where pricing is at.

At the end of the quarter going into the beginning of the second quarter here and kind of what kind of pressures you might be seeing on the funding side.

Yes, I mean, I think I think we did a pretty good job of that name and with our point in time number.

And our and 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.

I would point out.

The swap Rex mentioned, it's 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 <unk> for the quarter, yes for the quarter and then.

The other thing that we'll have going on.

Our time portfolio will continue to reprice.

I think the.

The point in time number on that time what was it.

231 was the Mark.

Great we had on time deposits.

So.

Again, thats, a competitive thing that sort of antibody gas.

But it is going to reprice up from there.

Got it okay.

Alright, that's helpful and then with respect to kind of provisioning provisioning and credit outlook.

Obviously very strong credit quality metrics.

Doesn't appear to be any any issues on the on the near term horizon.

How should we think about the provision.

And kind of.

Concert with where the loan loss reserve is right now do you feel you need to.

Kind of build the reserve and any higher or do you feel like Youre, just basically matching loan growth and net charge offs.

I think more of the ladder to me right now.

If our.

If our.

If the forecast for the economy got gloomier than that answer might change, but assuming sort of.

The same sort of economic forecast I think we will probably stay sort of in the range. We're at here Rex, but yes, I think so I mean, we're definitely going to be looking at a couple of <unk> that are going to be the outstanding loan balances what happens with those in 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. They will place all of that into the context of kind of how we see.

Economic factors compared to where we installed in March.

Got it Okay, and then I guess lastly on the expense front.

Rex any any updated outlook there do you feel that there's opportunities to lower expenses or <unk>.

Do you feel that there is there is still some investments that are taking place across the organization, which will kind of keep.

Fences, moving moving up a bit.

I don't know if theres going to be a whole lot of stuff that we foresee right now as far as.

Ways to cut things.

No one.

The $1 two a quarter, we have damage that will go away.

Our conversion date is now scheduled for May of 'twenty four so that will go away in may of 'twenty four.

<unk>.

Yes, so so 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 maybe commensurate growth in expenses.

But I don't know there will be a lot of cutting theirs.

Obviously been a lot of inflation and so.

Net of the.

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%.

I think it's pretty well constrained based on the kind of environment. We're in.

<unk>.

So I would say.

Expenses will kind of continue on the path that they're on now.

Okay great.

That's all the App and I'll step back thank you.

Thank you and ladies and gentlemen, with Tad will 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.

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