Great Southern Bancorp Inc (GSBC) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. First Quarter 2022 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to our speaker today, Ms. Kelly Polonus. You may begin.

Thank you, Latonya. 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, that 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, but we're just going to remain focused on our customers' 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, earnings performance ratios were very solid during the quarter at $1.27 per share -- or I'm sorry, 1.27% return on average assets and 11.14% return on equity. Our margin was 3.43% for the quarter. The Federal Reserve is obviously talking about pretty 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 did increase in the first quarter by about $100 million. Our pipeline of commitments continues to be strong. That's up about $98 million from the end of 2021. We did open our new commercial loan production office in Phoenix midway through the quarter, and we are expecting to open or hoping to open at least one more loan production office during 2022. Of course, our model is to hire an experienced lender from the market we're going into. And then sometimes, a number two from within our organization, or we'll hire -- in the case of Phoenix, we hired a number two in that market as well.

Asset quality metrics continue to be extremely strong with nonperforming assets of $5.2 million, a decrease of $821,000 from the end of 2021. And our nonperforming assets, the period end assets, was 10 basis points at the end of the first quarter, so negligible. I think 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 did decrease by about $34 million. Rex may go over this. I'll just give you the brief snapshot. And basically, we had increase to the capital, $17 million from earnings, $3 million from option exercises. So total increases to capital during the quarter were $20 million. Decreases were about $25 million or $26 million of stock purchases. Probably the decreases in our mark-to-market on our securities and our swap were about $23 million. And then the additional decrease will be the result of our dividends. So our capital ratios are still extremely strong and afford us the opportunity to really do whatever we want to do.

So I think with that, I'll turn the call over to Rex.

Thanks, Joe. I'll just add on to what Joe said. We did buy back a fair amount of stock in the first quarter, about almost 420,000 shares of our stock, and we still have about 750,000 shares yet available under our authorized repurchase program.

So 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 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. And then we also had net interest income of $44.2 million in the fourth quarter of 2021. So to compare those.

Joe mentioned, I think, earlier that our net deferred fees related to PPP loans dropped pretty significantly the first quarter of this year. We had $416,000 of net deferred fees that accreted to income this quarter. Previous year first quarter was $1.2 million of income and fourth quarter last year was $1.6 million. So obviously, a much less positive help there from the PPP fees. And we're down to about [$88,000] (corrected by company after the call) of net deferred fees, so there will be very little that flows into income now going forward.

Our net interest margin, as Joe said, was 3.43% in the first quarter this year. That 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 this year, 2022, we did have some shifts in our asset mix that helped us. Mentioned before, net loans grew about $104 million in the period, and investments grew just under $200 million or so in the period. So we were able to take a significant amount of funds that we had in account at the Federal Reserve Bank and put those to work in loans and investment securities, which most of those securities were purchased in March as rates have moved higher. So we didn't get a lot of benefit of those in the first quarter. But the yield on what we purchased is going to be -- we expect to be around 2.80%. So well in excess of what we were earning at the Federal Reserve.

We did also, in the first quarter, enter into an interest rate swap agreement, and it's only a two-year agreement, so fairly short. But we receive a fixed rate of about 1.67%, and we pay a floating rate of one-month LIBOR. And so in the month of March, that was a net increase to interest income of $369,000 for us, and we'll expect to see some increases in the second quarter as well. And now obviously, if the one-month LIBOR exceeds 1.67%, then at that point, we would owe settlements, and that would be a net offset to interest income at that point. And I think we mentioned before, too, that we do anticipate that the Federal Reserve, if they raise rates, that will be generally a positive thing for us.

Noninterest income was down $560,000 compared to the first quarter last year. Most of that, as Joe said, was related to a 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 a lot from where it was a year ago. And so our profit on sales declined by about $1.6 million, comparing those two periods.

What we have been doing though is originating loans that are fixed for a period of time and then become variable. And so our net, on books that we hold, single-family residential loans increased about $53 million in the first quarter compared to where we were at the beginning of the year.

Another area that actually we had increase in noninterest income was in point-of-sale and ATM fees. We were up about $606,000 compared to the first quarter last year. That increase is mostly almost entirely due to debit card transaction activity and the fees we earn on that. We continue to see in the latter half of last year and so far in the first quarter of this year pretty significant increase in usage of debit cards by our customers. And so we're earning additional transaction fees on those.

Other income was also up about $250,000 compared to the previous year quarter. Most of that or all of it, and then a little bit extra, was we did receive a $500,000 bonus. It's a one-time payment for levels that we achieved, or the benchmark levels we achieved, with debit card activity. And so that will not be a recurring thing that we crossed over the benchmarks on that and earned that $500,000 bonus.

Noninterest expense was up about $947,000 first quarter this year versus first quarter last year. That was really in most categories, we had a few things that were higher and lower, but they mostly offset. Other than salary and employee benefits, that was up about $960,000. And that's a lot of -- well, a variety of things. The new Phoenix LPO was opened in the first quarter, Joe mentioned that, and there was some costs associated there. Also, there was really just general -- with the employment market and things of that nature, we would have had just some general higher costs that we incurred this year versus last. Also normal annual raises, things of that nature, were in there.

And then lastly, we did have another kind of significant thing where a little bit technical accounting, but where you defer costs when you originate loans. There are certain fixed costs to originate loans, and you defer those and amortize those with the deferred fees into interest income. Last year, we had a lot of loan originations, PPP included in that. And so we deferred more fees first quarter last year versus first quarter this year, and that had an impact on why our expenses were higher this year as well.

The efficiency ratio for the quarter, this first quarter, was 59.62%. That compared with 56.33% in the first quarter last year. The efficiency ratio being higher was really primarily resulting from the noninterest expense increase this year.

Provision for credit losses, really not a whole lot happening there in the first quarter. We didn't have any change in our provision related to our outstanding loan portfolio. I think last year, we had a $300,000 provision there. So a slight difference from a year ago. Last year -- or I'm sorry, this year, we had $193,000 negative provision on our unfunded commitments and unfunded portion of loans, and that relates to a $674,000 negative provision in the first quarter last year.

Income taxes, just the effective tax rate there in the first quarter was 20.5%. It was 21% in the first quarter last year. We think that our effective tax rate, probably based on the level of tax-exempt investments and loans that we have and tax credit utilization that we have, it's going to probably run that our effective rate will be between 20.5% and 21.5%, we think, moving forward through the year.

That concludes the prepared remarks that we have. At this time, we will entertain some questions. And let me ask our operator to once again remind our attendees how to queue in for questions.

(Operator Instructions) And our first question comes from Andrew Liesch of Piper Sandler.

Question on the margin here and just the cadence of it following rate hikes. Can you just remind us how your margin has acted in prior rates up cycles? Has there been a lag effect at all? Have you gotten a margin benefit right away? How do you guys see that playing out based on historical trends?

Depends on how fast the Fed moves and how much market rates moves. I would say that first rate hike to 25 basis point rate hike in March happened late in the quarter. We didn't have a tremendous impact from that. If the Fed starts moving in 50 basis point increments, though, I would think that, that would be fairly quick that we would see some positive activity there on the loan side.

We've got prime-based loans and also one-month LIBOR resetting loans. So the prime-based loans would move immediately to the extent that they're above their floor rates, and the 1-month LIBOR loans would move sometime within that first 30-day period. And obviously, LIBOR rates have already been moving in anticipation of Fed rate hikes, too. So those things are starting to kind of happen already.

On the funding side, most of our funding is through -- pretty much all of this funded through deposits these days at the bank level anyway. And so we've got some noninterest-bearing accounts and interest-bearing checking accounts and then less than $1 billion of CDs. So those will probably be slower to increase in rate.

Yes. I think we have, Andrew, about $1.8 billion of adjustable rate loans that adjust reasonably frequently, like monthly or more often than that. And probably, Rex, like $700 million of them are at floors or something that are in the money. So they might not adjust immediately. But we probably have $1.2 billion of loans or so that would adjust pretty rapidly or would adjust with rate increases.

And then there's -- I mean you can probably decipher yourself. As Rex said, we've got a reasonably low level really of prime accounts. Most of our accounts are transactional of some sort. So they could move. It's just a question of how quickly they will. And I think there's been a fair amount of written about industry beta factors. And I think there's been probably some analysis of what our beta factors were in the last rate cycle. So you can probably review those.

Certainly. Okay. Then obviously, on the securities purchases that took place in March, I guess what's the thought process on -- are you looking to do more of that? Do you feel like what you've done is enough? How should we look at the securities book going forward?

I would say we've probably been the lion's share of what we're going to do. There could be a little bit more in the second quarter. But generally, I think we've probably done most of what we anticipated to do on that. So we should see the full benefit of that in the second quarter now.

And our next question comes from Damon DelMonte of KBW.

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

It's just hard to have a lot of visibility on that, Damon. I mean we do make larger commercial real estate loans, $15 million loans in a lot of cases. And so they can be a little -- repayment can be a little bit lumpy. So you might have five or six in one quarter. In the next quarter, you don't have many, but then maybe they happen in the first month of the following quarter. So I'm not ready to say that repayment activity have permanently slowed. I don't know.

As we've said before, we feel like our deals are at the top of or near the top of the credit curve. So they are attractive to a lot of different lenders. And so I'm sure we'll be continuing to fight through repayment headwinds. It would be nice, though, if it slows a little bit.

Logic would tell you, as rates go up, our customers aren't going to be quite as interested in moving into those fixed rate deals. So it fits well a little bit, but it's hard to call that at this point.

And we do have customers that complete projects, get them up and running and then sell the projects. So that's when we get paid off. So there's some of that that's going to probably continue to go on regardless of what interest rates are looking like.

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

It's hard to say. I mean we -- that's why we don't forecast loan growth because so much of it is dependent on level of competition and all those sorts of things. We're going to continue to do the same things or try to do the same things that have allowed us to have substantial origination volume over the last many years. And we're going to try to even improve our origination engine by -- we added the Phoenix LPO. And as I mentioned in my comments, we're going to try to add at least one more LPO this year. But as far as forecasting loan totals, we just -- we can't do that.

Got it. Okay. Fair enough. And then on the expense side, Rex, do you feel that you guys have captured wage inflation and just higher salary costs here in this first quarter? Or do you expect it to kind of continue to move up from this level?

I would think we've captured a lot of it probably. Many of our employees get their annual raises at the beginning of the year. A lot of our staff, though, also get raises throughout the year. So there'll be some of that. But I would say most of it, I would think, would be -- have happened in the first quarter. And hopefully, we've captured the wage inflation that's been going on in that as well.

I can't say for certain of that because, every day, you read different articles about such and such company is raising their minimum wage and that kind of thing. And so we're all competing for a lot -- some of those same people in some ways. So I can't say that it's totally done, but I think we've surely picked up a big chunk of it here in the first quarter, I think.

Yes. I agree with what Rex said. It's still a tough market for employers. And so there could easily be some additional employee expense -- not necessarily employee expense, but we are going through a systems conversion that will occur in August of 2023. And we do expect for consultants and others that are helping us through that process, that, that could add maybe $300,000 or so a quarter to our expense base. Would that be close, you think?

Somewhere in that ballpark

You said that's happening this August or next August?

Yes. That's happening next August, but probably from now until next August, we might have expenses increase by that $300,000 number as a result of activities going on with respect to that conversion.

Yes. We're already starting some preparation work for that conversion. It seems like it's a long way in the future, but it will be here before we know and we're already working on a lot of different projects related to that.

But that -- obviously, once the conversion occurs, so those expenses will drop off.

Got it. Okay. And then just one final question. Obviously, credit has been very strong for you, guys, in your pretty healthy reserve at, call it, [1 48] of loans. Where do you kind of see that reserve level trending to over time? And do you think that it's more likely that you would grow into that? Or you -- would you forecast maybe like another reserve release like we've seen over the last few quarters?

I'll take a stab at it and then let Rex take a stab at it. I mean I think our reserve is appropriately set for the size and composition of our loan portfolio. So if we saw substantial increases in our loan portfolio, I think it would be fair to assume there would be increases in the allowance as well.

Right. Yes. We've already adopted CECL. So we're under the CECL methodology, and so it's going to factor in different things. The composition and level of our loan portfolio is that it grows or constrains, that kind of thing. And then also, there'll be some factors that will be economic outlook and things of that nature. I know there's a lot of talk about will we be having a recession sometime next year or in 2024. We've got to factor those types of things into and figure out if we think there's going to be some issues with that.

A lot of the things that impact, we think, the level of losses in our portfolio are going to really boil back down to employment levels. And so we watched the unemployment numbers and the employment levels that are out there. And those things will play into our analysis as we try to set what we think is an appropriate allowance for credit losses.

The other part of it is also the unfunded amount, and that fluctuates and we do see that bouncing up and down some, depending on the unfunded commitments and the unfunded portion of construction loans and things like that, that we have out there.

So there's a few different factors that play into it. I mean we had some pretty healthy reserve release last year. I don't necessarily anticipate that's going to happen this year, depending on how our loan portfolio does, of course, but it doesn't seem like we're looking at a situation where that would be the thing that we do is doing a lot of.

Charge-offs play into it as well. If we -- again, like you said, we've got a really benign level of net charge-offs now for the last three years at least. And if that continues, then that would probably indicate that we would have a lot of fluctuations probably in the allowance year.

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

Okay. 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.