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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. [Operator instructions] 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, we -- our operating conditions here were -- 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 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 asserting $20.5 million during the first quarter, a $1.67 per common share compared to $17 million or a $1.30 in the year ago quarter.
We did have one significant item -- expense item in the quarter. The expense is related to our conversion to the Fiserv 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 $53.2 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 was 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 it's available on our Investor Relations site.
We understand -- we understand that there's a lot of industry or 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, 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 our other places in 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 remains excellent or 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 $22.4 million in the first quarter with retained earnings increasing $10 million in 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, net of taxes, it would've decreased stockholders' equity by another $15.5 million. This amount was about 2.8% of our total stockholder's 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 a 100,000 shares at an average price at $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.
All right, Thank you, Joe. I'm going to start off with net interest income and really just echo a couple of things, Joe already mentioned some of the highlights of that, that compared to the year ago quarter, our net interest income was up about $9.9 million down just a little bit from the fourth quarter. As Joe mentioned, two less calendar days were a big part of that from the fourth quarter last year versus first quarter this year.
Net interest margin was 3.99% in the first quarter compared to 3.43% in the first quarter in 2022. Net interest margin was 3.99%, also in the fourth quarter of 2022. Comparing those to first quarter of '23 versus first quarter of '22 periods, average yield on loans increased about 153 basis points, while the average rate on interest bearing deposits increase 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 investment security is increasing as well.
As we stated before and as you have seen a generally rising interest rate environment, particularly short term rates like fed funds and prime are beneficial to us from an increasing interest income standpoint. We would anticipate we would still get, if a Fed continues raising rates here shortly, we'll get some benefit from that.
However we expect a lot of those positive impacts will be significantly offset by increases in funding costs, which have started ramping up, obviously this year, particularly beginning in March and, continuing down into April. So we expect further ramping up of deposit and funding costs as we go through the first half of 2023, and then potentially beyond, depending on kind of where market rates start to trend at that point.
In 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 had some forward starting interest rate slots that we've disclosed in previous filings and discussions on calls.
Those were not -- 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 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 state where they are currently.
So I'll talk now a little bit about liquidity and deposits. Our liquidity position, which is just a measurement of our ability to generate cash to meet present and future obligations; it's very resilient. We've got readily available funding sources. We usually highlight those in our quarterly filings and we pointed it out in our earnings release this time.
So at the end of March, we've got about $1.8 billion or more total funding capacity and/or on balance sheet liquidity breaks down into different components, but the biggest pieces of it are home loan bank line availability and federal reserve line ability and that's the old federal reserve line, not the new temporary line that they put into place recently. So we've got substantial amounts of secured funding availability there.
In addition to that, we have, over $550 million of unpledged securities that are available to actually pledge if we chose to at the home loan bank or the Federal Reserve under their new funding program or the old ones, either one. So quite a bit of capacity from a liquidity standpoint that we have both on books and in secured lines.
During the three months of March 31, our total deposits increased about $114 million. Brokerage deposits increased about $125 million in that time period and that's through a variety of sources that we utilized from time to time. Time deposits through our banking center network and corporate services group increased about $37 million.
Time deposits that we've originated previously through our internet channels decreased about $20 million and then interest-bearing checking balances increased by about $46 million or about 2.1% primarily in money market type accounts and in non-interest bearing checking balances decreased by about $72 million in the first quarter. That's about 6.8% of 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 is about 14% of our total deposit base at the end of March.
Our total deposits were $4.8 million. We've got a little more granular information here. So, in the deposit base at the end of March, we had about $537 million, which was broker deposits, and then $4.3 million are core deposits spread through about roughly 224,000 active accounts.
Non-Interest income was down this 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 for 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 product. 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 a recognized loss of $291,000 in the first quarter of this year versus a gain of $152,000 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's some things that have to be recorded based on timing and market rates.
Non-interest expenses in the quarter, we did have an increase of $3.2 million compared to the first quarter of '22. The larger items, as Joe mentioned, legal and professional, or not legal, but professional fees were up about $1.3 million compared to the first quarter last year. Salary employee benefits increased about $1.1 million compared to first quarter last year. There's a few components in there, just normal merit increases, things of that nature.
We did have Charlotte LPO, which was not open at that time of year ago and then another kind of larger piece of it was about $350,000 related to the accounting function where you have to defer loan origination costs and fees and so we just had fewer loan originations, and so a year ago, we deferred about $350,000 more in costs in the first quarter than we did in the first quarter of this year.
And then lastly, occupancy expenses were about $840,000 higher than first quarter a year ago. About $500,000 of that is various types of computer license and support. Some things getting prepared for system conversion and other things just renewal the previous things that we had and things of that nature. So that was a larger piece of it and then there was just some additional repairs and maintenance on a variety of our buildings and ATM fleet and things of that nature. That was about $250,000 on it.
Efficiency ratio in the first quarter was 56.42%. That compared to 59.62% in the first quarter last year and really the improvement in the efficiency ratio is just mainly the interest income, net income increase partially offset by the increase in non-interest expense.
Provision for credit losses, Joe mentioned, our credit quality remains good. We recorded a 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 has come down a bit in the first quarter, and that was a negative provision expense of $826,000 and compared to a negative provision expense of $193,000 in the first quarter of 2022. We actually experienced net recoveries of $7,000 in the first three months this year and our allowance for credit losses on the outstanding loan portfolio equalled about 1.40% of that portfolio at March 31.
And then finally, I'll mention income taxes. So for the three months this year, our effective tax rate was 21.2%, comparing to 20.5% in the first quarter of 2022. Our effective tax rate is impacted by a variety of things. The biggest things are our utilization of investment tax credits, tax exempt interests, things of that nature, and then also the state tax expenses that we have in the variety of states where we do business and so, those are all things that impact that. We currently think that our normal kind of run rate on tax expense will be in that 20.5% 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'll entertain questions. So let me ask our operator to once again remind our attendees how to queue in 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 are 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 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 pretty high quality portfolio and people are still able to do some things with it.
So take some of these examples like were they refining elsewhere at terms that just don't make sense for others, or…
Yeah, I think the one that paid off yesterday was refining 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 pretty positive. Our borrowers are pretty positive operationally on their project. We went through about every quarter we go through all our loans, $1 million and over and we went through day before yesterday, our loans particularly in the Southeast and the Atlanta region for us, and a lot of multi-family, we talked about a lot of multi-family projects down there and things are going very well for them.
Rents are coming in above their projections and they're a lot of those don't get re-fied. They get sold and so they're filling up and kind of ready to test the market. It's just it -- they have, I guess, high hopes for what kind of cap rate they'll be able to sell those for, but it sort of remains to be seen.
And then just on the trend of non-industry 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.
Got it. All right, thanks for the questions here. Ill step back.
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 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 kind of -- 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 dollars, based on where rates are right now, I think close to $2.5 million. Is that Rex right, Rex for the quarter, yeah, for the quarter.
And then, the other thing that we'll have going on is our time portfolio will continue to reprise. I think the point in time number on the time, what was it, right?
2.31% was the margin rate we had on time deposit. 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, 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, and net charge offs?
I think more the latter to me right now. If our, 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 will 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 are going to be 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 we'll place all that into the context. That's kind of how we see the economic factors compared to where we saw them in March.
Got it. 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, 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, 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 kind of 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.