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 a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] 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 -- there’s continued economic and societal uncertainty, if the word is 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, earnings performance ratios were very solid.

During the quarter, $1.27 per share or, I’m sorry, $1 -- 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 would. 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 commercial loan production office -- new commercial loan production office in Phoenix midway through the quarter and we are expecting to open -- are hoping to open at least one more loan production office during 2022.

Of course our model is to hire an experienced lender for the market we’re going into and then sometimes you have a number two from within our organization we will follow them or we will hire -- in the case of Phoenix we hired a number of team in that market as well.

Asset quality make -- metrics continue to be extremely strong, with non-performing assets at $5.2 million, a decrease of $821,000 from the end of 2021. In our non-performing assets to 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.

I think basically we had increases the capital, $70 million from earnings, $3 million from ops and exercises. So total increases the 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 large dividends.

So we’re -- our capital ratios are still extremely strong and afforded the opportunity to really do whatever we want to do. So I think that, with that, I’ll turn the call over to Rex..

Okay. Thanks, Joe. I’ll just add on to what Joe says, 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 you compare those.

Joe mentioned, I think earlier that, our net deferred fees related to PPP loans dropped pretty significantly this -- first quarter of this year. We had 416,000 of net deferred fees accretive 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, much less positive help there from the PPP fees and we’re down to about $88 million or so of net deferred fees. So there’ll be very little that flows into income now going forward.

Our net interest margin, as Joe said, were 3.43% in the first quarter of 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 31st this year 2022, we did have some shifts in our asset mix that helped us.

I 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 investments 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 as 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 in interest income of $369,000 for us and we’ll expect to see some increases in the second quarter as well that now is, 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 the 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 clearly a positive thing for us. Non-interest income was down $560,000 compared to the first quarter last year. Most of that, as Joe said, was 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 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 or variable from the beginning. 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 non-interest 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’ve continued to see in the latter half of last year and so far in the first quarter of this year a 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, then a little bit extra was -- we did receive a $500,000 bonus. That’s a one-time payment for levels that we achieved, the benchmark levels we achieved with debit card activity. And so that will not be a recurring thing, but we did cross over the benchmarks on that and earn that $500,000 bonus.

Non-interest expense was up about $947,000 first quarter this year versus first quarter last year. That was really -- most categories, we had a few things that were higher and lower, but they mostly offset other than salaried 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 were some costs associated there.

Also, there was really, just general -- with the employment market and things of that nature, we would have had just in 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 little bit of technical accounting, but you defer costs when you originate loans or a certain fixed cost to originate loans, and you defer those and amortize those with a deferred fees into interest income.

Last year, we had a lot of loan originations, PPP included in that and so we differed 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 non-interest 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 or 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 around -- for this year we had $193,000 negative provision on our unfunded commitments and unfunded portion of loans relate -- and that relates to a $674,000 negative provision in the first quarter last year. Income taxes, just the effective tax rate here in the first quarter was 20.5%.

It was 21% in the first quarter last year. We think that our effective tax rates probably based on the level of tax exempt investments and loans that we have and tax credit utilization that we have is 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. This time we will entertain some questions and let me ask our Operator to once again remind our attendees how to pick you in for questions..

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

Hey. Good afternoon, everyone..

Hi, Andrew..

Quest -- hi.

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 upcycles, 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?.

It depends on how fast the Fed moves and how much market rates moves, I would say. That first rate hike, the 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 four rate and the one month LIBOR loans would move sometime within that first 30-day period. And obviously, LIBOR rates have already been moving in anticipation of federal rate hikes, too. So those things are starting to kind of happen already. On the….

Got it..

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

Yeah. 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 a market floors or something that are….

Yeah. That are going to be….

… that are in the money, so they might not adjust immediately. So we probably have $1.8 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 decide for yourself.

As Rex said, the -- we’ve got reasonably low level really a 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. Thanks for that.

And 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 looked 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 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’ll -- we should see the full benefit of that 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 really 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 kind of come in a bit and slowed and you’ve been able to keep your strong pace of origination and it’s been producing positive growth for you guys.

So can you just talk a little bit about kind of those couple dynamics and how the rest of the year is shaping up for you guys?.

Yeah. It’s just hard to have a lot of visibility on that, Damon. I mean, the -- 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, though, you might have five or six one quarter, that in the next quarter, you don’t have many, but then maybe they happen 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 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’s slowed a little bit. Logic would tell you….

Okay..

… as rates go up, the -- our customers aren’t going to be quite as interested in moving into those big rate deals, so it gets slow a little bit. But it’s hard to call that at this point..

And we do have customers that complete projects, getting them up and running and then sell….

Perfect. That’s right..

…so that’s probably get paid off. So there’s some of that just going to probably continue to go on regardless of….

Yeah..

… what the interest rates are looking like..

Got it. Okay.

But absent an acceleration of payback, you’re -- you feel good that you should be showing that growth in the coming quarters?.

It’s just -- it’s hard thing. It’s hard to say, I mean, the -- we -- that’s why we don’t forecast loan growth, because so much of its 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?.

Yeah. I would think we’ve captured a lot of it probably. Many of our employees get their annual raises in the -- 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 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, so 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..

Yeah. I agree with what Rex said is, 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 to -- for consultants than 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 to….

Yeah..

… that ballpark really, yeah..

Yeah. That….

Okay.

So that’s happening this August or next August?.

Yeah. This -- that’s happening next August. But probably from now until next August, we might have expenses increased by that $300,000 number, as a result of activity going on with respect to that conversion..

Yeah. We’re already starting some preparation work for that conversion..

Yeah..

And it seems like it’s a long way in the future, but it’ll be here for no and we’re already working on a lot of different stuff..

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

Got it. Okay. And then just one final question, obviously credits in very strong with you -- for you guys and you’re very -- pretty healthy reserve at, call it, 148 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?.

Again, 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 of -- 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?.

Yeah. 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 shrinks 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 lots of talk about will we be having a recession sometime next year in 2024? We 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 things that impact, we think the level of losses in our portfolio are going to really well 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. We had some pretty healthy reserve released last year.

I don’t necessarily anticipate that’s going to happen this year. Depending on 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 would be doing a lot of….

Got it. Okay..

Hard jobs is to play into it as well. If we -- again, like you said, we’ve had a really benign level of net charge-off now for the last three years at least and if that continues then that would probably indicate that we wouldn’t have a lot of fluctuation probably in the allowance..

Right. Got it. Okay. All right. That’s helpful. That’s all that I had. Thank you very much..

All right. Thank you..

Okay. 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..