Good day, thank you for standing by. Welcome to the Great Southern Bancorp, Inc. Q1 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone. If you require any further assistance during the conference, please press star 0. 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 of the date they are made. Please see our forward-looking statements disclosure in our Q1 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, as Kelly said, we really appreciate all of you joining us for our call today. Overall, our Q1 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 is continued economic and societal uncertainty, but we're just gonna 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 Q1 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 pre-tax 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 earnings performance ratios were very solid during the quarter, 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, you know, pretty significantly raising rates in 2022, which should be positive for us, assuming, you know, the liability rates follow suit, which there's no reason to believe they wouldn't. Our loans did increase in the Q1 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.
Then sometimes, you know, a number two from within our organization will follow them or we'll hire, in the case of Phoenix, we hired a number two into 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. Our non-performing assets to period-end assets was 10 basis points, at the end of the Q1 . You know, 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 stock, stockholders equity did decrease by about $34 million.
Rex may go over this. I'll just give you the brief snapshot. I mean, basically, we had increases to capital, $17 million from earnings, $3 million from option exercises. Total increases to capital during the quarter were $20 million. Decreases were about $25 or $26 million of stock purchases. Probably, the decreases in our mark-to-market on our securities and our swap were about $23 million. Then the additional decrease would be the result of our dividends. You know, our capital ratios are still extremely strong and, you know, afford us the opportunity to really do whatever we want to do. I think that with that, I'll turn the call over to Rex.
Thanks, Joe. I'll just add on to what Joe said. You know, we did buy back a fair amount of stock in the Q1 , about 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 income in the Q1 of 2022 decreased about $823,000 compared to the Q1 of 2021. The total was $43.3 million in this Q1 versus $44.1 million in the Q1 last year. Then we also had net interest income of $44.2 million in the Q4 of 2021, to compare those. Joe mentioned, I think earlier that our net deferred fees related to PPP loans dropped pretty significantly this Q1 this year. We had $416,000 of net deferred fees that accreted to income this quarter.
Previous year, Q1 was $1.2 million of income, and Q4 last year was $1.6 million. Obviously, much less positive help there from the PPP fees. 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, was 3.43% in the Q1 this year. That compared to 3.41% in the Q1 last year, and 3.37% in the Q4 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. 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 had moved higher. We didn't get a lot of benefit of those in the Q1 . The yield on what we purchased is gonna be, we expect to be around 2.80%. Well in excess of what we were earning at the Federal Reserve. We did also in the Q1 enter into an interest rate swap agreement. It's only a 2-year agreement, so fairly short.
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 to interest income of $369,000 for us. You know, we'll expect to see some increases in the Q2 as well. 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. As I think we mentioned before, too, we do anticipate that the Federal Reserve, if they raise rates, that will be, you know, generally a positive thing for us.
Non-interest income was down $560,000 compared to the Q1 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. 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.
Our net on books that we hold single-family residential loans increased about $53 million in the Q1 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 Q1 last year. That increase is mostly, almost entirely due to debit card transaction activity and the fees we earn on that. You know, we've continued to see in the latter half of last year and so far in the Q1 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, the benchmark levels we achieved with debit card activity, and so that will not be a recurring thing. We did cross over the benchmarks on that and earn that $500,000 bonus. Non-interest expense was up about $947,000 Q1 this year versus Q1 last year. That was really 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.
That's a lot of well, a variety of things. The new Phoenix LPO was opened in the Q1 . Joe mentioned that, and there were some costs associated there. Also, there was, you know, really, just general, with the employment market and things of that nature, we would've had just some general, higher, costs that we incurred this year versus last. Also normal you know, annual raises, things of that nature were in there. Then, lastly, we did have another kind of significant thing where, a little bit of technical accounting, but 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. We deferred more fees Q1 last year versus Q1 this year, and that had an impact on why our expenses were higher this year as well. The efficiency ratio for the quarter, this Q1 was 59.62%. That compared with 56.33% in the Q1 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 Q1 , we didn't have any change in or provision related to our outstanding loan portfolio. I think last year, we had $300,000 provision there, so a slight difference from a year ago.
Last year, or I'm sorry, this year, we had a $193,000 negative provision on our unfunded commitments and unfunded portion of loans and that relates to a $674,000 negative provision in the Q1 last year. Income taxes, just the effective tax rate there in the Q1 was 20.5%. It was 21% the Q1 last year. You know, 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 is gonna probably run at 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.
Certainly. As a reminder, please press star one on your telephone. To withdraw your question, please press the pound key. One moment. Our first question comes from Andrew Liesch of Piper Sandler. Your line is open.
Hey, good afternoon, everyone.
Andrew.
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 rate 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?
You know, it depends on how fast the Fed moves and how much market rates move, I would say. That first rate hike, the 25 basis point rate hike in March, happened late in the quarter. You know, we didn't have a tremendous impact from that. If the Fed starts moving in 50 basis point increments, though, I would think 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 1-month LIBOR resetting loans. So the prime-based loans would move immediately to the extent that they're above their floor rates. The 1-month LIBOR loans would move sometime within that first 30-day period.
Obviously, LIBOR rates have already been moving, you know, in anticipation of Fed rate hikes too. Those things are starting to kinda happen already.
Yeah.
You know, on the.
Got it.
On the funding side, you know, most of our funding is through pretty much all of it is funded through deposits these days, at the bank level anyway. You know, we've got some non-interest bearing accounts and interest bearing checking accounts, and then, you know, less than $1 billion of CDs. You know, those will probably be slower to increase in rate. Yeah. I think we have, Andrew, about $1.8 billion of adjustable rate loans that adjust, you know, reasonably frequently, like monthly or more often than that. You know, probably, Rex, like $700 million of them are at floors or something that are
Right. They're gonna be in the money.
that are in the money. They might not adjust immediately. We probably have $1.2 billion of loans or so that you know would adjust you know pretty rapidly or would adjust with rate increases. Then, you know, there's I mean, you can probably decipher yourself. You know, as Rex said, the you know, we've got a reasonably low level really of prime accounts. Most of our accounts are, you know, transactional of some sort, so they could move. It's just a question of how quickly they will. I think there's been a fair amount written about, you know, industry beta factors, and I think there's been, you know, probably some analysis of what our beta factors were in the last rate cycle. You can probably review those.
Certainly. Okay, thanks for that. 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 done the lion's share of what we're gonna 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. We should see, you know, 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.
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.
First question, just wanna talk a little about loan growth and maybe a little bit about your outlook. You know, I know, one of the challenges for you guys has been the prolonged acceleration of prepayment on particularly commercial real estate loans. You know, it seems like that's kind of coming 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. 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, you know, we do make larger commercial real estate loans, you know, $15 million loans in a lot of cases, and so they can be a little. You know, repayment can be a little bit lumpy. You might have five or six in one quarter, you know, the next quarter you don't have many, but you know, then maybe they happen the first month of the following quarter. You know, I'm not ready to say that repayment activity, you know, has permanently slowed. I don't know, you know.
As we've said before, you know, we feel like our deals are, you know, at the top of or near the top of the credit curve, so they are attractive to a lot of different lenders. I'm sure we'll be continuing to fight through, you know, repayment headwinds. It would be nice, though, you know, if it slowed a little bit. Logic would tell you as rates go up, you know, our customers aren't gonna be quite as, you know, interested in moving into those fixed rate deals, so it could slow a little bit. It's just hard to call that at this point.
We do have customers that complete projects, get them up and running, and then sell the project.
Yeah. That's right.
So.
That's right.
Y ou know, we get paid off. There, there's some of that that's gonna probably continue to go on regardless of what interest rates are looking like.
Got it. Okay. You know, 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, you know, that's why we don't forecast, you know, loan growth because so much of it's dependent on, you know, level of competition and, you know, all those sorts of things. You know, we're gonna continue to do the same things or try to do the same things that, you know, have allowed us to have substantial origination volume, you know, over the last many years. We're gonna, you know, try to even improve our origination engine by, you know, we added the Phoenix LPO, and as I mentioned in my comment, you know, we're gonna try to add at least one more LPO this year.
You know, as far as forecasting, you know, loan totals, we just can't do that.
Got it. Okay. Fair enough. On the expense side, you know, 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 kinda continue to move up from this level?
Yeah. I would think we've captured a lot of it probably. You know, 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. There'll be some of that. I would say most of it, I would think would be happened in the first quarter. Hopefully we've captured the wage inflation that's been going on in that as well. You know, I can't say for certain with that because you know, every day you read different articles about such and such company is raising their minimum wage and that kind of thing. We're all competing for a lot of some of those same people in some ways.
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. It's still, you know, a tough market for employers, you know. There could easily be some additional employee expense, you know, not necessarily employee expense, but, you know, we are going through a systems conversion that will occur in, you know, August of 2023. We do expect, you know, to pull 4 consultants and others that are helping us through that process, that could add maybe $300,000 or so a quarter to our expense base. Wouldn't that be close, you think, Rex?
Somewhere in that ballpark range, yeah.
Yeah.
I'm sorry. You said that's happening this August or next August?
Yeah. That's happening next August, but you know, probably from now until next August, you know, we might have expenses increased by that $300,000 number as a result of activity, you know, going on with respect to that conversion.
Yeah. We're already starting some preparation work for that conversion.
Yeah.
It seems like it's a long way in the future, but it'll be here before we know it, and we're already working on a lot of different stuff.
Right. That obviously, once the conversion occurs, those expenses will drop off.
Got it. Okay. Just one final question. You know, obviously credit's been very strong for you guys and in your very, you know, pretty healthy reserve at, call it 1.48% of loans. You know, where do you kind of see that reserve level trending to over time? Do you think that it's more likely that you would grow into that? Or 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, you know, take a stab at it. I mean, I think our reserve is appropriately set for the size and composition of our loan portfolio. 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 gonna factor in different things, the composition and level of our loan portfolio, as that if it grows or if it shrinks, that kind of thing. Then also there'll be some factors that will be, you know, 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 in 2024. You know, we've got to factor those types of things in too, 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.
We watched the unemployment numbers and the employment levels that are out there. You know, 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. There's a few different factors that play into it. I mean, we had some pretty healthy, you know, 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, you know, the thing that we'd be doing a lot of.
Got it. Okay.
Charge-offs play into it as well. Again, like you said, we've had a really benign level of net charge-offs now for the last three years at least. If that continues, then that would probably indicate that we wouldn't have a lot of fluctuation probably in the allowance either.
Right. Got it. Okay. All right. That's helpful. That's all that 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.