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 11 on your telephone. To withdraw the question, please press star 11 again. 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, thank you for joining us for our 1st 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 1st 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 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, Our operating conditions here 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 worked 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 $20.5 million during the first quarter, $1.67 per common share, compared to $17 million or $1.30 in the year ago quarter. We did have 1 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 and a half 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 that there's 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 other places in our franchise footprint. The average rentable square footage is 47,500 sq ft, and the median is 7,200 sq ft. As of March, all the loans in our office portfolio were performing, supported by strong equity and strong guarantors.
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 and 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 have decreased stockholders' equity by another $15.5 million. This amount was about 2.8% of our total stockholders' 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 100,000 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 and dividends reduced stockholders' equity by $10.5 million. That concludes my prepared remarks. 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 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, you know, 2 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.
You know, comparing those two first quarter of 2023 versus first quarter of 2022 periods, 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 investment securities increasing as well. You know, as we've 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 net interest income standpoint. You know, we would anticipate we would still get, if the 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, you know, have started ramping up obviously, this year, particularly beginning in March, and, you know, continuing now into April. We expect, you know, further, you know, 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, you know, 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 swaps that we've disclosed in previous filings and discussions on calls. Those no net settlements were due on those, but now we're going to begin those, I believe, starting in May. We're gonna have some negative interest income from those as we start into here into the second quarter, assuming that rates stay where they are currently. I'll talk now a little bit about liquidity and deposits. Our liquidity position, you know, which is just a measurement of our ability to generate cash to meet, you know, present and future obligations, is 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.
At the end of March, we've 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 are Home Loan Bank line availability, those, and Federal Reserve line ability. That's the old Federal Reserve line, not the new temporary line that they put into place recently. We've got substantial amounts of secured funding availability there. In addition to that, we have, you know, 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 one, either one.
You know, quite a bit of capacity from a liquidity standpoint that we have both on books and in secured lines. During the 3 months ended March 31st, 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 utilize from time to time. Time deposits through our banking center network and corporate services group increased about $37 million. Time deposits that we had originated previously through our internet channels decreased about $20 million. Interest-bearing checking balances increased by about $46 million, or about 2.1%, primarily in money market type accounts, and then 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, you know, our deposit base is well diversified by customer type and geography. We don't have significantly high concentrations of deposits tied to any particular, you know, industry or demographic sector. You know, 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. You know, our total deposits were $4.8 billion. We've got a little more, you know, granular information here.
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 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 cause for the decrease was net gain on sale of loans, the fixed rate loans that we originate and sell in the secondary market. We've had quite a bit, you know, fewer originations, obviously, in the first quarter this year compared to first quarter last year.
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. These are gonna be, you know, products that are back-to-back loan swaps or swaps that we've initiated on brokered time deposits. We had a recognized loss of $291,000 in the first quarter this year versus a gain of $152,000 in the first quarter last year. Those things are all gonna work their way over time back out to zero. The timing, there's some things 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 2022.
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 the Charlotte LPO, which was not open at that time a year ago. 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. We just had fewer loan originations.
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. 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, you know, some things getting prepared for a system conversion and other things just, you know, renewals of previous things that we had, things of that nature. That was a larger piece of it. There was just some additional repairs and maintenance on a variety of our, of our buildings and ATM fleet and things of that nature. That's about $250,000 of it.
Efficiency ratio in the first quarter was 56.42%. That compared to 59.62% in the first quarter last year. Really the improvement in the efficiency ratio is just mainly the interest income, net interest income increase, partially offset by the increase in non-interest expense. Provision for credit losses, Joe mentioned, you know, our credit quality remains good. You know, we recorded the 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 3 months this year, we did also have a negative provision on our unfunded commitments, which have come down a bit in the first quarter, that was a negative provision expense of $826,000 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 3 months this year. Our allowance for credit losses on the outstanding loan portfolio equaled about 1.40% of that portfolio at March 31st. Finally, I'll mention income taxes. For the 3 months this year, our effective tax rate was 21.2% comparing to 20.5% in the first quarter of 2022.
you know, our effective 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 do business. you know, those are all things that impact that. We currently think that our
Normal, you know, kind of run rate on tax expense will be in that 20.5%-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. Let me ask our operator to once again remind our attendees how to queue in for questions.
Thank you. To ask a question, simply press star one one on your telephone. To withdraw the question, simply press star one one again. One moment for our first question, please. This comes from the line of Andrew Liesch with Piper Sandler. Please proceed.
Hey, good afternoon. I just wanted to talk about here on the loan pipeline. Obviously, it came in a little bit, but it still seems like you have a good backlog of unfunded construction commitments. I mean, any sense on the pace of how these fund up? I guess, on the other hand, do you see any loans that are maturing coming forward that or going forward that might weigh on the growth?
Well, the... As far as the funding, Andrew, I think we fund about $80 million a month, roughly, of on our construction loans. You know, sometimes it could be a little higher, sometimes it could be a little lower, but that's probably roughly the number. You know, as far as payoffs, you know, we are seeing some payoffs. We, you know, had a larger payoff just yesterday or the day before. I mean, that's gonna happen too.
So
It's not like it was in 2021, though. you know...
Got it.
We got pretty high quality portfolio and people are still able to, you know, do some things with it.
Let's take some of these examples. Like, were they refining elsewhere at terms that just don't make sense for Great Southern or?
Yeah, I think the one that paid off, yesterday was refining, you know, 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 some 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?
You know, I think pretty positive. Our borrowers are pretty positive operationally on their projects. You know, we went through, about every quarter, we go through all our loans, you know, $1 million and over. You know, 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. You know, rents are coming in above their projections and, you know, they're, a lot of those don't get refied, they get sold. You know, so they're filling up and, you know, kind of ready to test the market. It's just, it's...
You know, they have, I guess, high hopes for what kind of cap rates they'll be able to sell those for, but it sort of remains to be seen.
Gotcha. Just on the trend of non-interest-bearing deposits, and just taking it industry-wide, we're seeing them decline. I guess, how much more remixing do you think you have on the deposit side? Any thoughts on where the non-interest-bearing might flatten out?
Yeah. Where the bottom is on it? you know-
Yeah.
I don't think we know that, Andrew. I mean, you know, we were down quite a bit in 2022. We were down 7% this quarter. I think we'll just have to, you know, kind of wait and see.
Got it. Yep. It's certainly challenging. All right, thanks for the questions here. I will step back.
All right. Thanks, Andrew.
Thank you. One moment for our next question, please. It comes from the line of Damon DelMonte with KBW. Please proceed.
Hey, good afternoon, guys. Hope everybody's doing well today.
Hi, Damon.
Hi, just a couple of questions on the margin and the outlook there. You know, 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, you know, 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 mean, I think we did a pretty good job of that, Damon, with our point in time numbers, in our average rates and spreads table. You know, we do have a March 31 point in time, which is sort of where we are right at the end of the quarter. You know, I would point out, the swap Rex mentioned is gonna impact net interest margin by probably two and a half million dollars. I mean, based on where rates are right now, I think close to two and a half million. Isn't that, Rex?
Right.
Right, Rex.
For the quarter.
Yeah, for the quarter. Then, you know, the other thing that we'll have going on is our time portfolio will continue to reprice. You know, I think the point in time number on the time, what was it, Rex?
2.31% was the margin-
Yeah.
rate we had on time deposits.
You know, again, that's a competitive thing. That's sort of anybody's guess as to, but it's gonna reprice up from there.
Got it. Okay. All right, that's helpful. With respect to kind of provisioning and credit outlook, you know, you're obviously very strong credit quality metrics. Doesn't appear to be any issues on the near-term horizon. I guess, you know, 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 net charge-offs?
I think more of the latter to me right now. You know, if our, you know, if the forecast for the economy got gloomier, then that answer might change. Assuming sort of, the same sort of economic forecast, I think we'll probably stay sort of in the range we're at here.
Yeah. I think so. I mean, we're definitely gonna be looking at a couple of pieces of it are gonna be, you know, the outstanding loan balances, what happens with those, and the unfunded portion as well. I mean, there's two pieces that are gonna be, you know, going on there in addition to, you know, just what we have as far as an economic forecast. We will look at balances of both outstanding and unfunded, and then we'll place all that into the context of kind of how we see, you know, the economic factors compared to where we saw them in March.
Got it. Okay. I guess lastly on the expense front, you know, Rex, any updated outlook there? Do you feel that there's opportunity 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, you know, moving up a bit?
I don't know that there's gonna be a whole lot of stuff that we foresee right now as far as, you know, ways to cut things.
The, you know, the one expense, the, you know, the $1.2 million a quarter we have, Damon, that will go away. You know, our conversion date's now scheduled for May of 2024, so that will go away in May of 2024. You know, other than that, I think, you know, I don't know that there will be a lot of cutting. I think we're in a position where we can grow without, you know, maybe commensurate growth in expenses. You know, I don't know there will be a lot of cutting.
There's, you know, obviously been a lot of inflation and so, you know, 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%, which, you know, I think is pretty well constrained, you know, based on the kind of environment we're in. I would say, you know, 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. Ladies and gentlemen, with that, we 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.