Great Southern Bancorp, Inc. (GSBC) Q4 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. Fourth Quarter, 2021 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]. Please be advised that this call is being recorded. [Operator Instructions]. I would now like to hand the conference over to your host today, Kelly Polonus, in -- of Investor Relations. Ma'am, you maybe begin.

Good afternoon. And thank you for joining us for our fourth quarter 2021 Earnings Call. This is Kelly Polonus, Investor Relations for Great Southern Bancorp. The purpose of this call today is to discuss the company's results for the quarter ending December 31st, 2021. 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 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 disclosure in our earnings release and other public filings. President and CEO, Joe Turner, and Chief Financial Officer, Rex Copeland, are on the call with me today. We'll get started right now and I'll turn the call over to Joe.

All right. Thanks, Kelly. Good afternoon. And thanks to all of you for joining us today. We ended 2021 in a strong financial position and have good momentum as we enter 2022. We're really pleased with our fourth quarter and full-year earnings for 2021 and we believe they reflect our associates ' ongoing commitment, resilience in taking care of our customers and each other during a challenging time. As is typical, I'll provide some brief remarks about our performance and then turn the call over to Rex, he will get into more detail on our financial results. Then we'll open it up for questions. In the fourth quarter of '21, we earned $15.3 million or a $1.14 per diluted share compared to $17.8 million or a $1.28 a share during the same period in 2020. Hopefully, you've had a chance to look at our news release, we did highlight the fact that we had $5.3 million of unusual expenses, $4.1 million related to money that we paid a consultant who was engaged to assist us in evaluating core and ancillary software systems and ultimately assisted us in negotiating pricing and contract terms for the contract that was ultimately signed at the end of 2021. The remaining $1.2 million was related to the contract termination fee for the -- for our current core and ancillary system provider. We had some other significant income statement items that Rex will cover. Earnings performance ratios for the quarter were solid with return on assets of 1.13 and return on equity of 9.74. Obviously those numbers, if not for those unusual expenses would've been substantially higher probably both, at least 25% higher. For the year -- our loan production activity for the year was quite brisk. But obviously our loan growth was challenged by the significant payoffs we saw during the year. Our multi-family portfolio loan was down $307 million. Loan originations were extremely strong during the year excluding to-be-sold mortgages or mortgages to be sold in the secondary market. Our originations were over $2 billion in 2021 and that is a very strong year of production for us. Our pipeline, and this portends good things for the future, our pipeline of commitments and unfunded loans also is extremely strong at this point. It grew $270 million during the fourth quarter and is up $409 million from the end of 2020. As we've told you on past conference calls, we are actively looking for 2 to 3 new loan production offices. And I would just say we believe our efforts are bearing fruit and hopefully we'll have more to talk about in the coming months on that. As a status update with respect to Paycheck Protection Program, we did obviously the first round loans are all fully forgiven. Second round we did 1650 loan, $58 million in principal balance, and we have received forgiveness on all but $10 million of those and we would expect to receive that forgiveness in the first quarter of 2022. With respect to CARES Act modifications, we have no remaining modifications to commercial loans -- CARES Act modifications to commercial loans. We do have $1.2 million of CARES Act modifications on consumer and mortgage loans. Asset quality continues to be historically strong for us. In '21, we ended the year with $116,000 of net recoveries. And our levels of non-performing assets, excluding FDIC assets are at $3.8 million, down 1.4 million from the end of the third quarter, including FDIC assets were at $6 million, which would yield a non-performing asset to period in asset ratio of 0.11%. Capital also continues to be very strong. From the end of 2020, our common stockholder’s equity decreased by about $13 million to $617 million. That was because of our adoption of CECL, the dividends we pay, and also we did purchase a substantial amount of our repurchases, a substantial amount of our common stock during the year. Of course, those decreases were offset by strong earnings during the year. Specifically, on the stock repurchase, we repurchased 266,000 shares of common stock at an average price of $57.72 during the fourth quarter. And for the full year, we repurchased 715,000 shares at an average price of $5,469. We currently have $1.2 million shares available in our stock repurchase authorization. That concludes my prepared remarks. I will turn the call over to Rex at this time.

All right. Thank you, Joe. I'm going to start out talking about net interest income. And in the fourth quarter of 2021, that decreased about $353,000 to $44.2 million compared to $44.6 million in the fourth quarter of 2020. And then also in the third quarter of '21, our net interest income was about $44.9 million. The income, as Joe mentioned of our PPP loans just a minute ago, our income does include some accretion of net deferred fees there in both 2020 and 2021 periods. We had about $1.6 million of accretion income in the 2021 fourth quarter versus about a $1 million in the 2020 fourth quarter. The amount of deferred fees that we recognized in income was $5.5 million and $2 million in the years ended December 31, '21 and 2020, respectively. At the end of December 2021, we still have remaining net deferred fees of about just over $500,000 and as Joe mentioned, we believe that the majority of that $10 million of PPP loans that remained outstanding at the end of the year will go through the forgiveness process, most likely most of it in the first quarter, some of it will be a little bit up to the borrowers obviously, but we are trying to work with them and encourage them to go ahead and get those things processed. That net interest margin in the fourth quarter was 3.37%. That was down slightly from 3.41% in the fourth quarter, 2020. The 3 months ended September 30, 2021, net interest margin was 336. So we were up about -- we were up one basis point Q3 versus Q4. Comparing the fourth quarter of '21 and '20, the average yield on loans decreased about 7 basis points, while the average rate on interest-bearing deposits declined by 35 basis points. The 2021 net interest margin continued to be impacted by changes in our asset mix. And while we had some additional liquidity in the 2020 period, we had additional liquidity in the 2021 period. And so our cash and cash equivalents increased by about $366 million on an average basis. And our average investment securities increased about $26 million and that was offset by average loans decreasing by about 388 million fourth-quarter '21 compared to fourth quarter of '20. So the additional liquidity, definitely without it, we would have had higher net interest margin in the fourth quarter period and also for the year. The one last thing I'll mention too that the FDC yield accretion that we've had for quite some time, a number of years, that's just about around 2 and we -- the impact to our net interest margin was about 6 basis points less in Q4 '21 versus Q4 '20. And at the end of the year, we've only got about $429,000 remaining of this accretion to take the interest income and we expect that that's all going to be recognized sometime during 2022. Our overall funding costs continued to decline somewhat during the fourth quarter of '21 as time deposits continued to re-price lower at maturity. We may see our cost of time deposits decrease a little more but the magnitude or the rate decrease overall will be more muted than it has been. Our recent new and renewed overall average time deposit rate has been about 35 basis points to 40 basis points. While our net interest margin percentage has been somewhat impacted by the increased deposits and resulting change in our asset mix. In terms of actual dollars’ net interest income was $177.9 million in 2021. And that's is up slightly from $177.1 million in the year 2020, we had about $4 million less in FDIC accretion income in comparing those two years and then as I mentioned, we did recognize about $3.5 million more in deferred PPP loan fees in 2021 versus 2020. Non-interest income decreased, and we're looking at the fourth quarter of this year versus fourth quarter of '20, non-interest income decreased $759,000 to $9.2 million. A lot of that decrease was from net gains on our loan sales of mortgage loans, that's down about $960,000. In the second half of 2020, and really the first half of '21, we had more significant origination of fixed rate single-family loans, which we typically sell in the secondary market, and those origination volumes in the second half of 2021 start to come down to more similar to historic averages for our Company. Other income decreased about $576,000, 2021, Q4 versus 2020. While the difference there was related to fee income that we generate on new interest rate swaps that we have with our customers and counterparties, we just had less volume of that in the fourth quarter, '21 versus '20. And then a positive thing, our increase in income was our point-of-sale and ATM fees increased $662,000 compared to the prior year period. That increase is really due to somewhat of a reduction in customer usage in the fourth quarter of 2020, pandemic related and things of that nature. And then in '21, we saw a higher level of debit card usage by our customers, and that got us back to kind of more normal levels. And in some cases, increased levels of activity. Non-interest expense increased $4.7 million to $35.8 million when you compare Q4 '21 versus Q4 2020. Joe already mentioned the $5.3 million that was related to some one-time expenses that we had there partially offsetting those increases we did have about 924,000 less in expenses on other real estate owned and repossessions. The decrease was -- we did have some write-downs and valuation allowances in the fourth quarter of 2020 leading up to the sale of some of our foreclosed property and didn't have that kind of activity in the fourth quarter of '21. The efficiency ratio for the fourth quarter was 66.98%, that compared to 56.98% in the same quarter in 2020. And if you exclude those 5.3 million of onetime expenses that we talked about, the efficiency ratio in the fourth quarter of '21 would have been about 57%. I'll move on now to the provision. Based on our assumptions, we did have a negative provision for loan losses or credit losses on our outstanding loan portfolio. We are -- as Joe mentioned, our unfunded loan commitments and the unfunded portion of loans that we've already originated grew quite a bit during the year. And so a reserve for those unfunded commitments went up by what we added, $1.3 million, of the expense to that in the fourth quarter. So the net was an effect of a negative $1.7 million in Q4 of '21 to credit related items. For the full year as it's quite a bit different, we had negative provision expense of about $6.7 million on our outstanding portfolio compared to $15.9 million of provision expense recorded in 2020. Obviously, we did add to our reserves in 2020 due to the pandemic. But as Joe mentioned earlier, our net -- our credit has been very good throughout '21 with a small amount of net recoveries for the year. Last thing I'll mention is Income taxes. You can see that our effective tax rate in the fourth quarter of '21 was 21.1% And that compared to 19% in the fourth quarter of 2020. Those things are impacted by the level of overall income that we have, also the level of tax exempt investments and loans that we have. And a lot of it relates to tax credit investment activity that we have. And I'd say in '21 that level was down some from where it was in 2020. So we think going forward that we kind of expect our effective tax rate to be somewhere between 20.5% to 21.5% in near-term future periods. So that concludes the remarks that I had today. And at this time, we'll entertain questions. So let me ask our Operator to once again remind the attendees of how to queue in for questions.

And thank you. [Operator Instructions]. Please standby while we compile the Q&A roster. [Operator Instructions]. And our first question comes from Andrew Liesch from Piper Sandler. Your line is now open.

Hey, good afternoon, everybody.

Hi, Andrew.

A question on the potential LPO expansion. Joe, can you remind us how you think about that? Like do you look for -- do you look at different markets and think this is where we want to go and then you go and find the lenders or are you examining several markets and if you find the right team in one of those, that's how you choose to -- where to go? Just your process on this LPO expansion that seemed to have worked pretty well over the last several years.

We're examining a few different markets, but I think we've mentioned on here before the few markets that we're looking at is our Phoenix, Charlotte, Nashville and Houston, and then we have different people within our company assigned to trying to -- we always try to staff the office with a local [indiscernible]. So that's what we've done in the past, and that's what we're doing right now.

Got it. Okay. That's helpful. Thank you for the reminder there. And then Rex, on the margin, even with all that liquidity to come on over the last several quarters, going to be -- done a really good job defending it since the Fed cut rates in 2020, so certainly getting some good deposit, price improvement. But how do you think the margins are going to react if we do start to see some rate hikes, assuming we are here later on this year.

Yeah. I -- we -- as we've said in our previous filings, we believe we are asset sensitive, and so it will -- should help us. I don't expect that we're going to see your cost of deposits increasing substantially right off the bat. We do have loans that are -- some were rates and so those will not re-price maybe immediately either. But I think throughout the course of the year, if we start getting rate hikes in March, which it seems like is what markets believe in right now, those will be helpful moderately throughout the rest of this year. If you get three rate hikes or whatever in 2022, we would anticipate that that would really help for -- more so in 2023 and moving forward from there, but it will be -- it should be positive for us based on our analysis right now.

Got it. Alright, thanks for taking the questions. I will step back.

Thanks, Andrew.

And thank you. And our next question comes from Damon DelMonte from KBW. Your line is now open.

Hey, good afternoon, guys. Hope everybody is doing well today.

Hi, Damon.

Hi. So first question just regarding loan growth and the outlook for growth, obviously, origination activity has been very strong for you guys. Kind of wondering what your thoughts are on the pace of the pay downs. Do you think that that's going to slow and thus allow for net growth as we go into 2022?

Well, that's a little bit hard to guess on. Damon, obviously, I think our multifamily portfolio dropped from $900 million to $600 million, so that's a 33% decrease. In real terms, it's going to be hard for that portfolio to decline as much you would think. But it's a bit of a guess. There still does seem to be a lot of demand out there for -- by banks to acquire good assets. So I think it will continue to be a competitive environment but we like where we're at with our level of unfunded commitments that we think we'll fund over the next year or 18 months and then as we're expanding our territory that should help as well.

Got it. Okay. That's good. And then with regards to your outlook for expenses, are you anticipating any cost savings from the contract renegotiations on the core processing that you went through this past quarter?

From current expense levels, I don't think there will be -- I don't think there will really be savings. We're going to have a -- what we believe is a much more robust system for us to use internally. And we think it will be better for our customers as well. So that's kind of the -- that's kind of where we were going. It's not -- there's not going to be a lot of expense saved there.

Got it. Okay.

And we'll still be under -- hey, Damon, we'll still be under our existing contract all through 2022. So there's not going to be anything going on differently there. We expect to start this new system in 2023 late midway through the year or so.

Got it. Okay. So then as we look at the year-over-year change in expenses, do you feel like you could kind of keep in the low-single-digit range for annual growth?

Again, we don't give forward guidance. I think we've done a fairly good job of controlling our expenses, particularly over the last -- really historically we have, but certainly over the last 5 or 6 or 8 years, that's a focus we have. I will say one thing that's challenging right now is on the employee side, there's just a real demand for employees and there does seem to be some wage inflation so that may filter through our results in 2022 a little bit.

Okay. Fair enough. Okay. That's all that I had for now. Thank you.

All right. Thanks, Damon.

And thank you, and our next question comes from John Rodis from Janney. Your line is now open.

Hey. Good afternoon, guys.

Hey, John.

Hey. Hope you guys are doing well. Joe, maybe just a question for you since the last quarter, one of your local competitors, GIFed, announced plans to sell. Just wondering if you see any opportunities there going forward.

I don't know that there will be a ton of opportunity, I'm sure there will be some. I think M&A, typically, does cause at least some dislocation, either loan officer dislocation or customer dislocation. So I wouldn't be surprised if there's some. There may not be a ton there but I would think there would be some probably.

And as far as Quad Cities was already in the market, would you characterize them as being pretty rational competition for you guys?

Yeah, I would say so. I think they do a pretty good job.

Okay. And then just as far as you mentioned, you guys have been pretty aggressive buying back your own stock, which makes a lot of sense. Do you think just as we look to -- for this year 2022, do you think from a capital management standpoint, does buying back stock probably still make more sense versus looking to do external acquisitions?

Yes. I would say so for us, John. I mean, the way -- as we've mentioned before, we feel like where external acquisitions get hard is as you look out, 3 and 4 and 5 years, are you going to be able to grow the acquired franchise at the same clip as you're growing your business? And buying back your stock, you just don't have that kind of analysis. You don't have that kind of headwind. So I think it -- where we are able to buy back our stock at whatever book in a quarter or whatever we are able to buy it back for right now, that's accretive all day long and I think makes lots of sense for us.

Yep, I agree with you. Okay. Thanks, everybody.

And thank you. And I am showing no further question. I would now like to go ahead and turn the call back to Kelly Polonus for closing remarks.

Well, thank you for joining us today. If you have further questions, please feel free to reach out to us and we hope you have a great evening. See you next quarter.

This concludes today's cal. Thank you for participating. You may now disconnect.