Great Southern Bancorp, Inc. (GSBC) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Stockholders of Great Southern Bancorp, Inc. Please note, today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Kelly Polonus with Great Southern. Kelly, the floor is yours.

Good morning. Thank you for joining us for the Great Southern Bancorp, Inc. Annual Meeting of Stockholders. We appreciate your interest and support of our company. I think we're ready to get started. It's my pleasure to introduce President and CEO, Joe Turner.

All right. Thanks, Kelly, and I also want to welcome you to our annual meeting this morning. I'm pleased to be here representing our more than 1,100 Great Southern associates to report on our company's performance and activities in 2022 and also for the first quarter of 2023. 2023 does mark our 100-year anniversary as a company. Before we get started with our presentation, I want to recognize our Board of Directors. Each of our directors brings his or her unique background and expertise, which contributes to our company's continued success. We appreciate their continued guidance, engagement and support. I'll introduce each Board member who is joining us virtually. First, we have William V. Turner. Mr. Turner has been Chairman of our Board since 1974. Next is Kevin Ausburn. Kevin is Chairman and CEO of SMC Packaging Group and was appointed a Director of both the bank and the holding company in 2017. Julie Turner Brown, Julie is an attorney with Carnahan, Evans and was appointed a Director of the holding company and the bank in 2002. Tom Carlson, Tom is President of Mid America Management, Inc. and was appointed a Director of the holding company and the bank in 2001. Steve Edwards. Steve is the former President and CEO of CoxHealth. Steve was appointed a Director of the holding company and the bank in 2022. Larry Frazier is the former CEO of White River Valley Electrical Co-op. Larry was appointed a Director of the bank and the holding company in 1992. Debbie Hart, Debbie is an attorney. She's owner of Housing Plus LLC and sustainable housing solutions and was appointed a Director of the bank and the holding company in 2017. I Doug Pit is the owner of Pitt Technology Group and Pitt Development Group, also is the founder of Care to Learn and was appointed a Director of the holding company and the bank in 2015. And Earl Steinert, Earl is CPA, he's co-owner of EAS Investment Enterprises and was appointed a Director of the holding company and the bank in 2004. Joining me today are 4 of my colleagues, our CFO, Rex Copeland, Chief Lending Officer, John Bugh, Chief Retail Banking Officer, Kris Conley; and Chief Communications and Marketing Officer, Kelly Polonus. I will provide a brief introduction and then turn the meeting over to my colleagues for their presentations. As we look back in 2022, it's only fitting to begin by thanking our more than 1,100 associates for their remarkable work in serving our customers, communities and each other. Our sharp focus on customers' needs and our commitment to building long-term relationships in a challenging economic landscape, were central in making 2022 an extraordinary year for our company. We are pleased to share that we ended 2022 in a strong financial position, giving us a very sound posture for the economic headwinds and market forces that we are now facing in '23. Our first quarter performance was solid as we navigated through a rather tumultuous time for the banking industry, especially during the last month of the quarter. The bank failures that occurred on the East and West Coast created turmoil and understandably focused attention on certain operational practices in those banks and others. During the intense media focus on these failures and worry about potential deposit runoff in the banking system, I'm pleased to report that operating conditions for Great Southern were stable, and we believe for most -- they were for most other banks in our market areas as well. The banks as well were proven to be outliers having significantly high levels of uninsured deposits and an undiversified deposit base -- deposit basis. We are fortunate in this country that our banking system is sound, resilient and well-capitalized. It is times like these that underscore the importance of operating our company with a long-term view. Our commitment over the years has been manageable for the long term and has produced many strengths that we rely on heavily and turbulent times. Our dedicated and talented team of associates, our culture of resilience, our pride in service excellence and our conservative business practices and our strong financial position. We continually work on building and nurturing these springs as a foundation for our long-term success. In 2022, we remained focused on our core strategic objectives, which included attracting and expanding customer relationships, developing our associates, managing risk, sustaining a strong credit discipline and driving a culture of continuous improvement. You'll see in our presentations this morning that 2022 was a very busy year, full of activities to further enhance our company and how we serve our customers. You'll see that we had a strong focus on our retail banking and commercial lending delivery channels while we navigated the effects of a rapidly increasing interest rate environment. I'll now turn the meeting over to Rex Copeland, who will discuss our financial results, again, a reflection of our associates' hard work and dedication.

All right. Thank you, Joe, and good morning, everyone. As Joe said earlier, our overall financial performance in 2022 was strong, and we've gotten off to a solid start in 2023, although recognizing that there is uncertainty as we move ahead throughout this year. This slide summarizes our growth trends in assets, loans and deposits for the past 5 years and first quarter of 2023. First, assets. Generally, since 2018, total assets have increased. In 2022, our total assets increased by about $231 million to $5.7 billion, mainly due to strong loan growth during most of the year. During the first quarter of 2023, the company's total assets also increased by about $88 million to $5.8 billion. This asset growth was primarily attributed to net increases in outstanding loan balances and cash and cash equivalents. Next loans. We had an outstanding year of loan growth in 2022. Net outstanding loans increased about $495 million to $4.5 billion from the end of 2021 to the end of 2022. In the first quarter of 2023, we experienced a $64 million increase in net loans compared to the end of 2022. As John Bugh will report later, loan production significantly decreased beginning in the fourth quarter of 2022, and that trend has continued into 2023. And lastly, your deposits. I'll give just a brief overview of our deposit trends, as Kris Conley will provide more information in his presentation. You can see the significant increase in deposits in 2020, which was when government pandemic stimulus programs were initiated and customers began parking their cash and checking accounts due to economic uncertainty. Deposits increased by approximately $133 million to $4.7 billion during 2022. At the end of the first quarter of 2023, our deposits totaled $4.8 billion, but there have been some changes in deposit mix in that first quarter. The next slide is profitability. I'll talk a little bit about the summary here of performance in several metrics over the last 5 years and the first quarter of 2023. For our net income, you can see that in 2021, we rebounded nicely from the 2020 level. In 2020, the company increased loan loss provisions to build our reserves for potential credit losses in anticipation of a difficult economic environment due to the COVID-19 pandemic. Fortunately, credit losses did not actually materialize in 2020 or later years and the build of reserves for credit losses was released throughout 2021. In the full year 2022, we earned $75.9 million or $6.02 per diluted common share. Higher net interest income primarily drove the increase from '21 to '22. Our earnings in the first quarter of 2023 were $20.5 million or $1.67 per diluted common share. Earnings in the first quarter of 2023 versus the first quarter of 2022 included higher net interest income and a negative provision for unfunded loan commitments. At the bottom of this slide, our profitability ratios generally used as measurements in the banking industry. Our ROATCE or return on average tangible common equity ratio has, in recent years, been primarily between the 12% and 13% range. We saw a decline in this ratio in 2020 because of decreased earnings for the reasons I just mentioned. In 2022, the annualized ratio returned to more normal levels based on strong net income. And in the first quarter of 2023, the annualized ratio increased to 15.39% due to increased net income and stable equity. The ROAA or return on average assets is an important financial profitability ratio, indicating the profit the company earns related to its assets. An ROAA above 1% is considered favorable in the banking industry. Over the last 5 years, our return on assets has been good. The ROAA declined in 2020 due to decreased earnings as we mentioned. For the first quarter of 2023, our ROAA was 1.43% annualized, reflective of rising interest rates, low credit costs and fairly stable operating expenses. We continue to focus on our efficiency ratio, which is noninterest expense divided by the sum of net interest income and noninterest income. The efficiency ratio for the year ended December 31, 2022, was 57.05% compared to 59.03% for 2021. The higher efficiency ratio during 2021 was primarily due to a significant onetime IT consulting and contract expenses incurred in that year. The efficiency ratio during the first quarter of 2023 improved somewhat to 56.42% primarily due to an increase in net interest income, partially offset by an increase in noninterest expense. Next, I'll talk a little bit about core net interest margin and some other things here. Our core net interest margin was relatively stable in 2018 and 2019. In that time frame, market interest rates were generally rising and were at relatively high levels in 2018 and 2019 compared to 2020 and 2021. We experienced core margin compression in 2020 as market interest rates declined dramatically due to the COVID-19 pandemic and reduced market rates. The core net interest margin remained lower in 2021 due to continued low market interest rates. In 2022, the core margin increased significantly in response to the Federal Reserve's aggressive increase in interest rates and changes in asset mix. As of its meeting of May 3, 2023, the Federal Reserve has raised interest rates by a total of 500 basis points or 5% since the central bankers began raising rates in March of 2022. The core margin during the first quarter of 2023 was 3.99% and was flat compared to fourth quarter of 2022 with higher deposit costs offsetting higher loan yields. As we stated before, generally a rising interest rate environment, particularly short-term rates, should positively impact our net interest income as floating rate loans reprice upward with increases in market rates. However, we do expect positive impacts to be significantly offset by increases in funding costs, which we expect will ramp up further in the first half of 2023 as fixed rate deposits mature and reprice higher and net interest settlements on forward starting interest rates while we begin in May of 2023. The next slide provides a look at the company's liquidity sources going back to 2018. Liquidity is a measure of the company's ability to generate sufficient cash to meet present and future financial obligations in a timely manner. The company's primary sources of funds are customer deposits, home loan bank advances, other types of borrowings, loan repayments, unpledged securities, proceeds from sales of loans and available-for-sale securities and funds provided from operations. The company utilizes particular sources of funds based on the comparative cost and availability at the time. From time to time, we have chosen not to pay rates on deposits as high as the rates paid by certain competitors and we believe to be appropriate, supplement deposits with less expensive or differently structured alternative sources of funds. Our liquidity position is resilient with readily available funding sources. At the end of March 2023, available secured funding lines through the Home Loan Bank and Federal Reserve Bank and on-balance sheet liquidity exceeded $2.0 billion. As a result of the company's ability to generate liquidity primarily through liability funding, management believes that the company maintains overall liquidity sufficient to satisfy its depositors requirements and meet its borrowers' credit needs. These sources of liquidity levels improved further in April 2023. The company's securities portfolio consisting of available for sale and held to maturity securities as shown as of March 31, 2023, on this slide. The portfolio has a relatively small percentage of the company's assets, but plays an important part in asset liability management and liquidity management. Available for sale securities, which include any security for which the company has no immediate plan to sell, but which may be sold in the future are carried at fair value. Unrealized gains and losses are reported net of related income tax effects and stockholders' equity. The amortized book value of the available-for-sale securities portfolio was $546.8 million or 8.6% of total assets at March 31, 2023. The fair value of this portfolio was $493.3 million at that time. Held-to-maturity securities, which include any security for which the company has both the positive intent and ability to hold until maturity or carry at historical cost, adjusted for amortization of premiums and accretion of discounts. Unrealized gains and losses on this securities portfolio are not recorded net of taxes and stockholders' equity.At March 31, 2023, held-to-maturity securities were $200.4 million or 3.5% of total assets at March 31, 2023. The amount of the unrealized loss net of taxes on this portfolio was equal to 2.8% of total stockholders' equity and would not have a material negative impact on our regulatory capital ratios if it were included. This next slide looks at our common stockholders' equity, which includes our small amount of intangible assets and our book value for outstanding share since 2013 and through March 31, 2023. The slide also includes the company's regulatory capital ratios, which continue to be substantially above regulatory and well-capitalized thresholds. Strong capital is a priority for our company. Winners in banking are those that have strong capital and are thus able to take advantage of the opportunities that may arise. We recognize that our common equity level of capital is generally high compared to the industry averages. Today's environment underscores the reason why we follow conservative capital management strategies and how important we think that is. Stockholders' equity decreased $83.7 million from $616.8 million at December 31, 2021, to $533.1 million at December 31, 2022. Although reduced capital levels remained strong. Accumulated other comprehensive income decreased $86.1 million during the year ended December 31, 2022, primarily due to decreases in the fair value of available-for-sale investment securities and the fair value of cash flow hedges. Stockholders' equity also decreased due to repurchases of the company's common stock totaling $61.8 million and dividends declared on common stock of $19.3 million. Partially offsetting these decreases were net income of $75.9 million for the year and a $7.7 million increase in stockholders' equity due to stock option exercises. In the first quarter of 2023, Stockholders' equity increased $22.4 million from $533.1 million to $555.5 million at March 31, 2023. Accumulated other comprehensive losses decreased $11.9 million during the 3 months ended March 31, 2023, primarily due to increases in the fair value of available-for-sale securities and the fair value of cash flow hedges. Stockholders' equity also increased due to net income of $20.5 million in that period. Partially offsetting these increases were repurchases of the company's common stock totaling $5.6 million and dividends declared on common stock of $4.9 million. A special note on this slide is the rather significant increase in book value for common share since 2013. Our book value of $45.78 per common share at March 31, 2023, has nearly doubled since the end of 2013. This increased book value is reflective of strong capital management, including opportunistic stock repurchases that we'll discuss shortly. Next, this slide provides a historic view of our tangible common equity or TCE and the TCE ratio since 2018. TCE is the measure of a company's total capital, less intangible assets and preferred stock, which is used to evaluate a financial institution's ability to handle potential losses. Some believe that TCE is one of the best measures of an institution's actual financial strength. The TCE ratio, represented by the orange line measures intangible common equity as a percentage of tangible assets. TCE and the TCE ratio decreased in 2022 for the reasons already discussed. At March 31, 2023, we saw an increase in both of these metrics as a result of what we discussed earlier with market value increases in securities portfolio and fair value of cash flow hedges along with net income retained after repurchases of the company's common stock and dividends declared. At March 31, 2023, the company's tangible common equity intangible assets ratio was 9.5% compared to 9.2% at the end of 2022. This current ratio is still considered to be at high level by industry standards and as an example of our strong financial position. Quarterly -- I'm sorry, we are all shareholders of Great Southern and understand the importance of the dividend as a component of the total return performance on our stock. Since 1989 through good and bad business cycles, Great Southern has paid consecutive quarterly cash dividends to our common shareholders. Quarterly dividend declarations are approved by our Board of Directors and are determined by, among other things, quarterly earnings levels, current strategic priorities and capital needs of the company. In 2022, we declared a total regular cash dividend of $1.56 per common share. During the first quarter of '23, we declared a regular cash dividend of $0.40 per common share. And lastly, I'll talk a little bit about shareholder value. So enhancing long-term stockholder value is a priority. Along with generating strong earnings, we work to create stockholder value primarily in 2 ways, paying regular quarterly cash dividends and repurchasing our stock as conditions allow. This slide provides a look back to 2018, showing our net income, the dividends we declared to stockholders and the cost of common stock purchases. The blue line indicates the number of outstanding shares revealing a reduction of more than 2 million shares during the time frame shown. The company has been in various stock buyback program since May 1990. The company has historically utilized stock buyback programs from time to time as long as management believe that the repurchasing of the stock would contribute to the overall growth of shareholder value. The number of shares that we repurchased today in particular time and the prices paid are subject to a variety of factors. Since the latter half of 2020, we have actively repurchased shares of our common stock. In January 2022, the company's Board of Directors authorized management to purchase up to 1 million shares of the company's outstanding common stock under a program of open market purchases or privately negotiated transactions. That authorization was completed in the second quarter of 2023. In December 2022, the company's Board of Directors also authorized the purchase of up to an additional 1 million shares of the company's outstanding common stock under again a program of open market purchases or privately negotiated transactions. We now have approximately 970,000 shares currently available in that stock repurchase authorization. That concludes my remarks today. It's my pleasure now to turn the meeting over to Chief Lending Officer, John Bugh.

Thank you, Rex. This next slide provides a nice overview of our $4.7 billion loan portfolio by both loan type and geographic regions as of March 31. I'm pleased to report that we have a strong and well-fortified loan portfolio, supported by a world-class experienced group of lenders. In 2022, the loan team had an exceptional year of serving our clients even in the wake of aggressive interest rate hikes that began in March. The majority of the growth that we saw in our loan portfolio occurred in the first 3 quarters of 2022. Lending production and activity markedly decline beginning in the fourth quarter and has continued into 2023. By the end of 2022, total net loans increased $499 million or 12.5% from the end of 2021. This increase was primarily in 1 to 4 family residential loans, construction loans, multifamily loans and other commercial real estate loans. In addition, our pipeline of loan commitments and the unfunded portion of loans significantly grew by about $400 million to $2.1 billion during 2022. As expected, our growth to start in 2023 has been modest with total net loans increasing $62 million or 1.4% since the end of 2022. This increase was primarily in multifamily and commercial real estate loans with a decrease in commercial construction loans. The pipeline of loan commitments decreased and the unfunded portion of construction loans also reduced, but remained significant at $1.3 billion as of March 31, a $111 million increase from the end of 2022. Loan payoffs have also contributed to the lower loan growth. This slide summarizes loan production that originated throughout our franchise in 2022. For the seventh year in a row, our commercial lending team originated more than $1 billion in loans, $1.8 billion total. This was exceptionally strong in light of the production slowdown I mentioned earlier. During 2022, our top producing markets were St. Louis, Kansas City, and Minneapolis. Notably, nearly 40% of our loan closings come from our loan production offices, which I will talk more about later. Despite significant increases in market rates during 2022, our mortgage lenders produced their second highest level of originations in history, totaling $443 million. Late in the year, mortgage loan production declined substantially, and we expect that trend to continue as long as mortgage rates remain elevated. Consumer lending produced approximately $114 million, primarily serving our customers' home equity lending needs. Our commercial loan production offices, or LPOs, have long been a successful model for the bank. They are cost-effective to open and allow the bank to be strategically placed in attractive commercial lending markets, typically large metropolitan areas. As I said earlier, nearly 40% of total commercial lending production flows through our 8 LPOs, and these offices represent approximately $1.2 billion or 25% of total outstanding commercial loan balances. Capitalizing on the success of the LPO model, we expanded our footprint to the West and the East, opening offices in Phoenix, Arizona and Charlotte, North Carolina in 2022. We start to hire local commercial lending experts with extensive market knowledge and found Justin Lutz and Chip Brinkman. Justin has more than 16 years of lending experience in the Phoenix market, and Chip brings over a decade of experience in the Charlotte market. Our other LPOs are in Atlanta, Chicago, Dallas, Denver, Omaha and Tulsa. I'm very pleased to report that our asset quality and allowance for credit loss coverage are excellent and at historic levels. This slide provides some metrics underscoring the loan portfolio's performance through the first quarter of 2023. Nonperforming assets have generally declined since 2018. At the end of March 2023, nonperforming assets totaled $3 million or just 0.05% of total assets. It's important to note that nonperforming assets will fluctuate from period to period due to changes in balances and composition of the loan portfolio; changes in economic and market conditions and other factors specific to a borrower's circumstances. The net charge-offs to average loan ratio has been minimal for quite some time, as you can see on the chart. Total net charge-offs were $274,000 for the year ended December 31, 2022, and the company experienced net recoveries of 7,000 in the 3 months ended March 31. The bank's allowance for credit losses as a percentage of total loans continues to be at a substantial level, with the metric at 1.4% at the end of the first quarter of 2023. Management considers the allowance for credit losses adequate to cover losses inherent in the bank's loan portfolio based on recent reviews in the loan portfolio and current economic conditions. The allowance for credit losses at the end of the first quarter of 2023 was approximately $65 million. The allowance coverage for nonperforming loans is very high with nonperforming loans totaling approximately $3 million at the end of the first quarter of 2023, decreasing by approximately $700,000 from the end of 2022. While we are on the subject of asset quality, I want to address the topic that has been circulating lately in the financial media regarding banks' commercial real estate loan portfolios, specifically concerns around credit in the office sector. I want to provide the perspective of our office portfolio as it does not represent the type of office credit exposures being discussed in recent news reports. For our company, the office sector represents only about 5% of our total outstanding loan portfolio and about 15% of the CRE book. It's a total of 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 franchise footprint. The average rentable square footage is 47,000 square foot and the median is only 7,000 of office space. The average LTV in this portfolio is 45%. So we're really not talking about huge office park developments. As of the end of March, all loans in the office segment were currently performing and supported by strong equity and sponsors. For more information about our loan portfolio, we filed quarterly loan portfolio presentations that are available on our Investor Relations site under the Presentations link. With that, I will turn it over to Chief Retail Banking Officer, Kris Conley.