Great Southern Bancorp (NASDAQ:GSBC) Q1 2019 Earnings Call

0:00 Good day, ladies and gentlemen, and welcome to the Great Southern Bancorp First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require assistance during the conference, you may press star, then zero, on your touch-tone phone. As a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Kelly Polonis of Investor Relations. Please begin. Well, good afternoon and welcome.

0:30 This is Kelly Polonis, Investor Relations for Great Southern. The purpose of this call today is to discuss the company's results for the quarter ending March 31, 2019. 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. You should not place undue reliance on any forward-looking statements which speak only as of the date they are made. 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 our earnings release dated the first quarter 2019. President and CEO Joe Turner and Chief Financial Officer Rex Copeland are here with me.

1:15 I'll now turn the call over to Joe Turner.

1:19 Well, thanks, Kelly, and good afternoon to everybody on the call. Thanks for joining us today. As is typical, I'll provide some preliminary remarks and then turn the call over to Rex, who will go into a little bit more detail on the financial statements, particularly the income statement, and then we'll open it up for questions. Hopefully all of you have had a chance to review our earnings release. We're very excited about the results for the quarter, feel very positive about it. Our earnings were $1.23 a share. during the quarter, or $17.6 million. We did highlight a couple of things in the release. One was kind of a non-core unusual item, and then another was just a highlight.

2:07 With respect to the non-core, non-operating item, we earned 3.6 cents as a result of sale of some assets that we acquired in FDIC acquisitions The assets were difficult to value and probably, and we concluded, were worth zero when we completed the acquisitions. And so we booked them at zero. And then over time, their value did increase. And we were able to sell them during this quarter for $677,000. The second item that we highlighted was a $513,000 increase to interest income. as a result of the balance sheet swap that we entered into in October of 2018.

2:56 Rex and I have been talking about this. It's a core item. Our loans, in our mind, based on our asset liability analysis, were a little bit shorter than what we would have wanted, and so we used an interest rate swap to synthetically lengthen the duration on those So we may quit separately identifying that. That's just part, we believe, of our core interest income at this point. Our annualized return on equity was 13.12%. Annualized return on asset was 149. And our margin, stated margin, was 406. I think our core margin was 393 net of the extra accretion.

3:47 Loan portfolio, things continue to be going well there. Our loans grew $61 million. Total growth, that's our funded loans. Our gross loans, which include unfunded amounts on our construction portfolio, were down slightly. But loan production continues to be good, strong, coming from all parts of the company and from all products as well. As we notified you earlier, we did completely exit the indirect business. This concluded that the returns weren't satisfactory in that business for us, and so we would expect our $180 million roughly of indirect portfolio to run off over the next two to four years.

4:37 We saw, I think, $24 million in pay down on that portfolio in the first quarter. Asset quality, you know, we've said this the last several quarters, we can't imagine it getting much better, but it did actually get just a little bit better in the first quarter with non-performing assets down by $1.5 million. Our capital position continues to be strong. We did deploy some capital. In the first quarter, we bought a little bit of stock. We, you know, had the special dividend of 75 cents and paid our regular dividend as well. And even after all that, our capital ratios ended the first quarter at the same place that they ended the year.

5:23 So we continue to have very strong capital, which gives us a lot of flexibility to consider additional share repurchases or additional dividends should our board deem that advisable. So at this time, I'll turn the call over to Rex, who will go, as I said, a little more into detail on the income statement, correct?

5:45 Thank you, Joe. I'll talk first a little bit about net interest margin. Joe mentioned earlier that our reported margin was 4.06%. The core margin, excluding the FDIC accretion, was 393. As Joe said, that's 12 basis points more than the core margin a year ago. and basically flat from where we were in the fourth quarter of 2018. We continue to see our core margin, I think, perform well. We've got probably from the growth from a year ago, it's really the growth in our loan and investment portfolios and higher rates on both of those, partially offset by increasing rates on deposits and borrowings. I'll talk a little more about that in a moment.

6:34 Joe talked about the interest rate swap that we entered into late last year and the effect that it had on our earnings. It's $513,000 of interest income that we recorded in this past quarter. Just to remind you that the way that's structured is we receive a fixed rate of interest of just over 3% and we're paying out a rate that's tied to one month LIBOR that adjusts monthly. presuming that the Federal Reserve is sort of sitting tight right now for the foreseeable future. The one-month LIBOR has been hovering around 2.5%, so that's how we get to that difference in the income that we derive from that right now.

7:25 We've talked about in our past filings, and Joe sort of alluded to it already here today, that We think that rising interest rates modestly help us. Falling rates probably are somewhat of a detriment. That's why we entered into the interest rate swap. We still think that our core margin, again, is holding in pretty well. I would think, though, that we'll probably continue to see some pressure on the liability side from the standpoint of deposit We do have a lot of our CDs have matured and repriced at the now market rates, but we do still have some more.

8:11 Part of our CD portfolio will probably continue to reprice up a bit, so we may have a little bit of pressure from that perspective, and assuming that the LIBOR rates don't move very much, we have a a pretty good portion of our loans that are tied to one month LIBOR. So if those rates don't move up much, we probably aren't going to see those loan rates moving up much higher as we move throughout the rest of the year. On the non-interest income side, our non-interest income increased about $515,000 compared to first quarter a year ago. Joe mentioned the majority of all that increase really related to the kind of one-time income that we had on these couple of items that we got through FDIC acquisitions.

9:06 We did have a little bit of a decrease of $286,000 compared to a year ago in our service charges and ATM fees. That's really mainly in overdraft and NSF fee income between our point of sale and ATM fees. Those were pretty consistent with the year ago quarter. We also saw a bit of a decrease, $214,000 in gain on sale of single family mortgage loans. We've originated over the last year plus, year and a half, we've originated more loans that are fixed to variable type loans and so we keep those primarily in our portfolio.

9:52 Non-interest expense area.

9:55 We're still tracking well, we think, on expense containment and operational efficiency. The non-interest expense total was $183,000 higher in the first quarter this year compared to first quarter last year. Pretty consistent with our expense level in the fourth quarter of last year. One thing, our salary and benefit line did increase a bit this year compared to a year ago. We did open a couple of new loan production offices. late last year. We also had some annual employee compensation increases and some other things related to that. So we did see the salary and benefit line item move up a bit. Offsetting that quite a bit was foreclosed asset expenses were down 521,000 compared to a year ago. We had some lower write downs, valuation write downs on and many more properties that were held in our ORE portfolio.

10:54 And also this year our consumer repossession and other related expenses are lower as we continue to see that portfolio move down. Also one other thing, we had some new market tax credit expenses for the last several years. projects completed and our flow of credits was up later in the year of 2018 so we wrote off the investment in relation to that and so we have those investments are now done and so we're not writing off those investments now in 2019.

11:39 The efficiency ratio overall has continued to improve. If you look at a trend of our efficiency ratio, it's been migrating down fairly nicely over the last two to three years. The efficiency ratio this quarter was 54.74%, down from about 61% first quarter last year. So we continue to focus on growing our company, but as we've said before, we feel like we've got the infrastructure in place to continue to grow without necessarily the commensurate expense growth along with it. One other thing along the lines of efficiency I'll mention is that we did recently this month consolidate our Fayetteville, Arkansas banking center into our Rogers, Arkansas office.

12:32 They're about 20 miles or so apart geographically and so now we operate the one banking center there in Rogers, Arkansas. One final thing that I was going to mention today that we haven't really talked a lot about before is kind of what's going on with us and the new accounting standard for loan losses, the CECL loss accounting standard. And so that will go into effect for us, as you know, the first quarter of 2020. We've been working hard for some time now in preparation for that. We're utilizing some software from a third-party provider that we are utilizing here in-house.

13:17 We've got the historic data in the system. We've been running some parallel testing and we'll do that throughout this year as we kind of fine tune that process and that effect. And so we'll probably be able to share some information on that further during our second quarter call and in our second quarter 10Q. That concludes our prepared remarks and at this time We can entertain some questions, and let me ask our operator to remind the attendees how to queue in for questions. Thank you. Ladies and gentlemen, at this time, if you have a question, please press star, then 1, on your touch-tone phone. If your question has been answered or you would like to remove yourself from the queue, you may press the pound key.

14:03 To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Andrew Lush of St. O'Neill. Your line is open.

14:15 Hey, everyone.

14:17 Hey, Andrew.

14:18 Hi. Just a quick question on the long growth here. Pretty solid mid-annualized or mid-single-digit pace here for the first quarter. Is this kind of like the base rate of long growth you're thinking for the year, or are there opportunities to improve upon this?

14:36 You know, kind of to issue our standard caveat, Andrew, you know, we don't project – and many more. So I think there's no big changes. Our consumer loans have been running off here for a couple of years and we would expect that to continue. hopefully our new offices will ramp up. If you've seen our portfolio by region report, this part of the loan portfolio report we do each quarter, you can see that Chicago's up to about $100 million, so hopefully we'll see some growth in Atlanta and Denver.

15:34 We feel positively about the direction, certainly, that the loan portfolio's as far as growth and quality goes.

15:45 Great. And then just on the deposit growth from the quarter, I'm curious what was driving that and what's the outlook there? Is there anything unique that drove the growth this quarter?

15:58 I can probably answer that one for you, Andrew. The growth has come, a fair amount of it has come from Internet, you know, CDs. So we're out there on a couple of the different – the internet boards that are out and we've had seen some growth there. Some of the Cedars product is also there. We did have another quite a bit of growth in our interest bearing checking accounts. So those three areas are primarily where we're seeing it. What we were able to do in the quarter is we kind of grew in these areas and we paid down Home Loan Bank advances and overnight borrowings from the Home Loan Bank.

16:45 And so at the end of March, we actually didn't have anything borrowed on the wholesale side from the Home Loan Bank. So it's just kind of a difference in the mix a little bit. But we continue to focus on trying to grow our deposits as best we can. What we're kind of seeing right now is... The growth is there more probably in the time deposit categories, but we also have had some growth in the interest-bearing checking type accounts too.

17:23 Gotcha. And so then to the extent that these inflows continue, it looks like you added some of the securities portfolio as well beyond just paying down the borrowing. Should we expect the securities book to rise along with the deposits?

17:40 I think we'll keep trying to look for, you know, options to buy securities that fit sort of our parameters. And, you know, there for a while we had lower rates. The market rates moved down. They kind of picked back up again a little bit here in the last few days. That's part of our interest rate strategy as well is to put on some securities that, you know, we feel very comfortable with the quality of. You know, as far as credit goes, there will be agency type stuff. with intermediate-type lives of five to ten years or something like that where that helps us from our overall interest rate risk strategy as well. So we'll continue to add some things on, but we don't really have any set amount or target we're trying to hit.

18:31 Okay. That covers my questions. I'll step back.

18:34 Thank you. Thank you. Her next question comes from Michael Perito of KBW. Your line is open.

18:42 Hey, good afternoon, everybody. Hi, Mike. I had a couple questions. I wanted to start, apologies if you mentioned this, but is there any notable cost save related to the auto exit that we should

18:56 be thinking about? You know, I think there will be. Mike, it sort of rolls in over time. Obviously the origination staff has now either been found other opportunities elsewhere or has been redeployed to open positions in the bank. But the origination staff was maybe 12 or so people, 12 or 15. As the loan portfolio pays down, there should be additional folks in servicing who we'll have the same opportunity with. Some will decide to stay at Great Southern and fill other open positions, and some may choose to seek employment other places.

19:42 So I think there have been some cost savings, and there will be down the road as well. I can't really quantify ultimately where that will be for you, though.

19:55 and really in the first quarter there weren't cost saves.

19:57 No, there weren't any cost saves in the first quarter.

20:01 Okay. And then a follow-up question, Andrew's question, it looked like the yield on the investment book jumped up a bit. So I'm just curious if you could talk a little bit more about the incremental yield of some of those investments you bought in the quarter.

20:16 Right. So what we were buying is what I mentioned earlier and so maybe the maybe the yield on those products is 340 to 360, 70 type range. We've had more in our portfolio than single family adjustable arm type product that's fixed for three, five, seven years and then floating. So we've had some stuff in there that's been a little lower yielding because it's a one year adjustable and some of those things have paid down. We did have a little bit, I mean it's not a lot, but we did sell some of those securities in the first quarter and then replaced it with some of these other type of securities.

21:12 So we probably did on $25 or $30 million of our securities portfolio get out of yield and add new securities to replace. And probably the net difference in that yield is maybe 50 basis points or something like that.

21:31 Okay, great. Thank you for the call, guys. Appreciate you taking my question. Thank you. Our next question comes from John Rodas of FIG Partners. Your line is open.

21:41 Good afternoon, guys. Good job. I guess, Rex, maybe just on expenses is, you know,

21:50 I guess it was up slightly from the fourth quarter core level.

21:55 Is there any new initiatives as far as expenses go that we should think about going forward or just some low single-digit growth off this level? Is that a better way to think about it?

22:09 We don't really have any corporate initiative type things. We have been for some time now. really kind of studying different areas of our company and trying to be more efficient and effective really as far as serving the customer and some of the things that have come out of that have been you know we've we've able to kind of streamline processes a bit and so sort of byproduct of that may be where we've been able to kind of be a little more efficient in certain areas but I wouldn't say John that we've got any big initiative to to reduce anything. Obviously, we're closing the location in Arkansas, but that was a small location, and there's not a lot of, in the overall scheme of the company, a lot of costs saved there. There's a little bit.

22:58 That was a lease facility, so we have a little bit of a lease expense that goes away, and then you've got maybe three people staffing it or whatever. But that's not a big thing in the overall scope of the company.

23:12 Yeah, John, this is... What Rex described earlier is what we call our process matters and that's something that is an important part of the way we run the business now. We probably have at least one process or probably one process matters workshop a month. We've hired a guy with lean accreditation and he runs that process for us, and we have identified a lot of opportunities to better serve the customers in a more cost-effective way. So that's an ongoing thing for us. And so hopefully that will continue to pay dividends, and we're always trying to identify ways to more efficiently do business.

24:09 Sure, that makes sense. I guess just one follow-up as far as new LPOs and stuff. Are all the expenses sort of for a full quarter in the first quarter now? Yeah, yes. Okay. Thanks, guys. Thank you. And this concludes our Q&A portion. I'd like to turn the call back over to Mr. Joe Turner for closing remarks.

24:33 Okay, well, we appreciate, again, everybody being on the call with us, and we'll look forward to talking to you after the results from our second quarter are published. So thank you, and have a good day. Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone have a wonderful day.