Great Southern Bancorp (NASDAQ:GSBC) Q4 2019 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to the Great Southern Bancorp, Inc. Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Kelly Polonis with Investor Relations. Please go ahead, ma'am.

0:36 Thank you, Sydney. Good afternoon and welcome to our call. The purpose of this call is to discuss the company's results for the quarter ending December 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 in financial performance. You should not place any reliance on any forward-looking statements which speak only as to the dates 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 the forward-looking statements disclosure in our fourth quarter 2019 earnings release. President and CEO Joe Turner and Chief Financial Officer Rex Copeland are on the call today, and I'll now turn the call over to Joe.

1:25 All right. Thanks, Kelly. Good afternoon. I also would like to thank you for joining us on our fourth quarter earnings call. As is usual, I'll go over at a high level our company's performance and then turn the call over to Rex, who will go into a little more detail on the income statement, and then we'll open it up for questions. Hopefully, you've had a chance to at least glance at our earnings release. If you have, you've seen that we had a solid quarter, especially given the Interest rate and competitive environment. We earned $1.24 per diluted common share during the quarter, or $17.9 million. In the full year, we achieved the highest annual net income we ever have at $73.6 million and $5.14 per common share. Our performance metrics during the quarter were return on common equity, $11.78, return on assets, 1.44%, Our margin was 382, and our efficiency ratio was 56.11. Loan production in the fourth quarter was pretty solid.

2:32 You probably noticed that our net loan balances were down about $3 million, but our gross loan balances, which include unfunded commitments, construction loan balances, were up about $34 million. Our net loan balances were up $165 million during the full year 2019, and gross loan balances were up about $99 million. I think we said last quarter and maybe previous quarters that it does seem to be getting a little bit more competitive. The lending environment seems to be getting a little bit more difficult. Maybe credit spreads are increasing. are shrinking on our loan products, and I think all that's still accurate. It's not a dramatic thing, though.

3:22 If you have a chance, you can look at page seven of our earnings release where we include a table on our unfunded commitments, and really the most pertinent sections are the last two sections of that table, which show what our unfunded construction loan commitments are or Thank you. Thank you. One year was $1 billion and $20-something million, and the other year was $1 billion and $60 million. So we are down slightly, but still have relatively robust loan demand. Our asset quality continues to be really pristine, the best in our history. Our non-performing asset balances went down $3.6 million during the year to $8.2 million, so I guess 16 basis points or something on assets.

4:40 Our capital continues to be strong, significantly exceeding regulatory thresholds. From the end of 2018 to 2019, our total common stockholders equity increased by about $71 million. I think about $23 million of that was as a result of appreciation on or unrealized appreciation on our available for sale securities portfolio and the increased value of our balance sheet swap, our $400 million swap. But the rest of that relates to just retained earnings. Both value for share increased from $4,198 to $4,229 during the last quarter and from $3,759 at the end of 2018.

5:33 are tangible common equity to tangible asset ratios, also very strong at 11.9%. And I'm sure you've noticed that we obviously declared and just recently paid our fourth quarter $0.34 per share common dividend, and we announced another dollar per share special dividend earlier this month. That concludes my prepared remarks. I'll turn the call over to Rex at this time.

6:02 Okay, thank you, Joe. I'll start out talking about net interest margin. As Joe mentioned earlier, we did see a little bit of margin compression in the fourth quarter versus the third quarter. The fourth quarter was 3.82% compared to 407 in the fourth quarter last year and 395 in the third quarter this year of 19. So we experienced about a 13 basis point decrease compared to the third quarter of 2019. A lot of that was related to a decrease in the average yield on our loan portfolio and also other interest earning assets. And then we partially offset that with some decreases in our average interest rates paid on deposits and other borrowings.

6:47 As you know, the Federal Reserve cut rates a couple of times in the latter part of the year, in September and October, and those rate cuts affected You know, short-term rates, primarily short-term LIBOR rates, which we have a lot of loans that are tied to that index. The positive impact that we've had on net interest income and net interest margin from additional yield accretion continued in the fourth quarter. It was about 19 basis points of net interest margin increase in the fourth quarter this year. similar to where we have been in the third quarter of 19 and the fourth quarter of 2018. You know, our net interest income dollars were up from a year ago quarter but down from the third quarter of 2019 a little bit. So, you know, we are continuing to see, as Joe mentioned, you know, our net interest income dollars have been pretty good that the margin as a percentage has come down a little bit as we've seen a little bit of compression here most recently.

8:01 One thing I'll note too is we did record about $1.2 million of interest income in the fourth quarter related to the balance sheet interest rate swap transaction that we've entered into. So that has enabled us to keep a little bit higher level of interest income related to that particular part of the loan portfolio. Non-interest income I'll talk about for a moment here. The non-interest income increased by about $474,000 compared to the fourth quarter a year ago. The increase was really in a couple of categories. Other income, we had a couple of things, some income related to interest rate swaps that we've entered into with our customers and back-to-back swap program.

8:48 We had some fee income from that, about $222,000, and then about $184,000 related to the exit of certain of our tax credit partnerships that we had in 2019. We also saw a gain on sale of loans, single-family loans primarily and some SBA loans, a lot more origination of fixed-rate loans, which we sell in the secondary market in the 2019 period versus 2018. Offspring that a little bit was a decrease in some of our service charge and ATM fees compared to the fourth quarter of 2018. Noninterest expense, Joe mentioned our efficiency ratio earlier, but we're still tracking well on expense containment and operational efficiency.

9:36 Noninterest expenses were up about $763,000 compared to the fourth quarter a year ago. Biggest drivers were increases in salary and and employee benefits related primarily to some incentives. Incentives in lending and operations areas, annual employee compensation, merit increases and then staffing additions in some areas including lending which will also include the new loan offices we opened in Atlanta and Denver in late 2018. We also had a little bit higher expenses related to occupancy and equipment mainly related to increased depreciation on some new ATM, ITMs and then also upgraded software on our ATM operating system.

10:26 We did continue to have also in this quarter the FDIC insurance premiums. We did continue to have a credit there so we didn't have to book FDIC insurance expense in the fourth quarter of 2019. One last thing that I'll just mention is the implementation of CECL. We, as you know, have been working on that for quite some time, and we're finalizing that or have finalized primarily that. We do expect that we'll continue, as I think we said last quarter, about a 2% to 3% decrease in equity. We'll probably be reflected based on the implementation of CECL in the first quarter of 2023.

11:13 and we have gone through pretty much all of our review on that and we're just finalizing everything now with our auditors or our accountants for implementation here in the first quarter this year. So with that, that concludes my prepared remarks and I'll turn it back over to questions and let me ask our operator to once again remind attendees how to queue in for questions. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from Andrew Leash with Piper Sandler. Please proceed with your question.

11:55 Good afternoon, everyone. Hi, Andrew. Hi. Just want to start with expenses here. About $29.5 million, certainly benefiting from A little bit from the lack of FJC insurance, but is this a good run right to look at going into next year, maybe creeping up towards $30 million? How do you guys view the expense base?

12:21 Rex, do you want to take that?

12:22 Yeah, this is Rex. I'll try to take that a little bit here. I think that we tried to highlight anything that was really out of the ordinary in the quarter. We mentioned a couple of things there that we have implemented and new things that are going on. So, I mean, we don't give a lot of forward guidance on it, but I'm not sure, I don't think there's anything really materially unusual necessarily in the quarter.

12:52 Gotcha. Okay, so the sequential increase in salaries and employee benefits, is that just normal course of business or was there anything unique in that line item?

13:02 I think a couple things. You know, along with the increased profit on loan sales, you know, we're paying the originators, you know, essentially a commission on that. So, you know, I would say that's a big chunk of it, Andrew, relates to that. And then as Rex said, you know, just normal kind of merit increases. We have had, you know, some staffing increases related to the LPOs we opened. So that would probably be the rest of it.

13:35 Okay. That's helpful. And then kind of switching back to Cecil, how do you think provisioning is going to play out under the new modeling? Should it be similar to what you guys have been doing, or what differences do you see ahead?

13:54 This is Rex again. I would say it's going to be impacted maybe slightly differently. It's going to be impacted obviously still by charge-offs. So whatever level of charge-offs we have, that will impact where our allowance moves up or down. Also, then just growth in the portfolio. So presumably the more growth that you have, the more you would need to provide for those new loans that are coming on your books. So I think it's not going to be terribly different than and what we've done before unless the economic outlook starts to change because that's also a piece of what we have to factor in is our economic forecasting and outlook for the future and do we think that the periods that we look out into the next few quarters do we feel like that the economic activity or the economic forecast is going to be more positive or more negative than it is currently?

14:56 Okay. That's very helpful. I will step back. Thanks. Thank you. And our next question comes from Michael Perito with KVW. Please pick me with your question.

15:11 Hey, good afternoon. Happy New Year, everybody. Hi, Mike. Hello. I want to start at the bottom of your release where you guys have kind of the business initiative section. I was reading through it last night, and the last comment that and a third-party vendor that you guys have engaged to kind of analyze your facilities and your in-branch customer experience. I was wondering, Joe, if you'd be willing to expand on that a little bit, I guess, kind of two-part question. One, you know, what specifically are they kind of analyzing with regards to like the in-branch customer experience? And then two, you know, I mean, do you have any kind of initial expectations of what you're hoping to learn or what you think you can learn from that analysis and how that might impact your decision-making going forward?

15:52 Well, I'll start, and Kelly Polonis is in here with me, and she may be able to add to it. You know, I think mainly it is, you know, we understand the, you know, kind of changing demographics and maybe changing expectations among our customer base, and we just want to make sure that we have a branched system, a banking center network that is, you know, structured and built to meet those expectations. So I think what they'll do is identify banking centers where we feel like we have the most untapped potential and then we'll focus resources on those banking centers and maybe make changes to them to the physical banking center that we think might help us to be able to serve our customers better.

16:48 The second thing we are interested in some expanding in some markets so that they may have some ideas that would help us there. Kelly, do you have anything to add to that? Second part of your question, Mike, I don't know that we – I mean, we kind of have some expectations, but probably before saying anything on this call, I would rather let them work for a little bit and then get back to us maybe on our – You know, second quarter or first quarter call, we might have something a little more concrete on that.

17:26 Okay, that's fair. Thanks for that, caller. And then I was curious just on kind of the construction growth opportunities. Obviously, that's been a proof of error for you guys recently. And I'm just curious, you know, as you think about the competitive dynamics of the market and being a bit more cautious, I was curious if that kind of lends equally to all the lines of businesses or – Are there certain businesses where you're still a little optimistic about growth and think there's maybe a higher velocity of opportunities? I was wondering if you could expand on that thought a little bit for us.

17:59 No, I really wouldn't say so. I think what is going to benefit us is having the Atlanta and Denver offices that are – relatively new. So, you know, we don't have a lot of, as we've talked about before, we don't have big balances that are going to be paying off out of those offices, and we hope to be able to grow. I mean, I think that's going to be kind of across product lines. There's certainly going to be some construction loans made out of those offices, but hopefully some commercial real estate as well. We also... are hired in our Kansas City office, a couple of C&I officers from a competitor in the Kansas City area, and we're hopeful there, too. We're not going to try to have $400 million or $500 million in C&I balances by this time next year.

19:05 That's not the way we do things, but we do think over time we'll be able to grow in that area and grow profitably.

19:14 Okay. And then just lastly, on capital, you mentioned in your prepared remarks about the special dividend two years in a row, and I was just wondering if you could maybe give us just a refresher on kind of the board's view on capital at this point. I mean, it seems like, you know, obviously the hopes to drive, you know, low to mid single-digit organic growth and then maybe Payout, this special dividend to bump up the payout, give you some flexibility, but not let capital accumulate too materially beyond where you are today. Is that kind of a fair way to summarize it? Is there anything else you think that you would expand upon based on what I just said?

19:49 No. I think that's a pretty fair summary of it.

19:53 Okay. And then can you just remind us just the near-term appetite for share purchases and what's left on your current authorization?

20:02 Rex, do you have that?

20:06 I don't have that exact number, but it's over 400 and something thousand dollars shares. 400 and something thousand shares. Yeah. They're still left on the authorization. That's right.

20:19 Okay. And any change in kind of your view on that as a method of capital deployment or still just use opportunistically and selectively based on market conditions with the preference for the dividend at this point?

20:31 I think at this point a preference for the dividend and then and then we do view share repurchases as another potential use of capital just depending on returns and so forth.

20:47 Got it. Great. Well, thank you guys for taking my questions. I appreciate it.

20:51 Great.

20:52 Thanks, Mike. Thank you. And our next question comes from John Rodas with Jannie. Please proceed with your question.

21:00 Good afternoon, guys. Hi, John. Hi, John. How are you guys doing?

21:08 Rex, you mentioned in your remarks service charges were down a little bit.

21:14 Is there anything unusual in there? It seemed like a pretty big drop from the third quarter to the fourth quarter in service charges, and typically they're flat to up in the fourth quarter of the last few years.

21:24 Yeah, I don't know that it's all, it's not as much related to service charges, I think, as maybe it is ATM fees, so we kind of group all that together in one line item, but I would say that it's probably a net ATM fee so there's some expenses that are netted in there as well as just the gross fee income and so we saw a little bit less income and then a little bit higher expenses that related to it so the whole net of all that was lower net.

21:58 Yeah, we're going through a conversion of systems kind of the I guess the best way to describe it is a system that's in between the ATM and us and we're converting from our current vendor to a new vendor and there have been some additional fees vendor fees related to that conversion that net in those numbers and I think that conversion probably explains as much of it as anything We expect that conversion to be kind of completed during this quarter, hopefully during this quarter. So, you know, the second quarter of 2020 should be a little cleaner quarter on that line item.

22:50 Okay. And Rex, just another question on the core margin of 363. You know, if the Fed's on hold this year, do you think you've sort of seen a bottom in the core margin or do you think there's still some more pressure given loan pricing and so forth that you talked about?

23:09 There's a couple of pieces that play into it, obviously. If one month LIBOR goes down any further, we'll see a little bit of pressure from that. We've got about $1.5 billion of loans that are tied to one month LIBOR that reset every month. We also have whatever loans are paying back or maturing within any given period may or may not be, but they may be at higher rates than the new loans that we're putting on. One example might be, you know, we've been allowing our consumer auto business to run down quite a lot. And so, you know, a lot of those are maybe, you know, 5% to 6% type loaned rates. And so we're probably not putting as high a rate product back on in different categories maybe as those are.

24:02 Now, that's not a big dollar amount anymore because, you know, there's only $100-something million of that left. But that's the kind of thing that, you know, could play into it as well. Then on the liability side, you know, we'll do what we can to lower rates on non-time accounts. also the time accounts as we are seeing maturities happening on those over the next several months. Those CDs have been on the books for several months or maybe a year or more and they have a higher rate so presumably as we replace those with new CDs or they renew we'll see some benefit of lower rates on those. It's hard to predict exactly how it's going to play out but those are the drivers I think that will affect it.

24:51 I mean, I guess already this quarter LIBOR's down what I think like 10 basis points or something. So, I mean, just sort of reading between the lines, it sounds like probably a little bit more compression, all things equal, but maybe not the pace we saw this quarter or last quarter.

25:07 The thing, like as Rex said, I think the two big drivers of for us going forward are going to be the repricing of our CD portfolio versus the repricing of our fixed-rate loan portfolio. And, you know, you should – that over the course of the next year should improve our margin a little bit. But, you know, as Rex said – So many things are difficult to predict. It's difficult to predict credit spreads. If we replace a lot of variable rate, you know, 275 over LIBOR variable rate loans with 250 over LIBOR variable rate loans, we obviously lose spread.

25:59 So, you know, the competitive pressures, you know, we have an in-town competitor paying, I think, over 2% for CDs right now. it's kind of hard to predict those sorts of things. We do have some things that should be helpful and as you point out since we index our loans to LIBOR as opposed to Prime things tend to move regardless of whether the Fed is moving so LIBOR has crept down some and this quarter. And, you know, we're going to feel the impact of that, certainly.

26:44 Okay. Well, here's an easy question. Who do you think is going to win the Super Bowl? Well, that's obvious, isn't it?

26:53 Are you going to Miami? No, I'm not going. I'm going to watch it from the comfort of my own home. Okay.

27:04 Good times for people in Kansas City. Thanks, guys. All right. Thanks, John. Thank you, and I'm not showing any further questions at this time. I'd like to turn it back to Kelly Polonis for any further remarks.

27:17 Well, this concludes our quarterly conference call. We want to thank everyone for joining us today and enjoy the rest of your day. Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.