Great Southern Bancorp Inc (GSBC) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Great Southern Bancorp, Inc. Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your host today, Kelly Polonus, Investor Relations. Please go ahead.

Thank you, Sarah. Good afternoon, and welcome. I hope everyone is well. The purpose of this call is to discuss the company's results for the quarter ending September 30, 2020.

Before we begin, I need to remind you that during the course of this call, we may be making forward-looking statements about future events and future financial performance. Please see the forward-looking statements disclosure in our third quarter 2020 earnings release for more information. President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland, are on this call with me today. I'll now turn the call over to Joe.

Okay. Thank you. Good afternoon. I also would like to thank everybody for joining us today, and I hope everyone on our call is well, also. As we manage through the pandemic, now in its seventh month, we remain focused on the well-being of our associates, customers and communities. I believe our associates are doing a tremendous job of serving our customers through this difficult time.

As we said last quarter, we are actively working with any customers who may be experiencing financial hardships caused by this pandemic. While there is still a lot of uncertainty about the months ahead, we are ready to respond to the challenges produced by the health crisis and are in a position of strength to do so with our strong capital, earnings and liquidity.

I'll provide some brief remarks about the company's performance during the quarter, and then I'll turn the call over to Rex Copeland, who will get into more detail on our financial results. Then we'll open it up for questions.

As expected in this operating climate, our earnings declined in the third quarter as compared to the year ago quarter. Still, we achieved very good earnings of $0.96 per diluted common share in the third quarter. The primary driver of our earnings decline when comparing it to the year ago period were: number one, a higher loan loss provision, but 100% or almost 100% of that provision went to grow our allowance for loan losses. We had very low charge-offs during the quarter. We did have lower net interest income than the year ago quarter, I think, by about maybe $1.8 million or so. Over half of that, though, is attributable to the result or the effects of the sub-debt that we issued at the end of the second quarter.

We had higher noninterest expense, which also affected us, which included $1.1 million related to special bonuses for our associates. As I mentioned earlier, our associates are doing a tremendous job for the company. We know that this is resulting in unprecedented hard times for our associates. Many of our associates have school-age children and they are dealing with virtual schools. And some of our associates have spouses that have lost their jobs. So it's just very difficult. We can't solve all their problems. But we do want to show that we're in the boat with them, and that's what the special bonus was for.

Our performance metrics for the third quarter were good. Our annualized return on common equity, and I might add, very high levels of common equity, was 8.48%. Our annualized return on assets was 0.98%. Our annualized reported net interest margin was 3.36% and our efficiency ratio was 59.64%. Our commercial lending production did decline in the third quarter as a result of activity in our markets being a little bit slowed. Retail mortgage lending production has been very strong, continues to be very strong, driven by low interest rates. We typically sell the majority of the fixed-rate mortgages that we produce. Total gross loans, which include unfunded loan amount, increased $229.6 million since the end of 2019, but decreased about $11 million during the third quarter.

Outstanding net loan balances increased about $260 million from the end of the year and increased $14 million from the end of the second quarter. Our committed pipeline continues to be relatively steady and was about $1.2 billion at the end of September, a decrease of about $70 million since the end of last quarter. The unfunded portion of our commercial construction loans is about $715 million, a decline of $39 million from the end of June. I would remind you if you're interested in more information on our loan portfolio. We file a loan portfolio presentation each quarter, and I think our third quarter presentation was filed yesterday.

Asset quality is very, very strong. As of September 30, 2020, our nonperforming assets were $5.5 million. Total net charge-offs during the quarter were $63,000, as I said, almost exclusively on indirect automobile -- on our indirect automobile portfolio. We actually had net recoveries, I think, in the commercial category.

One other thing I would mention is our internal loan classification watch list totals. At June 30, 2020, our loans classified as substandard were $9.3 million and loans classified as watch were $73.8 million. At September 30, 2020, our loans classified as substandard were $7.5 million, and the watch category was down to $64.4 million. The decreases during the third quarter were due to 2 substandard loans that paid off and some payments received on watch category credits. As I mentioned earlier, we fully understand that the difficulties we are in right now will likely persist and will result in difficult economic conditions as well. So we have been increasing our allowance for loan losses. We've increased it by nearly $14 million since the end of 2019.

As a reminder, our provision for loan losses is currently under the incurred loss methodology. Had we adopted CECL on January 1, we would have put $11 million to $14 million in our allowance at that time. And I think our current expectation would be that at the end of the year, we would put a similar amount into our allowance. And as a reminder, that won't flow through earnings. That will be while cumulative effect of a change in accounting principle and will be a direct debit to our equity and a credit to the allowance.

Loan modifications. At the end of June, we had over $1 billion of loan modifications, that's down to $395.5 million. At the end of September, 70% of those are paying interest only. So the modification was to remove the requirement to pay principal for some period of time up to maybe a year, but all different times, really, 3 months, 6 months and then 7 to 12 months.

Our capital continues to be very strong, as I mentioned. From the end of 2019, our total common stockholders' equity increased by about $22 million in our book value -- tangible book value per share increased by $2.71. Our book value increased from $44.50 to $45 at the end of the third quarter. It was $44.50 at the end of the second quarter.

Our tangible common equity to tangible assets is very strong as well at 11.4%. During the quarter, we did repurchase 206,400 shares of common stock at an average price of $37.39 per share. Additionally, we paid a $0.34 per share dividend. In spite of the obvious economic challenges caused by COVID, we expect that we will continue to operate profitably albeit not at 2019 levels, and we currently anticipate that our regular quarterly dividend can be maintained for the foreseeable future.

Our Board of Directors has approved a new stock purchase program of up to 1 million shares and we may continue to repurchase our common stock over the next several quarters if conditions warrant. The amount and timing of stock repurchases will be determined by the company in light of the overall capital and earnings levels, credit quality metrics and the market for our stock. And with -- and we'll always maintain open communications regarding our plans with our holding company and bank regulators. And prior to sort of recommencing our stock repurchase program, we did have those conversations with our holding company regulators over the course of about 2 or 3 weeks we were not required to seek the permission of the Federal Reserve in order to repurchase our stock, but we wanted them to know what we were doing. And at the end of those conversations, they said they had no objection to us repurchasing our stock in the manner that we were doing it.

So that concludes my prepared remarks. I'll turn the call over to our CFO, Rex Copeland at this time.

Thank you, Joe. I'm going to start today by speaking a little bit about net interest income and margin. Our net interest income for the third quarter of 2020 decreased about $1.7 million to $44.2 million. That compares to about $45.9 million for the third quarter of 2019. The net interest income was affected negatively by, of course, the Federal Reserve significant rate cuts that happened in March. We also had some additional lower earning assets, the SBA's Paycheck Protection Program loans, some investment security purchases and also increased balances that we hold at the Federal Reserve and cash and cash equivalents, and then also, more recently, in this quarter by the cost of the sub-debt that we issued in the mid-to-late June.

The core net interest margin, if you exclude the yield accretion from our acquired loan pools, was 3.27% for the third quarter of this year, that compares to 3.75% for the third quarter in 2019 and is the same, 3.27% as where we were in the second quarter of 2020. The decrease is a result of the same things I talked about previously. The one thing that is a little different when you compare Q2 this year to Q3, we did have about, on an annualized basis, about 8 basis points related to our cost of the sub-debt that we issued in June. So if you look at that on the core comparison, we were at 3.27% in Q2, 3.27% in Q3, but we had 8 basis points of headwind from the sub-debt cost. So we said on previous discussions and filings that rate cuts would negatively affect our net interest income and margin in the near term because we have a lot of loans that are indexed to LIBOR, but over the course of the next several months and a few quarters, a lot of our liabilities, our time deposits and some of our non-time deposits would reprice lower. And that, in fact, is what we've been seeing in the last quarter or two. If you look back and see where our cost of interest-bearing deposits was at second quarter compared to third quarter, our third quarter number was 21 basis points below where we were in the second quarter, and we were 62 basis points lower than we were in the fourth quarter of 2019. So our deposit costs continue to come down, and we anticipate based on maturities that are coming up in the next couple of quarters that we will continue to be able -- assuming rates stay where they are right now, we would continue to be able to reduce those deposit costs, maybe not quite as rapidly as we did in the last couple of quarters but we still should see some improvement there on the cost of funds side.

We are still having a little bit of impact, positive impact, on our net interest margin and income related to the yield accretion on our FDIC acquired loans. That impact in the third quarter this year was about 9 basis points. We've got about $2.9 million remaining in the unaccreted portion that's going to come into income over the next several quarters. About $930,000 of that should come into income in the fourth quarter this year.

Noninterest income for the quarter increased about $811,000 to $9.5 million when you compare it to the same quarter in 2019. A lot of that increase came in the form of gain on loan sales. Joe mentioned earlier, we originated a lot of fixed rate single-family loans. We typically sell those loans in the secondary market, and our gain on sale was about $1.9 million higher in Q3 this year compared to the same quarter a year ago. So quite a lot of originations there and income derived from that as we sold those loans.

Service charges, debit card fees, ATM fees, we continue to see a decrease there compared to the prior year, about $927,000 this quarter compared to the year ago quarter. We're seeing it kind of across a variety of things. Overdraft, insufficient fund fees are lower. Customers are not using those services as much as they were, so our utilization of that is down some.

A little bit of probably also in the second and third quarter this year, we were pretty proactive in waiving fees and things like that for customers as part of things that were going on during the pandemic. And I would say, in the middle or late part of third quarter, we're probably not waiving as many fees and things like that now as we were earlier in the year. So I think toward the end of the third quarter, that fee income sort of picked up a little bit from there.

Also, we've seen a little bit less usage and income from our debit card and ATM fees; that may start to again expand too, but we kind of saw a little bit of a lull there in the middle of the year for that.

Other income decreased actually compared to a year ago quarter, about $442,000. We had a larger amount of originations of interest rate swap deals with our loan customers in the year ago quarter compared to where we were this year. Those tend to be a little bit sporadic. We have them throughout the year, but not always at the same time and the same magnitude each quarter.

Noninterest expense. Noninterest expense increased $3.3 million to $32 million this year -- this quarter compared to the same quarter in 2019. The largest portion of that was an increase in salary and employee benefits. We were up $2.9 million compared to the prior year quarter. The largest part of that increase was, as Joe mentioned, the bonus that we elected to pay to our employees, that was about $1.1 million of the increase. We also had probably compared to last year, about $700,000-or-so higher level of compensation, both salary and incentive and additional people in the mortgage area. So that income, that I talked about a minute ago, we did have some offset to that in the form of compensation to the producers and the servicers in that area.

We've also had a few people out as part -- because they have got exposure to COVID or things like that. They were quarantined at home, and we're continuing to pay people in regard to that. And so we have some costs associated with that with people, part-time people, having to fill in. People that we normally wouldn't necessarily be paying, but if they are off because of quarantine, we do continue to pay them. So there's a couple of hundred thousand dollars or so probably in there, maybe a little more, that relates to that. So those are the main drivers. And then the rest of it, probably 3% to 4% of it is just from a year ago, normal merit increases and things of that nature.

And I think, too, Rex, we did have additional insurance costs because we no longer have the credit on our FDIC insurance.

Right. We had a full credit, I think, last year. And then this year, we had had a partial credit and we had to start paying the full amount again this year. So that's why the insurance cost was higher. Occupancy expense was also higher than it was a year ago, about $530,000. Some of that was depreciation. We rolled out some new ATM, ITM units late in the fourth quarter last year, and the depreciation on those is higher this year. Also, just some other repairs and maintenance things that occurred in the third quarter were $250,000 or so of it. So those are the costs that increased the occupancy line.

The one last thing in noninterest expense, expense on other real estate owned and repossessions, was lower by about $400,000 compared to the prior year period. We've been doing a good job, I think, in working down that foreclosed assets that we have. The repossessed autos are much lower level than they have been in the last couple of years. So we just got less cost associated with foreclosed real estate and with the repossession of the autos and the auto portfolio.

As mentioned before, our efficiency ratio for this quarter was 59.64% that compared to 52.63% in the third quarter last year. The higher efficiency ratio is mainly due to the higher level of noninterest expense that I mentioned and some of the reasons for that I just talked about.

Also, we had a small decrease in total revenue. Noninterest income was higher, but net interest income was a little bit lower. So despite these increases in costs, our noninterest expense to average assets remained at 2.34% for the quarter this year versus the quarter last year. Assets have continued to grow, as we've talked about, and the average assets for this 3-month period were about $550 million higher or about 11% higher than they were in the third quarter last year.

Just a couple of last things that I mentioned as we wrap up. Income taxes, we had a little bit higher normal effective tax rate in the third quarter 2020 and it's a little bit higher year-to-date. We've got state taxes that we're paying in various states and some of those are a little bit higher this year compared to previous years and probably where we're going to be in the future. The gain that we had when we terminated the interest rate swap earlier this year is flowing through in our state taxes and creating a little bit higher taxable income in certain states, some of which have higher tax rates than others. And so we're seeing a little bit higher effective rate there. The federal effective rates really are pretty much the same. It's just really being driven by state -- various state rates.

So we expect we're going to continue looking at that, refining our estimates for that throughout the year. But I think our effective rate for this year may be a little bit higher, more like the 9-month effective tax rate. And then presumably, it may we go back a little bit lower, more normal in 2021.

And then just one last thing, Joe mentioned already a little bit about CECL. Again, we anticipate based on what we know today that we will adopt CECL with our fourth quarter information. It will be retroactive, basically back to the beginning of the year and flow through our full year numbers. But we anticipate right now that would be the case that the CECEL adoption would occur as we finalize our fourth quarter financials. And then like Joe said before, we have previously discussed our CECL impacts in our previous filings. If you look at our June 10-Q, that's the most recent, I think, information there. And we don't think there's anything different right now materially than what we've talked about before. So we'll provide additional color on that during the fourth quarter information.

That concludes the prepared remarks we have. At this time, we'll entertain questions. And I'd like to ask our operator once again to remind the attendees how to queue in for questions.

(Operator Instructions) Our first question comes from the line of Andrew Liesch with Piper Sandler.

So just wanted to focus on expenses right now, a little bit higher this quarter than I was forecasting. You guys had a pretty good run rate there below $30 million. It seems like maybe some of it was affected by the mortgage business this quarter. But is this like that the new run rate we should be using? Or do you think it's probably close to that $30 million level?

Well, I mean, $1.1 million of it was this special bonus. And so that's -- you need to back that out, I think. The other costs, I mean, the other -- there's some other COVID costs that relate to supplies and cleaning and equipment and that kind of stuff, and that's going to be with us for a while.

And Rex, -- that probably $350,000 of our costs during the quarter were payments made to quarantined employees. Those costs will probably continue until we get out of the pandemic. I mean, I think the 2 things that could adjust, that seems to me is the $1.1 million will adjust, as Rex said. And then we did -- our mortgage-related compensation is up $800,000, I think, from -- or $750,000 from where it was during the third quarter of 2019. So you back those 2 numbers out or you normalize the mortgage and you back the $1.1 million off, and yes, you are at $30 million, but our mortgage volume continues to be strong. So you don't -- it's hard to see that changing as long as our mortgage volume remains strong.

Okay. That's helpful. And then around the margin, it sounds like still some good opportunities on the funding side to improve some costs there. What are you seeing on yield pressures right now? And is the funding cost benefit? Is that actually more than what you're seeing on the yield side right now?

Probably -- I mean, I think the funding costs are coming down a little bit more. We have had a little bit of our loans repay. A lot of those are typically maybe at higher rates than the new loans that are coming on. So we have seen a little bit of decline in the yield on loans. I mean, if you look at our -- in our press release toward the end, I think on Page 19, you can see for the quarter what our average yields and costs were. And then the first column there, we give you a yield and cost rates as of 9/30. So those are going to be the point in time numbers. And you can kind of see from there where the yields are on different asset classes and then on the liability side. And you can see on deposits, our 9/30 cost of deposits, is 67 basis points for the quarter. It was 79 basis points. So clearly, we anticipate we're going to see those costs come down a bit more.

The other area is probably not going to change much. I mean the subordinated notes, those are fixed rate. And the sub-debt is floating, but it's tied to LIBOR and LIBOR hasn't been moving around too much. So the reduction on the funding side is going to come on the deposits. And then on the loan side, the only thing that you don't see in there that the yield that we give you on the loans does exclude on the -- at the point in time, does exclude the yield accretion. So in the third quarter, that was 9 basis points of benefit. So you can kind of analyze that and say that, "Well, maybe that yield is a little bit higher than what we show here or will be." But it still is going to come down a little bit from where we were probably.

So 9 basis points is in the 3 months ended September -- the early number, but it's not in the point in time.

Correct. So we'll continue to see -- I mean, we've been -- we probably have between $100 million and $125 million a month of CDs -- time deposits that are maturing. And I think those probably have a weighted rate of somewhere around [1 40] or something like that. So we're replacing those at substantially lower rates than that. But it's just at $100 million, $125 million a month, it takes a little time for it to work through, like we said. So we've got probably 6 months of that kind of stuff already through the pipeline, and we've got 6 to 9 more months probably of time deposits that will roll off that we'll be able to reprice down.

(Operator Instructions) Our next question comes from the line of Michael Schiavone with KBW.

So fee income, and in particular, mortgage sales were really strong in the quarter. Can you just share some color on the mortgage pipeline going forward as well as your outlook for fee income, in general?

I mean, I think we're still originating quite a lot of mortgaged loans and we've got quite a few commitments out there.

Do we have a mortgage pipeline in our pipeline numbers?

Trying to look back and see if we've got that commitment number in here. Yes. It's about -- well, it's lower here -- I'm sorry, it's a little bit lower than it was in the previous quarter in, but it's still like $94 million in commitments that are not closed. We had a couple of quarter ends that were higher than that, but substantially higher than we were a year or 2 ago. And I don't -- I mean, I haven't seen or heard anything that leads me to think that the fourth quarter is going to be much less than the third quarter. Yes. I mean, we still -- I think we've still been very busy in the mortgage group, and I think they are still producing quite a bit of new loan commitments. So I don't know, I mean, we get to the very end of the year around the holidays, maybe it will slow down a little bit for that. So we may see a little bit of slowdown late in the quarter, but so far through the first part of the quarter, not really much change.

All right. That helps. And then the release noted some initiatives the bank is making towards modernizing and consolidating branch and office space. When you review your overall footprint, do you see further opportunity for like a larger scale rationalization of offices or branches?

I don't really think so. I mean, there may be -- keep in mind, we probably close, what, 25% of our branches over the last 4, 5 years.

It's 35 branches.

Yes, maybe more than that, maybe 30% or something. So yes, there could be further consolidation, but it would be 1 or 2 banking centers here or there. I don't think there will be kind of large wholesale changes. Now that's with customer behavior as it is in 2020, if that continues to change and people start accessing banks for -- they do access us in a number of different ways, but we found that for big transactions, borrowing money, opening deposit accounts, those sorts of things, they like to come in and do that in person. And so long as that is the case, I don't know that there will be large-scale rationalization.

Okay. Last question. So capital is pretty healthy levels, and you guys have actively been buying back shares and you refreshed your repurchase program. But can you just talk about your capital allocation priorities in terms of M&A, buybacks, dividend, organic growth, et cetera?

Well, I mean, I think we see the ability to continue to pay our dividend. Obviously, we're going to, to the extent we can grow, we want to grow, we think we can grow a lot, and that would certainly not impact our ability to pay our dividend. The third priority among those would be buying our stock back. And I think we would rather buy our stock back at 80% of the book or 90% of book, certainly than buy somebody else's stock at some multiple above book. So that's kind of how we would prioritize.

Thank you. We have no further questions in the queue at this time. I would now like to turn the call back to Mr. Joe Turner for closing remarks.

Well, we appreciate it. As I said earlier, we appreciate everybody being on the call today. We look forward to talking to you after the end of the year. And hopefully, we will have a President and have a vaccine and hopefully think we'll be looking up. Certainly, I hope everybody has a wonderful and healthy holiday season, and we'll talk to you in about 3 months. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.