Great Southern Bancorp Inc (GSBC) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Great Southern Bancorp, Inc. First Quarter 2020 Earnings Call. (Operator Instructions) At this time, I would like to hand the conference over to your host today, Ms. Kelly Polonus. Ma'am, please begin.

Thank you, Howard. Good afternoon, and thank you for joining us for our first quarter earnings call. The purpose of this call is to discuss the company's results for the quarter ending March 31, 2020.

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 the forward-looking statements disclosure in our earnings release.

President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland, are on the call with me today. Before I turn the call over to Joe to discuss our first quarter performance, we want to take some time to recognize that this is an extremely difficult time for everyone. And our thoughts are with those who are most affected by COVID-19, especially those on the front lines of this crisis.

This afternoon, we'd like to take just a few minutes to share some of the ways our company has responded to the to COVID-19 pandemic. As we manage through this very uncertain and challenging time, we are highly focused on ensuring the health and well-being of our associates providing safe, uninterrupted service for our customers and supporting the communities in which we live and serve.

In January, we activated our pandemic response plan and, of course, continued to monitor and respond to the effects of the rapidly changing environment that we're all in. By the end of the first quarter, the majority of our markets were under a stay-at-home mandate, resulting in a sharp reduction in economic activity. To protect our associates and customers, we follow CDC guidelines and governmental directives and instituted social distancing practices, including drive-through service only in our banking centers, department team splitting with portions of each team working from disaster recovery sites, and we have about half of our nonbanking center associates working from home at this time. We are extremely proud of our associates and how they have responded to this crisis. Their resilience, their can-do attitude, their compassion are greatly appreciated and so evident each and every day as we're serving our customers.

To support our associates during this time, paid time off and other benefits were enhanced and implemented. A few of these included, for our part-time associates, for the first time, we are awarding them paid sick benefits. Associates -- any associate that's placed under a restrictive quarantine due to the coronavirus will receive full pay. A few weeks ago, the company rewarded all full-time and part-time associates with special pretax bonuses of $1,000 and $600, respectively, to show our support.

For our customers, we are as focused as ever to serve their needs and provide uninterrupted service. Our banking center drive-throughs are open normal hours, and our customers have ready access to online and mobile banking services. Our ATMs and ITMs, telephone banking and online account opening. We understand that some of our customers are experiencing financial hardships due to the pandemic. We are actively reaching out to our customers in assisting them with loan payment relief and loan modification options. For our depository customers, certain account maintenance and service fees are being waived or refunded.

The company has been actively utilizing the CARES Act stimulus package to assist consumers and businesses. For instance, our teams springing to action very quickly a couple of weeks ago to participate in the FDA-administered Paycheck Protection Program or PPP, which provides emergency financial support to small businesses using federally guaranteed loans.

Due to the overwhelming national demand by small businesses, the FDA announced just last Thursday, as we all know, that funds available in the PPP were exhausted. At the time of that announcement, Great Southern had secured FDA funding for 860 small businesses, representing more than 12,000 employees, totaling approximately $104 million. Regrettably, we had several hundred more PPP applications being prepared for FDA approval at the time the funds ran out. Based on recent news reports, we are encouraged that Congress will authorize more PPP funding. If and when this does occur, we will promptly submit these applications to the SBA for approval and hopefully have the opportunity to help additional small businesses in our markets.

To help with the negative impact of COVID-19 in our communities, in March, we quickly committed up to $300,000 to address food and security and other critical health and human services needs. The funds have been distributed already to agencies serving Great Southern local markets across our 11-state franchise. In the coming months, we know there will be many more challenges coming our way. Our company will continue to respond with the same resolve and deep commitment to our associates, customers and communities.

With that, it's my privilege to turn the call over now to Joe Turner.

Okay. Well, thank you, Kelly. As Kelly said, as we navigate the uncertain and unprecedented COVID-19 times, our company is highly focused on ensuring the safety and well-being of our associates and customers. And we also want to provide our customers with uninterrupted and quality service. I want to publicly thank our nearly 1,200 Great Southern associates for their tireless work and resilience during this time. I'm so proud of our team and their response to this crisis. As always, 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 a little more detail on the income statement and the impact of COVID-19 and other activities.

Our underlying earnings for the first quarter were sound. We earned $1.04 a share or almost $15 million. The impact of the COVID-19 pandemic did cost us about $0.08 per common share in the quarter. In addition, our earnings were negatively impacted by additional loan loss provision, which I think can also be attributed to COVID-19. Performance metrics from the quarter, annualized return on common equity was 9.93%; annualized return on average assets was 1.2%; our margin was 3.84%; and our efficiency ratio was 58.91%.

As far as loans, our loans did grow by $41 million during the quarter at an annualized rate of, I think, pretty close to 4%. Our committed pipeline also grew during the quarter by about $81 million. I would say, though, that loan activity, particularly in the second part of the quarter, maybe that loan activity which occurs before a loan becomes committed and shows up in our pipeline has slowed.

Talking about customers requesting loans, loan officers bringing requests into the loan committee definitely has slowed. Through March 31, 2020, credit quality remained very, very solid, continues to be solid. Charge-offs were $237,000, and we have historically low levels -- continue with historically low levels of classified and nonperforming assets. With the likelihood of difficult economic conditions ahead, though, we did increase our allowance for loan losses by $3.7 million.

We have modified a number of credits since the impact of COVID-19 has been felt. We've modified 257 commercial loans with a total principal balance of $608 million. And 1,163 consumer loans and -- consumer and mortgage loans with balances of $48 million. About 70% of those modifications were just relieving the customer the responsibility of making a principal payment for 3 months. So that's primarily what we've done. Those modifications, the categories they relate to and kind of generally what the modification was, there's a pretty good description of that activity in our earnings release.

Our capital continues to be strong. Our capital did -- our stockholders' equity did increase by $11 million to $614 million during the quarter, 12.1% of total assets. I think our tangible equity to tangible -- tangible common equity to tangible assets is about 12%. And during the first quarter, we did repurchase about 184,000 shares of common stock. Those of you that are very familiar with our company know that, that repurchasing our common stock at opportune times, at the right time, has been an important part of our strategy since we went public in 1989. Now while we haven't formally rescinded or stopped our stock purchase program, I think our activity in that area will be very low, if any, at all, during the second quarter.

Finally, before I turn the call over to Rex, I want to make a brief comment on the company's near-term outlook. In spite of the obvious economic challenges posed by COVID-19, we expect that we will continue to operate profitably, maybe not at the level we saw in 2019, but continue to be profitable and also continue to pay our quarterly dividend for the foreseeable future. We have built a very strong capital position over the past several years, and we've built it for times just like these. And times like these are why we've got the capital we do because we think it will enable us to operate very well during a difficult environment.

We certainly understand that we are facing a number of challenges. The entire banking industry, I think, is facing a number of challenges, many that we don't even recognize yet maybe. But we think like in other tumultuous times, we have the financial flexibility, the technological capability and the human resource capability so that we are positioned and ready to work through whatever comes our way.

That concludes my prepared remarks. I'll turn the call over to Rex Copeland at this time.

Thank you, Joe. I'll start by just talking about a few things that we highlighted in the first page of our earnings release related to COVID-19 expenses and things of that nature. We kind of talked about some of these things in Kelly's comments earlier, but we did have a onetime special employee bonus that we paid and that was about $1.1 million. We also had the contributions that we mentioned, which was about almost $300,000 in the first quarter. And then we also had some other expenses, just the kind of normal things you would expect with cleaning services and supplies and equipment and different costs and things like that, which was about $103,000. So all that added up to, we think, expenses of roughly about $0.08 per share of kind of COVID-related items that were in our noninterest expense categories.

We also mentioned that we delayed the adoption of CECL in the first quarter. We expect that, obviously, under the CARES Act and the guidance from the accounting professionals and standard setters that we will enact or adopt CECL later in this year, either at the end of the year, retroactive back to January 1 or after the state of emergency has been lifted.

Some possible impacts going forward we also mentioned in our earnings release, I won't go over the details of those here, but just refer you back to the items that we mentioned maybe on Page 4. Obviously, all companies and certainly all banks are being impacted by the COVID-19 pandemic. And we expect in future periods that there may be some additional noninterest expenses related, perhaps some effect on our fee income, depending on activity and usage of some of the items, point-of-sale and things like that. So there's various things that we did mention regarding this.

I'll talk for a minute about net interest margin. It held up pretty well actually in the first quarter. We had a net interest margin, as Joe mentioned, of 3.84% compared to 4.06% in the first quarter of 2019. And that also compared pretty consistently with our fourth quarter '19 margin of 3.82%. The decrease from the prior year first quarter was really primarily a result of decreases in the average yield on loans and other interest-earning assets as we -- during March, had significant market rate cuts than in interest products.

As we mentioned also in our earnings release, and we've talked a little bit about our balance sheet swap that we had in the past. We mentioned it in our 10-K filing as a subsequent event, but we did terminate the $400 million notional balance sheet swap that we had in effect. We received a payment of almost $46 million as the value on that. That has -- net of -- net of deferred taxes, that has gone into our equity section as kind of the unrealized gain section. It actually is now basically realized, but it sits in the AOCI section of equity. That is going to be accretive to income and to interest income on loans in future periods. And we expect that, that will be approximately $2 million to interest income per quarter through the original termination date, which is in 2025.

The core margin, which excludes the impact of additional yield accretion from our FDIC-acquired loans. For the 3 months ended March 31, 2020, decreased by 25 basis points compared to the first quarter of 2019. Really, again, mainly due to the much lower market interest rates from a year ago, which caused lower LIBOR interest rates and generally resulted in just lower yields on loans and lower yields on our other interest-earning assets.

The net interest income dollars, however, were basically unchanged from the most recent quarter and up a bit from a year ago quarter, they increased about $333,000 in Q1 2020 versus Q1 2019.

A few items in noninterest income that we pointed out, noninterest income was really not that much changed overall from the previous year quarter. We did have -- we did recognize $407,000 decrease in the net fair value of our back-to-back interest rate swaps. That has nothing to do with the with the balance sheet swap that we terminated, but relates to the back-to-back swaps that we have with some of our loan customers. And so with falling interest rates, the net fair value of that position, dropped by about $400,000 in the quarter.

Service charges and ATM fees decreased about $200,000, mainly related to the expenses that are related -- or netted in with our ATM fee income and the conversion to a new debit card processing system, which we completed in the first quarter of 2020. Net gains on loan sales increased from the prior year. We did have more origination and sale of fixed rate single-family loans in the current year period versus a year ago. And then other income, overall increased about $226,000 compared to the year ago quarter. We did have some fairly significant income recognized in this year's quarter related to some swap -- origination fees on swaps with our loan customers, and also some termination or exit fees on some certain tax credit partnership investments that we've had in over several years. And then that was somewhat offset by some gains and recoveries that we had in the first quarter last year related to some FDIC-acquired items.

And the next thing, noninterest expense, I'll talk about briefly. We're still tracking well on our core expense containment, I think, and our efficiency. Noninterest expense did increase $2.3 million to $30.8 million compared to the year ago quarter. A lot of it we talked about related to COVID-19 items in this quarter that were recognized. We also had a little bit higher expenses in this year's period related to depreciation of some new ATM, ITM, machines and operating software that we had to upgrade and implement during the fourth quarter last year, which is now being written off and depreciated in 2020.

The efficiency ratio, I think Joe mentioned before, was at 58.91%. That's a little bit higher than it was in the first quarter last year at 54.74%. The higher efficiency ratio this year was really primarily due to the increase in noninterest expense that we talked about. The company's ratio of noninterest expense to average assets was 2.48% for the period this year versus 2.41% for the 3-month period in 2019.

Next, I'll mention a little bit about allowance and provision. As we said earlier, we had a provision for loan losses in the quarter this year at $3.9 million. That is related only to $237,000 of actual net charge-offs in the first quarter. So that resulted in an increase in our allowance for loan losses of $3.6 million in the first quarter this year.

One last thing I'll mention is liquidity. We did have a good strong liquidity position at the end of March. We had cash and unpledged securities of about $400 million total. In addition to that, we had about $1 billion available on our secured line at the Home Loan Bank. So we had that much capacity that we could borrow there. And we also have capacity to add broker deposits, if needed.

In the first quarter, our deposits increased about a little over $200 million. $125 million of that or so was various brokered deposit products. Checking was up $62 million and retail CDs up $32 million. So we have seen in the last month or 2 some customers withdraw relatively minor amounts from their accounts. But since the end of March, our deposit totals have increased in total.

Some of the increase is related to the stimulus funds that were deposited a week ago into customers' accounts. And so we do expect that some of these -- the increases in deposits will roll out these accounts over time.

That concludes our prepared remarks. At this time, we'll open it up for questions, and let me ask our operator, once again, to remind our attendees how to queue in for questions.

(Operator Instructions)

Our first question or comment comes from the line of Michael Perito from KBW.

I wanted to maybe start on the credit side. I appreciate the commentary in the remarks. I was wondering if you could dig a bit deeper for us and let us in your heads a little bit in terms of how you guys are thinking about some of the qualitative factors that are driving your credit model so we can kind of compare it to some of our economic assumptions and see where the provision might trend as we make our changes to our economic outlook.

Go ahead, Rex. That's kind of an allowance question. You want to take that?

Yes. We were talking about that. Yes. So as we said, we're still using the incurred loss model right now. And so we have to take into account with that as well, qualitative factors and things of that nature. So at the end of March, obviously, things were different in the world than they were at the end of December. But we are monitoring -- again, we talked about our modifications, things of that nature. Delinquencies, really, at the end of March were not elevated. And so I think we're going to know a lot more as we work through this quarter. By the time we get to the end of June, hopefully, we'll have a better feel and a better sense of where things are going with our loan customers. I mean we've got a lot of stimulus coming from the Federal Reserve and the Treasury, so there's money being put into the hands of some of our customers through various programs. Hopefully, additional funding's going to come out today or sometime this week regarding some of the small businesses. And so it's a bit -- just right now, it's somewhat uncertain and unknown. Kind of where the next couple of months are going to take us with some of our customers. We feel like we're in a good position, as we mentioned, on the schedule of modifications that we put in the earnings release. We think we've got pretty low loan-to-value percentages in there. We feel like those customers are strong customers. And so that's -- we have to look at that, and we will continue to review that over the next couple of months here and kind of see where we go.

Mike, I might just add a little bit to what Rex has said. The incurred loss model or our qualitative analysis was a little bit more general. We -- as Rex said, we have deferred CECL, but eventually we'll be retroactively using CECL back to January 1, 2020. And the driving factor we found for most of our loan categories, the driving economic factor is unemployment. So that will be something that is really critical to our CECL analysis. But part of the reason we did not implement CECL is because we really don't have a feel beyond the second quarter as to what unemployment will look like, number one. And number two, the question you have to answer -- or the question you're kind of driving at, with CECL or any other allowance model, is if the model's looking at unemployment impacted losses and in this very respect in prior periods. And so you're trying to use prior period information to estimate future losses. And as Rex said, the unemployment rates that are a result of COVID-19 are going to be so much different than what we've seen historically, both in magnitude, but also in the -- because of the government stimulus that is coming in to sort of hold people harmless while we, I guess, suspend the economy in animation and as we try to get people back to work. So eventually, I think unemployment is going to be the critical piece of our CECL analysis, though we're not using CECL yet.

That's helpful, guys. And -- but I guess, is it fair to think that, given what we know being -- at April 21 and with most of the stay-at-home orders now extending through at least end of the month, maybe even mid-May and later in some areas, that the second quarter will likely have a greater provision under the incurred loss model for you guys versus some of your peers that adopted CECL, where the first quarter provision was a little heavier, is that an okay way to think about it? I know there's a ton of variables in there. But just generally speaking, do you guys have any disagreements with that?

I think that's a reasonable way look at it. I mean, Joe, go ahead, if you want to -- if you got a comment there.

No, go ahead.

I think, Mike, I would say, yes. I think that's reasonable with the big caveat that there are so many variables, it's really hard to say.

Okay. And then on -- just on loan growth, there was some decent activity in the first quarter, any initial indications about how activity is kind of trending in the second quarter? And with everything going on, do you expect that to take the step back near term here just given kind of -- my guess is being slower economic activity in your markets?

Yes. I think I tried to point to that in my comments, and I don't think I did a very good job. The -- what we generally point to is our pipeline. And our pipeline is pretty much as it's been. But pipeline sort of includes all loans that we've committed on. And so there's a pretty big process prior to us actually making a loan commitment. And I think that the activity that we would see earlier on, like customers requesting credit, loan officers requesting loan approvals by our loan committee and so forth, that sort of activity has definitely slowed down. And so I think we'll see that start to reflect itself in our pipeline maybe in the second or third quarter, certainly in the second half of the year. Now I would say, and I don't know if this will continue, but it does seem that early payment -- prepayment activity has slowed down. So that's going to affect positively overall loan totals. But I think origination activity based on what we're seeing right now, is eventually going to slow down.

So we did get a substitute with the PPP loans activity, we've got $100-plus million of that going in here. So on a temporary basis, at least, we're going to have that in there.

Yes. And that was kind of my last question, Rex. Just for the margin, do you expect -- should there be a benefit in the second quarter from the PPP fees that flow through NII? And then kind of compression, therefore, after assuming that program, works as it should and the loans are forgiven because they're used for payroll. I mean, is that a decent way to think about the next couple of quarters? Numbers aside, just trajectory-wise? Or is there something else we should be thinking about?

Yes, there could be a little bit of positive income there because we'll get the fees -- we will defer the net fees. But as loans pay off or are forgiven because they met their criteria and the loan goes off our system, any remaining fee would just be taken to income at that point. So there could be a little bit of a pop from loans that actually are paid off early or things of that nature. That will be over the next several months. So in the second and third quarter primarily probably is where we would see that. Another thing that we've had going on in the first quarter, 1-month LIBOR rates stayed a little bit higher. I mean, they didn't drop as dramatically as Fed funds rates did, and we have a lot of loans that are tied to 1-month LIBOR. So we did continue to see less negative impact, I'd say, in the first quarter. It seems like in the last week or so, LIBOR rates have started to come down a bit, more normalized probably. So we'll see a little bit of negative impact there. But we're hopefully offsetting that -- quite a bit of that with deposit costs that are coming down as each month passes, and we have time deposits that mature and renew at new lower rates and things like that. So hopefully, that's going to help offset a good chunk of the LIBOR drop that may happen in the second quarter.

Our next question or comment comes from the line of Andrew Liesch from Piper Sandler.

I just want to follow-up more on the credit here. With the loans that you -- deferred, especially on the -- more so on the commercial side, but what's been the tone from these customers. Are -- and what -- I guess, what's been the tone of all your conversations with your commercial customers? How do they feel about the current situation? And what are their biggest concerns.

I don't think that, generally, the request for deferrals were -- I don't think it was a sign of weakness by our customers. Really, I think it's just a sign of, in general, they said, "We can pay you, but we would prefer to conserve cash." If they're health care customer, they don't know if they're payments from -- if they're ultimate payers, the government, they don't know if those payments will slow down. Obviously, retail, strip center, neighborhood center kind of landlords are having issue with their tenants, and they want to be able to work with their tenants with respect to rent. So I don't think it's -- and certainly -- we certainly don't see panic among our customer base. It's more -- I think a lot of our customers wanting to be proactive and conserve cash in what they feel like could be a bit of a difficult time going forward.

I think, obviously, Andrew, I'm sure you've been on other calls. The hotel, motel industry has been hit hard. The occupancy rates are 10% or 15%, probably some hotels lower than that. So obviously, that's not a sustainable occupancy rate for most hotels, and they're hopeful that as we get a therapeutic that works for COVID and as we work toward a vaccine and the stay-at-home orders are lifted, their occupancy rates will raise.

Our next question or comment comes from the line of John Rodis from Janney.

Rex, just back to the PPP loans, what is the average fee on those? Is it around 3%? Or...

I think it's a little bit above 3%. Yes, just a little bit above 3%.

Okay. Okay. And then just, Rex, as it relates to the core margin so it was up, like 5 basis points linked quarter. And then on the swap, you pick up, what, roughly $400,000 from this quarter to the second quarter? I mean -- and then given your comments on 1-month LIBOR pulling back some, if we exclude the impact of the PPP fees, do you think directionally the core margin is down some? Or just directionally, can you speak to that?

I think there'll be pressure on it. It's all going to depend, I think, John, on how much and how rapidly the 1-month LIBOR rates move. And we do have a lot of loans that have interest rate floors. So the floors will help us to some extent as rates move lower, too. So it's hard to tell you specifically right now, here's what I think directionally is going to happen. I would say, though, that we will probably see -- I mean just my belief is that we will see LIBOR rates move a little bit lower, so we'll probably have some pressure related to that. But like I said, we also are going to have a fair amount of deposits that are going to reprice lower as well as CDs mature and things like that. So I think, and I can't really tell you specifically, but I think that we've got a decent chance that we would be able to maintain our level reasonably. But I think there's probably going to be some negative pressure toward it, depending on how LIBOR rates go.

The thing I would add to that, John, we have $2.5 billion of checking accounts, and that's actually up a fair amount from the end of the quarter. And by -- I guess, I should say, non-time accounts. And we have not seen a big decrease in the cost of those, yet, isn't right, Rex?

That's true. We see, in the most recent months, it also has started to come down a bit.

Yes. And so if that trend continues, that's going to help us, too. If we start to see the cost of those accounts slide down some, that's going to help us. But that's dependent on competition, to a large extent. We don't want to lose the customers, lose the depositors. So we're kind of involved in a balancing act here.

Joe, has that been across the franchise? Or is that a few particular markets, I guess, as far as the pricing?

I feel like it's maybe a little bit more across the franchise. I'm sure, Rex, do you have a feel of some of our markets more competitive than others?

I would say, for a while at least, St. Louis was a little more competitive, maybe Springfield was competitive, but I think it's pretty much across generally the markets now. And that level of competition may have come down just a bit from where it was maybe 6 months ago.

Okay. Joe, maybe just 1 other question. I mean, obviously, back in '08, '09, you guys were fairly active, I guess, we could say on the FDIC front, -- [build] banks and stuff, and not that we know exactly where this -- how this plays out. But what are you thinking as far as potential M&A opportunities maybe over the next year, given where we're at right now?

Yes. I guess, obviously, we would be interested. And that's sort of why we've been since the early part of the 2008 crisis, we've been building our company so that we would be able to participate in consolidation that might occur at the time of the next crisis, and who knows whether this will be that crisis? Hopefully not. Hopefully, things will get back to normal pretty quickly.

But I think we're always going to be a more active acquirer in markets like this than we are maybe in the really high-flying markets. I mean, we're just more comfortable with our sort of economic analysis of either buying companies from the FDIC or potentially, we've never really done it, but potentially purchasing a bank on an open basis in this kind of environment where it might be less expensive and more compelling financially.

(Operator Instructions) I show no additional audio questions in the queue at this time, I'd like to turn the conference back over to management for any closing remarks.

Well, thank you, everybody. As John said, I hope that everybody will be safe and healthy, and we look forward to talking to you at the end of the second quarter. Thanks for being on the call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference call. This concludes the program. You may now disconnect. Everyone, stay safe.