Great Southern Bancorp Inc (GSBC) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Great Southern Bancorp Inc. Second Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Kelly Polonus, Investor Relations. Please go ahead.

Good afternoon and welcome. This is Kelly Polonus, Investor Relations for Great Southern Bancorp Inc. The purpose of this call is to discuss the company's results for the quarter ending June 30, 2019.

Before we begin, I need to remind you that during the course of this call, we could 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 disclosure in our second quarter 2019 earnings release. President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland, are here with me. I'll now turn the call over to Joe Turner.

Okay. Thanks, Kelly. Good afternoon, everybody. And I also want to thank you for joining our second quarter earnings call. As is typical, I'll provide some preliminary remarks about the company's performance and then turn the call over to Rex Copeland, who will go into more detail about the income statement.

We're excited about the way the quarter wound up. If you've had a chance to review the earnings release, you've seen that we did earn $1.28 per share and $18.4 million. We saw a good loan growth during the quarter. We further improved on our operational efficiency. We did experience a little bit of net interest margin during the quarter, which Rex will provide color around.

Some operating metrics that I want to highlight. Our return on common equity was 13.24%, our return on assets was 1.52%, our margin was 3.97% and our efficiency ratio was 54.5%. As for loans, we feel very positive about our loan portfolio. We've had good growth in 2019 so far. I think our loans are up -- funded balances are up $124 million from the end of last year, up $62 million in each quarter, I think. So nice loan growth so far.

Our gross loan balances are $42 million from the end of 2018. Our committed pipeline continues to be at about the same levels, so we continue to have a strong pipeline. I will say just anecdotally, it seems like to me things in the -- on the loan side are starting to tighten maybe just a bit. As I said, our pipeline's still strong, but there seems to be maybe slightly less deal flow than there was slightly fewer deals out there and so the competition is probably becoming even more significant.

Asset quality continues to be strong. We're coming off historically low levels. We've told you before that asset quality can be kind of lumpy, and we did add a $6.7 million relationship to our nonperformings during the second quarter and in fact, our relationship has -- during the first week of July has transitioned into other real estate. But this is a credit that we've had on our books since '07 and we've been watching it for some time. But even after adding this relationship to our nonperformings -- our nonperforming assets the total assets were still relatively low at 0.33%.

Our capital position continues to be strong. Our capital -- total capital or total common -- common stockholders' equity is $572 million or 11.7% of total assets. Our book value increased from $38.36 to $40.30 from the end of last quarter. The ratio of tangible common equity to tangible assets is very strong at 11.6%. We do want to point out that $32 million of our equity, it is GAAP equity but it's based on -- it's derived from unrealized gains on our available-for-sale securities portfolio plus the mark-to-market gain on our cash flow hedge. So as you think about our capital, you may or may not want to net that part out. We were pleased during the second quarter to declare a regular quarterly dividend of $0.32 per share. That concludes my prepared remarks. I'll turn it over to Rex Copeland and then we'll open it up for questions after Rex completes his presentation.

All right, thank you, Joe. As Joe stated earlier, we did see a little bit of compression in our net interest margin. The margin was 3.97% in the second quarter of this year compared to 4.06% in the first quarter this year and 3.94% in the second quarter of 2018. So compared to the 2019 first quarter, the compression in our margin was really caused primarily by higher average rates on deposits, a little bit on borrowings, but mainly on deposits and then it's just slightly lower yields on our loans due to LIBOR interest rates coming down just a bit in the second quarter.

The positive impact on our net interest margin from the additional yield accretion continued in the quarter. If you compare second quarter this year, second quarter last year and in first quarter this year, the accretion added 12, 10 and 13 basis points each of those quarters respectively to our net interest margin. Our net interest income dollars were up though from the year-ago quarter and in the most recent quarter. Net interest income for the second quarter of 2019 increased $3.7 million compared to the second quarter last year to a total of $44.9 million. And our net interest income was up about $300,000 from the first quarter of this year.

We continue to see growth in our assets, growth in our net interest income dollars but a slightly lower net interest income or net interest margin as a percentage.

One thing to note, we did record loan interest income of $568,000 in the second quarter related to the interest rate swap transaction that we did late last year. It was part of our ongoing interest rate management strategy to kind of help us mitigate any issues with falling rates that we might have. So again, under the terms of the swap, we were paid a rate of about 3.02% fixed, and then we pay a floating rate on that, which is LIBOR. So the rate most recently when it reached out this past month was 2.4%, so we do have a margin there that we -- spread there that we are receiving benefit of.

Like everybody else on the call, we are very interested in what the Fed will do on July 31 with their interest rate decision. We've indicated in past filings that we modeled various scenarios of rates up and down and then nonparallel and parallel shifts. We do believe that we'll -- falling rates will be modestly negative for us. We do have about almost $1.6 billion of loans that are tied to primarily 1-month LIBOR, some 3-month but they'll reprice based on LIBOR index within the next 90 days. So we do have a fair amount of our portfolio that is variable-rate tied to LIBOR. We will do what we can to manage the funding cost side and work hard to be able to reduce some of our costs as -- if and when rates fall on the -- in the market and on the liability side of the balance sheet.

Noninterest income for the quarter end decreased by $302,000 compared to the second quarter a year ago. Really the reductions were primarily in service charge, ATM fees, some commissions and then net gains on loan sales where we originated less -- fixed rate loans that we sell in the secondary market and more fixed-to-variable rate mortgages, which we generally retain in our portfolio. We did offset some decreases there with an increase in income related to new debit card contracts, which became effective at the beginning of 2019.

So we did derive some additional income from that. Noninterest expenses, I think we're still tracking well on our expense containment and operational efficiency. As Joe mentioned, our efficiency ratio earlier was at 54.5%. Noninterest expenses were down about $1.5 million from the second quarter comparison of last year. A big driver of this was lower expenses related to other real estate owned and repossessions. And that was the majority of the decrease related to write-downs in the prior year period on some certain of our foreclosed assets.

The decrease was offset a little bit by some increase as we had about $481,000 increase compared to a year ago quarter in salaries and benefits just related to additional staffing in various areas and the new loan production offices in Atlanta and Denver as well as other areas. And then also other operating expenses increased about $192,000. The majority of that, and we mentioned it in the earnings release, related to a pledge commitment that we made in our Sioux City, Iowa market for $250,000, it will cover a 10-year period for the work that they're doing to expand and sort of remake a portion of their downtown area with an Expo center and some other hotels and other businesses that are going into that area.

Again, as mentioned our efficiency ratio is 54.5%. That compared very favorably to the second quarter of last year in which the ratio was about 61.5%. So we continue to increase our revenues without a commensurate increase in our noninterest expenses.

Along those lines of efficiency, I'll talk about this real briefly a couple of business initiatives fairly small but the things that we did mention in our earnings release we got a couple of locations that we are -- have or will close, our Arkansas banking center has been consolidated into the Rogers, Arkansas office, and we also recently announced plans to consolidate our Ames, Iowa banking center into our office in Ankeny, Iowa that will be late third quarter in September. So I think that concludes all of our prepared remarks. So at this time, we can open it up for questions.

(Operator Instructions) Our first question comes from the line of Andrew Liesch from Sandler O'Neill.

So I just wanted to focus on deposit costs here. Looks like they were up about maybe 8 or 9 basis points this quarter, I guess are interest-bearing funding costs. Like what -- and I know you added some of the Internet CDs and CDARS in the first quarter, so maybe just the fourth quarter effective that is pushing up the funding cost. But what can you guys to right now? Have you lowered your offered rates right now to kind of mitigate the effect of the drop in LIBOR?

We have on some things, we've been working on some of that. We haven't lowered the majority of the rates probably. I'd say part of it is the -- also negotiating on CDs, we're negotiating at lower levels than we were maybe 2 or 3, 4 months ago. We were mindful of what competition is doing as well. Our home loan bank advance rates are down a bit. They're sort of tracking more along with the change in LIBOR. Most of our borrowings from -- well pretty much all of our borrowings from the home loan bank overnight-type borrowings at this time. So we're trying to kind of manage through this process right now. It seems like, I mean if you think about it, really the rates started to transition maybe a month or 2 ago. I don't think all of it's necessarily all filtered through yet, but I'd say that we are seeing as far as like on a month-to-month basis I think overall the cost of deposits, the growth in that cost is slowing compared to the change that we saw in the fourth quarter and first quarter and even into the part of second quarter of this year.

Okay. And then can you just make a couple of comments on the decline in deposits in the quarter, what drove that?

A little bit of it was seasonality. But I mean a lot of it is retail CDs. We continue to have a lot of competition in some of our markets with people running specials and things like that. And then some of it's just fluctuation in noninterest-bearing deposits, nontime deposits. But I'd say retail CDs are coming down some and then some of our interest-bearing and noninterest-bearing nontime deposits have also been fluctuating in there.

Okay. That's helpful. And then you guys have done a good job in expense control over the last several years. So I just take the $28.5 million or so and back out the OREO costs, maybe a little bit under $28 million. Is that a good run rate to you or could it be a little bit better than that, just with the branch consolidation?

Yes. The branch consolidation is not going to make a huge difference. I mean I can't tell you specifically on Ames, but I'm guessing our noninterest expense in Ames is probably in the 25,000 to 30,000 a month range, so that's not going to make a huge difference. I think we're doing all the right things on expense control right now. So I do think with our OREO balances going down, we should generally see the trends of OREO expense continuing to decline and that relates also to auto consumer loans too.

Yes, right, right.

Same thing. I think the quality of our automobile -- I mean the total of our automobile portfolio is shrinking, obviously and the quality of what remains is probably getting a little better. So overtime, I think the trend in that line should be somewhat down. I don't think there's a whole lot more we can do to really reduce expenses. Our focus is going to be to grow the company where we can, and so we'll maintain expenses so that we'll gain better leverage.

Your next question comes from the line of Michael Perito from KBW.

I wanted to maybe stick on the expense side of things for a second here and follow-up Andrew's question. We're seeing -- at least I'm seeing more and more of your peers kind of start to invest more heavily in technology and leadership as they plan for growth and whatnot. And obviously, you guys have done a nice job of keeping that expense growth fairly limited for almost 3 years now. And I'm just curious as you budget out into 2020 and think about that. I mean is there a point where it doesn't make as much sense to have the limited expense growth where there's investments that really need to be taking into account to kind of continue to grow the bank? Or are we not quite there yet? And is there still some things that you can do to kind of offset any investments you're making on a broader basis?

Well I mean, yes, I agree with the premise of your question, Mike, that not all expense is created equal and there are expenses that you need to have in order to invest in your bank. And good people, that's one of those expenses. And then you need to make sure you have attracted technological offerings, the kind of technological offerings that are attractive to customers. And honestly, I think we do. We are in the process of upgrading our online banking platform, and we have been improving our mobile platform too. So -- and we're not just guessing, we've actually surveyed our customers and surveyed our customers against other financial institution customers, and I think our customers seem to like our offerings but we are going to be investing in improving those.

So as you guys think out, I mean you basically have had an expense run rate annually in the $112-plus million range for almost 3 years now. I mean (inaudible) same this year. I mean do you think next year that realistically given everything going on in the industry today that, that number trends maybe a little higher? Or do you think there's still room to kind of offset what you're doing on the investment side with other corrections elsewhere within the company?

I would think significant to the extent we have significantly higher costs on our technological offerings, we're not going to be able to offset those somewhere else in the company. But I don't know, Mike, that that's going to dramatically increase our run rate. I do think it's probably reasonable to expect our noninterest expense to probably go up each and every year because of technology and other reasons. Part of the reason we've been able to hold our noninterest expense level is I think generally that OREO has trended downward and that's helped us to hold the overall level. But I think if you look at other things, our employee costs are up from where they were I think a year ago. So yes, I do think our expenses will probably trend up. And I think if we were to try to hold them at $112 million kind of run rate because of what that means for your people, because of what that means for your investment in technology, I think it would restrict our growth.

Got it. Very helpful. And just secondly, I wanted to ask on the margin. As I think about kind of where your core margin, excluding the purchase accounting, has trended, if I go back to '15, first few quarters of '15, I think you were in like the mid-to low 3.70s range. Today, you're in the 3.85% in second quarter, low 3.90s in the first quarter. But I mean the mix of the loan portfolio has changed a little bit, you have some higher yielding loan with the better construction mix. And then obviously, you're doing some stuff on this -- on the hedging side. As we think about where your NIM could can trend as rates start to move the other way here after benefiting from them moving up the last year but taking into account some of the things that you've done, how are you thinking about the core NIM trend over the next few quarters assuming the consensus economic outlook is reasonably accurate and we start to get at least 1 or 2 cuts in the Fed funds?

You need to take that one.

Yes, all right, so you're right, Mike. If you go back and look -- I'm looking at our schedule of net interest margin on a core basis here, we were, like you said, in the 3.70s, we trended down in 2016 and '17 into the 3.60s and 3.50s high 3.50s. We started back up again into 3.80s in 2018. It kind of peaked out I think here at 3.93% for a couple of quarters and dropped back just a little bit this time at around 3.85%. And I think if you look at our -- in our earnings release, we have our average balance and rate and yields table in there. And you can see for the quarter and year-to-date kind of what our spreads have been and what our margins look like. And at June 30 and again this is a point in time our spread was 3.51%. So for the quarter, our average spread was 3.64%. So it's a little bit lower, but the difference in there to get back kind of to the margin is going to -- and that 3.51% does not include accretion income. So that's excluding whatever accretion income we would look...

And the 3.64% does.

Right 3.64% does, that's right. So roughly 12-or-so basis points in there for that.

So roughly -- so in other words, what -- I think what Rex is saying is that our spread during the quarter -- during the second quarter it was roughly equal to our spread point in time when you had to normalize for. And to get from a spread to the margin I think what you have to do is take your -- the expense at which your average interest earning asset exceeds your average interest earning liability and multiply that by the rate on your average earning liabilities to get to where you might be. I think I agree with Rex. I mean that's probably the -- as you guys want to put together what our margin is, I think that's your best. I think that's the best tool you have is to use the point in time rates that we've given you and just calculate what you think it's going to be during the third quarter. Now I mean I think what we've told you is that we do think that interest rate decreases are going to be modestly hurtful to us. I don't think anybody expects it to be dramatic. But it's probably certainly not helpful and probably could hurt us slightly.

We've already seen some of the pain on the asset side with LIBOR moving down, so like I said before we've seen some of our overall loan yield come down a little bit. But if the Fed cuts, LIBOR's probably going to go down some more and so we'll continue to see perhaps some lower yield on our portfolio overall by a few basis points depending on the magnitude of the cuts and kind of what they say as far as anticipated future cuts or not.

Got it, helpful. And then just the last one. The tax rate in the quarter looked a little lower. Was that a result of that -- the onetime pledging expense or something of that nature? And we're trying to -- kind of where it's been for the last few quarters going forward or is there something else going on that we should be thinking about?

No, there wasn't anything particular that was flowing through there this quarter. I'd say it is just kind of normal generally. It is impacted a little bit by tax-exempt interest income and tax credit activities that we have as far as being able to utilize the credits in writing off the investments (inaudible). But I mean I think what we've said the rate for the full year, I mean if you look at the 6-month rate, that's probably in the ballpark of what our rate's going to look like as we get through the next couple of quarters I would think.

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

Joe, so you -- I guess when you were talking about loan trends, you said you're starting to maybe see some early signs of slowing in demand. Is that across the franchise or is that certain markets? Could you just maybe clarify that a little bit?

I would say that's more maybe across the franchise. It just seems like -- and it is pretty anecdotal. I guess the hard facts are pipeline, which we published as part of press release and it's still pretty strong. And that's probably why we feel the lion's share of our loan growth over the next 6 months anyway. But I just feel like there's maybe a little bit less deal flow and so the competition is a little bit higher for every deal. That's kind of my general feeling. Now on the other side for Great Southern, we've got 2 offices -- 2 loan production offices that are basically just starting and they're just starting at 0 and we've got experienced lenders there. So as we are able -- if we're able and as we're able to grow those offices, that will certainly help us grow our loans. For instance, Chicago, which I would still say is in its infancy, I think it's couple of years old or something and they are at $120 million in loan. So if Atlanta and Denver were able to perform like that over the next couple of years, that's a $0.25 billion of loan growth right there. Also our loans -- our consumer loans have been going down more or less $10 million a month. And that's obviously going to slow down because the portfolio is decreasing. And eventually, that's going to stop altogether because those loans will have paid off. So we've got some positive things too, I just more wanted to make a general statement about just my perception and it's probably I mean it's a perception that's been formed over the last 60, 90 days. So it could be a result of customers being on summer vacation or whatever. It might be a bit seasonal. But I do -- I mean if you were asking me right now, I feel like the market is starting to -- just the new deal flow is just starting to slow slightly.

That's -- Joe, I mean that's helpful. That's great. And then, Rex, maybe just a quick question for you on the securities portfolio. So you saw the securities portfolio go up a little bit. Just sort of the plans going forward is what, roughly 6% of assets today. And I guess, do you plan to grow it much further from here? And especially, I guess if deposits trend down more and don't go much higher?

Yes. I mean we just kind of watch that and we've been trying to grow it a little bit just from the standpoint of the types of securities that we've been putting in there are sort of intermediate-type, term, fixed rate, multifamily, agency-type securities is a lot of what we've put in there. Help us with our -- to try to mitigate down range scenarios, et cetera. But also provide a decent yield. The yield was more decent several months ago than it is today. So we're going to try to bring in a little -- a few more securities if we can as the market presents decent timing to do that as far as rates go and yields on those securities. But -- so I think we'll continue to see some growth in there. But I don't think it's going to be anything dramatic. I mean, we've probably grown that portfolio pretty decently over the last year or so. I don't think the growth will be at the same pace in the next 6 months that it's been in the last 12 months or so.

And it probably stays below 10% of assets, I would assume?

It would be.

Our next question comes from the line of Stan Westhoff from Walthausen & Company.

I just wanted to follow up a little bit on the big nonperforming loan and then I guess, subsequent OREO asset now I guess. How marketable is this property that you just got leaded over to? How long you think you might take to get it to off the balance sheet, I guess?

Well, I mean it's obviously, hard to say exactly. I mean we do think there is activity. It's actually really 4 pieces of property in all. 3 are in the Central Missouri area and then 1 is in Iowa. And I think there is activity on each of them. And activity or certainly indication at levels that would satisfy our investment in the asset. So I think we feel pretty good about where we are right now. But we're not going to feel really good until they are actually sold.

Yes. I mean just looking back over time, you guys have not been afraid to hold onto real estate for a time and have actually made quite a few big stride during the last couple of years here and got it down to I guess, what would be a normal level. I mean at one point, your nonperforming OREOs were actually higher than your nonperforming loans. What exactly happened with this property? I know that you just bought up the land, and got it somewhat developed and didn't -- it didn't pan out the way you planned on or...

Yes. It was -- I mean the relationship, as we pointed out in the earnings release, was -- is maybe 12 years old. It was a development that didn't go well. And the person continued to try to market and sell the property and in the end, interim, we've been insisting on semi-annual principal reductions. And eventually, the customer just got to the point where they didn't want to make those reductions, and we just reached a resolution there.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Joe Turner for any further remarks.

No. I don't have have any further remarks. We appreciate everybody being here or being on the call and look forward to next quarter's earnings call. Thank you.

Thank you.

Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.