Great Southern Bancorp (NASDAQ:GSBC) Q3 2019 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by, and welcome to the Great Southern Bancorp, Inc. Third Quarter 2019 Earning Conference Call. At this time, all participants are on a listen-only mode. After the speaker's 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. Please be advised that today's conference call is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Kelly Polonis. Thank you. Please go ahead.

0:29 Thank you, Valerie. Good afternoon and welcome. This is Kelly Polonis with Investor Relations for Great Southern Bancorp. The purpose of our call today is to discuss the company's results for the quarter ending September 30th, 2019. Before we begin, I need to remind you that during the course of this call, we may make forward-looking statements about future events and future 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 third quarter 2019 earnings release. President and CEO Joe Turner and Chief Financial Officer Rex Copeland are here with me.

1:19 I'll now turn the call over to Joe Turner.

1:22 All right. Thanks, Kelly, and good afternoon to everyone who's on the call. I want to thank you for joining us for our third quarter earnings call. As usual, I'll provide some introductory remarks, some high-level remarks, and then Rex, turn it over to Rex to talk a little bit more in detail about the income statement. Overall, our third quarter results were very good. Hopefully, you've had a chance to read the earnings release, and if you have, you've seen that we earned $1.38 a share, or $19.7 million. We saw good loan growth during the quarter, and we further improved our operational efficiency. While net income dollars did grow, we experienced some net interest margin compression during the quarter, and Rex will provide some color around that.

2:12 Our performance metrics were all strong. Return on common equity, 13.46%. Return on assets, 161. Net interest margin was 395. I think 375 core and our efficiency ratio was 52.63%. Loan production during the third quarter was pretty solid. We had growth both in outstanding loans and our pipeline during the quarter both when compared to the end of the year and when compared to the linked quarter. The increase in our outstanding loans was primarily due to increases in commercial real estate, owner-occupied one-to-four family and multifamily loans.

3:02 That was partially offset by decreases in the consumer auto loan portfolio, which we've talked to you guys about before. We do continue to believe that the market's flowing. We've seen lower deal flow, I think, and Typically, when rates start reducing, it's as a result of the economy slowing, and maybe lenders are getting scared, so you'll see increased credit spreads. Right now, we're seeing decreasing credit spreads, higher levels of competition for lower deal flow. I think it's a challenging environment from a loan growth perspective.

3:50 You don't really see that coming through in our pipeline. Our pipeline is still strong, but I think maybe looking further out, the loan business does seem to be slowing from a production standpoint. Asset quality is probably as good as it's ever been at our bank, so that's certainly a positive thing. are classified assets to capital and reserves are 3%. And as I said, that's as good as it's ever been at our bank. We looked at a slide yesterday in our board meeting that compared, looked at that number over a long period of time. And even in other very benign credit environments, we've never been as low as we are now.

4:44 Capital continues to be very strong. We've grown our capital. Since the end of the year, since the end of the second quarter, our tangible common equity to tangible assets is at 11.9% at the end of the third quarter. Our book value per share is almost $42. And we were pleased to increase our dividend during the third quarter to $0.34 a share. So with that, I'll turn the call over to Rex Copeland, our CFO.

5:16 Thank you, Joe. Just a couple of things I wanted to point out as sort of unusual items in the quarter. We highlighted those on the first page of the earnings release, but we did have a benefit of reduced insurance premium expense for our FDIC insurance premiums. The fund has hit certain thresholds, and so we have a credit coming back to us, and that reduced our expenses by a little over $300,000 in the quarter. We also did have a couple of valuation write downs on some foreclosed assets that was about $280,000 of additional expense there reflected in those write downs on those two assets. As Joe mentioned earlier, we did see a little bit of compression in our net interest margin as a percentage.

6:08 The dollars were higher, but the margin percentage was a little bit lower. We were at 395 reported in the third quarter, and that compared to 397 in the second quarter and 402 in the third quarter last year. So we have a little bit of lower rates on our investment securities and other interest-earning assets. So funds that we have at the Federal Reserve and things like that, the Fed fund rates have come down, and so we are seeing a little bit of a decrease from where we were a year ago. in that our rates paid on deposits are sort of flattish and other borrowings. So we are seeing a little bit of compression from those areas.

6:56 We did have some yield decrease in income that was a little bit higher in this third quarter than we had in the second quarter and the third quarter last year. So about 20 basis points of additional income or margin related to the creation on FDIC acquired loan pools. Like I said before, the dollar amounts were up from where we were a year ago and also in the second quarter of this year. We've continued to push through that with a little bit of increase in dollars, but the margin percentage has come back a little bit. In the third quarter, we talked before about our and John Buckeye.

8:10 The non-interest income section of the financials, we did have lower non-interest income compared to the year-ago quarter. As you'll remember, the year-ago quarter, we had the sale of the branches and deposits in Nebraska, and we booked about a $7.4 million gain on that sale in the quarter last year. so we did not have that obviously again this year and that related to some of the decrease we had. We did offset that a little bit with a little bit higher income in profit on loan sales during the quarter. Also, as we've had throughout this year, a little bit higher income on our debit card activity related to some contracts that we entered into at the beginning or at the end of last year for the beginning of this year. And then also in the third quarter, we did have quite a bit of income, and this will fluctuate from quarter to quarter, related to income on interest rate swaps that we entered into with customers and counterparties and also a little bit of income from exiting some of our certain contracts.

9:26 and a number of other tax credit partnerships that we had. So there was definitely some nice flow of income that came through in some of those categories. And not all of those things happen every quarter, but we did experience some good income in the third quarter this year from that. Non-interest expense, we continue to make operational efficiency and kind of containment of our expenses a priority. And we've been able to do that. up about $416,000 compared to the same quarter last year. Salary employee benefits, probably the largest area of our increases. Like I said before, we did have a $300,000-plus decrease in insurance costs because of the credit we got back on the FDIC insurance, and then a little bit lower expenses on our acquired deposit intangible asset amortization as some of those items have met their kind of final term now and we amortized off all those intangibles for certain of the acquisitions.

10:35 Our efficiency ratio, as Joe said, was down to 52.63% in the quarter. That's down from where it was in the second quarter of this year and it's up from last year because of the large gain that we had. But we feel like we're continuing to make good progress on efficiency and we'll continue to look toward that. One last thing I was going to mention is just briefly an update on CECL. We've been working through that throughout the year and continuing to finalize a few things with our accountants right now. Based on our analysis, we're looking at both the on-balance sheet items and off-balance sheet unfunded items. And that's kind of an impact for us.

11:21 The larger impact is going to be probably the The unfunded loan balances and commitments and things that we have. But overall, with all of it combined, we expect the impact of CECL to be a 2% to 3% decrease in our equity when we adopt that in the beginning of 2020. So that concludes our prepared remarks at this time, and I think we're ready to entertain questions. So I'll turn it back to the operator. Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephones. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Michael Perito. Your line is open.

12:05 Hey, good afternoon, everybody. Thanks for taking my questions. Since you brought it up, Rex, I'll maybe spend a minute on CECL here. Just curious, you know, the 2%, 3% equity question. Impact doesn't seem, you know, that dramatic. So I guess a two-part question here. One, you know, really shouldn't impact your capital planning at all, whether near-term or long-term, right? And then two, just as you went through that process, any, you know, any info you're willing to share kind of or, you know, different views on your portfolio that the CECL process forced you to take that might alter kind of your credit appetite going forward for certain asset classes or anything of that nature? Sure.

12:47 Yeah, I think the first part, you know, we don't expect it to really be all that impacting to our capital, obviously. It's not going to be a really – we don't think a really large number at this point. And then as far as, you know, the type of lending and things like that, I don't really see it being that impactful to the things that we do. I think we'll probably continue to do things in generally the same manner and look at the same type of loans. It might – individual loans would obviously be looked at on an individual basis, but we may look at do we want to make a loan that's maybe a little shorter term than we might otherwise, but I don't think it's going to be really impactful on what we're doing there either.

13:37 Okay. And then, Joe, on the growth side, it seems like you guys are a tad more kind of growingly more cautious, maybe just slightly, but as every quarter kind of passes here and we get through this 2019. But I guess to your point specifically, you mentioned that pipelines are still strong. So I guess can you maybe comment on kind of how the pull-through of that pipeline has been trending year-to-date thus far and whether you think you'll probably be closing on less deals in the pipeline moving forward or have you seen a material alteration in kind of the closing rate? No.

14:16 I don't think it's that so much, Mike. When I look at our pipeline, I think the two key numbers really are the closed construction loans with unused available lines, particularly the non-1-4 family because that's a big number, and then the loan commitment not closed yet, both secured by 1-4 and secured by not 1-4 loans. and I anticipate that our pull-through rate will be not significantly different than it's been in the past in those areas. I guess my I'm just talking more anecdotally.

15:01 I sit in on the committee so I see all of the larger loan requests that we're considering and it just seems like that's slowing down a little bit and As I talk to the leaders in our various offices, they say the same thing, that it seems to be a little bit less activity and a little bit more competitive. For instance, we were looking at a loan request yesterday, and the thing just – based on the kind of spread the LIBOR we were getting in the past, it seemed 25 basis points or so low from where it should be.

15:48 And so I mentioned that during our loan committee. And one of our senior lenders just said, that's kind of where the market is right now. So, you know, I think it is, you know, I guess my observation is more anecdotal than, you know, may be factual. The factual is probably our pipeline. But, you know, I do feel like it's probably, you know, things are slowing down, not dramatically, but just slightly.

16:22 Okay. And then lastly, you know, I mean, obviously the core NIM compressed a bit in the quarter, which you guys addressed, and, you know, there's obviously a decent probability that interest rates will continue to kind of work against us here, but but conversely, the SBA and mortgage gain on sale activity really served as kind of a nice offset in the quarter, and I'm just curious if you could comment on the outlook for those items, the SBA specifically, which I know is a bit newer for you guys, and do you think that that's something where you guys can see some fee income growth and hopefully maybe offset some of the NII pressures that could stem from a lower margin if interest rates continue to decline?

17:04 Yeah, we hope to, Mike. We're actively looking for SBA loans throughout our footprint, and so we hope to see that kind of volume. It's probably going to come in fits and spurts a little bit here initially until we get a pipeline of that built up too. So I wouldn't say that it's going to be real sort of kind of very normalized and recurring that way. but we certainly hope to grow it. And as you say, one to four family volume has been strong for us as well.

17:42 That's going to probably be somewhat a reflection of interest rates and refinance as part of it and then new purchase and that kind of thing too. We have had our loans held for sale. Balances have been higher in the last couple of quarters than they were last year and early this year. So we are continuing to see and a little bit higher level of activity in that. I can't guarantee that's going to happen in the next few quarters, but where it's at right now, it seems to be reasonably positive.

18:15 And then just one quick last follow-up, sorry, but just on the SBA team, can you just remind us, you know, how built out is that platform at this point for you guys? I mean, how much kind of capacity is there with the with the current team and support staff and credit staff on board that you think you can support? I mean, is there a lot of runway there, or do you think if it accelerates that there could be need for kind of further broadening of the support, et cetera, of that platform?

18:43 You know, we're trying to utilize the source deals. We're trying to utilize our existing staff throughout the branches, throughout the – throughout our lending teams, that sort of thing. Then we have, to help with the back office part of it, we've contracted with a company to help with that. That can certainly scale up. If we were doing way, way, way more volume, we might have to grow our administration of that program a little bit. I think we have opportunity to grow a lot without seeing really increased costs for a while anyway.

19:32 Okay. Great. Thank you guys for taking my questions. I appreciate it.

19:36 All right. Thanks, Mike. Thank you. Again, if you'd like to ask a question, please press star then 1 on your touchtone telephone. Our next question comes from Andrew Leach of San Jose. Neil, your line is open.

19:50 Good afternoon, everyone. Hey, Andrew. Good afternoon. Most of my questions have been asked already. I just want to follow up on deposit pricing here. It didn't seem like there was too much movement in the rates quarter over quarter, but what are you seeing in the markets that you guys are in with respect to pricing, and are there opportunities to lower your offered rates following these Fed rate cuts?

20:11 I'd say it's pretty competitive. As far as there's different banks and credit unions that are still advertising specials of, of money market rates and CD rates above 2%. And so we're trying to manage in that environment. I think we're seeing areas where we've been able to reduce our rates on a few things, but not across the board, certainly. And so we're going to continue to fight that battle a little bit. Money market rates and some of the interest-bearing checking rates There's not a ton of room for those to come down yet, probably.

20:56 So we're still trying to kind of work through that. There's a few of our products that we have reduced rates on, but not, like I said, across the board. We've seen a little migration, I would say, too, between non-time account types. And so there's been some flow of funds into some of the higher yield money market type accounts. And so we're not really seeing too much and a number of others. The time accounts were fairly recent, the rate cuts that have occurred. It takes a few months for those to filter through. We are seeing in some of our deposit types that we've been able to reduce the funding costs on the the maturity and then the new booking of new products in those types.

21:51 Retail CDs, a lot of our CDs mature within 3 to 12 months and so we're probably in the fourth quarter hopefully going to see a little more of the maturity start to replace with a bit lower rate and that kind of thing that we saw in the third quarter. We just didn't really have a chance with when the rate and many more.

22:41 Yeah, so, Andrew, I mean, the, you know, what you would have seen immediately, you know, both in margin and then you would have noticed in our spread calculation is if we had been able to reduce our non-time accounts. But as Rex said, competition is really preventing us from doing that to any great extent. And then, you know, with respect to time accounts, really, I think the cost of, you know, New Origination CDs is coming down a little bit. So that's a positive thing. But I don't know what the average term of our CD portfolio is, probably between six months and a year or something like that. It's going to take you some time to roll through that and reprice enough of it that you see much of a change.

23:32 Okay. That's all really helpful. You've answered all my other questions. Thanks so much. Thank you. I'm sure no further questions at this time. I'd like to turn the call back over to Joe Turner for any closing remarks.

23:48 Again, we appreciate everybody being on the call with us today, and we'll look forward to talking to you after the end of the year. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participating. You may now disconnect.