Great Southern Bancorp, Inc. Q1 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kelly Polonus, Investor Relations. Please go ahead.

Thank you, Judy. Good afternoon and welcome. The purpose of this call is to discuss the company's results for the quarter ending March 31, 2021. Before we begin, I need to remind you that during 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. Please see our disclosure in our first quarter 2021 earnings release for more information. President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland are on the call with me today. I'll now turn the call over to Joe.

Thanks, Kelly. Good afternoon, everyone. I appreciate you joining us today. I'm happy to announce that we started 2021 with solid operating results in the first quarter. As usual, I will provide some initial comments regarding the company's performance before handing it to our CFO, Rex Copeland, who will delve into more detail about our financial results. I hope you have had a moment to review the earnings release. If so, you will see that we recorded earnings of $18.9 million, or $1.36 per share, in the first quarter, compared to $14.9 million or $1.04 for the same period last year. The main contributors to our earnings increase this year were higher net gains on mortgage loan sales, driven by the strong mortgage market, along with lower credit cost provisions and well-managed expenses. This was partially offset by a slight decline in net interest income, which was largely due to reduced FDIC accretion income. Our net interest income fell by about $850,000 for the quarter, while our accretion income decreased by approximately $1.1 million to $1.2 million. Despite that, net interest income remained at a solid level. Additionally, a higher income tax rate is a result of increased income, which has a bigger impact on our tax expense because our tax credit has a diminished effect. Our performance metrics for the quarter were positive. The annualized return on common equity was 12.18%, which is strong given our level of common equity, which ended at 10.8%. Our annualized return on average assets was 1.38%, and our efficiency ratio stood at 56.33%. In the first quarter, we adopted CECL, leading to an increase in our allowance for loan losses of $11.6 million. We also set aside an allowance for losses on unfunded commitments of $8.7 million, resulting in a total additional allowance of $20.3 million on our balance sheet, which caused a $14 million debit to retained earnings after tax. Regarding loan sales, our loan growth since the end of 2020 has been fairly flat. We have seen good origination levels, but loan pay-offs have also remained high. Consequently, our gross loan portfolio, including unfunded loans, decreased by $2.7 million, while our net loans dropped by roughly $11.1 million since the end of 2020. Average debt origination remains strong, with our pipeline chart showing stability at $1.3 billion. Concerning the Paycheck Protection Program, we were glad to participate again. Our loan officers are dedicated to assisting our commercial clients with the pandemic's impact. Along with originating second-round loans, we are managing the forgiveness for first-round loans successfully. We originated 1,600 loans totaling $121 million during the first round of PPP funding last year. Now, we have received full forgiveness on over 1,100 of those loans, amounting to around $66 million, with more awaiting SBA approval. From our viewpoint, this process has gone smoothly, without any pushback from the SBA on our forgiveness applications. For the second round, we've received nearly 1,500 applications totaling $55 million and funded about 1,400 applications for around $53 million. These applications are roughly evenly divided between returning clients and those seeking a first draw this time. For further information on our loan portfolio, we filed our loan portfolio presentation last night, which should be available on our website and the SEC's website. Our asset quality remains very strong. As of March 31, 2021, excluding FDIC-acquired assets, non-performing assets were $6.7 million, a $2.9 million increase from the end of 2020, mainly due to two long-standing customer loans. Including FDIC-acquired assets, non-performing assets amounted to $10.9 million, reflecting a percentage of total assets at 0.19%. Our pandemic-related loan modifications have decreased to $146 million by the end of March, down from $251 million at the end of December 2020. Of the remaining modifications, there were 19 commercial loans totaling $141 million and 93 loans totaling $5 million in the consumer and mortgage sectors. Our capital base is still very robust, having decreased by about $18 million to $611 million since the end of 2020, mainly due to the additional allowance mentioned earlier, which reduced capital by $14 million, as well as a decline in the value of our available-for-sale securities portfolio. That concludes my prepared remarks. Now, I will turn the call over to Rex, our CFO, Rex Copeland.

Thank you, Joe, and thanks everyone for being here today. I want to start by discussing net interest income and margin. In our first quarter, net interest income decreased by approximately $849,000 from the previous year, totaling $44.1 million this quarter. One noteworthy aspect mentioned in our earnings release is the net deferred fees on the PPP loans. We recorded interest income of around $1.2 million from net deferred fees accretion this quarter. As a reminder, we deferred fees and costs associated with those loans, which are recognized as income over the expected duration of the loans. Any remaining amounts will be recorded as income once the loans are paid off. We anticipate additional income from this in the second quarter as we continue working on forgiveness and repayment of some of the first-round PPP loans. At the end of March, the net deferred fees for these loans were approximately $3.9 million, which will be recognized as income in the coming quarters. The net interest margin was 3.41% for the first quarter, compared to 3.84% in the same quarter of 2020, reflecting a decrease of 43 basis points. The margin was also stable at 3.41% when compared to the fourth quarter of 2020. When comparing the first quarter of 2021 with 2020, the average yield on loans fell about 76 basis points, while the average rate on deposits decreased by 80 basis points. Much of the margin compression can be attributed to a shift in our asset mix, a trend we have been experiencing for most of 2020 and early 2021. Our average cash equivalents rose by about $329 million, and investments increased by approximately $30 million. The average yield on cash equivalents fell by 106 basis points in the first quarter compared to the previous year. This change in asset mix accounted for about 24 basis points of the margin decrease, alongside the issuance of subordinated debt last June, contributing an additional 8 basis points to our margin reduction. The yield on our FDIC-acquired loans decreased by 11 basis points compared to the first quarter last year, which collectively captures the margin decrease from 3.84% to 3.41%. When compared to the December quarter, the average yield on loans dropped by 3 basis points and the average rate on deposits fell by 15 basis points. However, the net interest margin remained stable, primarily due to the change in asset mix, which involved a decrease in average loans paired with an increase in average cash equivalents in this year's first quarter compared to last year’s fourth quarter. The accretion income from FDIC-acquired loans stands at about $1.3 million at the end of March, with an expected $800,000 to $900,000 going into income for the remainder of 2021. Now, transitioning to non-interest income, in the first quarter of this year, non-interest income rose by $2.4 million, reaching $9.7 million compared to the first quarter of 2020. The increases were mainly driven by net gains from loan sales due to heightened origination activity in our mortgage business focusing on longer-term fixed rates that we sell in the secondary market. Profits from loan sales were up approximately $2.1 million in this quarter relative to last year’s first quarter. We also saw an increase in income from our derivative interest rate products, recognizing about $474,000 due to favorable shifts in fair value. In the first quarter of last year, we reported a reduction in market value, which reversed this quarter. However, other income declined by about $600,000 compared to the first quarter of 2020, largely due to income from newly originated interest rate swaps and tax credit partnership deals recognized last year. As for non-interest expenses, they were well managed this year compared to last. Non-interest expenses fell by about $494,000, totaling $30.3 million in the first quarter of this year. Salary and employee benefits reduced by about $1 million, partly due to a special bonus paid to employees last year amounting to $1.1 million recorded in the first quarter of 2020. Conversely, insurance expenses increased by about $378,000 compared to last year due to the full payment of FDIC deposit insurance premiums, which were previously reduced by overpayment credits. Expenses related to other real estate owned also dropped, showing a decrease of approximately $211,000 from the first quarter last year. The efficiency ratio for the first quarter of 2021 was 56.33%, an improvement from 58.91% in the same quarter last year, mainly driven by increased non-interest income and a slight reduction in non-interest expenses. Joe briefly touched on our tax expenses, which increased. Our effective tax rate for the first quarter of this year was 21%, compared to just under 16% in the first quarter of last year. This change was driven primarily by higher overall income levels and reduced utilization of low-income housing tax credits this year, along with lower tax-exempt interest income from municipal securities and some loans. The variations in state income taxes across different jurisdictions with varying tax rates also influenced the tax rate. We anticipate our effective tax rate will range from 19.5% to 20.5% moving forward this year. That wraps up our prepared remarks for now. We are now open to questions, and I'll ask our operator to provide instructions for the attendees on how to ask questions.

Our first question comes from the line of Andrew Liesch from Piper Sandler. Your line is now open.

Good afternoon, everyone.

Hi, Andrew.

Hi. Sorry if I missed it, but what is the balance of PPP loans at the end of the quarter?

It's around $120 million or so, I believe. I don't have the exact number.

I mean, I think it would be, Andrew, I think we funded $53 million and we've received forgiveness on $35 million. So I would think of $120 million, I would think it'd be $118 million, $119 million, something like that.

Got it. Yes, that makes sense. If I consider the $3.9 million of fee income that has yet to be realized and apply a 3% yield on it, that puts us at around $120 million. Thank you. It seems like the forgiveness process is going smoothly. Can you provide any timing on when you expect that to be forgiven? Will it lean more towards the second quarter or the third quarter? What are your thoughts?

It would be a total guess from my perspective, I would think the second quarter would be bigger than the third quarter when you...

I would think so. I know a lot of our lenders are working with our customers. We've got several things in the pipeline, and I know they're doing some outreach to talk to the customer. So I would think that they're going to try to get more of this done in the second quarter, but I mean, I'm going to guess some of this is going to the third.

Yes.

The original grouping and the more recent originations that started around mid-January likely won't see those forgiveness items until maybe the fourth quarter at the earliest.

Right.

Got it. Considering all the fees and various factors affecting the margin, how do you foresee the margin performing from this 3.41% level? Do you believe the fees will be beneficial, even though the influx of liquidity may pose a challenge?

Well, I mean, certainly the liquidity that we have, and as I said, the mix has dropped a little bit. So that's really been a lot of the story if you look back to where our margin was in the first quarter of 2020 before the pandemic sort of a little more normalized time. We -- probably like I said, half of that drop or so is really related to the mix. Just having a lot more liquidity, we probably have maybe $400 million more of liquidity now than we had then probably. And so, the other part of it, as I mentioned, the sub debt that we issued, that was another 8 basis points. And then the income that we're going to derive from the FDIC loans obviously is 5 basis points, I think in the first quarter of this year, and I believe it was 16 basis points in the first quarter last year. So there's not going to be a whole lot more of that income coming on the books. So as I mentioned, $800,000 or so, the rest of this year. So in the next three quarters, it's going to be $800,000 and they get spread in there, so.

Yes, if you exclude the FDIC income, I think there is still some remaining pickup primarily due to time deposits continuing to reprice. However, I don't believe anyone expects a significant increase in our margin until we see higher interest rates. Would you agree with that, Rex?

Yes. I mean what we're probably going to see is like Joe said our time deposits are going to reprice down over the next two or three quarters. We might see a little bit further reduction in rates on the non-time deposit balances. But I think those are like 19 basis points or something now, so there's going to be a limit at how much lower they can go. And what we're seeing on the loan side is a little bit of a reduction in loan balance rates, really because of the things that are repaying. Like Joe said, we've booked a lot of new loans, we generate a lot of loans. We just have a lot of repayments going on due, and a lot of those loans that are repaying are maybe going to be 4.5% kind of rates and the new loans going out may be closer to 4% or something like that. So we're seeing a little bit of headwind from that as well that's offsetting the good that we have from CD rates continuing to go down.

Got it. Okay, thank you so much for taking the questions.

Thanks, Andrew.

Thank you. Our next question comes from the line of Damon DelMonte from KBW. Your line is now open.

Hey, good afternoon, guys. Hope everyone is doing well today.

Hi, Damon.

Hi, Damon.

My first question is about the reserve level and the provision going forward. I apologize if this was covered in your prepared remarks, as I was switching between calls. Considering the significant boost from the adoption of CECL and the strong credit trends of the portfolio, can you provide some guidance on what the provision range might look like in the coming quarters?

I believe that a lot will depend on loan growth. If we assume that our loan portfolio remains flat, we feel confident that our current reserve levels are appropriate. With a stable loan portfolio and no charge-offs, we wouldn't expect provision expenses to be significant. However, if there are some charge-offs, we would likely need to account for some provision expense to address those charge-offs.

The other piece of it that you would have to think through too is, what your forecast is for the economy moving forward as well, so.

Yes, that's right.

How you see that looking into the next 12 to 18 months?

Yes, right.

If there's drastic chances there.

Yes, right.

And the other piece of that too is the unfunded. As we mentioned earlier, the unfunded commitments have to have a reserve against them are not part of the allowance for credit loss. They are different than over the liability section, but same kind of concept, so as that pipeline grows or declines, there are going to be differences that you're going to reflect there too.

Yes, that's a good point. We currently have about $1.3 billion in unfunded commitments. If that amount increases by 10%, it would be reasonable to expect that the allowance for those unfunded commitments could also increase by 10%, which translates to an $800,000 increase.

Okay. But from a pure loan loss reserve perspective here at like 1.59 excluding PPP, you don't think you need to go higher than that right? If anything, there should be a bias for some reserve release going forward?

Well, I mean, I think we think we're appropriately reserved at this point. So, yes, I mean, I guess I agree with what you're saying.

Okay, fair enough. That's helpful. Thank you. And then I guess my other question, you know, on expenses, again I apologize Rex if maybe you called out some one-time items that weren't repeatable, but can you help us think a little bit about a good quarter run rate going forward to go off?

I don't think really in the first quarter of this year, we really had too much that was not fairly standard. Our expenses are going to be a little higher related to the mortgage business, because I mean as long as the mortgage business is still robust, we're going to generate a lot of fee income from the profit on loan sales probably, but we're also having a decent compensation to our producers and things like that. So those expenses, all things being equal, should be fairly consistent, I would think as we move forward. I don't really think there was...

We didn't call out anything on the expense lines being sort of unusual.

Okay, that's all that I had. Thank you very much. Appreciate it.

Thanks, Damon.

Thank you. Our next question comes from the line of John Rodis from Janney. Your line is now open.

Good morning or good afternoon, guys. Hope you're doing well.

Hi, John.

Hi, John.

I have a question regarding capital, particularly since you adopted CECL. Joe, you mentioned that your capital levels are quite strong, with TCE over 10%. Can you remind us about your plans for capital usage moving forward? I know you repurchased some stock during the quarter, so could you provide us with an update?

Yes, as we have mentioned previously, if a strong acquisition opportunity arises, we would definitely be interested. However, we approach acquisitions with very conservative assumptions, especially regarding the growth of the target company. We aim for any acquisition to be accretive and beneficial for our existing shareholders. Unfortunately, we haven't encountered many such deals recently, unlike a decade ago when we were acquiring banks from the FDIC. Between stock buybacks and dividends, we generally lean towards stock buybacks, particularly since we were able to repurchase our stock in 2020 at nearly book value. While the stock price has moved away from book value, making buybacks less enticing than before, we may still consider buying back some stock at current levels. This situation also leaves the possibility for special dividends or increases in the current dividend open for discussion.

Okay, sounds good. Thank you, Joe.

Okay.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Joe Turner, President and CEO, for closing remarks.

Okay. Well, again, we appreciate everybody for taking the time to be with us on our call today. And we look forward to talking to you in about three months. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.