Great Southern Bancorp, Inc. Q3 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Great Southern Bancorp Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker 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 Kelly Polonus, Investor Relations. Please go ahead.

Good afternoon and welcome. The purpose of this call is to discuss the company's results for the quarter ending September 30th, 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. Please do not place undue reliance on any forward-looking statements which speak only as of the date they are made. Please see our forward-looking statements disclosure in our third 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 Turner.

All right. Thanks, Kelly. Well, good afternoon and we certainly appreciate you joining us today. We are very pleased with our third quarter earnings and continued strong financial position. I think we have both of which reflect our associates' ongoing commitment to take care of our customers in a very difficult operating environment. As is typical, I'll provide some brief remarks about the company's performance and then turn the call over to Rex Copeland, our CFO who will get into more detail on our financial results. Then we'll open it up for questions. For the third quarter of 2021, we earned $20.4 million or $1.49 per diluted common share compared to $13.5 million or $0.96 per share for the same period in 2020. Our increased earnings were primarily driven by negative credit loss provision which is indicative of continued strong credit quality, an improving economic situation, and a lower loan portfolio balance. We had higher net interest income, primarily driven by reduced deposit costs as well as PPP deferred fee income recognition and we had increased noninterest income, mainly related to debit card and ATM fees. Importantly, our pre-provision revenue continues to be strong with 2021 levels exceeding those achieved in 2020. Our earnings performance ratios were solid with an annualized return on average assets of 1.47%, return on equity of 12.82%, and an efficiency ratio of 57.2%. Thus far, in 2021, loan production activity in our markets has been quite vigorous, but loan repayments including customer refinancings project sales have been very, very high as well historically high. In fact, I looked at a report yesterday where we compare 2021 originations through 9/30 to 2019 and 2020 loan origination, both of which were very good years from a loan origination standpoint and we're on track to exceed or equal those two years in 2021. Our outstanding loans have decreased $271 million compared to the end of 2020, about $90 million of that is a decrease in the PPP loans. Our pipeline of loan commitments and unfunded loans remain strong. That pipeline increased about $100 million from the end of the second quarter. Certainly, this type of lending environment can be dangerous for banks. Like credit cycles in the past, we recognize the current short-term growth challenges and our commitment to our shareholders is that we will not stretch our credit culture discipline for the sake of loan growth. We manage for the long term and understand that we will have periodic ebbs and flows in our loan portfolio. As far as the Paycheck Protection Program, about 100% of the round one paycheck protection loans about $121 million have been forgiven, maybe just a very small portion have not and we don't expect to have problems with those. The second round, which began in January, we did about $58 million in loans. And I think we had $26 million of those forgiven. We had total deferred fees in the second round of $3.7 million. We recognized $1.6 million of that in the first quarter and we have $2.1 billion left to recognize, probably most of that will be in the fourth quarter. CARES Act modifications were down to $38 million of loans that are still under modification and we would expect most of those over the next probably three to nine months to be on regular payment terms. From an asset quality standpoint, I don't know what else we can say. It's as good as it's ever been continues to be. Net charge-offs for the year were $9,000. Our non-performing assets excluding FDIC-acquired assets were $5.2 million or 10 basis points of assets. Our allowance for credit losses, despite our reverse provision remains pretty steady at 1.56% of loans. From a capital standpoint, our capital remains extremely strong, $624 million. That's down about $5 million from the end of the year and down about $5 million or $6 million I think from the end of the second quarter as well. Basically, we made $20 million a little over in the third quarter. We paid a dividend of between $4 million and $5 million. We probably spent about $15 million buying back stock. And so that equaled about our earnings. So the reduction in our capital is from a reduction in our market value of our securities portfolio and our swap – interest rate swap. I'll also remind you that during the quarter we redeemed $75 million of subordinated notes and that occurred in August. So we had about half a quarter of the benefit from that redemption. That concludes my prepared remarks. I'll turn the call over to Rex Copeland at this time.

Thank you, Joe. I will begin by discussing net interest income and margin. In the third quarter of 2021, our net interest income increased by approximately $755,000, or 1.7%, compared to the same quarter in 2020. This quarter, we reported $44.9 million in net interest income, up from $44.2 million in the third quarter last year, and $44.7 million in the second quarter of 2021. The values remained relatively stable across these three periods, indicating consistency in the dollar amounts. As Joe mentioned, we recorded some accretion income from PPP loans this quarter, with net deferred fees contributing approximately $1.6 million, compared to about $1.1 million in the second quarter of 2021. We currently have around $2.1 million left in net deferred PPP fees, much of which we expect to recognize as income in the fourth quarter. We anticipate that customers will continue to seek forgiveness for those loans, leading to further repayments in the upcoming quarter. Our net interest margin stood at 3.36% for both this quarter and the same quarter last year, while it increased by one basis point from 3.35% in the second quarter of this year. The margin compression was primarily due to changes in our asset mix, as our average cash equivalents rose by about $333 million this quarter compared to a year ago, while average loans decreased by around $266 million, representing a shift from loans to cash and cash equivalent assets. Without this additional liquidity, our net interest margin would have been approximately 23 basis points higher, had we maintained the same liquidity level as last year. Additionally, we experienced lower accretion income from our FDIC-acquired portfolios this year compared to last year. The core net interest margin, which excludes yield accretion, was 3.34% and 3.27% for the three months ended September 30 in 2021 and 2020, respectively, indicating a slight increase year-over-year. Overall, our funding costs continued to decline in the third quarter, with time deposits re-pricing lower at maturity. We expect this trend to persist into the first half of next year. As of the end of September, our cost of time deposits was around 66 basis points, while our recent overall average new CD rate stands at approximately 35 to 40 basis points. Even though our net interest margin percentage was affected by increased deposits and changes in asset mix, our net interest income for the first nine months of this year was $133.7 million, an increase from $132.6 million during the same period last year. This is influenced by a decrease of $3.2 million in FDIC-acquired loan accretion income and an increase of $1.4 million in interest expense from subordinated notes issued in June 2020. We also redeemed some subordinated debt, yet overall expenses were higher this quarter compared to last year. On the positive side, we recognized $2.9 million more in deferred PPP loan fees this year in the first nine months compared to last year. Non-interest income rose by about $332,000 to $9.8 million in this third quarter compared to a year ago, largely due to increased point-of-sale and ATM fees, totaling an increase of approximately $657,000. The uptick in activity and debit card usage has been a consistent trend since the pandemic began. Overdraft and insufficient fund fees also rose by about $200,000 compared to the previous year, now returning to more typical levels after earlier waivers during the pandemic. Lastly, net gains on loan sales decreased by about $537,000 compared to the previous year's third quarter, attributed to lower origination activity this year compared to last year’s significant refinance activity spurred by low rates. Regarding non-interest expenses, they declined by about $649,000 to $31.3 million for the quarter ending September 30, compared to the same quarter last year. This decrease was mainly due to an $867,000 decline in salary and employee benefits from the prior year, attributable to a special bonus paid in 2020 in response to COVID-19 impacts that was not repeated in 2021. The efficiency ratio for this quarter was 57.27%, down from 59.64% in the same quarter of 2020. Lastly, the tax rate for this third quarter was just under 21%, slightly lower than the 21.5% from the previous year, and we expect the effective rate to be around 20% to 21% moving forward. This is influenced by our tax credit activities and the variety of tax rates across the states we operate in. That concludes my remarks, and we are now ready for questions.

Our first question comes from the line of Damon DelMonte with KBW. Your line is open.

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

Yes, hi, Damon.

Hi. So I wanted to start off with loan growth. Joe in your opening comments you talked about the strength of the origination activity that you guys have been seeing and that's kind of been muted by payoffs and whatnot. So if you look back over the last three or four quarters, net loan growth has been pretty hard to come by. What are you seeing today? And kind of how are you feeling going forward about being able to post some positive net growth in the coming quarters?

I see basically the same factors at play that have been at play over the last year. Again, I think what's driving the high level of refinance and that sort of activity, Damon, is just all the cash in the system, there's just so much competition. The risk-free rate of return right now for mortgage-backed – agency mortgage-backed five-year, seven-year duration whatever is 1.5%. So if they can refi a loan at 3%, 3.25% and it's typically not banks, it would be more live companies or agencies or those sorts of lenders, I mean, they're pretty quick to do it. And I don't see anything today really that's any different than what we've seen over the past year or so. So I think that will continue to be a headwind probably until we see those rates come up a little bit. If people were able to go out and get 2.25% or 2.5% mortgage-backed, they probably aren't going to be so quick to refi those projects. And really, I mean, I think what we're seeing is that those projects that we're doing we've told you are high quality, they are extremely high quality I think. And people are just willing to jump – the longer-term leaders are willing to jump into them more quickly. Whereas before they were wanting to wait for stabilization, now maybe they're willing to jump in at construction completion. So we just have to continue to be diligent. I think we've mentioned on the call that we are exploring – we've mentioned on previous calls that we're exploring new LTO sites. And so we're actively engaged in that and we're just going to manage through this process.

Got it. Okay. All right. So it sounds like at least another quarter maybe two before we start to see some positive momentum in the portfolio?

Yes. It's just hard to say. It's just hard to say. I mean, I will say, $90 million of the repayment thus far this year was with PPP loans. And obviously that's not going to repeat, right? $35 million roughly is pay down in the consumer portfolio which I'm sure is primarily indirect. That's not going to repeat. So that's $125 million of the pay down in our portfolio that likely won't repeat in future quarters. But there's still – like I said earlier, there are still factors at play which I'm sure are going to make repayment higher than typical.

Got it. Okay. That's helpful. I appreciate the color. And then with regards to expenses there was kind of an uptick in the occupancy and equipment expense. Were there any one-time charges in there? What was that related to?

There was.

Yes. I mean it wasn't all of it, but there were some things. There was an adjustment that we made to some asset lives that may have been a couple of hundred thousand dollars or so that we included to catch up in some expenses there that shouldn't go back to normal in the fourth quarter. And then there's just – when you have a banking center network like we've got in offices we had some – in the summer months we have some parking lot repairs and things like that. So, there's just things like that going on that don't necessarily occur. But likewise in the winter months, we're going to have snow removal probably in some places. So, some of that yes was I would say not going to recur, but then there are some things that probably are in there.

Okay. So then when we kind of look at the overall expense base like next quarter do you think we kind of keep it flat to this level to kind of back out a couple of those onetime items and then you get a little bit of normal growth in there?

Yes. I mean I think – and the sort of the two challenges that are present I think are just for Great Southern, but generally in the banking business is all this cash in the system is compressing rates and making the margin business more difficult. It's compressing margins and it's making it tougher to grow assets. So that's one issue. I think that's a temporary thing. I don't know if that's going to last six months a year, 18 months, but I think it's going to be temporary. The other thing that's interesting though is the employment situation in the country. It is just – it's tough. And so, I would assume that employee costs are going to come up some as we try to hire new people and keep the people we have. It's a very tough employment market right now.

And some of that's actually been occurring already. We're actually seeing some of that already this year and have had to adjust some salaries and trying to hire people and things of that nature. It's been harder to locate staff and potential employees.

Right. We always have open positions. I mean, I would think we have 1200 employees. I would think kind of steady state is 40 or so open positions. But I think we have close to 100 right now. And it's just – it's hard to find folks. And that's – obviously we all read in paper that's not Great Southern-specific. That's pretty much economy-wide.

Okay. Great. And then just lastly on credit trends obviously remain very strong. You had a negative provision this quarter for the third quarter in a row. With the outlook for loan growth being subdued for the next couple of quarters and credit trends remaining good, is it fair to expect another negative provision in the fourth quarter or at least very, very low like zero?

I mean, if we were to have another quarter with no charge off and if we had declining loan balance, it's possible certainly that the allowance could go down. I mean, we feel like we have a well-funded allowance based on the level of our loan portfolio right now. If all other things being equal, if the loan portfolio were to go down a little bit, yes, I guess the allowance could go down a little bit as well.

Okay. All right. That’s all that I had. Thank you very much, guys. Appreciate it.

Okay. Thanks, Damon.

Thank you. Our next question comes from the line of Andrew Liesch with Piper Sandler. Your line is open.

Hi, everyone. Good afternoon.

Hey, how are you?

Hi. Good. Thanks. Just wanted to touch on the margin here a little bit and some of the factors at play there. How much room do you think is still left on the deposit side? I know you referenced some CDs that are still set to mature. But are these maturities and the funding cost improvement, should that be enough to offset yield pressures?

I don't know. I'll take a shot and then let Rex. I mean, if you look at our second to the last page of release, I think it's the second to the last page, we show the level of time deposits Andrew and that's really probably where most of the repricing will come. We show the rate on our time deposits is 66 basis points. We're probably paying about half that right now. So there could certainly be some additional relief there.

And as far as the maturities go, just to give you an idea, within three months about $270 million of that CD portfolio will mature, within six cumulatively about $438 million. And then, within the next year about $795 million. So it's – most of that portfolio within the next 12 months is going to have a chance to reprice at maturity.

Yes.

Got it. That was actually going to be my follow-up on that side. Thank you for that. And then, obviously, there's some – there’ve been some very good loan production, also elevated payoffs. The loans that you've been adding, I guess, what's been the blended rate on those?

I don't have that number. We'll try to – we may try to put something like that in the 10-Q maybe, Andrew.

Got it. Yes. I'll look out for that. And then, the ones that pay off certainly appreciate you guys sticking to your knitting with pricing and underwriting. Just kind of curious what are the yields that you guys are losing? What are our competitors offering that's making it an economic portfolio?

I mean, I think what we see – I mean, as we've said, most of the deals that we do, especially multifamily or senior care, industrial or whatever, I mean, we have 30% to 40% equity in. And when those longer-term lenders come in, they're cutting our rate, but they're also probably giving the borrowers back some of their equity. And we have guarantees. And typically, those long-term loans do not have guarantees or at least have very limited guarantees. So it's at an amount at a guarantee structure and at a rate that we just wouldn't want to do.

Got it. That makes it tough to compete there. But thank you for taking the questions. I will step back.

All right. Thanks, Andrew.

Our next question comes from John Rodis with Janney. Your line is open.

Hey, good afternoon, guys.

Hi, John.

Hi, John.

Hi. Joe, just I guess just back to loans in a second. I guess you said in the press release that it's mostly multifamily. Are the payoffs in any particular market, or is it pretty much across the whole footprint?

I think it's across the board, John. And one thing that's interesting, I don't know if any of you looked at our loan presentation that we file every quarter. Rex and I were talking about this earlier. I looked at that. We have a page in there that shows the multifamily portfolio and sort of stratified it by LTV. If you look at that you'll note that as of June 30, 2021, we had about $70 million of a $1 billion multifamily portfolio that was over 76% LTV. And at the end of September, we only had $20 million that was over that LTV. So obviously, $50 million of what paid off in the quarter was higher LTV deals. Now I'm sure they weren't bad deals. I'm sure they were good deals, but it's across geographies that's probably higher LTV, lower LTVs is – I don't think there's – I think there's a lot of demand for that product out there right now.

Yes, that's interesting. Thanks. Rex, just a question on the securities portfolio. It's trended down again this quarter. If net loan growth remains sort of challenging in the near term, would you expect to grow the securities portfolio some, or is it still flattish to down?

Our portfolio has been structured for the past two to three years, focusing on fixed-rate agency and commercial-type projects. This strategy has allowed us to maintain a yield of around 260. On average, we are paying down about $4 million to $5 million each month due to some lockout and prepayment structures, which prevent the portfolio from experiencing significant fluctuations typically seen in a single-family setup. We did make some additions to the portfolio in March of this year when the 10-year treasury rate was approximately 1.75%, but yields have fluctuated since then, dipping in the second and much of the third quarter before starting to rise again. While I don’t have a definitive plan, we are considering whether it might be wise to add more securities to the portfolio with our available cash. Additionally, on the funding side, we have some Internet-based CD deposits that are maturing, and we have significantly lowered our rates on those, leading many of them to just expire without replacement. We anticipate around $70 million in these deposits rolling off in the coming months, which will reduce our liquidity. So, yes, we are exploring various options to utilize the liquidity that we currently have.

Thanks, Rex. I have one final question about expenses. It appears that advertising increased by about $400,000 from the previous quarter to nearly $1 million. Was this change mainly due to timing, or should we expect some reduction going forward?

Yeah. We'll tell Kelly she has to pull that back along.

It was timing.

It was timing. We had a few sponsorships and some things in there that happened in the third quarter. We also in the second quarter had a little bit of a credit that we got some marketing dollars back from another entity that we have a partnership with. And so there was a little bit maybe less expense in the second quarter and some extra expense in the third. And it's probably going to kind of even back out I'd say in the fourth quarter and moving forward.

Okay. So just...

John, well I think the sponsorships were high by maybe $100,000 or so.

It's kind of truly timing.

Okay. So just for overall expenses, again just back to the earlier question, it sounds like expenses are probably relatively stable going forward. I mean, maybe some modest growth, but it doesn't sound like there's a big pullback from the current level going forward?

I don't think so.

No. And I mean, obviously going into the fourth quarter there will be some things going on. But in the first quarter a lot of our people get raises.

People typically receive raises at the beginning of the next year, so we expect a lot of that. Non-exempt employees get raises on their anniversaries throughout the year, which means this happens continuously. However, we usually see a slight increase in the first quarter due to annual raises for exempt employees. There might have been some additional costs in the quarter, but I wouldn't categorize them as significant.

Okay. And Rex, just final question just PPP loans. Looks like they were what about $30 million at the end of September?

$35 million, I think.

Okay.

Yeah, remaining.

Okay. Thanks guys.

Thanks, John.

I'm showing no further questions at this time. I would like to turn the conference back to Joe Turner.

Okay. Thank you very much. Well, as I said, we really appreciate everybody being on the call today and we look forward to talking to you in January. Thank you.

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