Q3 2019 Earnings Call
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 listen only mode.
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I'd now like to hand, the converts over cheese speaker today, probably colonus. Thank you. Please go ahead.
Thank you Valerie good afternoon and welcome. This is Kelly politeness with Investor Relations for Great Southern Bank for the purpose of our call today is discuss the company's results for the quarter ending September Thirtyth 2019, before we again I need to remind you that during the course is this all we may make forward looking statements.
About future events in future financial performance, you should not place undue reliance on any forward looking statements, which speak only as of the day. 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.
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, right. So put an art here with me I'll now turn the call over to Joe Turner.
All right. Thanks, Kelly and good afternoon to everyone who's on the coal I want to thank you for joining us for our third quarter earnings call.
Usual I'll I'll provide some introductory remarks, some high level remarks, and then Rex turn it over to Rex to talk a little bit more detail about the income statement.
[laughter].
Huh.
Overall, our third quarter results were very good.
Hopefully you've had a chance to read the earnings release, and if you have you seen that we earned $1.38 a share or $19.7 million.
We saw good loan loan growth during the quarter and we further improve our operational efficiency.
Net income dollars did grow we experienced some net interest margin compression during the quarter and Rex will provide some color around that 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%.
Well production during the third quarter was pretty solid we had growth both in outstanding loans in our pipeline.
During the quarter or both when compared to the end of the year and when compared to the linked quarter.
The answer the a increase in our outstanding loans was primarily.
Due to increases in commercial real estate owner occupied one to four family and multifamily loan.
[laughter] that was partially offset by decreases in the consumer auto loan portfolio, which we talk to you guys about before we do continue to believe that the market slowing up [laughter] we've seen.
She is lower deep deal flow I think and.
Buckley when rates start reducing its as a result to the economy slowing a and maybe lenders are getting scared. So you'll see increased credit spread right now, we're seeing decreasing credit credit spreads.
Higher levels of competition.
For a lower deal flow. So you know I think it's a it's a challenging environment from a loan growth perspective, you don't really see that coming through in our in our pipeline our pipeline.
Still strong, but you know I think maybe looking further out you know the 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.
Yeah, that's certainly a positive thing or [noise].
Our classified assets the capital in reserves or 3% as I said that this is 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 in any event in other very benign credit environment.
We've never been as low as we are now.
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 handle that tangible assets is that 11.9 for set at the end of the third quarter, our book value per share as 40, almost $42 a and we were pleased to.
Introduced our or increase our dividend.
During the third quarter to 34 cents a share so with that I'll turn the call over to Rex Copeland our CFO .
Right. Thank you Joe I'm, 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 reduced insurance premium experience for our FDIC insurance premiums so the the fun.
Does it certain thresholds and so we have a credit coming back to us.
And that reduce our expenses by a little over $300000 in the quarter. We also did I have a couple of valuation write downs on some foreclosed assets. It was about $280000 of of additional expense. There are reflected in those in those write downs on those two assets.
As Joe mentioned earlier, we did see a little bit a compression in our net interest margin as a percentage or even the dollars were higher but the margin percentage was a little bit lower we were 395 reported in the third quarter and that compared to 397 in the second quarter in for two.
Two in the third quarter last year. So you know we have a little bit of of lower rates on our investment securities and and other interest earning assets. So funds that we have at the federal reserve and things like that.
Fed fund rates have come down and so we are seeing a little bit of a decrease from where we were a year ago.
That our rates paid on deposits are sort of flattish.
And other borrowing so we are seeing a little bit of a of compression from from those areas.
We did have some yield accretion 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.
Some additional in income or margin related to the accretion on FDIC acquired loan pools.
I guess it before the dollar amounts were up from where we were a year ago and also in the in the second quarter. This year. So we've continued to kind of push through that with with a little bit of increase in dollars, but the margin percentage has has come back a little bit.
In the third quarter, we did we've talked before about our interest rate swap that we did a late last year and included in our interest income in the third quarter. This year was just over $800000 of income related to that swap so where the current LIBOR rates.
And now compared to the amount that rate that we receive on that swap is about a 100 basis points are so different than that.
And so that's what's reflected in the the net settlements that we have with our counterparty there.
The non interest income section of the financials, we we did.
Have lower noninterest income compared to the year ago quarter, as you'll remember that a year ago quarter. We had the sale of the branches in deposits in Nebraska, and we booked about a 7.4 million dollar a gain on that sale in the in the quarter last year. So we.
Did not have that obviously again this year and that that related to some of the deep or the decrease we had we did offset that a little bit with.
A little bit higher income.
In a profit on loan sales during the quarter I'm also as we pad throughout this year, a little bit higher income on our debit card activity related to some contracts that we enter into a it to begin the 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.
This will fluctuate from quarter to quarter related to income on interest rate swaps that we entered into with with customers and Counterparties and also a little bit of income from exiting some of our certain a tax credit partnerships that we had so there was definitely some some nice.
Flow of income that came through in some of those categories and not all those things happened every quarter, but.
We did experience some some good income in the third quarter. This year from that noninterest expense should we continue to.
Make.
Operational efficiency and kind of containment of our expenses a priority.
And we've been able to do that are non interest expenses were about.
The up about $416000 compared to the same quarter last year salary employee benefits as probably the largest area of our increases like I said before we did have a 300000 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 that have have that they're kind of final term now.
And we.
Amortized off all those those intangibles for certain of the acquisitions.
Your 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 in 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 on efficiency and we'll continue to work.
Toward that.
One last thing I was going to mention is just briefly update.
Well on Cecil.
We've we've been working through that.
Throughout the year end and continuing to finalize a few things with our 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 then that's kind of though on the impact for us to larger impact is going to be probably the the unfunded loan balances and commitments and things.
We have but overall with all the combined we expect the impact of Cecil to be 2% to 3%.
Decrease in our equity we adopt that.
At the beginning of 2020, so that 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.
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Please standby, while we compiled acuity roster.
Our first question comes from Michael Perito Your line is open.
Hey, good afternoon, everybody. Thanks for taking my questions.
Right.
Just since you brought it up right. So they did spend a minute on Cecil here I'm, just curious the two or 3% equity.
[noise] impact doesn't seem that dramatic so I guess, a two part question here, one really shouldn't impact for capital planning at all weather near term or long term right and then to just as you went through that process any.
In fall, you're willing to share kind of or different views on your portfolio that that this the price Cecil process force you to take that might alter a kind of your credit appetite going forward or for certain asset classes or anything of that nature.
Yeah, I think first part I, we don't expect it to really be all that impact into our capital. Obviously, it's not decided to be a really we don't think really large number at this point.
And then as far as.
The type of lending and things like that I don't I don't really see at the end that impactful to the things that we do I think we'll probably continue to to do things in generally the same manner. It looks the same type of loans might it might.
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Cause us to look at every individual loans would obviously be looked at on individual basis, but.
We may look at do we want to.
Make alone that's maybe a little shorter term.
Than we might otherwise, but but I don't think is going to be really impactful and how we're doing there either.
Okay.
And then on the Joe on the growth saw.
It seems like you guys are tag work.
You know kind of Growingly.
More cautious maybe just slightly but I have every quarter or kind of pass this year and we get through this 2019, but 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 the pull through that pipeline has been trending year to date, thus far in and what do you think you'll probably.
The closing on less deals and the pipeline moving forward or have you seen a material alteration kind of closing rate, even though that I haven't seen as much.
I don't think it's that so so much Mike I mean, I think most when I look at our pipeline I think the two two key numbers really are the close construction loans with unused available lines, particularly the non one to four family because that's a big number and then the loan commitment not closed.
Yeah.
Both secured by one of four and secure by.
Not one to four.
So and again you know I anticipate that are pull through ray will be you know not significantly different than it's been.
In the past in those areas I guess my you know.
I'm just talking more anecdotally you know I sit in on the committee. So I see all of the larger loan requests that we're considering it just seems like.
Thats slowing down a little bit and you know as I talked to.
The leaders in our various offices.
They say the same thing the it it seems to be.
You know a little bit less activity and a little bit more competitive.
You know for instance, we were looking at.
Loan requests yesterday and the theme just in the.
Based on the kind of.
Spread to LIBOR, we were getting in the past it seemed.
25 basis points are so low from where it should be 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.
Yeah I think it is you know I guess my observation is more anecdotal than you know maybe factual the factual is probably our pipeline.
But you know.
I do I do feel like it's probably you know things are slowing down not dramatically, but just slightly.
Okay.
And then lastly, you know I mean, obviously the core NIM compressed a bit in the quarter, which you guys addressed and there's obviously a DC probability that that interest rates continue to kind of work against against us here, but but.
No.
Firstly, you know the ASP and mortgage gain on sale activity really serve just kind of a nice offset in the quarter and I'm. Just curious if you could comment on on on.
Outlook for those line items yesterday, specifically, which I know, it's a bit newer for you guys. Do you think that that's something where are you guys can see some fee income growth and hopefully the only be offset some of the and I pressures that could stem from from a lower margin if interest rates continue to decline.
Yes, we hope we hope to bike.
Yeah, we do have we're actively looking for SB eight wells 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.
Hi, I Wouldnt 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, yeah, that's going to probably be somewhat a reflection of interest rates and and refinance as part of it and new new purchase and that kind of thing too.
We have had our loans held held for sale balances have been higher and the last couple of quarters than they were last year and early this year. So we are continuing to see a little bit higher level of activity in that.
Can't guarantee that's going to happen in the next few quarters, but where is that right now it seems to be reasonably positive.
Got it and then just one quick last follow up sorry, but just on the Sps infused just remind us.
You know how built out at that platform at this point for you guys made how much kinda capacity is there with occurred team and support staff in credit staff on on onboard that that you think you can support it means there are lot of runway there or do you think if it if it accelerates that there could be need for kind of further broadening of the supported et cetera that platform.
You know we're trying to utilize the source deals were trying to utilize our existing no existing staff throughout the branches throughout the.
Yeah.
Throughout our lending teams that sort of thing and then we have.
To help with the kind of the back office part of that we've we've.
Contracted with a with the company.
To help with that so that can certainly scale up.
If if we were doing way way way more volume, we might have to grow kind of our administration of that program a little bit, but I think we have opportunity to grow a lot without seeing really increased costs.
For for a while anyway.
Okay.
Great. Thank you guys for taking my questions I appreciate it.
Hi, Thanks, Mike.
Thank you again, if you like to ask a question. Please press Star then one when you touched on telephone.
Our next question comes from Andrew Lee just Daniel Neil Your line is open.
Good afternoon, everyone.
Hey, Andrew.
My question has been asked already I'm just wanted to follow up on deposit pricing here I didn't seemed like there was too much movement.
And the rates quarter over quarter, but what are you seeing in the markets that you guys are in.
With respect to pricing and other are there opportunities to to lower your offered rates. Following these fed rate cuts.
I'd say, it's pretty competitive.
As far as there's different banks and credit unions that are still advertising you know specials 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 kind of fight that battle, a little bit money market rates and some of the interest bearing checking rates.
There's not there's not a ton of room for those to come down yet probably.
So we're still trying to kind of work through that Theres, 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 two between.
Non time account types and so there's been some flow of funds into some of the higher higher yield money market type accounts and so we're not really see in too much of a decrease in a non time.
Overall rates the time accounts, we're kind of just he knows.
It's fairly recent the rate cuts that have occurred and so.
It takes a few months for those to kind of filter through we are seeing in some of our deposit types.
That we've been able to reduce the the funding costs on the.
Maturity and then the new booking.
New products in the in those types.
Retail Cds a lot of our Cds mature you know within three to 12 months and so we're probably in the fourth quarter, hopefully get as CEO , a little more of the maturity start to read replace with.
A bit lower rates and that kind of thing that we saw in the third quarter, we just didnt really.
Have a chance with when the rate cuts occurred it just didnt and with that there's not that many maturities that occurred within within the third quarter. There. So we expect that we'll see.
Some of the rates that are.
Going to be rolling off here in the next two or three quarters. The current market rates would be lower than where those are so we would hope that we would see some some did decrease in the overall funding costs on the time.
End of accounts as well, yeah, So I agree I mean the.
Well you would've seen immediately both in margin and then you would have been you wouldn't notice the in our spread calculation as if we had been able to reduce.
Our non time accounts, but as Rick said.
Competition has really preventing us from doing that to any great extent and then you know with with respect to time accounts really I think the cost of.
New origination Cds is coming down a little bit. So that's a positive thing, but you know if the I don't know what the average term of our CD portfolio is probably between six months than a year or something like that it's going to take some time to roll through that and reprice enough of it the EU.
See much of a change.
Okay.
That's all really helpful. You've answered all my other questions. Thanks much.
Thank you I'm showing no further questions at this time I'd like to turn the call back over to Joe Turner for any closing remarks.
[laughter].
Again, we appreciate everybody being on the call with US today, and we'll look forward to.
Talking to you a after the end of year. Thank you.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participating you may now disconnect.