Q3 2020 Great Southern Bancorp Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Great Southern Bancorp.
Third quarter 2020 earnings conference call at this.
At this time, all participant lines on listen only mode. After this.
After the speaker's presentation, there will be a question and answer session.
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Press Star then zero I would not.
I would now like to hand accomplish over to your host today colleagues slowness Investor Relations. Please go ahead.
Thank you Sarah good afternoon, and welcome I hope everyone is well the purpose of this call is to discuss the company's results for the quarter ending September Thirtyth 2020, before we begin I need to remind you that during the course of this call we'd be may be making forward looking statements about future events and future financial performance.
Hi, Matt.
Please see the forward looking statements disclosure in our third quarter 2020 earnings release for more information.
The N C O, Joe Turner, and Chief Financial Officer, Rex Colin or on the call with me today I'll now turn the call over to Joe.
Okay. Thank you. Good afternoon, I also would like to thank everybody for joining us today and I hope everyone on our call and well also.
As we manage through the pandemic now in its seventh month, we remain focused on the well being of our associates customers and communities.
I believe our associates are doing a tremendous job of serving our customers through this difficult time.
As we said last quarter, we are actively working with any customers who may be experiencing financial hardships caused by this pandemic.
While there is still a lot of uncertainty about the months ahead, we're ready to respond to the challenge is produced by the health prices and aren't a position of strength to do so with our strong capital earnings and liquidity.
I'll provide some brief remarks about the companys performance during the quarter and then I'll turn the call over to Rex Copeland, who will get into more detail on our financial results. Then we'll open it up for questions.
As expected in this operating pharma our earnings declined in the third quarter as compared to the year ago quarter.
Bill we achieved very good earnings of 96 cents per diluted common share in the third quarter the.
The primary driver of our earnings decline when comparing it to the year ago period were number one a higher loan loss provision, but a 100% or almost 100% of that provision went to grow our allowance for loan losses, we had very low charge offs during the quarter.
We did have a lower net interest income then the year ago quarter, I think by about maybe a million 800000 or so over half of that though is attributable to the a result or the effects of the sub debt that we issued in at the end of the second quarter.
We had higher non interest expenses, which also affected us which included $1.1 million related to special bonuses for our associates as I mentioned earlier, our associates are doing a tremendous job for the company. We we know.
We know that this is a.
Uh huh.
Resulting in an unprecedentedly unprecedented hard times for our associates.
Many of our associates have school age children, and they're dealing with a virtual schools and some of our associates have spouses that have lost their jobs. So it's just very difficult we can't solve all their problems, but we do want to show that we are in the boat with them and Thats what the the special bonus was.
For our performance metrics for the third quarter were good our annualized return on common equity and I might add very high levels of common equity was 8.48% our annualized return on assets was 0.98%.
Our annualized reported net interest margin was 336 and our efficiency ratio was 59.6 before.
Our commercial lending production did decline in the third quarter as a result of activity in our markets being a little bit slowed right.
Retail mortgage lending production has been very strong continues to be very strong driven.
Driven by low interest rates, we typically sell the majority of the fixed rate mortgages that we produce.
Total gross loans, which include unfunded loan amount increased 2200 $29.6 million.
Since the end of 2019, but decreased about $11 million during the third quarter outstanding net loan balances increased about $260 million from the end of the year.
Increased $14 million from the end of the.
Second quarter, our committed pipeline continues to be relatively steady and it was about $1.2 billion at the end of September a decrease of about 70 million since the end of last quarter. The unfunded portion of our commercial construction loans is about $715 million a decline of $39 million.
From the end of June.
I would remind you if you are interested in more information on our loan portfolio, we file a loan portfolio presentation, each quarter and I think our third quarter presentation was filed yesterday.
Asset quality is very very strong through September 32020.
Our nonperforming assets are 5.5 million as of September 32020, our nonperforming asset.
Were $5.5 million total net charge offs during the quarter were.
$63000 as I said almost exclusively on the indirect automobile on our indirect automobile portfolio, we actually had net recoveries I think.
In the commercial categories.
One other thing I would mention is our internal loan classification watch list totals at June 32020, our loans classified as substandard were $9.3 million and loans classified as watch were $73.8 million.
Tim or 30 point, pointing our loans classified as substandard were seven and a half million and the watch category was down to 64.4 million. The decrease during the third quarter were due to two substandard loans that paid off and some payments received on watch category credits.
As I mentioned earlier, we fully understand that.
The difficulties, we're in right now will likely persist.
And will result in difficult economic conditions as well so we.
So we have been increasing our allowance for loan losses, we've increased by nearly $14 million since the end of 2019 as a reminder, our provision for loan losses. It is currently under the incurred loss methodology.
We have we adopted diesel on January one we would have put $11 million to $14 million in our allowance at that time and and I think our current expectation would be that at the end of the year, we would put a similar amount.
Into our allowance and and and as a reminder that won't flow through.
Earnings that will be.
While cumulative effect of a change in accounting principle and will be a a direct debit two of our equity and a credit to the allowance.
Loan modifications at the end of June we had over a $1 billion a loan modifications that down to $395.5 million.
At the end of September 70% of those are all are paying interest only.
So the modification was to remove the requirement to pay principal for some period of time up to maybe a year.
That all different times really three months six months.
And then seven to 12 months.
Our capital continued to be very strong as I mentioned from the end of 2019, our total common stockholders equity increased by about $22 million in our book value tangible book value per share increased by $2.71.
Our book value increased from 44 50 to $45.
At $45 at the end of the third quarter. It was 44 50 at the end of the second quarter.
Our tangible common equity to tangible assets is very strong as well at 11.4%.
During the quarter, we did repurchase 206400 shares of common stock at an average price of $37.39 per share.
Additionally, we paid a 34 cents per share dividends.
In spite of the obvious economic challenges caused by co, but we expect that we will continue to operate profitably, albeit not at 2019 levels and we currently anticipate that our regular quarterly dividend can be maintained for the foreseeable future.
Our board of Directors has approved a new stock purchase program of up to 1 billion shares and we may continue to repurchase our common stock over the next several quarters if conditions warrant the amount and timing of stock repurchases will be determined by the company in light of overall capital and earnings levels credit quality metric and the.
Market for our stock and with both and.
And we'll always maintain open communications regarding our plans with our holding company and bank regulators and prior to sort of re commencing.
Our stock repurchase program, we did have those conversations with our holding company regulators.
Over the course of about two or three weeks were not required to seek the permission of the federal reserve in order to.
Repurchase our stock, but we wanted them to know what we were doing and at the end of those conversations. They said they had no objection to us repurchasing our stock in the May.
In the manner that we were doing it. So that concludes my prepared remarks, I'll turn the call over to our CFO Rick Copeland at this time.
Thank you Joe Im going to start today by speak a little bit about net interest income and margin.
Our net interest income for the third quarter of 2020 decreased about $1.7 million to 44.2 million that compares to about $45.9 million for the third quarter of 2019.
The net into.
Net interest income was affected negatively by of course, the federal reserve significant rate cuts that would happen in March. We also had some additional lower earning assets SBH Paycheck protection program loans, some investment security purchases and also increased balances that we hold that does that.
Thats, the federal reserve and cash and cash equivalents.
And also more recently in this quarter by the cost of the sub sub debt that we issued in mid to late June.
The core net interest margin if you exclude the yield accretion from our acquired loan pools was 3.27% for the third quarter.
This year that compares to 3.75% for the third quarter in 2019 and is the same 3.27% as where we were in the second quarter of 2020.
The decrease is a result of the same things I talked about previously.
The one thing that is a little different when you compare.
Q2, this year to Q3, we did have about on annualized basis about eight basis points related to our cost of the sub debt that we issued in June. So if you look at that on a focus on the core comparison, we were at 327 in Q2 327 in Q3 that we had eight basis points of headwind.
From the from the sub debt costs. So.
We said on previous discussions and filings that.
The right test would negatively affect our net interest income and margin in the near term because we have a lot of loans that are indexed to LIBOR, but over the course of the next several months in a few quarters.
A lot of our liabilities, our time deposits and some of our non time deposits would reprice lower and that in fact is what weve been seen in the last quarter or two.
If you look back and see where our cost of interest bearing deposits was.
At second quarter compared to third quarter, our third quarter number was 21 basis points below where we were in the second quarter and we were 62 basis points lower than we were in the fourth quarter of 2019, So our deposit cost continue to come down and we anticipate based on.
Maturities that are coming up in the next couple of quarters.
We will continue to be able assuming rates stay where they are right. Now we we continue to be able to reduce those deposit costs.
Maybe not quite as rapidly as we did in the last couple of quarters, but we still we should see some improvement there on the the cost of fund side.
We are still having a little bit of impact positive impact on our net interest margin and income related to the yield accretion on our FDIC acquired loans that impact in the third quarter. This year was about nine basis points.
Got about $2.9 million remaining in.
In the.
Accreted, a portion thats going to come into income over the next several quarters about 930000 of that I will should come in to income in the fourth quarter. This year.
Noninterest income for the quarter increased about 811000 to $9.5 million when you compare to the same quarter in 2019, a lot of that increase came in the form of gain on loan sales. Joe mentioned earlier, we originate a lot of fixed rate single family loans, we typically sell those.
Loans in the secondary market and our gain on sale was about 1.9 million higher in Q3, this year compared to the same quarter a year ago. So quite a lot of originations there and income derived from that as we sold those loans.
Service charges debit card fees ATM fees, we continue to see.
Crease, there compared to the prior year about $927000 this quarter compared to the year ago quarter.
We're seeing that kind of across a variety of things overdraft insufficient funds fees are lower customers.
Has opted to they're not using those services as much as they were so our utilization of that is down some.
A little bit of probably also in the second and third quarter. This year, we were pretty proactive in waiving fees and things like that for customers as part of things were going on during the pandemic and I would say in the middle or late part of the third quarter, we were probably not waiting as many fees and things like that.
Now as we are.
As we were earlier in the year. So I think towards the end of the third quarter that fee income sort of picked up a little bit from from there also we've seen a little bit less.
Usage and income from our debit card and ATM fees.
That may start to again expand too, but we kind of saw a little bit below there in the middle of the year for that.
Other income decreased actually compare to a year ago quarter about $442000 we have.
We had.
A larger amount of originations of interest rate swap deals with our loan customers in the year ago quarter compared to where we were this year those tend to be a little bit sporadic we haven't throughout the year, but not always at the same time the same magnitude.
Each quarter.
Noninterest expense noninterest expense increased $3.3 million to $32 million this year this quarter.
Compared to the same quarter in 2019.
Largest portion of that was an increase in salary and employee benefits were up $2.9 million compared to the prior year quarter.
The largest part of that increase was as Joe mentioned the bonus that we elected to pay to our employees that was about $1.1 million of the increase we also had probably compared to last year about 700000, or so higher level of compensation.
Both salary and incentive and additional people in the mortgage area. So that income that I talked about a minute ago. We did have some offset to that in the form of.
Compensation to the producers and Servicers in that area.
We've also had a few people out.
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As part because they've got exposure to coded or things like that there are there quarantining at home and we are continuing to pay people in rugs.
In regard to that and so we have some cost associated with that with people part time people having to fill in.
People that we normally wouldnt necessarily be paying but we if they're off because of.
Quarantine, we do continue to pay them. So there is a couple of hundred thousand dollars or so probably in there maybe a little more that relates to that so those are the main drivers and then and then the rest of it probably 3% to 4% of it is just from a year ago normal merit increases and things of that nature and I think to Rex we did have.
Additional insurance costs, because we're not a lot we no longer have the credit right on our.
FDIC insurance right, we had a full credit I think last year and then this year. We has had a partial credit and we had to start paying the full amount again. This year. So that's why the insurance costs was higher.
Occupancy expense was also higher than it was a year ago about $530000. Some of that was depreciation we rolled out some new ATM ITM units late in the <unk> or in the fourth quarter last year and we've got the depreciation on those is higher this year also just some other repairs and maintenance.
Things that occurred in the third quarter were $250000 or so of it so.
We just those are the costs that that increase the occupancy occupancy line.
The what.
One last thing and non interest expense expense on other real estate owned and repossessions was lowered by about $400000 compared to the prior year period.
We just as we've been doing a good job I think of working down that fourq.
Foreclosed assets that we have the repossessed autos are much lower level than they would have been last couple of years. So we just got less cost associated with.
Foreclosed real estate and with the repossession of autos and auto portfolio.
As mentioned before our efficiency ratio for this quarter was 59.64% compared to 52.63% in the third quarter last year.
Higher efficiency ratio was mainly due to the higher level of non interest expenses I mentioned some of the reasons for that I just talked about.
Also we had a small decrease in in total revenue.
Non interest income was higher but net interest income was little bit lower.
So despite these increases in costs, our non interest expense to average assets remained at 2.34 per 2.34%.
For the quarter this year versus the quarter last year.
Assets have continued to grow as we talked about and the average assets for this three month period were about $550 million higher or about 11% higher than they were in the third quarter last year.
Just a couple of lasting instead I'll mention as.
As we wrap up income taxes, we had a little bit higher than normal.
And normal effective tax rate in the third quarter 2020.
And it's a little bit higher year to date, we've got.
State taxes that we pay in various states and in some of those were a little bit higher.
This year compared to previous years, and probably we are going to be in future.
The gain that we had when we terminated the interest rate swap earlier. This year is flowing through in our tech in our state taxes.
And creating a little bit higher taxable income in certain states some of which have.
Higher tax rates and others and so we're we're seeing a little bit higher effective rate there that federal effective rates really pretty much. The same it's just really being driven by state various state rates.
So we expect we're going to continue looking at that.
Refining our estimates for that throughout the year, but.
But I think our effective rate for this year, maybe a little bit higher more like the.
The nine month effective tax rate and then presumably.
Normally go back a little bit lower look more normal into.
In 2021.
And then just one last thing Joe mentioned are already a little bit about Cecil again.
Again, we anticipate based on what we know today that we will.
Adopt Cecil and with our fourth quarter information it will be retroactive basically back to the beginning of the year and flow through our full year numbers, but we.
We anticipate right now that that would be the case that that the seasonal adoption would occur.
As we as we finalize our fourth quarter.
Financials, and then like Joe said before we have previously discussed.
Our seasonal impacts in our previous filings if you look at our June in Q1 as the most recent I think information there and we don't think there's anything different right now materially than what we've talked about before so.
We will provide additional color on that.
During the fourth quarter information.
That concludes the prepared remarks, we have at this time, we will entertain questions and I'd like to ask our operator to once again to remind the attendees how to queue in for questions.
Thank you as a reminder to ask the question you need to press Star then one on your telephone to withdraw your question. Please press the pound key.
Our first question comes from the line of Andrew Liesch with Piper Sandler Your line is now open.
Hey, good afternoon, everyone how are you.
Hey, there thanks.
Hi.
Just wanted to focus on expenses right now you are little bit higher this quarter than than I was forecasting you guys had a pretty good run rate they are below $30 million.
It seems like maybe some of that was affected by the mortgage business this quarter, but.
Is this the new run rate, we should be using or do you think.
Excellent thats $40 million level.
Well I mean a million one of it was this one was the special bonus and so that you need to back that out I think I know it is wise right.
The other costs I mean, there's some other cobot costs that relate supplies and cleaning and equipment in that kind of stuff and that's going to be with us for a while I think that that had recommits, Andrew that probably 350000 of our cost during the quarter were.
Payments made to quarantine employees.
Those costs will probably continue until we get out out of the pandemic I mean, I think that to think that that could adjust it seems to me as though the 1.1 million will adjust as right that.
And then we did our.
Mortgage related compensation is up 800000, I think from our 750000 from where it was during the third quarter of 2019. So you back those two numbers that or you you normalize the mortgage and you back to work.
Back to 1.1 million off and yet we are 30 million, but but our mortgage volume continues to be strong so.
You know, it's hard it's hard to see that changing as long as our mortgage volume remains strong.
Okay. Thanks Thats helpful.
Thats helpful and then around the Mark.
Around the margin sounds like still some good opportunities on the funding side.
To improve some costs there what Uh huh.
What are you seeing on yield pressure right now in the funding cost benefited that actually more than what you're seeing on the yield side right now.
Probably I mean, I'd say the funding cost are coming down a little bit a little bit more we have had a little bit of art at loans repay.
A lot of those are typically maybe at higher rates than the new loans that are coming on so we have seen a little bit of decline in the yield on loans I mean, if you look at our.
In our press release toward the end I think on page 19, you can see for the quarter of what our average yields and costs work and then the first column there we give you.
Yield and cost.
Rates as of 930, so those are going to be the point in time numbers and you can kind of see from there.
Where the yields are.
On different asset classes, and then on the liability side and you can see on deposits.
Our our 930 cost of deposits the 67 basis points for the quarter. It was 79 basis points. So clearly we anticipate we're going to see those cost come down a bit more the other areas probably not going to change much I mean, the sudden subordinated notes.
Those are fixed rate.
And the sub debt is slipping, but it's tied to LIBOR and LIBOR has been moving around too much. So.
The reduction on the funding side is going to come on the deposits.
And then on the loan side, the only thing that you don't see in there that the the yield that we get you on the.
On the loans.
Does exclude owned at the point in time does exclude the yield accretion. So in the third quarter that was nine basis points of benefit. So you can kind of it.
Yeah.
Kind of analyze that and say that well maybe that yields a little bit higher than what we show here or will be but.
He was going to come down a little bit from where we were probably in the nine basis points is in the three months ended September 30 number but its not in the point on the point in time right correct correct.
So I will continue to see I mean, we've been.
You know probably have between 100 and 125 million a month of CD time deposits that are maturing and I think those probably have a weighted rate of somewhere around 140 or something like that so we replaced those at substantially lower rates than that but.
It just at 102 hundred 25 million a month it takes a little time for it to work through like we said so we've gotten.
Six months of that kind of stuff already through the pipeline and we've got six to nine more months probably have.
Time deposits that will roll off that will be able to reprice down.
Okay.
That's very helpful commentary I really appreciate it I will step back thank you.
Thank you.
Thank you as a reminder to ask a question. Please press Star then one on your telephone our next.
Our next question comes from the line of Michael in Shell bony with KBW.
The line is now open.
Hi, Good afternoon, I was everyone doing.
Thank you. Thank you.
Yes, good so fee income and in particular mortgage sales were really strong in the quarter.
Can you just share some color on the mortgage pipeline going forward as well as your outlook for fee income in general.
I mean, I think we're still originating quite a lot of mortgage mortgage loans, it and we've got quite a few commitments out there.
Do we have the mortgage pipeline in our.
Bottom line numbers.
Trying to look back and see.
If we've got that commitment number in here.
Yes.
It's about.
Well its lower here no I'm, sorry, it's a little bit lower than it was.
In the previous quarter end, but it's still like $94 million and commitment they are not close weve.
Had a couple of quarter ends that were higher than that but substantially higher than they were a year or two ago and I don't I haven't seen or heard anything that leads me to think that fourth quarter is going to be much less than the third quarter. Yes. I mean, we so I think we still did very busy in the mortgage.
Group, and I think theres still producing quite a bit of new new loan commitments. So I I don't know I mean, we get to the very end of the year.
Around the holidays, but maybe it will slow down a little bit for that so we made.
So we may see a little bit of slowdown.
Late in the quarter, but so far through the first part of the quarter not really much change.
Hi, Thank you that helps.
And then the release noted some initiatives the banks, making toward modernizing and consolidating branch in office space.
When you review your overall from footprint you see further opportunity for like a larger scale rationalization of offices and branches.
I don't know I don't really think so I mean, there may be you know keep in mind, we've probably close.
25% of our branches over the last four or five.
Four or five year 35 branches, yet it may be more than that maybe 30% or something.
So yes, there could be further consolidation.
But it would be one or two banking centers here or there I don't think there will be kind of large wholesale changes now staffed with.
Customer behavior as it is in 2020 at that.
<unk> continues to change and.
People start.
People start accessing bank for.
They do access us in a number of different ways, but we found that four big.
Big transactions borrowing money.
Opening.
Posit accounts those sorts of things.
They like to come in and do that in person.
And the.
So long is that the case.
I don't know that there will be large scale rationalization.
Okay. Thank you last question so capital is pretty healthy levels and you guys actively been buying back shares can you refresh your repurchase program, but can you just talk about your capital allocation priorities and in terms of M&A buybacks dividend organic growth.
Sanjay.
Well I mean I think.
We have the ability to.
Yes continue to pay our dividend, obviously, we're going to.
To the extent, we can grow we want to grow we we think we can grow a lot in that would certainly not impact our.
Our ability to pay our dividend.
The third priority among those would be buying our stock back and I and I think we would rather buy our stock back at 80.
80% of book or 90% above certainly than.
By somebody else the stock at some multiple above book.
So thats kind of how we would prioritize.
Great. Thank you thanks for taking my question.
Thank you.
Thank you we have.
No further questions in the queue at this time I would now like to turn the call back to Mr., Joe Tanner for closing remarks.
Well, we appreciate as I said earlier, we appreciate everybody bye.
Being on the call today, we'll look forward to talking to you yet.
After the end of the year and hopefully we will.
We have a president and.
I have a.
Vaccine and hopefully things will be looking up.
Certainly hope everybody has a wonderful and healthy holiday season and.
And we'll talk to you in about three months. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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