Q4 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 fourth quarter 2020 earnings call. At this time all participants lines are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during that session you will need to press star one on your telephone.

If you acquire any further assistance. Please press star Zero I would now like to turn the conference over to your Speaker Day Ms. Kelly Polonius. Please go ahead ma'am.

Thank you Catherine good afternoon, and thank you for joining us for our fourth quarter earnings call. This is Kelly <unk> Investor Relations for Great. Southern Bancorp, Inc. The purpose of this call is to discuss the company's results for the quarter ending December 31, 2020, before we begin I need to remind you that in this call we.

We may make forward looking statements about future events and financial performance. These statements are subject to a number of factors that could cause actual results to differ materially materially from the anticipated results.

Some of these factors please see our earnings release and other public filings President and CEO, Joe Turner, and Chief Financial Officer Rex Copeland are on the call with me I'll now turn the call over to Joe Turner, Alright, Thanks, Kelly and good afternoon, everyone.

We appreciate you joining us today I'm pleased to report that 2020 ended with strong operating results for us in the fourth quarter, our performance underscores our associates' dedication and tireless effort than taking care of our customers. During this unprecedented time I'm really proud of our team.

I'll provide some brief remarks about our company's performance during the quarter and then turn it turn the call over to Rex Copeland, Our CFO, who will go into more detail on our financial results and then we'll open it up for questions for the fourth quarter, we earned $17 $8 million per $1 28 per share compared to <unk>.

$17 $9 million on a $1 24 per share in the same period a year ago.

Earnings per share increase reflect reflects the company's cash.

Common stock repurchases during the year.

We purchased approximately 530000 shares of common stock during the year at an average price of $41 71.

The primary drivers of our slide earnings decline for the year from the year ago period water higher loan loss provisions.

Slightly lower net interest income higher non interest expense, mainly as a result of.

$828000.

Foreclosed real estate write downs.

As well as higher compensation expense.

Mainly on the mortgage area our performance metrics during the quarter were annualized return on common equity 11, two 7% annualized return on assets, 131% our margin was 341% and our efficiency ratio was about 56, 7%.

Our loan production in 2020 was pretty strong considering the operating climate, we surpassed $1 $2 billion on commercial loan originations.

And with historically hot with historically low mortgage rate.

We produced a record setting $540 million.

Single family mortgage loans.

Our total gross loans, which included unfunded loan amounts increased $202 million from the end of 2019.

<unk> decreased $27 6 million during the fourth quarter.

From the end of 2019 outstanding loan balances increased $143 million, including about $96 million of Paycheck protection program loans that were left on our book.

At the end of 2020 during.

During the fourth quarter, our loan balances decreased by about $117 million.

Because of payoffs.

About $26 million of those pay off.

We're PPP loans, our pipeline on loan commitments can continue continues to be strong.

That's shown in our pipeline chart is shown in our press release and if you look at it you can see that it's really been pretty steady.

I think December of 2018 is the first period in that in.

In that pipeline report and our pipeline has been fairly steady.

On January 19, we began accepting PPP applications from our small business customers. During the first PPP cycle, we did about 600 loans $121 million.

I also want to point out to you that for more information about our loan portfolio. We did post our quarterly loan portfolio presentation I believe yesterday.

Our asset quality is at historically strong levels.

At 12, 31, 2020, and nonperforming assets were $3 $8 million.

I think seven basis points, maybe of loans total net charge offs were $422000. During the year I think thats about one basis point and that was primarily on.

Or really exclusively in our in our to the extent of it related to loans. It was in our indirect portfolio I think the rest of our pretty much the rest of our loan portfolio had net recoveries during the year.

So very strong credit quality as.

As far as loan modifications, our total loan modifications were down to $251 million at the end of the year and we do expect those to continue to trend down.

During 2021.

Our capital remains very very strong.

<unk>.

Total equity to total assets of 11, 4%.

Common equity to tangible assets tangible common equity to tangible assets at 11, 3%. So strong levels of capital gives us lots of flexibility going forward.

As I mentioned, we did purchase about 530000 shares of common stock in 2020 140000 shares of that was purchased during the fourth quarter.

At a little higher price than obviously than the.

On the full year average price.

That concludes my prepared remarks, I will turn the call over to Rex Copeland at this time.

Thank you Joe I wanted to start off today with <unk>.

Brief discussion about our adoption of seasonal as you all know there was legislation at the end of 2020 that.

Enacted a lot of things, but one of the things that was part of it was day.

Optional additional deferral period for seasonal implementation.

We elected to initially adopt this in January of 2021, so the fourth quarter information is still prepared to.

The full year of 2020 is prepared under the incurred loss methodology beginning here in the first quarter of 2021.

We will adopt the seasonal methodology and so going forward be under that so what that will look like is we will have.

Accumulative adjustment that will happen.

At the beginning of this year.

We will add or increased our allowance for credit losses. There will also be an allowance for potential losses that relate to the unfunded portion of our loans and commitments.

And the net of that is all going to flow through.

Our retained earnings and so we think that the balance of the allowance will increase on the outstanding loan portion about $10 million to $13 million.

Funded portion to be about $7 million to $8 million and then the after tax effect of that that will flow through retained earnings as a decrease in retained earnings of about $13 million to $15 million. Upon implementation. So the initial adoption should have no impact on the income statement.

The next area I want to touch on is the net interest income and margin. So our net interest income for the fourth quarter of 2020 decreased about $365000 to $44 6 million compared to $44 9 million for the fourth quarter of 2019.

Net interest income was affected by the federal reserves interest rate cuts in March.

And also additional lower yielding earning assets like the PPP loans investment securities an increase funds and cash equivalents at the Federal Reserve Bank.

So interest expense related to the subordinated debt.

Issued in June of 2020, so the net interest margin as a percentage in the fourth quarter was $3 43, 41%.

Versus 382% in the fourth quarter of 2019 and also versus 336%.

In the third quarter of 2020, so if we compare the fourth the two fourth quarter periods.

The average yield on loans decreased about 82 basis points, while the average rate on deposits declined about 77 basis points.

Quarter versus quarter year over year.

So most of the margin compression actually resulted from changes in the asset mix.

With average cash equivalents, increasing about $212 million in average investment securities increasing about $63 million.

The average yield on cash equivalents decreased 153 basis points between the fourth quarter 2019 in the fourth quarter 2020.

So the change in asset mix accounts for about 16 basis points of the decrease with the additional subordinated notes issued in June 2020, accounting for another eight basis points and then in addition to that the yield accretion on our FDIC acquired loan portfolio was about 12 basis points less.

In the fourth quarter 2020 versus fourth quarter 2019.

So the core net interest margin when you when you exclude the additional yield accretion on the acquired loan pools was 334% in the fourth quarter of 2020 net compared to $3 six 3% in the fourth quarter of 2019 and $3 two 7% for the third quarter of 2020.

The core net interest margin increased compared to the third quarter of 2020 was primarily related to lower deposit costs between those two three months periods.

Debt.

To speak a little bit more about deposit costs. So during the three months ended December 31, 2020, our cost of interest bearing deposits was 15 basis points lower than it was in the three months ended September 32020, and it was 77 basis points lower than it was during the three months ended December 31 2019, we.

<unk>, we will make further progress, albeit maybe not quite as dramatic.

And reducing interest rates on our deposits throughout the first half at least and maybe beyond in 2021.

So I mentioned earlier the impact of the accretion income for FDIC acquired loans.

Obviously, you had that accretion income for it for many many years now.

The fourth quarter of 2020, the impact on that was a positive seven basis points.

To our margin.

And the remaining accretable yield that will affect income in future periods is about $2 million and we expect to recognize about $1 $5 million of that in the full year of 2021.

Okay.

Noninterest income also seek back for just a moment here increased when you compare the fourth quarter. This year versus fourth quarter of 19, noninterest income increased $2 3 million to $10 million.

The two main areas that.

Fit into that were net gains on loan sales. So we.

Originated as Joe said earlier, we originated a lot of residential loans many of them or most of them are fixed rate, which we typically sell on the secondary market. So our profit on loans sales increased about $1 8 million in the fourth quarter of 2020 versus fourth quarter 2019.

Also in other income net increased about $404000 compared to the previous year quarter.

Debt related to <unk>.

Little bit better performance some sales of fixed assets, we had some some gains this year versus some expense or loss in the fourth quarter of 2019, we also recognized.

A little more income about 76000 mortgage income on interest rate swaps with our customers. So these are just individuals swaps with individual on individual loans with art with our loan customers and then we also had an increase of about 58000 of income.

Compared to the previous year quarter that related to scheduled payments and exit fees and things related to our tax credit partnership activities.

Noninterest expense for the quarter.

Increased about $1 6 million.

To $31 1 million when comparing it to the fourth quarter of 2019.

The major areas, where we had increases in salary and employee benefits that was up $782000 from the prior year quarter that was.

A lot of that had to do with merit increases and just normal increases that happen.

From from year to year. We also had increased incentives in the mortgage division, which the cost there were about $220000 more than they were in the in the previous quarter.

Quarter or previous year quarter.

I mentioned, we had significantly more income related to the profit on those loans sales.

Insurance costs.

Increase those costs about 389000 compared to the prior year quarter that increase was related to our FDIC.

Insurance premiums in the previous year, we had some credits.

On that were available to us because of over over funding of the of the insurance funds and so we exhausted those credits in the fourth quarter of this year, we were paying the full amount.

Expense on other real estate owned and repossessions that was higher by about $535000 compared to the prior year quarter.

Mainly due to some write downs that we had in the 2020 period, we had small write downs in 2019 larger loans than in 2020, we had three foreclosed real estate properties that we took.

Write downs on one of which was actually sold in the fourth quarter in December.

The other two remain.

And then we also had some former bank properties about six of those where we wrote down some values on those a little bit more so in total is about $839000.

Our efficiency ratio for the fourth quarter 2020 was $56 nine 8% net compared to 56, 1% in the fourth quarter of 2019.

The higher efficiency ratio. This year was mainly attributable to noninterest expense increases partially offset by some increase in total revenue.

But despite those increases we were able to maintain or actually reduce the net interest expense to average assets ratio.

Down to $2, two 9% from 238% in the previous year quarter.

That concludes the prepared remarks I have so at this time I will turn it back over and entertain any questions you all may have.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

And our first question comes from Michael <unk> with <unk>. Your line is open.

Hi, good afternoon.

Hello.

So my first question I was wondering do you guys have any target capital levels. You are aiming for and can you provide an update on your deployment priorities in 2021.

I don't think we necessarily have a target capital level.

I would tell you we think we have.

We have plenty of capital.

I think our.

Highest priority would always be to utilize capital to.

Organically growth.

And so I.

We have plenty of capital, even assuming really outsized growth rates, we have plenty of capital to handle that.

From there.

We could use we'll be able to use the capital opportunistically ease.

Either through.

If there were an acquisition that came along that made sense, we could utilize it there more likely would be repurchases of our stock.

Yes.

Assuming there at all.

Our stock continues to be at attractive levels, and then third use would be special dividend as we've done a couple of times.

Okay. Thanks.

And then on fee income do you feel.

Service charges kind of normalize a bit from there.

The pandemic lows.

Do you expect that to continue and and then.

Can you also just provide an update on the mortgage banking pipelines on how you expect that strength.

That strength to continue.

That's why don't you.

So the service charges and things like that yes. They did normalize so we kind of.

Anticipate those will be similar.

But what we may find here in the first quarter is with another round of stimulus checks and things of that nature.

Draft.

And some other charges NSF charges. Some service fees May may go back down again, a little bit.

Unclear just yet what that's going to look like but that's a possibility because we saw that when the first stimulus checks went around.

I think point of sale transactions and things of that nature of fees that we generate from that.

Have stabilized and seem to be in the fourth quarter seem to be sort of normal.

And I would anticipate that that should continue.

And so I think those areas of fee income should should be.

Reasonable.

The other thing I think you mentioned was our income perhaps on the mortgage loan pipeline and that kind of thing.

Sure.

Sure.

I don't have an exact number on that or anything, but I would just think that probably.

Interest rates have ticked up a little not a lot, but mortgage rate so maybe picked up some.

And so also a lot of people that could refinance have probably already done so.

So I don't know that we will maybe quite see the same level of activity and maybe consequently profit on loan sales.

As we saw in the fourth quarter, but.

I think it will still be fairly brisk.

Okay. Thanks, and then just my last question I was wondering if you can provide a little color on that.

Bank on the future prototype you guys are working on and.

How many of those do you expect to roll out over the years.

I think we're going to I think we're going to build one or we have one bank.

Banking center under construction I mean, we're going to be modest and our rollout of that I think I think we're going to go with this work out the Kinks once we have <unk>.

Plan, then I would think maybe four or five a year after that something like that.

Okay. Thank you thanks for taking my questions.

Thank you.

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

Hey, everyone. Good afternoon.

Okay great.

Just on the PPP the latest round here, you said youre participating.

Any early indications on.

A number of applications or volume dollar amount of what youre seeing so far.

You know.

We've got the numbers I mean, I think overall.

Andrew we would expect it would not be our totals would not be as significant as.

The first round as.

As a reminder, we did about $120 million in the first round I think so far we've received about $27 million of applications.

Ed.

<unk>.

Maybe.

11% or 12% of those are first draw requests in other words customers that didn't participate back in the spring and then the rest are.

Customers that did participate in the in the spring.

Uh huh.

So I think I think there is obviously some interest but right now I think we would say, yes, it's probably not going to be.

At the level that it was in the spring day.

Got it okay.

And then just.

Looking at what they had some pretty good deposit growth here on the quarter.

Interest, earning cash was pretty high at year end what trend are you seeing there is any of that flowing off the balance sheet or is that going to be just held on cash flow I'm, just trying to get a sense of where liquidity is going to shake out here early in the quarter.

Yes, we've had a lot of growth throughout the entire year, but then we had another kind of big.

Influx on it right at the end of December so.

Ed mentioned this earlier, but I'll.

I'll take the opportunity now so if you looked at our earnings release and you looked at the average balance and average rate table. The point in time at December 31 that first call on.

In that table is three.

<unk>, 3.08% interest net interest rate spread.

On that.

It was kind of negatively impacted right at the end of the year by.

Fairly significant influx of funds that we had to park in the.

Third as cash equivalents, because we didn't have anything to do you couldn't.

Do anything with it at the moment so.

We've seen some of those deposits roll out of here, but I would say not a ton of it at all.

And so we've been.

Utilizing different things that we have we had a couple of we've got a broker deposit and some other things like that from national deposits that we've kind of turned the faucet off on a little bit and they are maturing and rolling out so we're eating into that a little bit with with some of our.

Maturing deposits and net of that nature.

The DDA as a non time balances are are staying pretty sticky with us and so we're continuing to see pretty high levels. There, but we are kind of eating into that.

Excess funds at the fed.

Kind of as we go through the next month or two.

Got it okay.

So this is kind of weighing that maybe liquidity be a little bit higher but you're also.

And some higher cost funds that you're maybe not renewing youre letting roll away, but maybe the overall the funding benefits not what it was.

Here on the fourth quarter, then maybe get another good quarter of Pvp recognition.

I guess pulling this all together, maybe a little bit higher margin on a reported basis here in the first quarter before trending lower.

Is that a reasonable way to think about it.

Well the things or the things that are going to happen that we kind of know about as we would anticipate that whatever.

Deposit maturities that we're going to have.

In the first quarter.

And to be replaced or either not be replaced were being replaced at much lower rates.

And what they are at today.

And so we'll continue to see some benefit from that the non time deposits.

Which are significant balance.

We've seen those balances move or I'm, sorry, the rates move down.

Maybe a basis point or two a month on average something like that and so we anticipate we'll continue to try to.

Work those rates down a little bit more but it'll be incremental basis points, it's not going to be big big changes.

Are you, saying, Andrew probably youre seeing margin decline because.

<unk>.

The wealthy.

Amortize the on.

On the PPP loans will go away.

Well, obviously it'll be higher here this quarter and then as time goes on that will that will drift, yes, yes, I mean, I think it was about $1 million.

Yeah.

Fourth quarter, so that annualized is still about $4 million. So thats really just giving us about a 4% yield on those PPP loans, I guess, where we're also earning about 1%. So maybe it's five so.

Got that.

That it's not a huge moneymaking proposition, it's not a big yield portfolio, even with the amortized fees so that portfolio.

Rolls off if we're able to replace it with.

Other loans.

Typically wouldn't be.

Probably in the 4% to 5% range, but theyre going to be.

Three five to four.

Would be the replacement you can probably closer to 3535 to $3 75.

There is not a big difference between the yield on PPP loans and the yield on other loans where banks.

Got it okay.

That's really helpful. Thanks for taking my questions.

Thank you. Our next question comes from John Rowan with Janney. Your line is open.

Good afternoon guys.

Hey, Joe Joseph.

I guess Joe of Rex maybe.

Could you provide any more color on the <unk>.

Loans that are still under deferral I guess, specifically, maybe the hotel motel and then the retail portfolio.

Those are your two biggest bogey buckets you said.

You expect continued improvement, but is that a quarter or do you think that plays out throughout the year.

No I think I think it will happen sort of ratably throughout the year on the on the rest of those and John I mean, I think probably.

Profit, probably my first comment would be I mean.

<unk>.

We don't look at those loans, if we thought there was.

<unk> credit on those loans, you would see those loans classified.

We don't see obviously with our levels of classification.

It was $8 million or whatever total classification.

None of those loans really are classified.

So we don't see impaired credit, we're just continuing to work with our customers generally they are paying interest only or does not.

Making a principal payment.

So that would be my first comment and we will continue to work with people.

In some cases certainly we've.

On.

In exchange for continued interest only payments, maybe they pledged additional collateral or or or per cash up.

So there has been an ongoing negotiation and our customers have shown good faith.

But.

They still remain in this table. Our current expectation is that is that youll see the total of $250 million total sort of ratably declines throughout the year.

That's what we would expect.

Okay. That's helpful. Joe Thank you.

Joe just on the on the if you look at loan growth for the for the year, excluding PPP loans were up about one 5%.

How deep do you think as you look to 'twenty one do you think.

Do you think you can do better than that one 5% or are you sort of feeling about core loan growth excluding PPP.

It's just so hard it's so hard to tell I mean, theres just parts of it that we don't have a great deal of visibility about the.

I think our origination.

Looks good.

Will be points in the year when.

<unk> down on speeds up in <unk>.

But you can kind of look at that.

R R.

Our.

Pipeline totals <unk> been as I said fairly consistent for.

Four or five years, or so or three years. So.

I feel pretty good about that we just don't know what.

On the competition is going to be doing and I Didnt know this.

We have and have intentionally.

Put ourselves in a position where we have a very strong loan portfolio, we have a loan portfolio.

Attractive to lots of long term lenders who are willing to.

Well on our customers' money at rates less than what we are.

While we have them on the book four and.

Limit or eliminate guarantee.

I think so.

Got an attractive portfolio.

Which I think is a good thing, but it does make it tougher.

To keep our loan balances up.

I mean, I think that's a long winded way of saying, we're going to continue doing what we're doing John and just let the chips fall where they may.

And as far as the specifically the indirect portfolio most of that run off has occurred correct or do you expect Sudan.

<unk> portfolio of like $48 million now right.

Okay guys. Just one final question the buyback what's currently remaining under the buyback.

So.

We didn't want yes, we just approved a new million share buyback, Jon so meters by 900000.

Allison shares left on something like that maybe around 900.

Okay. Okay. Thanks, guys.

Great. Thanks, Don.

Thank you and there are no other questions in the queue I'd like to turn the call back to Mr. Joe Turner for closing remarks.

Okay, well, we appreciate everybody being on the call with us today and.

We will look forward to talking to you in April after our first quarter earnings release.

If you have questions in the meantime, please don't hesitate to give Kelly close the call. Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating you may now disconnect everyone have a great day.

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