Q2 2019 Earnings Call
[music] good day, ladies and gentlemen, and welcome to the Great Southern Bancorp Inc. second quarter 2019 earnings call at this time all participant.
Sarna listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time, if anyone should require assistance. During the program. Please press Star then zero on your Touchtone telephone.
As a reminder, todays program, maybe recorded and now we'd like to introduce your host for today's program Kelly Polaris Investor Relations. Please go ahead.
Good afternoon and welcome. This is Kelly Calamitous Investor Relations for Great Southern Bancorp, Inc. The purpose of this call is to discuss the company's results for the quarter ending June Thirtyth 2019, before we begin I need to remind you that during the course of this call we could make forward looking statements about future events and financial performance.
You should not place undue reliance on any forward looking statements, which speak only as of the date. They are made these statements are subject to a number of factors that could cause actual results to differ materially from the results anticipated or projected for a list of some of these factors. Please see our disclosure in our second quarter 2019 earnings release, President and CEO , Joe Turner, and Chief Financial Officer Rex Copeland are here with me I'll now turn the call over to Joe Turner, Okay. Thanks Kelly.
Good afternoon, everybody [laughter] and I also want to.
Excuse me I also want to thank you.
Oh for joining our second quarter earnings call as is typical I'll provide some preliminary remarks about the Companys performance and then turn the call over to Rex Copeland, who will go into more detail about the income statement.
Yeah, we're we're excited about the way the quarter wound up.
If you've had a chance to review the earnings release, you've seen that we did earn $1.28 per share and $18.4 million. We saw good loan growth during the quarter. We further improved on our operational efficiency, we did experience a little bit of a net interest margin during the quarter with Rex will.
Provide color around.
Some operating metrics I want to highlight our return on common equity was 13.2 for our return on assets was 150 to our margin was 397 and our efficiency ratio was 54 and a half or so.
Yes for loans, we feel very positive about our loan portfolio Uh huh.
We've had good growth in the <unk> in 2019, so far I think our loans are funded balances are up 124 million.
From the end of last year of $62 million I guess in each quarter I think so.
Yeah, nice loan growth so far our gross loan balances are up 42 million.
From the end of 2018.
Our committed pipeline continues to be.
At about the same levels. So yeah, we continue to have.
A strong pipeline I will say just anecdotally it seems like to me.
Things in the on the loan side ours are starting to tighten maybe just a bit as I said, our pipeline is still strong, but there there seems to be maybe slightly less deal flow.
Then there was slightly fewer deals out there and so the competition is is probably becoming even more significant.
Asset quality continues to be strong.
You know, we're coming off historically low levels. We've told you before that asset quality can be kind of lumpy and we did add a 6.7 million dollar relationship.
To our our Nonperformings.
During the.
Second quarter and in fact that relationship has.
During the first week of July has transitioned into other real estate.
But you know this is a credit that we've had on our books and so seven then we've been.
Watching it for some time, but even after adding this relationship to our Nonperformings are.
Nonperforming assets to total assets was still relatively low at <unk>, 0.33%.
Our capital position continues to be strong.
Our capital total capital or cold comments about common stockholders equity is 572 million or 11.7% of total assets. Our book value increased from 30 836 to 40 30.
From the end of last quarter, the ratio of tangible common equity to tangible assets.
He is very strong at 11.6%, we do want to point out that $32 million of our of our equity it is gap equity, but it is.
Based on it's Unreal, it's derived from unrealized gains on our available for sale securities portfolio, plus the mark to market gain on our cash cash flow hedge.
So you know as you think about our capital.
You may or may not want to.
Net that part out.
We were pleased during the second quarter to declare a regular quarterly dividend of 32 cents.
Per share.
That concludes my prepared remarks, I'll turn it over to Rex Copeland and then we'll open it up for questions. After Rick completes his presentation all right. Thank you Joe.
As Joe stated earlier, we did we did see a little bit of a compression in our net interest margin or the margin was 397 in the second quarter this year compared to 4.06% in the first quarter this year and 3.94% in the second quarter of 2018, so compared to the 2019 first quarter or the compression to our margin was was really caused primarily by a higher average rates on deposits.
A little bit on borrowings, but mainly on deposits in it's just slightly lower yields on our loans due to LIBOR interest rates coming down just a bit in the second quarter.
The positive impact on our net interest margin from the additional yield accretion continued in the quarter or if you compare.
Second quarter of this year second quarter last year and in first quarter of this year. The accretion added 12, 10, and 13 basis points each of those quarters, respectively to our net interest margin.
Our net interest income dollars were up though from the year ago quarter in the most recent quarter net interest income for the second quarter of 2019 increased 3.7 million.
Compared to the second quarter last year to a total of $44.9 million and then our net to net interest income was up about $300000 from the first quarter of this year. So we continue to see growth.
In in our assets growth in our net interest income dollars, but slightly lower.
Net interest income or net interest margin as a percentage.
One thing to note, we did record a loan interest income of $568000 in the second quarter related to the interest rate swap transaction that we did late last year as part of our ongoing interest rate management strategy to kind of help us.
Mitigate any issues with.
With falling rates that we might have.
So again under the terms of the swap we are paid a rate of about 3.02% fixed and then we pay a floating rate on that which is.
Life or so.
The rate most recently when it reset this past month was 2.4%. So we do have a margin there that we earn spread there that we are.
Receded benefit.
Like everybody else on the call. We are very interested in what the fed will do on July 30, Onest with their interest rate decision and Weve indicated in past filings that we model various scenarios of.
The rates up and down and then non parallel in parallel shifts.
We do.
Believe it will.
Falling rates will be.
Modestly negative for us.
We do have about almost $1.6 billion of loans that are tied due primarily to one month LIBOR some three months, but.
We will go repriced based on LIBOR.
Index within the next 90 days so.
We do have a fair amount of our portfolio is variable rate tied to LIBOR.
We will do what we can.
To manage the the funding cost side and.
Work hard to to be able to reduce some of our costs.
As if and when rates.
Fall on the on the.
In the market and on the liability side of the balance sheet.
Non interest income for the quarter and decreased by 302000 compared to the second quarter a year ago.
Really the reductions were primarily in service charge ATM fees, some commissions and net gains on loan sales, where we originated less fit.
Fixed rate loans that we sell in the secondary market in more fixed to variable rate mortgages, which we generally retain in our portfolio. We did offset some decreases there with an increase in income related to new debit card contracts, which became effective at the beginning of 2019. So we did derive some additional.
Income from that.
Non interest expenses I think we're still tracking well on our expense containment and operational efficiency as Joe mentioned, our efficiency ratio earlier was at 54.5%.
Non interest expenses were down about one and a half million from the second quarter comparison with last year, a big driver of this was.
Lower expenses related to other real estate owned repossessions.
And that was the majority of the decrease.
Related to write downs in the prior year period on some.
Certain of our foreclosed assets.
The decrease was offset a little bit by some increased as we had about 481000 increase compared to a year ago quarter in salaries and benefits just related to additional staffing in various areas and the new loan production offices in Atlanta, Denver as well as other areas.
And then also other operating expenses increased about 192000.
The majority of that and we mentioned it in the earnings release related to.
Pledge commitment that we made.
In our city, Iowa market.
For $250000 to cover a 10 year period.
For work that they're doing to expand it and sort of remake portion of their downtown area with an Expo center and some other hotels and and other businesses that are going into that area.
You know again I mentioned, our efficiency ratio was 54.5% that compares very very favorably to the second quarter last year, which the ratio was about 61.5%. So we continue to.
Increased our revenues without a commensurate increase in our non interest expenses.
Along those lines of efficiency ill talk about this briefly a couple of business initiatives fairly small, but the things that we did mentioned in our earnings release, we got a couple of locations that we are.
Have either have or will close our Fayetteville, Arkansas banking center has been consolidated into the Rogers, Arkansas Office and then we also recently announced plans to consolidate our Ames, Iowa banking center into our office in Anthony Iowa that'll be late third quarter in September so.
I think that concludes all of our prepared remarks. So at this time, we can open it up for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on you touched on telephone. If your question has been answered and he'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Andrew Liesch from Sandler O'neill. Your question. Please.
We won.
Hi, Andrew Hi, So just wanted to focus on deposit cost here it looks like they were up about.
Maybe eight or nine basis points, this quarter, I guess or not or interest bearing funding costs like what.
And I know you added some of the Internet Cds in C dollars from the first quarter. So maybe just the full quarter effect of that.
Pushing up the funding cost for what.
What can you guys do right now have you lowered your offered rates right now to kind to mitigate the effect of the drop in LIBOR.
We have on some things we've been working on some of that we haven't lowered.
The majority of the rates, probably I'd say part of it is also negotiating on Cds that were negotiating at lower levels than we were maybe 234 months ago.
We were mindful of what competition is doing as well.
Our home loan bank advance rates are down a bit there, they're sort of track anymore, along with the change in LIBOR most of our.
Borrowings from pretty much all of our borrowings from the home loan bank or overnight type.
Borrowings at this time, so we're trying to kind of manage through this process right now it seems like that.
If you think about it really the rates towards the transition maybe a month or two ago I don't think all of its necessarily all filter through yet, but I'd say that we are seeing as far as like on a month to month basis I think overall, the the cost of deposits the growth in that cost.
Is slowing compared to the change that we saw in the fourth quarter and first quarter, but even that is part of the second quarter.
Of this year.
Okay.
And then can you just just make a couple of comments on the decline in deposits in the quarter, what so what drove that.
A little bit of it was seasonality, but I mean, a lot of it is some retail Cds.
We continue to.
Have a lot of competition in some of our markets with people running specials and things like that.
And then some of its just fluctuations in.
Non interest bearing deposits.
Non time deposits.
But I'd say retail Cds are coming down some and in some of our.
Interest bearing and non interest bearing.
Non time deposits of I've also been fluctuating in there.
Okay.
That's helpful. And then you guys have done a good job and expense control over the last several several years.
If I just take your 28, and a half million or so and back out the Oreo costs.
Maybe a little bit under $28 million.
That a good run rate to use or could it be a little bit better than that just with the branch consolidation.
Yes, the branch consolidation is not going to make a huge.
Different so I mean, I can't tell you specifically on names, but I'm I'm guessing are our noninterest expense. The names is probably in the 25 to 30000, a month range. So that's not going to make a huge difference I mean I think we're.
In all the right things on expense control right now.
So I do think with our O R E balances going down you know, we should generally see that friend of though R&D expense.
Continued to decline.
That of that relates also to auto yeah, right right, yes consumer loans. Thanks, Dave. Thank thing there I mean are are I think the quality of our automobile portfolio I mean, the the total of our automobile portfolio is shrinking obviously you know on the in the quality of what remains is probably.
Getting a little better so over time I think the trend in that line should be.
Somewhat down.
I don't think Theres a whole lot.
The more we can do to really reduce expenses yet our focus is going to be to grow the company, where we can and sort of maintain expenses so that it will.
Gain better leverage.
Okay.
Thank you those are all my questions.
Thank you. Our next question comes from the line of Michael Perito from KBW. Your question. Please.
Hi, good afternoon everybody.
Hi, Thanks for taking my questions I wanted to maybe stick on the sense.
Side of things for a second here and follow up and Flex you know.
No.
We're seeing at least I'm seeing more and more of your peers kind of start to invest more heavily in technology and leadership as they plan for growth and whatnot and obviously you guys have done a nice job of keeping that expense growth fairly limited for almost three years now and I'm. Just curious as you budget out into 2020, and and think about that I mean is there a point, where you know it doesn't make as much sense to have the limited expense growth, where there's investments that really need to be taken into account to kind of continue to grow the bank or are we not quite there yet and there's still some things that you can do to kind of offset any investments you're making on a broader basis.
Well I mean, yes, I agree with the premise of your question, Mike that that not all expenses created equal in there.
Spent that you you need to have in order to invest in your bank and.
Good people.
That's one of those expenses and then you need to make sure you have attractive technological offering.
That kind of technological offerings that.
You know our attractive to customers and honestly I think we do we are though.
In the process of upgrading our.
Online banking platform and we have.
Been improving our mobile platform to do so.
And you know.
We're not just guessing we've actually survey, our customers and and surveyed our customers against other financial institution customers and I think our customers seem to like our.
Offerings, but we are we are going to be investing in improving those.
So as you guys think out I mean.
I mean, you basically pad expense run rate annually in the 112 plus million dollar range for almost three years now you're on pace is saying this year I mean do you think next year that realistically given everything going on in the industry today that that number trends, maybe a little higher or do you think theres still room to kind of.
Offset what you're doing on the investment side with other you know.
Corrections elsewhere within the company.
I mean, I would think you know significant if you know to the extent, we had significantly higher costs on.
You know our technological offerings, we're not going to be able to offset those somewhere else in the end the company.
But you know I.
I don't know Mike that that's going to dramatically increase our increased our run rate I mean, I do think.
It's probably it's probably reasonable to expect our non interest.
<unk> expense.
Too you know.
Probably go up each and every year because of technology and other reasons.
Part of the reason, we've been able to hold.
Our non interest expense level is I think generally.
Data or Ilan has trended downward and that's that's helped us to hold the overall level, but you know I think you look at other things our employee costs are.
From where they were.
I think a year ago.
So yeah, I mean, I I do think our I do think our expenses will probably trend up and then you know I think if we were to try to hold them at $112 million kind of run rate.
Because of what that means for your people because of what that means for your investment in technology I think it would restrict our growth.
Got it very helpful. Thanks for that color and then just secondly, I wanted to ask one on the margin.
So as I think about kind of where your core margin.
Excluding the purchase accounting trend do you know if I go back to 15.
First few quarters of 15, I think you were in like the mid to low 300 Seventys range. You know today you are in the 385 in second quarter and all three now he's in the first quarter, but you know I mean, the mix of the loan portfolio has changed a little bit you have some higher yielding loans with the bigger construction mix and then obviously you're doing some stuff on the sound on the hedging side as we think about where your NIM could trend as as rates start to move the other way here after benefiting from that moving up the last year, but taking into account some of the things that you've done how are you thinking about the core NIM trend over the next few quarters, assuming the consensus economic outlook is reasonably accurate and we start to get at least one or two costs in the fed funds.
You need to take that yeah, all right.
So youre right, Mike If you go back and look and I'm looking at our schedule of.
Of.
Net interest margin you know on a core basis here. We were you know like you said in the 300 Seventys, we trended down in 2016 and 17 into the 300 Sixtys and three fifties.
Hi, 300, Fiftys, we've started back up again to three Eightys in 2018. It kind of peaked out I think here are 393 for a couple of quarters and dropped back just a little bit this time, but around 385 and and I think if you look at our in our earnings release, we we have our.
Average balances and rates and yields table in there and and you can see for the quarter a year to date kind of what our spreads have been or what our margins looked like and at June 30, and again. This is a point in time, you know our spread was.
It was 351, so you know both for the quarter, our average spread was 364 so.
It's a little bit lower but you know the difference in there to get back kind of to the margin is good and that 351 does not include the accretion income. So that's excluding whatever accretion income we would we would book and the 364 does right right. The pre 64 does that yeah. So you know.
Roughly 12, or so basis points in there for that so so roughly though so in other words, what I think was breakfast, saying as are our spread during the quarter.
During the second quarter was roughly.
Equal to our spread point in time when unit.
Normalized for.
And to get from a spread to a margin I think what you would have to do is take your the the extent to which your average interest earning assets exceed your average interest, earning liability and multiply multiply that by the rate on your average.
Earning liabilities to get to.
To get to where you might be I think I agree with Rex I mean, that's probably the.
As you guys want to put together what our margin is I think that's your Beth I think that that's the best tool you have is it is to use.
The point in time rates that we've given you and just calculate what you think is going to be during the.
During the third quarter now I mean, I think what we've told you is that we do think that.
Interest rate decreases.
We're going to be modestly.
Full modestly hurtful to us.
I don't think I don't think anybody expects it to be dramatic, but you know, it's it's probably certainly not helpful and probably could hurt us slightly.
Great and we were like will I think you've already seen some of the pain, we've already seen some of the pain on the asset side with wide, we're moving down so like I said before you. We've we've seen some of our.
Overall loan yield come down a little bit but.
You know if the fed cuts.
LIBOR is probably going to go down some more and so we'll continue to see.
Perhaps some lower lower yield on our portfolio overall.
By few basis points, depending on the magnitude of the cuts and kind of what they say as far as anticipated future cuts or or not.
Got it helpful. And then just just the last one you know that the tax rate in the quarter looked a little lower was that.
It was a result of that the onetime.
Pledging expense or something of that nature, and we will look to turn to you know kind of where it's been.
Over the last few quarters going forward or is there something else going on that we should be thinking about.
No there wasn't really anything particular that that was flowing through there this quarter I'd say it was just kind of normal generally.
As it is impacted a little bit by.
Tax exempt interest income and tax credit.
The activities that we have as far as being able to utilize the credits and writing off the investment and stuff in those so I mean, I think you know what Weve said the the rate for the full year.
Yeah, I mean, if you look at the six month rate, that's probably in the ballpark of what our rate is going to look like as we get through the next couple of quarters I would think.
Got it great. Thank you guys. Appreciate you taking all my questions.
Okay. Thanks, a lot.
Thank you. Our next question comes from the line of John Rogers from Janney Montgomery. Your question. Please.
Good afternoon guys.
Hi, John .
Hey, Joe So you I guess when you were talking about loan trends you said, you're starting to maybe see some early signs early signs of slowing.
In demand is that across the franchise or is that in certain markets could you just maybe clarify that a little bit.
I would say that that more maybe across the franchise.
It just seems like it's pretty anecdotal I mean, the I guess the hard facts or are.
Pipeline, which you know we publish that's part of the press release and this is you know it's still pretty strong you know and that's probably what would feel the lion's share of our loan growth over the next.
Six months anyway.
But I just feel like.
There's maybe a little bit less deal flow and so the competition is a little bit higher for every deal.
You know that that.
You know kind of my general feeling now you know on the other side for Greg Southern.
You know we've got two office the two loan production offices that are basically you know just starting and they're just starting at zero and we've got experienced lenders. There. So you know as were able if were able to have were able to grow the offices that will certainly help us grow our loans you know for instance.
Chicago, which I would I would still say is in its infancy.
Just a couple of years old or something and you know they're at a 120 million in loans. So you know.
Atlanta, and Denver, we're able to perform like that.
Over the next couple of years, that's the quarter of a billion dollars of loan growth right. There also you know our loans are consumer loans have been going down.
More or less $10 million, a month and that's obviously going to slow down of because that portfolio is decreasing and you know eventually that's going to stop all together because those loans will have paid off so we've got some positive things too I was just more wanting to make a general.
The statement about you know the just my perception and you know, it's probably I mean, it's a perception that's been formed over the last.
59 days so it could be you know a result of customers being on summer vacation or whatever it might be a bit seasonal but you know I do I mean, if you are asking me right now I feel like.
The market is starting to.
Just the new deal flow is just starting to slow slightly.
No. It's Joe I mean, that's that's helpful.
Great and then Rex maybe just a quick question for you on the Securities portfolio. So you saw the securities portfolio go up a little bit.
Just.
Sort of the plans going forward is what roughly 6% of assets today and I guess do you plan to grow it much further from here and especially I guess, if if deposits trend down more don't go much higher.
Yeah, I mean, we're we just kind of watch that and and we've been trying to grow it a little bit.
Just from the standpoint of the types of securities that we've been putting in there.
Our sort of intermediate type.
Term fixed rate multifamily agency type securities as a lot of what we've put in there help us with our you know to try to mitigate down down rate scenarios et cetera, but also provided a decent yield the yield was more decent several months ago than it is today. So you know we were going to try to.
Bring it up a little bit you know few more securities if we can as as the.
Market presents decent a timing to do that for as far as rates go and yields on those securities but.
So I think we'll continue to see some some growth in there.
But I don't think it's going to be anything dramatic I mean, we've probably grown that portfolio.
You know pretty decently over the last year or so I don't think the growth will be you know at the same pace in the next six months that it's been in the last 12 months or so.
Then it probably stays below 10% of assets I would assume.
I would be.
Okay.
Okay. Thanks, guys.
Thank you. Our next question comes online of staying less help from Walthausen and company. Your question. Please.
Hi, Good afternoon, Hey, I, just wanted to follow up a little bit on the.
The big a nonperforming loan and then I guess.
Subsequent mm.
[noise] Oreo assets now I guess.
How.
Hi, marketable is this a property.
You just got needed over two and.
How long do you think you might take to get.
Off the balance sheet I guess.
Well I mean, if it's obviously hard to say exactly I mean, we do think there's activity.
It's actually really.
Four pieces of property and all.
Three are in the central Missouri area and one of them.
Iowa, and yeah, I think there is activity on each of them.
And yeah.
<unk> activity or certain certainly indication.
No at levels that would.
Satisfy our investment and in the in the assets so.
You know I think we feel pretty good about where we are right now, but you know we're not going to feel really good until they are actually sold.
Yeah, I mean, yeah, I mean, just looking back over time, you guys have not been afraid to hold on to real estate for a time and actually maybe on a few big strides here in the last couple of years here and got it down to I guess it would be a normal level mean add 1.9 for the year oreos are actually higher than your nonperforming loans.
Yeah, what exactly happened with this property and he just bought up land got it somewhat developed and Didnt.
It didn't pan out the way.
Land.
It was I mean, the relationship as we pointed out in the.
Earnings release was it maybe 12 years old and it was a development that didn't go well and.
You know the person continue to try to market and sell the property in Indiana interim we've been insisting on.
Semiannual principal reductions and eventually he the customer just got to the point, where they didnt.
I want to make those reductions and.
No.
We are just reached a resolution that.
All right that's all I had.
Thanks for taking my question.
Thanks.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Joe Turner for any further remarks.
No I don't have any further remarks, we appreciate everybody being here or being on the call and look forward to next quarter's earnings call. Thank you. Thank you.
They do you think you ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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