Great Southern Bancorp, Inc. (NASDAQ:GSBC) Q2 2021 Earnings Conference Call July 22, 2021 3:00 PM ET

Company Participants

Kelly Polonus - Investor Relations
Joe Turner - President & Chief Executive Officer
Rex Copeland - Senior Vice President & Chief Financial Officer

Conference Call Participants

Andrew Liesch - Piper Sandler
Damon DelMonte - KBW

Operator

Thank you for standing by and welcome to the Great Southern Bancorp Inc. Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder today's conference call is being recorded.

I would like to turn the conference to your host Ms. Kelly Polonus, Investor Relations. You may begin.

Kelly Polonus

Thank you, Valerie. Good afternoon, and welcome. The purpose of this call today is to discuss the company's results for the quarter ending June 30, 2021.

Before we begin, I need to remind you that during this call you may -- we may 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. Please see our forward-looking statements disclosure in our second quarter 2021 earnings release for more information.

President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland are on the call with me today.

I'll now turn the call over to Joe Turner.

Joe Turner

Okay. Thanks. Thanks, Kelly, and good afternoon to everybody. I appreciate you joining us today. We are very pleased with our second quarter earnings and our continued strong operations and financial condition. Our associates' continued focus on taking care of our customers' lending deposit and other financial needs has enabled us to achieve strong operating results. I'll provide some brief remarks about the company's performance and then 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.

For the second quarter of 2021, we earned $20.1 million or $1.46 per share compared to $13.2 million or $0.93 per share in the same period in 2020. The primary drivers of our higher earnings this year were higher net gains on mortgage loan sales, increased point-of-sale debit card and ATM fees, Paycheck Protection Program net deferred fee income accretion of $1.1 million and a negative credit loss provision of $1.3 million related to both our outstanding loan portfolio and the unfunded commitments. The after-tax effect of this on earnings was $0.07 per diluted share.

Our earnings performance ratios improved with an annualized return on average assets of 1.44% and an annualized return on average equity of 12.84% and an efficiency ratio of 55.63%. The net interest margin was down a few basis points from a year ago, but we really believe was greatly improved. Rex will get into more color there. As we anticipated, overall loan growth decreased from the end of 2020, which is a reflection of how loan growth has a tendency to ebb and flow over relatively short periods of time and is dependent on economic and competitive factors.

Total gross loans which include unfunded loan amounts decreased by $40 million from the end of 2020. Outstanding net loan receivable balance decreased $82.5 million from $4.3 billion at December 31 to $4.21 million -- $4.21 billion at June 30. Our loan pipeline however did increase slightly. So far this year, loan production and activity in our markets has been vigorous for repayments including forgiveness of PPP loans have created significant headwinds. As you can see in our news release -- as I said earlier, our loan pipeline did grow slightly during the quarter continues to be very strong.

We were busy with the Paycheck Protection Program during the second quarter. Forgiveness, we originated 1,600 loans totaling approximately $121 million in round one of PPP. Currently, we have received full forgiveness on nearly all of those. I think we have $120 million of the $121 million and 1,578 of the 1,600 loans that we've received full forgiveness on. As far as the second round goes, we funded 1,650 loans totaling about $58 million. And we've received full forgiveness on 13 loans -- 13 of those loans totaling about $2 million.

As far as CARES Act loan modifications, at the end of the quarter we had 15 modified commercial loans with an aggregate outstanding balance of $91 million and 30 modified consumer and mortgage loans with an aggregate balance of $876,000. Asset quality generally has been -- continued to be excellent.

During the quarter we had just $100,000 of charge-offs. Our level of non-performing assets as we always say will fluctuate, but they're extremely low as of June 30, 2021. At that point excluding FDIC-acquired assets, our non-performing assets were $5.5 million, which is a decrease of $1.2 million from March 31, 2021.

Including FDIC-acquired assets our non-performing assets were $8.6 million and our non-performing assets to period end assets were 0.15%. So excellent, excellent credit quality. Our allowance for credit losses as a percentage of the total outstanding loans was 1.56%.

Our capital continues to be very strong. From the end of 2020, our total common stockholders' equity decreased slightly by about $100,000 to $629.6 million.

Decreases in stockholders' equity included the effects of our adoption of CECL loan loss standard, regular dividends paid, purchases of our common stock and a decline in the market value of our available-for-sale securities portfolio. These decreases were offset by our strong earnings during the first six months of 2021.

Our book value did increase from $45.79 per share to $46.10 per share. During the second quarter we repurchased 67,500 shares of common stock and during the first six months of 2021 we repurchased 142,000 shares of our common stock.

With our favorable credit quality and strong capital position we announced at the end of the quarter that we will redeem our $75 million sub-debt issue that hits its five year period in August of 2021. These subordinated notes have an interest rate of 5.25%. And since their issuance the company has recorded annual interest expense of about $4.3 million on these notes.

Finally in July, we were sad to see our Chief Operating Officer of many years Doug Marrs retire from the company. Doug has been with Great Southern 25 years and had a banking career that spanned 43 years.

During his tenure with Great Southern, he was directly responsible for many of the great things we accomplished. And as I say we're sad to see him go, but glad that he's able to enjoy what will hopefully be a very long and healthy retirement.

Doug as all our managers took very seriously his responsibility of making sure his area was positioned to thrive in his absence and he's been working with a very capable successor Mark Maples for well over a year to ensure a smooth transition. And that's what we're seeing certainly in that area.

Mark is also a banking veteran. He's probably a 30-year banking veteran with 15 of those years spent here with Great Southern. That concludes my prepared remarks. At this point I'll turn the call over to our CFO, Rex Copeland. Rex?

Rex Copeland

All right. Thank you, Joe. I'll start off with a little discussion on net interest income and net interest margin and Joe alluded to a few topics on that. So I'll just state a few things here and then we'll work our way through that.

So net interest income for the second quarter of this year increased about $1.2 million or 2.8% to $44.7 million compared with $43.5 million in the second quarter of 2020. Net interest income was $44.1 million in the first quarter of 2021. So we did increase our dollar amount a little bit here in the second quarter.

Included in that was some accretion of net deferred fees related to the PPP loans that we originated both last year and this year. That amortization amount was $1.1 million in the second quarter of this year and we had $1.2 million in the first quarter of the year. We didn't have any material amounts in 2020 at that point.

June 30 of this year our remaining net deferred fees related to PPP loans is $3.7 million. So we anticipate that those will flow into income over the next few quarters. It's going to depend somewhat on customer activity how quickly they work through the process to get their loans forgiven and repaid. But we would anticipate that a fair amount of those truly will be done in the third and fourth quarters this year.

Net interest margin for the second quarter was 3.35% this year compared to 3.39% in the previous year quarter, so a decrease of four basis points.

For the three months ended June 30 of this year compared to the first quarter of this year, we decreased our net interest margin by six basis points versus 3.41% in Q1 of 2021. So, comparing the second quarter this year versus the second quarter last year, the average yield on loans decreased by about 31 basis points, while the average rate on our interest-bearing deposits decreased 61 basis points.

A little bit of margin compression that we did experience as we said. A lot of that relates to changes in the asset mix of the company. So we started to have a little more liquidity in the second quarter last year, but we've got quite a bit more yet still in the second quarter this year. So our average cash equivalents comparing the two quarters were $193 million higher and investment securities on average were $27 million higher.

So a little bit -- a fair amount more of liquidity in the system right now versus a year ago. So without that additional liquidity, we believe our net interest margin would have been 11 basis points higher if you compared the two periods. The cost of the subordinated notes that we issued in the middle of June last year, we've got a full quarter's worth of that this year and that's about seven basis points of additional cost or a reduction to the margin. And then the yield accretion on our FDIC acquired portfolio was about four basis points this quarter period versus about 12 basis points so a reduction of about eight basis points there from the year ago quarter. So when you compare those things like Joe said, we feel like our margin has stabilized fairly well, and a lot of the reduction in it right now is just the asset mix is what's still holding it back a little bit.

Our core net interest margin, which excludes the yield accretion was 3.31% and 3.27% for both the three months this year and last year, so a little bit higher on a core basis there. And our overall funding costs have continued to decline in the second quarter of 2021, as our time deposits continue to reprice lower. We still have some more time deposits that are going to reprice lower in the next couple of quarters. It's probably not going to be quite as rapid as what we've seen in the last two or three quarters, but there is still yet some room to go on time deposits there.

So switch over now to non-interest income. As Joe mentioned a couple of things before that our earnings were higher related to some non-interest income areas. We had -- compared to the year ago quarter, we were up $1.3 million. A lot of that related to gain on loan sales. About $770,000 was higher profit on loan sales this year quarter versus last year quarter. Obviously, we've had a lot of refinancing activity, a lot of purchase activity as well, and so the fixed rate loans that we originate for the most part, we sell those in the secondary market.

Another area where we've seen increase in our fees, this point-of-sale and ATM activity fees, that was $967,000 more this year second quarter versus last year second quarter. We're starting to see just growth in accounts as part of it, but we believe that our customers are utilizing their debit cards more frequently higher transaction levels that kind of thing. And so we're seeing a higher interchange income flowing through from that.

Our other income category which is a little bit a variety of things decreased about $740,000 compared to the previous year quarter. That was really mostly due to our back-to-back swap programs with our loan customers. We have customers that sometimes want to convert floating rates to fixed rates and vice versa and so we had quite a bit of that happened in the second quarter last year. We do collect a fee on that and generate some income from it, and we didn't have very much of that in the second quarter this year.

So non-interest expense. Our expenses were about $843,000 higher than they were in the second quarter last year. They were about $30.2 million. A lot of that was driven by really $1.1 million or so of increase in salary and benefit costs. Some of that was attributable to just normal annual merit increases, some increased incentives in our mortgage area. Obviously, as I said, we had a lot higher origination levels, higher income and there are some incentives that go along with that. And so that was part of it. And then, another piece of it is about $400,000 of that $1 million or so is related to deferring loan origination costs when those loans are made.

And then, the net fee and the costs are netted together and taking the interest income overtime of the loans outstanding. And so we had a little bit of a difference there more costs that got deferred out of expense last year.

Efficiency ratio I think Joe mentioned was 55.63%, in this quarter. That compared to 56.75% in the second quarter of 2020. And our improved efficiency ratio again is due to a little bit of an increase in net interest income, increase in non-interest income that was partially offset by that increase in non-interest expense.

The last thing I was going to mention is income taxes. Our effective tax rate was 20.8% in this year's quarter versus 19.3% in the second quarter last year. Effective rates are a little bit below our 21% federal tax rate.

We do have -- what really kind of drives our tax rate is the -- just the gross amount of income that we have taxable income that we have, and somewhat the mix of how it lays out in the various states.

We're in various taxing jurisdictions and so they all have different levels of income that's includable and different tax rates. And so, those have been kind of the two things that have been driving our tax rate a little bit higher, than where it was maybe a couple of years ago.

We really anticipate a similar level of utilization of tax credits and tax-exempt loans and investments. But we think our tax rate probably going forward the rest of the year is going to be in that 20% to 21% kind of range.

So that concludes the remarks that I had today. And at this time we will be happy to entertain any questions you have. And I'll ask our operator please do remind attendees how to queue in for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Andrew Liesch of Piper Sandler. Your line is open.

Andrew Liesch

Hi everyone. Good afternoon.

Joe Turner

Hi, Andrew.

Andrew Liesch

Hi. So just a question kind of on the balance sheet mix and the margin here going forward, so, I mean cash and equivalents that's $681 million. I mean, that -- it looks like it was a record high balance for you guys and some of it a bit used for the sub-debt redemption.

But what plans do you guys have for that? Do you think some is going to flow out as liquidity is spent by your clients, or are there securities portfolio purchases that you're looking at possibly doing? Just kind of curious what your thoughts are on deploying this.

Rex Copeland

A couple of things Andrew, we do think that we will see some of that flow out. I mean the customers' deposit balances definitely are higher. We think we'll see a bit of that flow out. But probably fairly slow and steady not like big pieces of it going right away. So we do believe there's going to be some of that.

We did -- back in March, when rates kind of ticked up a little higher. We did buy some additional securities around $75 million or so. But our -- as you say our cash balances have continued to grow a bit since then. It just fluctuates a lot.

And I can tell you those balances were $100 million lower about a month ago and they just -- it just fluctuates. And so, we are trying to be mindful of that. As rates have gotten pretty low, it's just -- it's not overly attractive to put on a lot of securities right now. I mean we could look at some things.

The thing that is a little bit concerning would be yes we can go and put some securities on but to get a meaningful yield we probably have to have at least like a five-year type duration maybe or something like that and then maybe rates start moving up and at the end of next year or whatever they do.

And those securities go under water and that kind of thing. So we're trying to balance it a little bit as we move forward. And we do analyze it. And we do look at it within our ALCO group.

And Joe and I spent some time talking about it separately as well. So we're going to continue to look at it. But I really I mean as it stands right now I don't really have like a forward-looking answer for you on that.

Andrew Liesch

Okay. That's helpful though.

Joe Turner

Yeah. Perhaps very excited Andrew about -- yeah, I mean, obviously the cash balances are earning yeah, almost nothing. But we're not -- as Rex said, we're not excited about stretching out five years in getting less than 1% yield either.

Rex Copeland

And we have -- as Joe mentioned earlier, I mean, our loan pipeline is still strong. We are originating a fair amount of loans. And it doesn't show up in the ending balance, because there's a lot paying off. But we do believe we're going to have some loans to fund here too. So we don't want to get too carried away. But yeah, you're right. I mean, your question is good, but we are mindful of that level.

Andrew Liesch

Got it. And then just on the loan side, yeah, I mean, it sounds like production continues to be strong. But is there any light at the end of the tunnel for payoffs to possibly slow, or is it just continue to be at a very elevated pace?

Joe Turner

It's hard to understand – it's hard to estimate, Andrew. We don't have a lot of visibility on loan payoffs. I can just say – I would say, what's driving it is a bit of what you guys were just talking about. There's – the alternatives to loans are not very good. So there are people out there that are not necessarily banks, but other kinds of lenders that are out there and are very aggressive. And I think in that environment loan payoffs will continue to be fairly strong for – until we sort of break into a new environment. That would be my guess. I mean, it's good news bad news. Good news is our projects are operating as expected and are attractive to lots of different people. It's bad news, because we hate to lose the yield.

Andrew Liesch

Right.

Rex Copeland

Some of it too is construction loans, where the project finishes. And in some cases, it stays on our books as a permanent loan. But in other cases, they've got permanent financing, put together somewhere else. So when that construction's done then it pays off and moves on to our books somewhere else.

In the second quarter too we did – our PPP loan balances did go down about $45 million. So that was part of what was driving our second quarter balances down. So at the end of June, we still had $56 million of PPP loan balances left. So as I said, before presumably that $56 million is going to roll off a fair amount of that over the next two quarters. We don't have total visibility in that. I know, we're working with our customers and trying to kind of encourage them to get the paperwork done and go through the process here before the end of the year. But it's going to be kind of up to them on their time line when they want to do that. And our consumer auto portfolio continues to pay down some, but that portfolio is fairly small now, I'd say less than $50-or-so million. So – and we're not originating new stuff there. So that's another piece of it as well.

Andrew Liesch

Right, right. Thank you for all the detail. Really appreciate it. And I'll step back. Thank you.

Operator

Thank you. Our next question comes from Damon DelMonte of KBW. Your line is open.

Damon DelMonte

Good afternoon, guys. Hope everybody is doing well today.

Joe Turner

Hi, Damon.

Damon DelMonte

So first question on the margin. Rex, based on what you're saying is it fair that the outlook for the core margin is somewhat positive just given the impact from the redemption on the $75 million redemption? And then kind of the commentary on additional re-pricing on the CV side, do you think that's enough to offset the compression on the asset side?

Rex Copeland

Well, it should go a long way toward it, because the sub debt, I mean we still – we're still going to have a half a quarter of it – of expense in Q3, but that runs about $1 million a quarter. So we'll see a little bit of benefit there. As far as like the CD benefit, our CD portfolio is like what 74 basis points or something like that, yeah, 74 basis points. And so new CDs as we put them on the books and renew right now are like at around half-ish at that level 40 basis points, 35 basis points maybe something like that on a weighted average. So there is some benefit still yet there. But they don't all mature tomorrow, right? So I mean, we've got a lot of them that mature over the next six months.

But we're seeing a little bit of slippage on the asset side as far as the loans too, because as loans pay off some of those are paying off at rates that are at or higher than the overall portfolio yield, and some of the new loans that come on maybe a little bit lower than the overall portfolio yield. So we've seen – as you can tell I mean if you look at our loan rate, it's come down some obviously quarter-by-quarter. It's not dramatic because LIBOR rates haven't been really moving around too much. So our $2 billion LIBOR portfolio those rates aren't changing much, and a lot of those loans have floors too. So they're not moving around very much right now.

But for all the loans that we pay off that are fixed rate at a higher average rate in our portfolio, we do have a little bit of a headwind there. So I think those things being said, I mean, we do feel like our margin, I think has stabilized now from where it was. And as I said before as far as the dollars go, we earned more net interest income this quarter than we did in the first quarter and we did in the second quarter last year. So on a dollar basis even with the additional cash equivalents that we have we are making some headway in terms of just additional dollars anyway in the margin.

Damon DelMonte

Got it. Okay. Okay. That's helpful. Thank you. And then with regards to the outlook for credit, I mean, credit trends are very, very strong, very minimal, non-performing loans. Using the economic guidelines for reserving continues to point towards a minimal to in some cases future reserve releases. How are you guys thinking about the provision over the next couple of quarters? Do you think you could see like what we saw in the first half of the year, or do you think you go back to having to provide a little bit?

Joe Turner

I think you hit the nail on the head Damon. I mean, there's a couple of different -- obviously, many different factors that fit into your CECL calculation. Certainly, one of the biggest is what your loss history is. And as we have more and more quarters about loss history with no losses or relatively low losses, obviously, that's all other things being equal going to result in lower provision expense. But hopefully, we'll have some loan growth that could require provision expense going forward. My guess is we wouldn't expect to see allowance to total loans that ratio a lot lower than it is right now. Would you agree with that Rex?

Rex Copeland

Not in the near term at least I think.

Joe Turner

Yes. Yes, not in the near term, but -- so that's probably going to limit reserve releases going forward.

Damon DelMonte

Got it. Okay. That's helpful. That's all that I had it for now. So I’ll step back. Thank you.

Rex Copeland

Hey, David. David before you jump off.

Damon DelMonte

Yes.

Rex Copeland

I want to add one other comment on the margin that I was saying earlier. And to keep in mind, I mean, we -- as we said, we did have $1.1 million of net deferred fee income, take go to income on our PPP loans in the second quarter. And that basically we paid off almost all if not all of the first tranche of the PPP loans. So we've got like I said $3.7 million still left of net deferred fees. But the timing of that when that's going to come in if it's going to come in the third quarter, fourth quarter or even next year it's pretty unclear to us right now. So that makes it a little harder to -- for you guys as well as us to forecast that particular line item.

Joe Turner

Yes. Yes. That's a good point.

Damon DelMonte

Got it. Okay. Very helpful. Appreciate that. Thank you.

Joe Turner

Thanks, Damon.

Operator

Thank you. [Operator Instructions] I'm showing no further questions at this time. I'd like to turn the call back over to management for any closing remarks.

Joe Turner

Okay. Again, we appreciate everybody being on the call with us today, and we'll look forward to speaking with you at the end of the third quarter. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may all disconnect. Have a great day.