Great Southern Bancorp, Inc. (GSBC) Q4 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Great Southern Bank Fourth Quarter and Full Year 2017 Earnings Conference Call. At this time all participants are in a listen only mode. Later we will conduct the question-and-answer session and instruction will follow at that time. [Operator Instructions] I would now like to introduce your host for today's conference Ms. Kelly Polonus with Investor Relations. Ma'am, you may begin.

Good afternoon and welcome, this is Kelly Polonus, Investor Relations for Great Southern Bancorp. The purpose for this call today is to discuss the company's results for the quarter ending December 31, 2017. Before we begin, I need to remind you that during the course of this call we may make forward-looking statements about future events and future 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 the forward-looking statements disclosure in our fourth quarter 2017 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.

Thanks, Kelly and good afternoon to everybody on the call. We appreciate you joining us for our fourth quarter earnings call. I'll provide some remarks about the company's performance during the fourth quarter, and then I'll turn it over to Rex Copeland our CFO, who will kind of fill in the details particularly on the income statement, then of course at the end we will open it up for questions. Hopefully those of you on the call have had a chance to review our earnings release, if you had, you saw that we had a good quarter, we’re very pleased with it. As you saw from the earnings release, we earned $0.86 a share or $12.2 million during the fourth quarter, we earned $3.65 a share for the full year. For the fourth quarter our return on average assets was 1.1%, our return on common equity was 10.37%. No doubt, you saw that we did have two unusual items that occurred in the fourth quarter, first of all in response to the Tax Reform Act, which was enacted in the fourth quarter and as a way of rewarding our associates for the important work they have done for our company, we did give a one-time bonus that cost the company $1.1 million or $0.05 after tax. Additionally, in response to the Reform Act, all companies were -- are obligated to reevaluate their deferred tax item and that reevaluation process resulted in a $0.02 per share increase in our earnings per share in the fourth quarter. As far as loans, I am sure you saw that our outstanding loan balances were down for the quarter, but we believe there are -- or for the quarter and for the year. In spite of that we feel like there are lots of positive things going on in our loan portfolio certainly with credit, but also with origination. We feel like we are doing the right things to build the customer relationship in a way that will support a growing portfolio. And we think when you kind of look behind the numbers you'll see a lot of positive things going on. First of all our commitments were up $260 million during the year. Secondly, our gross loan totals, which would include the unfunded portion of construction loans were actually up, when you look at the whole gross loan portfolio that was up about $170 million. So there are some factors that lead us to believe that we can have a growing loan portfolio going forward. We did see reduction, primarily I think, as a result of declining balances of our FDIC acquired loans. Those were down $75 million during the year -- $73 million I think. And then our consumer portfolios declined about $144 million during the year. As I said, asset quality was strong to start the year and I think only improved during the year and during the fourth quarter. Our level of non-performing assets were down $5.1 million in the fourth quarter and down $11.5 million from the beginning of the year. The level of potential problem loans started the year very low and ended the year at about the same level. Foreclosed asset excluding those acquired from in the FDIC acquired transaction reduced by $6.8 million during the fourth quarter. Our net charge-offs for the fourth quarter were $1.7 million, of that amount $1.4 million came from consumer charge-offs, primarily indirect automobile charge-offs. Net charge-offs for the year were $10 million, $6.1 million of that was related to charge-offs, primarily again in our indirect automobile portfolio, $3.9 million were not indirect charge-offs. So primarily commercial maybe some mortgage on there. Of the $3.9 million, $2.9 million of those charge-offs came on five relationships, four which were originated prior to ‘08 and one of which we acquired when we acquired the Fifth Third loans. So we aren’t seeing any charge-off really activity at all commercially from loans we've originated even in the last 10 years. So feel very good about the quality of our originations. As you saw our capital again was strong going into the year and grew by $42 million to $472 million or 10.7%. Our total assets, our tangible common equity to tangible asset ratio is 10.5%. So gives our Board and management team a lot of options going forward. That concludes my prepared remarks. At this time, I'll turn the call over to our CFO, Rex Copeland. Rex?

Thank you, Joe. I am going to talk for a moment about net interest margin. Our reported margin in the fourth quarter this year was 3.75% that compares with reported numbers of 3.87% in the fourth quarter of last year and 3.77% in the third quarter of 2017. Our core net interest margin was very good we think in the fourth quarter of '17. The core margin excludes the impact of additional yield accretion recognized with our updated estimates of the acquired loan pools that improved about 11 basis points compares to the year ago quarter and was stable compared to the third quarter of this year at 3.68%. We've indicated in our past filings that rising interest rates may have a modest positive effect on our net interest income and margin. That's been born out to some extent so far in the previous rate increases that have occurred. We expect similar effects as we move forward, if we have further rate increases in 2018. Although the competition does remain significant and increased cost for deposits and other borrowings are anticipated. And we'll likely put some counter pressure on margin expansion. The headwinds to margin improvement also have included, as Joe mentioned earlier some reduction in our consumer loans and our acquired loan accretion income. Non-interest income I'll speak about for a moment. The non-interest income decreased $154,000 to $7.4 million, compared to the fourth quarter of 2016, primarily results in a couple -- from a couple of items. The largest of which is the line item for amortization of income related to business acquisitions. Because we terminated our loss sharing agreements in previous periods, that net amortization in the fourth quarter of 2017 was zero, compared to $848,000 for the fourth quarter of 2016. So that 2016 amount reduced non-interest income. The other income line item in our income statement is -- has a decrease of about $426,000, compared to the prior year quarter. We did have some disposal of some certain fixed assets and some ATM replacements, which we had recorded some losses related to that. The 2016 period also had income that was a little bit higher than normal. The fourth quarter other income item was pretty comparable to the 2017 third quarter other income line. You'll notice that for the year ended December 31, 2017, our non-interest income increased about $10 million to $38.5 million, comparing it to the year of 2016. We've got several items that we have listed in our earnings release that lead to that. The primary driver of that really was the gain that we recorded when we terminated our Inter Savings Bank loss sharing agreement that was about $7.7 million of pre-tax gain that was recorded in 2017. And also we had very small amount of amortization on the loss sharing assets in 2017 versus fairly significant dollar amount in 2016. As far as our non-interest expenses, I think our expense containment and operational efficiency remain a major focus for our company. Total non-interest expenses were $29.3 million in the 2017 fourth quarter, compared to $28 million in the 2017 third quarter and $29 million in the fourth quarter of 2016. As Joe mentioned earlier, we did have $1.1 million of additional expense related to the bonuses in the fourth quarter of 2017. There are few other items that kind of offset in the -- that we list in our news release, our earnings release that played a role in the comparing the fourth quarter amounts this year versus last year. And the overall, the efficiency ratio reported in the fourth quarter of this year was 62.78%. If you reduced the expenses by the $1.1 million that fourth quarter efficiency ratio would be just over 60%, 60.4%. The last thing I'm going to touch on is the tax reform implications and Joe had mentioned that briefly before. We expect to have an increase to our earnings of about $250,000 or $0.02 here in the fourth quarter, that estimate of the impact on the company's net deferred tax items includes among other things the timing and recognition of various revenues and expenses. We have reviewed that with the tax advisors for the company and we expect that to be a fairly good number, but we are still trying to finalize a few items related to it. One of which is what's flowing accumulated other comprehensive income there is some accounting items that are being finalized on that right now. The big thing probably though is as far as our effective tax rate for 2018 in future period. We think that typically in 2018, our effective tax rate is going to be in the range of 15.5% to 17.5% of pre-tax income. And that's based on our current levels of tax credit usage and tax exempt income among a few other items. The effective tax rate for the company may fluctuate as is impacted by the level and timing of our utilization of tax credits and the level of tax exempt investments and loans that we have. And then of course our overall level of pre-tax income will also affect the tax rate somewhat. That concludes our prepare remarks today. At this time we will open it up for questions. And let me ask our operator to once again remind the attendees on how to queue in for questions.

Thank you. [Operator Instructions] And our first question will come from the line of Andrew Liesch with Sandler O'Neill & Partners. Your line is now open.

Hey, everyone.

Hi, Andrew.

Just a question on the loan growth outlook here with -- I was kind of surprised to see the multifamily, C&I and residential -- single family residential portfolios declined. Is there anything going on there, just kind of curious what drove that and what your outlook for those types is going forward?

I don't think there is anything specific Andrew, going on in any of those portfolios. I do think it's a challenging environment for banks in that at least at the level -- at the credit level that we originate credit, I think very high quality credit that borrowers have lots of options. And so loans are getting completed and they are almost immediately refinanceable. So that’s the only issue going on in those, there is nothing other than that, I don't think.

Okay. And then just looking at expenses, if you take out of $1.1 million for the bonuses and back out the expenses on foreclosed assets I get a core expense number of just under $27 million, is that a good run rate to use going forward though there might be some seasonal cost here in the first quarter?

I think we've identified everything that we would conclude as noncore. Obviously you have normal kinds of compensation increases for employees, but I think we've done as best we can. We've identified anything that we would assume as nonrecurring in our numbers.

Okay, great. Thank you for taking my questions.

And thank you. [Operator Instructions] And the next question will come from the line of Michael Perito with KBW. Your line is now open.

Hey, good afternoon everyone. Thanks for the time.

Hi, Mike.

Couple of questions for me, one on the kind of the economic outlook, Joe maybe just any thoughts around commercial activity and how you kind a see it changing or maybe improving after tax reform. I mean, is there -- are you starting to have better more constructive conversations with any of your commercial clients and have you started to see that translating into any more kind of potential future activity down the line?

I would say it's hard to assess at this point. I do think there is kind of both anecdotally and what you're seeing the economic coverage. There does seem to be a fair amount of optimism out there. So hopefully that translates into additional economic activity. I think we're seeing very good economic activity throughout our geographic regions. We for the second year in a row we originated over $1 billion of commercial loans. And that goes Mike across our offices, $290 million in St. Luis, $190 million in Dallas, $160 million in Minneapolis and Tulsa, and Kansas City, $100 million in Springfield and even our newest LPO. Although it wasn’t opened that long Chicago originate $55 million. So I think it's going to be -- my guess is it's going to be probably more of the same. And maybe with tax reform you do read a number of articles where businesses are talking about the way in which that will help them.

Thanks, very helpful color, Joe. And then secondly on capital, I'm doing some quick back of the envelop math here. I mean, it seems like with that tax rate that Rex pointed out, I mean, you guys should be doing conservatively about 120 ROI maybe next year in that ballpark. Can you see would that will probably to be approaching almost 11% by the end of next year? I mean, I guess what's holding I know M&A is out there, and you guys are being selective and that make sense. But I guess what's the hold up in terms of maybe bumping up the payout ratio a little bit, maybe even doing a share repurchase? You guys are trading at a discount to peers on a book value basis. What are some of the Board's thoughts on some of those other non-M&A capital deployment methods at this time?

Well I don't want to get too far out in front of the Board, but I do agree with you. I mean, I think with tax reform with the increasing income we're going to have as our tax rate is decreased, yes our payout ratio will be a little low. And so we could certainly look at a dividend increase, and I'm sure that’s something our Board will consider going forward. Buybacks are something we could consider as well. And I haven't done the math lately, Mike before tax reform. So admittedly some of the metrics have changed. The kind of the -- if you looked at even at a $52 or $53 purchase price for our stock the tangible book value earned back still over six year. So unless you can get the stock bought really cheap, it's not that attractive. But I agree with you, our capital levels are getting high and we certainly have some options and some opportunities as a result of that.

Perfect, thanks Joe. I appreciate the color, very helpful.

Thank you. And the next question will come from the line of John Rodis with FIG Partners. Your line is now open.

Good afternoon, everybody.

Hi, John.

Hey. Joe or Rex I guess, just on the auto portfolio, how much more runoff would you expect there?

It's kind of hard to say John. I would think there is going to be at least another year of runoff. Kind of at the same -- kind of more or less at the same level maybe declining some. But I think we are looking at probably at least another year of it.

Okay. So that will end up taking the portfolio down to what less than 5% of total loans in theory?

Yes, I think so, roughly probably that amount.

And so are you guys are originating any new auto loans today?

Yes, we are. We told you I think probably a year ago this time, in fourth quarter of 2016 we had significantly strengthened our underwriting criteria because of weakness in the used car market. And so during all of 2017, I think we originated about -- I have got those numbers somewhere, I think we originated about $40 million or something of consumer credit, $34.6 million is still on the books that’s 2,719 loans and of those 19 are past due. So, I think the underwriting changes we made have worked. And so we will continue to have consumer portfolio, but it’s just going to be at a lower level than what we have had.

Okay. And then just one other question on the balance sheet, just deposits -- total deposits were down year-over-year, would you expect sort of deposit growth to sort of be similar to loan growth in 2018?

John, a lot of the decrease in deposits during 2017 was in the CD area and a lot of that was going to be like more traditional brokered and some of the cedars one way buy and products there. So I think our transactional type accounts were positive for the year and we will probably not see -- I wouldn’t think we’d the CD portfolio rundown too much more from here. But a lot of what did results in that decrease in 2017 was what you would call really non-core stuff in the CD side.

Okay. But I guess my point is Rex is just trying to, I know the loan to deposit ratio isn’t the only thing you look at, but I wouldn't think you wanted to go a whole lot higher than where it’s at right now, is that fair to assume?

Yes, I think that’s fair to say, I mean, I think our deposit growth will probably be roughly at least what loan growth is.

Okay, thanks guys.

Thanks, John.

Thank you. And I'm showing no further questions at this time. I’d like to turn the conference back over to Ms. Kelly Polonus, for closing remarks.

With that, we would like to thank you for joining our conference call and we look forward to next quarter’s call. Thank you.

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Ladies and gentlemen, thank you for participating in today’s conference. This does conclude your program. You may all disconnect. Everyone have a wonderful day.