Great Southern Bancorp, Inc. (GSBC) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Great Southern Bancorp Incorporated Second Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference maybe recorded. I would now like to turn the conference over to Ms. Kelly Polonus, Investor Relations. Ma’am, you may begin.

Good afternoon and welcome. This is Kelly Polonus, Investor Relations for Great Southern Bancorp. The purpose of this call today is to discuss the company’s results for the quarter ending June 30, 2018. 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 second quarter 2018 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.

All right. Thanks, Kelly. And good afternoon to everybody out there. Thank you for joining us for our second quarter earnings call. I’ll provide some general remarks about the quarter and then turn it over to Rex Copeland, he will talk a little bit more in detail about the income statement. And then of course we'll open it up for questions at the end. We did have a very strong quarter, and hopefully all of you've had a chance to at least glance at our earnings release. If you have, you've probably noticed that we earned $0.97 a share, or $13.8 million during the quarter. Our performance metrics during the quarter were good with 11.32% return on our annualized common equity or annualized return on common equity. Our return on assets was 1.23% and our margin was 3.94%. Our second quarter earnings were really driven by two things I think. First, an expanded core margins which was certainly aided by outstanding loan growth during the quarter and then good expense containment. We did have an unusual expense item during the quarter. At the end of the second quarter we made the discussion to reduce prices on some sticky parts of our ORE portfolio. That resulted in a $2.1 million or $0.11 per share declines in our expense item that reduced our earnings. We have though and it's very preliminary obviously because we're only three weeks into the third quarter but we have seen really good activity on our ORE portfolio particularly on the parcels where we reduced prices. So, we think we did the right thing there. We continue to feel really good about our loan portfolio, both for production and the quality of the portfolio. As you saw in our earnings release, our outstanding loan balances have increased about $133 million from the beginning of the year and about $100 million from the end of the second quarter. The increase was primarily in commercial real estate, multifamily and one to four family residential mortgage loans. Our pipeline also continues to grow, it's up about $120 million from the end of 2017. So, again we feel really good about that. Overall, I think our asset quality continues to improve but we're coming from really low levels of problem assets, so the improvement is relatively minor and relatively slow. But the level of nonperforming assets did decrease by $5.9 million during the quarter. Nonperforming loans decreased by $1.2 million and ORE decreased by $4.7 million. So, good improvement in the levels of our nonperforming loans. Our levels of potential problem loans increased 945,000 from the end of March that was mainly driven by the addition of a $2 million relationship which was briefly described in our earnings release. Our capital position continues to improve. Capital at the end of June was $490 million, that's $18.6 million higher than it was at the end of the year. About 10.7% of total assets, book value per share is now 33 - has increased to 34.69 from 33.48 at the end of the year. As far as business initiatives, tomorrow we do expect to close our Omaha transaction, and that's going to result in a $7 million gain. I think it's going to allow us to sort of marshal our managerial resources in the markets where we're having more luck. We are keeping though an Omaha loan production office which is extremely important to us and we're excited about keeping those folks on Board. As we told you during the - when we announced the sale, at that time we expected it to be slightly positive from an earnings perspective but that was, we told you as interest rates increase they will get probably closer and closer to a breakeven proposition on an ongoing basis and I would say, Rex, is probably closer to breakeven at this point. So, but we're still pleased with the parameters of that transaction. We also have open or will open in the first week of August, loan production offices in Atlanta Georgia, and Denver Colorado, those will both be staffed by veteran lenders probably 30 year kind of lenders in each of those markets. And we expect good things out of those folks. So, that concludes my prepared remarks. At this time, I'll turn over the call to Rex Copeland.

All right. Thank you, Joe. I'll talk first about net interest margin, as mentioned earlier the reported margin was 3.94% in the second quarter. Our core net interest margin which is going to exclude the impact of additional yield accretion that we recognized on the FDIC acquired loans, increased to 3.84%, that was an increase of 28 basis points and 3 basis points from the year ago quarter, in the most recent quarter respectively. The primary driver of the margin expansion continues to be increased yields in most of our loan categories and that's been partially offset by gradual but steady increase in deposit costs and you could see that in some of the information that's provided in the earnings release. Also one thing that helped drive our earnings this year was the lower income tax expense, lower income tax rates that we experienced now versus a year ago based on the legislation that was passed in December. So, we've told you before, indicated in previous filings that rising interest rates may have a modest positive effect on our net interest income and margin, and so far that's been borne out as we've seen the rate increases from the Federal Reserve. We expect those similar affect moving forward. That competition does remain very significant for us. And as I said, increased deposit costs and other borrowing costs are anticipated and we'll likely put bit of pressure on that margin expansion. We've also had headwinds to our margin expansion somewhat by reduction in our consumer loan portfolio. We've talked about that for quite a while now and we're continuing to see net runoff on the consumer loan portfolio at each month really. We are originating loans but the repayments continue to exceed the originations. And so our cost generally speaking on deposits, we think will increase; we did see more of an increase in the second quarter this year than we experienced in the first quarter as far as deposit rate percentages. Also cost on our other borrowings are good, generally be affected by changes in LIBOR rates as we do a lot of short-term borrowing from the home loan bank. Noninterest income during the quarter ended June 30, our noninterest income decreased $8.3 million compared to the year ago quarter. You may recall the year ago quarter we had some fairly significant items, the largest of which was the termination of the InterSavings Bank, FDIC loss sharing agreement. We recognized the gross gain of about $7.7 million in noninterest income on that last year second quarter. Other income, last year we had some higher income related to some interest rate swaps that we entered into which - that was not repeated in the second quarter this year and then also some late charges or prepayment penalties on some larger payoffs last year second quarter versus this year. So some of those things were sort of unusual, I see the biggest item being the gain on the termination of the loss sharing agreement last year. Joe mentioned earlier expense containment, and I think our expense containment and operational efficiency, we said remain a focus of our company, we did a good job of that in the second quarter. Obviously the reported number is higher this second quarter versus the year ago second quarter and also the first quarter of this year. The driver of that was related to the $2.1 million write-down on some of our foreclosed assets that we took this year second quarter that Joe mentioned. When you remove that, I think our expenses were very much in line with the last few quarters and what we kind of have been seeing as a run rate. We also identified a few other smaller items in our earnings release that related to noninterest expense, but again we feel like our core operating expense level has remained stable. That concludes I think the remarks that we had at this time. And so we will entertain questions now.

[Operator Instructions] And the first question will come from the line of Andrew Liesch with Sandler O’Neill. Your line is now open.

Just a follow-up here on the margins. So it sounds like funding costs are going to continue to march a bit higher, so this 3.94 level on a reported basis is that kind of like a plateau and it will drift lower from here. And again the similarly on a core basis with the 3.84, is that kind of at a top and maybe hold steady?

It’s hard to say exactly, depends on kind of what the Fed does. Our anticipation is I think along with consensus that the Fed is not going to raise rates in August but probably will raise 25 basis points in September. So we won’t get the benefit of that until late in the quarter, but a lot of our loans are tied to LIBOR. And so as LIBOR anticipates that we do have loans that generally reset on a monthly basis and some every three months. So and we do - start to see some benefit from that. I would just say that we are seeing competition in our markets on deposits and we’re trying to kind of walk the balancing act of raising rates selectively when we need to and trying to utilize our various funding sources in the most advantageous way we can. But certainly we’re going to see I think the cost of deposits and the cost of borrowing going up a little bit more. I’d say the percentage rise or the beta on those costs has not been as high maybe as what we had sort of anticipated it could be. So we're continuing to try to manage that increase as best we can. So it’s hard for me to answer that question specifically or concretely, but.

I think - the only thing I would add to what Rex said is that that it does seem like the benefit - the increase in interest income on loans when rate do increase comes little more quickly than the deposit cost. So yes, I think generally it’s fair to say once you can’t even say the Fed stops raising rates, once LIBOR stops increasing then I think we will have some catch up probably on deposit rates for a little while thereafter.

And then just on the expense side done a good job just keeping expenses here to kind of stable not including the foreclosed asset costs around 27.2 million recognizing that you’ve hired some folks in these new markets. I would imagine that the expenses build from here. So I’m just kind of curious where you think a good run rate might be for operating cost?

Well again I mean we don't really give forward guidance I think as you think through your model there are some things I would encourage you to keep in mind would be the opening of those LPOs. But those aren’t extremely expensive, you have maybe staff with a total of four people to start and then some rented office space. So those aren’t extremely expensive proposition and then beyond that we’re going to have sort of annual increases for our people. But generally I think we feel like there is operating leverage. We feel like we should be able to grow our company without commensurate growth in our operating expenses.

And just on the operating expense section, we will be reducing some cost there with the four brand, yes that we close here tomorrow. Yes, I think we said that it’s going to be about $1 million a year having $2 million I mean, one to two. So we will reduce - that will reduce our operating expenses but also as we said reduce our probably noninterest income by a little bit because it do generate a little bit of noninterest income and then just the funding cost of the net difference in the deposits versus what they're paying us for the premium and the fixed assets.

And the next question will come from the line of Michael Perito with KBW. Your line is now open.

I want to start maybe on the two new offices and Joe maybe a kind of high-level question for you, obviously - whether it’s the team specifically or the markets themselves I’m sure there is something that is strong in both Atlanta and Denver that - some form of opportunity there. But I guess how do you guys measure the cost and kind of the franchise impact I guess of moving to new markets versus maybe spending resources on expanding the team you have in the current markets that you’re already in?

Well I think it's all, I don't think the two are mutually exclusive it’s really about opportunity. I do think you have at least we found that you probably have maybe more opportunity to grow your loan portfolio by going into a new market like that because you’re not as opposed to hiring a new person in an existing market. Most of our existing markets we think are well staffed, it’s not that we wouldn’t add people if we could find them. And I guess that’s my bigger point it’s more about finding the right people and both of the people we've hired in Denver and Atlanta are very strong lenders there, very seasoned lenders and we think both Denver and Atlanta are vibrant marketplaces that will allow us opportunity for growth. And of course we have loan production offices in Dallas, Tulsa, Chicago and soon Omaha. Dallas and Tulsa are the most matured of those and they are very profitable endeavors for us and we expect good things out of Atlanta and Denver as well.

And maybe on Chicago specifically obviously it’s a market that’s seen some disruption recently. Is there any thoughts on maybe you’re trying to be more aggressive there. Or have you seen any greater opportunity to maybe scale that that particular LPO to help maybe reach the level you're at in Tulsa or Texas as examples as you just mentioned?

You mean by hiring more people or by just being more aggressive on the leading front.

Yes I mean - obviously there was a major mid market competitor that was acquired by a large regional that's historically struggled in the markets. So I guess maybe more basic question, have you started to see any fallout from that or do you expect to - and could that accelerate your build out in that market?

We would certainly be open to that. I don’t think we've really seen that yet Mike but we would certainly like to take advantage of that. We have taken advantage of similar situations certainly in Springfield in our Missouri markets when competitors have really, really, well regarded competitors have combined into larger institutions, out of town institutions. That’s generally has been a favorable thing and hopefully that will be true in Chicago as well.

And do you envision these kind of the broadening of the geography, I mean one thing I think that I'm hearing a lot this quarter is just the competition on the asset side. Rex you mentioned on the deposit side but just in terms of how competitive it is getting both term structure, pricing on the loan side I mean is the hope that by entering these newer markets they kind of broadens the pool of credits that you’re bringing to your credit team with the hope to you maybe be able to close on more without having to sacrifice too much on the term or pricing side?

Right, that's absolutely it. We’ve always said the more deals we look at the better chance we’re going to have to grow our company while maintaining our credit and pricing discipline so that’s 100%.

And then you also - just looking at the stock chart obviously year-to-date your shares have done fairly well and you know there was no share repurchase in the quarter. And I guess a two-part question I'm curious if one you know at the current level with this share of purchases isn’t very attractive capital deployment options to you guys at this point and your thoughts there. And then secondly is there any thought, it seems like growth is actually kind of picking up here especially with the auto rundown presumably slowing which is good. But I mean there still plenty of capital, is any thoughts around the dividend policy the payout accelerating that or just any thoughts on those two items would be helpful? Thank you.

Yes, I mean I think obviously as our price goes up share repurchases become relatively less attractive. I can't remember I did the numbers sometime back Mike and I think at a $53 level there was like a five-year earned back or something. And obviously you would analyze a share repurchase differently than you would buying another company but at $59 or $50 a share whatever we’re trading at right now those numbers get maybe slightly less favorable. Our earnings were very strong and core earnings, earnings that we feel good about. And so we will need to continue to examine our dividend in light of strong earnings and a very strong capital position.

[Operator Instructions] Our next question will come from the line of John Rodis with FIG Partners. Your line is now open.

I guess a lot of my questions were asked and answered, but guys with respect to the new SBA hired the Atlanta and Denver offices are any of those expenses, were any of those expenses in the second quarter?

No, I don’t think so.

Very little I don't even think the SBA person was in there either - he's onboard already but I don't think he was in the second quarter.

So with the branch sales if you save 200,000 to 250,000 a quarter. Do you think sort of those three initiatives maybe sort of offset those savings on a quarterly basis?

Yes, I mean - I think the new programs could be slightly higher, but I don't think it would be a lot.

Guys on page I think its 16 - the average balance sheet you guys always sort of put the end of the quarter day as far as where yields are and stuff. And this sort of back to the margin it shows your spread would be down 10 basis points I guess from the average for the second quarter. So does that sort of - again you guys talk about pricing pressure and stuff like on deposit side and loan side. Does that sort of point towards the lower margin or what are we missing in that?

I think that could do probably - I saw that same thing John. I think that’s got more to do with the 372 includes the yield accretion I believe. And the 352 does not, it would not because our yield accretion was about $1 million during the quarter, which times annualize that that’s 4 million that would be about 10 basis points on our level of interest bearing asset today I’m think about that way.

It is - John if you went back and looked at our previous earnings release and the first column there would be the marks you know point in time, rate and yield. It was a little bit higher than to but some of that has to do with the mix. This is a look at just a [indiscernible]. So on June 30 what the assets and liabilities that we have and the rates on each of those and what that project out. And we did have a higher amount of cash on those days because we had about well $40 million or $50 million of loans to pay back in the last two weeks of June. You'll probably see our average outstanding for the quarter was higher than right around where our end of quarter balance ended up. So, we did have some significant pay downs right at the end. So, the mix on that particular day was around numbers say $50 million lower in loans, and they are at a higher rate and $50 million more in funds at the Fed you know that are earning us 2% or something like that. So, some of that had to do with just the mix on that particular day as well, but as you can see the - if you look back at this versus the March 31 point in time, the yields are higher but the expenses are higher as well. So, I think that 362, I forget what the number was in the previous March, but it was little bit higher than 362 I think.

And back to just net interest income dollars on a core basis was over $40.4 million for the quarter, so there was nothing unusual in there as far as like elevated loan fees or anything like that?

No. I mean we do from time to time we will collect interest income on like nonaccrual loans, like maybe we'll have a nonaccrual loan payoffs that may feed into that number but that has - those kind of things happen in most quarter not a material amount I mean it was a large amount.

And then this final question on the loan-to-deposit ratio, I mean obviously you guys are comfortable running above 100%. But I think with the branch sale with that $55 million $60 million in deposits, so you kind of go from $108 million at the end of June to ultimate sequel $109 million which sort of seems to be - we're not covered you guys for a long time that's sort of the upper end of the range over the past decade.

The thing is, I mean we feel like we have a lot run way with alternative funding sources, brokered CDs, those kinds of things. So, we think there is no short-term need and by that I'm talking six quarters of relatively robust loan growth. I think beyond that our long - over the longer term our deposits do need to grow along with our loans and we've got plenty of runway. I think our biggest advantage there is we do have a system of banking centers that we're staffed we're able to handle more deposits if we can bring them. So, that's number one. We do have the ability in sort of our - I guess you would say a bit of a gangly franchise. We're able to go to metropolitan areas and offer special but a little higher rate without repricing our entire portfolio, and then we're working pretty hard on an online product that we could offer nationwide. And I think we'll have something going on that by the end of the year. So, I think those will be our free longer-term strategy. In the short term though we don't feel constrained, we don't feel unable to really aggressively pursue good loan opportunities because of the higher loan deposit ratio. You've covered us long enough Johnny, you remember when we probably had a third of our deposits were brokered. So not that we would necessarily want to get to that level again but we could certainly be much higher than the other some million that we have at the end of the second quarter.

But as far as the loan of deposit ratio is there, I mean I doubt it does it go to $115 million or $120 million, could it or?

Depending on how you calculated I guess. Yes, you found our loans to core deposits?

No, just total deposits.

We're going to be growing - if our core deposits don't grow to fund loan opportunities, we'll probably be funding on broker deposits. So, yes, I mean in that sense that number probably wouldn't go much higher.

Thank you. And I'm showing no further questions. I would now like to turn the call back to Ms. Kelly Polonus for any further remarks.

I believe that concludes our call. If anyone has any other further questions, please feel free to contact me, if not we will visit with you next quarter. Thanks for joining us.

Thanks, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, you may all disconnect. Everyone have a great day.