Great Southern Bancorp, Inc. (GSBC) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Great Southern Bancorp First Quarter 2019 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to introduce your host for today’s conference Kelly Polonus of Investor Relations. Please begin.

Well, good afternoon and welcome. This is Kelly Polonus, Investor Relations for Great Southern. The purpose of this call today is to discuss the company’s results for the quarter ending March 31, 2019. 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 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 earnings release dated the first quarter 2019. 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.

Well, thanks, Kelly, and good afternoon to everybody on the call. Thanks for joining us today. As it’s typical, I’ll provide some preliminary remarks and then turn the call over to Rex, who will go into a little bit more detail on the financial statements, particularly the income statement. Then we’ll open it up for questions. Hopefully all of you have had a chance to review our earnings release. We’re very excited about the results for the quarter, feel very positive about it. Our earnings were $1.23 a share during the quarter or $17.6 million. We did highlight a couple of things in the release: one was a – kind of a noncore, unusual item, and then another was just a highlight. With respect to the noncore nonoperating item, we earned $0.036 as a result of sale of some assets that we acquired in FDIC acquisitions. The assets were difficult to value and probably – and we concluded were worth zero when we completed the acquisitions and so that we booked them at zero, and then over time, their value did increase, and we were able to sell them during this quarter for $677,000. The second item that we highlighted was a $513,000 increase to interest income as a result of this – the balance sheet swap that we entered into in October of 2018. Rex and I have been talking about this. It’s not really a – it’s a core item. Our loans, in our mind, based on our asset liability analysis, were a little bit shorter than what we would have wanted, and so we used an interest rate swap to synthetically link in the duration on those assets. So we may quit separately identifying that. That’s just a part, we believe, of our core interest income at this point. Our annualized return on equity was 13.12%. Annualized return on asset was 1.49%, and our margin – stated margin was 4.06%. I think our core margin was 3.93% net of the extra accretion. Loan portfolio, things continued to be going well there. Our loans grew $61 million. Total growth – that’s our funded loans. Our growth loans, which include unfunded amounts on our construction portfolio, were down slightly. But loan production continues to be good, strong, coming from all parts of the company and from all products as well. As we notified you earlier, we did completely exit the indirect business. This concluded that the returns weren’t satisfactory in that business for us, and so we would expect our $180 million roughly of indirect portfolio to run off over the next two to four years. We saw, I think, $24 million in paydown on that portfolio in the first quarter. Asset quality, you know we’ve said this the last several quarters we can’t imagine it getting much better, but it did actually get just a little bit better in the first quarter with nonperforming assets down by $1.5 million. Our capital position continued to be strong. We did deploy some capital. In the first quarter, we bought a little bit of stock. We had the special dividend of $0.75 and paid our regular dividend as well. And even after all that, our capital ratios ended the first quarter at the same place that they ended the year. So we continue to have very strong capital, which gives us a lot of flexibility to consider additional share repurchases or additional dividend should our board deem that advisable. So at this time, I’ll turn the call over to Rex, who will go as I said a little more in detail on the income statement. Rex?

Thank you, Joe. I will talk first a little bit about net interest margin. Joe mentioned earlier that our reported margin was 4.06%. The core margin core margin excluding the FDIC accretion was 3.93% as Joe said. That’s 12 basis points more than the core margin a year ago and about – and basically flat from where we were in the fourth quarter of 2018. So we continue to see our core margin. I think it performed well. We’ve got probably from the growth from a year ago, it’s really the growth in our loan and investment portfolios and higher rates on both of those, partially offset by increasing rates on deposits and borrowings. And I’ll talk a little more about that in a moment. Joe talked about the interest rate swap that we entered into late last year and the effect it would have had on our earnings. It’s $513,000 of interest income that we recorded in this past quarter. Just to remind you that the way that’s structured is we receive a fixed rate of interest of just over 3%, and we’re paying out a rate that’s tied to one month LIBOR that adjust monthly. So presuming that the Federal Reserve is sort of sitting tight right now for the foreseeable future, the one-month LIBOR’s been hovering around 2.5%. So that’s how we get to that difference in the income that we drive from that right now. We’ve talked about in our past filings, and Joe sort of alluded to it already here today, that we think that rising interest rates modestly help us, falling rates probably are somewhat of a detriment. That’s why we entered into the interest rate swap. We still think that our core margin, again, totaling in pretty well. I would think though that we’ll probably continue to see some pressure on the liability side from the standpoint of deposit cost. We do have a lot of our CDs that mature and repriced at the now-market rates, but we do still have some more – part of our CD portfolio will probably continue to reprice up a bit. So we may have a little bit of pressure from that perspective. And assuming that the LIBOR rates don’t move very much, we have a pretty good portion of our loans that are tied to one-month LIBOR. So if those rates don’t move up much, we probably aren’t going to see those loan rates moving up much higher as we move throughout the rest of the year. On the noninterest income side, our noninterest income increased about $515,000 compared to first quarter a year ago. Joe mentioned the majority or – all of that increase really related to the kind of one-time income that we had on these couple of items that we got through FDIC acquisitions. We did have a little bit of a decrease of $286,000 compared to a year ago in our service charges and ATM fee. That’s really mainly in overdraft and assets fee income between our point of sale. And ATM fees, those were pretty consistent with the year ago quarter. We also saw a bit of a decrease, $214,000, in gain on sale of single-family mortgage loans. We’ve originated – over the last year-plus, 1.5 years, we’ve originated more loans that are fixed-to-variable, tight loans, and so we keep those primarily in our portfolio. Noninterest expense area, we’re still tracking it well, we think, on expense containment and operational efficiency. The noninterest expense total was $183,000 higher in the first quarter this year compared to few – first quarter last year, pretty consistent with our expense level in the fourth quarter of last. One thing, our salary and benefit line did increase a bit this year compared to a year ago. We did open a couple of new loan production offices. Late last year, we also had some annual employee compensation increases and some other things related to that. So we did see the salary and benefit line item move up a bit. Offsetting that quite a bit was foreclosed assets. Expenses were down $521,000 compared to a year ago. We had some lower write-downs – valuation write-downs on properties that were held in our ORE portfolio. And also, this year, our consumer repossession and other related expenses are lower as we continue to see that portfolio move down. Also one other thing. We had some new market tax credit expenses for last several years. Those projects completed, and our flow of credits was up later in the year of 2018. So we write – we wrote off the investment in relation to that, and so we have – those investments are now done, and so we’re not writing off those investments now in 2019. The efficiency ratio overall has continued to improve. If you look at our trend of our efficiency ratio, it’s been migrating down fairly nicely over the last two to three years. The efficiency ratio this quarter was 54.74%, down from about 61% first quarter last year. So we continue to focus on growing our company, but we – but as we’ve said before, we feel like we’ve got the infrastructure in place to continue to grow without necessarily to commensurate the expense growth along with it. One other thing in – long line. The efficiency I mentioned is that we did recently this month consolidate our Fayetteville, Arkansas banking center into our Rogers, Arkansas office. They’re about 20 miles or so apart geographically and so now we operate the one banking center there in Rogers, Arkansas. One final thing that I was going to mention today that we haven’t really talked a lot about before is kind of what’s going on with us and the new accounting standard for loan losses, the CECL loss accounting standard and so that will go into effect for us, as you know, the first quarter of 2020. We’ve been working hard for some time now in preparation for that. We are utilizing some software from a third party provider that we are utilizing here in-house. We’ve got the historic data in the system. We’ve been running some parallel testing, and we’ll do that throughout this year as we kind of fine-tune that process and that effect. And so we’ll probably be able to share some information on that further during our second quarter call and in our second quarter 10-Q. That concludes our prepared remarks. And at this time, we can entertain some questions and let me ask our operator to remind the attendees how to queue in for questions.

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

Hi everyone.

Hey Andrew.

Hi.

Hi. Just sort of – a question on the loan growth here. Pretty solid mid annualized – mid single-digit pace here for the first quarter. Is this kind of like the base rate of loan growth here you’re thinking for the year? Or the opportunities to improve upon this?

Kind of as your standard caviar, Andrew, we don’t project loan growth, but you can do it yourself. You can see that our pipeline is pretty well exactly what it’s been. So I think – and there’s no big changes. I mean, our consumer loans have been running off here for a couple of years and we would expect that to continue. Hopefully, our new offices, we’ll ramp up if you’ve seen our portfolio by region report, that’s part of a loan portfolio report we do each quarter, you can see that Chicago is up to about $100 million. So hopefully we’ll see some growth in Atlanta and Denver. I mean, we feel positively about the direction, certainly, that the loan portfolios, as far as growth and quality, go.

Great. And then just on the deposit growth from the quarter. I’m just curious what was driving that? And what’s the outlook there? Is there anything unique that drove the growth this quarter?

Yes, I can probably answer that for you, Andrew, that the growth has come – a fair amount of it has come from internet, CDs that we were out there on a couple of the different internet boards that are out, and we have seen some growth there. Some of the CDARS product is also there. We did have another quite a bit of growth in our interest bearing checking accounts. So those three areas are primarily where we’re seeing it. What we were able to do in the quarter is we kind of grew in these areas, and we paid down home loan bank advances and overnight borrowings from the home loan bank. And so at the end of March, we actually didn’t have anything borrowed from the wholesale side from the home loan bank. So it’s just kind of a difference in the mix a little bit. But we continue to focus on trying to grow our deposits as best we can. What we’re kind of seeing right now is the growth is there more probably in the time deposit categories, but we also have had some growth in the interest-bearing checking-type accounts, too.

Got you. And so then to the extent that these inflows continue, looked like you added some of the securities portfolio as well beyond just paying down the borrowings. We expect the securities book to rise along with the deposits?

I think, we’ll keep trying to work for options to buy securities that fit sort of our parameters. And there for awhile we had lower rates. The market rates moved down. They kind of ticked back up again a little bit here in the last few days. That’s part of our interest rate strategy as well as to put on some securities that we feel very comfortable with the quality of – as far as credit goes there’ll be agency type stuff. And with intermediate-type lives of five to 10 years or something like that where – that helps us from our overall interest rate risk strategy as well. So we’ll continue to add some things on, but we don’t really have any set amount or target that we’re trying to hit.

Okay. That covers my questions. I’ll step back.

Thanks Andrew.

Thank you. Our next question comes from Michael Perito of KBW. Your line is open.

Hey, good afternoon everybody.

Hi Mike.

Hi Mike.

I had a couple of questions. I want to start, apologies if you mentioned this, but is there any notable cost save related to the auto exit that we should be thinking about?

I think there will be, Mike. It sort of rolls in over time, Obviously, the originations staff has now either been found other opportunities elsewhere or has been redeployed the open positions in the bank, but the originations staff was maybe 12 or-so people, 12 or 15. As we – as the loan portfolio pays down, there should be additional folks in servicing, who we’ll have the same opportunity with. Some will decide to stay at Great Southern and fill other open positions, and some may choose to seek employment other places. So I think it will be – I think there have been some cost savings, and there will be down the road as well. I can’t really quantify ultimately where that’ll be for you the…

And really in the first quarter, there weren’t cost saves…

No, there weren’t. That leaves cost saves in the first quarter, right yes.

Okay. And then a follow-up question, just question, it looked like the yield on the investment book jumped up a bit. So just curious if you could talk a little bit more about the incremental yield or some of those investments you bought in the quarter?

Right. So what we are buying, so I mentioned earlier, and so maybe the yield on those products is 3.40% to 3.60%, 3.70%-type range. We have some – or we’ve had more in our portfolio than single-family adjustable arm-type product that – fixed for 3, 5, 7 years and then floating. So we’ve had some stuff in there that’s been a little lower yielding because it’s one year adjustable, and some of those things have paid down. We did have a little bit – I mean, it’s not a lot, but we did sell some of those securities in the first quarter and then replaced it with some of these other type of securities. So we probably did, on $25 million or $30 million of our securities portfolio, get out of yields and add new securities to replace, and part of the net difference in that yields may be 50 basis points or something like that.

Okay, great. Thank you for the color. I appreciate taking my question.

Our next question comes from John Rodis of FIG Partners. Your line is open.

Good afternoon guys.

Good afternoon.

I guess, Rex maybe just on expenses. Is there any – I guess, it was up slightly from the – sort of from the fourth quarter core level. Is there any new initiatives as far as expenses go that we should sort of think about going forward? Or just sort of some low single-digit growth off this level, is that a better way to think about it?

Yes. I mean, I don’t – we don’t really have any corporate initiative-type things. We have been for some time now really kind of studying different areas of our company and trying to be more efficient and effective. Really, as far as serving the customer and some of the things that have come out of that, have been we’ve been able to kind of streamline processes a bit. And so sort of byproduct to that may be where we’ve been able to kind of be a little more efficient in certain areas. But I wouldn’t say, John, that we’ve got any big initiative to reduce anything. I mean, obviously, we’re closing the location in Arkansas, but that was a small location, and there’s not a lot of – in the overall scheme of the company, a lot of cost save there, but there’s a little bit. That was a lease facility, so we have a little bit of lease expense that goes away, and then you have got maybe three people staffing it or whatever. So – but that’s not a big thing in the overall scope of the company.

Yes, John, this is Joe. What Rex described earlier is what we call our Process Matters, and that’s something that is an important part of the way we run the business now. We probably have at least one process – or probably one Process Matters workshop a month. We have a – we’ve hired a guy with lean accreditation, and he runs that process for us. And we have identified a lot of opportunities to better serve the customers in a more cost-effective way. So that’s just a – that’s an ongoing thing for us. And so hopefully, that will continue to pay dividend. And we’re always trying to identify ways to more efficiently do business.

Sure. That makes sense. I guess, just one follow-up as far as new LPOs and stuff. Are all the expenses sort of for a full quarter in the first quarter now?

Yes. Yes. Yes.

Okay. Okay. Thanks guys.

Thank you and this concludes our Q&A portion. I’d like to turn the call back over to Mr. Joe Turner for closing remarks.

Okay. Well, we appreciate, again, everybody being on the call with us, and we’ll look forward to talking to you after the results from our second quarter are published. So thank you, and have a good day.

Ladies and gentlemen, thank you for your participation in today’s conference. You may now disconnect. Everyone, have a wonderful day.