Ladies and gentlemen, thank you for standing by, and welcome to the Great Southern Bancorp Incorporated First Quarter 2020 Earnings 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] At this time, I’d like to hand the conference over to your host today, Ms. Kelly Polonus. Ma’am, please begin.

Thank you, Howard. Good afternoon, and thank you for joining us for our first quarter earnings call. The purpose of this call is to discuss the company’s results for the quarter ending March 31, 2020. 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 the forward-looking statements disclosure in our earnings release. President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland, are on the call with me today. Before I turn the call over to Joe, though, to discuss our first quarter performance, and we want to take sometime to recognize that this is an extremely difficult time for everyone. And our thoughts are with those who are most affected by COVID-19, especially those on the frontlines of this crisis. This afternoon, we’d like to take just a few minutes to share some of the ways our company has responded to the COVID-19 pandemic. As we manage through this very uncertain and challenging time, we are highly focused on ensuring the health and well-being of our associates, providing safe and uninterrupted service for our customers, and supporting the communities in which we live and serve. In January, we activated our Pandemic Response Plan, and of course continued to monitor and respond to the effects of the rapidly changing environment that we’re all in. By the end of the first quarter, the majority of our markets were under a…

Okay. Well, thank you, Kelly. As Kelly said, as we navigate the uncertain and unprecedented COVID-19 times, our company is highly focused on ensuring the safety and well-being of our associates and customers. We also want to provide our customers with uninterrupted and quality service. I want to publicly thank our nearly 1,200 Great Southern associates for their tireless work and resilience during this time. I’m so proud of our team and their response to this crisis. As always, I’ll provide some brief remarks about the company’s performance during the quarter. And then, I’ll turn the call over to Rex Copeland, who will get into a little more detail on the income statement and the impact of COVID-19 and other activities. Our underlying earnings for the first quarter were sound. We earned $1.04 a share or almost $15 million. The impact of the COVID-19 pandemic did cost us about $0.08 per common share in the quarter. In addition, our earnings were negatively impacted by additional loan loss provision, which I think can also be attributed to COVID-19. Performance metrics from the quarter, annualized return on common equity was 9.93%; annualized return on average assets was 1.2%; our margin was 3.84%; and our efficiency ratio was 58.91%. As far as loans, our loans did grow by $41 million during the quarter at an annualized rate of, I think, pretty close to 4%. Our committed pipeline also grew during the quarter by about $81 million. I would say, though, that loan activity, particularly in the second part of the quarter, maybe that loan activity, which occurs before a loan becomes committed and shows up in our pipeline, that kind of activity has slowed. Talking about customers requesting loans, loan officers bringing requests into the loan committee, that definitely has slowed. Through March…

All right. Thank you, Joe. I’ll start by just talking about a few things that we highlighted in the first page of our earnings release related to COVID-19 expenses and things of that nature. We kind of talked about some of these things in Kelly’s comments earlier. But we did have a one-time special employee bonus that we paid, and that was about $1.1 million. We also had the contributions that we mentioned, which was about almost $300,000 in the first quarter. And then we also had some other expenses just the kind of normal things you would expect with cleaning services and supplies and equipment and different costs and things like that, which was about $103,000. So all that added up to, we think, expenses of roughly about $0.08 per share of kind of COVID-related items that were in our non-interest expense categories. We also mentioned that we delayed the adoption of CECL in the first quarter. We expect that obviously, under the CARES Act and the guidance from the accounting, professionals and standard setters that we will enact or adopt CECL later in this year, either at the end of the year, retroactive back to January 1, or after the state of emergency has been lifted. Some possible impacts going forward. We also mentioned in our earnings release, I won’t go over the details of those here, but just refer you back to the items that we mentioned maybe on Page 4. Obviously, all companies and certainly all banks are being impacted by the COVID-19 pandemic, and we expect in future periods that there may be some additional non-interest expenses related, perhaps some effect on our fee income, depending on activity and usage of some of the items, point-of-sale and things like that. So there’s various things that…

[Operator Instructions] Our first question or comment comes from the line of Michael Perito from KBW. Your line is open.

Hey, good afternoon, guys.

Hi, Mike.

Hi, Mike.

Glad to hear everyone is doing well, as well as it can be. Thanks for giving us time this quarter, especially.

Sure.

I wanted to maybe start on the credit side. I appreciate the commentary in the remarks. I was wondering if you could dig a bit deeper for us and let us in your heads a little bit in terms of how you guys are thinking about some of the qualitative factors that are driving your credit model, so we can kind of compare it to some of our economic assumptions and see where the provision might trend, as we make our changes to our economic outlook?

Go ahead, Rex. That’s kind of an allowance question. You want to take that?

Yes, let me talk about that. Yes. So…

Yes.

…so, as we said, we’re still using the incurred loss model right now, and so we have to take into account with that as well qualitative factors and things of that nature. So, at the end of March, obviously, things were different in the world than they were at the end of December. But we are monitoring, again, we talked about our modifications, things of that nature, delinquencies really at the end of March were not elevated. And so, I think, we’re going to know a lot more as we work through this quarter. By the time we get to the end of June, hopefully we’ll have a better feel and a better sense of where things are going with our loan customers. I mean, we’ve got a lot of stimulus coming from the Federal Reserve and the Treasury. So, there’s money being put into the hands of some of our customers through various programs. Hopefully, additional funding is going to come out today, or sometime this week regarding some of the small businesses. And so, it’s a bit – just right now, it’s somewhat uncertain and unknown kind of where the next couple of months are going to take us with some of our customers. We feel like we’re in a good position, as we mentioned, on the schedule of modifications that we put in the earnings release. We think we’ve got pretty – low loan-to-value percentages in there. We feel like, those customers are strong customers. And so, that’s – we have to look at that and we will continue to review that over the next couple of months here and kind of see where we go.

Hey, Mike, I might just add a little bit to what Rex has said. The incurred loss model is, I mean, our qualitative analysis was a little bit more general. We – as Rex said, we have deferred CECL, but eventually, we’ll be – it looks like retroactively using CECL back to January 1, 2020. And the kind of the driving factor we found for most of our loan categories, the driving economic factor is unemployment. So that will be something that is really critical to our CECL analysis. But part of the reason we did not implement CECL is because we really don’t have a feel beyond the second quarter as to what unemployment will look like, number one. And number two, the question you have to answer or the question you’re kind of driving at in CECL or any other allowance model is the model is looking at, okay, unemployment impacted losses in this respect in prior periods. And so, you’re trying to use prior period information to estimate future losses. And as Rex said, the unemployment rates with respect to -- that are a result of COVID-19 are going to be so much different than what we’ve seen historically, both in magnitude, but also in the – because of the government stimulus that is coming in to sort of hold people harmless while we, I guess, suspend the economy in animation and as we try to get people back to work. So eventually, I think, unemployment is going to be the critical piece of our CECL analysis, though we’re not using CECL yet.

That’s helpful, guys. Thank you. And then – but I guess, is it fair to think that given what we know being at April 21 and with most of the stay-at-home orders now extending through at least end of the month, maybe even mid-May and later in some areas, that the second quarter will likely have a greater provision under the incurred loss model for you guys versus some of your peers that adopted CECL where the first quarter provision was a little heavier. Is that an okay way to think about it? I know there’s a ton of variables in there. But just generally speaking, do you guys have any disagreements with that?

I mean, I think that’s a reasonable look at it. I mean, Joe, go ahead if you want to – if you got a comment there?

No, go ahead. Go ahead.

Okay. So I mean, I think, Mike, I would say, yes, I think that’s reasonable with the big caveat that there are so many variables, it’s really hard to say.

Okay, thanks. And then on – just on loan growth, there was some decent activity in the first quarter. Any initial indications about how activity is kind of trending in the second quarter? And with everything going on, do you expect that to take the step back near term here? Just given kind of – my guess is being slower economic activity in your markets?

Yes. I mean, I think, I tried to point to that in my comments and I don’t think I did a very good job. The – what we generally point to is our pipeline. And our pipeline is pretty much as it’s been, but pipeline sort of includes all loans that we’ve committed on. And so there’s a pretty big – there’s a big – a pretty big process prior to us actually making a loan commitment. And I think that the activity that we will see earlier on, like customers requesting credit, loan officers requesting loan approvals by our loan committee and so forth, that sort of activity has definitely slowed down. And so I think we’ll see that start to reflect itself in our pipeline, maybe in the second or third quarter, certainly in the second-half of the year. Now, I would say and I don’t know if this will continue, but it does seem that early payment – prepayment activity has slowed down. So that’s going to affect positively overall loan totals. But I think origination activity, based on what we’re seeing right now is eventually going to slow down.

So we did substitute the PPP loans activity. We –we’ve got $100-plus million of that going in here. So on a temporary basis at least, we’re going to have that in there.

Yes. And that was kind of my last question, Rex. Just for the margin, do you expect should there be a benefit in the second quarter from the PPP fees that flow through NII? And then kind of compression, therefore, after assuming that program works as it should and the loans are forgiven, because they’re used for payroll. I mean, is that a decent way to think about the next couple of quarters numbers aside, just trajectory-wise, or is there something else we should be thinking about?

Yes. There could be a little bit of positive income there, because we’ll get the fees – we will defer the net fees. But as loans payoff or are forgiven, because they met their criteria and the loan goes off our system, any remaining fee would just to be taken to income at that point. So there could be a little bit of a pop from loans that actually are paid off early, or things of that nature, that’ll be over the next several months. So in the second and third quarter primarily probably is where we would see that. Another thing that we’ve had going on in the first quarter, one month LIBOR rates stayed a little bit higher. I mean, they didn’t drop as dramatically as Fed funds rates did, and we have a lot of loans that are tied to one-month LIBOR. So, we did continue to see less negative impact, I’d say in the first quarter. It seems like in the last week or so, LIBOR rates have started to come down a bit more normalized probably. So we’ll see a little bit of negative impact there. But we’re hopefully offsetting that quite a bit of that with deposit costs that are coming down as the each month passes and we have time deposits that mature and renew at new lower rates and things like that. So, hopefully, that’s going to help offset a good chunk of the LIBOR drop that may happen in the second quarter.

Great. Thank you, guys. I appreciate it. Stay well and talk more soon.

Okay. Thanks, Mike.

Thank you. Our next question or comment comes from the line of Andrew Liesch from Piper Sandler. Your line is open.

Everyone, good afternoon.

Hi, Andrew.

Hi, Andrew.

Hi, just want to follow-up more on credit here with the loans that you deferred, especially on the – more so on the kind of the commercial side, like what’s been the tone from these customers? Are and what – I guess, what’s been the tone of all your conversations with their commercial customers? How do they feel about the current situation? And what are their biggest concerns?

I don’t think the – I don’t think generally the request for deferrals were – I don’t think it was a sign of weakness by our customers really, I think it’s just a sign of – in general, they said, we can pay you, but we would prefer to conserve cash. If they’re healthcare customers, they don’t know. If they’re payments from – if they’re ultimate payers, the government, they don’t know if those payments will slowdown. Obviously, retail, strip center, neighborhood center kind of landlords are having issue with their tenants, and they want to be able to work with their tenants with respect to rent. So I don’t think it’s – it certainly – we don’t – we certainly don’t see panic among our customer base. It’s more – I think a lot of our customers wanting to be proactive and and conserve cash and what they feel like could be a bit of a difficult time going forward.

Gotcha. And…

I think, obviously, Andrew, I mean, I’m sure you’ve been on other calls. The hotel, motel industry has been hit hard. The occupancy rates are 10% or 15%, probably some hotels lower than that. So, obviously, that’s not a sustainable occupancy rate for most hotels. And they’re hopeful that, as we get a therapeutic that works for COVID and as we work toward a vaccine and the stay-at-home orders are lifted, their occupancy rates will raise.

I think you inversely already covered my other questions. Thanks.

Okay. Thanks, Andrew.

Thank you. Our next question or comment comes from the line of John Rodis from Janney. Your line is open.

Good afternoon, guys.

Hey, John.

Hey, John.

Okay. Rex, just back to the PPP loans. What is the average fee on those? Is it around 3%, or?

I think it’s a little bit above 3%. That’s a little bit above 3%.

Okay. And then just, Rex, as it relates to the core margin, so it was up what 5 basis points linked-quarter? And then on the swap, you pick up, what roughly $400,000 from this quarter to the second quarter? I mean, and then given your comments on one-month LIBOR pulling back some, if we exclude the impact of the PPP fees, do you think directionally, the core margin is down some, or can – just directionally, can you speak to that?

I think there’ll be pressure on it. I mean, it’s all going to depend, I think, John on how much the – and how rapidly the one-month LIBOR rates move. And we do have a lot of loans that have interest rate floors. So the floors will help us to some extent, as rates move lower, too. So I – it’s hard to tell you specifically right now, here’s what I think directionally is going to happen. I would say though that, we will probably see, I mean, just my belief is that we will see LIBOR rates move a little bit lower. So related to that, like I said, we also are going to have a fair amount of deposits that are going to reprice low or as well as CDs mature and things like lower, as well as CDs mature and things like that. So I think it’s – I mean, I can’t really tell you, specifically, but I think that we’ve got a decent chance that we would be able to maintain our level reasonably. But I think there’s probably going to be some negative pressure toward it, depending on how LIBOR rates goes.

The thing I would add to that, John, we have $2.5 billion of checking accounts. And that’s actually up a fair amount from the end of the quarter. But – and by, I guess, I should say, non-time accounts, and we have not seen a big decrease in the cost of those yet, isn’t right, Rex?

That’s true. That’s true. We see – in the most recent months, it also has started to come down a bit. Yes.

Yes. And so if that trend continues, that’s going to help us, too. If we start to see the cost of those accounts slide down some, that’s going to help us. But that’s dependent to – that’s dependent on competition. To a large extent, we don’t want to lose the customers, lose depositors. So we’re kind of involved in a balancing act here.

Joe, has that been across the franchise, or is that a few particular markets, I guess, as far as the pricing?

I feel like it may be a little bit more across the franchise, I’m sure. Rex, do you have a feel of some of our markets more competitive than others?

I would say it for a while at least St. Louis was a little more competitive, maybe Springfield was competitive, but I think it’s pretty much across generally the markets now. And that level of competition may have come down just a bit from where it was maybe six months ago.

Okay. Joe, maybe just one other question. I mean, obviously, back in 2008, 2009, you guys were fairly active, I guess, we could say on the FDIC front failed banks and stuff and not that we know exactly where this – how this plays out. But what are you thinking as far as potential M&A opportunities maybe over the next year, given where we’re at right now?

Yes. I guess, obviously, we would be interested. And that’s sort of why we – I feel like we’ve been since the early part of the 2008 crisis, we’ve been building our company, so that we would be able to participate in consolidation that might occur at the time of the next crisis. And who knows whether this will be that crisis? Hopefully not. Hopefully, things will get back to normal pretty quickly. But I think we’re always going to be a more active acquirer in markets like this than we are maybe in the really high flying markets. I mean, we’re just more comfortable with our sort of economic analysis of either buying companies from the FDIC, or potentially we’ve never done – we’ve never really done it, but potentially purchasing a bank on an open basis in this kind of environment, where it might be less expensive and more compelling financially.

Yes. Well, we’ll see how this plays out. So be safe, guys. Thanks.

Okay. You too, John.

Thanks, John.

Thank you. [Operator Instructions] I show no additional audio questions in the queue at this time. I’d like to turn the conference back over to management for any closing remarks.

Well, thank you, everybody. As John said, I hope that everybody will be safe and healthy, and we’ll look forward to talking to you at the end of the second quarter. Thanks for being on the call. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference call. This concludes the program. You may now disconnect. Everyone stay safe.