Ladies and gentlemen, thank you for standing by. And welcome to the Great Southern Bancorp, Inc. Third Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker today, Kelly Polonus. Thank you. Please go ahead..

Thank you, Valerie. Good afternoon and welcome. This is Kelly Polonus with Investor Relations for Great Southern Bancorp. The purpose of our call today is discuss the company's results for the quarter ending September 30, 2019.

Before 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 third quarter 2019 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 Turner..

All right. Thanks, Kelly. And good afternoon to everyone who is on the call. I want to thank you for joining us for our third-quarter earnings call. As usual, I’ll provide some introductory remarks, some high level remarks and then Rex - turn it over to Rex to talk a little bit more in detail about the income statement.

Overall, our third quarter results were very good. Hopefully, you’ve had a chance to read the earnings release, and if you have, you've seen that we earned $1.38 a share or $19.7 million. We saw good loan growth during the quarter and we further improved our operational efficiency.

While net income dollars did grow, we experienced some net interest margin compression during the quarter, and Rex will provide some color around that. Our performance metrics were all strong, return on common equity 13.46%, return on assets 1.61%, net interest margin was 3.95%, I think 3.75% core, and our efficiency ratio was 52.63%.

Loan production during the third quarter was pretty solid. We had growth both in outstanding loans in our pipeline during the quarter, both when compared to the end of the year and when compared to the linked quarter.

The increase in our outstanding loans was primarily due to increases in commercial real estate, owner occupied, one to four family and multi family loan. That was partially offset by decreases in the consumer auto loan portfolio, which we've talked to you guys about before. We do continue to believe that the market is slowing.

We’ve seen lower deal flow I think, and typically when rates start reducing, it’s as a result of the economy slowing and maybe lenders are getting scared, so you’ll see increased credit spread. Right now, we're seeing decrease in credit spreads, higher levels of competition for lower deal flow.

So I think it's a challenging environment from a loan growth perspective. You don't really see that coming through in our pipeline; our pipeline still strong. But I think, maybe looking further out, the loan business does seem to be slowing from a production standpoint. Asset quality is probably as good as it’s ever been at our bank.

So that's certainly a positive thing. Our classified assets to capital and reserves are 3%, and as I said, that is good as it’s ever been at our bank.

We looked at a slide yesterday in our Board meeting that compared looked at that number over a long period of time, and even in other very benign credit environment, we've never been as low as we are now. Capital continues to be very strong. We’ve grown our capital since the end of the year - since the end of the second quarter.

Our tangible common equity to tangible assets is at 11.9% at the end of the third quarter. Our book value per share is 40 - almost $42. And we were pleased to introduce or increase our dividend during the third quarter to $0.34 a share. So with that, I will turn the call over to Rex Copeland, our CFO..

Thank you, Joe. Just a couple of things I wanted to point out as sort of unusual items in the quarter. We highlighted those on the first page of the earnings release that we did have a benefit reduced insurance premium expense for our FDIC insurance premiums.

The fund has hit certain thresholds and so we have a credit coming back to us, and that reduced our expenses by a little over $300,000 in the quarter. We also did have a couple of valuation write-downs on some foreclosed assets that was about $280,000 of additional expense there reflected in those write-downs on those two assets.

As Joe mentioned earlier, we did see a little bit of compression in our net interest margin. As a percentage, the dollars were higher, but the margin percentage was a little bit lower. We were at 3.95% reported in the third quarter and that compared to 3.97% in the second quarter and 4.02% in the third quarter last year.

So we have a little bit of lower rates on our investment securities and other interest earning assets, so funds that we have at the Federal Reserve and things like that, the Fed fund rates have come down. And so we are seeing a little bit of a decrease from where we were a year ago.

In that, our rates paid on deposits are sort of flattish and other borrowings. So we are seeing a little bit of compression from those areas. We did have some yield accretion income that was a little bit higher in this third quarter than we had in the second quarter and the third quarter last year.

So that 20 basis points of additional income or margin related to the accretion on FDIC acquired loan pools. Like I said before, the dollar amounts were up from where we were a year ago, and also in the second quarter of this year.

So we’ve continued to kind of push through that with a little bit of increase in dollars, but the margin percentage has come back a little bit.

In the third quarter, we did - you know, we’ve talked before about our interest rate swap that we did late last year and included in our interest income in the third quarter this year was a - just over $800,000 of income related to that swap.

So where the current LIBOR rates are now compared to the amount that - rate that we receive on that swap is about a 100 basis points are so difference in that, and so that’s what reflected in the net settlements that we have with our counterparty there. The non-interest income section of the financials.

We did have lower non-interest income compared to the year ago quarter. As you’ll remember, the year-ago quarter, we had sale of the branches and deposits in Nebraska, and we booked about a $7.4 million gain on that sale in the quarter last year. So we did not have that obviously again this year, and that related to some of the decrease we had.

We did offset that a little bit with - a little bit higher income in profit on loan sales during the quarter, also, as we’ve had throughout this year, a little bit higher income on our debit card activity related to some contracts that we entered into at the beginning or at the end of last year for the beginning of this year.

And then also in the third quarter, we did have quite a bit of income. And this will fluctuate from quarter-to-quarter related to income on interest rate swaps that we entered into with customers and counterparties, and also a little bit of income from exiting some of our certain tax credit partnerships that we had.

So there was definitely some nice flow of income that came through in some of those categories, and not all of those things happen every quarter. But we did experience some good income in the third quarter, this year from that.

Non-interest expense and we continue to make operational efficiency and kind of containment of our expenses a priority, and we've been able to do that. Our non-interest expenses were about - of about $416,000 compared to the same quarter last year. Salary, employee benefits, probably the largest area of our increases.

Like I said before, we did have a $300,000 plus decrease in insurance costs because of the credit we got back on the FDIC insurance, and then a little bit lower expenses on our acquired deposit, intangible asset, amortization, and some of those items have met their kind of final term now and we amortized off all those intangibles for certain of the acquisitions.

Our efficiency ratio as, Joe said, was down to 52.63% in the quarter, that’s down from where it was in the second quarter of this year, and it’s up from last year because of the large gain that we had. But we feel like we're continuing to make good progress on efficiency and we’ll continue to look toward that.

One last thing I was going to mention is just briefly an update on seesaw [ph] We've been working through that throughout the year and continuing to finalize a few things with our accountants right now. Based on our analysis, we are looking at both the on-balance sheet items and off-balance sheet unfunded items. And that's kind of an impact for us.

The larger impact is going to be - probably the unfunded loan balances and commitments and things that we have. But overall, with all of that combined, we expect the impact of seesaw [ph] to be 2% to 3% decrease in our equity when we adopt that at the beginning of 2020. So that concludes our prepared remarks at this time.

And I think we’re ready to entertain questions. So I'll turn it back to the operator..

Thank you. [Operator Instructions] Our first question comes from Michael Perito [KBW]. Your line is open..

Hey. Good afternoon, everybody. Thanks for taking my questions..

Hi, Mike..

Yes. Since you brought it up, Rex, so maybe I’ll spend a minute on seesaw [ph] here. Just curious, the 2%, 3% equity impact doesn't seem that dramatic. So I guess a two part question here.

One, really shouldn't impact your capital planning at all whether near term or long-term, right? And then two, just as you went through that process, any info you’re willing to share kind of or different views on your portfolio that seesaw process force you to take that might alter kind of your credit appetite going forward for certain asset classes or anything of that nature?.

Yes. I think, first part, I - we don't expect it to really be all that impact into our capital. Obviously, it's not starting to be a really - we don't think it really large number at this point. And then as far as the type of lending and things like that, I don't really see at the end that impactful to the things that we do.

I think we'll probably continue to do things in generally the same manner and looking at the same type of loans. It might cause us to look at - I mean individual loans would obviously be looked at on an individual basis. But we may look at do we want to make a loan that’s maybe a little shorter term than we might otherwise.

But I don't think it's going to be really impactful in there either..

Okay. And then on the - Joe, on the growth side, it seems like you guys are tad or kind of growingly more cautious, maybe just slightly, but as every quarter kind of past this year, and we get through the 2019. But, I guess to your point specifically, and you mentioned that pipelines are still strong.

So I guess can you maybe comment on kind of how the pull-through of that pipeline has been trending year-to-date thus far, and whether you think you’ll probably be closing on less of deals in the pipeline moving forward or have you seen a material alteration kind of closing rate even though the pipeline hasn't changed much?.

No. I don’t think it's that so much, Mike.

I mean, I think, when I look at our pipeline, I think the two key numbers really are the close construction loans with unused available line, particularly the non one to four family because that's a big number, and then the loan commitment not closed yet, both secured by one to four and secured by not one to four.

So -- and I anticipate that our pull-through rate will be not significantly different than it's been in the past in those areas. I guess my, - you know, I’m just talking more anecdotally, I sit in on the committee, so I see all of the larger loan requests that we're considering. And it just seems like that's slowing down a little bit.

And as I talk to the leaders in our various offices, they say the same thing that it seems to be a little bit less activity and a little bit more competitive.

For instance, we were looking at a loan request yesterday, and the thing just the - based on the kind of spread to LIBOR we were getting in the past that seemed 25 basis points or so low from where it should be. And so I mentioned that during our loan committee, and one of our senior lenders just said, that’s kind of where the market is right now.

So I think it is – you know, I guess, my observation is more anecdotal than maybe factual, but the factual is probably our pipeline. But I do feel like it’s probably things are slowing down, not dramatically, but just slightly..

Okay. And then lastly, I mean, obviously the core NIM compressed a bit in the quarter, which you guys addressed, and there is obviously a probability that, that interest rates continue to kind of work against this here. But on the - conversely, the SBA and mortgage gain on sale activity really serve this kind of a nice offset in the quarter.

And I'm just curious if you could comment on the outlook for those line items, the SBA specifically, which I know is a bit newer for you guys.

And do you think that that's something where you guys can see some fee income growth and hopefully maybe offset some of the NII pressures that could stem from a lower margin if interest rates continue to decline?.

Yes, we hope to Mike. We do have – we’re actively looking for SBA loans throughout our footprint, and so we hope to see that kind of volume. It’s probably going to come and fits in parts a little bit here initially until we get a pipeline of that built up too.

So I wouldn't say that it’s going to be real sort of - kind of very normalized and recurring that way, but we certainly hope to grow it. And as you say one to four family volume has been strong for us as well, yes.

And that's going to probably be somewhere a reflection of interest rates and refinance as part of it, and then new purchase and that kind of thing too. We have had - our loans held for sale, balances have been higher in the last couple of quarters than they were last year and early this year.

So we are continuing to see a little bit higher level of activity in that. Can’t guarantee that's going to happen in the next few quarters, but where is that right now, it seems to be reasonably positive..

Got it. And then just one quick - last follow-up, sorry. But just on the SBA team.

Can you just remind us how build out [ph] is that platform at this point for you guys? I mean how much kind of capacity is there with the current team and support staff and credit staff on board that, that you think you can support? I mean, is there a lot of runway there? Or do you think if it accelerates, there could be need for kind of further broadening of the support et cetera at that platform?.

We’re trying to utilize - to source deals, we're trying to utilize our existing staff throughout the branches, throughout the - throughout our lending teams, that sort of thing. And then we have to help with the - kind of the back-office part of it, we - we've contracted with the company to help with that. So that can certainly scale up.

If we were doing way, way, way more volume, we might have to grow kind of our administration of that program a little bit. But I think we have opportunity to grow a lot without seeing really increased costs for a while, anyway..

Okay. Great. Thank you guys for taking my questions. I appreciate it..

All right. Thanks, Mike..

Thank you. [Operator Instructions] Our next question comes from Andrew Liesch of Sandler O'Neil. Your line is open..

Good afternoon, everyone..

Hi, Andrews..

Most of my questions have been asked already. I just want to follow up on deposit pricing here. I didn’t seem like there was too much movement in the rates, quarter-over-quarter.

But what are you seeing in the markets that you guys are in with respect to pricing, and are there opportunities to lower your offered rates following these Fed rate cuts?.

I’d say it's pretty competitive. As far as - there is different banks and credit unions that are still advertising spatials of money market rates and CD rates above 2%. And so we’re trying to manage in that environment. I think we are seeing areas where we've been able to reduce our rates on a few things, but not across the board, certainly.

And so we’re going to continue to kind of fight that battle a little bit. Money market rates and some of the interest-bearing checking rates, there is not a ton of room for those to come down yet probably. So we’re still trying to kind of work through that.

There is a few other products that we have reduced rates on, but not - like I said, across the board. We’ve seen a little migration, I would say to you between non-time account types.

And so there's been some flow of funds into some of the higher yield money market type accounts, and so we're not really seeing too much of a decrease in the non-time overall rates. The time accounts, we're kind of just – it’s fairly recent the rate cuts that have occurred and so it takes a few months for those to kind of filter through.

We are seeing in some of our deposit types that we’ve been able to reduce the funding costs on the maturity and then the new booking of new products in those types. Retail CDs, a lot of our CDs mature within three months to 12 months.

And so we’re probably in the fourth quarter hopefully going to see a little more of the maturity start to replace with a bit lower rate from that kind of thing that we saw in the third quarter. We just didn't really have a chance with when the rate cuts occurred. It just didn't.

With that - there's not that many maturities that occurred within the third quarter there. So we expect that we'll see some of the rates that are going to be rolling off here in the next two or third quarters.

The current market rates will be lower than where those are, so we would hope that we would see some decrease in the overall funding cost on the time accounts as well..

Got you..

Yes. So it's a very - I mean the -- what you would have seen immediately, both in margin and then you would have noticed in our spread calculation is, if we have been able to reduce our non-time accounts. But as Rex said, competition is really preventing us from doing that to any great extent.

And then with respect to time accounts, really I think the cost of new origination CDs is coming down a little bit. So that’s a positive thing. But you know, if the - I don't know what the average term of our CD portfolio is, probably between six months in a year, something like that.

It’s going to take you some time to roll through that and reprice enough of it that you see much of a change..

Okay. That’s all really helpful. You've answered all my other questions. Thanks so much..

Thank you. I’m showing no further questions at this time. I'd like to turn the call back over to Joe Turner for any closing remarks..

Again, we appreciate everybody being on the call with us today. And we’ll look forward to talking to you after the end of the year. Thank you..

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participating. You may now disconnect..