Ladies and gentlemen, thank you for standing by. And welcome to the Great Southern Bancorp Incorporated Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions].

Please be advised that today's conference maybe recorded. I would now like to hand the conference over to your speaker today, Kelly Polonus with Investor Relations. Please go ahead, ma'am..

Thank you, Sydney. Good afternoon and welcome to our call. The purpose of this call is to discuss the company's results for the quarter ending December 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 the forward-looking statements disclosure in our fourth quarter 2019 earnings release. President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland are on the call today. And I’ll now turn the call over to Joe..

Alright. Thanks, Kelly. Good afternoon. I also would like to thank you for joining us on our fourth quarter earnings call. As is usual, I will go over at a high level our company's performance and then turn the call over to Rex, who will go into a little more detail on the income statement and then we'll open it up for questions.

Hopefully, you've had a chance to at least glance at our earnings release. If you have and you’ve seen that we had a solid quarter especially given the interest rate and competitive environment. We earned $1.24 per diluted common share during the quarter of $17.9 million.

In the full year, we achieved our -- the highest annual net income we ever have at $73.6 million and $5.14 per common share. Our performance metrics during the quarter were return on common equity 11.78%, return on assets 1.44%. Our margin was 3.82% and our efficiency ratio was 56.11%. Loan production in the fourth quarter was pretty solid.

You’ve probably noticed that our net loan balances were down about $3 million but our gross loan balances which include unfunded commitments, construction loan balances were up about $34 million. Our net loan balances were up $165 million during the full year 2019 and gross loan balances were up about $99 million.

I think we said last quarter and maybe previous quarters that it does seem to be getting a little bit more competitive. The lending environment seems to be getting a little bit more difficult. Maybe spreads -- credit spreads are shrinking on our loan products. And I think all that’s still accurate. It's not a dramatic thing, though.

If you have a chance, you can look at Page 7 of our earnings release where we include a table on our unfunded commitments and really the most pertinent sections are the last two sections of that table, which show what our unfunded construction loan commitments are or proceeds that remain to be disbursed on construction loans, and then unfunded real estate and non-real estate loan commitments.

Those total like $1 billion, just slightly over $1 billion at the end of 2019. And then if you look at the two previous years, year-end 2018 and 2017, they were slightly higher than that, but not significantly, like maybe one year was a $1.20 billion and something and the other year was $1.60 billion.

So we are down slightly, but still have relatively robust loan demand. Our asset quality continues to be really pristine, the best in our history. Our non-performing asset balances went down $3.6 million during the year to $8.2 million. So I guess 15 basis points or something on assets.

Our capital continues to be strong significantly, exceeding regulatory threshold. From the end of 2018 to 2019, our total common stockholders’ equity increased by about $71 million.

I think about $23 million of that was as a result of appreciation on -- or unrealized appreciation on our security -- available for sale securities portfolio and that increased value of our balance sheet swap, our $400 million swap, but the rest of that is related to just retained earnings.

Book value per share increased from $41.98 to $42.29 during the last quarter and from $37.59 at the end of 2018. Our tangible common equity to tangible asset ratio is also very strong at 11.9%. And I'm sure you've noticed that we obviously declared and just recently paid our fourth quarter $0.34 per share common dividend.

And we announced another $1 per share special dividend in earlier this month. That concludes my prepared remarks. I'll turn the call over to Rex at this time..

Okay, thank you, Joe. I'll start out talking about net interest margin. As Joe mentioned earlier, we did see a little bit of margin compression in the third -- in the fourth quarter versus the third quarter. Fourth quarter was 3.82% compared to 4.07% in the fourth quarter last year and 3.95% in the third quarter this year of '19.

So we experienced about 13 basis point decrease compared to the third quarter of 2019. A lot of that was related to decrease in the average yield on our loan portfolio and also other interest earning assets. And we partially offset that with some decreases in our average interest rates paid on deposits, and other borrowing.

So as you know the Federal Reserve cut rates a couple of times in latter part of the year in September and October, and those rate cuts affected short-term rates, primarily short-term LIBOR rates which we have a lot of loans that are tied to that index.

The positive impact that we've had on net interest income and net interest margin from additional yield accretion continued in the fourth quarter was knock about 19 basis points of yield or of net interest margin increase in the fourth quarter this year, similar to where we have been in the third quarter of '19 and the fourth quarter of 2018.

Our net interest income dollars were up from a year ago quarter but down from the third quarter of 2019 a little bit. So, we are continuing to see, as Joe mentioned, our net interest income dollars have been pretty good but the margin as a percentage has come down a little bit as we’ve seen a little bit of compression here most recently.

One thing I'll note too is we did record about $1.2 million of interest income in the fourth quarter related to the balance sheet interest rate swap transaction that we've entered into. So that has enabled us to keep a little bit higher level of interest income related to that particular part of the loan portfolio.

Non-interest income, I'll talk about for a moment here, the non-interest income increased by about $474,000 compared to the fourth quarter a year ago. The increase was really in a couple of categories. Other income, we had a couple of things.

So the income related to interest rate swaps that we've entered into with our customers and back-to-back swap program. We had some fee income from that, about $220,000 and then about $184,000 related to the exit of certain of our tax credit partnerships that we had in 2019.

We also saw gain on sale of loans, single-family loans primarily and some SBA loans, more origination of fixed rate loans, which we sell in the secondary market, in the 2019 period versus 2018. Offsetting that a little bit was a decrease in some of our service charge and ATM fees compared to the fourth quarter of 2018.

Non-interest expense, Joe mentioned our efficiency ratio earlier but we're still tracking well on the expense containment and operational efficiency. Non-interest expenses were up about $763,000 compared to the fourth quarter a year ago.

The biggest drivers were increases in salary and employee benefits related primarily to some incentives, incentives in lending operations areas, annual employee compensation, merit increases and then staffing additions in some areas, including lending, which will also include the new loan offices we opened in Atlanta and Denver in late 2018.

We also had a little bit higher expenses related to occupancy and equipment mainly related to increased depreciation on some new ATM/ITMs years and then also upgraded software on our ATM operating system. We did continue to have also in this quarter the FDIC insurance premiums. We did continue to have a credit there.

So, we didn't have to book FDIC insurance expense in the fourth quarter of 2019. One last thing that I'll just mention is the implementation of CECL. You know we have been working on that for quite some time and we're finalizing that or have finalized primarily that.

We do expect that will continue -- I think we said last quarter about a 2% to 3% decrease in equity, will probably be reflected based on the implementation of CECL in the first quarter of 2020, and we have gone through pretty much all of our review of that and we are just finalizing everything now with our auditors or our accountants for implementation here in the first quarter this year.

So with that, that concludes my prepared remarks, and I'll turn it back over to questions and let me ask our operator to do again remind attendees how to queue up for questions..

[Operator Instructions]. And our first question comes from Andrew Liesh with Piper Sandler. Please proceed with your question..

Hi. Just wanted to start with the expenses here, about $29.5 million benefiting from -- a little bit from the lack of FDIC insurance. But what’s -- is this a good run rate run to look at going into next year, maybe creeping up towards $30 million.

How do you guys view the expense base?.

Rex?.

Yes. This is Rex. I'll try to take that a little bit here. I think that there is -- we tried to highlight anything that was really out of the ordinary in the quarter. We mentioned a couple of things there that we have implemented and new things that are going on.

So, I mean we don't give a lot of forward guidance on it but I'm not sure -- I do not think there’s anything really materially unusual necessarily in the quarter..

Got you. Okay.

The sequential increase in salaries and employee benefits, is that just a normal course of business or was anything unique in that line item?.

I think the -- along with the increased profit on loan sales, we're paying the originators essentially a commission on that. So, I would say that's a big chunk of it Andrew related to that. And then as Rex said, just normal kind of merit increases. We have had some staffing increases related to LPOs we opened. So, that would probably be the rest of it..

Okay. Well, that’s helpful. And then just kind of switching back to CECL, how do you think provisioning is going to play out under the new modeling.

Should it be similar to what you guys have been doing or what differences you see ahead?.

This is Rex again. I would say it’s going to be impacted -- or maybe slightly differently, it's going to be impacted obviously still by charge-offs. So, the level of charge-offs we have that will impact where our allowance moves up or down. Also, then just growth in the portfolio.

So presumably a more growth that you have, the more you would need to provide for those new loans that are coming on your books.

So, I think it's not going to be terribly different than what we've done before in the last -- the economic outlook starts to change, because that's also a piece of what we have to factor in is our economic forecasting and outlook for the future.

And do we think that the periods we look out into the next few quarters, if we see like that the economic activity or the economic forecast is going to be more positive or more negative than it is currently..

And our next question comes from Michael Perito with KBW..

I want to start at the bottom of your release, where you guys have kind of Business Initiatives section, I was reading through it last night.

And the last comment that third-party vendor that you guys have engaged to kind of analyze your facilities and your in-branch customer experience, I wondering Joe if you wanted to expand on that a little bit I guess, kind of two part question.

One, what specifically are they kind of analyzing with regards like the in-branch customer experience? And then two, do you have any kind of additional expectations of what you're hoping to learn or what you think you can learn from that analysis and how that might impact your decision making going forward?.

Well, I'll start and then Kelly Polonus is in here with me and she may be able to add to it. I think mainly it is, we understand the kind of changing demographics and maybe changing expectations among our customer base.

And we just want to make sure that we have a branch system, a banking center network that is structured and built to meet those expectations. So I think what they'll do is identify banking centers, where we feel like we have the most untapped potential.

And then we'll focus resources on those banking centers, and maybe make changes to them to the physical banking center that we think might help us to be able to serve our customers better. The second thing, we are interested in some -- expanding in some markets so that they may have some ideas that would help us there.

Kelly, do you have anything to add to that? Second part of your question, Mike, I don't know that we -- I mean we kind of have some expectations but probably before saying anything on this call, I would rather let them work for a little bit and then get back to this maybe on our second quarter or first quarter call, We might have something a little more concrete on that.

.

And then I was curious just on kind of the construction growth opportunities. Joe, obviously that’s been a true flyer for you guys recently.

And I was just curious, as you think about the competitive dynamics of the market and being a bit more cautious, I was curious if that kind of lends equally to all other lines of businesses or are there certain business where you're still little optimistic about growth and think there's good -- maybe a higher velocity of opportunities.

I was wondering if you could expand on that thought a little bit for us?.

No. I really wouldn't say so. I think what is going to benefit us is having the Atlanta and Denver offices, they are relatively new. So we don't have a lot of -- as we talked about before, we don't have big balances that are going to be paying off out of those offices, and we hope to be able to grow.

I mean I think that's going to be kind of a cross-product line. They're certainly going to be some construction loans made out of those offices, but hopefully some commercial real estate as well. We also hired in our Kansas City Office a C&I -- a couple of C&I officers from a competitor in the Kansas City area. And we're hopeful there too.

We're not going to try to -- I mean we're not going to try to have $400 million, $500 million in C&I balances by this time next year. That's not the way we do things but we do think over time we will be able to grow in that area and grow profitably..

Okay. And then just lastly on capital, you mentioned in your prepared remarks about the special dividend and that’s two years in a row. And I was just wondering if you could maybe give us just a refresher on kind of the Board's view on capital at this point.

I mean it seems like obviously the [hook] to drive low to mid-single-digit organic growth and then maybe payout the special dividend to pump up the payout, give you some flexibility but not let capital to stimulate too materially beyond where you are today.

Is that kind of a fair way to summarize it and is there anything else you think that you would expand upon on based on what I just said?.

No, I think that's a pretty fair summary of it..

Okay.

And then can you just remind us just the near term appetite for share repurchases and what's left on your current authorization?.

Rex, do you have that?.

I don't have the exact number but it's like -- it's over 400,000 and something shares that are still left on the authorization. That's right..

And any change in kind of your view on that as a method of capital deployment or still just to use opportunistically and selectively based on market conditions with the preference for the dividend at this point?.

I think at this point, a preference for the dividend and then we do view the -- we do view share repurchases as another potential use of capital just depending on returns and so forth..

Thank you. Our next question comes from John Rodis with Jenny. Please proceed with your question..

Rex, you mentioned in your remarks, service charges were down a little bit. Is there anything unusual in there? It seemed like a pretty big drop from the third quarter to the fourth quarter in service charges and typically they're flat up in the fourth quarter through the last few years. .

Yes, I don't know that if it’s all -- there’s not that is much related to service charges. I think it is maybe -- it is ATM fees. So we kind of group all that together in one line item. But I would say that it’s probably on net ATM fee. So there's some expenses that are netted in there, as well as just the gross fee income.

And so, we saw a little bit less income and then a little bit higher expenses that are related to it. So the whole net of all that was rolling on..

Yes, we're going through a conversion of systems kind of the -- I guess the best way to describe it is system that's in between the ATM and us. And we're converting from our current vendor to a new vendor. And there have been some additional fees, vendor fees related to that conversion that net in those numbers.

So -- and that -- I think that conversion probably explains as much of it as anything..

Okay. That makes sense. .

We expect that conversion kind of to be completed during this quarter -- hopefully during this quarter. So, the second quarter of 2020 should be able to point our quarter on that line item. .

Okay. And Rex, just another question on the core margin of 3.63%.

If the fed is on hold this year, do you think you've sort of seen a bottom in the quarter margin, or do you think there's still some more pressure given loan pricing and so forth that you talked about?.

Yes, it's -- there's a couple of pieces that play into it, obviously. So if one month LIBOR goes down any further, we'll see a little bit of pressure from that. We got about $1.5 billion of loans that are tied to one month LIBOR and get reset every month.

We also have whatever loans are paying back or maturing within any given period, may or may not be that they may be at higher rates than the new loans that we're putting on. One example might be, our -- we've been allowing our consumer auto business to run down quite a lot. And so a lot of those are maybe 5% to 6% type loan rates.

And so we're probably not putting as higher rate product back on in different categories maybe as those are. Now, that's not a big dollar amount anymore because there's only $100 million something of that left, but that's the kind of thing that could play into it as well.

Then on the liability side, we'll do what we can to lower rates on non-time accounts. Also the time accounts as we are seeing maturities happen in on those over the next several months. Those CDs have been on the books for several months or maybe a year or more, and they have a higher rate.

So presumably whether we replace those with new CDs or they renew we will see some benefit of lower rates on those. It's hard to predict exactly how it's all going to play out. But those are the drivers I think that will affect it..

I mean, I guess already this quarter LIBOR is down what I think like 10 basis points or something. So I mean, just sort of reading between the lines, it sounds like probably a little bit more compression all things equal.

Maybe not the pace which -- maybe not the pace we saw this quarter, last quarter?.

Yes, the thing like as Rex said, I think the two big drivers of for us going forward are going to be the repricing of our CD portfolio versus the repricing of our fixed rate loan portfolio. And you should -- that over the course of the next year should improve our margin a little bit. But as Rex said, so many things are difficult to predict.

It's difficult to predict credit spreads. If we replace a lot of variable rate 2.75 over LIBOR variable rate loans with 2.50 over LIBOR variable rate loans, we obviously lose spread. So, the competitive pressures -- we have an in-town competitor paying I think over 2% for CDs right now. It's kind of hard to predict those sorts of things.

We do have some things that should be helpful. And as you point out, since where we index our loans to LIBOR as opposed to prime, things tend to move regardless of whether the fed is moving. So, LIBOR has crept down some this quarter and we are going to feel the impact of that certainly..

Okay. Well, here is an easy question.

Who do you think is going to win the Super Bowl?.

Well, that's an obvious business..

Are you going to Miami?.

No, I'm not going. I'm going to watch it from the comfort of my own home..

Thank you. And I'm not showing any further questions at this time. I'd like to turn it back to Kelly Polonus for any further remarks..

Well, this concludes our quarterly conference call. We want to thank everyone for joining us today and enjoy the rest of your day. Thank you..

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