Ladies and gentlemen, thank you for standing by, and welcome to the Great Southern Bancorp’s Fourth Quarter 2020 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Kelly Polonus. Please go ahead, ma'am..

Thank you, Catherine. Good afternoon, and thank you for joining us for our fourth quarter earnings call. This is Kelly Polonus, Investor Relations for Great Southern Bancorp, Inc. The purpose of this call is to discuss the company's results for the quarter ending December 31, 2020.

Before we begin, I need to remind you that in this call, we may make forward-looking statements about future events and financial performance. These statements are subject to a number of factors that could cause actual results to differ materially from the anticipated results.

For a list of some of these factors, please see our current earnings release and other public filings. President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland, are on the call with me. I'll now turn the call over to Joe Turner..

All right. Thanks, Kelly, and good afternoon, everyone. We appreciate you joining us today. I'm pleased to report that 2020 ended with strong operating results for us in the fourth quarter. Our performance underscores our associates' dedication and tireless efforts in taking care of our customers during this unprecedented time.

I'm really proud of our team. I'll provide some brief remarks about our company's performance during the quarter and then turn it in -- turn the call over to Rex Copeland, our CFO, who will go into more detail on the financial results, and then we'll open it up for questions.

For the fourth quarter, we earned $17.8 million or $1.28 per share compared to $17.9 million or $1.24 per share in the same period a year ago. The earnings per share increase reflects the company's common stock repurchases during the year. We purchased approximately 530,000 shares of common stock during the year, at an average price of $41.71.

The primary drivers of our sly earnings decline for the year -- from the year ago period were higher loan loss provisions, slightly lower net interest income, higher noninterest expense, mainly as a result of $828,000 of foreclosed real estate write-downs as well as higher compensation expense, mainly in the mortgage area.

Our performance metrics during the quarter were annualized return on common equity, 11.27%, annualized return on assets, 1.31%. Our margin was 3.41%, and our efficiency ratio was about 56.7%. Our loan production in 2020 was pretty strong considering the operating climate. We surpassed $1.2 billion in commercial loan originations.

And with historically low mortgage rate, we produced a record-setting $540 million of single-family mortgage loans. Our total gross loans, which included unfunded loan amounts, increased $202 million from the end of 2019, but decreased $27.6 million during the fourth quarter.

From the end of 2019, outstanding loan balances increased $143 million, including about $96 million of Paycheck Protection Program loans that were left on our books at the end 2020. During the fourth quarter, our loan balances decreased by about $117 million because of payoffs. About $26 million of those payoffs were PPP loans.

Our pipeline of loan commitments continues to be strong. That's shown in our pipeline chart, is shown in our press release. And if you look at it, you can see that it's really been pretty steady to -- I think, December of 2018 is the first period in that pipeline report, and our pipeline has been fairly steady.

On January 19, we began accepting PPP applications from our small business customers. During the first PPP cycle, we did about 1,600 loans, $121 million. What I also want to point out to you that for more information about our loan portfolio, we did post our quarterly loan portfolio presentation, I believe, yesterday.

Our asset quality is at historically strong levels at 12/31/2020. Nonperforming assets were $3.8 million, I think 7 basis points maybe of loans. Total net charge-offs were $422,000 during the year.

I think that's about 1 basis point, and that was primarily or really exclusively in our -- to the extent it related to loans that was in our indirect portfolio. I think the rest of our -- pretty much the rest of our loan portfolios had net recovery during the year. So very strong credit quality.

As far as loan modifications, our total loan modifications were down to $251 million at the end of the year. And we do expect those to continue to trend down during 2021. Our capital remains very, very strong. Total equity to total assets of 11.4%.

Common equity to tangible assets -- tangible common equity to tangible assets at 11.3%, so strong levels of capital give us lots of flexibility going forward. As I mentioned, we did purchase about 530,000 shares of common stock in 2020.

140,000 shares of that was purchased during the fourth quarter at a little higher price than -- obviously than the full year average price. That concludes my prepared remarks. I'll turn the call over to Rex Copeland at this time..

Thank you, Joe. I want to start off today with a brief discussion about our adoption of CECL. As you all know, there was legislation of it at the end of 2020 that enacted a lot of things, but one of the things that was part of it, was the optional additional deferral period for CECL implementation. We elected to initially adopt this in January of 2021.

So the fourth quarter information is still prepared and the full year of 2020 is prepared under the incurred loss methodology. Beginning here in the first quarter of 2021, we will adopt the CECL methodology and so going forward, be under that.

So what that will look like is we will have a cumulative adjustment that will happen at the beginning of this year. We'll add or increase our allowance for credit losses. There will also be an allowance for potential losses that relate to the unfunded portion of our loans and commitments.

And the net of that is all going to flow through our retained earnings. And so we think that the balance -- the allowance will increase on the outstanding loan portion of about $10 million to $13 million for the unfunded portion to be about $7 million to $8 million. And then the after-tax effect of that, that will flow through retained earnings.

There's a decrease in retained earnings of about $13 million to $15 million upon implementation. So the initial adoption should have no impact on the income statement. The next area I want to touch on is the net interest income and margin.

So our net interest income for the fourth quarter of 2020 decreased about $365,000 to $44.6 million compared to $44.9 million for the fourth quarter of 2019. Net interest income was affected by the federal reserves, interest rate cuts in March.

And also additional lower-yielding earning assets, like the PPP loans, investment securities and increased funds and cash equivalents at the Federal Reserve Bank, also interest expense related to the subordinated debt that we issued in June of 2020.

So the net interest margin as a percentage in the fourth quarter was 3.41% versus 3.82% in the fourth quarter of 2019 and also versus 3.36% in the third quarter of 2020.

So if we compare the fourth -- the two fourth quarter periods, the average yield on loans decreased about 82 basis points, while the average rate on deposits declined about 77 basis points quarter versus quarter, year-over-year.

So most of the margin compression actually resulted from changes in the asset mix, with average cash equivalents increasing about $212 million and average investment securities increasing about $63 million. The average yield on cash equivalents decreased 153 basis points between the fourth quarter 2019 and the fourth quarter 2020.

So the change in asset mix accounts for about 16 basis points of the decrease with the additional subordinated notes issued in June 2020, accounting for another 8 basis points. And then in addition to that, the yield accretion on our FDIC acquired loan portfolio was about 12 basis points less in the fourth quarter of 2020 versus fourth quarter 2019.

So the core net interest margin, when you exclude the additional yield accretion on the acquired loan pools, was 3.34% in the fourth quarter of 2020 and that compared to 3.63% in the fourth quarter of 2019 and 3.27% for the third quarter of 2020.

The core net interest margin increased compared to the third quarter of 2020 was primarily related to lower deposit costs between those 2 -- 3 month periods. Speak a little bit more about deposit costs.

So during the 3 months ended December 31, 2020, our cost of interest-bearing deposits was 15 basis points lower than it was in the 3 months ended September 30, 2020. And it was 77 basis points lower than it was during the 3 months ended December 31, 2019.

We expect that we'll make further progress, albeit maybe not quite as dramatic, in reducing interest rates on our deposits throughout the first half at least and maybe beyond in 2021. So I mentioned earlier, the impact of the accretion income for FDIC-acquired loans. We've obviously had that accretion income for many, many years now.

In the fourth quarter of 2020, the impact on that was a positive 7 basis points to our margin. And the remaining accretable yield that will affect income in future periods is about $2 million, and we expect to recognize about $1.5 million of that in the full year of 2021. Noninterest income, I'll seek back for just a moment here.

It increased when you compare the fourth quarter this year versus fourth quarter of '19, noninterest income increased $2.3 million to $10 million. The two main areas that fed into that were net gains on loan sales. So we originated -- as Joe said earlier, we originated a lot of residential loans.

Many of them or most of them are fixed rate, which we typically sell in the secondary market. So our profit on loan sales increased about $1.8 million in the fourth quarter of 2020 versus fourth quarter 2019. Also in other income, that increased about $404,000 compared to the previous year quarter.

That related to a little bit better performance, some sales of fixed assets. We had some gains this year versus some expense or a loss in the fourth quarter of 2019. We also recognized a little more income -- about $76,000 more in income on interest rate swaps with our customers.

So these are just individual swaps with individual -- on individual loans with our loan customers. And then we also had an increase of about $58,000 of income compared to the previous year quarter. That related to scheduled payments and exit fees and things related to our tax credit partnership activities.

Noninterest expense for the quarter increased about $1.6 million to $31.1 million when comparing it to the fourth quarter of 2019. The major areas where we had increases were in salary and employee benefits, that was up $782,000 from the prior year quarter.

That was a lot of -- that we had to do with merit increases and just normal increases that happen from year-to-year. We also had increased incentives in the mortgage division, which the costs there were about $220,000 more than they were in the previous quarter -- previous year quarter.

And as I mentioned, we had significantly more income related to the profit on those loan sales. Insurance costs. We increased those costs about $389,000 compared to the prior year quarter. That increase was related to our FDIC insurance premiums.

In the previous year, we had some credits that were available to us because of overfunding of the insurance fund. And so we exhausted those credits. And then the fourth quarter this year, we were paying the full amount.

Expense on other real estate owned and repossessions, that was higher by about $535,000 compared to the prior year quarter, mainly due to some write-downs that we had in the 2020 period. We had small write-downs in 2019, larger ones in 2020.

We had three foreclosed real estate properties that we took the write-downs on, one of which was actually sold in the fourth quarter in December, the other two remain. And then we also had some former bank properties, about 6 of those, where we wrote down some values on those a little bit more. So in total, it was about $839,000.

Our efficiency ratio for the fourth quarter 2020 was 56.98%, and that compared to 56.11% in the fourth quarter of 2019. The higher efficiency ratio this year was mainly attributable to noninterest expense increases partially offset by some increase in total revenue.

But despite those increases, we were able to maintain or actually reduce the net interest expense to average assets ratio, down to 2.29% from 2.38% in the previous year quarter. That concludes the prepared remarks I have. So at this time, we'll turn it back over and entertain any questions you all may have..

[Operator Instructions] And our first question comes from Michael Schiavone with KBW..

So my first question, I was wondering, do you guys have any target capital levels you are aiming for? And can you provide an update on your deployment priorities in 2021?.

I don't think we necessarily have a target capital level. I would tell you, we think we have plenty of capital. I think our highest priority would always be to utilize capital to organically grow. And so I think we have plenty of capital, even assuming really outsized growth rates, we have plenty of capital to handle that.

From there, we could use -- we'll be able to use the capital opportunistically, either through -- if there were an acquisition that came along, that made sense, we could utilize it there. More likely would be repurchases of our stock, assuming they're at -- our stock continues to be at attractive levels.

And then a third use would be special dividend as we've done a couple of times..

Okay. And then on fee income, do you feel -- service charges kind of normalized a bit from the pandemic lows.

And do you expect that to continue? And then can you also just provide an update on the mortgage banking pipeline and how you expect that strength -- if you expect that strength to continue?.

Rex, why don't you answer it?.

So the service charges and things like that, yes, they did normalize. So we kind of anticipate those will be similar but what we may find here in the first quarter is with another round of stimulus checks and things of that nature, overdraft and some other charges, NSF charges, some service fees may go back down, again, a little bit.

Unclear just yet what that's going to look like, but that's a possibility because we saw that when the first stimulus checks went around. I think point-of-sale transactions and things of that nature fees that we generate from that have stabilized and seem to be in -- in the fourth quarter seem to be sort of normal.

And I would anticipate that, that should continue. And so I think those areas of fee income should be reasonable. The other thing I think you mentioned was our income, perhaps on the mortgage loan pipeline and that kind of thing.

I don't have an exact number on that or anything, but I would just think that probably -- the interest rates have ticked up a little, not a lot, but mortgage rates have maybe picked up some. And so also, a lot of people that could refinance have probably already done so.

So I don't know that we'll maybe quite see the same level of activity and maybe consequently, profit on loan sales as we saw in the fourth quarter, but I think it will still be fairly brisk..

Okay. And then just my last question. I was wondering if you can provide a little color on that the bank of the future prototype you guys are working on.

And how many of those you expect to roll out over the years?.

I think we're going to build -- or we have one banking center under construction. I think we're going to be modest in our rollout of that. I think we're going to go with this, work out the kinks. Once we have a plan then I would think maybe 4 or 5 a year after that, something like that..

Our next question comes from Andrew Liesch with Piper Sandler..

Just on the PPP, the latest round here, you said you're participating.

Any early indications on number of replications or volume dollar amount what you're seeing so far?.

We've got the numbers -- I mean, I think that overall, Andrew, we would expect it would not be -- our totals would not be as significant as the first round. As a reminder, we did about $120 million in the first round. I think so far, we've received about $27 million of applications. And about maybe 11% or 12% of those are first draw request.

In other words, customers that didn't participate back in the spring, and then the rest are customers that did participate in the spring. So I think there's obviously some interest. But right now, I think we would say, yes, it's probably not going to be at the level that it was in the spring..

Got it. Okay. And then just looking at some pretty good deposit growth here in the quarter, interest-earning cash was pretty high at year-end.

What trend are you seeing there? Has any of that flown off the balance sheet? Or is that going to be just held in cash? Or -- I'm just trying to get a sense of where liquidity is going to shake out here early in the quarter..

Yes. We've had a lot of growth throughout the entire year, but then we had another kind of big influx of it right at the end of December. So I didn't mention this earlier, but I'll take the opportunity now.

So if you looked at our earnings release and you looked at the average balance, an average rate table, the point in time at December 31, that first column in that table is a 3.08% interest -- net interest rate spread.

That -- it was kind of negatively impacted right at the end of the year by fairly significant influx of funds that we had to park in the Fed as cash equivalents because we didn't have anything to do -- we couldn't do anything with it at the moment. So we've seen some of those deposits roll out of here, but I would say not a ton of it, at all.

And so we've been utilizing different things that we have. We had a -- we've got a brokered deposit and some other things like that, some national deposits that we've kind of turned the faucet off on a little bit, and they're maturing and rolling out. So we're eating into that a little bit with with some of our maturing deposits of that nature.

But the DDA or the nontime balances are staying pretty sticky with us. And so we're continuing to see pretty high levels there, but we are kind of eating into that excess funds at the Fed kind of as we go through the next month or 2..

Got it. Okay.

So just kind of weighing that, maybe liquidly be a little bit higher, but you're also -- you have some higher cost funds that you're maybe not renewing or letting roll away, but maybe the -- overall, the funding benefit's not what it was here in the fourth quarter, but then maybe get another good quarter of PPP recognition, I guess, rolling this all together, maybe a little bit higher margin on a reported basis here in the first quarter before trending lower? Is that a reasonable way to think about it?.

Well, the thing there -- I mean, the things that are going to happen that we kind of know about is we would anticipate that whatever time deposit maturities that we're going to have in the first quarter are going to be replaced or -- either not be replaced or be replaced at much lower rates than what they're at today.

And so we'll continue to see some benefit from that. The nontime deposits, which are significant balance, we've seen those balances move -- I'm sorry, the rates move down, maybe a basis point or 2 a month on average, something like that.

And so we anticipate we'll continue to try to work those rates down a little bit more, but it will be incremental basis points. It's not going to be big, big changes..

What you're seeing -- Andrew, probably you're seeing margin decline because the -- well, the amortized fee on the PPP loan will go away?.

Well, obviously, it will be higher here this quarter. And then as time goes on, that will drift [indiscernible]..

Yes. I mean, I think it was about $1 million in the fourth quarter, so that annualizes to about $4 million. So that's really just giving us about a 4% yield on those PPP loans, but I guess we're also earning about 1%. So maybe it's 5%. So that -- it's not a huge moneymaking proposition. It's not a big yield portfolio even with the amortized fee.

So that portfolio rolls off, if we're able to replace it with other loans. They typically would be probably in the 4% to 5% range, but they're going to be 3.5% to 4% would be the replacement, probably closer to 3.5% to 3.75%. So there's not a big difference between the yield on PPP loans and the yield on other loans we're making..

Our next question comes from John Rodis with Janney..

I guess, Joe or Rex, maybe could you provide any more color on the loans that are still under the deferral? I guess, specifically, maybe the hotel, motel and then the retail portfolio. Those are your 2 biggest buckets.

You said you expect continued improvement, but is that a quarter? Or do you think that plays out throughout the year?.

No. I think it will happen sort of ratably throughout the year on the rest of those. And John, I mean, I think probably my first comment would be -- I mean, we don't look at those loan -- if we thought there was impaired credit on those loans, you would see those loans classified.

We don't see -- obviously, with our levels of classification, whatever it was, $8 million or whatever, total classification, none of those loans really are classified. So we don't see impaired credit. We're just continuing to work with our customers. Generally, they're paying interest only. They're just not making a principal payment.

So that would be my first comment. And yes, we'll continue to work with people. In some cases, certainly, we've -- in exchange for continued interest-only payments, maybe they pledged additional collateral or put cash up. So there's been an ongoing negotiation, and our customers have shown good faith, but they still remain in this table.

Our current expectation is that you'll see the total of $250 million total sort of ratably decline throughout the year. That's what we would expect..

Okay. That's helpful, Joe. Joe, just on the -- if you look at loan growth for the year, excluding PPP, loans were up about 1.5%.

Do you think as you look to this '21, do you think you can do better than that 1.5%? How are you sort of feeling about core loan growth excluding PPP?.

It's just so hard -- it's so hard to tell. I mean there's just parts of it that we don't have a great deal of visibility about the -- I think our origination looks good. There will be points in the year when it slows down and speeds up.

And -- but you kind of look at that -- our pipeline totals, they've been, as I said, fairly consistent for 4 or 5 years, so -- or 3 years. So I feel pretty good about that. We just don't know what the competition is going to be doing.

And I do know this, we have -- and have intentionally put ourselves in a position where we have a very strong loan portfolio.

We have a loan portfolio that's attractive to lots of long-term lenders who are willing to loan our customers' money at rates less than what we are -- what we have them on the books for and limit or eliminate guarantee, do lots of things.

So we've got an attractive portfolio, which I think is a good thing, but it does make it tougher to keep our loan balances up. So I mean, I think that's a long-winded way of saying, we're going to continue doing what we're doing, John, and just let the chips fall where they may..

And as far as the -- specifically the indirect portfolio, most of that runoff has occurred, correct? Or do you expect [indiscernible]?.

Yes. I think that portfolio is like $48 million now..

Right. Yes. Okay. Guys, just one final question.

The buyback, what's currently remaining under the buyback?.

Yes, we just approved a new 1 million share buyback, John. So I mean, there's probably 900,000 shares left, something like that, maybe around 900,000..

And there are no other questions in the queue. I'd like to turn the call back to Mr. Joe Turner for closing remarks..

Okay. Well, we appreciate everybody being on the call with us today, and we'll look forward to talking to you in April after our first quarter earnings release. If you have questions in the meantime, please don't hesitate to give Kelly Polonus a call. Thank you..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day..