Good day and thank you for standing by. Welcome to the Great Southern Bancorp Third Quarter 2021 Earnings 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 is being recorded.

[Operator Instructions] I would now like to hand the conference over to Kelly Polonus, Investor Relations. Please go ahead..

Good afternoon and welcome. The purpose of this call is to discuss the company's results for the quarter ending September 30th, 2021. Before we begin, I need to remind you that during this call, we may make forward-looking statements about future events and financial performance.

Please do not place undue reliance on any forward-looking statements which speak only as of the date they are made. Please see our forward-looking statements disclosure in our third quarter 2021 earnings release for more information. President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland are on the call with me today.

I'll now turn the call over to Joe Turner..

All right. Thanks Kelly. Well, good afternoon and we certainly appreciate you joining us today. We are very pleased with our third quarter earnings and continued strong financial position. I think we have -- both of which reflect our associates' ongoing commitment to take care of our customers in a very difficult operating environment.

As is typical, I'll provide some brief remarks about the company's performance and then turn the call over to Rex Copeland, our CFO who will get into more detail on our financial results. Then we'll open it up for questions.

For the third quarter of 2021, we earned $20.4 million or $1.49 per diluted common share compared to $13.5 million or $0.96 per share for the same period in 2020.

Our increased earnings were primarily driven by negative credit loss provision which is indicative of continued strong credit quality, an improving economic situation, and a lower loan portfolio balance.

We had higher net interest income, primarily driven by reduced deposit costs as well as PPP deferred fee income recognition and we had increased noninterest income, mainly related to debit card and ATM fees. Importantly, our pre-provision revenue continues to be strong with 2021 levels exceeding those achieved in 2020.

Our earnings performance ratios were solid with an annualized return on average assets of 1.47%, return on equity of 12.82%, and an efficiency ratio of 57.2%.

Thus far, in 2021, loan production activity in our markets has been quite vigorous, but loan repayments including customer refinancings project sales have been very, very high as well historically high.

In fact, I looked at a report yesterday where we compare 2021 originations through 9/30 to 2019 and 2020 loan origination, both of which were very good years from a loan origination standpoint and we're on track to exceed those two years -- or equal or exceed those two years in 2021.

Our outstanding loans have decreased $271 million compared to the end of 2020, about $90 million of that is a decrease in the PPP loans. Our pipeline of loan commitments and unfunded loans remain strong. That pipeline increased about $100 million from the end of the second quarter. Certainly this type of lending environment can be dangerous for banks.

Like credit cycles in the past, we recognize the current short-term growth challenges and our commitment to our shareholders is that we will not stretch our credit culture discipline for the sake of loan growth. We manage for the long-term and understand that we will have periodic ebbs and flows in our loan portfolio.

As far as Paycheck Protection Program, about 100% of the round one paycheck protection loans about $121 million have been forgiven, maybe just a very small portion have not and we don't expect to have problems with those. Second round, which began in January, we did about $58 million in loans. And I think we had $26 million of those forgiven.

We had total deferred fees in the second round of $3.7 million. We recognized $1.6 million of that in the first quarter and we have $2.1 billion left to recognize, probably most of that will be in the fourth quarter.

CARES Act modifications were down to $38 million of loans that are still under modification and we would expect most of those to – I guess $38 million of commercial and then $2 million of consumer, we would expect most of those over the next probably three to nine months to be on regular payment terms.

From an asset quality standpoint, I don't know what else we can say. It's as good as it's ever been continues to be. Net charge-offs for the year were $9,000. Our non-performing assets excluding FDIC-acquired assets $5.2 million or 10 basis points of assets.

Our allowance for credit losses, despite our reverse provision remains pretty steady at 1.56% of loans. From a capital standpoint, our capital remains extremely strong, $624 million. That's down about $5 million from the end of the year and down about $5 million or $6 million I think from the end of the second quarter as well.

Basically, we made $20 million a little over in the third quarter. We paid a dividend of between $4 million and $5 million. We probably spent about $15 million buying back stock. And so that equaled about our earnings.

So the reduction in our capital is from a reduction in our – the market value of our securities portfolio and our swap – interest rate swap. I'll also remind you that during the quarter we redeemed $75 million of subordinated notes and that occurred in August. So we had about half a quarter of the benefit from that redemption.

That concludes my prepared remarks. I'll turn the call over to Rex Copeland at this time..

All right. Thank you, Joe. I'm going to start by talking a little bit about net interest income and margin. So our net interest income in the third quarter of 2021 increased about $755,000 or about 1.7%, compared to the third quarter in 2020.

So this quarter we were $44.9 million in net interest income, $44.2 million in the third quarter last year and then we were at $44.7 million in the second quarter of 2021. So those numbers – the values didn't change a whole lot between those three periods but it's been fairly consistent as far as the dollars go.

This quarter, as I think Joe mentioned, we did have some accretion income from the PPP loans. The net deferred fees with the income was about $1.6 million in the third quarter of this year, and we had about $1.1 million that went to income from PPP deferred fees in the second quarter of 2021.

So Joe said, we have about $2.1 million left in net deferred PPP fees. And we think a large portion of that is going to go to income in the fourth quarter. We do expect our customers are probably going to continue to avail themselves of getting those loans forgiven and even repaid. So we expect most of that will occur yet in the fourth quarter.

The net interest margin was 3.36% in both the third quarter of this year and last year. For the three months ended September 30 this year, our net interest margin increased one basis point compared to 3.35% in the three months ended June 30 of this year.

The – if you compare back this quarter to the previous year quarter, the average yield on loans decreased about 11 basis points, while the average rate on interest-bearing deposits declined by about 46 basis points.

The margin compression really resulted from changes in our asset mix with our average cash equivalents increasing by about $333 million this quarter period versus a year ago quarter period. And average loans in that same time frame were down by about $266 million. So a significant shift from loans into cash and cash equivalent-type assets.

So without that additional liquidity, if you had the same kind of level of liquidity that we had a year ago, our net interest margin would have been about 23 basis points higher. In addition, this year we also had lower accretion income from our FDIC-acquired portfolios.

So that played into it from this quarter of this year versus the previous year quarter. The core net interest margin which excludes that yield accretion was 3.34% and 3.27% for the three months ended September 30, 2021 and 2020. So our kind of core margin was up a bit from where it was a year ago.

Overall, our funding costs continued to decline in the third quarter, as our time deposits continue to re-price lower at maturity. We should be able to see that continue here in the fourth quarter and probably into the first half of next year. I think our – at the end of September, our cost of time deposits was about 66 basis points.

And most recently, we've been originating overall sort of an average new CD rate of around 35 to 40 basis points.

So also while our net interest margin percentage has been impacted by the increased deposits and changes in asset mix in terms of dollars for the nine-month period, this year versus last our net interest income was $133.7 million in the first nine months this year, up from $132.6 million in the same nine-month period a year ago.

So some of the factors in that also are – in addition comparing those nine-month periods, we had $3.2 million less in FDIC acquired loan accretion income, as I mentioned earlier, and $1.4 million more in interest expense on subordinated notes as we issued some additional notes in June of 2020.

So we did have a reduction for the half of the quarter of the sub debt that we did redeem. But overall, the expenses were higher in the quarter than they were a year ago. So partially offsetting these items, we also did recognize $2.9 million more in deferred PPP loan fees this year -- first nine months versus the first nine months of last year.

Non-interest income was up by about $332,000 to $9.8 million compared to the year ago third quarter as Joe mentioned point-of-sale and ATM fees were higher. That was an increase of about $657,000 in comparing the two quarters. We just had more activity, more debit card usage.

And that's been going on for the most part since the pandemic began maybe not right off the bat but certainly more recently. And that level has just continued to stay fairly steady at a higher level than it was pre-pandemic. Overdraft and insufficient fund fees were up about $200,000 compared to the previous year quarter.

Really we're at a normal -- I think a more normal level now. In 2020 we had waived a lot of fees as the pandemic has shut down different retail establishments. There were some stay-at-home orders and things like that. And we had gone through early on and determined to be pretty lenient with waiving on overdraft and insufficient.

The last thing in non-interest income is net gains on loan sales. This third quarter versus previous year third quarter, the net gain on loan sales actually decreased by about $537,000. The decrease really was just a little bit less origination this year versus last in the third quarter. Last year we had pretty significant refinance activity going on.

Rates were very low also a lot of purchase activity. And I would say now the purchase activity is still going fairly strongly but refinance in the third quarter had dropped back quite a bit from where it was a year ago maybe to a more normal level. And non-interest expense, I'll talk about that for just a moment.

So for the quarter ended September 30 this year, our non-interest expense decreased about $649,000 to $31.3 million when you compare it to the year ago quarter. This was primarily driven by an $867,000 decrease in salary and employee benefits compared to the prior year quarter.

In the 2020 period, we did have a special bonus that we paid to our employees in response to some of the ongoing impacts of COVID-19. There was $1.1 million of bonus and related costs that occurred in 2020 period that did not reoccur in 2021.

The efficiency ratio for the third quarter of this year was 57.27% and that compared to 59.64% for the same quarter in 2020. Income taxes. I'll, kind of, wrap up with that. The tax rate was just under 21% this third quarter of this year a little bit less than 21.5% in the third quarter last year.

The effective rate is probably we expect is going to be somewhere around that 20% to 21% as we move through the rest of this year and probably into the beginning of next year. It is impacted a lot by the tax credit activities that we have, some of our municipal and loan activities that are tax exempt, the income from those are tax exempt.

And then also just the level of income in a variety of states that we operate in where each state, obviously, has different tax rates. And so the mix plays into some of that with our overall tax rate that we have. So that concludes the remarks that I have. And at this time, we'll entertain questions.

And let me ask our operator to once again remind the attendees on how to queue in for questions..

[Operator Instructions] Our first question comes from the line of Damon DelMonte with KBW. Your line is open..

Hey, good afternoon guys. Hope everybody is doing well today..

Yes, hi, Damon..

Hi. So I wanted to start off with loan growth. Joe in your opening comments you talked about the strength of the origination activity that you guys have been seeing and that's kind of been muted by payoffs and whatnot. So if you look back over the last three or four quarters, net loan growth has been pretty hard to come by.

What are you seeing today? And kind of how are you feeling going forward about being able to post some positive net growth in the coming quarters?.

I see basically the same factors at play that have been at play over the last year. Again, I think, what's driving things -- what's driving the high level of refinance and that sort of activity Damon, it's just all the cash in the system, there's just so much competition.

The risk-free rate of return right now for mortgage-backed -- agency mortgage-backed five-year, seven-year duration whatever is 1.5%. So if they -- if somebody can refi a loan at 3%, 3.25% and it's typically not banks, it would be more live companies or agencies or those sorts of lenders, I mean, they're pretty quick to do it.

And I don't see anything today really that's any different than what we've seen over the past year or so. So I think that will continue to be a headwind probably until we see those rates come up a little bit. If people were able to go out and get 2.25% or 2.5% mortgage-backed, they probably aren't going to be so quick to refi those projects.

And really, I mean, I think what we're seeing is that those projects that we're doing we've told you they're high quality, they are extremely high quality I think. And people are just willing to jump -- the longer-term leaders are willing to jump into them more quickly.

Whereas before they were wanting to wait for stabilization, now maybe they're willing to jump in at construction completion. So we just have to continue to be diligent. I think we've mentioned on the call that we are exploring -- we've mentioned on previous calls that we're exploring new LTO sites.

And so we're actively engaged in that and we're just going to manage through this process..

Got it. Okay. All right.

So it sounds like at least another quarter maybe two before we start to see some positive momentum in the portfolio?.

Yes. It's just hard to say. It's just hard to say. I mean, I will say, $90 million of the repayment thus far this year was with PPP loans. And obviously that's not going to repeat, right? $35 million roughly is pay down in the consumer portfolio which I'm sure is primarily indirect. That's not going to repeat.

So that's $125 million of the pay down in our portfolio that likely won't repeat in future quarters. But there's still -- there's -- like I said earlier there are still factors at play which I'm sure are going to make repayment higher than typical. .

Got it. Okay. That's helpful. I appreciate the color. And then with regards to expenses there was kind of an uptick in the occupancy and equipment expense. Were there any onetime charges in there? What was that related to... .

There was. .

Yes. I mean it wasn't all of it, but there were some things. There was an adjustment that we made to some asset lives that may have been a couple of hundred thousand dollars or so that we included to catch up in some expense there that shouldn't go back to normal in the fourth quarter.

And then there's just -- when you have a banking center network like we've got in offices we had some -- in the summer months we have some parking lot repairs and things like that. So, there's just things like that to go on that don't necessarily occur. But likewise in the winter months, we're going to have snow removal probably in some places.

So, some of that yes was I would say not going to recur, but then there are some things that probably are in there. .

Okay.

So then when we kind of look at the overall expense base like next quarter do you think we kind of keep it flat to this level to kind of back out a couple of those onetime items and then you get a little bit of normal growth in there?.

Yes. I mean I think -- and the sort of the two challenges that are present I think are just for Great 7, but generally in the banking business is all this cash in the system is compressing rates and making the margin business more difficult. It's compressing margins and it's making it tougher to grow assets. So that's one issue.

I think that's a temporary thing. I don't know if that's going to last six months a year 18 months, but I think it's going to be temporary. The other thing that's interesting though is the employment situation in the country. It is just -- it's tough.

And so, I would assume that employee costs are going to come up some as we try to hire new people and keep the people we have. It's a very tough employment market right now. .

And some of that's actually been occurring already. We're actually seeing some of that already this year and have had to adjust some salaries and trying to hire people and things of that nature. It's been harder to locate staff and potential employees. .

Right. We always have open positions. I mean, I would think we have 1200 employees. I would think kind of steady state is 40 or so open positions. But I think we have close to 100 right now. And it's just -- it's hard to find folks. And that's -- obviously we all read in paper that's not Great Southern-specific. That's pretty much economy-wide. .

Okay. Great. And then just lastly on credit trends obviously remain very strong. You had a negative provision this quarter for the third quarter in a row.

With the outlook for loan growth being subdued for the next couple of quarters and credit trends remaining good, is it fair to expect another negative provision in the fourth quarter or at least very, very low like zero?.

I mean, if we were to have another quarter with no charge off and if we had declining loan balance, it's possible certainly that the allowance could go down. I mean, we feel like we have a well-funded allowance based on the level of our loan portfolio right now.

If all other things being equal, if the loan portfolio were to go down a little bit, yes, I guess the allowance could go down a little bit as well..

Okay. All right. That’s all that I had. Thank you very much, guys. Appreciate it..

Okay. Thanks, Damon..

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

Hi, everyone. Good afternoon..

Hey, how are you?.

Hi. Good. Thanks. Just wanted to touch on the margin here a little bit and some of the factors at play there. How much room do you think is still left on the deposit side? I know you referenced some CDs that are still set to mature.

But are these maturities and the funding cost improvement, should that be enough to offset yield pressures?.

I don't know. I'll take a shot and then let Rex. I mean, if you look at our second to the last page of release, I think, it's the second to the last page, we show the level of time deposits Andrew and that's really probably where most of the repricing will come. We show the rate on our time deposits is 66 basis points.

We're probably paying about half that right now. So there could certainly be some additional relief there..

And as far as the maturities go, just to give you an idea, within three months about $270 million of that CD portfolio will mature within six cumulatively about $438 million. And then, within the next year about $795 million. So it's -- most of that portfolio within the next 12 months is going to have a chance to reprice at maturity..

Yes..

Got it. That was actually going to be my follow-up on that side. Thank you for that. And then, obviously, there's some -- there’ve been some very good loan production, also elevated payoffs.

The loans that you've been adding, I guess, what's been the blended rate on those?.

I don't have that number. We'll try to -- we may try to put something like that in the 10-Q maybe, Andrew. .

Got it. Yes. I'll look out for that. And then, the ones that pay off certainly appreciate you guys sticking to your knitting with pricing and underwriting.

Just kind of curious what are the yields that you guys are losing? What are our competitors offering that's making it an economic portfolio?.

I mean, I think, what we see -- I mean, as we've said, most of the deals that we do, especially multifamily or senior care, industrial or whatever, I mean, we have 30% to 40% equity in. And when those longer-term lenders come in, they're cutting our rate, but they're also probably giving the borrowers back some of their equity. And we have guarantees.

And typically, those long-term loans do not have guarantees or at least have very limited guarantees. So it's at an amount at a guarantee structure and at a rate that we just wouldn't want to do..

Got it. That makes it tough to compete there. But thank you for taking the questions. I will step back..

All right. Thanks, Andrew. .

[Operator Instructions] Our next question comes from John Rodis with Janney. Your line is open..

Hey, good afternoon, guys..

Hi, John..

Hi, John..

Hi. Joe, just I guess just back to loans in a second. I guess you said in the press release that it's mostly multifamily.

Are the payoffs in any particular market, or is it pretty much across the whole footprint?.

I think it's across the board, John. And one thing that's interesting, I don't know if any of you look at our loan presentation that we file every quarter. Rex and I were talking about this earlier. I looked at that. We have a page in there that shows the multifamily portfolio and sort of stratified it by LTV..

Page 11..

Page 11..

Yes, Page 11. And if you look at that you'll note that as of June 30, 2021, we had about $70 million of a $1 billion multifamily portfolio that was over 76% LTV. And at the end of September, we only had $20 million that was over that LTV. So obviously, $50 million of what paid off in the quarter was higher LTV deals. Now I'm sure they weren't bad deal.

I'm sure they were good deals, but it's across geographies that's probably higher LTV, lower LTVs is – I don't think there's – I think there's a lot of demand for that product out there right now..

Yes that's interesting. Thanks. Rex, just a question on the securities portfolio. It's trended down again this quarter.

If net loan growth remains sort of challenging in the near term, would you expect to grow the securities portfolio some, or is it still flattish to down?.

Our portfolio is kind of structured. We put most of this portfolio on back maybe two to three years ago and its fixed rate agency, commercial-type projects. So we've been able to maintain our yield so far at around 260 plus. And so that's been helpful.

And it probably pays down on average $4 million or $5 million a month just normal payment because there's some lockout structure on this and prepayment structure on it. So we don't get like a normal single-family portfolio with no prepayment stuff on it.

We don't get these wild swings coming in with big prepayments generally on that portfolio, at least not yet for a while anyway. But we did add some in that portfolio back in the – I think March of this year. And I think at that time the 10-year treasury that's gotten back up to around 175 or something like that.

And then the yields have gone back down through the second and a lot of the third quarter. But the yields are coming back up again a little bit now. So long-winded answer, but yes, we're going to look at that. I don't know for sure what we're going to do yet.

But that is something that we need to consider is it time to maybe add some more securities in the portfolio again with the extra cash that we have. And one of the things that we're doing too is, we've got on the funding side, we've got some Internet-based CD deposits. And those as they come due, we basically dropped our rates to almost zero.

And the majority of those as they mature are just going away. So we're trying to eat up some of our liquidity with just letting those deposits roll off and not replace them at any cost really. So what's rolling off there is probably going to be I don't know 70 or so million coming up in the next few months. And so that will not get replaced.

So that -- it should eat into some of that extra liquidity that we have as well. But yeah, John, we're going to look at some different avenues to see if there's some things that we might want to try to do with the liquidity that we have sitting there now..

Okay. Thanks, Rex. And then Rex maybe just one final question on -- just back to expenses. It looks like advertising was up about $400,000 linked quarter to almost $1 million.

Was that more timing, or does that maybe pull back some going forward?.

Yeah. We'll tell Kelly she has to pull that back along..

It was timing..

It was timing. We had a few sponsorships and some things in there that happened in the third quarter. We also in the second quarter had a little bit of a credit that we got some marketing dollars back from another entity that we have a partnership with.

And so there was a little bit maybe less expense in the second quarter and some extra expense in the third. And it's probably going to kind of even back out I'd say in the fourth quarter and moving forward..

Okay. So just... .

John, well I think the sponsorships were high by maybe $100,000 or so..

It's kind of truly timing..

Yeah, for sure. .

Okay. So just for overall expenses, again just back to the earlier question, it sounds like expenses are probably relatively stable going forward.

I mean, maybe some modest growth, but it doesn't sound like there's a big pullback from the current level going forward?.

I don't think so..

No. And I mean, obviously going into the fourth quarter there will be some things going on. But in the first quarter a lot of our....

People get raises..

Yeah. People get raises typically at the beginning of the next year. And so, we're going to have a lot of that. Nonexempt people get raises at their anniversary throughout the year. So that goes on all year long. But there usually is a little bit of an uptick for the first quarter for that because of the exempt annual increases and that kind of thing.

So I -- there was a few -- there's some extra stuff in the quarter maybe on expenses, but I wouldn't say it was huge amounts so..

Okay. And Rex, just final question just PPP loans.

Looks like they were what about $30 million at the end of September?.

$35 million, I think..

Okay..

Yeah, remaining..

Okay. Thanks guys..

Thanks, John..

I'm showing no further questions at this time. I would like to turn the conference back to Joe Turner..

Okay. Thank you very much. Well, as I said, we really appreciate everybody being on the call today and we look forward to talking to you in January. Thank you..

This concludes today's conference call. Thank you for participating. You may now disconnect..