Great Southern Bancorp, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Great Southern Bancorp Fourth Quarter 2020 Earnings Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during that session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Kelly Polonis. 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 Polonis, Investor Relations for Great Southern Bank Corp, 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 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 slight earnings decline from the year-ago period were higher loan loss provisions, slightly lower net interest income, higher non-interest 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 rates, 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 of 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. It's shown in our press release. And if you look at it, you can see that it's really been pretty steady since, 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. 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. 12-31-2020, non-performing assets were $3.8 million. I think some basis points maybe of loans. Total net charge-offs were $422,000 during the year. I think that's about one basis point, and that was primarily or really exclusively to the extent it related to loans, it was in our indirect portfolio. I think pretty much the rest of our loan portfolios had net recoveries 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 obviously than the 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 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 of the allowance will increase on the outstanding loan portion about $10 to $13 million. For the unfunded portion, it will be about $7 to $8 million. And then the after-tax effect of that that will flow through retained earnings is a decrease in retained earnings of about $13 to $15 million upon implementation. So the initial adoption should have no impact whatsoever. on the income statement. The next area I want to touch on is the net interest income and margin. 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 Reserve's interest rate cuts in March. and also additional lower yielding earning assets like the PPP loans, investment securities, and increased funds in 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 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 eight 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 of 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 increase compared to the third quarter of 2020 was primarily related to lower deposit costs between those two three-month periods. Let's speak a little bit more about deposit costs. So during the three months ended December 31, 2020, our cost of interest-bearing deposits was 15 basis points lower than it was in the three months ended September 30, 2020. and it was 77 basis points lower than it was during the three months into December 31st, 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 seven 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. Non-interest income, I'll speak about for just a moment here, it increased when you compare the fourth quarter of this year versus the fourth quarter of 19. Non-interest 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 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 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. Non-interest 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 had to do with merit increases and just normal increases that happened 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 year quarter. 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 some 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 six of those where we wrote down some values on those a little bit more. In total, it's about $839,000. Our efficiency ratio for the fourth quarter of 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 non-interest 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.