Good day and thank you for standing by. Welcome to the Great Southern Bancorp, Inc. 1st Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.
Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kelly Polonis, Investor Relations. Please go ahead.
Thank you, Gigi. Good afternoon and welcome. The purpose of this call is to discuss the company's results for the quarter ending March 31, 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. You should not place undue reliance on any forward looking statements, which speak only as of the date they are made.
Please see our disclosure in our Q1 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.
Thanks, Kelly. Good afternoon, everybody. I also want to thank you for joining us today. I am pleased to report that we began 2021 with strong operating results in the Q1. As is typical, I'll provide preliminary remarks about the company's performance and then turn it over to our CFO, Rex Copeland, who will go into more detail about our financial results.
Hopefully, you've had a chance to at least glance at the earnings release. If you have, you've seen that we earned 18,900,000 or $1.36 in the Q1 per share compared to $14,900,000 or $1.04 for the same period a year ago. The primary drivers of our earnings increase this year were higher net gains on mortgage loan sales. Of course, that's a result of the very robust mortgage market we're in, lower credit cost provision and generally well contained expenses. That was partially offset by slightly lower net interest income that was really almost exclusively driven by lower levels of FDIC accretion income.
I think our net interest income was down about $850,000 for the quarter, and our accretion income was down like $1,100,000 or $1,200,000 for the quarter. So that's really the culprit there. But generally a pretty good level of net interest income. And then higher income tax rate, I think just as a result of higher levels of income result generally in a higher income tax rate for us because our tax credits have a lower impact on our ultimate tax expense. Our performance metrics for the quarter were good.
Annualized return on common equity was 12.18%, and that's return on robust levels of common equity. I think we ended the quarter at 10.8%. Our annualized return on average assets was 138%. Our efficiency ratio was 56.33%. During the Q1, we did adopt CECL, which resulted in an increase in our allowance of allowance for loan losses of $11,600,000 We also established an allowance for losses on unfunded commitments of $8,700,000 So essentially $20,300,000 of additional allowance that we now have on our balance sheet that resulted in a $14,000,000 debit to retained earnings net of tax.
As far as loans go, since the end of 2020, our loan growth has been relatively flat. We've had good levels of origination, but loan payoffs have been pretty robust as well. So our gross loan portfolio, including our levels our unfunded loans decreased by $2,700,000 Our net loans decreased by about $11,100,000 both of those decreases from the end of 2020. As I said, origination activity continues to be strong. If you look at the pipeline chart in our earnings release, our pipeline continues to be relatively stable at $1,300,000,000 A little bit of information about Paycheck Protection.
The Paycheck Protection Program, We were pleased to again participate in that. Our loan officers are proud to be helping our commercial customers deal with the effects of the pandemic. We in addition to originating 2nd round loans, we're also knee deep in forgiveness on the 1st round loans, and that's going extremely well. To refresh you, we originate 1600 loans $421,000,000 about this time last year during the first round of PPP funding. Currently, we have received full forgiveness on more than 1100 of those loans totaling about $66,000,000 and we have more in the pipeline awaiting SBA approval.
I think from our perspective, we would say that the process has gone well and we've had not a ton of pushback from the SBA on our forgiveness applications. As far as the second round goes, we have received nearly 1500 applications totaling $55,000,000 We funded about 1400 of those applications totaling $53,000,000 Those have been roughly split fifty-fifty between customers who participated in the program before and those that were seeking a 1st draw under the program this time. I would remind you for more information about our loan portfolio, we did file our loan portfolio presentation last night. That should be on our website as well as the SEC's website. Asset quality continues to be extremely strong.
At March 31, 2021, excluding FDIC acquired assets, nonperforming assets were $6,700,000 about a $2,900,000 increase from the end of 2020. That's really just 2 loans, I think, customers that have been around the bank for quite some time. Including FDIC acquired assets, nonperforming assets were $10,900,000 resulting in a percentage of total assets nonperforming assets to total assets of 0.19%. Our pandemic related loan modifications dropped to $146,000,000 at the end of March compared to $251,000,000 at the end of December 2020. Of the remaining loan modifications, 19 loans totaling $141,000,000 were commercial and 93 loans totaling $5,000,000 were in the consumer and mortgage categories.
Our capital continues to be very strong. From the end of 2020, it did decrease by about $18,000,000 to $611,000,000 principally as a result of the additional allowance that I spoke about before, which reduced capital by $14,000,000 and also the drop in the value of our available for sales securities portfolio. That concludes my prepared remarks. At this time, I'll turn the call over to our CFO, Rex Copeland. Rex?
Thank you, Joe, and thank you, everybody, for joining us again today. I'll talk a little bit first about net interest income and margin. Joe mentioned earlier that our Q1 net interest income was down about $849,000 from a year ago to a total of $44,100,000 this year's quarter. One component of that I'll make note of, we mentioned in our earnings release, is the net deferred fees on the PPP loans Joe was talking about, the number of loans earlier. We recorded income interest income of about $1,200,000 related to the net deferred fees accretion in the Q1 this year.
I'll remind you that we defer fees and costs related to that and accrete that to income over the expected life of the loans. If the loans pay off, then anything remaining gets taken to income at that point. So we'll expect to see some more of that probably here in the Q2. As Joe mentioned, we're still working with some of the first round stuff to get forgiveness and repayment on some of those PPP loans. At the end of March, the net deferred fees related to those loans, the PPP loans, for both of the groups of loans that we originated was about $3,900,000 So that will be taking the income over the upcoming quarters.
The net interest margin was 3.41% in the Q1 this year. That compared to 3.84% in the Q1 of 2020, which was a decrease of 43 basis points. The net interest margin was also 3.41% in the Q4 of 2020. So no change between Q4 2020 and Q1 this year. In comparing the Q1 of 2021 2020, the average yield on loans decreased about 76 basis points, while the average rate on deposits declined about 80.
Most of that margin compression resulted from a change in asset mix. We kind of talked about that previously, and it's been kind of the thing that's been going on for most of 2020 and into 2021 for us. Our average cash equivalents increased about $329,000,000 and average investments increased about 30,000,000 dollars The average yield on those cash equivalents decreased about 106 basis points Q1 this year versus Q1 last year. So that change in asset mix, I mentioned a minute ago, was about 24 basis points of the decrease. With the addition, if you recall last year in June, we issued some subordinated debt, and that was about 8 basis points of additional cost or reduction in our margin.
The additional yield accretion from our FDIC loans was down about 11 basis points from the Q1 last year. So those three components make up really the whole difference of the decrease in our margin from 3.84 to 3.41. The average compared to December's quarter, the average yield on loans decreased about 3 basis points, while the average rate on deposits declined 15 basis points. However, the net interest margin, as I said, was unchanged, that's really got to do mostly with asset mix again, where we had decrease in average loans, increase in average cash equivalents in Q1 this year versus Q4 last year. I mentioned the accretion income on FDIC acquired loans.
What we have left to take to income is about $1,300,000 at the end of March, and we'll have about $800,000 to $900,000 of that will go into income in the remainder of 2021. I'll shift over to non interest income now. For the Q1 this year, non interest income increased $2,400,000 to $9,700,000 when you compare it to the Q1 of 2020. The increases there were primarily net gains on loan sales, as Joe mentioned earlier, significant activity origination activity in our mortgage business, and a lot of that's longer term fixed rate, which we sell in the secondary market. So the profit on loan sales was up about $2,100,000 Q1 this year versus Q1 2020.
We also had an increase in income on our derivative interest rate products. So the net effect of that we have, derivatives are going both directions. They're back to back swaps with our customers and loan counterparties. And as rates have moved a little bit higher, the net impact of that to us is we did recognize about $474,000 increase in that fair value. So that flows through our income statement in the noninterest income category.
Last year's Q1, I think we had net reduction in the market value. So that flipped around for us in the Q1 this year. Other income was actually down about $600,000 compared to the Q1 of 2020. In that 2020 period, we had about $486,000 of income related to newly originated interest rate swaps with our customers. And we also had some income recognized on the exit of certain tax credit partnership deals.
Noninterest expense, as Joe said, fairly well contained this year versus last. Our noninterest expense decreased about 494,000 when compared to the Q1 last year to a total of $30,300,000 in the Q1 this year. Salary employee benefits was down about $1,000,000 The impact of that really was, as you may recall, we paid out a special bonus to our employees last year, and there was about $1,100,000 of expense that was recorded in the Q1 of 2020 related to that. Also, insurance expense increased about $378,000 this year compared to last year quarter. That's really in the FDIC deposit insurance premiums.
A year ago, we had credits where we did not have to pay the insurance premiums due to overpayment into the fund. This year, we're paying the full amount and expensing the full amount. The last thing was expense on other real estate owned. Our repossession totals and real estate owned totals are down. The expenses on those decreased about $211,000 compared to the Q1 a year ago.
The efficiency ratio for Q1 of 2021 was 56.33 percent, and that compared to 58.91% for the Q1 of 2020. The improvement in the efficiency ratio this year was really due to the increase in non interest income and also a little bit to the decrease in non interest expense. Joe mentioned just briefly our income tax expenses were or our rate was higher. So that rate was the effective rate was 21% in the Q1 this year and was a little less than 16% in the Q1 last year. The drivers of that, as Joe said, are primarily the higher overall level of income that we achieved this year and then a little bit lower levels of utilization of low income housing tax credits this year compared to the previous year and also lower levels of tax exempt interest income on municipal securities and some of our loans.
And then another factor that plays into it is our same income taxes and how the income is allocated between the various taxing jurisdictions where we have to pay tax and some of that some of those jurisdictions have higher tax rates than others, and so that plays into a little bit of the tax rate as well. We think though that going forward, our effective tax rate is going to be somewhere around 19.5% to 20.5% as we move forward this year. That concludes our prepared remarks at this time. So we'll entertain questions. And let me ask our operator to once again remind the attendees how to queue in for questions now.
Our first question comes from the line of Andrew Liesch from Piper Sandler. Your line is now open.
Good afternoon, everyone.
Hi, Andrew.
Hi. Sorry if I missed it, but what is the balance of PPP loans at the end of the quarter?
It's around $120,000,000 or so, I believe. I don't have that exact number. Yes.
I mean, I think it would be, Andrew, because I think we funded $53,000,000 and we received forgiveness on $55,000,000 So I would think Alpha 1.20, so I would think it'd be $100,000,000 somewhere in there. $18,000,000,000, $19,000,000 something like that.
Got it. Yes, that makes sense. If I take the $3,900,000 that's yet to be real of fee income that's yet to be realized and back into a 3% yield or so on, it's right around $120,000,000 Okay, thank you. And then it sounds like forgiveness on that is going pretty smoothly. Is there any timing you can provide on how you think that's going to be forgiven or will be more weighted towards the Q2 or Q3?
What are the what are your thoughts there?
It would be a total guess from my perspective. I would think the second quarter would be bigger than the 3rd quarter, wouldn't you?
I would think so. I know our a lot of our lenders are working with our customers. We've got several things in the pipeline, and I know they're doing some outreach to talk to the customers too. So I would think that they're going to try to get more of this done in the Q2. But I mean, I'm going to guess some of it's going to still do the 3rd.
Yes. And that's what the original grouping. And then the more recent originations here that have happened since the beginning or since mid January, I mean, I'm going to guess we're not going to see those forgiveness items until maybe Q4 to start probably? Correct.
Correct. Got it. And then just rolling in those fees and all the different dynamics that are at play here on the margin, like how do you think the margin should perform from this 3.41% level? I mean, still you have the benefit from the fees, but it seems like the core trend with all the liquidity coming on might be a detractor from that?
Well, I mean, certainly the liquidity that we have and as I said, the mix has dropped us a little bit. So that's really been a lot of the story if you look back to where our margin was in the Q1 of 2020 before the pandemic, sort of a little more normalized time. We probably, like I said, half of that drop or so is really related to the mix. Just having a lot more liquidity, we probably have maybe $400,000,000 more of liquidity now than we had then probably. And so the other part of it, as I mentioned, the sub debt that we issued, that was another 8 basis points.
And then the income that we're going to derive from the FDIC loans, obviously, is 5 basis points, I think, in the Q1 of this year, and I believe it was 16 basis points in the Q1 last year. So there's not going to be a whole lot more of that income coming on the books. As I mentioned, dollars 800 or so the rest of this year. So in the next three quarters, it's going to be $800,000 is going to get spread in there.
Yes. Sort of if you exclude the FDIC income, yes, I think there's Andrew, I think there's still some remaining pickup as a result of primarily time deposits continuing to reprice. But I don't think there's I don't think anybody thinks there's meaningful increase in our margin from here until we see higher interest rates. Would you agree with that, Eric?
Yes. I mean, what we're probably going to see is, like Joe said, our time deposits are going to reprice down over the next 2 or 3 quarters. We might see a little bit further reduction of rates on the non time deposit balances, but I think those are like 19 basis points or something now. So there's going to be a limit to how much lower they can go. And what we're seeing on the loan side is a little bit of a reduction in loan balance rates really because of the things that are repaying.
Like Joe said, we've booked a lot of new loans. We've generated a lot of loans. We just had a lot of repayments going on too. And a lot of those loans that are repaying are maybe going to be 4.5% kind of rates and the new loans going on are maybe closer to 4% or something like that. So we're seeing a little bit of headwind from that as well that's offsetting the good that we have from CD rates continuing to go down.
Got it. Okay. Thank you so much for taking the questions.
Thanks, Andrew.
Thank you. Our next question comes from the line of Damon DelMonte from KBW. Your line is now open.
Good afternoon, guys. Hope everybody is doing well today.
Hi, Damon. So
my first question, just on the and I apologize if you covered this in your prepared remarks. I was jumping between conference calls. But just in terms of how we should think about the reserve level and the provision going forward, I mean, obviously, the adoption of CECL was quite a big boost. And just given the strong underlying credit trends of the portfolio, Is there a way you can kind of frame out what a range for the provision could look like in the upcoming quarters?
I think I mean, I think a lot is going to depend on loan growth, really, frankly. I would think if you assumed a flat loan portfolio, we sort of believe with our loan portfolio at the level it's at right now, we've got the right reserve level. So if you have a flattish loan portfolio and no charge offs, there might not be you wouldn't think provision expense would be too high. If you have a little bit of charge offs, then you're going to have to not replace your charge offs, but you would generally think you're going to have to have some provision expense if you have a level of charge offs.
The other piece of it that you'd have to think through too is what your forecast is for the economy moving forward as well. So how you see that looking in the next 12 to 18 months, that kind of thing, if there's drastic changes there. And the other piece of that, too, is the unfunded. As we mentioned earlier, the unfunded commitments have to have a reserve against them. They're not part of the allowance for credit loss.
They're different than they're over the liability section, but same kind of concept. So as that pipeline grows or declines, there's going to be differences that you're going to reflect there too.
Yes. I mean, that's a good point. If you had I mean, we have about $1,300,000,000 in unfunded. If that went up 10%, it would be reasonable to assume that, that allowance for the unfunded commitments might go up 10% as well. And that's $800,000 So
Okay. But from a pure loan loss reserve perspective, so you're at like $159,000,000 excluding PPP. You don't think you need to go higher than that, right? If anything, there should be a bias for some reserve release going forward?
Well, I mean, I think we think we're appropriately reserved at this point. So yes, I mean, I guess I agree with what you're saying.
Okay, fair enough. That's helpful. Thank you. And then I guess my other question on expenses. Again, I apologize, Rex, if maybe you called out some one time items that weren't repeatable.
But can you help us think a little bit about a good core run rate going forward to go off of?
I don't think really in the Q1 of this year, we really had too much that was not fairly standard. Our expenses are going to be a little higher related to the mortgage business because as long as the mortgage business is still robust, we're going to generate a lot of fee income from the profit on the loan sales probably, but we're also having to do some compensation to our producers and things like that. So those expenses, all things being equal, should be fairly consistent, I would think, as we move forward. I don't really think there was
We didn't call out anything on the expense line as being sort of unusual. No.
Okay. Okay. That's all that I had. Thank you very much. Appreciate it.
Thanks, Damon. Thank you. Our next question comes from the line of John Rodis from Janney. Your line is now open.
Good morning or good afternoon, guys. Hope you're doing well.
Hi, John.
Just I guess just a question on capital, obviously, so you adopted CECL, but Joe, I think as you alluded to your capital levels remain pretty strong. TCE is north of 10%. Can you maybe just remind us again your sort of bias towards uses of capital going forward? And I know you bought back some stock during the quarter, but just sort of give us an update.
I think what we've said before, obviously, if there was something really opportunistic on the acquisition side, we would be interested in that. But to remind you, the way we view acquisitions is we're going to have conservative assumptions. And based on very conservative assumptions, particularly with respect to growth in the with the target company, based on those assumptions, we want the thing to be accretive, be a good deal to our existing shareholders. And generally, we don't find those kind of deals out there. We did 10 years ago when we were buying banks from the FDSP, but we really haven't to any big extent since.
So as between stock buybacks and dividends, we would probably prefer stock buybacks, especially given where we were able to buy our stock back in 2020 at close to book value. It's spread out from book value now. And so stock buybacks are not quite as attractive as they were. It's not to say that we wouldn't buy back some stock at these levels, but there's it's not as attractive as it was back in 2020. And so that would leave special dividends or an increase in the current dividend possibly.
Okay. Sounds good. Thank you, Joe.
Okay.
Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Joe Turner, President and CEO, for closing remarks.
Okay. Well, again, we appreciate everybody for taking the time to be with us on our call today, And we look forward to talking to you in about 3 months. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.