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 Please be advised that today's conference is being recorded. I would now like to hand the conference over to Kelly Polunis, 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 30, 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. In our Q3 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 Q3 earnings and continued strong financial position. I think 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 Then we'll open it up for questions. For the Q3 of 2021, we earned $20,400,000 or $1.49 per diluted common share compared to $13,500,000 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, a improving economic situation and a lower loan portfolio balance. We had higher net interest income primarily driven by reduced deposit cost as well as PPP deferred fee income recognition and we had increased non interest income mainly related to debit card and ATM 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 147, 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. The loan repayments, including customer refinancing, 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 930 to 2019 2020 loan originations, both of which were very good years from a loan origination standpoint, and we're on track to exceed those 2 years or equal or exceed those 2 years In 2021, our outstanding loans have decreased $271,000,000 compared to the End of 2020, about $90,000,000 of that is a decrease in the PPP loans. Our pipeline of loan commitments and unfunded loans remain strong. That pipeline increased about $100,000,000 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 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 1 paycheck protection loans, about $121,000,000 have been forgiven, maybe just a very small portion Have not. We don't expect to have problems with those.
2nd round, which began in January, we We did about $58,000,000 in loans, and I think we've had $26,000,000 of those forgiven. We had total deferred fees in the second round of $3,700,000 We recognized $1,600,000 of that in the 1st quarter and we have 2 point Remains pretty steady at 1.56 percent of loans. From a capital standpoint, our capital remains extremely strong, dollars 624,000,000 That's down about $5,000,000 from the end of the year and down about $5,000,000 or $6,000,000 I think from the end of the second quarter as well. Basically, we made $20,000,000 a little over in the Q3. We Paid a dividend of between $4,000,000 $5,000,000 We probably spent about $15,000,000 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 on our interest rate swap. I'll also remind you that during the quarter, we redeemed $75,000,000 of subordinated notes and that occurred in August. So we had about a 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 Q3 of 2021 increased about $755,000 or about 1.7 percent, compared to the Q3 in 2020. So this quarter, we were $44,900,000 in net interest income, dollars 44,200,000 in the Q3 last year, And then we were at $44,700,000 in the Q2 of 2021.
So those numbers the Values didn't change a whole lot between those three periods, but they've 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 1,600,000 In the Q3 of this year, and we had about $1,100,000 that went to income from PPP deferred fees in the 2nd quarter Of 2021. So Joe said we have about $2,100,000 left in net deferred PPP fees. And we think a large portion of that is going to go to income in the Q4.
We do expect our customers are probably going to continue to Avail themselves of getting those loans forgiven and repaid. So we expect most of that will occur yet in the 4th quarter. The net interest margin was 3.36% in both the 3rd quarter Of this year and last year, for the 3 months ended September 30 this year, our net interest margin increased 1 basis point compared to 3.35% in the 3 months ended June 30 this year. 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 $333,000,000 This quarter period versus a year ago quarter period and average loans in that same timeframe were down by about $266,000,000 So 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 3 months ended September 30, 2021, 2020. So we our Kind of core margin was up a bit from where it was a year ago.
Overall, our funding costs continue to decline in the 3rd quarter As our time deposits continue to reprice lower at maturity, we should be able to see that continue here in the Q4 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 9 month period This year versus last, our net interest income was $133,700,000 in the 1st 9 months this year, up from $132,600,000 In the same 9 month period a year ago.
So some of the factors in that also are, in addition, comparing those 9 month periods, we had $3,200,000 less in FDIC acquired loan accretion income, as I mentioned earlier, and $1,400,000 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 $2,900,000 more in deferred PPP loan fees this year, 9 1st 9 months versus the 1st 9 months of last year. Non interest income It was up by about $332,000 to $9,800,000 compared to the year ago Q3. As Joe mentioned, point of sale and ATM fees were higher. That was an increase of about $657,000 in comparing the 2 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 kind of stay Fairly steady at a higher level than it was pre pandemic. Overdraft and insufficient fund fees were up about 200 $1,000 compared to the previous year quarter. Really, we're sort of at a normal I think a more normal level now. In 2020, We had waived a lot of fees as the pandemic had 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 Q3 versus previous year Q3, 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 Q3. 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 3rd quarter Had dropped back quite a bit from where it was a year ago, maybe to more maybe a more normal level.
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 $31,300,000 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-nineteen, there was $1,100,000 of Bonus and related costs that occurred in 2020's period that did not reoccur in 2021. The efficiency ratio for the Q3 of this year was 57.27 percent 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 Q3 of this year, a little bit less than 21.5% In the Q3 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 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
And 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.
Good morning, Mike.
So Hi. 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 Seeing and that's kind of been muted by payoffs and whatnot. So if we look back over the last 3 or 4 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 I think what's driving the High levels 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 5 years, 7 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.
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% We're 2.5% mortgage backed. They probably aren't going to be so quick to 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 are high They're high quality. They are extremely high quality, I think.
And people are just willing to jump the longer term lenders 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 mentioned on the call that we are exploring we mentioned on previous calls that we We're exploring new LPO sites and so we're actively engaged in that And we're just going to manage through this process.
Got it. Okay. So it sounds like At least another quarter, maybe 2 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 I mean, I will say $90,000,000 of the repayment thus far this year With PPP loans. And obviously, that's not going to repeat, right?
Dollars 35,000,000 roughly It is pay down in the consumer portfolio, which I'm sure is primarily indirect. That's not going to repeat. So that's $125,000,000 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's still factors at play, which I'm sure are going to make Yes, repayment higher than typical.
Got it. Okay. That's helpful. I appreciate the color. And then with regards to There was kind of an uptick in the occupancy and equipment expense.
Were there any one time charges in there, Rex, that's related
to 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 $100,000 or so That we included to catch up in some expense there that shouldn't go back to normal in the 4th 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 that 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's 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 and kind of back out couple of those one time items and then you get a little bit of normal growth in there?
Yes. I mean, I think the sort of the two challenges Our President, I think not just for Great Southern, 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 So that's one issue. I think that's a temporary thing. I don't know if that's going to last 6 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's tough. And so I would assume that employee costs are going to come up Yes, Sam, 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 written paper that's not Great Southern specific. That's Pretty much economy wide.
Okay, great. And then just lastly, credit trends, obviously, remain very strong. You had a negative provision this quarter for the Q3 in a row. With the outlook for loan growth being Subdue for the next couple of quarters and credit trends remaining good. Is it fair to expect another negative provision in the 4th quarter or at least Very, very low, like 0?
I mean, If we were to have another quarter with no charge offs and Yes. If we had declining loan balances, 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, Andrew. Hi. Good, thanks.
Just wanted to touch on the margin here a little bit, and some of the factors that 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 last page of our release, I think it's the second to 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 60 six 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 3 months, about $270,000,000 of that CD portfolio will mature within 6,000,000 cumulatively about 438,000,000 And then within the next year, about $795,000,000 So it's most of that portfolio within the next 12 months is going to Have a chance to reprice it 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 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?
Yes. 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, but none of the ones that pay off, certainly appreciate you guys sticking to your knitting with pricing and underwriting. I'm just kind of curious what are the yields that you guys are losing? What are the competitors offering that's making it uneconomical for you?
I mean, I think what we see I mean, as we've said, most of the deals that we Yes, especially multifamily or senior care, industrial, whatever. I mean, we have 30% to 40% equity in. And when those longer term lenders come in, They're cutting our rates, 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. Yes, that makes it tough to compete there. But thank you for taking the questions. I will accept that.
All right. Thanks, Andrew.
Thank you. Our next question comes from John Rodis with Janney. Your line is open.
Hey, good afternoon, guys.
Hi, John. Hi, John.
Hey. 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 stratifies 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 $70,000,000 of $1,000,000,000 multifamily portfolio that was over 76% LTV. And at the end of September, we only had $20,000,000 that was over that LTV. So Obviously, dollars 50,000,000 of what paid off in the quarter was higher LTV deals. Now I'm sure they weren't bad deals.
I'm sure they were good deals. It's across geographies. It's probably Higher LTV, lower LTV, it's 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
Our portfolio is kind of structured. We put most of this portfolio on back maybe 2 to 3 years ago, and it's fixed rate agency commercial type projects. So we've been able to maintain our yield so far at around 2.60 plus. And so that's been helpful. And it probably pays down on average $4,000,000 or $5,000,000 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, I think March of this year. And I think at that time, the 10 year treasury yield had gotten back up to around 175 or something like that. And then the yields had gone back down Through the second and a lot of the third quarter, yields are coming back up again a little bit now.
So long winded answer. 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, 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've basically dropped our rate to almost 0.
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, it's probably going to be, I don't know, dollars 70 or so 1,000,000 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 yes, 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 Rex, maybe just one final question on but just back to expenses. It looks like advertising was up about $400,000 linked quarter to almost $1,000,000 Was that more timing or Does that maybe pull back some going forward?
Yes, we'll tell Kelly she has to pull that back a lot. It was timing. We had a few sponsorships and some things in there that happened in the Q3. 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 3rd, it is probably going to kind of even back out, I'd say, in the Q4 and moving forward.
Okay. So just
Well, I think the sponsorships were high by maybe $100,000 or so.
And some of it's really about timing. Yes, 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 Q4, there'll be some things going on. But in the Q1,
A lot of our People get raises. Yes.
Yes. People get raises typically at the beginning of the next year. And We're going to have a lot of that non exempt 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 Q1 for that because of the exempt annual increases and that kind of thing.
So There was a few there was some extra stuff in the quarter maybe on expenses, but I wouldn't say it was like huge amounts. So
Okay. Rex, just final question, just PPP loans, looks like they were what about $30,000,000 at the end of September?
$35,000,000 I think.
Okay.
Yes, remaining.
Okay. Okay. Thanks, guys.
All right. 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.