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Great Southern Bancorp Inc  (NASDAQ:GSBC)
Q4 2018 Earnings Conference Call
Jan. 23, 2019, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Great Southern Bancorp, Inc. Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. (Operator Instructions) As a reminder, this conference call may be recorded for replay purposes.

It is now my pleasure to hand the conference to Ms. Kelly Polonus, Investor Relations. Ma'am, you may begin.

Kelly A. Polonus -- Vice President and Director of Communications & Marketing

Thank you, Brian. Good afternoon and welcome. This is Kelly Polonus, Investor Relations for Great Southern. The purpose of this call is to discuss the company's results for the quarter ending December 31, 2018. Before we begin, I need to remind you that during the course of this call, we may make forward-looking statements about future events and future financial performance. You should not place undue reliance on any forward-looking statements, which speak only as of the date they are made. These statements are subject to a number of factors that could cause actual results to differ materially from the results anticipated or projected.

For a list of some of these factors, please see the forward-looking statements disclosure in our fourth quarter 2018 earnings release. President and CEO, Joe Turner; and Chief Financial Officer, Rex Copeland are here with me.

I'll turn the call over to Joe Turner.

Joseph William Turner -- President and Chief Executive Officer

Thanks, Kelly. Good afternoon, everybody. And I also want to thank you for joining our earnings call this afternoon. As usual, I'll provide some preliminary remarks and then Rex will go into the release in a little more detail.

Hopefully, you've had a chance to review the release. If you have, you've seen that we had a very solid quarter and year, for that matter. During the fourth quarter, we earned $17.3 million or $1.21 per share. For the fourth quarter, our return on average common equity was 13.34%, our annualized return on assets was 1.5% and our margin was 4.07%. We did earn about almost $700,000 during the quarter from a income on an interest rate swap that was entered into in October. Fees associated with -- one-time fees associated with entering into that swap that added about $0.015 to our earnings.

We continue to feel very positive about the loan portfolio, both in terms of production and in terms of quality. Our loans grew $46 million during the quarter, $263 million during the year that's in spite of $42 million of paydowns in the acquired loan portfolio. And I think like a $106 million of paydowns in the consumer portfolio as we continue to see that portfolio paydown. So really good healthy loan growth. Great commercial loan origination volume $1.35 billion of new originations across our footprint.

Atlanta and Denver offices were opened during the quarter and their core staff by industry veterans and were excited to see what they will do in 2019. Our loan pipeline continues to be good up about $140 million from the end of the year. Importantly closed construction loans were up $204 million from the end of the year, and up about $78 million from the end of the third quarter.

Asset quality continues to improve as well coming out very good numbers in the third quarter. Non-performers actually reduced by about $4 million to $11.8 million. So I think at this point, we're something less than 0.25% or 1% non-performer ratio. So to have that -- so we feel very good about where that is.

Common stockholders equity grew $50 million during the year, of course, almost and not quite $10 million of that relates to mark-to-market gain on the swap that I mentioned earlier, but even without that, our common stockholders' equity grew $50 million. Our book value per share increased from $3,348 to $3,759. Our ratio of tangible common equity to tangible assets of 11.2%, and we were calculating earlier today, even if you were to net the $9 million of mark-to-market gain off and approximate $10.5 million that we're going to pay with -- for the special dividend that we announced earlier today, we'd still be 10.7% or 10.8% tangible common equity ratio. So a very strong capital position.

We did repurchase 17,542 shares of stock during the quarter at a average price of $51.52. And as I mentioned, we probably, more importantly, just announced our intend to pay a special dividend of $0.75 a share, I think that's under -- underscores our commitment to return value to shareholder.

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

Rex A. Copeland -- Senior Vice President and Chief Financial Officer

Thank you, Joe. I'm going to talk first little bit about net interest margin. We mentioned some things earlier about this, but our core margin, which excludes the FDIC acquired loan portfolio accretion for the fourth quarter was 3.93%, which is the 25 basis points higher than a year ago quarter and 5 basis points higher than the third quarter of 2018.

Primary driver for the expansion versus the year ago quarter is just some growth in the loan portfolio and also increasing interest rates, what kind of drove the expansion between the third quarter and the fourth quarter of '18. A lot of that had to do with the interest income on the swap that was mentioned earlier.

So just a couple of things to clarify on the swap interest income. We will receive on this swap three point -- roughly 3.02%, as a fixed rate that we will receive on it and will pay one-month LIBOR rate. So as of today, one-month LIBOR was around 251 (ph). So we are still in a position and that resets every month. So we're still in the position where we would receive net payments. Now if the one-month LIBOR rate moves higher, we'll receive less or we could even end up having to pay net settlements on that.

So, as Joe said, the first -- in the fourth quarter, we did record $673,000 of interest income related to the swap. We've indicated kind of along those same lines, we've indicated in our past filings that, that rising interest rates may have a positive -- modest positive effect on our net interest income and margin. And that's been borne out so far as rates have moved higher. But as competition is significant for deposits, we would anticipate that we may have a little bit of headwinds to margin improvement, just because of higher funding cost from deposits, and of course, our borrowings outside of deposits that we utilized to fund our assets are really going to kind of affected by changes in short-term LIBOR rates primarily.

Non-interest income for the quarter decreased by about $154,000 compared to the fourth quarter a year ago. We did have the largest decrease in that and really most significant item was in gain on loan sales. We do -- historically, we've sold fixed-rate loans that we've originated one-to-four family loans in the secondary market, book the gain on those at the time. And then more recently, in 2018, we primarily have originated more hybrid ARM type loan. And so we've been holding those in our portfolio primarily, and so we have not originated and sold this much of the longer term fixed-rate loans in 2018.

Non-interest expense, our non-interest expenses were lower compared to the fourth quarter last year and a little bit higher compared to the third quarter of 2018. We continue to focus on efficiency and cost containment. Our core operating expenses, I think, are staying relatively stable even as we've been able to grow our assets over the last year. The efficiency ration in the fourth quarter was 55.6% and was 56.4% for the full year. We'll see some additional -- the full cost of the newest LPOs in Denver and Atlanta will start in the first quarter of 2019, but we expect that they will begin covering those operating cost relatively soon.

Kind of going along with the efficiency a bit, and this is not a large item, but we did mention that we are going to be consolidating an office in Arkansas -- in State of Arkansas into our Rogers, Arkansas office, that will be occurring here fairly soon. So we will have one office in Arkansas once that's completed and one in Rogers.

So that was all the things that I had to cover. At this time, we will entertain questions, and let me ask our operator once again remind the attendees on how to queue in for questions.

Questions and Answers:

Operator

Thank you, sir. My pleasure. (Operator Instructions) And our first question will come from Andrew Liesch with Sandler O'Neill. Your line is now open.

Andrew Liesch -- Sandler O'Neill & Partners LP -- Analyst

Hey, guys. Good afternoon.

Joseph William Turner -- President and Chief Executive Officer

Good afternoon, Andrew.

Andrew Liesch -- Sandler O'Neill & Partners LP -- Analyst

Just some questions here on expenses. If I just maybe take out the charge or the fee for entering into the swap as well as OREO cost right around $28 million, I guess, maybe step up here in the first quarter for payroll taxes and bonus accruals. But beyond that is like $28 million a decent run rate for the expense base going forward?

Joseph William Turner -- President and Chief Executive Officer

We probably reasonable in that, if you're going to exclude the ORE, I mean, that can be kind of choppy. So if you're going to exclude that from it, maybe there'll was some expenses there. We still do have some, and there are some expenses associated with it. So there would be some component of that.

Rex A. Copeland -- Senior Vice President and Chief Financial Officer

Yes, we have -- Andrew, I mean, the number of our folks gave that have employment reviews annually, and so it raises probably kick in at that point. So there might be some increase there as well, but I mean, we are trying to highlight anything that we see is unusual or out of pattern and we haven't -- we didn't highlight anything really other than the swap fee.

Andrew Liesch -- Sandler O'Neill & Partners LP -- Analyst

Okay. And then just on the margin, the swap certainly was beneficial this quarter, but it seems like maybe the margin would have been fairly stable. Is that kind of your outlook going forward, and are you caution for rising deposit cost, but you also having doing a good job in getting stronger loan yield as well. So I mean, if we kind of assume that for now anyway that the swap is accretive versus where it might have been previously forecasting, so the margin may be -- margin outlook, but may be better now than what it was say four months ago?

Joseph William Turner -- President and Chief Executive Officer

Yes, well, I mean, I would say this, Andrew. I mean, we didn't put the swap on to be -- I mean, it's a benefit that it's initially accretive, but the purpose of the swap from our perspective is, we told you we're slightly asset sensitive, which means if rates -- if and when rates come down, we would be hurt modestly. And so we put that swap on the books to benefit us when rates begin to fall. So that's number one. I mean, that was not -- it was not really -- that we didn't put the swap on a -- $400 million swap on the book to try to pick up $500,000 or $600,000 a quarter of additional interest income. But as far as margin goes, we have highlighted anything really different. The one thing I would say is that, really most of the benefit from rising interest rate because our loans are generally tied to LIBOR, most of the benefit happens prior to the Fed rate increase. As LIBOR is going to increase in anticipation of a rate increase, I would say most of the paying, the increase in deposit cost happen subsequently. Would you say that right, Rex?

Rex A. Copeland -- Senior Vice President and Chief Financial Officer

Yes, and I think you can kind of think of it like this a lot of quite like $1.4 billion or something like that of our loans are tied to one-month LIBOR. So you can kind of see a large portion of our loan portfolio is going to be reflected by, however, one-month LIBOR is moving around. Likewise with the swap, you can kind of figure out what our spread is going to be on that swap based on one-month LIBOR. The part this maybe not as clear is if we're generating some fixed-rate loans that maybe they have three to five-year maturity or something like that, just to know what the fixed rate, as you know that we're able to generate on that. On the liability side, the borrowings and things that we have are going to be a lot tight primarily to one-month LIBOR rates, generally speaking and deposits like Joe said, we do have a bit of a lag on some of our deposits, essentially CDs, in particular, because may we have a CD that was originated a year ago, its getting ready to come up for maturity to one-year CD. And so a year ago, the rates were probably lower than what they are going to be today. So there is still may be some additional cost associated with deposits reprising up little bit they mature and replace.

Andrew Liesch -- Sandler O'Neill & Partners LP -- Analyst

Okay.

Joseph William Turner -- President and Chief Executive Officer

So I mean, I guess long way to answer is saying, we're not promising that there's going to be some contraction. There could possibly be some contraction, but we're trying to -- we're pulling every level we can negotiating for higher yields on loans, trying to pay as lower rate as we can on deposits, we're doing everything we can.

Andrew Liesch -- Sandler O'Neill & Partners LP -- Analyst

Got you. Yes, that's very helpful. Thank you so much.

Operator

Thank you. (Operator Instructions) Our next question will come from the line of Michael Perito with KBW. Your line is now open.

Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst

Good afternoon.

Joseph William Turner -- President and Chief Executive Officer

Hey, Mike.

Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst

I was -- I've been looking kind of at the loan growth production, it seems like the last couple of years specifically the construction portfolio has seen fairly accelerated growth, and I was curious, I guess, where -- I guess, I have a handful of questions related to that. I guess, one, as you think about the percentage of portfolio is now in construction, which to me seems like if I'm looking in your filings from last quarter or seems like it's north to 20%. I guess, how do you guys think about that number in terms of managing the concentration there? What do you think is a number where you -- the range, I guess, where you feel comfortable bringing that construction exposure to as you continue to try and grow moving forward?

Joseph William Turner -- President and Chief Executive Officer

Mike, I'm looking at our portfolio report that we file every quarter, and we file, I think, yesterday or today and it's showing our construction land development at 17% of the portfolio. And I think based on where we are, based on the way we underwrite those loans, the quality that we believe those loans are, we would believe we've got more a lot -- quite a lot more runway there. We really like the quality of the business. It's diversified geographically, it's diversified across property type and we really think we have very high quality borrowers there. So I think, we have a fair amount of runway there.

Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst

What's the difference between, because I'm looking -- looking at the filing though and I see that -- if I sum up the four lines in the 10-Q of the one-to-four family as into construction and subdivision construction land development and commercial construction, it's like almost $1.4 billion, but that would seem to be a different number than the construction in the 8-K that you guys filed last night. I guess, what the different segment thing is that makes up that different?

Joseph William Turner -- President and Chief Executive Officer

That listing that you had may be I've o look back and see that maybe gross...

Rex A. Copeland -- Senior Vice President and Chief Financial Officer

It include unfunded.

Joseph William Turner -- President and Chief Executive Officer

The unfunded, perhaps.

Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst

Okay. That makes sense. And then I guess, can you remind us I guess just a little bit -- give us a little bit more rather about the construction portfolio, just from a metric perspective like average credit size and what like the official yield is in that portfolio today?

Joseph William Turner -- President and Chief Executive Officer

I don't know that we've filed any of that, Mike. I can tell you that we do -- that we'll typically do loans from $3 million to $15 million. Those are going to be variable rate loans, and I would say, from at the very low end 250 (ph) over LIBOR, I would say more typically, 275 (ph), 300 (ph), 325 (ph), over LIBOR and I can't remember what else did you say besides pricing and...

Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst

No, that...

Joseph William Turner -- President and Chief Executive Officer

Well you asked about the yield? Yes.

Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst

And then I guess my last question on the topic is just -- and the reason I'm asking really overall is because I'm trying to get a better sense. Obviously, you guys did a special dividend, which helps on the capital front. And relative to peers, your capital level still see pretty healthy, I guess, what I'm trying to understand is, what's the right kind of number to be thinking about is in terms of capital that would be indexed as. I mean, as I try to think about the regulatory guideline, I think it's with the risk waitings relative to the construction exposure, and which I think is supposed to be less than 100%. I'm just trying to think about how you guys are thinking about that capital position and how much of it is we should really be considering as potentially dry powder for additional action, whether that would be M&A, share repurchases, organic growth dividends or capital that needs to be held as you guys continue to grow that construction portfolio?

Joseph William Turner -- President and Chief Executive Officer

Right, right. That's good question. I mean, we're probably not going to get down to a number, but I would say this, Mike, you hit the nail on the head with our loan portfolio, heavy commercial real estate construction, multifamily, that's a portfolio that regulators do expect to see some higher level of capital. So given that, you are probably going to see a little higher capital levels are great certainly than you might see other banks our size. But having said that, we think based on our capital levels, where they are post payment of the special dividend, based on what we believe are our operating prospects, based on what we believe are -- what we believe about the quality of our loan portfolio, we still believe we have a very strong capital position and are in -- continue to be in a position to grow the company organically to consider acquisition, to consider or by additional shares. As we see share price at a level that we like and to consider more special dividend. So we -- I guess, what I'm saying is, we don't believe we fired our last bullet here. That's not the perception that we have.

Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst

Okay, that's very helpful, Joe. Thank you. And I guess just to wrap it up, just on that incremental capital deployment, I mean, it sounds like you guys are fairly agnostic. I mean, it's just really obviously see it endeavored and the next year comes around, you'll see where capital levels are at. During the course of the year, you'll use share purchases modestly as the market permits and then kind of consider any dividends on top of your regular dividend at that point. Is that kind of a fair way to think about how you guys are approaching it? Or should we think about something else?

Joseph William Turner -- President and Chief Executive Officer

No, I think that's fair.

Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst

Okay, great. Well, thank you guys for the color and for taking my questions. I appreciate it.

Joseph William Turner -- President and Chief Executive Officer

Okay.

Operator

Thank you. And I'm showing no further questions at this time. So now it is my pleasure to hand the conference back over to Mr. Joe Turner for any closing comments or remarks.

Joseph William Turner -- President and Chief Executive Officer

All right. Well, we appreciate everybody attending the conference today and we'll look forward to talking with you in three months. Thank you.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and you may disconnect. Everybody, have a wonderful day.

Duration: 25 minutes

Call participants:

Kelly A. Polonus -- Vice President and Director of Communications & Marketing

Joseph William Turner -- President and Chief Executive Officer

Rex A. Copeland -- Senior Vice President and Chief Financial Officer

Andrew Liesch -- Sandler O'Neill & Partners LP -- Analyst

Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst

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