Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Great Southern Bancorp Inc (NASDAQ:GSBC)
Q2 2020 Earnings Call
Jul 21, 2020, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Great Southern Bancorp, Inc. Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Kelly Polonus, Investor Relations. You may begin.

Kelly Polonus -- Director of Corporate Communications & Marketing

Thank you. Good afternoon, and welcome. I hope that everyone on the call is well. The purpose of this call is to discuss the Company's results for the quarter ending June 30, 2020.

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 financial performance. You should not place undue reliance on any forward-looking statements, which speak only as to 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 second quarter 2020 earnings release.

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.

Joseph W. Turner -- President and Chief Executive Officer

Well, get afternoon. Thanks, Kelly. And I want to thank everybody for joining us today. Hopefully, you've had a chance to review our second quarter earnings release. We're certainly proud of what we accomplished during the second quarter in a very difficult environment. As we continue to manage through the pandemic, as always, our primary concern is for the well-being of our associates, customers and the communities we serve. I want to thank our nearly 1,200 Great Southern associates for their tireless work and resilience during this difficult time. I'm so proud of our team in their response to this crisis.

As we said last quarter, we are steadfast and following CDC health guidelines, while providing our customers ready access to our products and services. We continue to actively work with our customers who may be experiencing financial hardships. The duration and severity of the pandemic remains unknown, creating great uncertainty and challenges for the U.S. economy. We are ready to respond to the challenges that are produced by the pandemic and are in a position of strength regarding capital, earnings and -- capital, earnings, liquidity and credit quality.

I'll provide some brief remarks about the Company's performance during the quarter and then I will turn the call over to Kelly Polonus to talk about business initiatives. And then Rex Copeland, our CFO, will talk about financial results. Then, we'll open it up for questions.

As expected, in this operating environment. our earnings declined in the second quarter as compared to the year-ago quarter. The primary driver of the earnings decline was our loan loss provision expense, which was $4.4 million higher in the second quarter of this year than in the year-ago quarter. Still, we achieved earnings of $0.93 per diluted common share. Pre-tax, pre-provision earnings were down about $1.3 million or 5.6% from the year-ago quarter. Rex will give a little more color on our earnings.

Our annualized return on common equity during the quarter was 8.45%, our return on assets was 0.98%, our net interest margin was 3.39%, and our efficiency ratio was 56.75%.

As far as loan production, loan production in the second quarter was solid and came from all areas of the franchise. Unscheduled loan payoffs have certainly decreased since February-March timeframe of this year. Our outstanding loan balances increased $246 million from the end of the year from $4.15 billion to $4.4 billion, and increased about $187 million from the end of the first quarter. About $120 million of the increase was with PPP. We saw increases in multi-family loans, commercial business loans, which is where the PPP loans would be housed, 1-4 family residential, and commercial real estate loans.

Our committed pipeline continues to look good with about $1.3 billion. That's down about $91 million from the end of last quarter. The unfunded portion of our commercial construction loans is about $754 million, down about $56 million from March -- from the end of March. Our asset quality continues to be extremely strong. Our charge-offs for the quarter were $127,000. Our charge-offs for the year were $365,000. So, a very little charge-off activity, historically low levels of non-performing loans and ORE and classified loans as well.

We do fully understand though that this difficult environment that we're in for an unforeseen period is going to produce hardship for some of our customers. In fact, we saw an increase of about $40 million in our watch customers from $34 million to $74 million, so about a $40 million increase. Still past credits, but credits with a little bit more concern than just a regular past credit would have. That's why we are increasing our allowance for loan losses. We've increased that about 25% from $40 million to just under $50 million at the end of the quarter to account for more uncertainty in the loan portfolio. And I would remind you that we did not adopt CECL. And we have said that had we adopted CECL on January 1, we would have added $11 million to $14 million to our allowance at that time.

Loan modifications. Our loan modifications totaled $1 billion. Our COVID-related loan modifications totaled $1 billion at the end of June. We modified 431 commercial loans with a principal balance of $931 million and 1,702 mortgage and consumer loans, with a balance of $80 million. As you may remember from our meeting last year, we granted modifications to virtually all customers who requested assistance. It wasn't based on need or credit concerns. And about three-fourth of the $1 billion of modified loans were modified to interest-only for 90 days. In other words, we deferred the principal portion of their payment for 90 days. And based on discussions with our customer base, we do believe that a substantial portion of those that were modified will return to normal payment terms by the end of this summer.

Our capital continues to be strong. Our stockholders' equity increased $24 million to $627 million from the beginning of the year. Our book value increased from $43.61 to $44.50 during the second quarter and increased $3.21 during the first half of the year. Our ratio of tangible common equity to tangible assets continues to be strong at 11.1%.

During the second quarter, we further enhanced our regulatory capital position with the issuance of $75 million of 5.5% Fixed-to-Floating Rate Subordinated Notes due June 15, 2030. The notes will accrue interest at a fixed rate of 5.5% to June 15, 2025. And if we don't pay them up at that time, they will accrue interest at a floating rate.

Also during the quarter, we declared a regular cash dividend of $0.34 per common share and we currently anticipate that our regular dividend can be maintained for the foreseeable future.

That concludes the formal part of my remarks. I'll turn the meeting over to Kelly Polonus, our Director of Corporate Communications, who will talk about our business initiatives during the quarter.

Kelly Polonus -- Director of Corporate Communications & Marketing

Thank you, Joe. And I thought today I'd shares some activities in our banking center network. And as of today, we closed two banking centers located in Hy-Vee stores in our Quad Cities, Iowa market. We were notified in April that Hy-Vee was making store infrastructure changes necessitating these closures, and so that will leave us with three banking centers operating in the Quad Cities area with approximately $110 million in deposits.

In August, we'll consolidate a stand-alone drive-thru office into our downtown office in Parsons, Kansas. And when this consolidation occurs and that will ultimately leave our Company operating a total of 94 banking centers in the franchise. While we're on the subject of banking centers and there has been a lot of talk about how COVID-19 maybe speeding up rationalization or closures of brick-and-mortar banking centers, since customers have been driven to more self-service delivery channels, I thought I'd share some of our statistics today kind of let you see how it's affected us.

Looking back at our statistics since March, which is about when stay-at-home orders went into effect in most of our markets, we have seen a general uptick in self-service channel usage and adoption. In late March, our banking centers began providing drive-thru service-only and in-person service by appointment only. We experienced a rather dramatic decrease in customer traffic in our banking centers, but only really at the beginning of the pandemic period.

From the end of March, when it first kind of started to the end of April, we saw customer traffic decrease by about 50% in our banking centers and the total number of transactions decreased by about 16%. Since then though as our communities have opened up more, we're seeing a return to near-normal levels of customer traffic and transaction activity.

From a big picture perspective though, I think it's important to say what near-normal levels are. We have, in the past few years, experienced relatively steady trend in fewer teller transactions in our banking centers and we expect this to continue. So there has been a decline there.

And looking at our self-service channels during this time and we believe that this pandemic definitely presented an opportunity to introduce more of our customers to our self-service channels and promote more usage. For example, our mobile check deposit, which is included in our mobile app, where you can take a picture of your deposit, take a picture of the check and it will be deposited automatically into your account, was utilized more than normal. And we had an increased enrollment rates since the beginning of March. We saw a 28% lift in the number of transactions with that service and a 12% increase in enrollments.

We saw more usage of our person-to-person, P2P, service with a 21% increase in transaction volumes since March. We also saw a significant increased login activity in our online banking platform and mobile app, especially around the time that the government's stimulus checks were paid. Also, we experienced a faster-than-normal adoption rate of both the new online banking customers and mobile banking app users since the beginning of March. So we definitely have seen an uptick.

We've always said we will continue to evaluate our banking center network and rationalize where appropriate, having closed or consolidated more than 36 offices in the last six years. And of course, we'll continue to focus on investing in digital channels for our customers. For now, what we're seeing is a mix in availability of convenient access channels is important to our customer base. From our recent survey data that we had with J.D. Power, we found that a significant number of our customers still enjoy utilizing our banking centers and consider a branch as a main point of access. At the same time, many of these customers are also utilizing self-service channels, but again the banking scenario is still very relevant to their service preference. This includes the younger generations Gen X and Gen Y.

We fully understand, though, that our industry is evolving and the traditional banking center is a part of that evolution. In that light, we're currently engaged with a vendor that is conducting an in-depth study of our banking center network. This study is nearing completion right now, and we expect that the subsequent results and recommendations will ultimately guide us to ensure that our network is optimized and competitively positioned for the future.

And with that, I would be glad to turn the meeting over to Rex Copeland.

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

Thank you, Kelly. I'm going to start this afternoon by talking about net interest income and margin. Our net interest income in the second quarter of 2020 decreased about $1.4 million to $43.5 million, and that compares to about $44.9 million in the second quarter of 2019 and also in the first quarter of 2020. Net interest income was affected by the Federal Reserve's significant interest rate cuts that occurred in March and additional lower-earning assets that were put on the books in the second quarter of this year, which would include that the PPP loans that Joe mentioned before, some investment securities that we added, and also just increased cash balances that are held at the Federal Reserve Bank. And then also to a smaller extent the subordinated debt offering that we completed in mid-June had a little bit of a negative effect on our net interest income.

We think that, that sub-debt offering that we did will probably impact our margin going forward about 8 basis points on an annualized basis. The net interest margin in the second quarter this year was 3.39% and that compared to 3.97% in the year-ago second quarter and 3.84% in the first quarter of 2020. The decrease in the margin from the prior-year second quarter was about half the result of the decrease in the average yield on our loan portfolio due to market interest rate cuts in March. The other half of it was related to the kind of liquidity items or other items I mentioned previously, the added PPP loans, the additional cash equivalents and the additional investment securities. All those things combined were about another $500 million of assets that were added.

The rate cuts, of course, negatively affected our net interest margin in the near term as a large portion of our loan portfolio is indexed to one-month LIBOR rates, and those are going to decline almost immediately with the rate cuts. We have a portfolio of around $1.8 billion or so of loans that would be tied to that one-month LIBOR index.

Our deposit portfolio will reprice lower as well, but not as quickly as time deposits have to mature over a period of time. So just kind of to give you a little comparisons, on June 30 of this year our cost of deposits was 29 basis points lower than it was on March 31 of this year. So in that three-month timeframe, we were able to reduce our deposit cost by about 29 basis points overall. We expect to continue to make further progress in reducing our funding cost of deposits in the remainder of this year. Just a couple of numbers I'll throw out. Cumulatively, we've got about $540 million of time deposits that will mature and reprice in the next three months, and cumulatively that number grows to about $842 million through six months' time. And then 12 months out from June 30, the cumulative total of all those time deposits would be about $1.4 billion. So we do have quite a bit of deposits that will be coming due and repricing in the next three to six months, and then most of the remainder would be in the following six months after that. The weighted average rate on that time deposit portfolio is going to be around 1.5% right now, give or take a little bit either way, depending on which one of those cumulative target range you look at. But about 1.5% is sort of the average of what we have in there right now.

The company's net interest margin has been positively impacted. As you know, throughout by significant additional yield accretion that we recognized, related to the FDIC acquisitions that we've done several years ago. In this quarter, the impact to our net interest margin was a positive about 12 basis points. Remaining yield accretion that we have is about $4.2 million and we think about $2.2 million of that will be recognized in the remainder of 2020.

Next thing I want to talk about is, non-interest income. For the quarter, June 30 this year, our non-interest income increased $1.1 million to $8.3 million compared to the year ago quarter. The increases were really in a couple of areas. Net gains on our loan sales were up about $1.5 million compared to the prior year -- quarter. The increase was really due to a lot of fixed-rate loan originations, which we turned around and sell primarily in the secondary market. As you are well aware, rates dropped so much, and there has been a lot of refinance activity, and so we have had quite a bit higher level been then maybe normal of loan originations, and a lot of those loans have been sold in the secondary market.

We also had other income that increased about $667,000 compared to the year ago quarter. We did have in the second quarter of this year, several new interest rate swaps that we entered into back-to-back swaps with our customer, our loan customer and counterparties. And so we had some fee income, of a little over $800,000 related to that. Partially offsetting those increases, we've had decreases in our service charge and ATM income that's down about $1.2 million from for the year-ago quarter. That decrease is really a combination of lower usage by our customers. They just have not been taking advantage of as much as they were previously, insufficient fund, overdraft, products that we have. And also then just a more liberal decisioning on our part, as far as waiting fees and things of that nature. So in relation to the pandemic, that came about here in the first and second quarter. And so, we've been working with customers to make sure that they are able to continue making their obligations and working with them on that.

The non-interest expense categories, I'll just talk about sort of at a high level. We're still tracking well on our core expense containment and operational efficiency. Non-interest expenses increased about $966,000 to $29.3 million this quarter versus the year ago quarter. The main drivers for that increase, were primarily related to salary and benefits, included in that, incentives in our mortgage lending area, where again as I said, we had a lot higher level of originations and so there are some salary increases and some incentives that have come about in the mortgage area, and also little bit higher occupancy expenses. Those were partially offset by expense reductions related to travel and marketing initiatives, sort of related to the pandemic, and then also lower FDIC insurance premiums that we have had for a while now, with credits that were to our benefit.

I think Joe mentioned earlier, the efficiency ratio for the second quarter was 56.75%. That compares to 54.50% for the second quarter of 2019. That higher efficiency ratio in the 2020 period was related to a little bit higher non-interest expense levels. Also looking at though however, the company's ratio of non-interest expense to average assets dropped from 2.35% a year ago to 2.17% in this June 30, 2020 quarter. Again, that was related to the big increase that we had in assets that I mentioned earlier.

And the last thing I want to touch on today is liquidity. At the end of June, our liquidity position was very good. We had deposits at the Federal Reserve Bank and Home Loan Bank and unpledged securities, aggregating about $580 million. So totally liquid funds there in the on-balance sheet and in addition off balance sheet, we had the ability to borrow about $1.1 billion on our secured line at the home loan bank, and we also have additional capacity if we choose to add broker deposits if needed. So our liquidity position, we feel is very strong. Here at the end of June, the -- our deposits increased during the second quarter by about $333 million, checking accounts are up by about $500 million, and that was offset some by decreasing balances, as some of our time deposit categories. I'd say some of the increases related to stimulus funds deposited into customer accounts. Also PPP loan proceeds were in there, and some other things that were added into some of our reciprocal securitized money market deposits through the ICS product.

We expect that some of these funds are going to be drawn out of our deposit accounts over time and we have made plans for that. We've already seen some of the PPP funds obviously go out, as businesses have been paying their employees and their rent obligations and things like that. So we've seen some of those funds come out of our balances already, and we anticipate some of these other balances may go out over time throughout the rest of this year. But we definitely have made plans for that.

And that concludes the comments that I had today. So at this time, I'll turn it back over to our moderator for any questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Our first question comes from the line of Andrew Liesch with Piper Sandler. Your line is open.

Andrew Liesch -- Piper Sandler & Co. -- Analyst

Good morning, everyone.

Joseph W. Turner -- President and Chief Executive Officer

Good morning.

Andrew Liesch -- Piper Sandler & Co. -- Analyst

Or I guess good afternoon, sorry. The loan growth was stronger here than I thought, excluding the PPP. Just curious if there was more -- what information you can provide, surrounding that? I mean, we will take some draws on construction, but what's the sense of business development plans for new customers?

Joseph W. Turner -- President and Chief Executive Officer

I'll take a shot at that, Andrew. I mean, obviously we have the loan portfolio, where you can see exactly where the loan growth came from. I would say, loan growth generally though is being driven less by new origination activity. Although we did have new origination activity occurring across our franchise, and probably a little bit more by slower repayments. We have a lot less refis occurring than we did say this time last year. So I think that's what's driving loan growth, maybe more than origination activity.

Andrew Liesch -- Piper Sandler & Co. -- Analyst

Okay. And then with the -- what's the outlook right now when speaking with the customers on the PPP loans? Like how long do you expect those to remain on the balance sheet. So if some of those pay, like how quickly do you think those are going to be paid out or forgiven?

Joseph W. Turner -- President and Chief Executive Officer

I would think they're going to be paid off sooner rather than later. I think most of ours were originated under two-year note and I would think they will be paid off well ahead of that. I don't know, Rex, if you've had more recent discussions on those than I have? But I think we would expect a big chunk of those to be paid off by the end of the year.

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

I think that's right. I mean, probably more so maybe in the fourth quarter, just depending on the level of paperwork that has to get done. But if -- I know there are some things being discussed about maybe having a really shortcut process, if your loan was less than $150,000 and if that's the case, many, many of our loans were less than $150,000. So those might be expedited somewhat into the third quarter. But I would think that, most everything would be paid off, either in the third or fourth quarter this year.

Andrew Liesch -- Piper Sandler & Co. -- Analyst

Okay. And then just one follow-up question. Kelly, you got something you have -- in that study of your branch network, banking center network that's going to be finalized. So are there any early conclusions that you're able to share with us, or that is too soon to tell?

Kelly Polonus -- Director of Corporate Communications & Marketing

I really kind of think it's too soon to tell. We are in the really early phases. That they are looking at the entire network and looking at demographics, market potential, the building itself, branding opportunities, and we are just looking at a full spectrum of variables for all of our banking centers.

Andrew Liesch -- Piper Sandler & Co. -- Analyst

Great. That covers my questions, I'll step back.

Operator

Thank you. Our next question comes from the line of Michael Perito with KBW. Your line is open.

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

Hey, good afternoon everybody. Thanks for taking my questions.

Joseph W. Turner -- President and Chief Executive Officer

Hi Mike.

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

I wanted to stay on the branch topic. I was curious if you guys could tell us who the vendor is that you're using, as you guys kind of go down this path of analyzing the branch network?

Kelly Polonus -- Director of Corporate Communications & Marketing

We're using La Macchia, they're based out of Milwaukee, Wisconsin.

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

And obviously, the process is ongoing as per your response to Andrew's question. So not necessarily looking for takeaways yet, but I'm a little more curious about what the actual kind of review process looks like and what some of the metrics maybe that you guys are kind of looking at, in the decision making process?

Kelly Polonus -- Director of Corporate Communications & Marketing

We're looking -- I mean as I said, a lot of different variables, and we're looking at this also from the standpoint of branch of the future, if you will, kind of, what kind of technology that we will incorporate into our branches, if there is any kind of changes. We're not expecting to do a full spectrum change of the entire network. We're looking where those opportunities lie. Again they are looking at our customers that are in that market, the market potential that is there, the growth potential population, all the demographic. That's really about just what the transaction counts are at those locations, how those branches are utilized. And also going all the way down to how they are branded and how we project to the community that we serve. It's a well-rounded study.

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

Interesting. And I guess from a higher level standpoint, I mean, if we try to marry that internal review that you guys are doing with kind of your financial strategic planning. I mean, the high level hope would obviously be that there is probably some investments you need to make, maybe on the digital side. There are probably some cost savings that could probably come out on the physical office side, and the hope is that net-net, you'll be in a better position to kind of serve your customers in each local market. But maybe, be able to kind of help protect your pre-provision earnings, given the lower margin, is that kind of a fair summarization as you guys see it today?

Joseph W. Turner -- President and Chief Executive Officer

I think it is, Mike. I mean I think we don't believe necessarily that we have a ton of low hanging fruit, when you bear in mind that over the last six or seven years we probably closed 25% of our banking centers. So there is not a ton of consolidation opportunity. I don't think -- there may be some here and there. But yeah, I mean I think net-net we would love to be in a position at the end to have a system of banking centers that fits our customers' needs better and at a cost that's not a lot higher than we have right now.

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

Okay. And just curious from an economic standpoint, I mean you guys have exposure to a few different markets, and it's kind of been a moving target for the entire country, things look better than I look worse. And I guess any particular markets that, relative to the first quarter you feel better about today, or conversely maybe you feel a little worse about today, as the span of last 90 days kind of unfolding?

Joseph W. Turner -- President and Chief Executive Officer

Not really. I mean -- I think we feel and I assume you're talking about geographic markets?

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

Yeah, sorry. Yeah, geographic, yeah.

Joseph W. Turner -- President and Chief Executive Officer

I think we feel I don't think the -- I don't think really are -- that we are any significantly more or less concerned about a given market, than we were at the beginning, say, at the end of the first quarter. I think generally, you know, we would have hoped like everybody else, that our new cases of COVID-19 would not be as high as they are right now. So I think our general level of worry is maybe up a little bit from where we would have expected it to be at this time. But I don't think that's about any one market necessarily.

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

Helpful. Thanks Joe. And then to Rex lastly, sorry if I missed it, but you walked through some of the liability repricing opportunities in the margin that are coming down in the near future here. Can you maybe just kind of summarize a little bit? Ultimately, as we think about the direction of margin, obviously the PPP loans can move down or out of it. But if we back that out here, I mean with the hope that a lot of the pain from the reduction in Fed funds and LIBOR was felt in this current quarter, and that while there might be some more next quarter that some of those liability repricings will help offset that to a greater degree, is that kind of the message, or is there something else that you would point us to?

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

Right. I think that's correct. I mean what we've said in the past and we believe this will be the case, our expectation anyway is that, usually when we have a big rate drop like we had, that impacts us negatively for the first, two, three months, because loans have repriced them close to immediately. The deposits -- some of our non-time deposits we've been reducing rates on those, and we brought some of those rate levels down over the last several months. About the time deposits, obviously you have to wait till they mature, and so that takes a little bit longer. What we kind of see in our modeling, is that we kind of take a bit of a hit in the early first two or three months, and then over the next, you know, whatever, six to nine months, that starts to help, as time deposits mature. And so our belief at this point would be that, we should see our cost of deposits come down, mainly our cost -- I mean our yield on loans has pretty much dropped in the second quarter this year. For the most part already, LIBOR has been I think -- one-month LIBOR I think is sitting at 17 or 18 basis points for quite a while now. So most of those loans that are tied to LIBOR, I believe that probably had a chance to reset down to that lower rate.

And so on the funding side, as I mentioned before, we dropped our cost of deposits down by about 29 basis points from the end of March to the end of June. I don't know that we can duplicate that in the next 90 days, but we certainly are going to hopefully reduce our cost of deposits by a fair amount, and for sure on the time deposits we -- like I said, we've got in the next six months about $840 million of time deposits that will mature at around a 1.5% rate and the current market rate, probably for replacing that stuff is you know maybe 60 basis points or something like that, if we went back into new time deposits, depending on the nature of the term and that kind of thing, so maybe the average is somewhere in that 60 basis points range. So there is presumably some significant reduction in costs over the next six months.

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

Helpful. Thank you guys for taking my questions. I appreciate. Stay well.

Joseph W. Turner -- President and Chief Executive Officer

Sure, thank you. You too.

Operator

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

John Rodis -- Janney Montgomery Scott -- Analyst

Good afternoon, everybody.

Joseph W. Turner -- President and Chief Executive Officer

Hey John.

John Rodis -- Janney Montgomery Scott -- Analyst

Hey. Hope you guys are well. Rex, I guess just as far as the balance sheet goes, would you expect this level of, I guess, higher liquidity to stick around at least for a few quarters? And then maybe just as far -- along those lines, the securities portfolio, where do you sort of -- it inched up some in the quarter, can you just talk about that too?

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

Sure. I think the overall liquidity I think will stay pretty solid. We'll probably over time, eat into that, the funds that we have at the Federal Reserve. We still got a pretty healthy balance there, and so we've got some capacity to reduce that. So some of the play [Phonetic] that flows out from other areas, we may just offset it by reducing the funds we have at the Fed, which are earning 25 basis points.

I think the investment portfolio, we've grown it a little bit. We tried to be sort of selective in that. Part of what we grew in the second quarter was some really short-term pre-refunded municipals just as a substitute for money at the Fed. So, we didn't earn very much on those 50 basis points or something like that kind of played out. There is not much yield on those. If 50 basis points was yield, it's even worse now. And so we don't really see a ton of growth in that respect. We may add a few things in the investment portfolio, but I doubt it's going to be large amounts. So I think we'll probably see the liquidity level we have now may be drop down some, but I don't think it's going to drop down tremendously, John. I mean I think we're still going to have some level of excess liquidity maybe than what we -- typically what we've run within the past.

John Rodis -- Janney Montgomery Scott -- Analyst

Okay. And then I guess just along those lines, sort of back to the previous question on the margin, you'll have a full quarter's impact of the sub-debt. So, wouldn't that impact offset a good portion of the savings you would see on the CD book?

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

Yeah. I think it will. I think I said -- I think it's going to be about 8 basis points annualized, what will be -- what that would cost us. So, yeah, there'll be some additional costs there that we'd haven't had in the past.

John Rodis -- Janney Montgomery Scott -- Analyst

Okay. And then just, Rex, in the second quarter, the impact in interest income from the PPP loans, was that around $500,000, $600,000, sort of ballpark?

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

Probably a little more than that. I'm trying to think. Probably the fee income on that would have been maybe $400,000. And then -- yeah, I mean, it's probably close, it's probably in-between $500,000 and $600,000.

John Rodis -- Janney Montgomery Scott -- Analyst

Okay. Okay. And then just, Joe, I think you talked about in your remarks about the modified loans. Is there any update? I guess, as far as some of the loans coming up on their 90 days, have any of those matured and rolled off yet, or is there any sort of update there?

Joseph W. Turner -- President and Chief Executive Officer

Yeah. Some have matured and rolled off. I think it's kind of what I said, John, that we do expect that a substantial chunk of those will return to normal payment terms. So, I mean, I don't have a lot more color than that, but I don't anticipate big challenges there.

John Rodis -- Janney Montgomery Scott -- Analyst

Okay. And then I guess, Joe, you just -- one final question, just on opportunistic M&A stuff like that. Is it too early to talk about that or just sort of what's your train of thought there?

Joseph W. Turner -- President and Chief Executive Officer

Yeah. I mean, you know the kind of buyer that we are -- we're more a value buyer. So obviously, if we got into a situation where the FDIC was selling banks again, we would be interested there. And possibly if sellers were selling under much reduced expectations, we might be open there. But we're -- that's not really our focus. Our focus is to acquire customers and grow our Company organically.

John Rodis -- Janney Montgomery Scott -- Analyst

Okay. So I guess where I was going with that is with your branch, I guess, rationalization sort of looking at the branches, the focus is more internal I guess to your point versus looking at acquisitions today. Is that fair?

Joseph W. Turner -- President and Chief Executive Officer

That's fair. Yeah.

John Rodis -- Janney Montgomery Scott -- Analyst

Okay. Okay. Thank you everybody.

Operator

Thank you. I'm showing no further questions at this time.

Kelly Polonus -- Director of Corporate Communications & Marketing

Well, thank you...

Joseph W. Turner -- President and Chief Executive Officer

Thanks everybody for being on the call.

Kelly Polonus -- Director of Corporate Communications & Marketing

Take care.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Kelly Polonus -- Director of Corporate Communications & Marketing

Joseph W. Turner -- President and Chief Executive Officer

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

Andrew Liesch -- Piper Sandler & Co. -- Analyst

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

John Rodis -- Janney Montgomery Scott -- Analyst

More GSBC analysis

All earnings call transcripts

AlphaStreet Logo