Great Southern Bancorp, Inc. (NASDAQ:GSBC) Q1 2019 Earnings Conference Call April 18, 2019 3:00 PM ET Company Participants Kelly Polonus – Investor Relations Joe Turner – President and Chief Executive Officer Rex Copeland – Chief Financial Officer Conference Call Participants Andrew Liesch – Sandler O’Neill Michael Perito – KBW John Rodis – FIG Partners Operator Good day, ladies and gentlemen, and welcome to the Great Southern Bancorp First Quarter 2019 Earnings Call. At this time all participants are in a ...

Part I [Item 1. Business](index=3&type=section&id=Item%201.%20Business) Great Southern Bancorp, Inc. is a bank holding company with **$4.68 billion** in assets, primarily focused on commercial real estate and construction lending across six states Consolidated Financial Highlights as of December 31, 2018 | Metric | Amount (USD) | | :--- | :--- | | Consolidated Assets | $4.68 billion | | Consolidated Net Loans | $3.99 billion | | Consolidated Deposits | $3.73 billion | | Consolidated Stockholders' Equity | $532.0 million | - The company has grown significantly through five FDIC-assisted transactions between 2009 and 2014, expanding its footprint from Missouri into Iowa, Kansas, Minnesota, and Nebraska[12](index=12&type=chunk)[13](index=13&type=chunk)[14](index=14&type=chunk) - The company's primary lending strategy focuses on commercial real estate, construction, multi-family, and other commercial loans, which collectively accounted for approximately **81.1%** of the total loan portfolio as of December 31, 2018[22](index=22&type=chunk)[267](index=267&type=chunk) - In February 2019, the company decided to cease its indirect automobile lending services, effective March 31, 2019, due to profitability challenges and strong competition. It will continue to service existing loans[86](index=86&type=chunk) [Lending Activities](index=6&type=section&id=Lending%20Activities) Legacy Great Southern Loan Portfolio Composition (December 31, 2018) | Loan Type | Amount (in thousands) | Percentage of Total | | :--- | :--- | :--- | | **Total Real Estate Loans** | **$4,072,901** | **84.4%** | | One- to four-family | $400,954 | 8.3% | | Other residential (Multi-family) | $784,894 | 16.3% | | Commercial | $1,385,375 | 28.7% | | Construction (All types) | $1,501,678 | 31.1% | | **Total Other Loans** | **$754,349** | **15.6%** | | Consumer loans | $432,230 | 8.9% | | Other commercial loans | $322,119 | 6.7% | | **Total Loans** | **$4,827,250** | **100.0%** | Loans Acquired (ASC 310-30) Portfolio Composition (December 31, 2018) | Loan Type | Amount (in thousands) | Percentage of Total | | :--- | :--- | :--- | | **Total Real Estate Loans** | **$155,990** | **84.6%** | | One- to four-family | $102,153 | 55.4% | | Other residential | $13,396 | 7.3% | | Commercial | $34,853 | 18.9% | | Construction | $5,588 | 3.0% | | **Total Other Loans** | **$28,461** | **15.4%** | | Consumer loans | $23,600 | 12.8% | | Other commercial loans | $4,861 | 2.6% | | **Total Loans** | **$184,451** | **100.0%** | - At December 31, 2018, the Bank's largest single borrower relationship totaled **$50.4 million** in commitments (**$36.9 million** outstanding), collateralized by healthcare facilities, apartment complexes, and a retail development. This was within the legal lending limit of approximately **$149.9 million**[40](index=40&type=chunk) [Loan Delinquencies, Classified and Non-Performing Assets](index=20&type=section&id=Loan%20Delinquencies%2C%20Classified%20and%20Non-Performing%20Assets) Non-Performing Assets (Legacy Portfolio) | Category | Dec 31, 2018 (in thousands) | Dec 31, 2017 (in thousands) | | :--- | :--- | :--- | | Non-accruing loans | $6,300 | $11,159 | | Foreclosed assets & Repossessions | $5,480 | $16,575 | | **Total Gross Non-Performing Assets** | **$11,780** | **$27,830** | | As a % of Average Total Assets | 0.26% | 0.62% | - Total classified assets (substandard, doubtful, loss), excluding FDIC-acquired assets, decreased significantly from **$35.7 million** at year-end 2017 to **$15.1 million** at year-end 2018[106](index=106&type=chunk) - Troubled debt restructurings (TDRs) decreased by more than half, from **$15.0 million** at year-end 2017 to **$6.9 million** at year-end 2018. Of the 2018 total, **$4.7 million** were accruing interest[115](index=115&type=chunk) [Allowances for Losses on Loans and Foreclosed Assets](index=25&type=section&id=Allowances%20for%20Losses%20on%20Loans%20and%20Foreclosed%20Assets) Allowance for Loan Losses Activity | Metric (in thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Beginning Balance | $36,492 | $37,400 | | Provision for Loan Losses | $7,150 | $9,100 | | Net Charge-offs | ($5,233) | ($10,008) | | **Ending Balance** | **$38,409** | **$36,492** | - The ratio of net charge-offs to average loans outstanding improved to **0.13%** in 2018 from **0.26%** in 2017, primarily due to lower charge-offs in the consumer loan portfolio[129](index=129&type=chunk) [Sources of Funds](index=30&type=section&id=Sources%20of%20Funds) Deposit Composition (December 31, 2018) | Deposit Type | Amount (in thousands) | Percent of Total | | :--- | :--- | :--- | | Non-interest-bearing demand | $661,061 | 17.75% | | Interest-bearing demand and savings | $1,472,535 | 39.53% | | Time deposits | $1,591,411 | 42.72% | | **Total Deposits** | **$3,725,007** | **100.00%** | - The company utilizes brokered deposits as a funding source, which increased to **$326.9 million** at year-end 2018 from **$225.5 million** at year-end 2017[148](index=148&type=chunk) - Borrowings from the Federal Home Loan Bank (FHLBank) are a key source of funds. At year-end 2018, the company had **$178.0 million** in overnight FHLBank borrowings, compared to **$15.0 million** in overnight borrowings and **$127.5 million** in term advances at year-end 2017[155](index=155&type=chunk)[167](index=167&type=chunk) [Government Supervision and Regulation](index=39&type=section&id=Government%20Supervision%20and%20Regulation) - The company is subject to extensive regulation by federal and state agencies, including the Federal Reserve Board (FRB), FDIC, and Missouri Division of Finance (MDF). Major legislation impacting operations includes the Dodd-Frank Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act (Economic Growth Act)[195](index=195&type=chunk)[196](index=196&type=chunk)[197](index=197&type=chunk) - Effective January 1, 2015, the company became subject to new capital regulations implementing Basel III, which established higher minimum capital ratios for Common Equity Tier 1 (CET1), Tier 1, and Total Capital, and introduced a capital conservation buffer[215](index=215&type=chunk)[216](index=216&type=chunk)[219](index=219&type=chunk) - The 2017 Tax Cuts and Jobs Act reduced the federal corporate income tax rate from **35%** to **21%**, effective January 1, 2018. This required the company to re-measure its deferred tax assets and liabilities in Q4 2017, resulting in a **$2.1 million** increase to the deferred tax asset recorded in 2017 income tax expense[252](index=252&type=chunk) [Item 1A. Risk Factors](index=46&type=section&id=Item%201A.%20Risk%20Factors) The company faces material risks from concentrated loan portfolios, geographic market exposure, interest rate fluctuations, and regulatory compliance - A primary risk is the high concentration of commercial and residential construction, commercial real estate, multi-family, and other commercial loans, which constituted approximately **81.1%** of the total loan portfolio as of December 31, 2018[267](index=267&type=chunk) - The business is geographically concentrated in Missouri, Iowa, Kansas, and Minnesota, with the largest loan concentrations in the St. Louis and Springfield, MO metropolitan areas, making the company susceptible to downturns in these local economies[259](index=259&type=chunk)[263](index=263&type=chunk) - The company faces significant interest rate risk, as approximately **45.0%** of its total loan portfolio as of December 31, 2018, had adjustable rates. Changes in rates could impact net interest income and borrower ability to repay[277](index=277&type=chunk) - Anti-takeover provisions in the company's charter, including a **10%** voting limitation and a staggered board, could discourage potential acquisitions and adversely affect stockholders[326](index=326&type=chunk) [Item 2. Properties](index=60&type=section&id=Item%202.%20Properties) As of December 31, 2018, the company operated 99 banking centers and over 200 ATMs, with premises and equipment valued at **$132.4 million** Property Overview (as of Dec 31, 2018) | Property Type | Count | Ownership Status | | :--- | :--- | :--- | | Retail Banking Centers | 99 | 89 Owned, 10 Leased | | ATMs | >200 | N/A | | Loan Production Offices | 7 | 1 Owned, 5 Leased | | **Net Book Value (Premises & Equip.)** | **$132.4 million** | N/A | [Item 3. Legal Proceedings](index=60&type=section&id=Item%203.%20Legal%20Proceedings) The company is subject to routine legal actions, with management expecting no material adverse effect on financial condition or operations - In the normal course of business, the Company and its subsidiaries are subject to pending and threatened legal actions. Management does not expect the outcome of such litigation to have a material adverse effect on the Company's business, financial condition, or results of operations[333](index=333&type=chunk) [Item 4A. Executive Officers of the Registrant](index=60&type=section&id=Item%204A.%20Executive%20Officers%20of%20the%20Registrant) This section lists key executive officers who are not directors, including the Chief Credit Officer, Chief Lending Officer, and Chief Financial Officer Part II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=61&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ under 'GSBC,' with a **500,000**-share repurchase program authorized and **17,542** shares repurchased in Q4 2018 - The Company's common stock is listed on The NASDAQ Global Select Market under the symbol "GSBC"[344](index=344&type=chunk) - On April 18, 2018, the Board of Directors authorized a new plan to repurchase up to **500,000** shares of common stock[345](index=345&type=chunk) Stock Repurchases in Q4 2018 | Period | Total Shares Purchased | Average Price Per Share | | :--- | :--- | :--- | | Oct 1 - Oct 31, 2018 | 2,500 | $52.05 | | Nov 1 - Nov 30, 2018 | 0 | N/A | | Dec 1 - Dec 31, 2018 | 15,042 | $51.43 | | **Total Q4 2018** | **17,542** | **$51.52** | [Item 6. Selected Financial Data](index=63&type=section&id=Item%206.%20Selected%20Financial%20Data) This section summarizes five years of financial data (2014-2018), showing consistent growth in assets, loans, and deposits, alongside improved profitability and asset quality Selected Financial Data (2014-2018) | Metric (in thousands, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | $4,676,200 | $4,414,521 | $4,550,663 | $4,104,189 | $3,951,334 | | Loans receivable, net | $3,990,651 | $3,734,505 | $3,776,411 | $3,352,797 | $3,053,427 | | Deposits | $3,725,007 | $3,597,144 | $3,677,230 | $3,268,626 | $2,990,840 | | Net Income Available to Common Shareholders | $67,109 | $51,564 | $45,342 | $45,948 | $42,950 | | Diluted EPS | $4.71 | $3.64 | $3.21 | $3.28 | $3.10 | | Book Value per Common Share | $37.59 | $33.48 | $30.77 | $28.67 | $26.30 | Key Performance Ratios (2014-2018) | Ratio | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Return on average assets | 1.49% | 1.16% | 1.04% | 1.14% | 1.14% | | Return on average stockholders' equity | 13.46% | 11.32% | 10.93% | 12.13% | 12.63% | | Net interest margin | 3.99% | 3.74% | 4.05% | 4.53% | 4.84% | | Efficiency ratio | 56.41% | 58.99% | 62.86% | 62.85% | 66.30% | | Gross non-performing assets/year end assets | 0.25% | 0.63% | 0.86% | 1.07% | 1.11% | [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=66&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2018, net income increased **30.1%** to **$67.1 million**, driven by higher net interest income and improved asset quality, alongside strategic business initiatives Year-over-Year Performance Summary (2018 vs. 2017) | Metric | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Net Income | $67.1M | $51.6M | +30.1% | | Net Interest Income | $168.2M | $155.2M | +8.4% | | Net Interest Margin | 3.99% | 3.74% | +25 bps | | Provision for Loan Losses | $7.2M | $9.1M | -21.4% | | Non-Performing Assets / Total Assets | 0.25% | 0.63% | -38 bps | - Net loans grew by **$262.7 million** (**7.0%**) in 2018, driven by organic growth in construction loans (**+$350.5 million**) and commercial real estate loans (**+$136.1 million**), partially offset by a strategic decrease in consumer auto loans (**-$103.6 million**)[384](index=384&type=chunk)[426](index=426&type=chunk) - In July 2018, the company sold four Omaha-area banking centers, resulting in a pre-tax gain of **$7.4 million** and a reduction of approximately **$56 million** in deposits[404](index=404&type=chunk)[472](index=472&type=chunk) - The company terminated its final FDIC loss sharing agreements in June 2017, receiving a **$15.0 million** payment and recognizing a **$7.7 million** pre-tax gain. All post-termination recoveries and losses on these assets are now fully recognized by the bank[380](index=380&type=chunk)[740](index=740&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=99&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk, managed to maintain net interest margin stability, with a **$400 million** interest rate swap hedging floating-rate loans - The company's most significant market risk is interest rate risk. As of December 31, 2018, models indicate that rising interest rates are expected to have a positive impact on net interest income, while declining rates would have a negative impact[568](index=568&type=chunk)[570](index=570&type=chunk) - A substantial portion of the loan portfolio (**$1.46 billion** at Dec 31, 2018) is tied to short-term LIBOR indices, making it highly sensitive to market rate changes. Of this, **$1.34 billion** had interest rate floors[571](index=571&type=chunk) - In October 2018, the company entered into a **$400 million** notional interest rate swap to hedge cash flow risk from its floating-rate loans. Under the swap, the company receives a fixed rate of **3.018%** and pays a floating rate of one-month LIBOR[580](index=580&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=103&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements for 2018, including financial condition, income, and cash flow statements, with detailed notes on accounting policies Consolidated Statement of Financial Condition Highlights | (in thousands) | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $202,742 | $242,253 | | Loans receivable, net | $3,989,001 | $3,726,302 | | Available-for-sale securities | $243,968 | $179,179 | | **Total Assets** | **$4,676,200** | **$4,414,521** | | **Liabilities & Equity** | | | | Deposits | $3,725,007 | $3,597,144 | | Total borrowings | $397,594 | $324,097 | | Total stockholders' equity | $531,977 | $471,662 | | **Total Liabilities & Equity** | **$4,676,200** | **$4,414,521** | Consolidated Statement of Income Highlights | (in thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Interest Income | $168,192 | $155,156 | $163,056 | | Provision for Loan Losses | $7,150 | $9,100 | $9,281 | | Noninterest Income | $36,218 | $38,527 | $28,510 | | Noninterest Expense | $115,310 | $114,261 | $120,427 | | **Net Income** | **$67,109** | **$51,564** | **$45,342** | [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=177&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) No changes in or disagreements with accountants on accounting and financial disclosure were reported during the period [Item 9A. Controls and Procedures](index=177&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with an unqualified attestation - Management concluded that as of December 31, 2018, the company's disclosure controls and procedures were effective[905](index=905&type=chunk) - Management assessed the effectiveness of internal control over financial reporting as of December 31, 2018, and concluded that it was effective based on the COSO framework[910](index=910&type=chunk) - The independent registered public accounting firm, BKD, LLP, issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2018[914](index=914&type=chunk) [Item 9B. Other Information](index=179&type=section&id=Item%209B.%20Other%20Information) No other information was reported for this period Part III [Item 10. Directors, Executive Officers and Corporate Governance](index=180&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 proxy statement [Item 11. Executive Compensation](index=180&type=section&id=Item%2011.%20Executive%20Compensation) Information on executive compensation is incorporated by reference from the 2019 proxy statement [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=180&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership and related stockholder matters is incorporated by reference, detailing outstanding options and shares available for future issuance Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Shares to be Issued Upon Exercise | Weighted-Average Exercise Price | Shares Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by stockholders | 773,236 | $43.886 | 614,850 | | Not approved by stockholders | N/A | N/A | N/A | | **Total** | **773,236** | **$43.886** | **614,850** | [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=180&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on related party transactions and director independence is incorporated by reference from the 2019 proxy statement [Item 14. Principal Accounting Fees and Services](index=181&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information on principal accounting fees and services is incorporated by reference from the 2019 proxy statement Part IV [Item 15. Exhibits, Financial Statement Schedules](index=182&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all exhibits and financial statement schedules filed as part of the Form 10-K, including key agreements and certifications

Great Southern Bancorp, Inc. (NASDAQ:GSBC) Q4 2018 Earnings Conference Call January 23, 2019 3:00 PM ET Company Participants Kelly Polonus – Investor Relations Joe Turner – President and CEO Rex Copeland – Chief Financial Officer Conference Call Participants Andrew Liesch – Sandler O'Neill Michael Perito – KBW Operator Good day, ladies and gentlemen, and welcome to the Great Southern Bancorp, Inc. Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may b ...