Southern Missouri Bancorp, Inc. (SMBC) Q4 2015 Earnings Report, Transcript and Summary

Good day and welcome to the Southern Missouri Bancorp Incorporated Quarterly Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I would now like to turn the conference over to Mr. Matt Funke, Chief Financial Officer. Sir, the floor is yours.

Thank you, Mike. Good afternoon everyone, this is Matt Funke, CFO, Southern Missouri Bancorp. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, July 27, 2015, and to take your question. We may make certain forward-looking statements here in today's call when we refer you to our cautionary statement regarding forward-looking statements contained in the press release. As most of you are aware, the June quarter is the fourth quarter of our fiscal year. I'll start by touching on some of the highlights from the quarter and the year. We are in $0.47 diluted in the quarter, that's up $0.03 on a split adjusted basis from the third quarter of fiscal 2015, the linked quarter, and it's up $0.08 from the $0.39 diluted that we earned on a split adjusted basis in the prior year's fourth quarter. For the fiscal we earned a $1.79 diluted, up from a $1.45 diluted for the prior fiscal year, again with both figures well adjusted. In the current quarter, our amount of net interest income is opened from fair value discount accretion on loans and a smaller amount of fair value premium amortization on time deposits resulting from the First Southern Bank acquisition which was in 2010, that totaled $43,000, it's down from $151,000 in the same period last year for the full fiscal year that acquisitions purchase accounting impact was $288,000, down from $631,000 in the prior year. So we're kind of reaching the tail-end in a material financial impact from the purchase accounting on that acquisition. Also for this quarter and this fiscal year, we've recognized the benefit from accretion of fair value discount on loans and time deposits on Peoples Bank's acquisition, that acquisition closed in August of this most recent fiscal year at August 2014, that amounted to $444,000 in the current quarter and $2.1 million in the current year with no comparable benefit in the prior year periods. So if you've been tracking this quarter-by-quarter as we've disclosed in our press release and talked about in our calls, considered that figure is coming down relatively quickly but it's still material. These benefits are somewhat offset by additional provisions that we wind up taking as the acquired loan dollars reprised/refinanced with new – or are replaced and therefore become subject to allowance accounting rather than purchase accounting methodology. We'll talk about that in a minute. Our margin in the third quarter was 3.85%, of which 16 basis points was the result of those fair value discount accretions mentioned previously. In the year ago quarter, margin was 3.79%, of which six basis points resulted from that same fair value discount accretion. So while we're looking at as a quarter basis, our margin for the quarter was down four basis points year-over-year, core asset yield was down seven basis points and core cost of fund is down four basis points. For the fourth fiscal year margin was 3.92%, it was 20 basis points as attributable to the fair value discount accretion mentioned. For the prior fiscal year margin was 3.81%, and seven basis points attributable to the fair value discount accretion. For the year then what we're considering our core margin was down two basis points. Moving on to non-interest income, outside of securities, gains and losses, we were up two basis points from the third quarter to the fourth quarter, and up five basis points compared to the fourth quarter of last year. Generally we expect to rebound from a little bit softer non-interest income in the March quarter, we saw that again this year, up 10 basis points from the linked quarter. And in 2014, the June quarter was up nine basis points from the March quarter, so fairly consistent seasonal impact which we attribute to NSF charges that are little softer in the March quarter of the secondary market loan originations. Non-interest expense declined from the linked quarter, we had no M&A charges in the June quarter compared to a small amount, just $21,000 in the March quarter. In the June quarter a year ago we had $136,000 in acquisition related charges. As we see seasonal growth in our lines of credit, we generally have a recovery of our provision for off balance sheet credit exposure in the June quarter, as net interest expense, the way you will see on our quarterly report that we filed in a couple of days, that's one from the charge without $60,000 in the March quarter to a recovery of about the same amount in the June quarter. On to the balance sheet, we consider non-performing assets to be foreclosed and repossessed property, non-accrual loans and loans 90 days or more past due, those numbers are down slightly from March 31, and total non-performing assets are at $8.3 million, they were at $4.4 million at the beginning of the fiscal year, prior to the Peoples acquisition. Total non-performing assets are 64 basis points compared to 43 basis points at the beginning of fiscal year and 66 basis points at March 31. Non-performing loan specifically are 36 basis points on total loans compared to 17 basis points at the beginning of fiscal year and 41 basis points at March 31. We mentioned early the earlier the impact of purchase accounting on our margin, in fact that there is somewhat offsetting impact on provision as acquired loans mature and are replaced through renewals, new originations, and how those dollars migrate from being accounted under purchase accounting to traditional allowance methodology. Allowance as a percentage of our gross loans is 1.15% at June 30, 2015, up from 1.11% at March 31, 2015. Also up from 1.14% at June 30, 2014, before the Peoples acquisition. Immediately after the Peoples acquisition, the ratio was 98 basis points at September 30. Peoples loan portfolio was notable short, so the purchase accounting discount is meaningfully and relatively fast, and the allowance likewise involving more quickly. Provision in the current period was $659,000, it's down from the last three quarters sequentially on slower loan growth this quarter and fewer of those acquired loan dollars transitioning from purchase accounting to allowance methodology. The $659,000 was up a little bit from $598,000 in the year ago period. For the fiscal year, provisioning was $3.2 million versus $1.6 million in the prior fiscal year. Now staying on the balance sheet, we grew assets by $279 million for fiscal 2015, 91% of that growth has been in the loan portfolio and about three quarters of that growth is attributable to the Peoples acquisition. Deposits are up $269 million, looking at our quarter sequentially we did see loan growth slow earlier this summer, deposits were down $2 million from March 31 to June 30. Within that deposit portfolio, we had been seeing maturity at some brokerage funding over the last three quarters from September 30 to June 30 that totaled $15 million overall, and with $5 million in the June quarter. We another $3 million that is set to mature in July. I'll let Greg speak a little more broadly about core loan and deposit growth here in a minute. With this being the conclusion of the fiscal year, just wanted to take a step back and look at kind of where we are with our longer term performance goes. I do think the management seems pleased with the outcome of the Peoples acquisition, again with that closing just almost a year ago now with the operational merger four months after that in this number, basically 7.5 months into the combined bank charter. We're comfortable with where that but acquired loan portfolio has performed in terms of credit quality. We are looking forward to seeing what we can accomplish in terms of growth out of that new market. Now that we have the operational merger behind us, we kind of know where we want to go in terms of market development. We are pleased with what we've delivered in 2015 in terms of EPS growth, but we know that continued growth as we see diminished contributions to the headline number from those purchase accounting impacts, that's going to be dependent on our leverage capital, leverage our operational capabilities, and to bring our acquired branches in line with our operating model with regard to their efficiency. So with that, I'm going to introduce our CEO, Greg Steffens, who will talk more about our strategic initiatives.

Thank you, Matt. First thing I'd like to talk about is our lending activity and our credit quality itself. As that indicated earlier, credit quality continues to be excellent with a very manageable level of non-performing assets. Over this last quarter we did have our regulatory examiners complete their examination in May, they reviewed over 50% of our high risk assets as they defined them and the review went very well. Speaking to the growth of our loan portfolio over the last quarter, we are disappointed with the overall level of growth that we had this quarter and that did fall below our expectations. We did go at loan $3.6 million over the quarter, and $252 million over the year. Included in the loan growth for the year were $190 million of loans that we acquired from Peoples, however, those balances acquired from Peoples is declined from the $190 million to $155 million today. So we've had $35 million in pay down since acquisition, of which $11 million came varying this last quarter. The pay downs that we've received on Peoples Bank portfolio has been due to a variety of factors that primarily rate competition and pricing of rates towards a relative credit risk inherit within the loans as several loans to go ahead and move to other financial institutions. In addition, there has been a change in underwriting standards from what Peoples Bank had compared to what we have, and that has contributed to some of the loan run office. Finally we've also added certain amount of loan office for turnover as the staffing of the lenders in Southwest Missouri has changed. We do believe that with the additions of several new lenders that we've put in place now and their longevity with us that the understanding of our credit culture is much better than where we were, and we do anticipate that Peoples Bank, they also are small balances will be much more stable this quarter. And then after this quarter we expect to see growth beginning to occur from the acquired locations. If we step back and we take Peoples Bank, we also are out of our equation and we look at organic growth that we experienced during the year, we grew our loan portfolio organically, basically $97 million this year, which will equate to a growth percentage of 11%, which is in line with what we have historically done. Our organic growth was spread across most of our footprint, it was actually Southeast Missouri, leading the way with $51 million of growth followed by Springfield market of $32 million, and then the Jones with $10 million. Over the last quarter contributing to our growth that we did have, we had Ag balances of $19 million of which operating loans were $11 million in growth. However, the Ag portfolio was slower and drying up this year than what we technically have experienced due primarily to raining and wet traditions that concluded farmers from giving their profit on ground soon is normal. Technically this would mean that average balances will remain higher in the upcoming two quarters. So for record, our Ag operating balances now there are $58 million at June 30, there was $53 million of last year, so we ended up very similar to the prior year. Also have note, in the agricultural portfolio these Ag prices have improved from our last conference call, and we did have a row spike up in commodity prices that we believe were number of our farmers to contracts and grains at pretty – at higher than initially projected rates. So that's a good development. Our agriculture real estate also increased significantly during the year from $82 million this year from $64 million last year, and lot of average was contributed to new customers. When we look at the loan pipeline and what we're participating for loan growth, our loan pipeline is at $10 million from where it was at $3.31 million, and it's also higher now than what it was at June 30 of last year. We're projecting total new money in our pipeline of $30 million at this point. Loan pricing has got more competitive over the last quarter, especially in Southwest Missouri, as we've seen some newer trends in the market and some existing entrance in the market that became much more competitive on your pricing. In addition, loan pricing in central Arkansas become more competitive from where it has been. When we look at our loan-to-deposit ratio, it continues to exceed 100% and we continue to expect that to continue over 100%, and our last regulatory examination no concerns were known what that have. On a positive note, the storm [ph] briefly with secondary market lending activity which has continued to improve, this year we've generated $587,000 in fee income versus $485,000 in the prior year. And things are looking to be on the continued capacity improvement there. Shifting to M&A activity, Matt touched on the Peoples acquisition which closed in August 14, and merged into our system in December of 2014. Most of the integration has been completed and the operations stabilized, and our cross segments have exceeded projection. Our deposit customer retention has been good while our loan retention was not as good as what we had hoped, but we understand the reasons for the declines. Our non-maturity deposits which we continue to focus primarily on is well over the last quarter, and our balances are higher now than what we have required. Looking forward we're expecting the Peoples Bank locations to generate a significant portion of our deposits that we have in our maturity deposits. Looking at M&A activity across out footprint, there has been several deals and I'll start with like several months, the largest deal was the Metropolitan Bank which was in Springfield, which was a privately negotiated deal that we did not have the opportunity to bid on. We are interested in looking for the right transaction, and we would like to see a transaction come our way. We're having some conversations but there is nothing eminent at this point in time. Pricing does tend to be moving a little higher but we do anticipate working at several deals over the last half of this year. So in the meantime, we continue to focus on our internal loan and deposit growth, and now we're continuing to expect 8% to 10% of internal loan growth as we have in prior years, and we're targeting non-maturity deposit growth of 8%. And then we're also planning to continue, as Matt indicated, to focus on generating some cost savings and becoming a little more efficient. Looking at fixed assets, we are in complete – are underway still on the construction of our new main headquarters. We are anticipating it to be completed in March in 2016. And then we are also anticipating moving into our new offices in Springfield in December of 2015 that will be lead space. Looking in deposit activity, deposits have been generating core non-maturity deposit growth continues to be our focus. Over the last quarter we grew $10 million from $483 million to $493 million during the quarter which represented 8.3% annualized growth, which was in line with our targets. However, when we look for the fiscal year, we only grew non-maturity deposits by $21.5 million or 4.13%. That level of growth is disappointing and we hope to do better, we feel like our level of growth was impacted by integration of several acquisitions. And again, we do expect that improvement to be better this year. And when we look at our CD balances, we're anticipating that to maintain stability, basically advanced and that indicated already that we had fairly significant reductions in our brokerage balances. Moving onto capital and capital planning moving forward, at quarter end and fiscal year end, our tangible common was 8.05% which is up from 8% at the last quarter end. And looking at capital levels, we're anticipating those to maintain basically stability at this point, and while the things we're looking at is with our strong business lending time but we are anticipating retire that with our existing capital structure. We are planning to pay dividend from the bank to the holding company, subject to regulatory approval, and based upon our last examination, discussions with our regulatory authorities, we do not anticipate any issues with being able to dividend sufficient money from the bank to the holding company to repay as ELF. We are hoping that that repayment can be completed by the end of this current quarter or early in the follow on quarter. In addition, we filed the shop registration statement several months ago for up to $75 million of additional shares. Those shares are reserved primarily for a closer and we're not anticipating tapping in self-registration unless we have the right acquisition to present our self. So therefore, we're satisfied with our term capital structure. With that, that completes the scheduled remarks I have. I would like to turn it back over to Matt.

Thank you. I'll turn it back over to Mike. Mike, if you will remind callers if they would like to queue for questions and we will take those at this time.

[Operator Instructions] Our first question comes from Andrew Liesch of Sandler O'Neill Partners. Please go ahead.

Hey guys.

Hi, Andrew.

It sounds like competition for loans has increased even further across your footprint. I'm just kind of curious, like how you think that's going to affect the core margin? In my guess, that would be trending lower from here. Just curious what your thoughts are.

Yes, today's competition has primarily been in the Springfield market which has been a significant contributor to our growth. However, when you look at our growth of this last year, a lot of the growth came in our Southeast Missouri area while we've been able to maintain margins. So I think that there will be some pressure on our margins for this upcoming year that has even with their increased competition we think that it will not be as great, maybe it's what you might expect.

And then on the non-interest income section, it's kind of like that the secondary mortgage gains were pretty good this quarter. Just curious what your thoughts are going forward there, maybe decline a little bit than be a little weaker in the winter months, is what I'm thinking.

Historically, the winter months are the weakest months for a secondary market income activity. However, sequentially quarter-over-quarter or year-over-year for the same quarter, we have been seeing some pretty good growth. So we are anticipating secondary market income to be higher in this current fiscal year than what's the prior year. And we're looking at growth in the 10% margin range.

Greg here, Andrew we are approaching that product a little bit differently than we have previously. We're taking servicing on the fair amount of originations now. I think we have fairly brought out to the last year so that's yet over a year now in terms of the movement. So we hope for that as well, and just be certain improvement for us.

Great, those are my questions.

[Operator Instructions] Mr. Funke, Mr. Steffens, it appears that we have no further questions at this time gentlemen.

All right, Mike, we appreciate it, and we appreciate the interest from our callers and we'll talk to you again in three months.