Southern Missouri Bancorp, Inc. (SMBC) Q4 2016 Earnings Report, Transcript and Summary

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

Thank you, Aaron, and good afternoon, everyone. This is Matt Funke, CFO with Southern Missouri Bancorp. The purpose of this call is to review the information and data that we presented in our quarterly earnings release dated Monday, July 25, 2016, and to take your questions. We may make certain forward-looking statements during today's call, and we refer you to our cautionary statement regarding forward-looking statements contained in that press release. I'll start off with some of our preliminary results highlighted in the quarterly release. Remember that the June quarter is the fourth quarter of our 2016 fiscal year. We earned $0.49 diluted in the June quarter, that's up $0.02 from the $0.47 diluted we reported for the same quarter a year ago, and it's up $0.04 from the $0.45 diluted that we earned in the linked quarter, which was our March 2016 quarter. For all of fiscal 2016, we're preliminarily reporting diluted EPS of $1.98, that's up $0.19 from the $1.79 in the prior fiscal year, and that prior fiscal year is a split-adjusted figure. In August of 2014, we closed on the Peoples Bank acquisition. We continue to report net interest income that results from fair value discount accretion on loans and time deposit premium amortization from that acquisition. In the current quarter, that item amounted to $416,000. In the year-ago quarter, we recognized accretion of $444,000. In the linked quarter, March, discount accretion accounted for $322,000 of net interest income. So it's jumped back up in this most recent quarter. It had also jumped up most recently in the December 2015 quarter at $557,000. Our general trend on that item is for it to be heading downward. And we think, basically, a year from now, we'll probably stop having to talk about this as a material item. But in this most recent quarter and in the December quarter, we had a little bit of a pop in that item due to resolution of some particular purchase credit impaired loans at payoffs that were above those loans' carrying value. So those were kind of one-time items within that noncore item. Overall, our benefit this year from fair value discount accretion on the Peoples transaction was about $1.7 million pretax. That's down about $400,000 from last year, and that benefit last year would have been over just the 11-month period from August to June. Staying on net interest income, margin in the fourth quarter was 3.73%. Of that, 13 basis points was the result of the fair value discount accretion we mentioned. A year ago, margin was 3.85%, with 14 basis points resulting from Peoples Bank fair value accretion. So on what we're considering a core basis then, our margin was down 11 basis points quarter -- quarterly comparison there. Compared to the linked quarter, or March quarter, margin was 3.72%, with 10 basis points of benefit from the purchase accounting items. So on a core margin basis, linked quarter, we would see 2 basis points of margin compression. Outside of a very small securities gain, noninterest income as a percentage of average assets increased to 75 basis points annualized on our average assets. That's up 1 basis point compared to the same quarter a year ago. And compared to the March quarter, which is typically weaker for us on noninterest income, it was up 10 basis points. We noted in the press release that we had a $138,000 gain on our sale of an interest in a low-income housing tax credit partnership. That benefit would have accounted for 4 basis points of that sequential improvement. Noninterest expense was up slightly compared both to the linked quarter and the same quarter a year ago. When we exclude our intangible amortization, seasonal swings and our provision for off-balance sheet credit exposure, we calculate that our operating noninterest expense as a percentage of average assets is down 5 basis points from both the year-ago quarter and from the linked quarter at 2.35%. We consider nonperforming assets to be foreclosed property, repossessed property, nonaccrual loans and loans 90 or more days past due; and at June 30, they totaled $9 million. That's up just over $700,000 from the prior fiscal year-end. And as a percentage of total assets, they're unchanged at 64 basis points. Compared to the linked quarter end, March 31, we're up 2 basis points, also about $700,000 in dollar terms. We did have a larger nonperforming loan that was charged off during the quarter. That pushed our annual charge-offs up to -- right at $1 million or 9 basis points on average loans for the fiscal year. That loan was an acquired relationship from our First Southern acquisition, which is almost 6 years old now. Nonperforming loans now stand at $5.7 million or about 0.5% on total loans. That's up from 35 basis points at the beginning of the fiscal year and 44 basis points at the end of the linked quarter. We mentioned in the press release that the reason for that uptick was primarily a number of relatively small dollar relationships with no particular trend or cause behind that. We mentioned earlier the purchase accounting impact on margin, and we've talked in these quarterly calls about the offsetting impact on our loan loss provisioning as those acquired loans mature and are replaced through renewals or new loan originations. And those dollars in our portfolio basically migrate from being accounted for under purchase accounting to more traditional allowance methodology. Allowance as a percent of gross loans was 1.2% at June 30, that's up from 115 basis points June 30 a year ago, and it's down from 1.24% at March 31, 2016, due to that specific charge-off and loan growth. We did have dollars within the allowance set aside at March 31 for that specific charge-off. Just after the Peoples acquisition, the ratio had reached a low of 98 basis points at September 30, 2014. Loan loss provisions in the current period were $817,000 versus $659,000 in the same quarter of last year. Staying on the balance sheet, we grew assets by just under $60 million for the quarter. Gross loans were up almost $41 million, of which some is seasonal, with $19 million in ag operating lines funding. We also made an additional $10 million investment in bank-owned life insurance late in the quarter. Deposits were down about $1.5 million, with the decrease accounted for in time deposits. We made up the funding mismatch there between the asset and liability side with FHLB advances. Compared to the prior fiscal year-end, net loans are up $82 million or 7.8%. Deposits are up $65 million or 6.2%. Within the deposit portfolio, time deposits are down from the prior fiscal year-end; while non-maturity deposits, which have been a focus for us, are up more than 10%. So with this being a fiscal year-end, just kind of setting back and thinking about where we've been over the last 12 months, we did see some struggles in the first half of the fiscal year for loan growth, and payoffs from the acquired Peoples portfolio were heavier. But really, giving that -- given that, we're pretty pleased with loan growth coming in at almost 8%. We are looking forward to the coming fiscal year when we expect that hurdle will be lower. Non-maturity deposit growth was very strong. We intend to continue to focus on that as a core funding source. It was a good year for noninterest income, but it was helped by some nonrecurring items, which we've disclosed quarter-by-quarter as we've gone along. If you strip those out, noninterest income growth was just under 4%. Recent months have been a little tougher for deposit service charges, but they've been a little better on debit card revenue and secondary market residential lending. Core noninterest expense was also just -- was also up just under 4%. It's outside of our intangible amortization and last year's M&A expenses. Occupancy is trending up as we've invested in our new corporate headquarters and technology for the branch network. But we do expect benefits to be realized from those investments over time also, and especially as we continue to grow our footing. Finally, we've already talked earlier about core margin compression. We expect the asset side of the balance sheet, with rates being where they are today, to continue to come under some pressure. But we do think we have some options on the funding side of the balance sheet, too, specifically with what we've talked about on non-maturity deposit growth and what we're willing to pay for those, the trade-off between rate and potentially growth on that item. So with all that said, I'll turn this over to Greg to talk a little bit about some of the strategic initiatives for the company.

All right, thank you, Matt. And I'd like to just start off with just some touching up on our lending activities. We are very pleased with our loan growth over the last quarter, again, totaling $41 million. Our loan growth for the year did come in at 7.8%, which is a little bit below our 8% to 10% target that we've established out there. We feel this is primarily due to payoffs related a lot to our acquisition of Peoples Bank. During the quarter, we did originate $128 million worth of loans compared to $107 million last year. So we were able to increase loan production, and we did see the bottom line growth. Overall, our loan growth has been strong, and ag has contributed a fair amount to that growth. When we look at the compositions of growth over the quarter, ag lines of credit again grew $19 million, ag real estate grew $6 million, then non-owner-occupied residential real estate was up $7 million, while owner-occupied was up $8 million and our multifamily loans were up $3 million. When we look at for the year at where our growth was concentrated for the year, we had ag real estate at $20 million, ag lines of credit were up $15 million, then non-owner-occupied commercial real estate was up $20 million and owner-occupied was up $10 million, while multifamily loans were up $14 million. When we look geographically at where our loan growth occurred over this last year, Southeast Missouri was our largest contributor to growth, growing nearly $40 million, while our Arkansas locations were up $23 million and Southwest Missouri was up $18 million. So again, we had a lot of our growth or nearly half of it was from Southeast Missouri. Some of that reflects competition that we saw in our Southwest Missouri markets, and they contributed less in growth this year, in part, to the prepayment activity on the Peoples loan side mentioned earlier. When we look at our ag operating balances and their activity, they finished the year at $73 million, which is up from $54 million at 3/31 and $58 million 1 year ago. Our ag operating balances have now hit their highest level that we've had in the history of our company. When we look at our crops that are planted, the crops have progressed well, and a lot of the product has already been made, and now it's just waiting for the product to mature. The crops are, again, are looking good, and we did have a real improvement in prices during the quarter. And we're hopeful that a lot of our farmers took advantage of some of the prices by locking in contract prices from what they had done. And when we look to the prices that were available, they were above where we underwrote most of our credits. When we look at our loan pipeline, it is approximately $56 million, which is down slightly from last quarter, but it is up from $30 million in our pipeline a year ago. Pricing competition does remain very competitive on our Southwest Missouri markets, and it's pretty stable in our Arkansas and Southeast Missouri markets. When we look at our pipeline, it's really a diverse mix of loan products and across a lot of our market areas where we feel good about the diversity in the pipeline. We continue to target 8% to 10% loan growth annually, and we feel good about how we're getting off to our start on that this year. Secondary market income, Matt touched on briefly, but we did have a record year for secondary market fee income, and we're pleased with the pipeline that we have at present on that. One thing that we are paying attention to is our loan-to-deposit ratio, which has moved higher, and it's a little higher than where we would like it to be. Though we also are seeing higher balances in our ag operating lines, which are not a long-term asset, so we do see that, that will result in funding overnight money with some of those ag production loans. Moving on to an M&A discussion, we continue to look at different transactions and opportunities that we have. We did really miss out on one deal we would have liked to have had, but we just missed. We are still hoping that we're going to have something that we announce before the end of the calendar year. And we are actively discussing transactions with several people, and we're hoping that they will go forward. Overall, M&A is still an important part of our growth. And we do really hope to be able to bring some sort of accretive deal to the table, with pricing similar to what we have done in former deals. When we look at our deposit growth, Matt highlighted a lot of the topics that we talked about there. We do continue to focus on non-maturity deposits, and we were very successful in the last fiscal year with that. When we look at nonpublic unit non-maturity deposits, we did grow those by 10% over the last year. Our growth was led by Southwest Missouri, which was up 23%. Or -- excuse me, it was up $23 million or 16%. Arkansas was up 7%, and Southeast Missouri was up 7.5%. When we look at our overall CD portfolio, our CDs did decline $3.4 million over the course of the year, and it declined $2.2 million in the last quarter. But when we look inside the CDs that we have, we did have a $3 million reduction in traditional brokered CDs to $8 million from the $11 million that existed at June 30. So basically, our CD portfolio remained flat for the year. When we look at the bank's capital position, it does continue to grow. But our percentage of capital did not grow this last quarter as we were able to generate more loan growth than capital growth, so we did reduce our capital ratio slightly. Our tangible common equity to asset ratio did decline from 8.52% at 3/31 to 8.44% at the end of this quarter. We continue to target tangible common equity in a range of 7.5% to 8.5%. So at the present time, we are at the higher end of that range, but we're hoping to manage that down by an acquisition, hopefully, by the end of the calendar year. With that, that concludes my prepared remarks, and I'd like to turn it over.

Aaron, if you would, please remind callers how they could queue for questions?

[Operator Instructions] And our first question comes from Andrew Liesch of Sandler O'Neill + Partners.

Just a question, Matt, on the accretion that's left on the Peoples deal, it sounds like a year from now, it will basically be gone. But just kind of curious if you have a dollar amount on what you expect to flow through NII over the next 12 months.

I don't have it in front of me, Andrew. It's been -- if you kind of look at it over time and project that out going towards 0 in the next 15 months, that's probably about the right path for it. It will be a little bit up and down with some of these specific purchase credit impaired loans as those are resolved. But no, I don't have a number for you on that. I apologize.

Okay. And then the -- just looking at the non-performers, the dollars set aside and the net charge-offs, so it looks like the provision was that basically to cover loan growth because it seemed like the charge-offs or the provision was -- might have been just to cover -- or the -- I'm curious -- I'm sorry, was the provision to cover loan growth? Or was that related to the charge-offs in the quarter?

Most of it would have been for loan growth. The one we charged off was half-covered with dollars that we'd already set aside.

It was over half-covered with dollars we'd already set aside.

Okay. And then one last question, just on the loan paydowns. You had been pretty vocal about them from Peoples over -- or like the last part of last calendar year. But as you look at the -- your pipeline right now, your loan portfolio, do you see any large or maybe have any large loans paid off so far this month that might weigh on growth over the next -- over this quarter?

We haven't had anything to date that we're concerned about having paid off. We have had indications that we do have one $6 million, $7 million [ph] credit that's likely to pay off between now and September 30. But again, with the size of our pipeline, we don't think that will materially impact what we have targeted for growth for the year.

[Operator Instructions] Our next question comes from David Welch of River Oaks Capital.

Looking for kind of your commentary regarding prioritization in this merger effort. Kind of on the one end of the spectrum would be what I'm assuming are more rural markets that might have a lot of deposits and not many lending opportunities, which I could see being attractive with your 1 03 (sic) [ 100.2% ] loan-to-deposit ratio; and the flip side or the other end of the spectrum being more exposure to maybe more vibrant urban markets that are more competitive, but offer more loan growth. I'm kind of guessing the answer is you'd like to be looking at both, but prioritize for me what's more likely before year-end? If you could plan it, if you could wish it to come together.

Well, we would love for both to happen. I mean, priority-wise, our preference would be to have something in one of our stronger growth markets just because that's going to generate the engine to be able to have more growth and better EPS growth for the future, to where that would be our preferred priority. But secondarily, at rural market and more deposits to help with our loan-to-deposit ratio would be good, too. We do have other accesses to funding via brokered deposits and some of that, since brokered deposits are a small part of our balance sheet at this point, that we could always use to get our loan-to-deposit ratio under the 100% market. But overall, I mean, we feel good about the acquisitions we've done both in rural and urban markets. And we just want the opportunity to buy the right company that's going to be able to the generate returns like we have in our prior deals.

Okay. And I believe you referred to one that I think your phrase was you missed. Did you just get outbid? Did they like somebody else's lunch better? What was the process there?

It's a little bit of both. I think that our bids were very competitive. But I think that they basically decided that they were a little better suitor than us. I think they thought they were maybe a little sexier than we were.

[Operator Instructions] Gentlemen, it appears we have no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Matt Funke for any closing remarks.

Okay, Aaron. Thank you, everyone, for your participation. Pleased to spend some time with you talking about the results. And we appreciate your patience in allowing us to reschedule the call after the technical difficulties yesterday. So we'll talk to you again in 3 months.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.