Southern Missouri Bancorp, Inc. (SMBC) Q1 2017 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Southern Missouri Bancorp Quarterly Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Matt Funke, CFO. Please go ahead, sir.

Thank you, Laurie 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 we presented in our quarterly earnings release dated Monday, October 24, 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 such forward-looking statements contained in the press release. To start off, lets touch on the preliminary results highlighted in the quarterly earnings release. Again, note the September quarter is the first quarter of our 2017 fiscal year. We did earn $0.50 diluted in the September quarter, that's up $0.02 from the $0.48 diluted we reported for the same quarter a year ago, and it's up $0.01 from the $0.49 diluted that we earned in the linked quarter, which was our June 2016 quarter. Asset growth was notably strong in the quarter as we grew assets by almost $66 million. This was a second consecutive quarter of brisker asset growth. Gross loans were up nearly $69 million, but the investment portfolio shrank a bit. If you look back over time, we typically have seen better loan growth in the June and September quarters, and this year has been typical in that regard so far. And I'll let Greg comment in a moment on the outlook. Compared to the year ago, gross loans were up just over 12.5%. Deposits were up almost $47 million for the quarter with most of that in brokered CDs. Compared to September of last year time deposits would be up just $2.5 million excluding the $38 million in brokered funding that we took in this quarter. But non-maturity deposits are up $69 million over that same 12 month period, which is almost 10.5%. Staying with funding, we did chose to prepay $16.5 million in FHLB advances during the quarter and we utilized brokered funding to accomplish that as well to fund loan growth. The advances we prepaid carried a weighted average rate of almost 4% and the new brokered funding was at less than 1%. You might see from our cost of funds that the prepayments were completed and the brokered CDs were funded relatively light in the quarter. The balance of our asset growth was funded primarily through overnight FHLB advances. Moving to the income statement, we generally update you each quarter on our fair value discount accretion on loans, and our fair value premium amortization on-time deposits related to the People's Bank acquisition, which was just over two years ago now. In the current quarter, that item jumped back up to $601,000, moving up for the second consecutive quarter due to resolution of particular purchased credit impaired loans, where we received payoffs that exceeded the loans carrying value. In the year ago quarter ended September 2015, we recognized accretion of 412,000. So we're up 50% over that same period, and in the linked quarter ended June 2016, discount accretion provided a benefit to net interest income of $416,000. So again, up by almost half. If you go back to the March 2016 quarter, the figure was only $321,000. We do continue to expect that the impact of discount accretion in total will continue to move notably lower in coming quarters, but there is still potential for some one-time bump as we resolve these particular impaired credits. Our net interest margin in the fourth quarter was 3.81%, of which 18 basis points was the result of the fair value discount accretion we've mentioned. In the year ago period, our margin was 3.87%, of which 13 basis points resulted from the People's Bank fair value discount accretion. On what we would view then as the core basis, our margin was down 11 basis points comparing the September 2016 quarter to the September 2015 quarter. Our core asset yield is down 10 basis points and our core cost of funds is down two basis points. Compared to the linked quarter, when our net interest margin was 3.73% and we had 13 basis points of benefit from the purchase accounting related to the People's acquisition, we would consider our core margin to have moved up 3 basis points. Loan pricing was not hurt quite as much as we might have feared when market rates had moved down early in the quarter. Non-interest income as a percentage of average assets annualized decreased to 72 basis points as a percentage of average asset, up 3 basis points compared to the same quarter a year ago. Compared to the linked June quarter, non-interest income is down 3 basis points but we did note in the press release for the June quarter that we had a $138,000 one-time gain included in those results. And if you exclude that item, we're actually up 1 basis point in comparison. Non-interest expense was up, compared both to the linked quarter and to the same quarter a year ago. We reported in this quarter's press release that we had $335,000 in expense due to the prepayment of the FHLB advances we discussed earlier. When we also exclude intangible amortization and seasonal swings in our provision for off balance sheet credit exposure, we calculate that our operating non-interest expense as a percentage of average assets is up 5 basis points from the year ago quarter and from the linked quarter at 2.4%. Some of the biggest factors there are compensation. That's resulting primarily from adding staff in loan production, credit administration and positions in our retail banking function, occupancy expense resulting from new locations in Poplar Bluff and Springfield and legal and accounting expenses resulting from our formation of a real-estate investment trust. On asset quality, we consider non-performing assets to be foreclosed and repossessed property, non-accrual loans and loans 90 or more days past due. At September 30th, those totaled $8.25 million. That's down about 800,000 from June 30th. As a percent of total assets, they're down to 52 basis points which is the lowest level since the quarter end, immediately following the People's acquisition. Charge offs were consistent with the prior fiscal year level at 9 basis points, and non-performing loans specifically are now $5 million, or 41 basis points on total loans which is down 8 basis points from June 30. The allowance as a percentage of our gross loans was 1.19% at September 30th. That's down 1 basis point from June 30. Immediately after the People's acquisition, the ratio was 98 basis points at September 30, 2014. As the People's loan portfolio has matured or repaid, those dollars which had been accounted for with the credit mark under purchase accounting were replaced with new loan production or long renewals, which are accounted for under our AOOO methodology, and we've had to made provisions to fund the allowance accordingly. In this present quarter though, the larger provision of $925,000 was mostly due to loan growth and in the linked quarter, which was also a good quarter for loan growth we provisioned $817,000. A year ago in the September quarter, we provisioned just $618,000. We noted in the press release that our effective tax rates had declined to a bit under 27%. That’s lower than the previous fiscal year by about 4 percentage points. That lower effective tax rate is the result of our formation of a bank subsidiary that again has organized this real estate investment trust. And that concludes my prepared remarks. I'll introduce our CEO, Greg Steffens to provide his thoughts on our performance and to update you on our strategic initiatives.

Thank you, Matt. To start with, I just wanted to talk briefly about our lending. And we are very pleased with having $68 million in long growth for the quarter, which since June 30, represents growth of a little over 6% which is running well ahead of our internal annual growth targets of 8% to 10%. Part of the reason for this growth is we had several larger loans that closed at the very beginning of the quarter that we had anticipated actually funding in the June quarter, but they carried over a little bit. Our growth was especially strong in this quarter, but we also had lower prepayments than what we have had for last several quarters, which also contributed to growth. We originated $149 million in loans during this quarter, versus $106 million in the same quarter of the prior year when we grew $16 million. We do anticipate our growth rate to slow markedly over the next several quarters, in part primarily due to pay downs from some of our agricultural portfolio. When we look at the composition of growth over the last quarter, Ag growth for our lines of credit grew as we projected last quarter at $10 million, our Ag real estate balances were up $4 million, commercial real estate balances were up $44 million, our multifamily portfolio grew $4 million, our CNI portfolio grew $4 million and construction loans were up $3 million. Geographically, our growth was fairly wide spread. Our average balances in our loan portfolio in South East Missouri grew $16 million, while our balances in Arkansas grew $21 million and our balances in South West Missouri grew $26 million. When we look at our Ag operating lines and their total, they totaled $83.2 million at the end of September, which has traditionally been our peak balances for each year for the last four years. That is compared to $73.3 million at the end of September last year. The Harvest is well underway and our balances are now declining, which is what we would traditionally expect. Farmers have produced a good crop and we do expect that we'll be figuring out where the Ag customers ended up a lot more over this next quarter. The production was good, the pricing will determine how will they overall do and some of that will relate to how well each farmer did with their own marketing plans. But again, we'll have a much better idea indication on how our farmers are going to be performing next quarter. Based upon our analysis of our crop inspections and everything, we are expecting to have a pretty decent year for our Ag market. When we're looking at our loan pipeline, it totals $55.4 million versus $55.9 million at June 30th, and it is up significantly from $37.6 million one year ago. When we look at our pipeline, our pipeline is pretty diverse geographically with a little more concentration in commercial real estate. We do plan to be monitoring closer our commercial real estate concentrations and looking more closely at each aspect of the CRE portfolio. We do again expect growth this quarter, but it will be more closely associated with the 8% to 10% annualized growth that we have traditionally targeted. Again, we do expect our Ag pay downs to limit their growth as we're anticipating approximately $15 million in pay downs in the Ag portfolio, which will have an impact on growth. When we look at our pricing, pricing is basically flat compared to where we were last quarter. It remains definitely competitive in our Southwest Missouri market, but pricing is basically the same as where we were a quarter ago. One other bright spot that we had this quarter is our secondary market lending has continued to improve, and this quarter we had $8.2 million in sales versus $5 million a year ago. And for the year-to-date, we've recognized gains on the sales secondary market loans for $272,000 compared to a $133,000 at this same time last year. And when we're looking at our pipeline, our secondary market loans that are in the pipeline is quite a bit higher still at this point than it was a year ago. One other point that we want to mention is our loan-to-deposit ratio which is increased from 101% to 104%. Again, this is higher than what we had targeted and it usually peaks around this time of the year and we do expect the numbers to improve over this next quarter as deposit growth will likely outpace loan growth, but it is something that we are paying close attention to. When we look at our deposit growth, our deposit growth for the quarter was again almost $47 million or 4.2%. However, as Matt indicated we have $38 million in brokered CDs that we did bring in this month to fund primarily loan growth. Our primary focus continues to be on non-maturity deposits. Those non-maturity deposits did grow $9 million or 6% on an annualized basis, which is an improvement from where we were a year ago and we are traditionally a little more challenged in the September quarter on non-maturity deposit growth. When we look at where our deposit growth did come from in non-maturity deposits, Southwest Missouri represented $8.3 million of growth, our Arkansas locations was $1.5 million, and our Southeast Missouri locations actually contracted. Again, part of this contraction is due to public unit monies being down but also our Ag customers, as our Ag deposit balances draw down as the harvest nears and they usually begin to increase again after the harvest starts. Moving on to mergers and acquisitions, we continue to explore various opportunities. We still continue to hope to have something to announce by the end of the calendar year, and we have seen an increase in the call volume of people interested and discussing acquisitions. We do continue to see some people that have pricing expectations that are unrealistic. But we are definitely talking with more people than we have the last several quarters. We also have an increased interest in acquisition of a more core deposit heavy partner, as our loan-to-deposit ratio has continued to increase and loan growth continues to exceed that of deposit growth as we do have more concern about our level of core deposit funding versus brokered deposits. When we look at our capital ratios, our capital continues to grow in a dollar term, but it was down again for the second consecutive quarter as loan growth has outpaced capital growth. Our tangible common equity to asset -- our tangible asset ratio is now 8.33% versus 8.49% last quarter. But that has improved from 8.22% at September 30th. We continue to target a capital range of 7.5% to 8.5% for tangible common equity, and we do hope to manage this level of capital slightly lower by acquisition when that opportunity does arise. That concludes my remarks at this point in time.

Alright, thank you Greg. And Laurie, if you would, we'd like to take questions from participants at this time. So, please remind them how they might queue for those.

Certainly. [Operator Instructions] And our first question will come from Andrew Liesch of Sandler O'Neill.

A question on the tax rate, moving these assets and to forming a REIT. Just curious, is this a good tax rate going forward, this 27% or so, or is this just a one quarter effect?

No, we think that should be an ongoing benefit.

Got you, and then, is there is going to be like an offset in operating expenses?

It should not be as significant going forward. And it wasn’t even a huge item this quarter, but it did contribute a little bit. But on an ongoing basis it ought to be fairly minimal.

Got you, so maybe then, just I guess turning to expenses, so the rise in operating expense is not including though the prepayment penalty. It looks like that might have been from space under your prepared remarks, unfunded commitment provisions. Did I hear that correct?

No, I think that was actually a positive item this quarter, but compensation was a little bit higher, somewhat due to personnel. We have a few timing issues. The June 30 quarter end being yearend. we had some accrual adjustments there for bonus and things like that, but the biggest item then it was just additional of some talent.

[Operator Instructions] And showing no additional questions, I would like to turn the conference back over to Matt Funke for any closing remarks.

Okay thank you again Laurie, and thank you everyone for your participation. I appreciate your interest and we'll talk again in a few months.

The conference is now concluded. Thank you for attending today's presentation, you may now disconnect.