Southern Missouri Bancorp, Inc. (SMBC) Q4 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the Southern Missouri Bancorp Fourth Quarter Earnings 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. Sir, please go ahead.

Thank you very much, and good afternoon, everyone. This is Matt Funke, CFO, with Southern Missouri Bancorp. The purpose of our call today is to review the information and data presented in our quarterly earnings release, which was dated Monday, July 23, 2018, and to take your questions. We may make certain forward-looking statements during today's call, and we'd refer you to our cautionary statement regarding forward-looking statements contained in the press release. So thanks for joining us today, everyone. I'll start off by reviewing the preliminary results highlighted in the quarterly earnings release. Again, the June quarter is the fourth quarter of our 2018 fiscal year. We earned $0.63 diluted in the June quarter. That is up $0.03 from the linked March quarter, and it's up $0.14 from the $0.49 diluted that we earned in the June quarter one year ago. The current quarter included a relatively smaller amount of M&A expenses. Partially offsetting those M&A expenses was a small gain on available-for-sale securities. In the linked March quarter, we saw larger amount of M&A expense, but it was offset by both larger available for sale securities gains and by gains on sale of fixed assets. And the March quarter also included a higher level of discount accretion. The June quarter a year ago included a larger amount of M&A expense also, and it also included a fixed asset - excuse me, a fixed asset impairment charge. And we also saw in that quarter additional discount accretion on the acquired loan books compared to the current period. For the full fiscal year, we preliminary reported earnings of $2.39 per diluted share, up from $2.07 a year ago. That's an increase of $0.32 or 15.5%. That improvement is attributable to a good year-over-year increase in earning assets, the result of acquisitions and organic growth, slight core margin expansion, additional discount accretion and improvements in our core non-interest income and non-interest expense. Also, we saw a small overall improvement in the year's effective tax rate, inclusive of the deferred tax asset write-down recorded in December. This was the first full quarter following our acquisition of the Southern Missouri Bank of Marshfield. So we saw the impact of discount accretion on their loans and time deposits have an impact improving net interest income by $79,000. Similar items from the Capaha acquisition contributed $159,000 in the current quarter. It's down significantly from the $429,000 in the linked March quarter and with no comparable impact in the year-ago period. The linked quarter impact was higher due to resolution of some impaired relationships with larger credit marks. Finally, the similar items from the Peoples Acquisition improved net interest income in the current quarter by $120,000 as compared to $113,000 in the linked March quarter and $409,000 in the June quarter a year ago, when also we saw a resolution of some impaired relationships with larger credit marks. We expect this component of net interest income to be lower in the coming fiscal year. The total between the three acquisitions accounted for an additional $358,000 in net interest income, which added about 8 basis points to our reported net interest margin. Between the three acquisitions the fair value discou8nt accretion accounted for an additional 358,000 in net interest income, that added about 8 basis points to our reported net interest margin. The impact in the linked March quarter was $570,000 or a 14 basis point contribution to margin. In the June quarter of the prior fiscal year, we reported $409,000 in this component of net interest income, which was about 12 basis points addition to our margin, and we also had, at the same time, $284,000 in interest income recognized on the payoff of loans, which had previously been on non-accrual status for which we differed recognition of interest income. That item contributed an additional 8 basis points to our margin. Our net interest margin in the fourth quarter was 3.72%, of which, again, about 8.5 basis points was the result of the fair value discount accretion we just mentioned. In the year ago period, our margin was 3.82%, of which 12 basis points resulted from the Peoples Bank fair value discount accretion, while another 8 basis points was the result of the recognition of deferred interest income on those non-accrual payoffs mentioned earlier. So on what we would view as a core basis, our margin was up less than a basis point when you compare the June '18 quarter to the June '17 quarter. Our core asset yield is up 19 basis points and our core cost of deposits was also up 19 basis points, though our total core cost of funds was up slightly more at 21 basis points. Compared to the linked quarter when our net interest margin was 3.74% and we had 14 basis points of benefit from discount accretion, that would indicate that our core margin is up three basis points. But you may remember, in the prior quarter, we talked about the impact on the number of days in the quarter and our annualization method kind of - got the reverse situation now going from a 90 day quarter to a 91 day quarter. If we correct for that 91 days this quarter versus 90 days last quarter, we actually have seen our margin have declined by less than a basis point on a core basis. Excluding securities gains of $43,000, we saw non-interest income as a percentage of average assets on an annualized basis at 75 basis points. That's unchanged from the June quarter a year ago, and it's down from the linked quarter in March when we recognized a $188,000 gain on fixed assets. Year-over-year, we're seeing improvements in bank card interchange income, deposit account service charges and loan servicing income. Non-interest expense was up 4.1% compared to the same quarter a year ago when we recognized the fixed asset impairment charge noted earlier and were down 5.5% from the linked March quarter when we saw those elevated M&A charges. If you exclude M&A, you exclude intangible amortization and provision for off-balance sheet credit exposure, which is a recovery in the current quarter compared to a charge in the March quarter, exclusive of all those items, we were up 6 tens [ph] of a percent of the linked quarter as we saw full quarter's expense from the Marshfield operation. As a percentage of average assets, non-interest expense fell by 20 basis points to 2.42%. But if you exclude the $149,000 in M&A charges, intangible amortization and seasonal swings in that off-balance sheet credit exposure provision, then we would calculate our operating non-interest expense as a percentage of average assets to be down 4 basis points from the linked March quarter and down by 14 basis points from the June quarter of last year when we saw elevated charges on foreclosed real estate, including charges to write-down the carrying value of some properties. With our December earnings release, we've provided an outlook for our effective tax rate to be between 24% and 26% for the remainder of this fiscal year, before we then see an additional decrease in fiscal 2019. We actually came in at just under 22% for the current quarter as we had fewer non-deductible M&A expenses. Also, we increased utilization of our real estate investment trusts, which provides state tax benefits allowing us to move down from 25.5% in the March quarter. So for the six month period since December 31, we're showing an effective tax rate of just under that 24% guidance. We do continue to expect an 18% to 20% effective tax rate in the new fiscal year. On the balance sheet, we saw a return to better loan growth following the slower March quarter. Greg will give you more flavor on the makeup of our loan growth in his remarks. But hitting the highlights, total assets increased $36.3 million for the quarter, and they're up $178 million for the fiscal year-to-date. At the acquisition date, the February acquisition of Southern Missouri Bank of Marshfield increased assets by about $86 million. Compared to June 30, 2017, gross loans are up $168 million on the fiscal year. And we did pick up about $68 million at fair value in the Marshfield acquisition, although we have had some paydowns in that loan book since that time. Deposits were up $5.6 million in the June quarter, and they're up more than $124 million in the fiscal year-to-date. Marshfield accounted for about $68 million in deposits also at the time of acquisition, so we'd be up about $56 million exclusive of that. We have reduced traditional brokered deposits throughout the fiscal year. We're down more than $62 million in traditional brokered CDs and about $8 million in non-maturity brokered funding. Public unit deposits have grown more than $81 million in the fiscal year, with several new relationships and the Marshfield acquisition adding to that funding source. We generally expect seasonal outflows to public unit deposits in the June and September quarters, before picking back up closer to year-end into the March quarter. FHLB advances were up almost $26 million in the June quarter, and they were up $33 million for the fiscal year. Nonperforming loans did move higher this quarter by about $3 million to $9.2 million, and they're up about -- they are $6 million higher than they were at the beginning of the fiscal year. In percentage terms, NPLs are 59 basis points on gross loans at June 30, '18. That's up from 41 basis points at March 31 and as compared to 23 basis points June 30 a year ago. Non-performing assets at June 30, '18, were $13.1 million, up from $10.4 million at March 31 and $6.3 million at June 30, '17. And again, as a percentage of total assets, NPAs were 69 basis points at June 30, '18, up from 56 basis points at March 31 and 37 basis points at June 30, '17. The increase in NPLs and NPAs this quarter was attributable to a single relationship secured by 1-4 family residential properties. And over the year-to-date, we've seen a handful of loan relationships move to nonperforming. Net charge-offs for the quarter were down to a single basis point annualized as compared to 4 basis points in the linked March quarter, and they're equal to the same 1 basis point charged off in the June quarter a year ago. For the full fiscal year, charge-offs equaled 2.5 basis points. Provision for loan losses picked back up in the current quarter with loan growth to just under $1 million, up from $550,000 provision in the linked March quarter and as compared to $383,000 in the June quarter a year ago. The provision represented a charge of 26 basis points annualized on average loans in the current quarter. That's up from 15 basis points in the March quarter and 12 basis points in the June quarter a year ago. For the full fiscal year, we provisioned at 20 basis points on average gross loans. The allowance as a percent of gross loans was up 3 basis points this quarter to 1-15, 1.15%, as compared to 1.12% at March 31, as we did see non-performers pickup and we saw acquired loan balances pay down sequentially pretty much as expected, replaced by loans subject to allowance methodology. A year ago, immediately after the Capaha acquisition, the ALLL was 1.1% on gross loans. That concludes my prepared remarks, and I'll introduce CEO, Greg Steffens, who hopefully has made it back onto the call and will share comments on our performance and the strategic outlook for the new fiscal year. Greg?

All right. Well, thank you, Matt. I did make it back, and so hopefully I'll stay here. I'd like to talk a little bit about loans and deposits and then M&A. Net loan growth for the June quarter totaled $41 million. This growth was slightly below our internal expectations, but we're still pleased with the amount of growth we had for the quarter. For the fiscal year, we've grown our loan balances $168 million or 12%, which did include the Marshfield acquisition. Excluding the acquisition, the gross loan portfolio increased by approximately $109 million or 7.8%, which fell just slightly below our internal growth targets of 8% to 10%. Loan growth was negatively impacted over the year by higher-than-anticipated prepayments in both quarter and the fiscal year. Increased prepayments have been attributed to a combination of factors, which have included customers selling assets, customers seeking more aggressively priced longer-term fixed rate loans or customers obtaining financing elsewhere who did not meet our underwriting standards as part of the acquired loan balances that we've had. Of those acquired loan balances, they have declined by approximately $48 million in this fiscal year. We also have noted contributing to the prepayments was an increased number of sales of properties where we have demands as increases in capitalization rates in the marketplace have lagged increases of market interest rates, causing some of what we feel to be our more astute investors to sell some of their properties. Overall, we are pleased with the volume of our loan originations, which had totaled $550 million for this fiscal year, which is up 11% from originations to the prior year. Overall, our loan portfolio mix has not changed significantly year-over-year, but we have noted a decline in our CRE concentrations, which had dropped from 272% of capital to 245%, with our multifamily portfolio dropping by $24 million. When we take a look at our ag portfolios, our ag real estate balances remained basically stable over the quarter while our ag operating lines increased $14 million. The growth in our operating line portfolio was a little below what we had anticipated due to several relationships moving out of the bank. We do anticipate ag line of credit portfolio draws for the quarter to be heavier than our historical averages this quarter, due in part to the original delays in the planting season and then current dry weather conditions, which is increasing some of our farmers' anticipated costs to bring their crops to maturity with more use of irrigation. When we look at the current condition of our crop, it is very good at present with cotton looking extremely well. Our beans, corn and rice are all above historical averages for crop appearance based on our farm inspections. We have considered the recent drop in our commodity prices, and that will impact our customers negatively. But we have been evaluating all of our farm customers' use of contracting their prices. And 65% to 70% of our farmers' crops had been booked at prices above levels where we've completed our underwriting on them, which we believe will offset a lot of the recent drop in agricultural prices. Overall, we continue to feel good about our ag portfolio and are pleased with it at this time. Looking at our loan pipeline for loans to be funded within 90 days, which totals $81 million, it's very similar to where we were last year at this time and just down slightly from last quarter. The loan pipeline is diverse in nature and very similar to our existing loan portfolio mix. Based on our loan pipeline, we should experience reasonable growth this quarter, but it may be slightly below historical averages. Our concerns continue to exist regarding current pricing in the marketplace for both rate and term as loan spreads are narrowing and amortizations are expanding in several of our market areas. As we forewarned last quarter, we believe that our organic loan growth of 8% to 10% will be difficult to achieve in the presence of current market conditions and therefore, we've lowered our anticipated loan growth to be 6% to 8% for this upcoming fiscal year. Looking at deposit growth for the quarter, it was better than expected and totaled $6 million. For the year, deposit growth has totaled $124 million, which did include the Marshfield acquisition. Exclusive of the acquisition, non-maturity deposits grew $81 million or 8.7%, which did meet internal growth goals of 8% to 10%. This growth did allow us to reduce brokerage CDs as Matt indicated earlier. When looking at the composition of our non-maturity deposit growth, it was comprised of 49 million in public unit funds and 31 million in retail funds. In addition, we've grown our retail CD base by $25 million. Overall, we remain pleased with our deposit generation in this period of interest rate changes. Looking forward, deposit growth will likely be more challenging as market competitions become more aggressive and deposit betas are increasing. Our East and West regions are leading our non-maturity deposit growth, but we are seeing increased competition from non-traditional sources, which includes Internet banks, investment and brokerage companies. Last quarter, during our call, we indicated we were evaluating what we anticipated for deposit growth over upcoming periods, and we are lowering our non-maturity deposit growth projection to 6% to 8% for the upcoming year. As we turn to M&A, our Capaha partnership has worked out very well, and we're pleased with its continued contributions to our results. Deposits have grown by nearly $20 million, while our loan balances are up as well since the June '17 acquisition. We've achieved our anticipated cost savings and are very happy with deposit growth and the projections looking forward, especially in the Cape and Jackson markets. Our Southern Missouri Bank of Marshfield acquisition, which was completed in February and converted to our system in March, the conversions went well and we believe we've been well received in the community. Deposit growth since the acquisitions approximated $4 million while our loan balances had declined by 11. In addition, we are well ahead of our expectations for cost savings. We recently announced the acquisition of First Commercial Bank on June 12. We filed our applications with the Federal Reserve, and we are working through the merger process. We anticipate closing the transaction and completing the data conversion in the fourth quarter of this calendar year. Looking at future M&A, we continue to have numerous opportunities to review potential partnerships. We've passed on several opportunities recently, but we do continue to look. We have raised our preferred target size of companies to within $250 million to $500 million in assets, but we will consider smaller or larger companies depending upon their strategic benefit for us, both financially and/or geographically. And that concludes my remarks.

We’ll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Andrew Liesch with Sandler O'Neill. Please go ahead.

Guys, a couple of questions for me. First is around the margin to your comments on the deposit growth being slower and then with the - to the increase in borrowing this quarter that maybe - or that funding costs are likely going to rise. Are you going to be able to offset that with stronger loan yields? Or should we start to see the core margin move lower here this quarter?

Greg, do you want to take that on loan pricing?

Loan pricing, I believe that we'll be able to do a little better on some of the loan pricing than what we've done to loan originations over the last quarter as we are seeing more movement to more fixed rate financing and things that are going to provide a higher overall yield to us than where we were pricing last quarter.

On the funding side, Andrew, I'd say we definitely saw a little bit of pickup in our betas, and I'm seeing that in our other releases that we're watching this quarter as well. We'll have to see what happens here if that was kind of a onetime bump up in what market competition was pricing deposits at or if we should expect to see that continue to be a little more aggressive going forward on the funding side.

Okay. And then just on the -- I know it's small, but the non-interest income about $3.5 million backing up the securities gains. Is that a good number to use going forward? Or is there anything that might be onetime in there? Or is this bolstered by some mortgage banking?

We do have a little bit of a benefit in the current quarter on just revaluation annually of the mortgage servicing rights, but it's not terribly significant. And we've -- we're really seeing the improvement primarily on the debit card income and the NSF charges.

Okay. That was my questions. Thanks.

Okay.

[Operator Instructions] And our next question comes from Kelly Motta with KBW. Please go ahead.

Hi, Greg and Matt. Can you hear me?

We can hear you.

Yes.

Excellent. So turning to expenses. Expense control looked really good this quarter. X the onetime charges, it looks like they declined about $350,000 quarter-over-quarter, which included that full quarter of SMB Marshfield. I was wondering, excluding the recovery of the provision of unfunded credits, if that's a good base to build off of from here. And kind of if you could refresh us on kind of what your targets are in terms of efficiency and/or expenses to average assets for 2019?

It's probably a little bit more favorable than what we'd expect to be able to continue on. It's our fiscal year-end, we're truing up accruals and things like that. And I would say things on -- we had things falling both ways. But on that, probably a little bit of a benefit to us. Overall, we look at our core efficiency. We'd like to get down as low as 55%. I don't know if that's achievable immediately. I've got it pegged at about 57% over this last fiscal year. And somewhere in that range, we'd be happy with 55% to 57%.

Great. And then I think on the last call, you said that headcount was running a little low on the senior side. And I know you put out a release that you hired a CLO. Are you at fully staffed levels at this point in your Q4 run rate?

We do have vacancies that we will anticipate to generally continue, some we'd like to fill a little faster than others. But no senior positions we're anticipated filling in the short-term that will have a significant impact all at once.

Okay, great. And then maybe turning to credit with the tick-up in NPLs. You had the higher provisions on that, but you really haven't had any net charge-offs really so far in this last year. So how should we be thinking about provisioning levels and credit? And with what you're seeing with the migration of credits to non-accrual, is there anything systemic there that we should be thinking about?

We really feel pretty good about our credit quality, which is one of the relationships that we have out there that contributed to the NPAs. It's something that has been out there for a long period of time from an acquired institution from a lot of years ago and it just finally reached its conclusion. But as far as the overall credit quality of the organization, we don't see really any downticks in it. We're just reaching the resolution of several credits that had been out there for a long period of time, but we're not seeing indications of any real credit stress in the remaining parts of our portfolio.

Kelly, within the loan footnote, we do have to identify specific reserves set aside on impaired relationships, and we did see one of those relationships that went to nonperforming status in this last year that we had set aside some dollars on through the allowance. But two of them were not anticipating any loss, even though they are nonperforming.

Okay. And then maybe finally, on capital. You touched on M&A there at the end, Greg. So post Gideon, can you remind me where you kind of fall out on TCE, and kind of the room you have within your target. Are you still targeting kind of an 8% to 9% TCE ratio?

We're expecting the acquisition to move us down by about 100 basis points on TCE with the 50% cash component and the intangible we would create with the acquisition, but that would still be towards the high end of that 8% to 9% range that you mentioned.

Great. I’ll step back. Thank you.

Thank you.

And showing no further questions, this concludes our question-and-answer session. I'd like to turn the conference back over to Matt Funke for any closing remarks.

Okay. Thank you, again. I appreciate everybody's interest in the call, and we'll talk to you again in three months.

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