Southern Missouri Bancorp, Inc. (SMBC) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to the Southern Missouri Bancorp Incorporated Quarterly Earnings Conference Call. [Operator Instructions] Please also note, today’s event is being recorded. At this time, I would like to turn the conference call over to Mr. Matt Funke, Chief Financial Officer. Sir, please go ahead.

Thank you, Jamie. Good afternoon, everyone. This is Matt Funke, CFO for Southern Missouri Bancorp. Purpose of this call is to review the information and data presented in our quarterly earnings release that was dated Tuesday, January 22, 2019, 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 the press release. So thanks again for joining us today. I appreciate your interest. I want to start by reviewing the preliminary results highlighted in our quarterly earnings release the quarter ended December 31, 2018 is the second quarter of our 2019 fiscal year. During the December quarter, we closed the acquisition of Gideon Bancshares on November 21, that accounted for most of the changes in our balance sheet quarter-over-quarter and it had an impact though less pronounced on the income statement. We also completed the merger of Gideon subsidiary First Commercial Bank into our bank subsidiaries Southern Bank a few weeks later on December 7 coincident to our debt conversion. So for the December quarter, we earned $0.81 diluted, that is up $0.05 from the linked September quarter and it is up $0.21 from the $0.60 diluted that we earned in the December 2017 quarter. Compared to the year-ago and linked quarter, we reported less discount accretion from acquired loan portfolios currently. More non-core expenses as merger and acquisition charges picked up. But in the current quarter, our non-core expenses were roughly offset by what we would identify as non-core, non-recurring income. We provision less for loan losses in the current period, and we grew our average balance sheet and leveraged our capital somewhat through the mid-quarter acquisition of Gideon. Compared to the year-ago period, we benefited from the full impact of the lower corporate tax rate that was enacted in December 2017 and the comparison to the year-ago period is also more favorable because the impact of revaluing our deferred tax asset during that quarter because of that tax law change. Because of the mid-November acquisition of Gideon, we have a partial quarter’s discount accretion on their loans and time deposits. This improved net interest income by $131,000 and obviously that's with no comparable item in the prior fiscal year or in the linked quarter. Similar items from the Southern Missouri Bank of Marshfield acquisition, which had closed in February 2018, that contributed $66,000 in the current quarter and it's down from $92,000 in the linked September quarter and again, with no comparable benefit in the year-ago period. Moving on back through the acquisitions to our June 2017 Capaha Bank acquisition, that loan book contributed $122,000 in the current quarter that's down from $740,000 in the linked September quarter, which was particularly elevated due to the resolution of some larger impaired credits and that’s as compared to $301,000 in the year-ago period when we saw more modest amount of income attributed to impaired credit resolution. Finally, the similar items from the Peoples acquisition improved net interest income in the current quarter by $148,000, that’s as compared to $345,000 in the September quarter when we saw resolution of impaired credit and that’s as compared to $559,000 in the December quarter a year ago, when there were significant recoveries on previously written of loans. So the total between the four acquisitions accounted for an additional $467,000 in net interest income in the current period, that added about 10 basis points to our net interest margin. The impact in the linked September quarter was $1.2 million, which was a 27 basis point contribution to margin. And in the December quarter, a year ago, we reported $860,000 in this component of net interest income, and that contributed about 21 basis points to the net interest margin. So all things equal we would have expected, a decline in our headline net interest margin and we did see that, it was at $371,000 again with about 10 basis points of that from discount accretion. A year ago, the margin was $387,000 with 21 basis points attributable to fair value discount accretions. And on what we would look at it as a core basis than our margin was down about 5 basis points year-over-year December 2018 versus December 2017. That's with the core asset yield that’s increased 37 basis points and core cost of deposit that is up a little less at 34 basis points, but our total core cost of funds is up more at 41 basis points as we've been more reliant on non-deposit funding, which has increased in price faster. Compared to the linked quarter, when our net interest margin was $392,000 and we had 27 basis points of benefit from discount accretion. This would indicate our core margin is down 4 basis points. The largest factor driving compression has been utilization of wholesale funding to make up for that loan growth that's been in excess of our core internal deposit growth. We'll talk about that more as we get into balance sheet discussion. Moving on to non-interest income. As a percentage of average assets annualized, that was 77 basis points in the current quarter, that's 5 basis points higher than the same quarter a year ago and also 5 basis points higher than the September quarter. If we exclude non-core items, which included a BOLI benefit paid in excess of the cash value of the policy and a gain on the sale of banker’s bank stock, those two are combined $406,000 in the current quarter. We put an adjusted number down at 69 basis points, which is down 2 basis points from the year-ago period and down 3 basis points from the linked period. In total dollars non-interest income excluding those non-core items and an available for sale securities gain in the year-ago period were up 16.3% from the December quarter last year and 6.4% compared to the linked quarter. And of that increase quarter-over-quarter, we attributed a little more than a third to Gideon. We continue to see good improvements in bank card interchange income, loan fees other than late charges were higher as well. Loan late charges are back up after a week of September quarter. And year-over-year, they're growing, but they're growing more slowly than assets. NFS charges are up quarter-over-quarter and year-over-year but in both cases they're are also growing more slowly than our balance sheet. Gains on sales of residential loans originated for sale into the secondary market are down quarter-over-quarter and year-over-year as the late year upward movement in market rates disincentivized that activity. Noninterest expense was up 19.3% compared to the same quarter a year ago, which would have been in advance of the Marshfield acquisition and its up 9.6% compared to the linked quarter. If you exclude M&A expenses, our core deposit intangible amortization and provisioning for off-balance sheet credit exposure. And that last item is the larger charge in this current quarter compared to a small charge in the September quarter and a recovery in the December quarter a year ago. So exclusive of those items, noninterest expense was up 6.8% over the linked quarter. And of that amount, about two-thirds would be attributable to Gideon. As a percent of average assets, our annualized noninterest expense is down three basis points from the linked quarter and unchanged year-over-year. At 2.38% but if you exclude the $420,000 in the M&A expenses, the intangible amortization and the provision for off-balance sheet credit exposure, recalculate our operating noninterest expense as a percent of average assets to be down about eight basis points from the linked September quarter and to be down 10 basis points from the December quarter last year as we've grown our assets without adding much to our core expense structure. Same kind of story as you see on the noninterest income side, we’ve grown the balance sheet faster than these noninterest income and expense items. The effective tax rate was down slightly for the quarter to 19.5%, that's down two-tenths of a percent compared to the September quarter. And the comparison to the December quarter a year ago really isn't that meaningful as that was the quarter where we began recognizing the reduced annual effective tax rate for our – our tax year that would end June 30, 2018. But then we more than offset that benefit with the write down of the value of our deferred tax assets in that quarter. So as a result, we showed an effective tax rate in the December 2017 quarter of 33%, whereas in the September quarter immediately prior to that, that’s the September 2017 calendar quarter, we've shown an effective tax rate of 28%. Moving over to the balance sheet. Our organic loan growth slowed somewhat this quarter to $33 million, that's down from $62 million in the September quarter but still that’s a good result for the December quarter for our portfolio given seasonal factors that we faced. The Gideon acquisition added another $144 million after adjustments from purchase accounting available for sale of securities were up $53 million for the quarter, that's attributable entirely to Gideon and they're up $51 million in the fiscal year-to-date. Total assets were up $263 million in the quarter, that's attributable mostly to Gideon, which came over at $218 million in total assets. And assets are up $320 million for the fiscal year-to-date. Compared to 12 months ago, so December 31, 2017, total assets were up $430 million, which includes the $218 million from Gideon plus another $86 million that we acquired with Southern Missouri Bank of Marshfield. Over that same 12 months, gross loans were up $351 million, again with $144 million attributable to Gideon and $68 million from Marshfield. Although, some of those acquired loans have paid down at this point. Deposits are up $205 million in the December quarter with $171 million coming from the Gideon acquisition and with organic growth picking back up after a slower September quarter. We saw a small amount of brokered funding matured and public unit deposits come back higher after both moved in opposite directions in the September quarter. The December quarter is – the December quarter end is usually our highest four public unit deposits, though higher balances do often continue to move in during early January because of the tax calendar specific to Missouri public units. Over the last 12 months, our total deposits were up $287 million with Gideon again accounting for $171 million of that and Marshfield accounting for about $68 million. Brokered funding over the last 12 months is basically flat, although if you do look at our regulatory reports you wouldn't see that because of the change, the definition as it relates to reciprocal placement arrangements. Public unit funding over the last 12 months is up about $48 million with a little more than half of that coming from the two acquisitions we’ve closed. We have seen depositors migrate from non-maturity deposits to time deposits at about twice the rate of the prior year. FHLB advances were up $37.5 million in the December quarter with about two-thirds of that coming from overnight funding. Nonperforming loans were significantly higher this quarter as a result of the Gideon acquisition. They increased to $20.5 million, that's up almost $13 million from September 30. In percentage terms, nonperforming loans increased to 1.12% on gross loans, that's up from 46 basis points at September 30 and 50 basis points at December 31 of last year. Nonperforming assets at quarter end were $24.4 million, that's up almost $12 million from September 30. As a percent of total assets, NPAs are 1.11%, that's up from 64 basis points at September 30 and 62 basis points at December 31 a year ago. NPAs are up because of the higher NPLs. We also had a small amount of foreclosed real estate from Gideon but that was partially offset by some foreclosed property sales during the quarter. Our credit folks are actively working these nonperformers, and they are focused on reducing these balances with the intention of making significant progress by our June 30 fiscal year-end. Net charge-offs for the quarter were two basis points annualized that’s as compared to three basis points in the linked September quarter and four basis points in the same quarter a year ago. Additionally, we saw loan growth slowed this quarter from last and our provision for loan losses decreased to $314,000 as we had a stable outlook for the legacy – a stable credit outlook for the legacy loan book. A year ago in the December quarter, we provisioned $642,000, which was 18 basis points on average loans. This quarter's provision equated to seven basis points. If you look at those figures on a trailing 12-month basis, our provision to average loans in the last four quarters is at 16 basis points and charge-offs to average loans over that time period is two basis points. A year ago, those figures would have been a provision of 17 basis points over the trailing 12-month and charge-offs of four basis points. The allowance as a percentage of our gross loans was down 10 basis points to 1.04% at December 31, 2018. That's as compared to 1.14% at September 30 a year ago, in advance of the Marshfield acquisition, the ALLL was over 1.15% on gross loans. The acquired loans, of course, are subject to fair value adjustments at the time of acquisition and we do not hold an allowance against them unless we identify subsequent impairment. That concludes my prepared remarks on the financial results. And at this time, I'll introduce CEO, Greg Steffens.

Thank you, Matt. We're pleased with our loan growth for this point of the year thus far, and our loan growth has exceeded our expectations. And part of this is due to this continuing to look at a number of loan opportunities and we're pleased with our volume and the amount of loans we're looking at. One of the things I wanted to talk about was how our loan portfolio proposition has changed due to the acquisition as well as our organic loan growth. Over the year-to-date, the largest changes we've had an $82 million increase in our non-residential non-owner-occupied real estate portfolio, $60 million in commercial loans, $29 million in owner-occupied non-residential real estate and then $22 million each in agricultural real estate and multifamily, filing an additional $10 million in one- to four-family. Our overall growth was aided this quarter after the year-to-date by reduced prepayments in our commercial loan portfolio as we've experienced fewer owners selling their properties as well as refinancing with other lending institutions when compared to recent quarters. With our growth and changes in our loan portfolio, our CRE concentration has moved from 233% at June 30, 2018 to approximately 270% at 12/31/2018, which is slightly above our CRE level of 251% at 12/31/2017. Our organic loan growth was centered primarily on our East and West regions as well. We are pleased with the volume of our loan originations, which totaled at $156 million for the quarter and $334 million for the year-to-date, which is up from $131 million and $268 million respectively over the same periods of the prior year. I would also like to give a brief update on our agricultural portfolio. Agricultural real estate and production loan balances grew $22 million and $3 million respectively for the fiscal year-to-date, primarily due to the acquisition as legacy, ag real estate balances were flat and our ag production lines dropped a higher than anticipated $22 million for the quarter. This was due – part due to higher government subsidy payments from the market facilitation program related to the tariffs with China. Our agricultural customers have had a good year and overall results have exceeded our underwriting expectations. We expect very few issues related to our legacy agricultural portfolio. However, we will have some cleanup associated with the acquired agricultural balances related to the recently completed first commercial acquisition. Current year underwriting has just started and it's too early to determine how projections will look for this year, but we anticipate renewing the majority of our ag production loans. Our loan pipeline for loans to be funded within the next 90 days totals $93 million, which is similar to the prior year's totals of $97 million, but is down from $114 million last quarter. The pipeline’s diverse in nature and very similar to our existing portfolio of mix. Based on our pipeline, seasonality of our agricultural portfolio and the recent reduction in loan prepayment rates, we should experience limited loan growth in the March quarter, which has traditionally been a weaker quarter for loan growth. Pricing pressures in the marketplace remain similar to where we were in our last earnings call. Due to our faster-than-expected loan growth in the first half of the year, we anticipate our annual loan growth to be at the top end or slightly exceeded our previous six to eight forecasted range for the loan growth. Moving on to mergers and acquisitions. We announced the acquisition of First Commercial Bank on June 12. We completed the acquisition on November 21, and we completed the data conversion on December 7. To date, that transition is going well and we believe that we should exceed anticipated cost savings. We have announced the anticipated closing on three of the acquired locations located in Morley, Morehouse and Oran, Missouri. Overall, since the transaction deposits have grown $1.7 million, while loan balances have declined by approximately $7 million. So overall the acquisition is off to a good start. Moving on to other M&A activity. We had a drop off in opportunities recently to review potential partnerships. We did look at several companies during the December quarter, where we were selected to pursue due diligence in any of those cases. With the recent market decline at bank stock trading multiples, including ours, we anticipate a drop off in M&A for the time being as buyer and seller pricing expectations will likely diverge. We will continue to target looking at companies within our general market footprint in the $250 million to $500 million asset range, but we will consider smaller or larger opportunities depending upon the strategic benefit for us both financially and geographically. Our ideal partner would also provide some additional liquidity. That concludes my prepared remarks.

All right. Thank you, Greg. Jamie, if you would you please remind callers how they can queue for questions.

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] Our first question today comes from Andrew Liesch from Sandler O'Neill. Please go ahead with your question.

Good afternoon, guys.

Good afternoon, Andrew.

Good afternoon.

Just curious where you stand on the full integration for First Commercial. Have you guys realized all the cost savings in the transaction yet?

No, we have not. The offices are targeted to close March 1.

Okay.

And then there is still things related to that and then just general personnel.

Got you. So, I mean, if I just look at the expense base here if we take out the merger charges in the past quarter where we had about $12.1 million, it sounds like maybe before we get the cost saves maybe they’ll also start to flow and meaningfully overall will be realized by the start of the year fourth fiscal quarter. But then you also have the partial quarter effect of the deal so far. So what do you think where the expense run rate can shake out once you finish the cost saves and you get the full quarter of the deal right about $12.5 million a quarter? Or anything may be larger?

We don't have a number to share with you on it. It's fair to say that 331 target for achieving the full cost savings should be accurate. We do have a little bit of seasonality in the non-interest expense in terms of our wage adjustments for our team members who are usually effective January 1, so we did go through that process. It's not a huge impact on the number, but we do generally see a little bit of slowdown in efficiency gains in the January – in this March quarter. It's usually being a softer quarter for non-interest income.

Okay. And then, Matt, you referenced more depositors are accelerating maybe moving towards – more towards having non-time deposits in the CDs. So curious, what's the typical rate on a new CD right now?

We're running specials as high as 270, 275, that's for approximately two-year CD.

Got you. Very helpful. I will step back.

Our next question comes from comes from Kelly Motta from KBW. Please go ahead with your question.

Hi, guys, good evening. I had a question about capital, you mentioned M&A has kind of the opportunities that slowdown a bit. And I wanted to ask you about the buyback authorization that you announced this quarter, potentially it's M&A opportunities don't present themselves. How were you thinking about the buyback? Are you anticipating potentially using that in order to deploy some of the capital you have on hand?

Yes. As you may have noticed the announcement on that plan was, I think, just before we went into quiet period on our earnings that we've had not had any activity on it so far. But that's certainly the idea that as we see your opportunities to leverage our capital approved activity we can be opportunistic and looking at the repurchasing some of our shares and could return to shareholders.

Great. And then I also wanted to talk about the sizes of balance sheet and kind of the makeup there. The size was this quarter a bit bigger than what I had modeled having build the securities book more substantially from Gideon. You mentioned – you talked overnight funding, I believe, in order to fund the strong growth that you had. How are you thinking about the securities book? Is that a potential source of liquidity for you as you look to fund what turning out to be a very strong year for loan growth?

It is. It's not a silver bullet for our liquidity situation, but it is generally unencumbered. They had a relatively low level of public units. They were utilizing that for – we will work with the public units payments, we do our own started transitioned to those reciprocal deposit insurance arrangements. Hopefully, we will free up even more collateral. But there is some degree of balance sheet where we do want to maintain, but I wouldn't look at necessarily a substantial part of that paying down keep borrowing.

Okay. So your securities turning out, it went to 10% from 9% last quarter, fair to say that it might shake out somewhere in the middle of that? Is that…

Yes. I think that at the low end, somewhere in the low end.

Okay. Got you. And then on your prepared remarks, Matt, you mentioned core expenses acts the provision for balance sheet funding as well as CDI and the provision has been in the release. Do you have a dollar amount of CDI that you reported this quarter?

I can, one second. CDI, $374,000, and then that is down from the prior quarter as we had couple maybe just one over acquisition during this quarter, but then we'll have a full quarter first commercial launch in the following quarter.

Understood. Okay.

Commercial, we've been talking about it with Gideon as the…

A final question, if I may, with your NIM outlook. How are you thinking about the NIM going forward with the curve being as flat as it is and kind of the migration you talked about towards CDs. Should be – it is fair to assume little bit more pressure there? Or do you think you should be able to offset that?

Our anticipated modest per share NIM at this point in time.

Tell me if I'm wrong, Greg, I think we've seen a little less move back in loan yield than what we had maybe release on the deposit side here in the last six weeks since the…

We have been getting a little of pricing on our loans compared to where we have in the been similar loans have extended out a little bit further on the maturity mix. So are there initial repricing periods. So that's stabilizing some of it. So we're anticipating just a very modest reduction potentially in the NIM.

Thank you. I will step back.

[Operator Instructions] Our next question comes from Don Koch from Koch Investments. Please go ahead with your question.

Thanks, guys, nice quarter. You did a nice job here. Help us a little bit – you clearly, in your prepared remarks, you really clear about the challenge you had with Gideon. Many times when you go through this process, there is always a prize at the end of the marriage or the hug. Do you think it's through all that? Or do you think – do you think there’s – more that you got to uncover that's going to materially raise your NPAs going forward.

We feel like we have a pretty good handle on the loan book that we acquired. And really from all of our acquisitions to date, we really haven't been surprised by any credit issues. If anything, our credit surprises have been to the positive side and to the negative. And we haven't seen anything, we indicate anything on the contrary on this.

Okay. Keep on doing the great job guys. Thanks.

Thank you.

And at this time, I'm showing no additional questions. I would like to turn the conference call back over for any closing remarks.

Okay. Thanks, again, Jamie, and thanks for everyone for interest in our call. We look forward to talking to again in three months.

Ladies and gentlemen, that concludes today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.