Southern Missouri Bancorp, Inc. (SMBC) Q3 2019 Earnings Report, Transcript and Summary

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

Thank you, Elisa. Good afternoon everyone. This is Matt Funke, CFO with Southern Missouri Bancorp. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, April 22nd, 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, thank you for joining us today. I want to start by reviewing the preliminary results highlighted in the quarterly earnings release. The quarter ended March 31st, 2019 is the third quarter of our 2019 fiscal year. This March quarter was the first full quarter after our November acquisition of Gideon Bancshares and its subsidiary, First Commercial Bank. And in December of 2018, we merged the bank subsidiary and that occurred legally at the same time as we converted data systems and merged those. So, we have a full solid quarter with results including that acquisition. We earned $0.76 diluted in the March quarter. That is down $0.05 from the linked December quarter and it is up $0.16 from the $0.60 diluted that we earned in the March 2018 quarter. Compared to the year ago period, we had slightly more discount accretion from acquired loan portfolios in the current period, but it had slightly less impact on our net interest margin due to our larger balance sheet. And compared to the linked quarter, we saw a modest increase in discount accretion both in dollar terms and in the impact to the margin. Non-recurring items and non-interest income and non-interest expense were roughly offsetting in the current quarter. The March quarter is typically weaker for us due to seasonal factors and the shorter day count. We've provisioned slightly less for loan losses compared to the year ago period and slightly more compared to the linked quarter. Finally, compared to the year ago period, we benefited from the full impact of the lower corporate tax rate enacted in December 2017. In the March quarter a year ago, we were still administratively subject to a 28.1% federal income tax rate, and that's because of our June 30 tax year-end, while since July 1st, 2018, we've been subject to the newly enacted 21% federal rate. So, that's a positive impact year-over-year. Hitting some income statement details, with the Gideon acquisition closing in the middle of the December quarter, the current March quarter is the first with a full quarter's impacted from discount accretion on their loans and time deposits. This improved our net interest income by $349,000 in the current period, obviously with no comparable item in prior fiscal year, and it is up from $131,000 in the linked quarter. Similar items from other acquisitions were generally declining as you would expect with the passage of time with the exception of the Southern Missouri Bank of Marshfield acquisition from February 2018 which only contributed to net interest income for a partial quarter in the year ago period, while we now recognize the full quarter's accretion in the current year. It's relatively small still at $60,000, but it is up from $28,000 in the same quarter a year ago. The inclusion of that full quarter's impact from the Gideon acquisition largely offset the inclusion in the year-ago period of a larger amount of accretion attributable to the resolution of a specific acquired impaired credit from the Capaha acquisition without any comparable instances in the current period. The total between the four acquisitions that we're still tracking accounted for an additional $632,000 in net interest income in the current quarter, which added about 13 basis points to our reported net interest margin. The impact in the linked December quarter was $467,000, which was a 10 basis point contribution to margin. And in the March quarter of the prior fiscal year, we reported $570,000, which contributed about 14 basis points to the net interest margin. Total net interest margin in the third quarter was 3.73% and again with 13 basis points of that resulting from the fair value discount accretion we just mentioned. A year ago in the March quarter, margin was 3.74%, of which 14 basis points resulted from fair value discount accretion. So, on what we would view as a core basis then, our margin was essentially unchanged March 2019 to March 2018. In that time period, our core asset yield is up 45 basis points, and our core cost of deposits is up slightly less at 41 basis points, but total core cost of funds would be up slightly more than deposits at 45 basis points. Compared to the linked quarter, when our net interest margin was 3.71% and we had 10 basis points in benefit from discount accretion, this would indicate that our core margin is down about one basis point. However, the 90-day March quarter impacts that measurement as we figure our annualized net interest margin by taking the quarterly net interest income figure and multiplying by four. That methodology positively affects margin by a few basis points in 92-day quarters and negatively affects it by a few basis points in the 90-day March quarter. Non-interest income as a percentage of average assets on an annualized basis was 72 basis points in the March quarter, 13 basis points lower than in the same quarter a year ago and down five basis points from the linked December quarter. In the current quarter, we had gains on the sale of available for sale securities of $244,000, a non-recurring benefit related to an agreement with a broker-dealer to offer wealth management services through Southern Bank, $185,000, and a relatively small gain on the sale of precious metals acquired in a recent acquisition for $29,000. A year ago, non-core items included a gain on AFS securities of $254,000, some little change there and a gain on the sale of fixed assets for $188,000. So, in total, not a whole lot of difference compared to the current period. Finally, in the linked December quarter, noncore items included a BOLI benefit paid in excess of cash value on a policy and a gain on the sale of bankers bank stock. Those were a combined $406,000. So, non-core items up a little bit but not really significantly. Compared to the linked quarter, we'd say that our core noninterest income as a percent of average assets has declined about five basis points. That's a little more than what we usually see for the March quarter, although the March quarter usually is our weakest. It's also down about 11 basis points from the same quarter a year ago, which was an unusually strong March quarter. Though the trend has been somewhat negative since the beginning of the current fiscal year in July. Seasonal declines in NSF charges, non-sufficient funds charges, were in line with the same quarter a year ago, but year-over-year improvement has slowed this year and is not keeping up with balance sheet growth. This quarter a year ago, we did see strong loan fees, including an unusually large prepayment penalty. Loan fees were weaker in the current period. We continue to see good improvements year-over-year in bank card interchange that were down just a bit sequentially with the smaller number of days, probably some seasonality in transaction volume, behaving as expected. Late charges collected are up compared to the linked quarter and year ago period. Gains on sales of residential loans originated for sale under the secondary market picked back up this March quarter compared to a particularly soft December quarter, but they remained down year-over-year. Non-interest expense was up 10.6% compared to the same quarter a year ago, which was the quarter we closed the Marshfield acquisition and they're up 5.1% as compared to the linked quarter. If you exclude $243,000 in M&A expenses; a non-recurring charge of $185,000 related to our hiring of investment representatives for our wealth management service; our intangible amortization of $462,000 this quarter; and the provision for off-balance sheet credit exposure, which is a small charge in the March quarter as compared to a larger charge in the December quarter and in the year ago quarter. So, if you exclude those, non-interest expense was up 6% over the linked quarter and in total, the excluded items were little changed from the linked quarter. The increase is due in part to the full quarter's impact of the Gideon acquisition, adding to our compensation and occupancy expenses in particular. And the new calendar year impacts our quarterly financial as that is the date when we generally award annual pay increases, and we are liable for additional payroll and unemployment taxes as compared to the December quarter. As a percent of average assets, non-interest expense is up four basis points from the linked quarter and down 20 basis points year-over-year to 2.42%. But if you exclude M&A and other non-recurring expenses, intangible amortization, provision for off-balance sheet credit exposure, we calculated operating non-interest expense as a percent of average assets to be up seven basis points from the linked December quarter and down 12 basis points from the March quarter of last year, continuing a trend of steady improvement in that ratio over the last several acquisitions. Our effective tax rate was nearly unchanged from the prior two quarters at 19.6%. A year ago in the March quarter after the December 2017 passage of the tax bill, including a reduced federal income tax rate for 2018 and that 28.1% federal income tax rate we discussed earlier, beginning in the first quarter of this current fiscal year, we were able to recognize that full benefit of the lower federal rate. Moving over to the balance sheet, our loan growth slowed to $22 million in the March quarter, it's down from $33 million in the December quarter outside of the Gideon acquisition and from $62 million in the September quarter, which is typically our strongest. A year ago in the December and March quarters combined, we achieved just $5.5 million in total organic loan growth. So, over that six-month window for us to be at $55 million in comparable period this year, it's a very good comparison. That's given the typical seasonality of our loan portfolio's growth patterns. After increasing substantially last quarter with the Gideon acquisition, our available for sale securities were down about $36 million this quarter and have now increased only $15 million in the fiscal year-to-date as we liquidated some acquired securities to repay borrowings, reducing our balance sheet with the yield curve inverted between the overnight funding costs in the middle of the treasury curve. Total assets decreased almost $30 million in the March quarter, attributable to those security sales and lower cash equivalent balances, partially offset by our loan growth. For the fiscal year-to-date, total assets are up about $290 million. It's attributable mostly to Gideon, which included $218 million in total assets, although we have liquidated securities as noted. Compared to 12 months ago, total assets are up $327 million, which again includes that $218 million from Gideon, plus strong organic loan growth. Gross loans are up $303 million over the last 12 months, with $144 million of that attributable to balances at the time of the acquisition of Gideon. So, the remainder of the $159 million in growth would represent just over 10% organic growth over the trailing 12 months. Deposits were up $78 million in the March quarter, as we saw increased growth in both non-maturity and time deposits. As we've seen over the last year, we continue to experience better growth in time deposits, with those up $45 million and non-maturity deposits up $33 million. Those figures included increases in brokered CDs of $7 million and non-maturity brokered deposits of $9 million. We utilized that brokered funding, along with the security sales and other core organic deposit growth, to pay down overnight Federal Home Loan Bank borrowings. For the fiscal year-to-date, we are up $123 million in deposits outside of the Gideon acquisition, but that year-to-date figure is more reliant on brokered funding than the March quarter alone as more than $52 million out of the $123 million is brokered. Also, for the year-to-date, we are more tilted toward CD growth versus non-maturity. Compared to a year ago, deposits are up right at $300 million, with Gideon accounting for $171 million of that. Exclusive of acquisitions, brokered funding is up almost $35 million over the last 12 months, non-brokered time deposits are up a little more than $82 million and non-brokered transaction accounts and savings deposits are up of more than $11 million. Outside of the acquisitions, we've seen modest growth in public unit balances over the last 12 months and a good deal of depositor migration from non-maturity accounts over to certificates of deposit. FHLB balances, Federal Home Loan Bank, were down $117 million in the March quarter as our team worked very hard to grow deposits, and we've reduced securities balances as noted previously. Compared to March 31st, 2018, FHLB balances are down about $12.5 million. Non-performing loans were slightly higher this quarter -- this quarter end due in part to a $1.1 million relationship out of the Gideon acquisition that moved to non-accrual. That's in addition to similar -- a similar net amount of legacy loans doing the same. With non-performing loans increasing to $22.7 million, that's up $2.2 million from December 31st. In percentage terms, NPLs are now 1.23% of gross loans, up from 1.12% at December 31st and from 0.4% at March 31st, 2018. Non-performing assets moved similarly at quarter end. They were $26.3 million, up $1.9 million from December 31st. They make up 1.21% of total assets, up 10 basis points since December 31st and up from 56 basis points at March 31st, 2018. The bank's credit management team is making progress with acquired relationships in terms of improving the delinquency. We are not seeing material concerns that we had not previously identified out of the acquired portfolio in the five months since the Gideon acquisition. Net charge-offs for the quarter were two basis points annualized. That's unchanged from the linked December quarter, and it's down from four basis points in the same quarter a year ago. Additionally, loan growth picked up a bit this quarter and our provision for loan losses increased to $491,000 as compared to $314,000 in the linked quarter. And a year ago in the March quarter, we provisioned $550,000, which was 15 basis points on average loans. This quarter's provision was 11 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 running at 15 basis points, and our charge-offs to average loans are running at two basis points. A year ago in March, those figures would have been provisioning at 17 basis points on average and net charge-offs at three basis points. The allowance as a percentage of our gross loans -- gross loan portfolio was up one basis point to 1.05% at March 31st compared to 1.04% at December 31st. And a year ago in March, right after the Marshfield acquisition, the allowance was 1.12% of gross loans. Since that time, of course, we closed on the Gideon acquisition. Acquired loans are subject to fair value adjustments at the time of acquisition and we do not hold an allowance against those unless we identify subsequent impairment. That accounting distinction explains the decrease in the allowance compared to the year ago period. That concludes my prepared remarks on the financials. And at this time, I'll introduce our CEO, Greg Steffens.

Thank you, Matt. I'd like to provide a brief summary of other items that we have today. We are quite pleased with loan growth for the quarter and the year-to-date as it has exceeded our initial expectations at the beginning of the fiscal year. Exclusive of the Gideon acquisition, organic loan growth for the year has totaled $117 million or 7.4%. We have projected organic loan growth for the fiscal year to come in at 6% to 8%, but we have revised our estimates to 8% to 10%. We have exceeded expected loan totals due to stronger than anticipated loan demand and reduced prepayment rates. Our organic growth continues to be led by increases in our commercial loan portfolios. This growth, along with the Gideon acquisition, has changed the composition of our loan portfolio with an increase of $86 million in non-residential, non-owner-occupied real estate; $58 million in commercial loans; $33 million in multifamily; $30 million in owner-occupied non-residential real estate; $22 million in ag real estate; and $12 million in one to four family. With this growth and changes in our loan portfolio, Southern Missouri Bancorp's CRE concentration has moved from 233% at June 30th, 2018, to 260% at 12/31/18; and approximately 265% at 3/31/2019, which is also slightly above our CRE levels of one year ago of 234%. Our organic loan growth continues to be centered primarily in our East and West regions, which have grown by $44 million and $78 million, respectively for the fiscal year-to-date. We are pleased with our volume of loan originations also, which have totaled $149 million for the quarter and $482 million for the fiscal year-to-date, which is up from $424 million over the same period of the prior year. Now, I'd like to provide an agricultural update. Agricultural real estate production loan balances, as I've mentioned before, grew $22 million and $3 million, respectively, for the fiscal year-to-date. Outside of the Gideon acquisition, our legacy ag real estate balances and production balances were down $4 million and $9 million, respectively. Our agricultural customers performed well for the 2018 crop production year as we have very few customers not fully pay out. We are continuing to work with and sometimes modify agricultural relationships acquired from the Gideon acquisition. Our underwriting for this year's ag operating line renewals is nearly completed, and most of our customers' operating lines have been renewed. Current year planning is well underway, but it is slightly behind where we were last year at this time and its historical averages due to a wet and cool spring. We estimate that the planting for our corn, soybeans, cotton, and rice at 75%, 20%, 10%, and 20% complete, respectively. At present, we are actively having our ag customers planning ground right now and we expect to move closer to historical averages over the next several weeks. Our loan pipeline for loans to be funded in 90 days totaled $78 million, which is below last quarter and the prior year's totals of $93 million and $112 million. The pipeline's diverse in nature and similar to our existing portfolio mix. Based on our pipeline, seasonality of our agricultural portfolio and the recent reduction in loan prepayments, we anticipate our loan portfolio to grow at or slightly below historical averages for the June quarter. Pricing pressures remain in the marketplace but have eased slightly from where they had been, especially given the recent drop in longer term rates. We are also pleased with our $78 million in deposit growth for the quarter, which surpassed historical trends and internal expectations. Most of this growth was organic and not brokered and included both non-maturity deposits and CDs. Non-maturity deposits have grown nearly 2% for the fiscal year-to-date, exclusive of the Gideon acquisition, which represents good improvement from where we were in the first six months of this year but will likely remain well below our internal goal of 6% to 8% for the fiscal year, due largely to the aforementioned migration of customers from non-maturity accounts to CDs. This migration as well as our marketing efforts have led to a greater than anticipated growth in our CD portfolio, which has exceeded historical growth rates. Core deposit growth continues to be challenging in a focus of ours and will likely to continue to be challenging given the aggressive competition in our marketplace. As we turn to M&A, as Matt indicated, we completed the acquisition of First Commercial Bank on June 12th. We completed the acquisition on November 21st, and we completed the data conversion December 7th. To-date, the transition is well, and many of the anticipated cost savings have been achieved during the March quarter. Overall, we expect slightly higher than anticipated cost savings. We completed the closing of three of their locations on March 1st and overall, we are pleased with the acquisition and the loan and deposit retention rates. As to M&A future activity, we've seen an -- recent activity, we've seen an increase in activity in the M&A space over the last quarter as we've seen more sellers coming to market as compared to the prior quarter. We have evaluated a number of potential mergers, some of which we did not feel were a good fit to -- due to their footprint. Some didn't fit in that very well with our business model and several, we had a real interest in pursuing. However, the downward movement in our stock price has made it more challenging to model pricing that works for both us and the potential sellers that we pursued given other offers we understand they had seen, especially in higher growth or larger market areas. We'll continue to evaluate potential activity in our markets or in nearby markets where we believe our business model will perform well and offer the opportunity to profitably grow our franchise and we'll look also for continued acquisitions that offer good core deposits to provide for long-term growth. We will continue to target companies in the $250 million to $500 million asset range, but will consider smaller or larger companies depending upon their strategic benefit for us both financially and geographically. We are committed to being patient and we will not chase deals. We announced a stock repurchase plan for 450,000 shares in November 2018. To-date, we have not been active on this plan. The company continues to look at the market value of our stock compared to valuation metrics for other stocks in our industry and peers in our region. We continue to evaluate the potential use of capital through stock repurchases versus other options to deploy capital and provide for long-term shareholder returns. Notable downward price movements have occurred twice since the announcement of the approved repurchase plan, first in mid-to-late December and again, in late March. Both times -- both of these being times we were in our quiet period, which would have prevented us from initiating repurchase activity had we wanted. We may consider adopting a 10b5-1 plan to allow some level of -- or authorized repurchase activity to potentially occur during future quiet periods, presuming there's no material non-public information that will preclude it. That concludes my remarks.

Thank you, Greg. Elisa, at this time, we'd like to take any questions our participants have. If you could remind them how to queue for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Andrew Liesch of Sandler O'Neill. Please go ahead.

Good afternoon guys.

Good afternoon Andrew.

Hi. So, just on the securities book, just down the $36 million or so that you referenced, Matt, is this a good level to build off of here, this $160 million, $162 million or so?

Yes, we would've probably preferred to be a little more active putting some of those dollars back to work, but with the market where it has been and where it is, we are going to be patient on that.

Okay. And then the margin here came in a little bit better than I was expecting, partly on a reported basis, and then I was also expecting a little bit of core compression as well. Just some of this 3.73% level though, do you -- I mean do you expect the provision or the allowance in the -- not the allowance, I apologize, the accretion to decline slowly over time and kind of then converge with the core margin in the quarters ahead?

Sure. Certainly, over time, we're seeing that every quarter as we move forward outside of the unusual instances where we resolve something that was a larger impaired relationship. So, outside of those, which I can't predict, yes, those will definitely compress over time.

Okay. And then just on deposit cost in general, just if you have any comments on what you're seeing in the marketplace as far as competition for new deposits and how much are you having to pay up to retain good customers.

I feel like -- and I hope I'm not being overly optimistic that we may be passed a little bit of an inflection point in the last 60 days. I'm looking at Greg to see if he'll nod his head on that. But I think we've been hearing a little bit less from our retail folks about what they are seeing from competitors in the market. I'd say early February, we were seeing some really silly one-year CD pricing. We're not hearing as much of that right now. And maybe just every quarter that every month that passes after the Fed has kind of taken a pause here, we'll get a little bit of relief from that repricing pressure.

Okay, very good. That covers all my questions. Thanks.

Thanks Andrew.

[Operator Instructions] Our next question comes from Kelly Motta of KBW. Please go ahead.

Hi guys, good afternoon.

Afternoon Kelly.

Hi. I was hoping to ask you a bit about expenses. It sounds great that you're expecting to get some more cost saves from the Gideon deal. I was wondering about how much you'd realized in your March quarter and kind of how we should be thinking about the expense level as you realize a greater amount of these cost saves having just closed the branches.

Well, I mean we closed them during the quarter, so we would've had severance agreements for the people that departed or moved to other places and our operating costs would have only been in the numbers for two months. So, we have realized most of what we have to be a modest reduction from expenses so we would've carried in the March quarter.

Okay. And then you had referenced the hirings you've done in the wealth group. Could you give us a bit more color on what you're doing there and when you kind of expect to see their production pull through and kind of your outlook for fees?

Well, we certainly hope so, produce as soon as possible. They've been working very hard here over the last couple of months to move business as they can. Their upfront costs, as you saw from the numbers, we have identified. What was the second part of the question?

Expectations for revenue moving forward.

Yes. We don't want to provide any guidance on that, but we are reasonably optimistic that they'll reach breakeven here relatively soon.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Matt Funke for any closing remarks.

Okay. Thank you, Elisa. Thank you, everyone for joining us. We appreciate your interest in the company and we'll speak again in a few months. Have a good afternoon.

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