Southern Missouri Bancorp, Inc. (SMBC) Q2 2020 Earnings Report, Transcript and Summary

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

Thank you, Kate. 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, which was dated Monday, January 27, 2020 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 all for joining us today. I'll begin by reviewing the preliminary results highlighted in the quarterly earnings release. The quarter-ended December 31, 2019 is the second quarter of our 2020 fiscal year. We earned $0.84 diluted in the current December quarter, that is down $0.01 from the linked September quarter and it's up $0.03 from $0.81 diluted that we earned in the December 2018 quarter. Our net interest margin for the second quarter was 3.70%, that included about 10 basis points of contribution from fair-value discount accretion on acquired loan portfolios and premium amortization on assumed deposit, which was about $525,000 in dollar terms. Additionally, the current period's margin included about 4 basis points benefit, $194,000 in dollar terms from interest collected on a few larger loans that had been treated as non-accrual.In the year ago period our margin was 3.71% of which, again, 10 basis points resulted from fair-value discount accretion; in dollar terms that was $467,000. On what we see as a core basis then, our margin was down about 5 basis points comparing the December 2019 quarter to the December 2018 quarter. Our core asset yield in that time was up about 8 basis points, that's less than the increase in our core cost of deposits which we see as 21 basis points higher, but our total core cost of funds is up a little less than deposits alone at 14 basis points higher. Compared to the linked quarter, when our net interest margin was 3.81% and we had 10 basis points in benefit from discount accretion, plus another 8 basis point benefit from similar interest recognized on a limited number of loans that had previously been treated as non-accrual; this would indicate that our core margin is down about 7 basis points sequentially.Non-interest income was up 6.9% compared to the year-ago period, and it's up 5.7% as compared to the linked September quarter. As a percentage of average assets, our non-interest income annualized was 76 basis points, which is 1 basis point lower than the same quarter a year ago and 3 basis points improved from the linked quarter. There are no gains or losses on available for sale securities in any of the relevant period, but in the year ago period we did have a little more than $400,000 that we identified as non-recurring item; these were a BOLI benefit and a gain on sale of bankers main [ph] stock. Additionally, compared to the year-ago period, our deposit service charges, wealth management insurance brokerage commissions, debit card revenues and gains on secondary market loan sales were up, loan servicing and other loan fees were down. Compared to the linked September quarter, we saw an increase in our NSF revenues as we made an upward adjustment to our NSF per item charge. Also other loan fees which includes loan brokerage income was higher, so our gains on loans we originate and sell were lower along with our debit card revenues.Non-interest expense was up 9% compared to the same quarter a year ago, and 5.6% as compared to the linked September quarter. In the same quarter a year ago we had $422,000 in merger and acquisition expense, with only $25,000 by comparison in the current period and none in our linked September quarter. Core deposit intangible amortization is $67,000 higher than it was a year ago, reflecting the Gideon acquisition. We recognized losses in the current period on fixed assets totaling $327,000 as we sold bank facilities, we've acquired in the Gideon acquisition. We also recorded a charge for provision for off balance sheet credit exposure at $362,000 in the current quarter as compared to a smaller charge in the same quarter a year ago, just $162,000; and as compared to a recovery of $146,000 in the linked quarter as our lines of credit were at their seasonal lows at September 30.Turning to ongoing items compared to the year-ago period we see increases in compensation, occupancy, bank card expense offset by decreases in deposit insurance assessments as we continue to realize benefits from the one-time FDIC credits. We expect those credits to offset most of our expense again for the March quarter before returning to the normalized level in the June quarter. Compared to the linked September quarter other than the fixed asset losses and provisioning for off balance sheet credit exposure already noted, we would have seen a slight decrease in non-interest expense as we had a better quarter for compensation due to timing effects. As a percentage of average assets, non-interest expense is up 2 basis points as compared to the same quarter a year ago, and up 8 basis points from the linked quarter at 2.40%. But if you exclude M&A, other non-recurring charges, our intangible amortization and the provision for off balance sheet credit exposure, we calculate that our operating non-interest expense is up 1 basis point from the December quarter a year ago and down 7 basis points from the linked September quarter; so we're very pleased with our expense control in the December quarter.Our effective tax rate was little changed at 19.9%, and it's in the middle of our range over the last few quarters. In the December quarter a year ago, the rate was slightly lower at 19.5% as we were running a little bit lower on the rate as we had some additional tax advantage investments during the prior fiscal year.Moving over to the balance sheet; we saw loan growth accelerate in the December quarter as gross loans increased $48 million after growing by $29 million in the September quarter. Typically, we've seen a bit slower growth in the December quarter but we're seeing less seasonal impact than normal in some recent periods. The $77 million in growth in the first six months of our fiscal year is less than the $95 million we saw in the first six months of last year excluding the Gideon acquisition. Over the last 12 months exclusive of the acquired balances, the gross loan portfolio continues to grow at a little less than a 7% rate; a year ago that was running a little above 9%. We continue to be slightly more active in our investment portfolio but it's not terribly meaningful to the balance sheet as a whole.Total assets increased about $63 million of the December quarter. Our cash items typically run a little bit higher at the December quarter-end and we expect balances to drop back from where they were this year as well. Deposits were up $42 million in the December quarter after having dropped $21 million in the September quarter. Brokered funding and public unit deposits had both dropped a fair amount of the September quarter, and in this quarter brokered funding was little changed but we did see a seasonal increase in our public unit funding. We also saw growth in other non-maturity funding balances, but - excuse me, but depositor interest in time deposits remains reduced. Exclusive of acquisitions and brokered funding over the last 12 months, time deposit balances have grown at about an 8.5% clip [ph], and that number is trending down while non-maturity balances are up about 6.5% and that number is trending higher.FHLB balances were up $11 million in the December quarter after growing faster in the September quarter compared to a year ago at December 31, FHLB borrowings are down about $41 million. The increase in our current quarter was taken on an overnight basis at this time as we expect some more significant public unit inflows early in the new calendar year to allow for repayment of some of these borrowed funds. We're happy to report another sequential reduction in our non-performing loan balances this quarter, down from $14 million at September 30 to $10.4 million at December 31. Non-performing loans represent 54 basis points as a percentage of total loans, that's down from 74 basis points at the prior quarter-end, and it's as compared to 1.12% at December 31, a year ago, which is the quarter-end that followed the Gideon acquisition. Non-performing assets at quarter-end were also down close to $4 million and they now stand at $14.1 million. As a percent of total assets NPAs are 61 basis points, down from 80 basis points at September 30 and down from 1.11% at December 31 one year ago.Our classified and delinquent loans continue to be reduced as well. Net charge-offs did pick up a bit and they were 6 basis points annualized in the current quarter; that's our highest level since March 2017 but we don't expect that this is indicative of any trend. Because of the reduction in non-performing loans, classified and delinquents, our provision expense declined to $388,000 as compared to $896,000 in the linked September quarter. We provisioned $314,000 in the December quarter a year ago when our loan growth in net charge-offs were both lower but our credit stats at that time were skewed somewhat by the Gideon acquisition. Our provision expense is 819 [ph] and 7 basis points as a percentage of average loans in the current linked and year-ago period. And if you look at those measures on a trailing 12 month basis, our provision to average loans over the last four quarters is running at 13 basis points, unchanged from a quarter ago and our charge-offs to average loans are at 3 basis points over the last 12 months which is up 1 basis point from where we were at September 30. At December 31 of 2018, those figures would have been a trailing 12 month provision at 16 basis points, and a trailing 12 month charge-off of 2 basis points.The allowance as a percentage of our gross loans dropped back by 2 basis points to 1.07% at December 31, 2019; that's the same level as we began our fiscal year at June 30. A year ago at December 31, immediately after the Gideon acquisition, the allowance was 1.04% of gross loans. Acquired loans which are subject to fair value adjustment at the time of acquisition, and against which we don't hold an allowance for loan losses unless we identified subsequent impairment; those make up a smaller percentage of our loan portfolio as compared to 12 months ago, but also as we've noted above, we're seeing declines in non-performing classifieds and delinquents. We continue to work towards implementation of the new current expected credit loss accounting standard which will be effective for the company on July 1, 2020 but we've not developed estimates of the impact on our allowance at this time.That concludes my prepared remarks on our financial performance. And at this time, I'll turn the call over to our CEO, Greg Steffens.

Thank you, Matt. I'm going to talk a little bit more about loans briefly.So overall, we're pleased with our rate of growth in our gross loan portfolio for the second quarter and fiscal year. For the quarter, we generated $48.4 million or 2.6% growth and which has typically been one of our weaker quarters for growth. For the six months of our fiscal year we've realized gross loan portfolio growth of $77 million for a little over 4% which puts us modestly ahead of pace on achieving our guidance of 5% to 7% loan growth. However, it should be noted that our seasonal growth factors have been less pronounced over recent periods, and we were able to reduce our NPAs, our non-performing assets as expected from the Gideon acquisition which has slightly reduced overall loan growth.Our organic loan growth has been led by increases in one-to-four family residential loans, multi-family housing, and drawn construction balances while our other loan portfolios have had more modest changes. Overall, our loan portfolio mix has changed slightly as we have grown more in residential property over the last several quarters than we had in prior periods. During recent periods, Southern Missouri Bancorp's commercial real estate concentrations has moved from 260% at 12/31/2018 to 255% at June 30 of 2019, and now has backed up to 265% at 12/31. Our organic loan growth continues during the fiscal year and has been spread fairly evenly over each of our three regions. Our volume of loan originations which totaled $195 million during the current quarter was up $39 million as compared to the same period at the prior year. However, for the fiscal year-to-date loan originations have totaled $319 million, which is down $15 million from the same period of the prior year.Now I'd like to provide a brief update on our agricultural portfolio. Agricultural real estate balances dropped a little bit over $1 million over the quarter and fiscal year-to-date, while our agricultural production loans have decreased $17 million for the current quarter and $3 million for the fiscal year-to-date. Our agricultural customers 2019 crop year finished better than we had expected at the beginning of the year as our amount of production, prices and support payments generally exceeded our underwriting expectations. We have started the renewal process for the 2020 production year and overall, we are pleased with what we have seen to date. We anticipate most of our operating lines to be renewed and we're approximately 20% of the way through that renewal process at this point. Overall, we expect limited change in the mixture crops that would be planted this year compared to last year.I'd also like to add to Matt's comments on our non-performing loans. As we are pleased with reduction in our non-performing loan balances which has been elevated since the Gideon acquisition. We have continued to improve our non-performing loans as forecast and have brought these acquired non-performing loans down to $2.4 million from $12.9 million one year ago and from $8 million in the sequential quarter.Looking forward, we would anticipate only modest improvement at current levels in non-performing loans which will more closely approximate our historical averages. We have also seen modest improvements in payment performance on our loan portfolio, as loans 30 days past due or more have continued to drop over recent quarters. Our loan pipeline for loans to fund and within the next 90 days totaled $73 million at 12/31 as compared to $83 million at June 30, and $93 million at December 31, 2018. The pending pipeline is diverse in nature and is fairly similar to our existing portfolio things [ph], but does include a slightly higher proportion of construction loans that are closed but not yet funded to be drawn on various types of assets. Based on our pipeline seasonality of the agricultural portfolio, increased prepayment rates and aggressive market pricing by various competitors; we anticipate our loan portfolio to grow at a weaker pace than the last several quarters. But we do believe our loan portfolio growth will remain in line with our guidance of 5% to 7% annualized growth.We're also satisfied with our growth in deposit balances of $42 million over the quarter, which has typically been one of our strongest quarters for growth. And our deposit growth of $30.5 million for the fiscal year-to-date has exceeded our prior year's results of $9.4 million [ph]. Excluding brokered and public unit deposits for the first six months of our fiscal year, our non-maturity deposits have grown $30 million or 3.1%, while CDs have grown $2 million or less than 0.5%. Non-maturity deposits are expected to grow 5% to 7% for the fiscal year which is consistent with our prior guidance. However, growth in certificates of deposit is now expected to fall below our previous guidance of 5% to 7% due to declining interest rates, increased deposit competition and we reduced preference of our customers for a time deposit given the reduction on market interest rates.Core deposit growth continues to be challenging or likely continue to be so due to the aforementioned items.Now we're going to turn to M&A. During the quarter, we looked at several potential partners for a number of looks over the last several quarters have declined from what we were seeing in the first part of the calendar year 2019. We did announce the acquisition of Central Federal Bancshares Inc. on January 17. This acquisition is smaller than recent acquisitions and was smaller than our targeted size as its assets totaled approximately $17 million. We anticipate this acquisition to be completed and converted onto our data system late in the June 2020 quarter. This acquisition is expected to modestly improve earnings per share and has an intangible earn-back period of approximately two years. We are excited to enter the role of the market and believe this is an effective use of our shareholders capital given other options available to us, and the low integration risk for this transaction. We continue to evaluate other potential acquisitions in our markets wherein nearby markets where we believe our business model will perform well and offer the opportunity to properly grow our franchise.Now, we will continue to look for acquisitions that offer good core deposits to provide for long-term growth. We will continue to primarily target companies in the $250 million to $500 million asset range, but we will consider smaller or larger companies depending upon the strategic benefit for us, both financially and geographically, and we remain committed to being patient and we will not chase deals.In closing, we announced a stock repurchase plan for 450,000 shares in November 2018. During the December quarter we did not repurchase any shares of stock, and have 329,000 shares remaining authorized for repurchases. 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 long-term shareholder returns.That concludes my remarks.

All right. Thank you, Greg. And Kate, at this time we'd like to take any questions our participants may have. So, if you would remind folks how they could queue for those, we'll wait.

We will begin the question-and-answer session. [Operator Instructions] Our first question is from Andrew Liesch from Piper Sandler. Go ahead.

Good afternoon, everyone. So Matt, you were just talking about the fee income quarter-over-quarter; NSF fees from upward adjustment there, and then other loan fees and brokerage income rose but mortgage down a little bit, maybe from seasonal factors there. If I just look at the fee income going forward; is this a good run rate to build off of? It seems like what some of the changes you guys have made that your fee income should be higher than it has been in previous years?

Well, we're hoping that the NSF charges will hold up with the fee increase. We always do see some seasonality on that in the March quarter, especially; so we'll be mindful of that. It's been a pretty good year so far for mortgage originations; some of our servicing has taken a hit with refi activity but I think we're relatively optimistic, that should continue and we've got no - a good start on the brokerage and insurance business, so we should be building from that as well.

Great. And then just following up on the margin; I think in the last conference call you guys referenced some higher cost CDs that you might have paying off earlier - early this year which could provide some funding relief. How do you expect [indiscernible] margin to trend from this 356 level?

Well, it's not just CDs, we've made some concessions on money market pricing and basically guaranteed some rates a year ago when we were crunched for funding a little bit more than what we are right now. But those new roll-off somewhat during the March quarter and we should see some cost of fund relief. I'd say 3-4 weeks ago, we would have probably thought to look more optimistically about margin for the March quarter but we're seeing some additional loan pressure at this time; what we're seeing in the treasury market right now may cause some of that to continue or even be more aggressive loan pricing on the other side of that. So, I think at this point we'll be happy to maintain margin in the March quarter, especially when you consider it the 90-day quarter, we always struggle a little bit with that on the reported number as well. But then we should have seen the peak on cost of funds, we should continue to see some benefits that I should say going into the March quarter.

Great, that's very helpful. I will step back. Thanks.

Thanks, Andrew.

[Operator Instructions] Our next question is from Kelly Motta from KBW. Go ahead.

Hi guys. Thank you so much for taking my question. I thought I'd maybe start off - I think, Matt, in your prepared remarks you've mentioned being more active in the investment portfolio. Wondering any strategies are implementing there and how we should be thinking about maybe building securities as a percentage of average earning assets? Thanks.

Yes, nothing is really novel in terms of the investments we're going into, it's just been a little faster growth in the portfolio this year-to-date compared to what we've typically pursued. I don't think it will be anything that moves the needle on our overall investment yield.

Okay, and then - and then, the size; should we kind of keep it at this 9% of average earning assets than kind of where you were last quarter? Is that good or…

Yes, I think modeling [ph] just to grow along with our overall balance sheet. It might lag a little bit in the second half of the year, especially if this interest rate environment continues.

Got it. And I - I know you mentioned the pressure on loan yields; I was wondering if you could provide more color on what you're seeing in your markets and how pricing is trending in the competitive landscape?

We've seen increased competition primarily in our West region where loan pricing has become a lot more aggressive than what it had been. We're looking at a lot of deals, but we're losing a lot more than what we're getting; deals of larger size, no. Overall, I think that - for the quarter, it's going to be basically flat on margin to slightly positive.

Thanks. Thanks for that, Greg. And then, maybe on expenses; it looks like you had an increased provision for off balance sheet in the expenses there. Excluding that is that a good run rate to build off of kind of around the $30 million dollar range?

Well, we don't anticipate having another loss of the disposition of branches acquired. So that will be one thing we won't have.

Kelly, we always do see a little bit more cost pressure in the March quarter with compensation expense. We generally do a lot of our annual legitimates [ph] in the month of January; so that always hurts us a little bit in the first quarter. I think otherwise, most of our expenses should remain pretty steady.

Great. And then lastly, the amount of the FDIC benefit you had this quarter?

We should be running 1.60, 1.70 [ph] a quarter on it.

Great, thank you.

You're welcome.

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

Okay. Thank you, Kate. And thank you again, everyone for joining us. We appreciate your interest and we'll talk with you again in three months. Thanks.

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