U.S. Markets close in 5 hrs 11 mins

Edited Transcript of SMBC earnings conference call or presentation 23-Oct-18 8:30pm GMT

Q1 2019 Southern Missouri Bancorp Inc Earnings Call

POPLAR BLUFF Nov 8, 2018 (Thomson StreetEvents) -- Edited Transcript of Southern Missouri Bancorp Inc earnings conference call or presentation Tuesday, October 23, 2018 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Greg A. Steffens

Southern Missouri Bancorp, Inc. - President, CEO & Director

* Matthew T. Funke

Southern Missouri Bancorp, Inc. - Executive VP & CFO

================================================================================

Conference Call Participants

================================================================================

* Andrew Brian Liesch

Sandler O'Neill + Partners, L.P., Research Division - MD

* Kelly Ann Motta

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the Southern Missouri Bancorp, Inc. First Quarter Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Matt Funke. Please go ahead.

--------------------------------------------------------------------------------

Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [2]

--------------------------------------------------------------------------------

Thank you, Brandon. Good afternoon, everyone. This is Matt Funke, CFO with Southern Missouri Bancorp. The purpose of this call is to review the information and data we presented in our quarterly earnings release dated Monday, October 22, 2018, and to take your questions.

We may make certain forward-looking statements during today's call. We refer you to our cautionary statement regarding forward-looking statements contained in the press release.

So thanks again for joining us today. I'll start by reviewing the preliminary results highlighted in the quarterly earnings release. And as a reminder, the September quarter is the first quarter of our 2019 fiscal year.

We earned $0.76 diluted in the September quarter. That figure is up $0.13 from the linked June quarter, and is up $0.20 from the $0.56 diluted that we earned in the September quarter a year ago. We reported a larger amount of discount accretion from acquired loan portfolios in the current period as we worked through some relationships we had identified as impaired from the Capaha and Peoples acquisitions. We had a modest amount of M&A expenses in the current period, in the linked period and in the year ago period, so really not much of a difference-maker is that regard.

And finally, this quarter is also the first in which we realized the full impact of the lower corporate tax rate enacted in December 2017, and we saw a decrease in the effective rate compared to where it ran in the second half of the fiscal year ended June 30, 2018.

This was the second full quarter following our acquisition of Southern Missouri Bank of Marshfield, and the impact of discount accretion on their loans and time deposits improved net interest income by $92,000 in the current quarter, that's up a little bit from the $79,000 in the linked quarter and, of course, with no comparable item in the year-ago period.

The similar items from the Capaha acquisition contributed $740,000 in the current quarter. That's up significantly from the $159,000 in the linked June quarter and up from $231,000 in the year ago period.

The current quarter impact was higher primarily due to resolution of an impaired relationship with a larger credit mark.

Finally, the similar items from the Peoples acquisition improved net interest income in the current quarter by $358,000. That's compared to $120,000 in the linked June quarter and $234,000 in the September quarter a year ago. We had a couple of impaired -- acquired relationships, which repaid during the current quarter from that acquisition also.

We expect this component of net interest income to be significantly lower in the future. The total between the 3 acquisitions accounted for an additional $1.2 million in net interest income, which added about 27 basis points to our reported net interest margin. The impact in the linked June quarter was $358,000, which we equated to about 8.5 basis points on margin and in the September quarter a year ago, we reported $465,000 in this component of net interest income, which was about 12 basis points on margin.

Our total margin in the first quarter was 3.92%, of which, again, 27 basis points was fair value discount accretion. A year ago, our margin was 3.79% in the September quarter, of which, 12 basis points, was from fair value discount accretion. So on what we would view as a core basis then, our margin was -- our core margin was about down about 2 basis points, comparing the September 2018 quarter to the September 2017 quarter.

In that time, our core asset yield moved up 25 basis points. Our core cost of deposits moved up 27 and our total core cost of funds moved up by 29. Compared to the linked quarter when our net interest margin was 3.72%, and we had about 8.5 basis points of benefit from discount accretion, that would show that our core margin is up by 2 basis points, but we have a 92-day quarter in September as compared to a 91-day quarter in June, and that impacts that measurement slightly when we annualize that. And on a core basis, we would probably assess that we'd move down by about that same 2 basis points linked sequential quarter versus year-over-year, exactly the same as year-over-year, I should say.

Net interest income, as a percentage of average assets annualized, was 72 basis points, that's down 4 basis points from the same quarter a year ago and down 3 basis points from the linked June quarter after excluding a gain on AFS securities we recognized in that quarter. We continue to see good improvements in bank card interchange income. Net NSF charges are growing a little more slowly than our assets, and it was a tougher quarter for loan late charges, loan servicing income, gains on secondary market loans and other loan fees. The September quarter a year ago was notably strong on some of those items.

Noninterest expense was up 6.5% compared to the same quarter a year ago, which would have been before the Marshfield acquisition, but we would still have had some cost saves yet to be realized from the Capaha acquisition at that time last year. If you exclude M&A, intangible amortization and provision for off-balance sheet credit exposure, which is a small charge in the September quarter compared to a larger recovery in the June quarter this year, we're down about 0.3% over the linked quarter.

As a percentage of average assets, noninterest expense is down 7 basis points year-over-year to 2.41%. But if you exclude the $175,000 in M&A expenses, our intangible amortization and the seasonal swings and our provision for off-balance sheet credit exposure, we calculate an operating noninterest expense as a percentage of average assets to be down 6 basis points from the linked June quarter and down 7 basis points from the September quarter last year, so improvements in efficiency that we're happy to see there.

Our tax rate for the September quarter came in towards the top end of our projected range at 19.7% as the large amount of discount accretion pushed that higher as pretax income moved higher in relation to our tax advantaged investments.

Moving over to the balance sheet. We saw loan growth pick up as we generally expect to during the September quarter. Greg will have additional comments on the composition of loan growth in his remarks. But hitting the highlights, we saw total assets increase by $57.5 million for the quarter and assets are up $180 million in the last 12 months, which would include the Southern Missouri Bank of Marshfield acquisition, which brought about $86 million in assets onto our balance sheet. Gross loans were up $62 million for the September quarter, and they're up $177 million over the last 12 months, which also would have been impacted by the Marshfield acquisition, with $68 million in loans at fair value, although we've had some pay downs in that acquired loan book in the interim.

Deposits were up $11.2 million in the September quarter and they're up more than $119 million over the last 12 months, of which, Marshfield again accounted for about $68 million. In the current quarter, we issued additional traditional brokered deposits, increasing that funding source by about $39 million, including both time and nonmaturity brokered funding.

Public unit deposits were down this quarter, some of which is seasonal and some of which were time deposits just put out for bid, and public unit deposits were down by about $22.5 million in total.

We generally do expect seasonal outflows of public unit deposits in the June and September quarters. FHLB advances were up almost $42 million in the September quarter, mostly in overnight funding. Nonperforming loans moved back lower this quarter by about $1.6 million to a total of just over $7.5 million. In percentage terms, NPLs moved down 12 basis points to 0.47% on gross loans compared to 0.59% at June 30, 2018. They are up, however, from 0.18% at September 30, 2017.

Nonperforming assets at September 30 were $12.5 million, down a little more than $0.5 million since June 30, 2018, and up from $6 million at September 30, 2017. Again, as a percentage of total assets, the NPAs are 64 basis points, down from 69 basis points at June 30 but up from 34 basis points September 30 a year ago.

The decrease in NPLs this quarter was attributable to principal repayment on one nonaccrual relationship and migration to foreclose property on another, with NPAs moving down less because that specific foreclosed property was not liquidated by quarter end.

Net charge-offs for the quarter were 3 basis points annualized, as compared to 1 basis point in the linked June quarter and also 1 basis point in the September quarter a year ago. Despite our strong loan growth, provision for loan losses dropped this quarter to $682,000 as that pay down mentioned on the nonaccrual relationship allowed us to reduce some of the allowance attributable to those loans. A year ago in the September quarter, we expensed a provision of $868,000. The provision in the current quarter represented a charge of 17 basis points annualized as a percentage of average loans, down from 26 basis points in the linked June quarter and down from 24 basis points in the September quarter a year ago.

And finally, the allowance as a percentage of gross loans was down 1 basis point to 1.14% at September 30, '18, as compared to 1.15% at June 30. A year ago, in September, which was then shortly after the Capaha acquisition, the ALLL was 1.12% on gross loans.

That concludes my prepared remarks on the financials. And I'll turn this over to Greg Steffens, our CEO.

--------------------------------------------------------------------------------

Greg A. Steffens, Southern Missouri Bancorp, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Matt. I'm going to hit a little bit about loans and deposits and then some things on M&A today. Net loan growth for the September quarter, the first quarter of our fiscal year, totaled a record $61 million or 3.9%. This level of growth did exceed our prior expectations as well as exceeding our loan growth of $52 million in the same quarter of the prior year. The September quarter is typically our strongest quarter for growth and will likely be so again this year. Growth was spread over several loan types with the largest changes being $23 million in nonresidential, nonowner-occupied real estate, $17 million in commercial business type loans and $10 million in advances on agricultural lines of credit.

In addition, our net growth was aided by reduced prepayments in our commercial loan portfolios as we experienced fewer owners selling their properties as well as less refinancing within our portfolio from other lending institutions when compared to recent quarters. With this growth and changes in our loan portfolio, our CRE concentrations moved from 245% of capital at 6/30/2018 to 257% at September 30. But this is still below our CRE levels of 272% that were in place at September 30, 2017.

Loan growth was centered primarily in our East region and totaled approximately $44 million. Our East region includes our recently acquired markets in the Cape Girardeau area and then as well as our Poplar Bluff market and our agricultural centers in Sikeston and Dexter. We also had growth in our West region, totaling $11 million, which includes the Springfield market area. We're pleased with the volume of our originations over the quarter, which totaled $177 million, which is up from $137 million in the same period of the prior year and $127 million in the sequential quarter.

Next, I would like to provide a little update on our agricultural portfolio and experience this quarter. Our ag real estate balances dropped approximately $5 million over the quarter. The decline is largely attributed to us being able to move an acquired impaired loan out of the bank, which contributed to the aforementioned recovered credit marks that Matt went over. Also as stated previously, our ag operating lines increased $10 million over the quarter. Our agricultural customers have completed approximately 65% of their harvest, which is roughly 3 weeks behind where we were at this time last year.

For harvested crops to-date, yields have exceeded our estimates from both our internal crop inspections and as well as from our original underwriting when the loans were underwritten this spring. The cotton, rice and soybean crops have generally done very well, while the corn crop has just been average. On a negative note, current market prices are presently below levels where we completed our underwriting, but this should be mitigated for our farmers by better-than-expected production and the anticipated receipt of government subsidy payments from the Market Facilitations Program, which was basically the government program enacted in response to the tariffs placed on soybeans and other agricultural crops.

In addition, our farmers' increased use of contracting their crops earlier this year should also be a mitigating factor to the current price levels. Based on our preliminary review of our farmers to-date, we believe that they will have a better-than-average year, and we expect our agricultural book to perform well this year, and we expect no material credit issues within the agricultural book.

Looking at our loan pipeline for loans to be funded within the next 90 days, it presently totals $115 million, which is above the $85 million where we stood 1 year ago and up from $81 million last quarter. The pipeline remains diverse in nature and is quite similar to our existing portfolio mix. Based on our pipeline and recent reductions in loan prepayments, we should experience reasonable growth this quarter. Our primary concerns about current market pricing in the marketplace for both rate and loan terms has lessened to a degree in most of our market areas.

Due to our faster-than-expected loan growth in the September quarter and a strong loan pipeline, we anticipate our annual loan growth to be at the upper end of our 6% to 8% forecasted range.

Turning to deposits. Our deposit growth for the quarter came in at $11 million. As we predicted last quarter, deposit growth was more challenging during the September quarter, which has traditionally been our weakest quarter of the year for deposit growth. Non-maturity deposits dropped $36 million this quarter as our public unit deposits declined $20 million and retail deposits dropped $16 million. These declines were attributed to several factors, including seasonality of deposit flows in our agricultural communities as well as our municipal units and public units. Also, fierce deposit competition for deposit products of all types and an increased migration of deposits from checking accounts to money market accounts into CDs contributed to some of these declines.

During the September quarter, retail CDs grew $10 million while our use of brokered CDs deviated from our recent trends and increased $38 million. We do anticipate nondeposit growth rates to improve this quarter due in part to the aforementioned seasonality in deposit flows and enhanced deposit gathering initiatives and training. But our 6% to 8% growth target for non-maturity deposits may be tough to attain given current market conditions and competitive factors.

Turning to mergers and acquisitions. Our Southern Missouri Bank of Marshfield acquisition, which was completed in February and converted into to our systems in March. Most of our anticipated cost savings have been recognized and we are pleased with our entry into the market and have been well received based upon deposit activities within that market. We also announced the acquisition of First Commercial Bank on June 12. We have received approval from the Federal Reserve and are working through the merger process. We anticipate closing the transaction and completing the data conversion in the current quarter.

We continue to have opportunities for review of potential additional partnerships. We have passed on several of these opportunities recently but we continue to look for the right fit. We continue to target companies within our general market footprint and in the $250 million to $500 million asset range. But we will continue to consider smaller or larger companies depending upon their strategic benefit for us both financially and geographically. Our ideal partner would provide additional liquidity as well.

That concludes my remarks.

--------------------------------------------------------------------------------

Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Well, thank you, Greg. At this time, Brandon, we'd like to take any questions that our participants may have, so if you'd remind folks how they may queue for questions, we'll do that at this time.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Andrew Liesch with Sandler O'Neill.

--------------------------------------------------------------------------------

Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [2]

--------------------------------------------------------------------------------

I'm just wondering if you can provide some thoughts on your outlook on the core margin. It sounds like deposit competition's getting tougher and you may need to fund it with some brokered sources, maybe at some higher cost there but also your loan growth and prospects there seem pretty good. So I'm just kind of curious, if you roll those things to the balance sheet, where do you think the core margin can go from here?

--------------------------------------------------------------------------------

Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [3]

--------------------------------------------------------------------------------

Well, we want to be optimistic. Greg mentioned that the loan pricing outlook was maybe a little relief here in the most recent quarter. I know other companies are experiencing funding pressure just like us, so maybe we'll have a little more rational pricing on that side. But you're right to think about cost of funds, too, and whether we can keep pace on the asset side. We're going to be hopeful to maintain but we don't have any real specific guidance for you either.

--------------------------------------------------------------------------------

Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [4]

--------------------------------------------------------------------------------

Got you. And then just in the expense side, did you say that there were some merger charges this quarter -- or in your first fiscal quarter?

--------------------------------------------------------------------------------

Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [5]

--------------------------------------------------------------------------------

Yes, that's correct.

--------------------------------------------------------------------------------

Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [6]

--------------------------------------------------------------------------------

Okay. So then presumably those loans -- and then what do you anticipate recording here in your second quarter?

--------------------------------------------------------------------------------

Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [7]

--------------------------------------------------------------------------------

In M&A charges?

--------------------------------------------------------------------------------

Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [8]

--------------------------------------------------------------------------------

Yes, yes.

--------------------------------------------------------------------------------

Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [9]

--------------------------------------------------------------------------------

I don't have a number for you on that. We've been -- I'm remembering in the -- in the numbers here, we've been between $150,000 and $225,000 a quarter in each of these numbers that we're comparing between the year-ago period, the linked period to the current period, that's probably not going to be a huge number. I can't think of anything outsized with the pending acquisition that should hang up on them.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Kelly Motta with KBW.

--------------------------------------------------------------------------------

Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [11]

--------------------------------------------------------------------------------

So with the provision this quarter being a bit lower with the aforementioned pay downs of purchased credit impaired loans, about how much of the impact was -- did that have on the provision? And also, with kind of the workout of these impaired loans, is there more that could maybe come -- understanding that there is some volatility and lumpiness with this, that could perhaps impact accretion and your provision levels? Or was this kind of it here?

--------------------------------------------------------------------------------

Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [12]

--------------------------------------------------------------------------------

Well, lumpiness, I like it. I would say, if you went back to our loan footnote at the last -- at fiscal year-end, I think we had about $700,000 set aside on that specific relationship where we were able to release that. This was a very big quarter for growth, obviously, and so that weighed on the other side and wouldn't necessarily expect those -- we can't fund those, that many quarter-over-quarter. But in general, it's somewhat offsetting, I would say, between the growth and the relief on that one relationship.

--------------------------------------------------------------------------------

Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [13]

--------------------------------------------------------------------------------

Okay. So a provision at this kind of level, or maybe last quarter blended average, is kind of what we should expect sort of going forward knowing that growth is obviously very strong, like between the 17 basis point to 26 basis point type of thing from the prior 2 quarters?

--------------------------------------------------------------------------------

Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [14]

--------------------------------------------------------------------------------

That's been fairly consistent over the last several years as we've had limited charge-offs and fairly consistent loan growth over the years.

--------------------------------------------------------------------------------

Greg A. Steffens, Southern Missouri Bancorp, Inc. - President, CEO & Director [15]

--------------------------------------------------------------------------------

If we don't see any change in our credit portfolio metrics and we see loan production back off a little bit, I would anticipate that the loss provision would be no more than what it was this quarter.

--------------------------------------------------------------------------------

Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [16]

--------------------------------------------------------------------------------

Okay, that's helpful. And then with Gideon, I know -- I think you have the shareholder vote coming up very soon, do you still have -- you have the fed approval, do you still have state approvals to get? And basically, how soon after that can you close the deal in the quarter? And should we expect sort of an impact to next quarter's earnings from that? Or is that more of a 3Q '19? Is that more of the following quarter's income statement impact?

--------------------------------------------------------------------------------

Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [17]

--------------------------------------------------------------------------------

We're hoping to close sometime mid to -- probably, mid to late quarter, it probably will be a two-step closure with ownership coming before the bank merger. So I don't think it will be a huge item within the second quarter numbers but it should be positive and then we'd pick up a full quarter benefit in the March quarter.

--------------------------------------------------------------------------------

Greg A. Steffens, Southern Missouri Bancorp, Inc. - President, CEO & Director [18]

--------------------------------------------------------------------------------

Typically, the State of Missouri saves their approval for right prior to the actual acquisition. They have a very brief time period of when they issue their approval. So we anticipate no issues with that. Basically, it's more of a formality at this point.

--------------------------------------------------------------------------------

Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [19]

--------------------------------------------------------------------------------

Great. And if I could sneak in one more. You had talked about some deposit-gathering initiatives in your prepared remarks. I was hoping you could comment a little bit further on that and whether you've been running CD promotions that we've been seeing at a lot of other banks.

--------------------------------------------------------------------------------

Greg A. Steffens, Southern Missouri Bancorp, Inc. - President, CEO & Director [20]

--------------------------------------------------------------------------------

We don't do a lot of external promotions, so to speak. Our primary mode of advertising is digital. But we have done a lot more in getting our lending staff focused on the need for deposits, and then we have several training things to where -- we have started training to where -- we call it queue up training for ourselves. But basically, it's several procedures that we're putting in place to get people to be listening more to customers' needs and to be asking questions on a conversational basis, and we're getting better at doing the ask for additional business, and we do plan to see several of those things generate some additional deposit growth.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [22]

--------------------------------------------------------------------------------

Okay. Thanks again, Brandon, and thanks, everyone, for your interest, and we look forward to speaking again in 3 months. Thank you.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

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