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Southern Missouri Bancorp Inc (SMBC) Q4 2019 Earnings Call Transcript

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Southern Missouri Bancorp Inc (NASDAQ: SMBC)
Q4 2019 Earnings Call
Jul 23, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Matt Funke. Please go ahead.

Matthew T. Funke -- Chief Financial Officer

Thank you, Ben, and good afternoon, everyone. This is Matt Funke, CFO with Southern Missouri Bancorp. The purpose of our call today is to review the information and data presented in our quarterly earnings release dated Monday, July 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 thank you to all for joining us today. I want to start by reviewing the preliminary results highlighted in the quarterly earnings release. The quarter ended June 30, 2019 -- I'm sorry, June 30, 2019 is the fourth quarter of our 2019 fiscal year. So we earned $0.81 diluted in the June quarter, that is up $0.05 from the linked March quarter, and it's up $0.18 from the $0.63 diluted that we earned in the June 2018 quarter. For the full fiscal year, these preliminary earnings showed $3.15 per diluted share, that is up $0.76 from the $2.39 in the prior fiscal year.

Our net interest margin in the fourth quarter was 3.77%, and that number includes about 12 basis points of contribution from fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits were about $615,000 in dollar terms. In the year ago period, our margin was 3.72%, of which 8 basis points resulted from fair value discount accretion or $358,000. And the reason for the increase year-over-year is primarily the first commercial for our Gideon Bancshares acquisition. So on what we see as a core basis, then our margin was up by about 1 basis point comparing the June 2019 quarter to the June 2018 quarter. Our core asset yield was up 43 basis points, roughly equal to the increase in our core cost of deposit, but our total core cost of funds is up just less than 42 basis points, as we saw some benefit this quarter from reduced wholesale funding.

Compared to the linked March quarter, when our net interest margin was 3.73% and we had 13 basis points of benefit from discount accretion, this would indicate that our core margin was up 5 basis points. However, if we take into account the number of days in the quarter, the impact on that measurement because we figure our annualized net interest margin simply by taking our quarterly figure and multiplying by four. We think that methodology provides a lift of a few basis points in the 91-day June quarter as compared to the 90-day March quarter. Adjusted for that day count, we would have put the improvement in the margin on a core basis at closer to 1 basis point.

Non-interest income as a percent of average assets annualized with 68 basis points, which is 8 basis points lower than the same quarter a year ago, and it's down 4 basis points from the linked March quarter. In the current quarter, we had no gains on the sale of AFS securities, that's compared to gains of $244,000 in the linked quarter, and $43,000 in the same quarter, one year ago.

Other non-core items in the linked quarter totaled a little more than $200,000. So compared to the linked quarter, we'd say our core non-interest income as a percentage of average asset improved by about 4 basis points, but did remain about 7 basis points below the same quarter a year ago. Most of that decrease is attributable to a swing from a positive adjustment to the fair value of our mortgage servicing right at the prior year end to a negative adjustment this year.

Non-interest expense was up 13.3% compared to the same quarter a year ago and down 3.1% as compared to the linked quarter. In the same quarter a year ago, we had $149,000 in mergers and acquisitions expenses, with none in the current period. Core deposit and tangible amortization is a bit higher currently at $441,000 this quarter, and we had a small recovery of provision for off balance sheet credit exposure $46,000, as compared to a larger recovery in the same quarter a year ago, $162,000.

In the linked quarter, we had some unusual expenses related to the establishment of the wealth management division, and $243,000 in M&A charges. As a percentage of average assets, non-interest expense was down 10 basis points from both the linked quarter and the same quarter a year ago to 2.32%. But if you exclude M&A and other non-recurring expenses, and tangible amortization provision for off-balance sheet credit exposure, we would calculate that our operating non-interest expense as a percentage of average assets is down 1 basis point from the linked March quarter, and down 9 basis points from the June quarter of last year, as we continue to improve efficiency following the last several acquisition.

Our effective tax rate was little changed at 19.7% a year ago in the June quarter, following the December 2017 passage of the tax bill, including a reduced federal income tax rate for 2018. We were administratively subject to a 28.1% federal income tax rate due to our June 30, tax year end. Beginning in the first quarter of this current fiscal year, we were able to recognize the full benefit of the lower 21% federal rate.

Moving over to the balance sheet, loan growth increased slightly to $23 million in the June quarter from $22 million in the March quarter. The figures over the last six months are very similar in dollar terms to our result from January -- a year ago, that we saw a little more of a seasonal tilt in the growth toward the June quarter a year ago.

Available for sale securities increased just a bit since March 31, as we did not view market opportunities as favorably as we would have hoped. Total assets increased about $38 million in the June quarter, attributable to loan, securities, and cash equivalent growth. For the full fiscal year, total assets are up about -- I'm sorry, about $328 million attributable and large part to the Gideon acquisition, which did include $218 million in total assets, although we liquidated a good amount of their securities, as we noted on last quarter's call.

Gross loans were up almost $285 million for the fiscal year, with $144 million of that attributable to balances acquired from Gideon, so the remaining $141 million in organic growth could represent just a little less than 9% growth for the year. Deposits were up a little less than $20 million in the June quarter, slowing from a more robust March quarter. Brokered deposits were down $12.6 million this quarter. So on a core basis, we were happier with that result. And though it's down from the core March growth pace, it's in line with what we typically expect our drop off and deposit growth to be from the March to June quarters.

For the fiscal year, we are up $143 million outside of the Gideon acquisition, and just under $40 million of that total is brokered growth. Excluding brokered deposits and the acquisition, about 70% of our growth came from time deposits, growing at a rate of just under 14%. Now, maturity deposits excluding brokered funding and the acquisition grew at just over a 3% rate. A lot of that tilt toward time deposits is the result of our depositors migrating from non-maturity funding and the CDs, taking advantage of higher rates available during the fiscal year. Combined between the two, we put core deposit growth at a little better than 6.5% for the fiscal year.

Federal Home Loan Bank advances were up about $6.5 million in the June quarter, following a significant reduction during the March quarter. Average balances declined from the March quarter reflecting the significant March quarter reduction, and helped us with some funding cost pressures. From June 30, 2018, we reduced FHLB funding by almost $32 million or a little more than 40%.

Non-performing loans dropped slightly this quarter end, down almost $1.7 million or about 10 basis points as a percentage of total loan, and they stand at 1.13%, not quite doubled our prior year end figure, following the Gideon acquisition. Non-performing assets at quarter end were $24.8 million, down almost as much as our NPLs. And as a percentage of total assets, NPAs are 1.12%, down from 1.21% at March 31, and up from 69 basis points at June 30, one year ago. The bank's credit management team continued to make progress with acquired relationships to improve delinquencies, and we expect that, that will soon translate to some more significant improvement in non-performing loan and asset figures.

Net charge-offs for the quarter were 2 basis point annualized, that's unchanged from the December and March quarters, and it's equal to the June quarter a year ago. With loan growth a little changed from the March quarter, our provision increased slightly to $546,000 as compared to $491,000 in the linked quarter. A year ago in the June quarter, we provisioned almost $1 million, which was 26 basis points on average loans. This quarter's provision was 12 basis point.

If you look at those figures on a trailing 12-month basis, our provision to average loans in the last four quarters is at 12 basis points, and our charge-off to average loans are at two basis points. A year ago, those figures would have been a provision of 20 basis points and net charge-offs of 2 basis points.

The allowance as a percentage of our gross loans was up 2 basis points to 1.07% at June 30, 2019, as compared to 1.05% at March 31. A year ago, before the Gideon acquisition, the ALLL was 1.15% on gross loan. Acquired loans are subject to fair value adjustment at the time of acquisition, and we do not hold an allowance against those loans, unless we subsequently identify impairment. And that explains most of the decrease in our ALLL in percentage terms compared to the year ago period.

With that, I've concluded my prepared remarks. And I'll introduce our CEO, Greg Steffens.

Greg A. Steffens -- President and Chief Executive Officer

Thank you, Matt. For the quarter, we are pleased with loan growth for both the fiscal year and the quarter as it exceeded our initial expectations. Exclusive of the Gideon acquisition, organic loan growth for the fiscal year totaled $141 million or nearly 9%, with growth of $23 million in the June quarter. We originally projected organic loan growth for the year to come in at 6% to 8%, we revised our estimates to 8% to 10% last quarter.

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 $81 million in non-residential, non-owner occupied real estate, $61 million in commercial loans, $33 million in multi-family, $32 million in owner occupied non-residential real estate, $22 million in ag real estate, and $11 million in one-to-four-family. With this growth and changes in our loan portfolio, our CRE concentration at the holding company level moved from 233% at June 30, '18 to 260% at 03/31 '19, and remained slightly below 260% as of June 30.

Our organic loan growth continues to be centered primarily in our East and West regions, which grew by $67 million and $76 million, respectively for the year. We're also pleased with the volume of our originations, which totaled $124 million during the quarter and $606 million for the fiscal year, which is up from $550 million in the prior year.

Now, I'd like to provide an agricultural upstate. Agricultural real estate balances remained flat over the quarter, while agricultural production loans grew $11 million for the fiscal year. Ag real estate balances and production balances grew about $22 million and $14 million, respectively, primarily due to the Gideon acquisition. Our agricultural customers' 2019 crop year started slowly due to wet and cool weather conditions, and has remained wet for most of the year, leaving our anticipated harvest days to be approximately one month later than normal.

Given these delays, it's hard to assess where we are in anticipated yields, and we are just beginning to make our farm inspections at the present time, and to ascertain how much of the anticipated crop has been booked by our customers. Generally, our farmers were able to plant approximately 90% of their acreage with the remainder not planned due to wet conditions. But there was also some transition from their anticipated crop mix to include more soybeans, due to the planting delays and market prices. Our farmers' financial performance issue will be largely determined by upcoming weather, crop prices and government payments will be made. Overall, we have less clarity than normal on our agricultural loan portfolio at this time.

I would also like to add to Matt's comments regarding our non-performing loans. Our analysis have been elevated from historical levels since the Gideon acquisition. We've been diligently working on resolving these credits and we are anticipating the resolution in several larger ones during the current quarter, which will move us closer to our historic non-performing asset ratios. We have also seen improved payment performance on our loan portfolio, as loans 30 days or more past due, dropped from $19.7 million or 1.07% at March 31, 2019, to just $11.6 million or 0.62% at June 30.

Our loan pipeline for loans to be funded in 90 days totaled $33 million, which is similar to both last quarter and the prior fiscal year ends. The pipeline is diverse in nature and similar to our existing portfolio base. Based on our pipeline and seasonality of our agricultural portfolio, the recent drop in treasury rates, some anticipated reductions in loans acquired in the Gideon acquisition, and a reduction in loan demand, we anticipate our loan portfolio to grow slightly below historical averages.

Pricing pressures in the marketplace have increased with the recent drop off in loan demand and the drop in interest rates. Due to recent softening in loan demand, the interest rate outlook and again some of the acquired reductions and acquired loan balances, we're expecting slower loan growth for the fiscal year in the 5% to 7% range.

Deposit growth also slowed to approximately $20 million during the fourth quarter of our fiscal year, bringing deposit growth for the year to $103 million, excluding the Gideon acquisition and brokered funding. Non deposit -- non-maturity, the deposits grew $32 million, or approximately 3% with $25 million occurring during the June quarter.

Our internal goal for non-maturity growth was 6% to 8%, but we fell below this target primarily due to increase and continued migration at deposits from non-maturity accounts into CDs. This migration, as well as our marketing efforts, led to greater than anticipated CD growth, which exceeded historical growth rates. For the fiscal year, CDs grew by $71 million or 13%, with $7 million occurring in the June quarter. We're especially place with deposit growth during the second half of the fiscal year, when deposits grew by $94 million. Core deposit growth continues to be challenging and will likely continue to be so due to aggressive competition from both banks and investment companies.

We expect continued deposit growth in both non-maturity and CDs for the fiscal 2020 year. We are projecting non-maturity and CD growth of 5% to 7%. We announced the acquisition of First Commercial Bank June 12, of last yea. We completed the acquisition on November 21, and completed the data conversion December 7. To date, the transitions went well and anticipated cost savings have been achieved. Overall, we're pleased with the acquisition and the loan, and deposit of retention.

We have looked at a number of potential partners over the last quarter and submitted several bids, in both rural and urban areas. The price has been quite competitive. We'll continue to evaluate potential activity in our markets where 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 for acquisitions that offer good core deposit basis to provide for long term growth.

We will continue to target companies in the $250 million to $500 million range, but will consider smaller or larger companies depending upon their strategic benefit for us, both financially and geographically. We're committed to being patient and we'll not chase deals. We announced the stock repurchase plan for 450,000 shares of our stock in November of 2018. During the last quarter, we repurchased 35,351 shares of our stock. 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 a region.

We will continue to evaluate the potential use of capital through stock repurchases versus other options to deploy capital and provide for long term shareholder returns. Of note, we also did adopt the 10b5-1 plan during the current quiet period and repurchase approximately 10,000 shares under the plan through June 30, 2019.

That concludes my remarks.

Matthew T. Funke -- Chief Financial Officer

Okay. Ben, at this time we'd like to take any questions. So if you would remind our listeners how to queue for question.

Questions and Answers:

Operator

Okay. Thank you. [Operator Instructions] Okay. Our first question comes from Andrew Liesch of Sandler O'Neill. Please go ahead.

Andrew Liesch -- Sandler O'Neill -- Analyst

Hey, guys.

Greg A. Steffens -- President and Chief Executive Officer

Hello, Andrew.

Andrew Liesch -- Sandler O'Neill -- Analyst

Can you just give a little outlook on how you think the margin is going to perform from here with the expectation of the Fed cutting rates next week?

Greg A. Steffens -- President and Chief Executive Officer

Andrew, we're -- we know that we'll have loans that we can identify reprice. We don't know exactly what will happen on the funding side. We've already seen some reduction in competition for time deposit, but we still have time deposits that are rolling over that are a year or more older and would have originally been priced at fair amount lower. Also, to achieve some of our deposit growth over the last six months, we've made some short -- rather short term commitments on rates. But that will take a little bit of time to roll through as well before we could make any adjustments on that pricing. So realistically, we would expect it to provide some pressure on the margin over the medium term, but probably not that significant beyond six months or so.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay. So it sounds like the deposit cost might peak here in your mid-late this quarter or some point in October?

Greg A. Steffens -- President and Chief Executive Officer

Yes, that's probably a really good guess.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay then just on the provision here, seems like you guys are trying to get a handle on credit, and working out some of the loans acquired from Gideon. But if loan growth is going to be a little bit slower, should and then with working on some non-performers, should the provisions also be maybe lower than you've historically provided, kind of something similar that you did here in the fourth quarter?

Greg A. Steffens -- President and Chief Executive Officer

So thinking through that, we -- if we see loan growth come in lower than what it otherwise would, yes, we would expect provisioning to be less, everything else equal. We do have dollars that have been acquired and are still subject to fair value accounting that has those dollars kind of -- are replaced by organic production. Even renewals with those same customers, we have to go ahead and make allowance provision at that point on those dollars.

So we don't want to give you a number to guide toward on it. But assuming charge-offs remain low, we would expect that the provision would be relatively consistently low.

Andrew Liesch -- Sandler O'Neill -- Analyst

Got you. That's helpful. You've covered all my other questions. I'll step back.

Greg A. Steffens -- President and Chief Executive Officer

Thanks.

Matthew T. Funke -- Chief Financial Officer

Thank you, Andrew.

Operator

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

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

Hi, Greg and Matt, thanks for the question.

Greg A. Steffens -- President and Chief Executive Officer

You're welcome, Kelly.

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

Hey, so you referenced Greg in your prepared remarks about the drop in loan demand. I was wondering if you could give us an overview, maybe if there's any certain categories that may be driving it and why you think that is?

Matthew T. Funke -- Chief Financial Officer

We're saying a lot -- we are having a lot less inquiries, particularly in the commercial real estate space, where we're just not having the levels of interest that we had before. We have less loans that are in the CRE pipelines. Our residential activity has actually been increasing, but more where we loan our dollars is in more of the commercial real estate, commercial arena. And we're just not having the level of demand that we've had in prior periods.

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

Okay. And then with the outlook for loan growth slowing, and I know you mentioned that you established a 10b5-1 plan this quarter. Is it fair to assume that if that remains the case, that you may be more active with the repurchases like you had started this last quarter?

Matthew T. Funke -- Chief Financial Officer

Yes. In the prior two quarters, when we had a stock repurchase plan, we hadn't repurchased any shares. We started repurchasing shares this quarter and we're going to continue to evaluate the best uses of our capital. And our capital ratios have been growing and we're definitely going to be running our evaluations on where and what level of stock repurchases may be appropriate.

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

Okay. Thanks. And then I was hoping, I really appreciated the overview on ag that you gave in the prepared remarks. I was hoping, do you have, where your ag portfolio is now at 630? [Phonetic] And I had read about -- I think you you alluded to it in your prepared remarks, maybe some increased flooding in the Missouri area. It would be interested to see, how -- if that's directly been impacting your customers. And I think you referenced 90% had been planted if the expectation is for the harvest to come in lower. I know you had said there's less clarity this quarter. But any color would be really helpful.

Matthew T. Funke -- Chief Financial Officer

We have --we really have not had too much problem with flooding for most of our market area. We did have some areas where that 90% figure I referenced, that 10% is largely some ground in the Mississippi River bottom that never was planted to begin with, so never got dry enough to plant, so just wasn't planted. So really, -- as far as flooding of plant that ground, [Phonetic] we've had very little of any of that. There's areas where yields might have been hampered by water being over a very short period of time, that really flooding, yes, had been there severe in our area as a lot of other parts of the state of Missouri.

Does that answer enough for what you're looking for?

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

Yes. No, that's helpful. And do you the dollar amount of ag loans as 630? [Phonetic] I think you had referenced how much it was up, but I don't have the quarter-over-quarter in front of me.

Matthew T. Funke -- Chief Financial Officer

I think, Greg had referenced the -- probably the growth for the year.

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

Okay. Yes.

Matthew T. Funke -- Chief Financial Officer

But the growth for the quarter would have been probably in the $10 million range.

Greg A. Steffens -- President and Chief Executive Officer

Yes. It is $10 million or $11 million.

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

So where the loan balances -- ag loan balances stand?

Matthew T. Funke -- Chief Financial Officer

To -- including the real estate portion of it, probably 270-ish. [Phonetic]

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

All right, that's helpful. Thank you. And...

Greg A. Steffens -- President and Chief Executive Officer

Ag real estate was 182 and ag operating lines is $96 million.

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

Thank you so much. Maybe last one you referenced that there is a $200,000 of non core fees this quarter, what was that?

Matthew T. Funke -- Chief Financial Officer

The non-core purchase mortgage servicing.

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

Okay.

Matthew T. Funke -- Chief Financial Officer

So for the prior quarter, is that what you're asking?

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

Okay. Maybe I misunderstood. I thought you had said $200,000 this quarter, but perhaps it was higher quarter.

Matthew T. Funke -- Chief Financial Officer

If I did, I misspoke. It was in the prior quarter.

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

Got you. Okay. Thanks.

Operator

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

Matthew T. Funke -- Chief Financial Officer

Okay. Thank you, Ben, and thank you to everyone for participating. We appreciate your interest. And we'll speak again in a quarter. Have a good day.

Greg A. Steffens -- President and Chief Executive Officer

Thank you, all.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Matthew T. Funke -- Chief Financial Officer

Greg A. Steffens -- President and Chief Executive Officer

Andrew Liesch -- Sandler O'Neill -- Analyst

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

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