Southern Missouri Bancorp, Inc.
Q2 2017 Earnings Call Transcript

Published: 25 Jul 2017

[Operator:]

Good afternoon. And welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. All participants will be in a listen-only-mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask question. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Matt Funke, Chief Financial Officer. Please go ahead.

[Matt Funke:]

Thank you, Phil, and welcome everyone. This is Matt Funke with Southern Missouri Bancorp. The purpose of our call today is to review the information and data we presented in our quarterly earnings release dated Monday, July 24, 2017, 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 such statement contained in the press release. So thanks again for joining us. I'll begin by reviewing the preliminary results highlighted in our quarterly earnings release. The June quarter is the fourth quarter of our 2017 fiscal year. We earned $0.49 diluted in the June quarter that is the same result from the June quarter a year ago and it's down $0.04 from the $0.53 that diluted that we earned in the linked March quarter. The current period includes some non-recurring items, which we'll touch on as we move through the areas of the income statement. Some were positive and some were negative. And the one-time expenses did outweigh the one-time benefit. So linked March quarter had some larger non-recurring benefits, which we discussed on last quarter's call and we'll try to highlight those as we move through the income statement also. On the balance sheet, the asset growth in the June quarter was primarily attributable to the mid-June acquisition of the Capaha Bank. Total assets were up $212 million and included loan growth of $172 million. Capaha made up $152 million on that loan growth and they were also primarily reason for most other asset category increases. Compared to June 30, 2016, gross loans were up $264 million and if you take out the $152 million of Capaha, we show an increase of $112 million or just under 10% for the year. The investment portfolio continues to grow more slowly outside of the increase attributable to Capaha for the quarter. The portfolio is up about 4% over the last 12 month. Deposits went up a $183 million in the June quarter with $167 million of debt attributable to the Capaha. Our public unit deposits which have been a source of growth for us over this fiscal year, they were actually down this quarter on an organic basis, although Capaha acquisition contributed about 12.5 million in new public unit monies. Similarly while we have grown in broker deposits during the fiscal year, we did not utilize them in the June quarter, although Capaha add about $18 million in that funding source remaining at June 30. For the year-to-date, our deposits are -- for the year, our deposits are up $335 million with $167 million coming from Capaha and $58 million coming from our legacy use of traditional brokerage funding. We did see good growth in public unit deposits this year with some of our public unit customers moving from our swept repurchase agreement into deposit accounts, which utilize over separate goal broker deposit arrangements. Equity was up during the quarter with the issuance of stock in the Capaha acquisition and also the completion of our aftermarket offering of common stock, both in mid June. Shares outstanding increased by more than 1.1 million, but our average shares outstanding during the quarter increased far less because both issuances were late in the quarter. Moving over to the income statement, we included common equity this quarter on our fair value discount accretion on loan and a smaller premium amortization on time deposits from our Peoples Bank acquisition. That acquisition is now three years old and recurring accretion will really not be too consequential moving forward. In the current quarter however that item jumped back up to $409,000 almost double where we were in the linked March quarter. June quarter of the prior fiscal year included a similar level to this quarter and the September quarter of our current fiscal year had even higher level, each of these instances were at increase like that as a result of resolution of particular purchased credit impaired loans. While we expect the impact of discount accretion from Peoples to continue to move lower in the coming quarters, we may still see some isolated increases as we continue to resolve a few individual impaired credits. Our net interest margin in the fourth quarter was 3.82% of which 12 basis points was the result of that fair value discount accretion. Another 8 basis points would be attributable to recognition of interest income on the payoff of loans, which we had carried previously on non-accrual status. In the year ago period, our margin was 3.73% of which 13 basis points resulted from the Peoples Bank, fair valued accretion. So what we would look at as a core basis when our margin was up 3 basis points comparing the June 2017 quarter to the June 2016 quarter. Our core asset yield is up 6 basis points and our core cost of funds is up 2. Compared to the linked quarter when our net interest margin was 3.64% and we had 6 basis points of benefit from the purchase accounting related to the Peoples acquisition. Else would indicate that our core margin is up 5 basis points, but we did note on our call last quarter that the March quarter is slightly negatively impacted how we annualize our quarterly figures. So we actually had to think quite that much improvement on a sequential basis if you would calculate that on a daily calculation. Non-interest income as a percentage of average assets annualized was 75 basis points. That is unchanged from the same quarter a year ago. But we did identify in the June quarter last year that we had about a 143,000 in non-recurring benefit primarily related to the sale of an interest in a low income housing, low income housing tax credit partnership. This quarter was the best quarter of our fiscal year. On a core basis, it’s up from the figure we posted in the linked March quarter if you exclude 343,000 in one-time benefit in the March quarter which primarily reflected a bank-owned life insurance benefit. The rebound we saw on a core basis from the March quarter is somewhat typical for the start of year. Non-interest income was up compared both to the same quarter a year ago and compared to the linked quarter. We had 536,000 net expense attributable to M&A activity after a much smaller amount in the last couple of sequential quarters and none of the year ago period. As a percentage of average assets non-interest expense increased to 2.82%, but if you exclude those M&A expenses, our write off of fixed assets related to flooding at one of our locations, intangible amortization and a seasonable swing in our provision throughout balance sheet, credit exposure. We calculate that our operating interest expense as a percentage of average assets is up 13 basis points from the year ago quarter and a 4 basis points from the linked quarter. Items including legal, data processing, advertising and compensation were affected by M&A. We also saw a shift from a -- to a more significant provision for off balance sheet credit exposure as compared to recovery on that items in the same quarter a year ago and we also had some charges to-write down recurring value foreclose real estate. Non-performing loans were down a bit in dollar terms to 2.8 million, they declined further in percentage terms to 20 basis points on our total loans, down 5 basis points from where we were at March 30th at 0.25%, and from $5.6 million or 0.49% at June 30, 2016. We noted in our call last quarter that we've restored almost 2.5 million to approval status in several purchase credit impaired loans, which were performing according to churns and that's the primary reason for the decline year-to-date. Non-performing assets at June 30th were 6.3 million, declining it about the same amount as our NPL and they extended our lowest levels since 2011 in percent of the terms. As a definitional matter, we consider non-performing assets to be foreclosed and rebuilt us property, non-accrual loans and loans 90 or more days past due. Net charge-offs for the quarter were just 1 basis points annualized and for the full year charge-offs were 5 basis points. Last year, for the full fiscal year, our average was 9 basis points. The allowance as a percentage of our gross loans was down to 1.10% at June 30, 2017. The acquired Capaha Bank loans to be subject to fair value accounting instead of that allowance, we provisioned 383,000 in the June quarter, that's up slightly from where we were in the linked quarter and it's down more significantly from the year ago period, as charge offs were much lower and we had a lower level of mixed performers. Our effective tax rate for the quarter was 28.9% down from 31% in the same period of the prior year. That's up from the 27% in the linked quarter, 27.0% in the linked quarter. The bank's formation at the beginning of this fiscal year, our Real Estate Investment Trust has benefitted our effective tax rate year-over-year while the current quarter includes the non-deductible expenses related to M&A while the linked quarter included to one-time benefit related to bank-owned life insurance, which allow the effective rate to be lower during that quarter. That concludes my prepared remarks on the financials. I'll introduce our CEO, Greg Steffens to provide his thoughts on our performance and to update you on some of our strategic initiatives.

[Greg Steffens:]

Thank you, Matt, and good afternoon everyone. I'm going to start off with lending and our net loan growth for the year again totaled 262 million or up 23%, included in that total again was a 152 million in loans from Capaha. Outside the Capaha acquisition and based on our internally generated branch profitability reports, our average loan balances for the year were up a 116 million or 10.2%. So, we slightly exceeded our internal goals for loan growth of 8% to 10%. Our strong loan growth was attributed to continuing to build on good relationships that we have with existing and new customers and the investment we made in some additional loan staff over the year. Our average loans grew $24 million in the June quarter from the March quarter and the majority of this loan growth over the last quarter was led by commercial real estate and C&I type loans. Including our Capaha acquisition the composition of the loan portfolio has changed slightly as our non-owner occupied non-residential real estate is driven by 91 million while ag real estate has gone up 38 million, commercial loans were up 32 million, non-owner occupied one-to-four family is up 22 million, the multifamily loans were up 21 million. The remainder of the increase was spread over a variety of different loan types, basically much of the Capaha portfolio kind of followed what percentage of loan portfolio we have prior to the acquisition. For our internal loan growth for the year, it was led considerably by our West Region. Our West Region which includes the Springfield, Missouri market area was up nearly $70 million or 90.5%, followed by our South Region, which was up $28 million or nearly 10%, while our legacy location in the East Region was up $18 million or nearly 4%. The West and South regions will continue to be the key for sustaining the loan growth targets that we have. And we're forward to where we're going to be at over the upcoming year. For an update on our agricultural lending, our ag real estate balances have grown to $140 million, while our operating lines are up to $87 million. That does include the balances from the Capaha acquisition. Excluding the Capaha acquisition, our ag operating balances were a little bit more than $3 million due our over the last quarter which was lower than what we'd anticipated due to the pay off of one larger operating line that we were not able to renew and they were able to obtaining financing elsewhere. As far as the ongoing crop gear, the crop by enlarge is looking pretty good for most of our farmers. A lot of the areas we would categorize the conditions is excellent. However we do have a few areas that were impacted by flooding including the flooding of our facility we had several ag customers that were negatively impacted. Overall, we feel like the ag portfolio was looking good and we feel comfortable with where our farmers are in the ag production cycle this year. We expect ag balances to continue to draw down as we have nearly $19 million left to draw and we would anticipate approximately $10 million in additional draws over the next or over the term quarter. When we look at our existing loan pipeline, it is strong in the highest quarter end balance that we've had to date and totals $80.7 million. The loan pipeline consists of wide variety of loans and we believe that it should be at a leave to put on pace to hit within our anticipated loan growth targets of the 8% to 10% on annualized basis. Our loan production for the quarter was good as the total $99 million which is down slightly from the $110 million we've originated a year ago and down $121 million last quarter. For the fiscal year 2017, we've originated a total of $495 million in loans as compared to $426 million in the prior fiscal year. So our loan production was up 16%. Secondary market lending activity continued to be strong for us and our total fee income generated totaled not quite $1.1 million versus $850,000 in the prior year. We anticipate this activity continue to grow as our originations this year totaled $48 million as compared to $36 million in the prior year. And with the acquisition of Capaha we would expect some activity there to continue to expand. When we look at our deposit activity for the fourth quarter and for the year-to-date, as Matt indicated we grew $335 million for the year with Capaha representing a $160 million in growth. So we generated a $168 million in growth organically or including $50 million of brokers --. We're especially proud of our non-maturity deposits growing $018 million, of which, only $27 million was in public unit funds leaving non-maturity deposit growth of $81 million or 13.2%. Again, we have established internal growth targets of 8% to 10% and we're happy that we were able to exceed those growth targets this year. And we're looking forward to hoping that continued deposit growth happens over this current fiscal year. In addition to our non-maturity deposit growth, we were able to generate $22 million of growth in our CD portfolio which also drive us to where we generated more in deposit growth than we did in loan growth. So we are able to reduce our overnight borrowing cycle. Our deposit growth was led in our south region which includes most of Arkansas operations and some Missourian locations while we did have really good strong growth in our west and east regions as well. As we turn to M&A, our Capaha transaction closed on June 16 and all is proceeding well. We did convert them to our system on that same date of June 16. So we were able to bring them online and change their signage and everything. To-date this is the smoothest transaction that we have completed yet and integration is moving well and is ahead of schedule. And our cost savings are at least on target if not slightly ahead. And looking at additional M&A opportunities, we continue to look at a number of deals and we are hopeful that something will come to fruition in within the next six months. We do continue to anticipate a need for core deposits. That our recent growth in deposits has alleviated some of those short-term needs but long-term we do anticipate that we still need to continue to look for deposits heavy acquisitions. Most of the opportunities that we are looking at are a little smaller in size. We do continue to have opportunities across most of our footprint where areas adjacent thereto. We do have some issues with sellers seeming to consider themselves worth a little bit more than what we evaluate them at but usual pricing expectations will come in line overtime. When we look at capital, our ATM offering that we commenced was completed within four days and we were pleased to be able to generate the capital, and we felt like to have set a good reasonable price and we welcome our new expanded shareholders to our company. Internally, we continue to target 8% to 9% tangible common equity at assets. At present, we are at 9.36%, so we are above those targeted levels. And we are up from the 8.55% that we were at last quarter. Outside of doing the ATM offering, we would have been a little bit under 8%. So we do feel like we have a little bit of a capital [indiscernible] right opportunity would allow itself to come to fruition. Overall, we are pleased with our opportunities and where we are at. And that concludes my remarks.

[Matt Funke:]

Alright, Phil, if you would please remind folks how they can queue for questions, and we’ll be ready to take those.

[Operator:]

[Operator Instructions] The first question comes from Andrew Liesch with Sandler O’Neill. Please go ahead.

[Andrew Liesch:]

Just question on the loan pipeline being up here near to 81 million, how much of that’s from Capaha versus just the legacy franchise from the further deal?

[Greg Steffens:]

The majority of it is through our existing franchise before Capaha. Capaha has not contributed much at this point.

[Andrew Liesch:]

Okay. That’s still heavily weighted towards the Western Region and Southern Region, that pipeline.

[Greg Steffens:]

That is correct.

[Andrew Liesch:]

And then just related to M&A, you mentioned you are looking at smaller deals but certainly with this capital you have, you could do something larger. So I am just thinking, is that something you would be considering and any of the geography that you would be looking to expand to if not a real transaction with lots of deposits?

[Greg Steffens:]

We're primarily looking within our footprint or any market that would be adjacent to our footprint like the Capaha transaction just right beside where we operate in. We would consider that type of opportunity. We are not looking to expand into a completely different area. Our longer term objectives is still to look to be from Kansas City to St. Lewis down as far as South as maybe Memphis and as parts of the West as Little Rock. So that's kind of our geographic area that we're looking at. As you get outside of that, pricing and the benefits to us would have to be greater to take the risk going outside of our anticipated footprint.

[Operator:]

[Operator Instructions] Okay. This concludes our question-and-answer session. I'd like to turn the conference back over to Matt Funke for any closing remarks.

[Matt Funke:]

Okay. Thanks again and thank you to everyone for joining us. Appreciate your interest in the company and we’ll talk again in three months.

[Operator:]

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