Southern Missouri Bancorp Inc (SMBC) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the SMBC Quarterly Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Matt Funke, Chief Financial Officer. Please go ahead, sir.

Thank you. Good afternoon, everyone. This is Matt Funke, CFO of Southern Missouri Bancorp. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, October 23, 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 forward-looking statements contained in the press release.

Thanks, everyone, for joining us. I'll begin by reviewing the preliminary results highlighted in the quarterly earnings release. The September quarter is the first quarter of our 2018 fiscal year.

We were pleased to earn $0.56 diluted in the September quarter. That is an increase of $0.06 from the $0.50 diluted in the September quarter a year ago, and it's up $0.07 from the $0.49 diluted that we earned in the linked June quarter. The June quarter did include an elevated level of onetime expenses. We have a smaller amount of M&A costs included in this current quarter's results.

Asset growth in the September quarter was primarily attributable to loan growth. Total assets were up $56 million, and that included loan growth of $52 million. This is the seasonally strong quarter for us in terms of loan growth. Compared to September 30, 2016, a year ago, our gross loans are up almost $248 million, and if you take out the $152 million we picked up from our Capaha acquisition in June, we'd be up just a touch below 8% year-over-year. That is down slightly from where we stood on a 12-month basis last quarter as the September quarter of last year was really quite strong for us in terms of loan growth.

Deposits were up $16 million for the September quarter, which, as opposed to my preceding comments on lending, is typically a weaker quarter for us in terms of growth on the deposit side. While we've grown our deposits faster than loans over the last 12 months, some of that is due to the use of brokered deposits as well as our Capaha acquisition. In the quarter, though, we actually did reduce our use of traditional brokered deposits, and we utilized FHLB funding to a greater extent.

Since June, our company's equity has changed only as you'd expect from retention of earnings, but I did want to point out that our average shares outstanding had moved up quite a bit from the June quarter because of that Capaha acquisition and also our at-the-market common offering that we completed in the June quarter, both of which were completed in the middle of the month in June, so we had the full impact of those issuances on our average shares outstanding in the September quarter for the first time.

Within the income statement, we were pleased with the results on our net interest margin. We've mentioned every quarter for the last several years our fair value [discount] accretion on loans and fair value premium amortization on time deposits related to the Peoples Bank acquisition. While that's generally been declining, we see in the September quarter the first impact from our Capaha Bank acquisition, which closed in June.

The total between the Peoples and Capaha acquisitions accounted for an additional $465,000 in net interest income. That added 12 basis points to our reported NIM. In the September quarter of last fiscal year, this component of net interest income was higher at $601,000, and that was equivalent to 18 basis points on our net interest margin.

The impact in the linked June quarter was $409,000 or a 12 basis point contribution to our reported margin. Also in the June quarter, we had a payoff on some loans which had been carried on a nonaccrual status, and that added another 8 basis points to our reported margin.

So the margin for the first quarter in September was 3.79%, of which 12 basis points was that fair value accretion we just mentioned, a year ago at 3.81% with 18 basis points from margin. So on what we look at as a core basis, we evaluate that our margin expanded by 4 basis points from September of '16 to September of '17. That's a result of the core asset yield that's up 11 basis points and a core cost of funds that is up 7. Compared to the linked quarter in June, when margin was 3.82% and 20 basis points of benefit from purchase accounting on the nonrecurring item we noted above, this would indicate our core margin was up 5 basis points.

Moving down the income statement. Our noninterest income as a percentage of average assets was 76 basis points. That's up 4 basis points from the same quarter a year ago, and that's up 1 basis point from the June quarter. This quarter is often a seasonally strong time of year for noninterest income. We didn't have any significant nonrecurring items in this period or the year ago period or the linked quarter.

Noninterest expense was up compared to the same quarter a year ago and down slightly from the linked quarter. In the linked quarter, we had a higher level of expense attributable to M&A activity and a significant fixed asset writeoff. We also had a reduction this quarter in our provision for off-balance sheet credit exposures, which can be seasonal.

As a percentage of average assets, noninterest expense decreased to 2.48%. But if you exclude those M&A expenses, intangible amortization, seasonal swings and net provision for off-balance sheet credit exposure, we look at our operating noninterest expense as a percentage of average assets as being down 5 basis points from the year ago quarter and down 13 basis points from the linked quarter when we would have not excluded the fixed asset writeoff from that figure.

Nonperforming loans were down slightly to $2.6 million, and in percentage terms, that's 18 basis points on gross loans, down from $3.2 million or 23 basis points on gross loans at June 30 and from $5 million or 42 basis points on gross loans at September 30, 2016.

Nonperforming assets at June 30 were $6 million, declining about the same amount as our nonperforming loans. And we -- they remain at the best level that we've reported in more than 5 years. We -- as a disclosure matter, we consider our nonperforming assets to be foreclosed and repossessed property, nonaccrual loans and loans 90 or more days past due.

Our net charge-offs for the September quarter were at just 1 basis point annualized. That's the same as our linked June quarter. In the September quarter of last year, we charged off 9 basis points annualized.

The allowance as a percentage of our gross loans was up slightly to 1.12% at September 30, 2017, as compared to the June 30 end of our prior fiscal year. Provisioning covered our strong loan growth. We provisioned $868,000 in the September quarter. That's up significantly from the linked quarter, and it's up slightly compared to the September quarter a year ago.

Finally, our effective tax rate for the quarter was 28.0%. That's up from 26.8% in the same period of the prior fiscal year, but it's below the 28.9% in linked quarter. In that linked June quarter, we did include some nondeductible expenses related to M&A, so that pushed the effective rate higher that quarter.

So that concludes my prepared remarks on the financials. And at this time, I'll introduce our CEO, Greg Steffens, to share his thoughts with us on our performance and to update you on our strategic initiatives.

Thank you, Matt. Start off with our net loan growth for the first quarter, which totaled the $52 million or 3.7%. September as a quarter is typically one of our strongest of the fiscal year, and we perceived that again for this year. We usually will begin to see ag paydowns starting in the December quarter, but at this time, we really feel pretty good about our 8% to 10% annual growth target for the fiscal year.

When we look at the composition of our growth this year, included in growth was a little over $8.7 million in loan participations that we did repurchase for loans that we acquired in the Capaha transaction. So that did boost our level of loan growth during the tail end of the first quarter of our fiscal year.

Changes in our loan portfolio over the year did include growth in commercial real estate of $32 million. Our ag balances between ag real estate and ag operating lines were up $10 million, and our C&I portfolio was up $8 million.

Loan growth was nearly equally divided over all 3 of our regions in the East, West and South. Overall, we're pleased with our lending activity in the first quarter and look forward to the upcoming December quarter.

And giving an update on our agricultural portfolio. Ag real estate balances grew a modest $3 million while our operating lines were up $7 million, which was slightly below the $10 million that we had estimated at our last earnings call. And part of the reason that we didn't hit the $10 million was we had several ag relationships that were -- we experienced certainly payoffs on related to the Capaha acquisition. We're currently projecting about $15 million in ag paydowns this -- this quarter for operating lines as the farmers are paying down their operating lines.

As for the actual harvest update, our customers are nearing the end of their harvest. And at this point in time, the yields that our farmers are receiving are higher than what we had budgeted, and we have many farmers that are experiencing record yields. That's on the positive note.

On a little bit of a negative point is the average price of the agricultural commodities is a little lower than what we had modeled out when we were doing our underwriting. But overall, we feel like it will be a net positive as the increase in yields outweighed the pricing pressures.

One other factor that will have significant influence over our customers' results will be their marketing plans and what they are dealing with when they -- when or if they hedged any of their production in their sales that they are going to be having. Overall, we believe our ag sector will perform a little better this year than it did last year when we look at everything on a sum basis.

When we look at our loan pipeline, it remains strong, and it's at a record $85 million, which is up slightly from the $80 million -- $81 million we were at last quarter. The pipeline is really pretty well distributed over each of our regions. We have commercial real estate loans in the pipeline being the largest component or type of loan that we have pending at this point.

Loan growth will slow in the December quarter from the September quarter due to, again, the ag paydowns, but at this time, we're really pleased with our pipeline and how it compares to our prior year.

When we look at loan production for the quarter, it did total $153 million, which compares similarly to production of $149 million in the same quarter of the prior year and up significantly from the $99 million that we originated over the sequential quarter. When we look at secondary market lending activity, that is a little bit of a negative for us this quarter as our activity did slow from the same quarter of the prior year and from the sequential quarter.

Over the last quarter, income was down $17,000 and then $68,000 over the prior year. Most of the decline is attributed to less refinancing activity as market rates have increased, and we're having less volume than what we had in the prior year.

When we move to deposits, our deposit growth for the quarter was $16 million, as Matt mentioned earlier. Growth was hampered a little bit by $26 million of a drop in our brokered deposit accounts, but we were able to offset that and experience growth. Our nonmaturity deposits were up $22 million while our CD balances, exclusive of brokered deposits, were up $19 million. Included in the growth of these deposits were $15 million in public unit funds.

Overall for this quarter and the seasonality that we typically experience with our deposits over the first quarter, we're very satisfied with these results, and we look forward to increased deposit growth in December's quarter, which is typically one of our stronger quarters for deposit growth. Our East and South regions have led our deposit growth for the first quarter of our fiscal year.

When we look at M&A, our Capaha partnership is going well as our cost savings are on target, and we've been able to generate some deposit growth from the acquired balances. And our loan balances are only down slightly when you exclude the aforementioned loan participation buybacks. To-date, the acquisition is going well, and we're pleased with these results.

When we look at other M&A activity, we're seeing good deal flow, and we're looking at a variety of potential partners. Our potential pipeline continues to be higher than what we've traditionally seen in the past, and it's similar to what we were seeing at our last conference call. Most of our potential deals are similar to what we've historically done, but there are several larger opportunities looming as a potential.

At this time, pricing remains competitive, and we continue to look at being able to attract deposit-heavy institutions. On our Southern Missouri Bank of Marshfield partnership, it is on track, and we're moving forward, and we anticipate closing or merging them into our company during the first quarter of 2018.

When we look at capital levels, we continue to target 8% to 9% tangible common equity. Currently, we're at 9.3% as compared to 9.36% last quarter and 8.33% 1 year ago. So tangible common equity remains above targeted levels.

Brooke, I think that concludes Greg's comments, and we'll take questions at this time, if you'll remind our callers how they can queue.

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

Question on the margin, really on the loan yields. If I strip out the accretion from the deals, it looks like core loan yields increased a little bit this quarter. Can you confirm that? And then also, what's the main driver behind that?

That is what we're seeing as well, and we'd just attribute it to better pricing since we've seen the uptick in rates really since December.

Got you. And then it also looks like you're seeing some deposit pricing pressure as well. So going forward, like what's your -- what are your thoughts on the core margin? Hold steady, maybe a little bit of expansion here.

We feel happy with the expansion we've seen. I wouldn't get too aggressive with it going forward, but we're hopeful that deposit [betas] will hold in line and (inaudible) keep pricing loans just slightly better than what we have to increase our deposits.

Okay, got you. And then on the operating expense front, taking out the deal costs right around $10.5 million, certainly, that can fluctuate depending on the -- on some of the commitment line in provision there. But is this $10.5 million a good level to build off of? Or are there any -- is there any reason to think that it might be a little bit above that?

You're trying to think if there's anything that we ought to warn you off of there. We -- no, it was a good quarter. Just some things kind of fell our way within the number. I wouldn't want to be too aggressive with any kind of outlook, but we do feel good about savings. We've got a little bit more savings to wring out with Capaha still, and we'll do our best to hold everything else steady.

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

Well, thank you, and thank you, everyone, for joining us. We appreciate your interest, and we'll talk to you again in 3 months.

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