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Southern Missouri Bancorp Inc (NASDAQ:SMBC)
Q1 2020 Earnings Call
Oct 22, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call.

[Operator Instructions]

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

Matthew T. Funke -- Chief Financial Officer

Well, thank you, Rocco and 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, dated Monday, October 21st, 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 statement contained in the press release.

So thank you all for joining us today. I will begin by reviewing the preliminary results highlighted in the quarterly earnings release. The quarter ended September 30th, 2019, is the first quarter of our 2020 fiscal year. We earned $0.85 diluted in the current September quarter, that is up $0.04 from the linked June quarter and up $0.09 from the $0.76 diluted that we earned in the September 2018 quarter.

Our net interest margin in the first quarter was 3.81%, and that included about 10 basis points of benefit from fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposit, which was about $508,000 in dollar terms. Additionally, the current period's margin included about 8 basis points of benefit or $414,000 in dollar terms, from interest collected on a few larger loans that had been previously treated as non-accrual.

In the year-ago period, our margin was 3.92%, of which 27 basis points resulted from fair value discount accretion or $1.2 million. So what -- on what we see as a core basis then, our margin was down by about 2 basis points, comparing the September 2019 quarter to the September 2018 quarter. Our core asset yield is up 30 basis points, less than the increase in our core costs of deposits, which we see at 37 basis points. But our total core cost of fund is up a little less than deposits by themselves at 33 basis points of increase.

Compared to the linked quarter, when our net interest margin was 3.77% and we had 12 basis points of benefit from discount accretion, this would indicate our core margin is down 2 basis points sequentially also. However, the number of days in the quarter does impact that measurement, as we figure our annualized net interest margin by taking our quarterly figure and multiplying by 4. And that provides a lift of a few basis points in the 92-day September quarter, as compared to the 91-day, June quarter. So adjusted for the day count, we would put the sequential decrease in the core margin at about 6 basis points.

Non-interest income as a percentage of our average assets annualized was 73 basis points, which is 1 basis point better than the same quarter a year-ago and 5 basis points improved from the linked June quarter. There are no gains or losses on AFS securities in any of the relevant periods and nothing of significance that we'd identified as non-core items.

The largest changes from the linked period are loan servicing fees, where we took a hit on valuation at our June 30, 2019 fiscal year-end and improvement in deposit service charges, primarily NSF revenue, some of which is seasonal as we moved later in the calendar year, bank card revenues and late charge collections. Compared to the year-ago period, debit card revenue was the largest contributor followed by deposit service charges, wealth management and insurance brokerage commissions, which are new revenue sources for the Company. And gains on the secondary market loan sales and late charges collected.

Non-interest expense was up 13.2% compared to the same quarter a year ago and up 1.4% as compared to the linked quarter. In that same quarter a year ago, we included $175,000 in mergers and acquisition expense, with none in the current period. Core deposit intangible amortization is a bit higher than a year ago at $441,000 this quarter. And we have recognized a relatively large recovery of provision for off-balance sheet credit exposure, $146,000 as compared to a small charge in the same quarter a year-ago, $23,000.

In the linked quarter, we had a smaller recovery on that item, $46,000. As a percentage of average assets, non-interest expense is down 9 basis points, as compared to the same quarter a year ago, and unchanged for the linked quarter at 2.32%. But if you exclude mergers and acquisition and other non-recurring expenses, intangible amortization and provision for off-balance sheet credit exposure, we calculate that our operating non-interest expense is up 2 basis points from the linked June quarter and down 1 basis points from the September quarter a year ago.

Our effective tax rate was a bit higher at 20.2% this quarter, as growth and pre-tax income outpaced our tax advantaged investments. A year ago, linked quarter effective rate was 19.7%. We are happy to note that for the first time in a couple of years, we have consistent tax law for year-over-year comparison purposes, as our June 30 fiscal year-end had delayed the full impact of the corporate tax changes for our results until the first quarter of fiscal 2019.

On the balance sheet, loan growth was up a bit in the September quarter, as gross loans increased $29 million, after having grown $23 million in the June quarter, but we are seeing less seasonal impact than normal over the last four quarters. Growth in the first nine months of this calendar year, is running about 30% less than -- over the first nine months of the prior calendar year. And we feel that this decrease is consistent with our recent expectations.

Over the last 12 months, exclusive of acquired loan balances, the gross loan portfolio has grown a little less than 7%. We have been slightly more active in investment securities, since the prior quarter end. So we still haven't been excited about opportunities to put funds to work there. Total assets increased about $35 million in the September quarter, attributable to loans, securities and Federal Home Loan Bank membership stock.

Deposits were down $21 million in the September quarter, as our decision to allow some brokered deposits to grow into overnight borrowings, combined with public unit outflows, which we typically see at this time of year, but which were larger this year as they included one particularly notable draw from the deposit or utilizing funds for capital improvements, resulted in an overall decrease in the portfolio.

We've seen a reduction in deposit or appetite for time deposits, as the inverted yield curve has reduced the term premium available. So we do continue to see isolated competitors offering pricing that doesn't make sense for us, given our available funding sources. Exclusive of acquisitions and brokered funding, over the last 12 months, time deposits are up almost 13%, while non-maturity balances are up a little more than 5%.

FHLB advances were up $58 million in the September quarter after we had reduced them notably earlier in the calendar year and they are at $103 million in total at quarter end. Compared to a year-ago, FHLB borrowings were down about $15 million. The increase in the current quarter was attributable to loan growth and deposit outflows, including primarily the public unit and brokered funding noted earlier.

The majority of the funding has been taken on an overnight basis at this time, as we expect deposit inflows and modest loan growth, as we move toward calendar year-end. We were pleased to see a reduction in non-performing loan balances this quarter, down by one-third or $7 million to stand at $14 million at September 30, 2019.

NPLs represent 0.74% as a percentage of total loans, down from 1.13% at the prior quarter end and as compared to 0.46% a year ago, which was the last quarter end prior to the Gideon acquisition. Non-performing assets at quarter end were $17.9 million, down almost as much as NPLs in dollar terms. And as a percentage of total assets, NPAs are at 0.8%, down from 1.12% at June 30 and up from 0.64% at September 30, one year ago.

The bank's credit management team has continued to make progress with our delinquent and classified credit, and we hope to see continued improvement in non-performing loan and asset figures in coming periods. Net charge-offs remained at 2 basis points annualized, that's unchanged over the last 12 months. And it is down 1 basis point from the September quarter a year ago. With slightly better loan growth, our provision increased to $896,000 as compared to $546,000 in the linked quarter.

We provisioned $682,000 in the September quarter a year ago, when loan growth was stronger, but we resolved some problem credits, which had previously had specific allowances set aside. Provision expense is 19, 12 and 17 basis points respectively, as a percent of average loans in the current, linked and year-ago periods. If you look at those measures on a trailing 12-month basis, our provision to average loans over the last four quarters is at 13 basis points, and our charge-offs to average loans are at 2 basis points. A year ago, those figures would have been a provision of 19 basis points and net charge-offs of 3 basis points.

The allowance as a percentage of our gross loans was up 2 basis points to 1.09% at September 30, as compared to 1.07% at June 30. A year ago, at September 30, before the Gideon acquisition, the allowance was 1.14% on gross loans. Our acquired loans are subject to fair value adjustments at the time of acquisition, we do not hold an allowance against them, unless we identify subsequent impairment, and that explains most of the decrease in our allowance in percentage terms compared to the year-ago period, and it also helps to explain the reason the allowance has been growing over recent quarters, as a percentage of our loan portfolio that is subject to holding an allowance has been increasing, while the percentage that is subject to purchase accounting marks has been decreasing.

We continue to work toward implementation of the new current expected credit loss accounting standard which will be effective for the Company July 1, 2020, but we have not developed estimates of the impact on our allowance at this time.

That concludes my prepared remarks. And at this time, I will introduce Greg Steffens, our CEO.

Greg A. Steffens -- President and Chief Executive Officer

Thank you, Matt. And thank you all for dialing in this afternoon. I'd like to say -- to begin with, we are satisfied with loan growth for the first quarter of our fiscal year of $28 million or 1.5%, as it came within our guidance of 5% to 7% loan growth. However, it should be noted that the first quarter of our fiscal year has typically been one of our stronger quarters for growth, but seasonal growth factors have been less pronounced over recent periods, and we are able to reduce our NPAs as expected from the Gideon acquisition.

Our organic growth was led by increases in agricultural operating and equipment loans, followed by growth in non-construction balances and consumer loans related, and partially offset by declines in our commercial real estate loans. Overall, the changes in the composition of our loan portfolio is fairly limited.

During recent periods, Southern Missouri Bancorp's CRE concentration moved from 244% at September 30, 2018, to 255% at June 30, 2019 and is back below 250% at September 30th, 2019. Our organic loan growth during the quarter was centered primarily in our South and East regions, as our West region was relatively flat due to increased competition within that market. Overall, the South region grew by $16 million and the East region grew by $12 million, respectively.

Our volume of loan originations, which totaled $124 million for the quarter, was comparable to the linked quarter, but was down from $177 million over the same period of the prior year. The drop in originations over the prior year reflects our lower pipeline as of June 30, 2019. Reduced loan originations were primarily in non-owner occupied CRE and commercial loans and were attributable to reduced loan demand than we anticipated in our lower loan growth expectations.

Now I would like to provide an update on our agricultural customers. Agricultural real estate balances remained flat over the quarter, while agricultural production loans balances grew $14 million. Our agricultural customers' 2019 crop year started slowly, but due to a dryer than normal fall, our customers have made good progress on their harvest, we are actually ahead of schedule compared to recent years, as approximately 70% of our crop has been harvested.

Based upon our crop inspections completed during the September quarter, we are projecting somewhat better than expected results for agricultural customers. Based on these inspections, enhanced internal analysis compared to recent years and current crop prices, we are expecting only a quite small number of customers to fall short on their operating lines and/or term debt in-line with our customers' historical performance. Overall, we are quite pleased with our agricultural customers' anticipated results and believe that they will perform similar to our historical experiences.

I'd also like to add to Matt's comments on our non-performing loans. Our non-performing loan balances have been elevated from historical levels since the Gideon acquisition. We have been diligent working on resolving these credits, and we are pleased to have reduced NPLs, as anticipated last quarter. Total NPLs at September 30, 2019, from the Gideon acquisition were $8 million as compared to $13 million reported at December 31, 2018. In addition, we continue to anticipate continued improvement during the current quarter, which will move us even closer to our historical non-performing loan ratios.

We have also seen improved payment performance as well in our loan portfolio, as well as 30 days or more past due drop from $11.6 million or 0.62% at June 30, 2019, to just $9.9 million or 0.52% as of September 30. Our loan pipeline for loans to be funded in 90 days totaled $101.7 million at September 30th, compared to $83 million at June 30th, 2019, and $114 million at September 30, 2018. The pipeline is diverse in nature and similar to our existing portfolio mix.

Based on our pipeline, seasonality of the agricultural portfolio, recent declines in treasury rates, which have contributed to accelerated prepayments, and some softening in loan demand, we anticipate our loan portfolio to grow in-line with our prior guidance of 5% to 7% annualized growth. Pricing crisis in the marketplace have increased with the recent drop-off in loan demand and the dropping interest rates.

Moving on to our deposits. Even though total deposits declined $21 million during the first quarter of our fiscal year ended September 30, we are satisfied with our deposit portfolio's performance for retail non-maturity deposits. The decline in deposit balances was attributable to a net reduction in brokered deposits of $12 million and public unit deposit outflows of $24 million. We have traditionally experienced seasonal outflows of public unit deposits during the September quarter, but this quarter's outflow was somewhat higher than normal due to one large one-time withdrawal that Matt mentioned earlier.

Excluding brokered and public unit deposits, retail non-maturity deposits grew $10 million or 1%, which is slightly below our internal goal for non-maturity growth of 5% to 7%, but the September quarter typically is one of our weaker quarters for non-maturity growth and we usually experience a better pick-up in the second quarter.

CD growth for the quarter, excluding brokered deposits and public unit balances, totaled $5 million or 0.8% which is below recent trends. We believe reduced CD growth is primarily attributed to the drop in interest rates, as consumers are slowing their migration of funds from non-maturity accounts into CDs. Core deposit growth continues to be challenging and likely continue to be due to aggressive competition within our marketplaces. We expect continued deposit growth in both non-maturity accounts and CDs for fiscal 2020, and we continue to project non-maturity and CD deposit growth of 5% to 7%.

Turning to merger and acquisition activities. We have looked at several potential partners over the last quarter, but our number of looks has declined over the last quarter compared to the prior one. We continue to evaluate potential activity in our markets, where in nearby markets where we believe our business model will perform well and offers opportunity to profitably grow our franchise and we will continue to look for acquisitions that offer good core deposits to provide for long-term growth.

We continue to primarily target companies in the $250 million to $500 million asset range, but will consider smaller or larger companies, depending upon their strategic benefit, both financially and geographically. We are still committed to being patient and will not chase after deals. We also announced a stock repurchase plan for 450,000 shares in November 2018. During the last quarter, we repurchased 86,050 shares of our stock at an average price of $32.70 per share and have 329,000 shares remaining to authorize for repurchase under our repurchase plan.

The Company continues to look at the market value of our stock compared to valuation metrics for other stocks in our industry and peers within our region. We continue to evaluate the potential use of capital through stock repurchases versus other options to deploy capital and provide for long-term shareholder returns. Thank you.

Matthew T. Funke -- Chief Financial Officer

Thank you, Greg. And at this time Rocco we'd like to take any questions that our participants may have. So if you would please remind folks, how they can queue for questions.

Questions and Answers:

Operator

Absolutely sir. Thank you. [Operator Instructions] Today's first question comes from Andrew Liesch of Sandler O'Neill. Please go ahead.

Andrew Liesch -- Sandler O'Neill -- Analyst

Good afternoon, everyone.

Greg A. Steffens -- President and Chief Executive Officer

Good afternoon, Andrew.

Matthew T. Funke -- Chief Financial Officer

Good afternoon, Andrew.

Andrew Liesch -- Sandler O'Neill -- Analyst

Just one question for me here, just kind of like, your thoughts on the margin here, you had held up a little better than I was expecting. Certainly drops in LIBOR and expectations of more Fed rate cuts, should be putting pressure on earning assets yields. Do you guys have opportunities to lower funding costs, as well to keep pace and maybe keep the margin range bound?

Matthew T. Funke -- Chief Financial Officer

We'll have some opportunity with some wholesale funding, some of the brokered funding, some of the FHLB. We don't anticipate significant opportunities probably in the coming quarter. We think we will get more relief in the January quarter on the funding costs.

Andrew Liesch -- Sandler O'Neill -- Analyst

Okay. And then just back on M&A. It sounds like maybe you're looking at deals in market, but also maybe next to or addition to what your current footprint is. Are there any locations that when you look on a map that you think that this will be a nice place for us to expand to?

Greg A. Steffens -- President and Chief Executive Officer

We have looked primarily at our market footprint. It is ranging from Kansas City, to St. Louis, to Memphis to Little Rock, within that general geographic footprint.

Andrew Liesch -- Sandler O'Neill -- Analyst

Got you. Thank you. Those are all my questions.

Matthew T. Funke -- Chief Financial Officer

Thanks, Andrew.

Operator

[Operator Instructions] Our next question comes from Kelly Motta of KBW. Please go ahead.

Kelly Motta -- KBW -- Analyst

Hi guys, good afternoon.

Matthew T. Funke -- Chief Financial Officer

Good afternoon.

Kelly Motta -- KBW -- Analyst

So my first question is on expenses. You mentioned in the text of the press release, the FDIC benefit. I was wondering about how much that was this quarter?

Matthew T. Funke -- Chief Financial Officer

Well, if you look back to the June quarter, I think we are running somewhere around $160,000 per quarter. Let me verify that for you.

Kelly Motta -- KBW -- Analyst

Okay. And so that kind of amount should come out of the following quarter as well and then kind of builds back up based on --.

Matthew T. Funke -- Chief Financial Officer

Yeah, look, our expectation is that we won't have anything new for the December quarter either and then a partial assessment for the March quarter before it's back up to normal.

Kelly Motta -- KBW -- Analyst

Got you. Was there anything else, I think outside of that, expenses grew about 3% quarter-over-quarter? What were the drivers of that?

Matthew T. Funke -- Chief Financial Officer

Some of it is just year-end clean up of our accruals, year-end type expenses, bonuses, 401(k) accounting, those types of things fell a little bit more in our favor for the June 30 quarter end. I think, we had a relatively small loss on some fixed assets we recognized in the June quarter end. No, no one big thing.

Kelly Motta -- KBW -- Analyst

Okay. And then, maybe on fees, I think you mentioned there is nothing really unusual about that. But you did in your prepared remarks reference the MSR and you recorded a, I believe, loss on that in the fourth quarter of 2019, your June quarter. I'm just wondering, if you had kind of the moving parts of that, and if there is anything else to kind of consider with these or if this is kind of a good level to think about building off of from here?

Matthew T. Funke -- Chief Financial Officer

I don't think there's anything else there on the mortgage servicing. We were roughly a $230,000 swing there, it looks like quarter-to-quarter. I don't think the writedown on the service being rights was quite that much, but it was in that ballpark.

Greg A. Steffens -- President and Chief Executive Officer

It was around $200,000.

Matthew T. Funke -- Chief Financial Officer

Yeah.

Kelly Motta -- KBW -- Analyst

Great.Thank you.

Matthew T. Funke -- Chief Financial Officer

Kelly, on the FDIC, it was -- I'm sorry, it was 220 for the fourth quarter. It had been running a little bit below that previously before the Gideon numbers kind of filtered it through into ours in the assessment, around $160,000 prior to that.

Operator

Thank you, sir. This concludes today's question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Matthew T. Funke -- Chief Financial Officer

Thank you, Rocco and thank you everyone for participating and for your interest in the stock. I'll speak with you again in three months.

Operator

[Operator Closing Remarks]

Duration: 26 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 -- KBW -- Analyst

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