Southern Missouri Bancorp, Inc. (NASDAQ:SMBC)
Q3 2016 Earnings Conference Call
April 26, 2016, 16:30 ET
Matt Funke - CFO
Greg Steffens - CEO
Andrew Liesch - Sandler O'Neill
Welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Matt Funke, Chief Financial Officer. Please go ahead, sir.
Thank you, Denise. 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, April 25, 2016, and to take your questions. We may make certain forward-looking statements during today's call and we refer you to the cautionary statement regarding those forward-looking statements contained in the press release.
I will begin with our highlights from the quarter. The March quarter is the third quarter of our 2016 fiscal year. We earned $0.45 diluted in the March quarter, that's down $0.11 from the $0.56 diluted we reported for the December 2015 quarter, and it's up $0.01 from the $0.44 diluted that we earned on a split adjusted basis in the prior year's third quarter.
In December 2015 results which had the higher EPS figure that included some non-recurring non-interest income items and a higher level of fair value discount accretion resulting from the resolution of a purchase credit impaired loan. In August of 2014 we closed on the People's Bank acquisition, we continue to report net interest income resulting from fair value discount accretion on loans and fair value premium amortization on time deposits related to that acquisition.
In our current quarter the March 2016 quarter and amounted to 322,000. In the year ago quarter March of 2015 it amounted to 558,000 so significant reduction there and in the linked quarter ended December 2015 discount accretion provided benefit of net-interest income a 557,000. So again that number was higher than what it would have otherwise been sequentially. It has been reducing on a quarter over quarter basis but because of the resolution of the particular credit with a payoff higher than the loans carrying value we did recognize some additional interest income. As a comparison if you go back to the September 2015 quarter the discount accretion was $412,000.
Going forward we would expect the impact of that the creation to continue to move lower quarter over quarter. Net interest margin for the third quarter was 3.72% of which 10 basis points was the result of that fair value discount accretion that we just mentioned. A year ago our margin was 3.89% in the March quarter of which 19 basis points resulted from the fair value discount accretions specifically from People's Bank. So on what we would view as a core basis then our margin was down 8 basis points comparing the March 2016 quarter to the March 2015 quarter. The core asset yield is down 8 basis points and our core cost of funds is unchanged. Comparing these results to the linked quarter when net interest margin was 3.88% and 18 basis points of that margin was result of purchase accounting benefits from the People's acquisition. We also would consider the core margin to deteriorated at 8 basis points. That's due mostly to continued pressure on loan origination pricing. Some concessions on existing loans and a few basis points due to the number of days in the quarter and the simplified manner in which we analyze our figures.
Moving on to non-interest income, outside of the securities gains and the losses, our non-interest income was up 1 basis point to 65 basis points compared to the March quarter of the prior fiscal year when it stood at 64 point. The current quarter is down 19 basis points compared to the linked quarter the December 2015 quarter, because that linked quarter included benefits from a bank owned [ph] life insurance policy payout and a gain on the company's stock and those are [indiscernible] in investment corporation which was acquired by [indiscernible] First National. If you exclude those items non-interest income is relatively stable on a linked quarter basis and that's a reasonably good performance for us and what's usually our toughest quarter for that measure.
Non-interest expense was up slightly compared both to linked quarter and the same quarter a year ago. We had no M&A expenses recognized in the current or linked quarter and just a negligible amount in the March 2015 quarter. When we exclude intangible amortization and some seasonal swings in our provision for off-balance sheet credit exposures. We calculate that our operating non-interest expense as a percentage of average assets is up three basis points from the year ago quarter and from the December 2015 quarter the linked quarter to now stand at 2.4%.
Items pushing that figure, a bit higher include occupancy expenses and compensation. We generally award merit based increases annually to most employees in January and occupancy charges have moved a little bit higher due to deployment of new integrated teller machine and our occupancy at the new corporate headquarters. We do expect that the integrated teller machine on a long term basis will be cost effective for us in terms of how we manage personnel and head counted our branches. We consider non-performing assets to be foreclosed and repossessed property, non-accrual loans and loans 90 or more days past due and those numbers are all in line with where they were at our June 30 fiscal year-end. In total non-performing assets are 8.3 million now the same as the beginning of fiscal year and they stand at 62 basis points on total assets down 2 basis points from the beginning of the fiscal year and as compared to 66 basis points at March 31, 2015.
Non-performing loans are now 44 basis points on total loans as compared to 36 basis points at the beginning of the fiscal year and 41 basis points at March 31 a year ago. We did have one commercial loan that we noted in the press that migrated to non-accrual status, that was an acquired loan from our First Southern acquisition in December 2010. And that accounted for the majority of the increase in non-accruals on a linked quarter basis.
We mentioned earlier in the discussion the impact of purchase accounting on our margin and we've talked previously on these calls about the offsetting impact on our loan loss provisioning as our acquired loans mature and our replace renewals, renewals origination and the fact that those dollars in our loan portfolio would migrate from being accounted for under purchase accounting to traditional allowance methodology.
So that has been moving our allowance higher sequentially, it's at 1.24% of gross loans at March 31, 2016 that's up 3 basis points from December 31 of '15 and it's at 9 basis points since fiscal year-ended June 30, 2015. Immediately after the People's the ratio was 0.98% at September 30, 2014. The People's loan portfolio was notably short and so the purchase accounting discount was accretive relatively quickly and as that happened as those loans became subject to allowance methodology the allowance required had to grow as well.
Loan loss provisions in the current period were 563,000 as compared to 837,000 in the same quarter of last year. For the quarter, the balance sheet grew by just a little less than $7 million, gross loans were up almost 16 million but cash and equivalents were down, investment securities were relatively stable. Deposits were up less than $5 million dollars, a lower growth paced in the linked quarter but we were relatively pleased that we didn't see more of a total outflow given some of the seasonality of the public unit funding.
We did begin to see draws on our agricultural operating lines in the loan book. If you go back to March 31 of 2015 loans were up almost 4.5% year over year and deposits are up 6.2%. Loan and deposit growth over those 12 months is a little bit below our longer term targets but we are feeling particularly good about recent deposit growth especially out of the Southwest Missouri market and Greg will talk shortly about a positive outlook for the loan pipeline.
Overall for the quarter we'd like to have same core profitability figures hold up a little bit better than they did even though we always expect the March quarter to be the toughest for us on a number -- for a number of reasons both on the net interest income and non-interest income front and they are usually some seasonal noninterest expense pressure well. Metric will be watching most closely in the coming months as margin and we'll be working to combat continued pressure from very tight loan pricing.
With that I'll introduce our CEO, Greg Steffens to talk about some other matters.
Thank you, Matt. First I would like to talk about is our lending and loan growth. Our loan growth did approximate our expectations but average balances did fell slightly below our expected levels. The growth during the March quarter is typically one of our tougher periods due primarily to Ag paid outs. During this particular quarter we originated renewed a 146.5 million in loans which compares to 138.4 million last year during that same time period.
However, last year during the March quarter we grew $35 million while this year we grew a little more than 15 which is indicative of an increase in the amount of pay down so we've been receiving over the last quarter and spent a little bit of a headwind for us for growth. In addition, during this quarter we had several significant relationships that we ended up repricing primarily due to competitors offering very attractive rates and we were trying to maintain our balances which did hurt our margin slightly. When we look at our loan growth for the quarter it was comprised primarily of growth in non-residential owner occupied loans of 5.7 million, non-owner occupied non-residential loans of 3.8 million, Ag real estate was up a little over nine while one to four family non-owner occupied properties were up 5.6 million offsetting part of those increases were a reduction in owner occupied one to four family loans of 4.2 million and a decline in our Ag operating loans of 6.9 million.
For the year to date our loan portfolio was up $41 million which is a little over 4% which is right at half of our internal goal of generating 8% to 10% loan growth. For the year we're targeting still reaching the lower end of that 8% to 10% growth. It's going to be tough but we do think that given the size of our pipeline and some of what we're seeing out there that we hope to be at the lower end of that range at June 30. When we look at our loan growth for the year to date as of $ 41 million that has been spread out pretty evenly over a lot of our footprint whereas Southeast Missouri having 12.7 million in growth.
Our [indiscernible] market has been up 5 million while Arkansas has been up 13 million and Southwest Missouri has now moved $8 million. Also of note is our legacy, our acquired People's Bank those locations grew this last quarter by almost $1 million compared to shrinkage during the December quarter of 15 million. So we have kind of work through some of the staffing and related issues with the loan portfolio there to where we are in position where we will have those offices contributing to growth going forward.
And looking at our Ag operating lines the balances at 331 were 54 million which compares to 61 million at 12/31 and 47 million a year ago. Our Ag balances did hit their bottom figures in February which has been the same case for the last four years now and the balances are now growing. Our farmers completed their harvest and the results were similar to what we expected and the renewal season has been nearly completed for this year with us renewing most of the credits that we had from the prior year, planning and operating for the farmers that we deal with is running ahead of last year as we can see with the higher balances extended.
Our Ag credit quality remains good and we’re satisfied with our Ag portfolio at this point in time and looking at the Ag portfolio we only had really one liquidation of an Ag farmer which we consider to be good this year considering the difficulties we experienced in Ag. When we're looking at our Ag contributions to loan growth over this quarter three of the last four years our Ag average balances that grow $19 million over the. March to June period and we're expecting it to be similar this year. When looking at our loan pipeline, our pipeline at this point is $59.2 million which is up significantly from 35.2 million in December 31 of this year and substantially more impressive compared to the 19.7 million that we had in place at 331 of last year.
At any quarter end this is highest pipeline that we have had and we believe that that points to the favorable growth trends for our loan portfolio.
We would note however the pricing remains competitive and our pricing is a little bit more competitive than we historically have been versus intermediate treasuries which will have some pressure that puts on margin. That being said, we are hopeful that margin pressure will be limited. When we're looking at the mix of the loans in our portfolio or in our pipeline coming up it is scattered over most of our market areas and really it is a diverse portfolio of potential loan growth. So we feel good about growth for this upcoming quarter both for the quality of the loans and mixture of loans we had in the pipeline.
When talking briefly about secondary market income, our volume is up for the quarter and it's compared to the prior year and over the nine month period our year-to-date income is down slightly but overall we're looking for a positive trend the last several months to continue and we expect our secondary market fee income to exceed levels of those in the prior year. We do note that part of the reduction in our in-house one to four family residential portfolio is likely to some recent increases in our secondary market activity. In moving our discussion to M&A, we’re continuing to look at a number of transactions. We have several deals that we looked at in several in significant detail but none of those we’re able to work out.
We presently have a listing of 8 or 10 targets that we are at some level of discussion with we’re pursuit of and we’re really hoping that we're going to have something lined out by the end of the calendar year. Competition for deal activity remain strong and pricing expectations between us as a buyer and the sellers are not quite in line but we're seen them potentially move closer together. Recent M&A activity in our market has also been down but we are expecting based upon conversations just with investment bankers and other people that that will likely improve.
In moving to deposits, we continue to be pleased with our core deposit growth. Non-maturity deposit growth continues to be our key focus and we continue to target non-maturity growth of 8% to 10%. For the current year, we’re up $68.7 million for year to date, we're up 10.5% from 652 million to 722 million with most of the growth occurring in checking accounts.
When we’re looking at the composition of our non-public, non-maternity deposit growth it has totaled 43.3 million with the majority of the growth occurring in Southeast Missouri at 18.7 million and Southwest Missouri at 17.5 million. So we’re very pleased with Southwest Missouri markets that have been added to our franchise and they're contributing well to our deposit growth.
On our nonpublic deposit growth for the year to-date is up 8% which again is ahead of our internal targets. When we look at capital levels they continue to increase, our tangible common equity ratio was a little over 8.5% at 331 versus 8.3% last quarter. So our tangible common equity is growing, we’re a little disappointed with that and we're hoping that that trend will change over this particular quarter due to increased loan growth. Our targeted tangible common equity ratio was 7.5% and 8.5% so we’re a little bit above our high end of that range at this point but again we're hoping that growth this quarter and then potential acquisitions in the future are going to bring that ratio back towards the mid-range or lower.
Last I have just fixed assets and we have moved into our new facility now at the beginning of March and we do have extra space now at this point in time to facilitate future growth and we're looking forward to fully occupying this building.
With that I want to turn it back over to Matt.
Thank you, Greg and Denise at this time we'd like to take any questions that our participants may have. If you wouldn't mind reminding folks how they can queue for questions.
Certainly, sir. [Operator Instructions]. And our first question will come from Andrew Liesch of Sandler O'Neill. Please go ahead.
Just one follow-up question for me, just looking at your loan pipeline like what sort of yields do you think those might -- those loans might come on and how might that affect the margin this quarter and then into your first fiscal quarter?
We’re anticipating that yields to come on just on average between 4.10% and 4.25%.
And how does that compare to this last quarter?
The average loan rate will be below what it has been but volume will be higher.
And it doesn't look like it but was there any benefit to the fed rate hike in December on your loan or securities?
It was a very slight benefit on loan book basically overcome by what's happened on the longer end of the curve.
[Operator Instructions]. And at this time I'm showing no additional questions. I would like to hand the conference back over to Matt Funke for his closing remarks.
Well thank Denise and thank you everyone for participating. We appreciate your interest in the stock and we will visit with you again in three months. Thank you.
Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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