Southern Missouri Bancorp, Inc. (SMBC) Q2 2021 Earnings Report, Transcript and Summary

Good day, and welcome to the Southern Missouri Bancorp 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. Please go ahead.

Thank you, 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, January 25, 2021, 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. I'm joined today on the call by Greg Steffens, our President and CEO. And to lead us off, Greg is going to provide a quick update on the bank's operations in the continuing pandemic environment.

Thank you, Matt, and good afternoon, everyone. This is Greg Steffens, and thank you for joining us today. I want to start again this quarter with an update on our operations as we continue to deal with the pandemic. When we spoke a quarter ago, we noted that our communities, in general, were seeing increasing virus cases and hospitalization. Today, the most recent data indicates that we're at similar levels as we were 3 months ago for new cases and hospitalizations, but we are thankfully currently trending lower from peak levels that were noted 4 to 8 weeks ago in most of our markets. While the virus remains an issue for business activity, we're hopeful that we will continue trending in the right direction. And as the vaccine distribution ramps up, we're hopeful for the end of this difficult time being in sight. We continue to have limited restrictions on actual activity in most of our markets, and our schools are generally open. We continue to have limited instances where we have needed to temporary close a facility or move to drive-through-only service for a period of time, and our facilities have generally remained open for business. For an update on our loans that have been deferred or modified, our borrowers have continued to make good progress in returning to their originally contracted payment terms and obligations. As you noted in the final table of the earnings release that since June 30, when the modifications under the CARES Act that we had agreed to reached $380 million, we're down to approximately $40 million at December 31 at the end of the quarter. All of those were also at least requiring interest-only payments. We continue to remain in discussion with a limited number of borrowers who may need additional relief or concessions in the coming quarter for a period of time. And expect that in some instances, we will agree to some concessions where operations have been significantly impacted. Overall, we remain very pleased with the underlying performance of our loans in the environment that we've experienced. For an update on PPP, the new round of PPP lending is expected to provide some additional relief to our borrowers, who are facing difficulty as a result of the pandemic. And we're quite hopeful that the relief, limited concessions on our part and good news on the vaccine front will provide some optimism to the later part of the calendar year. Since we spoke last, PPP forgiveness has picked up significantly. The release notes that we saw a $38 million decrease in PPP balances. The pace of forgiveness has been really steady since early November, and we are nearing in at 50% of the dollars extended for forgiveness. We've also begun processing some applications for the second draw PPP loans early in the calendar year, but they've been relatively limited in amount and we don't have a good projection today of the amount that we may be able to originate for existing customers or other borrowers. Presently, new PPP loans are roughly equaling the PPP loans that are being forgiven. For an update on our nonperforming loans, they were very little changed over the last quarter and remained at good levels. Adversely classified loans were also unchanged at about $25 million, and past due loans were only up by a little less than $1 million to $7.7 million, which is about 35 basis points of total loans. We remain cognizant of the fact that some of the modifications may be affecting past due figures for ourselves and the industry. And so for borrowers who haven't yet been able to return to their originally scheduled payments, we're including them on our watch list, which has added about $39 million to the figures since the CARES Act modification started. In addition to adversely classified credits, our watch list includes $61 million in loans at December 31, which is up about $32 million from a year ago, but is less than the $39 million that's been added for the CARES Act. Focusing on our ag portfolio and giving our ag update, our borrowers are in the harvest season. Agriculture real estate loan balances were up a little more than $3 million over the quarter and are little changed for the fiscal year. While production and other loans to farmers dropped by $23 million in the quarter, and are lower for -- by about $2 million for the fiscal year-to-date. Our ag borrowers have completed their 2020 harvest, and lenders report a strong year for yields and expect substantially all borrowers to repay their annual obligations and many to notably improve their working capital positions as overall, it was a successful year. For crops carried to harvest, our portfolio mix was approximately 30% soybeans, 25% corn, 25% cotton, 15% rice and 5% other specialty crops. We may see some shift in 2021 away from cotton to corn or soybeans due to favorable pricing. For those that hadn't fully contracted, the pricing generally improves their profitability for the year. At present, with corn, prices moving higher. Some of our borrowers sold their harvest sooner than expected and resulted in an earlier paydown on their operating lines than we previously expected, affecting our overall loan balances. If pricing remains elevated, we may see a number of borrowers also contract their 2021 production earlier than normal, which could affect next fall's repayment schedule as well. In comparison to our prices used for loans already underwritten for 2021, corn prices are trending 18% higher, soybeans are roughly 30% higher, rice and cotton are -- excuse me, rice is trending about even and cotton is trending 17% higher. Our farmers are looking forward to the '21 production year with the strong improvements in pricing, though input costs are beginning to rise as well. We're seeing more borrowers also prepaying some of their input costs to lock in price. There remains some instability in the market due to COVID-19, but our farmers generally had an average to better-than-average year and looking forward to '21 production with stronger expected working capital positions. Matt, would you go ahead and update our financial results?

Sure. Thanks, Greg. Well, in the December quarter, we earned $1.32 diluted. December is the second quarter of our fiscal year. And that's an increase from $0.23 diluted in the September quarter, and it's up $0.48 from the same quarter a year ago when we earned $0.84. Sequentially, net interest income increased due mostly to acceleration of deferred fee accretion on PPP loans as those balances were forgiven. Noninterest income increased due mostly to nonrecurring factors, provision for loan losses declined modestly and noninterest expense was little changed. Compared to a year ago, noninterest income was up a little more than $2 million as gains on residential loan sales were $1.2 million higher and that nonrecurring, bank-owned, life insurance benefit added almost $700,000. In the -- as compared to the linked quarter, that BOLI item accounted for most of the noninterest income increase of almost $800,000, while an increase in secondary market gains was mostly offset by the inclusion in the linked quarter of a nonrecurring wealth management benefit. Year-over-year, excluding the onetime item, we saw higher interchange income and servicing income, partially offset by lower-deposit service charges. In mortgage, our volume originations was more than 4 times the year ago period, and the average gain per loan remains slightly higher as well. We're also generating more in mortgage servicing income as the dollars under servicing continued to increase sharply, and we generated new mortgage servicing rights with our increase in originations. Compared to a year ago, our loans under servicing were up by about $80 million, which is a 50% increase. Debit card interchange and deposit service charges continue to follow similar trends from recent quarters. And as a percentage of average assets, our noninterest income annualized was 89 basis points, of which 11 basis points was attributed to the BOLI benefit. In the same quarter a year ago, we were at 65 basis points annualized with nothing identified as nonrecurring. And in the linked quarter, we showed 78 basis points, of which 3 basis points was the nonrecurring book management item. Noninterest expense was up 3.1% compared to the same quarter a year ago and down 0.5% as compared to the linked quarter. A year ago, we had a $350,000 nonrecurring items total mostly due to loss on a fixed asset disposal. And in the linked quarter, we had $150,000 in nonrecurring compensation expense related to wealth management. We also recorded a charge for provision for off-balance sheet credit exposure at $388,000 in the current quarter, up from $362,000 in the same quarter a year ago and as compared to a charge of $226,000 in the linked quarter. Compared to the year ago December quarter, significant changes on what we see as a core basis are compensation and occupancy up 8% and 5%, respectively; data processing, up 34%; deposit insurance, up to $218,000 in the current quarter from 0 in the same quarter a year ago; and advertising remains below trend and core deposit and tangible amortization is lower by about $100,000 per quarter as a couple of CDIs from some older acquisitions have rolled off. As a percent of average assets, noninterest expense is down about 20 basis points compared to the same quarter a year ago. Excluding fixed asset losses in that year ago period, we'd be down about 11 basis points and most of that decrease would be attributable to our higher-average assets resulting from the PPP loans. Our net interest margin in the December quarter was 3.92%, which included about 8 basis points of contribution from fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits, which were about $478,000 in dollar terms. Also, the accelerated origination fee accretion on the PPP loans, as those were forgiven, added another $968,000 to interest income, which contributed 16 basis points to the margin. A year ago in December, our margin was 3.70%, of which 10 basis points resulted from fair value discount accretion. And we also had some benefits in that quarter from loans that had previously been on nonaccrual and returned to accrual status or resolved otherwise, those added another 4 basis points to the reported margin. So on what we see as a core basis, our margin is up about 11 basis points from December 2019 to December 2020. We see our core asset yields down 55 basis points, core cost of deposits down 66% and total core cost of funds down 68%. Making that same comparison to the September quarter when we had a reported margin of 3.73%, we had less discount accretion, which had added 6 basis points of benefit to that margin, and we didn't have any impact from PPP forgiveness. So on a core sequential basis, we saw less than 1 basis point decline. Greg noted nonperforming loans and assets were stable in the current quarter at about $11 million. Nonperforming assets are down about $3 million from the same quarter a year ago. That's due primarily to a reduction in problem loans and assets from the Gideon acquisition from November 2018. At $224,000, net charge offs were a bit higher in the December quarter as compared to the linked September quarter, and they're 4 basis points annualized on average loans. That's the same as our trailing 12-month figure. We've had about $800,000 in net charge offs over the last 12 months. A year ago, that trailing 12-month figure was 3 basis points on average loans. With limited loan growth, stable credit metrics in our outlook and the required provisioning remains limited, we set aside just over $600,000, which is 11 basis points annualized. Looking back over the last 12 months, provisioning has totaled $6.1 million or 29 basis points on average loans over that period. The effective tax rate was 20.7%, down a bit from the linked quarter and up a bit from the year ago quarter. Over the last 12 months, our effective tax rate has also been 20.7%. And we're trending higher from 19.8% on a trailing 12-month basis a year ago. Looking at the balance sheet. Gross loan balances were down in the December quarter as PPP forgiveness more than offset growth elsewhere. Gross balance is down about $29 million, while PPP balances declined $38 million. Compared to 12 months ago, gross loan balances are up $162 million outside of the Central Federal acquisition and up about $66 million outside of both the acquisition and PPP loans, which would translate to about a 3.4% core growth rate. Last year at this time, without any noncore growth to adjust for, we were running about 6.8% on a 12-month basis. The investment portfolio is up modestly, and we continue to see cash flow from our mortgage-backed securities, some municipal calls. We're picking up more in cash balances in total than we want to, but we're being cautious about locking in asset yields also. Total assets were up $82 million in the December quarter, with cash up more than $100 million. The allowance as a percentage of our gross loans increased to 1.64% at December 31, up significantly since June 30, primarily due to the adoption of the CECL standard while provisioning in excess of net charge offs has also added another $1 million. The allowance would have been 1.72% as a percentage of gross loans outside of PPP, up 1 basis point from the linked quarter. Deposits were up $97 million in the December quarter following a decline in the September quarter, which was the only quarter of the calendar year where we didn't post strong deposit growth. Brokered funding was down $5 million in the current quarter, while public unit deposits were up $32 million, more than reversing the decrease we had seen in the September quarter in public units. Time deposits outside brokered funding were down by $25 million this quarter, similar to what we saw in the September quarter and almost 9% lower than our balances 1 year ago outside of the Central Federal acquisition. We've seen strong growth in CDs through mid-2019, while rates were headed higher. Nonmaturity deposits were up $122 million in this most recent quarter, and they're up 29% as compared to 12 months ago outside of the Central Federal acquisition. Nonmaturity growth had slowed in late 2018 into early 2019 as depositors had shown a preference for time deposits, and now that is in full reversal. FHLB advances are down $22 million in the December quarter as we don't really have a need for the funding. Compared to December 31 a year ago, advances are down about $51 million. Greg, I'll hand it back over to you for some strategic comments.

Right. Thanks, Matt. When we're looking at the present quarter and just where we're anticipating loan growth, we're really -- we would have had modest loan growth in the last quarter, if it would not have been for PPP forgiveness. As we're looking forward, we're anticipating March quarterly growth to be tough to maintain balances, that is really unclear, depending upon how much second draw PPP loans occur. When we look at some of our specific portfolios, our nonowner-occupied CRE concentration was at 264% of capital at 12/31 as compared to 272% at 9/30 and 274% a year ago. In the current quarter, loan balances were up modestly, while regulatory capital levels grew a little faster. Our volume of loan originations was almost $230 million in the December quarter, which is relatively high and up from $205 million in the September quarter. A year ago, originations were $195 million in the comparable quarter. Compared to the year ago quarter, we saw a $45 million increase in secondary market residential production. So we'd be slightly down outside of that product. Our loan pipeline for loans to fund in 90 days was at $85 million at 12/31, down from $123 million at September 30 as compared to $73 million 1 year earlier. The current figure doesn't include any impact from second draw PPP loans, which we would expect that those could have a modest impact on production. But again, we really don't have good insight there yet. Right at 25% of our pipeline at 12/31 was loans that were targeted for sale in the secondary market. As we move into the new calendar year, we are looking to hold in our loan portfolio some of those 15- and 20-year fixed rate residential loans that would normally have been originated for sale. Over the last several quarters, we'd estimate that might have been $10 million to $15 million per quarter, up to 1/3 of our secondary market lending. Although we wouldn't expect that level of origination or portfolio into those loans to continue far into the mid calendar year, given our cash position and the yields available on securitized mortgages, we think that it's a better option for us for the current period of time given returns on cash balances. We remain pleased with our deposit growth over the last year and while we expect that there will come a time when some of the outsized growth will be out of our balances. We are maintaining additional on balance sheet liquidity to be ready for that eventuality. Growth in nonmaturity deposits over the last 12 months is coming from all of our regions, while our CD balances are declining across all of our regions. On the M&A front, we remain in a wait-and-see mode, happy to look at any opportunities, but really not expecting much in the early part of this year. We do continue to expect things will pick up eventually over the course of the year. In an 8-K filing last week, reiterated in our earnings release, we announced a modest increase in our dividend. Given our core profitability, we generally would have looked to increase our dividend yields in July, but we decided to forgo that at that time due to the pandemic. With 91,000 shares repurchased in the December quarter, we have about 141,000 shares remaining available for repurchase under the repurchase plan that we entered into the new calendar year. That concludes my remarks. Matt?

Okay. Thanks, Greg. And at this time, we'd like to take questions from any of our participants. So if our operator would remind folks how they might queue for questions, we'll do that at this time.

[Operator Instructions] The first question comes from Andrew Liesch with Piper Sandler.

Greg, just a follow-up question on one of your comments here. It sounds like you're willing to retain some of the 15- and 20-year fixed rate residential mortgages. Within [ the last year here, did I hear you correctly ] that you actually think the securitized mortgages present a better opportunity to retain on the balance sheet. Was I hearing that right?

We just feel like the -- look, we wouldn't be securitizing them. We're originating with secondary standards, but we're just going to put them in our portfolio instead of sell them at the present time.

Got it. Okay. Helpful. Then I just want to then talk about the margin trajectory, certainly benefited from the PPP origination fees. I guess as those go away, do you think that the core margin is going to shake out kind of near this 3.67%, 3.68% level, where it's been the last couple of quarters once those fees dissipate?

We've really been a little positively surprised that it's held up through the December quarter so far. When we were looking at this in May, June, we anticipated our asset yields would have dropped a little bit faster than this, a little faster than we could bring down our core cost of funds in the second half of the year, but we've really kept pace on that side. It still seems to me, just intuitively, that there's a little bit further to fall on the asset side than what we'll be able to bring the cost of funds down, but we'll do our best to maintain.

Got it. All right. And then just one follow-up for me on expenses. Some good expense control here this quarter and then the lower it was the last -- well, at the last 2 quarters, at the end of your last fiscal year. So is this $13.4 million or so a good run rate to build off of?

We always see some upward pressure as we enter the new year, especially on the compensation front. I don't feel like there's really anything else significant out there to warn you about just between benefits and compensation adjustments, which take effect for us in January. Payroll taxes and things like that, we always have a tougher quarter in March. We have to kind of grow into it over the calendar year.

[Operator Instructions] The next question comes from Kelly Motta with KBW.

Maybe going to capital. You obviously repurchased some shares in the quarter and did the penny dividend increase. What is your appetite for continued share repurchases given where your stock is trading?

Well, we have to complete this one before we will elect to opt for a new one, but that's something that we regularly would talk about once this buyback is completed.

As long as we don't see a huge run-up in pricing, I think we would have some appetite just to deploy capital more so than even considering where pricing is on it. But if we're not able to achieve much in the way of asset growth over the coming year and if these levels of profitability hold up, we'll certainly be building capital faster than we're wanting to.

Got it. Yes. Okay. I just wanted to make sure you're going to continue to use your current authorization. With the reserve, we've seen a lot of banks release reserves this quarter. You kind of held steady if you strip out the PPP loans. Assuming the outlook continues to improve, do you think you might start to release reserves in the coming quarters?

We feel like at our present level of 1.72%, we're at the high end of reserve levels needed. Given that we're expecting loan growth to be pretty muted, we would anticipate additional provisioning to be limited. And depending upon how our portfolio performs, it may drop a little.

Got it. And then I just want to make sure I'm understanding your commentary about mortgage. I appreciate that you're going to portfolio some of the mortgage that you would have otherwise originated for sale. Are you going to continue to sell a portion of those loans still?

The 2/3 of the loans we originate for sale in the secondary market, our 30-year fixed rate mortgages, so we are going to be continuing to sell those. We just will be retaining the 15- and 20-year production and so that will offset some of our loan shrinkage.

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

Okay. Thank you again. Thanks for your interest in the company and participation in the call, and we'll speak with you again in about 3 months. Thanks.

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