Southern Missouri Bancorp, Inc. (SMBC) Q1 2023 Earnings Report, Transcript and Summary

Good morning, and welcome to today's Southern Missouri Bancorp Quarterly Earnings Conference Call. My name is Drew, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Lora Daves, Chief Financial Officer, to begin. Please go ahead.

Thank you, Drew, and good morning, everyone. This is Lora Daves, CFO with Southern Missouri Bancorp. Thank you for joining us. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, October 24, 2022 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 on the call today by Greg Steffens, our Chairman and CEO; and by Matt Funke, President and Chief Administrative Officer. Matt will lead off our conversation today with some highlights from our most recent quarter.

Thank you, Laura, and good morning, everyone. This is Matt Funke. Thanks for joining us. We're pleased to report this morning that the September quarter, the first of our fiscal year, provided continued growth for Southern Missouri. Due to the above trend growth in loans as well as due to some deterioration in the macroeconomic outlook required provisioning cut into profitability despite very low charge-offs and continued strong credit quality metrics. We earned $1.04 diluted in the September quarter, that's down $0.37 from the linked June quarter and down $0.39 from the September 2021 quarter. Net interest margin for the quarter was 3.65% compared to 4.01% reported for the year ago period and 3.66% recorded for the fourth quarter of fiscal 2022, the linked quarter. The large drop off from a year ago was due to large amounts of deferred PPP origination fees recognized in that quarter. We viewed - our core quarterly margin is stable quarter-over-quarter and down slightly year-over-year. But if we did adjust for the 92-day quarter in September, we'd be down about 3.5 basis points compared to the June quarter. Average interest earning cash and cash equivalent balances decreased compared to the linked quarter and year ago period and are back in line with our historical norms. Net interest income for the quarter was $28.5 million, an increase of $2.9 million or 11.2% as compared to the same period of the prior fiscal year. The increase was attributable to a 22% increase in the average balance of interest-earning assets, partially offset by the decrease noted in our net interest margin. On the balance sheet, gross loan balances were up more than $257 million in the September quarter compared to one year ago at September 30, 2021 gross loan balances were up $695 million or almost 30%. Our Fortune merger in February of 2022 added $202 million during that period. So net of that, our annual growth rate for the year for the 12-month period would be about 22%. The investment portfolio was a little changed over the quarter, while cash and equivalents decreased almost $42 million. Deposit balances increased by almost $36 million in the first quarter and have increased by $479 million compared to September 30 of last year. The year-over-year increase was attributable in part to the February Fortune merger, which provided $218 million in deposits at fair value. We also had a little more than $28 million that we picked up in a branch acquisition in the second quarter of fiscal 2022, FHLB borrowings increased by $187 million during the quarter, consisting of overnight balances. We typically see better deposit growth after our September quarter, and we also see some seasonal loan payoffs in the December and March quarters. But still, this would be a higher than normal overnight position for us due to the very strong loan growth that we had this quarter. Greg is planning to speak to some key credit themes. Greg?

Thank you, Matt. Our borrowers' credit performance remains quite strong. We noted for the last several quarters that we were working with two hotel industry relationships totaling just under $24 million with business models that were particularly impacted by the pandemic. We continue working with those borrowers and have transitioned them back to principal and interest payments at this time. $9 million in such loans are considered special mention assets, while the other $15 million is considered substandard. Adversely classified loans were a little over $27 million and remained relatively unchanged from the June quarter. A year ago, adversely classified assets totaled $17 million. Watch and special mansion credits totaled a combined $31.2 million at September 30, and we're up about $6.8 million during the quarter due primarily to one ag relationship being more closely watched. Nonperforming loans were just under $4 million or 0.13% of gross loans at September 30, down just a little bit as compared to June 30 and as compared to just over $6 million or 0.27% of gross loans one year ago. The reduction in nonperforming loans was attributable primarily to the return to accrual status of one loan relationship secured by single-family residential rental property partially offset by an increase of about $650,000 related to a customer from the Fortune merger. Nonperforming assets were $5.7 million, were 0.17% of total assets at September 30, down about $600,000 as compared to June 30 and as compared to slightly above $8 million or 0.31% of total assets one year ago. In addition to the reduction in nonperforming loans, we sold a legacy foreclosed asset and past due loans continue to remain at very low levels. At September 30, past due loans 30 days or more were up slightly in dollar terms from one year ago, but remained at a low level of 21 basis points and they remain at 21 basis points at June 30 compared to September 30. To date, we're not seeing any material changes to our credit profile since June 30. Turning to the ag portfolio. Ag production loans and other loans to the farmers were up $30 million in the quarter and up almost $14 million compared to this time last year. While ag real estate balances were up $4.5 million over the quarter and up $22 million compared to a year ago. Our agricultural customers are close to finishing the 2022 harvest, and we could likely see many of them finished by the end of October or early November, which is something that we have not seen in many years. Fall drought conditions have allowed our farm customers to move forward quicker than normal with their harvest. The majority of land that our producers farm on can be irrigated with flood or center pivot irrigation which has allowed them to withstand the drought conditions, and they are generally reporting above-average yields for most crops for this year. We would anticipate loan prepayments to occur slightly faster than normal. However lower river levels have been impacted by the drought conditions may cause some delays for some farmers to fulfill their contracts at river terminals. Rail-based inland grain elevators, however, are accepting grain and they're moving - allowing our farmers to move a large part of their crops out. Our crop mix was approximately 25% soybeans, 30% corn, 20% cotton and 20% rice with another 5% mix of specialty crops. Input costs for the 2022 season were substantially increased from the prior year. However, farmers have been able to contract and more favorable prices than they could receive in prior years as well, which offset part of the increased cost of production. Our lenders maintain close contact with our borrowers and the expectation is that the majority of our farmers should be able to pay out for the 2022 crops season. Lora, would you provide some additional details on our financial performance, please?

Thank you, Greg. Matt hit on some of the key financial items already, but I wanted to share a few details on the margin. First item is our net interest margin in the September quarter was 3.65%, which included about seven basis points of contribution from fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits, or $520,000 in dollar terms. As PPP loan balances and forgiveness repayment diminished - accelerated accretion of deferred origination fees on those loans dropped significantly in the September quarter adding just $37,000 to interest income, which had no material impact to margin. In the year ago period, our margin was 4.01%, of which six basis points resulted from fair value discount accretion of $376,000 and PPP forgiveness caused us to accelerate accretion of $2.2 million in deferred origination fees contributing 34 basis points to the margin. On what we see as our - core basis, our margin remained relatively unchanged from the prior quarter and was three basis points lower compared to the period one year ago. Average cash balances were significantly lower in the current quarter compared to the year ago period. And security yields were higher helping our overall - our earning asset average yield to increase about 33 basis points, exclusive of accretion of PPP deferred fees or discounts on acquired loans. Our cost of funds increased 34 basis points compared to the year ago period. In the June linked quarter, we reported a margin of 3.66% which included a similar benefit from fair value discount accretion of eight basis points and just a bit more recognition of deferred PPP origination fees on forgiveness, contributing only one basis point in that quarter. We viewed our core asset yield as increasing 32 basis points, while our cost of funds was also up 34 basis points over the June quarter. Noninterest income was up just under $1 million compared to the year ago period, attributable to increases in servicing and other loan fees as well as deposit account service charges, and these were partially offset by decreases in gains realized on the sale of residential real estate loans originated for that purpose. Compared to the linked quarter, noninterest income was down $1 million on lower bank card interchange, loan servicing fees and net gains realized on loan sales decreased mostly in the sale of the SBA guaranteed portion, and also on non-deposit insurance product income. Noninterest expense was up $2.7 million compared to the year ago quarter including $169,000 in charges related to M&A this quarter as compared to just $25,000 in the year ago quarter. The overall increase is attributable primarily to compensation and benefits, which was up $1.5 million, occupancy expenses up $334,000, data process and expenses up $176,000 and then also legal and professional fees, advertising and other noninterest expenses. Compared to the linked quarter, noninterest expense was down a little more than $400,000 with modest declines and spread across - which was spread across a number of categories. The company, again, had very low net charge-offs in the September quarter, little changed from the last several. Our trailing 12-month figure is now right - at $109,000, which is plus the one basis point. The company recorded a provision for credit losses or PCL charge of $5.1 million in the three-month period ending September 30, as compared to a PCL recovery of $305,000 in the same period of the prior fiscal year. Our allowance for credit losses at September 30 was $37.4 million or 1.26% of gross loans and [960%] of nonperforming loans as compared to the ACL of $33.2 million or 1.22% gross loans and [806%] of nonperforming loans at June 30 the linked quarter. The increase in our ACL [indiscernible] gross loans was attributable primarily to a modest deterioration in the economic outlook modeled in our ACL methodology. Our tangible common equity ratio declined 43 basis points during the quarter as assets grew faster than our equity. Matt, would you like to share other comments?

Thanks, Lora. Our loan growth did accelerate in the September quarter and the growth of more than $250 million resulted mostly from multifamily residential, non-owner occupied commercial real estate, ag lines, construction and C&I. All of our regions showed growth this quarter led by our West region centered in Springfield, Missouri and followed next by our East region, which includes much of our ag activity. We expect growth to continue in the next quarter with our pipeline for loans to fund in 90 days at $230 million at September 30, down just a bit from a quarter earlier and up from $181 million reported at this time last year. Our non-owner CRE concentration was approximately 344% of regulatory capital at September 30, increasing by 39 percentage points as compared to June 30 and as compared to 272% one year ago. Our volume of loan originations was approximately $436 million in the September quarter, up approximately $308 million from the June quarter. In the same quarter a year ago, we originated $219 million. Lending categories leading the originations were multifamily residential, non-owner occupied commercial real estate, construction and single-family residential. Our June and September quarters are usually our softest for deposit growth, and we saw decreases in transaction accounts, money market and savings accounts. Public unit funds increased $43 million compared to the prior quarter accounting for the quarter's growth. Deposit growth in the fiscal year-to-date came from our West and South regions as we established relationships with several new public unit depositors in different communities. Our cash balances decreased further in the September quarter as expected, and we ended the quarter in an overnight borrowed position. We continue to expect increased competition for deposits to negatively impact our cost of funds and margin over the coming quarters. While we did not see any decline in NSF revenue in the quarter, we expect noninterest income may be impacted by further tweaks to our program as we try to reduce fees assessed consumers for small overdraft balances. And as we've noted previously, we continue to face competitive pressure on the compensation front. As we approach our scheduled calendar year-end adjustments to our compensation program, we are looking at what we need to do to remain competitive in our communities, and we'd anticipate that we'll again need to ensure larger increases than what we were accustomed to seeing historically. Greg, any closing thoughts?

Sure, Matt. I'd like to just close out by noting that since our last quarterly call, we announced our agreement and planned merger with Citizens Bancshares. Citizens Bank and Trust, 14 branch locations serves customers in Kansas City, St. Joseph, [Chill & Coffee], Maryville and several other communities in Northwest Missouri. So these locations will complement Southern Bank's existing footprint, improve our market share in Missouri, and provide potential opportunities for other revenue enhancements. As of June 30, 2022, Citizens had assets of $1 billion deposits of $904 million and stockholders' equity of $94.2 million. Citizens' has maintained a great core deposit base over its history and will provide an opportunity for us to continue to improve our funding base. Citizens' provides us a much more asset-sensitive balance sheet and should help considerably with our net interest margin in the current rising rate environment. A portion of our outsized loan growth for the current quarter was made in anticipation of utilizing some of their excess liquidity and placing them into loans. In addition, we were attracted to the ability to further grow their deposit and lending basis with the addition of our deposit and lending platforms to some of their rural markets, especially some opportunities within the agricultural industry. Overall, we're really excited to be partnering with Citizens and we look forward to our combined organization. Thank you.

Thank you, Greg. At this time, Drew, we're ready to take questions from our participants. So if you would, please remind folks how they may queue for questions at this time.

Thank you [Operator Instructions] Our first question today is from Kelly Motta from KBW. Your line is now open.

Hi everyone, good morning. Thanks for the question and great color.

Good morning, Kelly. Thank you.

I think I want to start with loan growth just because it was so incredibly strong. Just wondering if there is anything unusual in that in terms of like line draws or anything because 38% linked quarter annualized is really super strong. So, just any color around there and maybe the potential for pay-downs prospectively?

We have seen some increases in usage on commercial lines of credit. We did have a little bit of additional ag production lines to credit usage this quarter compared to historical quarters. But other than that, we just had a really strong quarter for growth as our commercial real estate portfolio expanded quite a bit, especially in the multifamily arena. But we also had a little bit of a reduction in loan prepayment rates, which also contributed to some of our growth as we didn't have as much going out the back end as what we are booking, but - no, it was the strongest quarter for growth we've ever had.

Got it, right.

And we should have a pretty good upcoming quarter.

Excellent. And then in terms of funding that growth, it looks like you pulled on the FHLB borrowings, the kind of bridge the gap, but you have Citizens coming on, which has - which is very deposit rich and is flush with liquidity. Can you just provide us - remind us what their deposit costs are? And if that gives you kind of the flexibility to replace the borrowings you took out with their core funding base. Just any color around that and the prospective cost of funds going forward would be helpful?

Yes, I don't have their number in front of us specifically, but I believe it was below 20 basis points through June 30. We haven't seen a September 30 calculation on that yet, but would anticipate their probably less sensitive to rising rates on their deposit costs and what we are just given their deposit mix.

Yes, I think it's 630, I think their cost of deposits were 17 basis points. And then they have on balance sheet liquidity with a lot of excess cash balances that are greater than what our overnight borrowings are at present, which was a big impetus for some of our loan growth that we had this quarter or the September quarter, and we're hoping to utilize most of their excess deposits with paying down our overnight borrowings.

Got it.

But there will be a short-term cost of those overnight borrowings.

Got it, that's helpful. Maybe last question for me is on fee income. The decline looks like its multi German by resi mortgage. So wondering if this a kind of good level of gain on sale of loans from here just given what's happened with the refi market and secondary markets as well as it looks like interchange is down a little bit. Just wondering if you changed your rates at all or if that's just kind of a blip there? Thanks.

Yes on the interchange that really just some seasonal fluctuations that we have pretty commonly, no change to the contract there. As far as the secondary market production, of course, we don't know exactly where that will go, but there should be some baseline of activity would be surprised if we see any meaningful improvement over the next couple of quarters until things kind of settle out from the right shop the secondary markets had.

Got it, I will step back now. Thank you so much for all the questions, appreciate it.

Thanks Kelly.

Thank you.

Thank you [Operator Instructions] Our next question today comes from Andrew Liesch from Piper Sandler. Your line is now open.

Hi, good morning everyone.

Good morning, Andrew.

Good morning, Andrew.

Just trying to look at the yield side here, I guess, with 6% average loan growth, I would have expected earnings, I say yield to be up more than this. I'm just curious like what sort of yields were you obtaining on these new loans, then are there any sort of like subsectors or industries that are driving this growth?

Multifamily has been the primary sector driving the growth as most of that is in what we call LIHTC conversions which are low income housing tax credit projects that are being converted from subsidized rent to market rate rent units, and we've really been pretty successful expanding that business line. And that's been the largest component of our growth. We will see during the current quarter, we'll see quite a bit of ag lines pay-down. And - no, I think we'll have some seasonal outflows of - on some of the lines of credit that we have for our businesses. Our current loan pricing is - a lot of the new loans we're originating now will be in the upper fives to mid-sixes to maybe even a little higher than that. Just depending upon when the loans were committed. And we did have a little bit of a lag in asset yields that were booked this last quarter, but the loans being booked this current quarter should be very positive to overall asset yielding mix.

Got you, right that's helpful. But - and then I guess, kind of related to the provision, the - I always understood those multifamily and LIHTC loans to be pretty safe assets and I'm just curious if there's anything that's driving beyond just the growth, the increase in the allowance this quarter. I would not expect the loss rates on those - on that product to be overly concerning. So I'm just curious like what kind of what went into building the allowance this much this quarter?

Yes, there's not - it's not anything specific to the loans that we originated or the multifamily loans, in particular, it's really just the economic conditions that are layered into our loss drivers projected out over time. We're seeing from the net of service that we use, increased expectations for unemployment and a little bit lower GDP growth over the time horizon, and that's just caused the overall calculation to kick up a couple of basis points.

Underlying credit metrics, I mean, we're really not seeing any deterioration. And we have very few, if any, past due loans, not really much any of any changes. I mean, credit quality has been stellar. It's just forecast for the future and us wanting to make sure we have our cushion for - if things do slowdown in 2023 calendar year.

Got you, well that make sense, you covered all my other questions. I'll step back thank you.

Thanks Andrew.

Thank you. There are no further questions at this time. I'll hand you back over to Matt Funke for closing remarks.

Okay, thank you, again Drew. Thank you, everyone, for joining us. Appreciate your interest in the company...

Apologies Matt sorry to interrupt, but we do have another question from David Welch from River Oaks Capital.

Okay, go ahead David.

Yes, hi Matt sorry for jumping in there on your closing comments. But I think we're all just asking questions about the extraordinary loan growth. I think it surprised a lot of longtime observers of your company. And I understand you're probably, as you mentioned or Greg mentioned a little prefunding the acquisition earning assets. But I guess, was there anything either wholesale or brokered or I'll call it nonstandard in the loan production in the most recent quarter?

We really don't have anything in this quarter that's outside the realm of what we have historically did. So - we just had a standard quarter we just had a lot better growth than some historically.

Okay. Did you - and I'll say, put your thumb on the scale a bit to be a little more aggressive with rates or terms or structures or anything? Because I know you have to be looking at that excess liquidity that comes through the acquisition. Did you get full pricing for the loans you put on the books this most recent quarter?

The multifamily that we booked was all primarily related to one group of investors and their loan pricing tends to be some of the most competitive that we offer. And so more of our growth was at a little better than a lower end of [rates cuts], but there are also some of the most highly qualified borrowers that we do business with. So we did give a little bit on loan yields on some of that growth, but it's still our best borrowing groups.

Okay.

[indiscernible] very, very limited credit exposure.

Okay. Is that a long-time customer for the bank?

Yes. We've been doing business with them for over 10 years now.

Okay all right. And the projects are generally in footprint or are they more nationwide or more regional?

Our borrowers are within our footprint, but the underlying projects will be scattered over multiple states basically Southeastern United States, Oklahoma, Texas, Arkansas, Mississippi, Tennessee, Alabama.

Okay, all right, thank you and again sorry for interrupting your closing comments.

No worries David, thank you for your interest. Again thanks, everyone, for joining us, and we'll speak again soon. Thank you.

That concludes today's Southern Missouri Bancorp quarterly earnings conference call. You may now disconnect your lines.