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Southern Missouri Bancorp, Inc. (SMBC)

Q4 2023 Earnings Call· Tue, Jul 25, 2023

$69.72

+1.78%

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Transcript

Operator

Operator

Hello, and welcome to Southern Missouri Bancorp Earnings Conference Call. My name is Elliot, and I will be coordinating your call today. [Operator Instructions] I'd now like to hand over to Matt Funke, President. The floor is yours. Please go ahead.

Matt Funke

Analyst

Thank you, Elliot, and good morning, everyone. This is Matt Funke, President of Southern Missouri. Thanks for joining us. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, July 24, 2023, 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 I'll start off with some highlights on our financial results. We're happy to report this morning that the June quarter, the final quarter of our fiscal year, showed a rebound in what we would call headline profitability as the March quarter had included large nonrecurring charges related to our merger with Citizens Bancshares. We still had some smaller charges related to the merger in the June quarter and some other noise on the expense side, but we also had some benefits in non-interest income to mostly offset those. Earnings per common share diluted in the June quarter were $1.37, down $0.04 or 2.8% as compared to the same quarter a year ago, and up $1.15 or 523% from the third quarter of fiscal 2023, the linked quarter. The impact from $829,000 pretax in merger-related charges this quarter was approximately $0.06 per common share as compared to approximately $0.01 in the year ago period due to similar charges. Our annualized return on average assets was 1.44%, while annualized return on average common equity was 14.1%, and those are compared to 1.62% ROA and 16.2% ROE, respectively, in the same quarter a year ago. And in the March quarter, impacted by the larger merger charges, our ROA was 0.23% and the ROE was 2.3%. Net interest…

Greg Steffens

Analyst

Thank you, Matt. And good morning everyone. Overall, our asset quality remains quite strong with adversely classified loans at $46.3 million or 1.28% of total loans at June 30, decreasing a little more than a $0.5 million or seven basis points during the quarter. Non-performing loans were $7.7 million in June 30, up slightly in dollar terms, but overall steady at 0.21% of gross loans. In comparison to fiscal year 2022, non-performing loans increased $3.5 million or 6 basis points with the significant majority of the increase resulting from our merger with Citizens. Loans past due 30 days or more were $10.7 million or up $3.4 million from March 31 and at 30 basis points on gross loans, they were up nine basis points compared to the linked quarter and up 13 basis points compared to the very low levels of the prior year. Most of our increase, again is attributed to the Citizens merger. From March 31 ag real estate loans and other loans, the farmers increased by a total of $31.6 million, with ag real estate balances up a little more than $8 million over the quarter, and ag production balances up $23.5 million. Compared to a year ago combined balances are up $53 million split pretty evenly between real estate and operating loans. And then some of the increase was attributable to the Citizens acquisition. For an update on our ag customers they are in the mid-season for the 2023 crop production year. Our lenders are reporting that farmers were able to get off to an earlier than usual planting season due to a drier spring, and most crops were in the ground by the end of May. Dry conditions have continued, but fortunately most of our ag customers have irrigated land to help mitigate drought conditions.…

Matt Funke

Analyst

Thanks, Greg. Our earnings release did include a more detailed table on deposit trends over the last year. Of course, in March, we show [ph] jumped with the Citizens merger, but we did see outflows as compared to December 31 outside of the merger impact. On a monthly basis for total deposits outside of the merger, and outside of any brokerage funding. We had positive months in January and February, followed by negative months in March and April and then relatively stable balances in May and June. We were up a little bit for the year outside of the merger, but down just a little for the year if you exclude brokered funding. Given this rate environment, we’re pleased to see our noninterest-bearing balances are behaving pretty well. Our interest-bearing transaction accounts have moved down, and we see consumers and businesses alike holding lower average balances than they did a year ago. We don’t have hard stats on it, the tax payment outflows this year in both April and June seem to – maybe to catch up after a few years of stimulus. We do have a lot of customer migration to time deposits within our portfolio. Public units have been the most notable outflows. Some of that is seasonal, some of that is cyclical. We had some public units that were holding excess funds. They’ve invested some of those with deposit brokers or in short-term securities and others who were holding some grant funds over the last few years have deployed some of those balances. And unfortunately, we did lose a couple of relationships over the first half of the year as well. We have picked up even more relationships in number terms recently, but the total balance picked up will probably be about a wash as far as those old relationships versus several more new ones. But those new relationships generally hadn’t moved their balances by June 30. So while September is always a tougher quarter for us on public unit balances just due to seasonality, some of these new inflows may help offset some of those seasonal drawdowns. Any closing thoughts, Greg?

Greg Steffens

Analyst

Yes. Just an update on the Citizens Bancshares. We’re now six months past our merger and five months past the systems conversion. We continue to remain focused on integration, expansion and service and deposits for those markets and elsewhere. We're not currently actively pursuing additional merger opportunities and would expect that other than a very unique circumstance will stay on the sidelines for a little bit longer. We have basically achieved most of the cost savings we'd anticipated in the merger. And from here forward there could actually be a slight pickup in compensation as we look to recruit community bankers in some of the new markets that we've entered. We're looking forward to achieving the same success we've achieved in banking, rural and middle market communities as well as in the Kansas City market area.

Matt Funke

Analyst

Thanks Greg. Elliot, at this time we're ready to take questions from participants. So if you would please remind them how they can queue for questions. We'll be ready for those.

Operator

Operator

Thank you. [Operator Instructions] Our first question comes from Andrew Liesch with Piper Sandler. Your line is open.

Andrew Liesch

Analyst

Hey, good morning guys.

Matt Funke

Analyst

Good morning Andrew.

Andrew Liesch

Analyst

I just wanted to. Good morning. I just wanted to focus on the margin here, surprising to see the increase, nice to see there. But has the benefit for the full quarter benefit from Citizens deal – of the Citizens deal already played itself out and do you think just with what you're seeing on funding costs that's going to result in the margin trending down from here?

Matt Funke

Analyst

Yes. There wouldn't be any additional benefit as far as the timing of the merger going forward. Their balance sheet was set up a little better than ours for rising rates. So we will have some continued benefit from the fact that the merger has happened as the fed maybe raises rates tomorrow or further from there. But on an ongoing basis, yes, we're – we would be looking to the deposit cost as the big driver in any changes from here.

Andrew Liesch

Analyst

Got it. All right. And then on – like there are a few one-time items that ran through fee income that you mentioned. I guess what should be the right run rate on this line on non-interest income going forward backing up some of some of the seasonal or one-time items that may have affected fourth quarter – your fourth quarter results?

Matt Funke

Analyst

Yes. So while we don't want to provide any forward guidance, the number that we reported here would be probably a little heavy than what's sustainable. We tried to lay those out in the release as far as what those impacts are. But expect it would trend down from here a little bit over the near term.

Andrew Liesch

Analyst

Okay. Like interchange was up quite a bit. And then so was the other loan fees, so you didn't go through and trend back down to where they were before this quarter or is there some benefit from Citizens that might flow through there?

Matt Funke

Analyst

There would be some benefit from Citizens. Their trust in wealth management was an ad for us. I think that interchange income benefit was north of 300,000. We have the tax credits I think we're 700,000. Some of the mortgage servicing rights that was 300,000 plus this year up from last year. Loan fees were a little heavy this – this quarter compared to our normal run rate.

Andrew Liesch

Analyst

Got you. All right. I will step back. Thanks for taking the questions.

Matt Funke

Analyst

Absolutely.

Operator

Operator

[Operator Instructions] Now turn to Kelly Motta with KBW. Your line is open.

Kelly Motta

Analyst

Hey, good morning guys. Thanks – thanks for the questions and congrats on a really strong quarter.

Matt Funke

Analyst

Thank you, Kelly.

Kelly Motta

Analyst

Wondering that loan growth just finished the – it finished the year really strong and was really strong into the – through the fourth quarter. I'm just wondering if you're starting to see higher rates impact borrower demand and any maybe potential pullback you might be having in terms of tightening up underwriting in this environment as we think about the growth rate ahead?

Greg Steffens

Analyst

We have definitely tightened our underwriting criteria some, and we are – loans are much harder to get today than what they were six months ago, three months ago, in part due to liquidity and then just concerns about the future. We're not looking at near as many loan opportunities for people that we have not banked before. We're limiting more activity to customers we have a relationship with. And then just overall, we're taking a tougher look at credit underwriting requirements, more equity down payments than what we had done before. We do have a fair construction pipeline that is still working through the process that we anticipate a lot of those loans will be funding over the next [ph] three to six months, but we'll be having less new originations, will have more draw activity. And then we also are anticipating a little bit slower prepayment activity on our existing book than what we had before. So when we're looking forward, I would anticipate that we'll have more front-end loaded growth for this current fiscal year, and then growth will taper off as the year goes on.

Kelly Motta

Analyst

Great. That's super helpful. Got it. And then with margin definitely surprised the upside this quarter and rebounded nicely. At this higher level of profitability, I did see you maintained your dividend this month, but just wondering any high-level thoughts on capital return, and how you're viewing capital? I know in your commentary, you mentioned the M&A might be slowing, but wondering if you have any updated thoughts on dividends as well as buybacks, especially for what you recently issued in Citizens deal.

Matt Funke

Analyst

I didn't quite catch the end of that, Kelly, but just speaking to the maintaining of the dividend. We spent a lot of time talking about that with our board. Just decided that in the current environment, it was best to maintain that and be a little more conservative. We do have an approved – share repurchase program out there. Should we see balance sheet growth slow a lot, capital ratios pick up too much, we could always deploy that. But we just want to maintain a strong balance sheet and be a little bit cautious in this current environment.

Kelly Motta

Analyst

Got it. Appreciate it...

Greg Steffens

Analyst

Higher capital ratios at the moment.

Kelly Motta

Analyst

Understood. Last question from me. You really benefited from that higher level of liquidity from Citizens, and you brought your loan-to-deposit ratio up, and cash levels are down. Are you comfortable with this level of cash and kind of any more room on the loan-to-deposit side, especially with deposits being more under pressure at least across the industry.

Greg Steffens

Analyst

Well, overall we would like to have more deposits. We just have to be mindful of what the cost of the deposits are versus...

Matt Funke

Analyst

Wholesale funding.

Greg Steffens

Analyst

Yes. But overall, I mean, our loan-to-deposit ratio is reaching higher levels than where we would like to be in this environment that I think that we're likely to continue to maintain levels at this level or maybe even grow slightly over the near term.

Kelly Motta

Analyst

Got it. Okay. I'll step back. Thank you so much for the additional color.

Matt Funke

Analyst

Thanks, Kelly.

Greg Steffens

Analyst

Thank you.

Operator

Operator

This concludes our Q&A. I'll now hand back to Matt Funke, President for closing remarks.

Matt Funke

Analyst

Thank you again, Elliot, and thank you, everyone, for joining us. We appreciate interest and pleased to report on the quarter, and we'll talk to you again in three months.

Greg Steffens

Analyst

Thank you all.

Operator

Operator

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.