Southern Missouri Bancorp, Inc. (SMBC) Q1 2024 Earnings Report, Transcript and Summary

Good morning or good afternoon, and welcome to the Southern Missouri Bank Quarterly Earnings Conference Call. My name is Adam, and I'll be your operator for today. [Operator Instructions] I will now hand the call over to CFO, Stefan Chkautovich to begin. Stefan, please go ahead, and you are ready.

Thank you, Adam. Good morning, everyone. This is Stefan Chkautovich, 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 23, 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 with Greg Steffens, our Chairman and CEO; and Matt Funke, President and Chief Administrative Officer. Matt will lead off our conversation today with some highlights from our most recent quarter.

Thank you, Stefan, and good morning, everyone. This is Matt Funke. Thanks for joining us. I'll start off with highlights on our financial results from the September quarter, which is the first quarter of our fiscal year. Quarter-over-quarter, we did show some pressure in profitability at higher cost of funds as well as lower fees tied to loans, mortgage and transaction accounts weighed on results. But for this current environment, we're relatively pleased with those. Offsetting some of this pressure was lower reported noninterest expense from lower merger-related costs as well as other operating expenses in the September quarter. Despite challenges, the bank was still able to report an 11.5% year-over-year increase in diluted EPS, due primarily to a reduction from the larger provision for credit losses posted in September of 2022. That diluted EPS figure for the current quarter was $1.16, down $0.21 from the linked June quarter, but up $0.12 from the year ago September quarter. Our annualized return on average assets was 1.2%, while annualized return on average common equity was 11.7%. Those compared to 1.16% ROA and 11.7% ROE in the same quarter a year ago and 1.44% ROA and 14.1% ROE in the linked June quarter. Net interest margin for the quarter was 3.44%, down from the 3.65% reported for the year ago period and down from the 3.60% reported for the fourth quarter of fiscal '23, the linked quarter. Net interest income was down 2% quarter-over-quarter and up 24% year-over-year as we average earning asset balances. We had a similar amount of margin impact from non-core items in the current quarter as compared to the linked quarter, but our reported margin was improved on a year-over-year basis by the non-core items compared to September of 2022. On the balance sheet, gross loan balances increased by almost $81 million during the first quarter and by $723 million over the prior 12 months with 12-month figure, including a $447 million increase outside of -- inclusive of fair value adjustments that were attributable to the Citizens merger, which had closed in the third quarter of fiscal '23. Loans anticipated to fund in the next 90 days were $158 million at September 30. Deposit balances increased by $115.6 million during the first quarter of '24 and they increased by $990 million over the prior 12 months, which included $851 million attributable to the Citizens merger during the third quarter of fiscal '23. Solid growth in deposits this quarter was the result of CD and savings account increases from well-received special rates offered during the quarter, and we did utilize some brokered funding early in the quarter. FHLB advances were $114 million at September 30, a decrease of just under $20 million from June 30, as we repaid all our overnight borrowings and lowered the bank's reliance on non-core funding. We took a net increase of about $14 million in term FHLB borrowings during the quarter. But compared to a year ago, our FHLB balances are down by $111 million. I'll now hand it over to Greg for some discussion on credit.

Thank you, Matt. And good morning, everyone. Overall, our asset quality remained strong at September 30, with adversely classified assets standing at $42.5 million or 1.15% of total loans, which represents a decrease of around $3.8 million or 13 basis points during the quarter. Non performing loans were $5.7 million at September 30, down $2 million compared to June 30 and decreasing to 0.16% of gross loans. In comparison to September 2022, nonperforming loans increased $1.8 million and are up 3 basis points on total loans. Loans past due 30 to 89 days were $26.7 million, up $19.7 million from June and at 72 basis points of gross loans. This is an increase of 53 basis points compared to the linked quarter and 57 basis points compared to a year ago. Of this increase, 96% relates to a single borrower group relationship with notes that are past maturity are not renewed due to a dispute among the partnership, which prevented timely renewal. We expect this dispute to be resolved and the delinquency to be resolved during the December quarter. The relationship is not criticized or classified and we do not anticipate any loss to the bank resulting from this dispute. Guarantor's strength provides substantial network and liquidity. Overall, total delinquent loans at September 30 were $28.4 million, up $17.7 million from June. From June 30, Ag real estate balances were up $1.8 million over the quarter and up $22.3 million compared to the same quarter a year ago while agricultural production loans increased $26.3 million for the quarter and $24.2 million over the prior year. Our agricultural customers continue to make great progress on their '23 crop harvest, and we'll likely see many of them finish their corn and rice harvest in October and have a significant amount of their soybeans and cotton harvested by month end, perhaps into mid-November. Very dry conditions this fall have allowed our borrowers to move forward more quickly than normal with their harvest. For the most part, we feel that our farmers were able to get through this year's drought conditions, and our lenders are reporting average to above average yields on most crops on their irrigated farm [ ground. ] However, this did drive expenses higher. Farmers continue to face higher seed, fuel, fertilizer and chemical costs this growing season. And unlike last year, prices have not trended above the levels they received for the prior year crops. Farmers that have on-farm storage will likely be delayed hauling their grain to fulfill contracts due to lower Mississippi River terminal levels until river stages return to a more normal level. Fortunately, farmers can utilize the USDA's CCC loan program to get loans on stored grain so that they can at least pay down a portion of the traditional borrowing lines until grain can be marketed. The farmers holding a good portion of their corn and soybean crops until spring, we anticipate we may see smaller paydowns than normal on some of our borrowing lines for the quarter ending in December. For the crop year crop banking rate mix was about 30% corn, 25% soybeans, 20% rice and cotton and 5% other specialty crops. Corn prices have dropped since earlier this year, especially on the spot market, they may stay lower until the Mississippi River levels come back up for full barge traffic. Rice has strong pricing and it's too early to project how slippings will end up this year. Generally, we expect our farm lines will pay out for 2023 and anticipate lower working capital positions. There may be a small number of farmers that suffered yield losses on their dry land farms this year that may struggle to meet some of their term payments. However, should they not meet all their term payments, most will have sufficient equity to be able to successfully restructure any shortfall. Speaking on the loan portfolio as a whole, the portfolio grew $79.5 million or 8.9% annualized net of ACL during the quarter. This loan growth was led by our East region where we have a bunch of our agricultural activity. Our South region was just behind the East with good growth in those markets. We are continuing to focus on making credit available to our core clients between that and seasonal ag lines paying down, we wouldn't expect to see much net loan growth in the December quarter, even though we will continue to fund construction line drops. Our pipeline for loans to fund in the next 90 days totaled $158 million at quarter end as compared to $135 million at June 30 and $230 million one year ago. Our volume of loan originations was approximately $230 million in the September quarter. A decrease of $43 million as compared to the June quarter. In the September quarter a year ago, we originated $436 million in loans. The leading categories this quarter for loan production with commercial, nonresidential real estate and ag production. Our nonowner-occupied CRE concentration levels at the bank level was approximately 324% of Tier 1 capital and the allowance for credit losses at September 30, down by 6 percentage points as compared to June 30. Stefan?

Thanks, Greg. Going into a little more detail on the income statement. Matt mentioned our margin of 3.44%. Our net interest income for the quarter was $35.4 million, an increase of $6.9 million or 24.2% as compared to the same quarter a year ago. The increase was attributable to a 31.6% increase in the average balance of interest-earning assets compared to the same period a year ago partially offset by a 21 basis point decrease in net interest margin as we work to improve on balance sheet liquidity, leading to a higher cost of funds. Net interest income from loan discount accretion and deposit amortization resulting from the company's acquisitions contributed 16 basis points to net interest margin in the current quarter. Unchanged from the impact in the fourth quarter of fiscal 2023, the linked quarter and up from a 7 basis point contribution in the same quarter a year ago. Recognition of deferred origination fees on PPP loans was immaterial across these periods. On what we view as core we then see margin down 30 basis points year-over-year and down 16 basis points sequentially. Compared to June, the 92-day quarter in September helped add about 3 basis points of reported margin. Noninterest income was up a little more than 6% compared to the year ago period, but down 34.6% compared to the linked quarter. We saw a significant reduction in NSF charges as we change policy on how we assess fees for some items. Bank card interchange income was back down to a more normalized level after seasonal benefits in the quarter. So nonrecurring charges related to lending offset some application fee income in the quarter as well. We'll show a bounce back from those, but the NSF charges will be a headwind. Mortgage banking activity also remains low. Noninterest expense was up 40.1% as compared to the year ago period, but down 4.7% from the linked quarter as nonrecurring merger charges dropped to $134,000 as compared to $829,000 in the linked quarter. The year-ago quarter also included a modest amount of M&A charges at $169,000. There wasn't a lot in the quarter that we consider unusual otherwise. We'll see an uptick in compensation beginning in January, and we will have a little bit of occupancy cost increase in the coming quarters as we relocate some personnel into better position offices in our newer metro markets. Our provision for credit losses was $900,000 in the quarter ended September 30, 2023, as compared to a PCL of $5.1 million in the same period of the prior fiscal year. In the linked June quarter, it was $795,000. The PCL in the year ago period was impacted by substantial loan growth during that quarter as well as a modest decline in the modeled economic outlook. The company's assessment of the economic outlook at September 30, 2023, was little change as compared to the assessment of the June 30, 2023. Qualitative adjustments in our ACL model were slightly decreased based on a reduced pace of loan growth, but we did increase adjustments relative to a small group of classified hotel loans. Net charge-offs remained at a low level during the quarter, with our trailing 12-month net charge-offs running at 3 basis points. The allowance for credit losses at September 30, 2023, totaled $49.1 million, representing 1.33% of gross loans and 856% of nonperforming loans as compared to an ACL of $47.8 million, which represented 1.32% of gross loans and 625% of nonperforming loans in our June 30, 2023, fiscal year-end. Our earnings release included a more detailed table of deposit trends over the last year. On a quarterly basis for total deposits, exclusive of brokered funds, we had solid growth. This was primarily due to well received rate specials ran in the quarter for savings in CDs. We're also pleased to see more stable noninterest-bearing deposit levels. We use core growth and brokered funding to meet seasonal loan demand while reducing reliance on FHLB funding during this quarter. Matt noted earlier, the elimination of our overnight position and reduction from a year ago in FHLB borrowings. It's especially notable that we did so in the September quarter as we currently are at our peak loan demand and trough deposits funding position on the calendar. Going into the fourth calendar quarter, we are entering a period which we see further deposit growth from ag, the general business cycles, and public funds, which is based on the tax cycle in our areas. While we want to remain cautious about the liquidity outlook in the current quarter, if normal trends hold, we may look at further reductions in non-core funding, such as broker deposits. Looking into full year fiscal 2024, we anticipate continued solid levels of profitability, though the lag effect of the Fed's rate increases will still pressure margin over the next quarter or so. We're optimistic if the Fed is done with significant rate hikes we saw over the prior period that we should see a trough over the next 2 quarters. Greg, any closing thoughts?

Thanks, Stefan. Right now, we're now 9 months past our merger with Citizens Bancshares and 8 months past the systems conversion. We remain focused on deposit retention in those markets and elsewhere and have seen steady improvements over the last quarter and how we're integrating those team members into our operations and procedures. The team is doing a fine job. We have achieved the cost savings we had anticipated in the merger. And from here forward, we are repositioning some of our office locations, as Stefan noted, and we are also looking to recoup community bankers in some of our new markets. So there could be modest incremental upticks in noninterest expense. We are 100% committed to providing our excellent services in the more rural and middle market communities we added to our partnership with Citizens in addition to the Kansas City metro area. We're not currently actively pursuing additional merger opportunities I would expect that other than under very unique circumstances, we'll stay on the sidelines for a bit longer. That said, continued regulatory and macroeconomic factors pressuring banks could eventually lead to an uptick in potential interest of partners.

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

[Operator Instructions] And our first question today comes from Andrew Liesch from Piper Sandler.

Welcome, Stefan. The CD specials that you were running, any more details on those what were you -- what was some of the rates and the terms and are those ongoing here into this quarter?

They are ongoing, Andrew. We were primarily marketing shorter-term CDs, 15 months and in which rates up to 5.5% where we had taken some broker funding in the prior quarter, early in this quarter, summed up with some longer-term brokered funding that we would have added to try to balance out the latter there.

Got it. And so both campaigns are continuing. So we expect to see more CD growth here this quarter? And is that kind of leading to that margin compression that you talked about with the guidance in the near term?

Yes, it certainly has contributed and will continue to contribute there. It has continued into this quarter. We've dialed it back just a little bit. We'll continue to look at how aggressive we need to be on that pricing relative to our funding position.

Got you. And then looking out to the rest of the fiscal year, on loan growth and decent growth here. But it sounds like the pipeline is down certainly compared to a year ago. What sort of growth rate do you expect? And what are your clients telling you for like for their credit demand and needs for the next 12 months?

We're really looking at muted growth for the current quarter and the following quarter, which are traditionally our lowest growth quarters, and then we'll have a fair amount of uptick in activity again in the final quarter of our fiscal year, as Ag lines grow again, we draw about $20 million a month in construction draws that will maintain a lot of our current balances for the next 6 months.

Overall for the year, Andrew, probably in the mid-single digits for percentage growth.

Got it. Yes, makes sense.

The next question comes from Kelly Motta from KBW. Kelly.

Nice to hear from both of you, Greg and Matt as always, and nice to have Stefan joining us. Welcome. I was hoping you could refresh us a bit on loan portfolio repricing about how much of that portfolio comes due this year? And can you provide where new loans are coming on just so we can get a sense of what further lift we might see on the loan yield side?

Loan production is coming on primarily 8.25%, 8.5% for link production and monthly, I would anticipate, on average, we would have roughly $50 million a month maturing that would be repricing higher.

Prepayments could add to that Kelly.

Got it. That's helpful. And then in your prepared remarks, Greg, I think you mentioned that you're looking to add new teams to certain markets. Can you provide kind of -- are there any particular markets in particular that you're looking to add talented and where are you seeing the greatest opportunity for growth, either through the addition of new teams or through current organic production.

When we partnered with Citizens, there were several other rural outstate markets are outside of Kansas City area that they did not have any lending teams in place. We are looking for lending personnel in several of those more rural markets. So that would include potentially Chilicothe, Brookfield, Macon, Boonville or Trenton, Missouri. We probably would not fill someone in all those markets, but we are looking for talent, but at present, we're just in the looking for stage.

Got it. That's helpful. And then in terms of capital, I mean, levels are pretty solid here. In terms of capital priorities, it seems like M&A might there may not be that many opportunities near term, although you're looking. Can you just walk us through your priorities for capital? Is the idea there really to save any dry powder for what deals may lie ahead in addition to organic growth? Or is there any appetite for buyback here?

I would really not anticipate us to initiate any type of buyback. I would see us building more of a capital work test, so to speak, for deployment in future acquisitions.

Got it. That's helpful. Maybe last question for me. Looking at these, I know you had the kind of nonrecurring benefit last quarter. It looks like one area on a core basis that may have pulled back was deposit service charges. Was there -- is that just a function of activity or was there any repricing of -- on your side that kind of drove that lower? Just trying to get a sense if that's a good number to start off as or if we should kind of have that snapping back to where it was in both prior 2 quarters of your last full year.

We would expect that to probably move lower than what those last couple of quarters would Kelly. We've adopted some policy changes on the items that we do charge for. So that will be downtick in the run rate there.

Got it.

[Operator Instructions] As we have no further questions, I'll hand the call back to the management team for any concluding remarks.

Thank you, Adam. And thank you, everyone, for joining us. We appreciate your interest, and we'll speak again in 3 months. Have a good day.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.