Southern Missouri Bancorp, Inc. (SMBC) Q3 2024 Earnings Report, Transcript and Summary

Hello, and welcome to today's Southern Missouri Bancorp conference call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Stefan Chkautovich, CFO, to begin. Stefan, please go ahead.

Thank you, Jordan. Good morning, everyone. This is Stefan Chkautovich, CFO of Southern Missouri Bancorp. Thank you for joining us today. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, April 29, 2024, 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 Matt Funke, President and Chief Administrative Officer. Matt will lead off our conversation today with some highlights from our most recent quarter and fiscal year.

Thank you, Stefan, and good morning, everyone. This is Matt Funke, and thanks for joining us. I'll start off with those highlights from the March quarter, which is the third quarter of our fiscal year. Quarter-over-quarter, our profitability was down a bit as the higher cost of funds weighed on our margin. But for this current environment, we remain relatively pleased with the results. In the third quarter, we have seen the net interest margin stabilize, although at a lower level compared to the second quarter, and net interest income was slightly above the linked quarter due to a larger average earning balance sheet. Despite the challenging rate environment and our cost of funds, and inflations impact on the -- on our operating expenses, year-over-year, we were still able to grow our core earnings outside of M&A costs and available-for-sale securities losses, and we've grown our tangible book value over the last 12 months by almost 13%. We earned $0.99 diluted in the March quarter, that's down $0.08 from the linked December quarter, and it's up $0.77 from the March 2023 quarter, which would have included the Citizens merger charges. During the current quarter, the bank executed a securities loss trade, selling bonds with a book value of $18.4 million and recognizing a loss of just over $800,000 in noninterest income. We reinvested those proceeds into higher-yielding fixed-rate securities, which is expected to result in an earn-back of the realized loss in under 2 years. Recognition of this loss during the quarter reduced after-tax net income by $626,000, our earnings per diluted share by $0.06 and our ROA by 5 basis points. Our tangible book value per share ended the quarter at $35.51, and that's increased by $4.05 or 12.9% over the last 12 months. Our net interest margin for the quarter was 3.15% as compared to 3.48% for the year ago period, and it's down from 3.25% reported for the second quarter for fiscal '24. If we would adjust for the impact of reduced purchase accounting marks and the day counts in the shorter March quarter, however, we believe we're down to a low single digit decline in the margin, linked quarter to current quarter, on a core basis, and I'll let Stefan run through those details in a moment. Our net interest income was up 0.1% quarter-over-quarter and 2.2% year-over-year as we grew average earning asset balances. Noninterest expense was down 7.2% for the current quarter compared to a year ago, primarily as a result of the onetime merger expenses associated with the January 2023 merger with Citizens, and it was up 5% from the linked second quarter of fiscal '24, due primarily to annual merit compensation increases as well as higher advertising and occupancy expenses. On the balance sheet, gross loans increased by $39 million compared to the December quarter end, and by $291 million as compared to March 31, 2023. Year-over-year, gross loans have grown 8.4%. And in what is usually our seasonally soft third quarter, loans grew at an annualized rate of 4.2%. Cash equivalent balances as of March 31, '24, decreased by $48 million compared to December 31, as loans outpaced deposit growth and as we also purchased some securities, but we increased by $53 million over the last 12 months. Although cash balances were lower at quarter end compared to the linked quarter, levels throughout the current quarter remained elevated with our average interest-bearing cash balances totaling $182 million for the third quarter, roughly doubled compared to the December quarter and up by $55 million as compared to the same quarter a year ago. During the quarter, we had some modest opportunistic stock repurchase activity, which totaled about 4,400 shares acquired at an average price of just over $42, which was just below our March 31, '24 book value. As of this quarter end, the company has about 302,000 shares remaining in its current buyback authorization, and we would expect to continue to be opportunistic with stock buybacks. I'll hand it over to Greg now for some additional discussion on credit.

Thank you, Matt, and good morning, everyone. Overall, our asset quality remained strong at March 31. Our adversely classified loans totaled $42 million or 1.12% of total loans, an increase of about $3 million or 7 basis points during the quarter. Nonperforming loans were $7.4 million at March 31, which increased $1.5 million compared to last quarter and totaled 0.20% of gross loans. In comparison to March of 2023, nonperforming loans were relatively flat and 1 basis point lower as a percentage of total loans. Loans past due 30 to 89 days totaled $5.5 million, which is down $1.5 million from December and at a low rate of 15 basis points of gross loans. This is a decrease of 4 basis points compared to the linked quarter, but it is up 3 basis points compared to 1 year ago. Total delinquent loans were $8.6 million, up $333,000 from December. This quarter, ag real estate balances totaled $234 million or 6.2% of total loans, and ag production and equipment loans were just under $140 million or 3.7% of total loans. As compared to the prior quarter end 12/31, ag real estate balances were down $4 million, but up $4 million compared to March 31, 1 year ago. Agricultural production and equipment loan balances were down $6.7 million quarter-over-quarter due to normal seasonality, but we're up almost $25 million from 1 year ago. Most ag loan renewals for 2024 are complete and our farmers are well into the new season. As we noted on last quarter's quarterly call, our ag borrowers generally entered the year with somewhat lower working capital positions due mostly to higher input and irrigation costs in 2023. Most of our farmers were able to get in the fields a little earlier this year as weather has been a little warmer and dryer than it was last year, influencing timing of droughts compared to last year. During the renewal season, we conducted our usual stress testing of our farmers to make sure that cash flows were strong enough for the underwriting of those credits. So far this year, futures and spot pricing on crops that make up most of our operating lines are in line or slightly above projections utilized during underwriting. Last year's yields were good across the irrigated farm ground, which makes up the majority of what we finance. Drought conditions did affect the ability of corn growers especially to get grain to market due to lower river levels. The decline in corn sales had a modest impact on outstanding balances in addition to the favorable spring weather. Our farmers remain cautiously optimistic for a profitable year, preparing for what could be another demanding season and hoping that Congress can reach agreement on a longer [ extension ] of the Farm Bill providing more certainty on a year-to-year basis about insurance and price supports. We overall continue to feel good about our agricultural segment of our portfolio. Matt also mentioned that we had a pretty good March quarter for loan growth overall, and it was well rounded, stemming from non-owner-occupied commercial real estate loans, residential real estate loans, multifamily and drawn construction loan balances. This low growth was also spread throughout our footprint, with good growth in our South, West and Eastern markets. I would note that some of our growth was due to lower-than-expected prepayment rates. Thinking about the loan portfolio overall. We are continuing to prioritize making credits available to our core clients. And in our fiscal fourth quarter, we're optimistic about a little better rate of loan growth due to seasonal factors, as well as bringing a few new producers to our lending team and looking to add to our pipeline. At quarter end, our pipeline for loans to fund in the next 90 days totaled $117 million as compared to $141 million at 12/31 and $164 million 1 year ago. Our volume of loan originations was approximately $241 million in the March quarter, which was in line with the December quarter. In the March quarter a year ago, we originated $255 million. The leading category this quarter compared to last was non-owner-occupied CRE, land and ag real estate. Next quarter, we expect that ag loans to be a bigger contributor due to seasonal draws. Our non-owner-occupied CRE concentrations at the bank level was approximately 329% of Tier 1 capital and allowance for credit losses at $3.31, up modestly as compared to 12/31, and in the middle of a range of about 10 percentage points that we've been maintaining since the Citizens merger. Our intent will be to hold relatively steady on this measure and to grow CRE commensurate with capital. As pointed out in the earnings release, our office portfolio is minimal with 36 loans totaling just $27 million or 0.72% of total loans. The remainder of our CRE portfolio is rather diverse, and our multifamily is primarily in our Midwest footprint. Stefan?

Thanks, Greg. Matt hit on some of the key financial items already, but I wanted to share a few details. Looking at this quarter's net interest margin of 3.15% and included about 11 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits compared to the linked December quarter of 14 basis points and the prior year's March quarter of 14 basis points, too. Also, the 91-day March quarter compared to the 92-day quarter in December impacted reported margins to the downside, with a swing of as much as 4 basis points. Adjusting for those items on what we view as a core basis, net interest margin would be only down about 3 basis points. The primary contributor to the net interest margin compression compared to the linked quarter was the increase in the cost of deposits by 17 basis points to 2.78%, primarily led by CD and savings specials. In total, the cost of liabilities increased 17 basis points to 2.84%. But as stated on the last call, we believe the biggest jump in funding cost increases is behind us, compared to the December quarter increase of 35 basis points and September quarter of 44 basis points. Part of this improvement is due to lowering rates we are offering on CD specials towards the end of December quarter. In comparison, our yield on average earning assets was only up 5 basis points in the quarter. As CDs, which make up about 1/3 of our deposits, have now mostly adjusted up to the higher interest rate environment, we believe we have seen the net interest margin trough in the current quarter. and it did move up very modestly in the month of March. Looking at our CD versus loan repricing going forward, we expect to continue to see some incremental net interest margin expansion if deposit competition does not re-escalate from here. In addition, the margin should benefit from any increase in new loan production at these higher interest rates next quarter, and we have continued to see net interest margin expansion in April from the combination of the moving parts I mentioned. Noninterest income had some noise in the quarter from the loss trade we executed, with the resulting loss of $807,000. Excluding the loss trade, in the last 2 quarters, noninterest income would have been up about 2% as compared to the year ago period and up 1% compared to the December linked quarter. For the linked quarter, the increase was from higher wealth management revenues and other loan fees. This was partially offset by a lower gain on sale of SBA loans. Although not impacting the linked quarter comparison, we will continue to have a drag on year-over-year comparisons due to NSF policy changes we adopted in July 2023 at the beginning of our fiscal year on how we assess fees for some items, resulting in a reduction of fee income. Noninterest expense was down 7.2% compared to the year ago quarter due primarily to merger expenses in the prior period and up 5% compared to the linked quarter. Excluding $3.3 million in merger expenses in the year ago period, noninterest expenses in the current quarter were still about 1% lower due to the timing of cost saves, as well as higher foreclosed property and other expenses in the year ago period. In comparison to the linked quarter, the bank had higher compensation and benefits, mainly due to annual merit increases and cost of living adjustments. We also had increased marketing expenses as well as a slight uptick in occupancy expenses associated with the combination of expenses from new offices and other more miscellaneous items. As Greg mentioned, credit remains benign, and net charge-offs remain minimal at 1 basis point annualized for the current quarter and 5 basis points in the trailing 12 months, which is very solid performance by comparison to historical industry figures. Our provision for credit losses was $900,000 in the quarter as compared to $10.1 million in the same period of the prior year. Of which, $7 million was for the acquired Citizen loan portfolio and were also in line with the linked quarter in comparison. Our allowance for credit losses at March 31, 2024, was $51.3 million or 1.36% of gross loans and 693% of nonperforming loans, as compared to an ACL of $50.1 million or 1.34% of loans and 846% of nonperforming loans at December 31, 2023, the linked quarter. The current period PCL was the result of $1.4 million in provision attributable to ACL for loan balances outstanding, partially offset by a recovery of $458,000 in provision attributable to the allowance for off-balance sheet credit exposure. This was due to construction draws reducing available credit and increasing our on-balance sheet exposure. Our assessment of the economic outlook was little changed, but we did have slightly increased ACL requirement due to qualitative factors and individually evaluated credits. Despite some of the challenges over the last few quarters, as the bank navigated this higher interest rate environment, impacting our margin, slowing the overall economy and resulting in lower loan originations and secondary market fees, we feel opportunistic about margin and overall earnings for the June quarter and beyond if we remain in a stable interest rate and credit environment. Greg, any closing thoughts?

Yes, Stefan. We're now a year past our merger and systems conversion with Citizens Bancshares. We have remained focused on core deposit retention in those markets and are turning the corner towards expansion in our new Kansas City and St. Louis markets. We have been recruiting community bankers in some of our new markets and have seen some modest incremental upticks in noninterest expense. But we are starting to see the benefits of these new hires as well. We are also 100% committed to providing our excellent services in our more rural and middle-market communities we have added as well, and are offering a wider array of financial services in these markets including treasury management, wealth and insurance offerings. Although we are not currently in active conversations with any potential near-term merger partners, we continue to further explore possible opportunities to achieve scale in certain markets and possibly new platforms and offerings where we can acquire and further oversupply and provide more growth outlets. With continued regulatory and macroeconomic factors pressuring banks, we expect the environment to eventually lead to an uptick in potential interest to partners. On an additional note, this quarter, we've reached our 30th anniversary of our initial public offering, and we're very pleased with the growth and success the bank has achieved over these 30 years. We look forward to continuing to serve our customers, provide opportunity for our communities and our team members, and to delivering value to our investors.

Thank you, Greg. At this time, Jordan, 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.

[Operator Instructions] Our first question comes from Andrew Liesch of Piper Sandler.

The loan growth outlook here, seasonally stronger. I expect more agriculture to come in as those draws hit the balance sheet. But it looks like that the pipeline is lower. So just kind of curious about is the pipeline pretty much all in agriculture? Just kind of give us a sense of what that is there. And then also, some of the loan growth also predicated on a continued low pace of pay downs?

Our loan -- our pipeline as far as what's out there, it's going to be a pretty even mixture of our various credits. So I'd say a lot of our loan growth will be similar to the mix that we've had just over time. So it's more than just ag credits. And we are definitely seeing over prepayment rates than what we had seen, and we don't have any expectation that prepayment rates are going to change that much. But we are anticipating our loan growth maybe to be a little higher than what we had maybe guided in our last quarter's call, and we could see looking forward growth of 5% to 8%, depending on the rates in prepayment activity.

Got you. All right. Yes. That's really helpful there. And just on the expense base here, right around $25 million. I hear you with some of the other hiring and what not, higher -- and the occupancy that's coming from that. Is this is a good level to build off here going forward? Or do you think there's maybe more hiring and additional expenses to come on top of this?

I don't think we've got a lot of significant adds to headline on top of this. Like a lot of banks, we're dealing with higher turnover and entry-level positions and more vacancies than we'd like. So we'll look to incrementally fill those as we can. We have seen a little bit better success rate in hiring and retaining during the last 6 months or so. But I don't think you'll see significant changes in the compensation structure from here through the rest of the year.

Our next question comes from Kelly Motta of KBW.

I agree, the commentary on the margin is really helpful. I was hoping to get a little bit more color about the loss trade you guys did this quarter, what yield the proceeds were reinvested at versus the yield at which that they were sold.

Yes. So overall -- all right. I got you. All right. So overall, the -- what we sold was yielding about 2.4% versus what we bought back at about 5.16% yield.

Got it. That's super helpful. And then with your expectation of margin to kind of build off of these levels, it looks like the increase in deposit costs was a lot less this quarter. And you -- I believe in your prepared remarks, you mentioned that CD pricing is coming down. How should we be thinking about -- assuming higher for longer, how should we be thinking about the pricing of the deposit base, interest-bearing deposit costs from about 3 20? Does it roll off here from incremental pressure? Any help would be helpful.

I think you could see some incremental pressure, but from where we were coming off of last year, we could still see a net benefit. We ran some CD specials last summer, and that benefit may decrease a bit, but still over the next 12 months should still be a net benefit on that front.

Last question from me, and I apologize I have a little tickle in my throat. You bought back a modest amount of shares and it seems like you continue to look for M&A, but there's nothing imminent yet. How are you guys viewing managing those capital levels in the buyback in light of valuation here?

We feel pretty positive about that opportunity should the M&A not develop. Just with pricing where it is, we think our earn-back on repurchases we would have at levels around this pricing point are pretty good. So we would have interest in holding back the capital growth and utilizing it for repo activity at this time.

[Operator Instructions] Our next question comes from David Cohen, a private investor.

Yes. Could you repeat the current tangible book value?

Was it $35.5 million? Yes, $35.51, David.

With that, we have no further questions on the line, so I'll hand back to the management team for any closing remarks.

All right. Thank you, Jordan, and thank you, everyone, for joining us. Appreciate your interest in the company, and we look forward to speaking again here in another 3 months. Have a good day.

Thank you, everyone.

Thank you all for joining. You may now disconnect your lines.