Southern Missouri Bancorp Inc (SMBC) 2022 Q3 法說會逐字稿

Hello, and welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. My name is Alex, and I will be coordinating the call today. (Operator Instructions) I will now hand over to your host, Matt Funke, CFO for Southern Missouri. Over to you, Matt.

Thank you, Alex. Good morning, everyone. This is Matt Funke, CFO with Southern Missouri Bancorp. Thanks for joining us today. The purpose of the call is to review the information and data presented in our quarterly earnings release dated Monday, April 25, 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 President and CEO. Greg will lead off our conversation today with commentary on our current operations, our lending activity and credit quality measures. Greg?

Thank you, Matt, and good morning, everyone. This is Greg Steffens, and thank you, and we appreciate you joining us today. The first item I'd like to note is that we completed our merger with Fortune Financial Corporation with locations in the St. Louis metropolitan area in late February. We completed system conversions on that same weekend and operations have been running smoothly since the acquisition. As for our COVID update, as most of the U.S., our market areas saw a rapid decline in reported cases of COVID and hospitalizations beginning in February and dropped to the lowest levels since the beginning of the pandemic. Scheduled team members have not been an issue with COVID for the last several months, which has been a welcome relief.

We do note that there are a few areas of the country where new variants may be pushing infection rates in the wrong direction, but it's hard to imagine that we would see another wave or anything in our areas that would result in any significant mitigation efforts that would affect our business activity for our customers. Our borrowers' credit performance remained strong. We noted in January that we were working with 2 hotel industry relationship loans, totaling just under $24 million with business models that were particularly impacted by the pandemic. We've seen improvement as hoped for on the performance on those properties and one has returned to scheduled principal and interest payments. The second comprised of 3 loans has not yet moved to principal and interest, and we moved it to substandard as a result of that.

We do expect to return to principal and interest payments by the end of the June quarter on those credits, and we expect continued improvement in occupancy as the calendar year progresses for both properties. Nonperforming loans moved modestly higher in the March quarter, up about $900,000, which was primarily due to a handful of loans acquired in the Fortune merger. Adversely classified loans increased by around $12 million, primarily due to the relationship noted above and totaled $27.7 million.

A year ago, adversely classified assets totaled $20.8 million. Watch and special mention credits totaled a combined $45 million at March 31, up $9.5 million this quarter, due primarily to a single construction loan in lite tech industry, offset by the migration of the special mention and substandard hotel loan discussed earlier. We don't anticipate any issues on the construction loan, but the downgrade was just primarily due to unanticipated delays in the completion of the project. Watch and special mention loans totaled $64.5 million a year earlier, so they've declined substantially. Past due loans were modestly higher, but remain at very low historical levels. At 4.4 million loans past due 30 days or more represented 17 basis points of our total loans, which was up from 14 basis points last quarter, but it is down from 20 basis points or $4.3 million a year ago.

Turning to our agricultural portfolio, ag production and other loans to farmers were down $13 million in the quarter and up $1.1 million compared to the same time last year. While ag real estate balances were up $6 million over the quarter and $20 million compared to the same period last year. We noted on the last quarter's earnings call that our farm customers had a strong 2021 with good yield and pricing, and that's translated into expected payment performance and line management.

Renewals for 2022 are completed for the most part as most of our relationships have been renewed, and most of our customers are beginning the year with very strong working capital positions. Input costs have increased substantially for our customers with fuel costs and other input costs growing, as the season has gotten underway. Our lenders are visiting with our borrowers and checking on where they are with locking in their crop production and sales prices for this year. With commodity prices having already moved offsetting most or all of the cost of higher input costs. Most of the crops that we financed have increased in price by 20% or more than where we completed our underwriting. And these increases would more than offset again the cost of our crops. One unknown is what impact the hostilities in Ukraine or the resolution could create for the commodity markets.

We have seen some delays in planning for the 2022 season, due to spring rains as we're falling a little behind anticipated schedules on a historical basis. We do expect that some of our corn acreage, which carries higher input costs than our other common crops may be diverted to soybeans or cotton if crop -- planting conditions don't improve. If the wet weather continues, we could see more soybeans and cotton. We financed a limited amount of livestock overall, but increasing grain costs, feed live bottlenecks and supply chain issues affecting deliveries are all stressing these borrowers more so that our row crop farmers. To the extent any are affected to the pointed stresses or working capital positions, we will look to be utilizing the FSA guaranteed loan programs. PPP forgiveness continued in the March quarter, and we made good progress on the remaining balances for those loans we originated.

With our originated balances outstanding dropping from $11.5 million to $4.2 million, which is comprised of only 10 loans. We also picked up a small amount of PPP loans that remain outstanding from the Fortune acquisition, and those totals were down to $2.4 million on 22 loans at March 31. We expect to make further progress in the June quarter, accelerated fee recognition continued to decline in the March quarter. And at present, we have 100,000 in deferred fees remaining on those remaining PPP loans. Matt, would you provide us an update on our financial results?

Thanks, Greg. We did earn $1.03 diluted in the March quarter, March is the third quarter of our fiscal year. That figure is down $0.32 from the linked December quarter, and we're also down $0.24 from the $1.27 diluted that we earned in the March 2021 quarter. Items primarily contributing to the decline include $1.1 million in nonrecurring noninterest expense attributable to the merger. $2 million in provision for credit losses needed to fund the allowance for credit losses for loan balances outstanding as well as for off-balance sheet credit exposures. Also, a significant drop in the accretion of deferred loan origination fees from PPP loans, as Greg mentioned.

In the year ago quarter, we had a modest negative provision and we would have done the same in the current quarter, except for the provision required for the acquired non-PCD loans from the merger. Our net interest margin in the March quarter was 3.48%, which included about 6 basis points of contribution from fair value discount accretion on acquired loan portfolios which was about $448,000 in dollar terms. Also PPP loan balances and forgiveness repayments dwindled as did the accelerated accretion of deferred origination fees on those loans, dropping to $180,000, which contributed just 2 basis points to the margin.

A year ago, margin was 3.68%. We had 10 basis points from fair value accretion and PPP forgiveness contributed 18 basis points. So on what we see as a core basis, our margin was down less than 1 basis point year-over-year, March '22 -- from March '21. And we see our core loan yield is dropping 22 basis points over that period, while our core cost of deposits was down 7 basis points, and our cost of funds was down 19. Average cash balances are modestly higher in the current quarter compared to the year ago, but securities yields are a little bit better, helping to offset that pressure. In total, excluding PPP accretion on acquired loans excluding PPP or accretion of fair value discount on acquired loans, our earning asset yield was down 17 basis points. In the linked December quarter, we had a margin of 3.77%, which included a similar benefit from fair value discount accretion, but significantly more recognition of PPP origination fees and that contributed 13 basis points in the December quarter.

So on what we see as a core sequential basis, we're seeing a decrease of about 19 basis points, about 8.5 of those basis points are attributable to higher cash balances, 7.5 are due to the drop to a 90-day quarter from a 92-day quarter in December. Core loan yields dropped about 3 basis points when we adjust for the day count difference in the quarters, and that accounts for most of the remainder of that decline, while our cost of funds was unchanged. Noninterest income was up $380,000 compared to the year ago period. That's attributable to wealth management and insurance increases due in large part to the Fortune merger. A nonrecurring $152,000 in assistance from our broker-dealer to help us bring on new advisers. Loan fees, deposit service charges are up compared to the year ago period, but secondary market residential originations continued to fall compared to that year ago period. They are down about 71% in dollar terms.

Compared to the linked quarter, noninterest income was down as we had an unusually strong quarter in December from Wealth Management. We also had a gain on our exit from a renewable energy tax credit, partially offset by fixed asset loss. Deposit service charges, which are usually somewhat seasonal dropped a bit from December to March and secondary market residential income declined sequentially also. Noninterest expense was up $3.2 million compared to the year ago quarter. That includes that $1.1 million in M&A charges, mostly data processing and legal. Other increases were attributable mostly to compensation, which was up $1.5 million year-over-year; and occupancy, up just over $400,000. Our annual compensation increases are generally completed effective in January and would have added about 7.5% to our payroll as we continue to see competitive pressure there.

Fortune team members were on our payroll for about 5 weeks. And in addition to base salary, that group will introduce more volatility as they have a higher percentage of their team members participating on a commission basis. A payroll tax reset with the calendar year-end always influences our compensation expense in the March quarter. And we also had modest severance charges and transition assistance to those wealth management reps from Fortune. We accrued for PTO, this new higher base rate of pay. We also saw benefit expenses increase in line with an 8% increase in average headcount. Occupancy increased year-over-year due to the inclusion of the Fortune locations for part of the quarter, as well as the trend increase we've seen due to relocations and remodels. Compared to the linked quarter, noninterest expense was up $1.7 million, mostly due to items that we already commented on, and partially offset by lower foreclosed credit charges in the quarter.

The company again had very low net charge-offs in the March quarter, little changed from the last several. Our trailing 12-month figure is now less than $100,000, which is less than 1 basis point on our average loans. Loan growth did slow a bit in the March quarter and along with continued positive credit metrics and projections for the economic factors that drive our CECL calculation, we would have had a net release of allowance for credit losses, except for the provision required in the Fortune acquisition. In the last 12 months, we've reported a total negative provision of $1.4 million and outside of Fortune that would have totaled approximately $3.4 million negative.

Due to the additional loans and what would have been a negative provision, otherwise, our allowance as a percentage of gross loans dropped 7 basis points from the linked quarter to 1.29% at March 31. On the balance sheet, gross loan balances were up $222 million in the March quarter, backing out the Fortune merger, this would have been about $19.5 million in core growth. I say core, but that's actually net of PPP balances, which declined by a little more than $7 million. Compared to March 31 a year ago, gross balances were up $443 million, just over 20%.

Fortune added $202 million, while PPP balances declined $96 million over those same 12 months. So if we adjusted for both those items, our annual rate of growth over the last 12 months would be a little more than 15%. The investment portfolio added $20 million over the quarter, while cash and equivalents increased almost $70 million quarter end to quarter end. Fortune added cash to our holdings, but no material investments for the portfolio. Deposits had another strong quarter with $303 million in growth. Backing out the Fortune merger, we would have recorded $84 million. Brokered funding was up $11 million, which is attributable to Fortune while public unit deposits in total were up $40 million, which also included about $11 million from Fortune. We also saw other public unit inflows, and we expect those to continue in the coming quarters.

In the current quarter, time deposit balances outside of the Fortune merger dropped about $5 million. Over the last 12 months, the time deposits are down $39 million outside of acquisitions and brokered funding. Nonmaturity deposits meanwhile, are up $291 million outside of acquisitions and brokered funds, and that includes just under $100 million in public unit funds. FHLB borrowings were up $6.4 million as advances assumed from Fortune were partially offset by repayment of a small amount of term advances. We also assumed $7.5 million phased amount of subordinated debt from Fortune that note is callable in 2026, and it matures in 2031. Our tangible equity ratio decreased by about 71 basis points during the quarter, reflecting the merger and a decline in the company's accumulated other comprehensive income. That was partially offset by earnings retention that modestly outpaced our asset growth aside from the acquisition. The AOCI decline contributed about 20 basis points of the reduction in the equity ratio. Greg, final comments?

Thanks, Matt. As expected, our loan growth tapered off during the March quarter, following a very strong September and December quarter. Excluding the loans acquired with Fortune, we saw strong growth this quarter in our residential and multifamily real estate portfolios. Our C&I and construction balances did decline during the quarter. Activity in our West region centered in Springfield, Missouri, led the way again in the current quarter and has shown very strong growth over the last 12 months. Our East and South regions were relatively little changed in the current quarter, but have also shown very good growth rates over the last 12 months. We expect loan growth to continue in the June quarter, which historically has been one of our best 2 quarters of the year.

Our pipeline for loans to fund in 90 days was $181 million at March 31, up from $158 million at 12/31 as compared to $146 million we reported a year ago. As I mentioned, we had modest ag paydowns in the March quarter, and that should reverse in the current quarter and the impact from PPP forgiveness should be immaterial.

Our nonowner-occupied CRE concentration did rise during the quarter and totaled approximately 304% of regulatory capital at $331 million, up 16 percentage points as compared to December 31 and as compared to 262%, 1 year ago. Fortune's concentration was the biggest factor to the increase, as the loans they added outpaced new capital that we issued in the merger, and they had a higher CRE concentrations upon acquisition. Our volume of loan originations was about $268 million during the March quarter, down about $68 million from the December quarter. In the same quarter a year ago, we originated $251 million in loans which was substantially elevated by PPP originations.

Our December and March quarters are usually our best for deposit growth. And on a core basis, this March quarter was above average, but much lower than the linked December quarter. The Fortune merger added about $218 million with a limited amount of public unit or brokered funds. On a core basis, time deposit balances continued to stabilize this quarter, with balances little changed over the last 6 months. Public unit funds have made up about 35% of our deposit growth in the fiscal year-to-date, and guidance from our depositories is to continue expecting inflows for the rest of our fiscal year. Our East region is leading in nonmaturity deposit growth outside of public units, while the West region leads in total nonmaturity growth, including public units. Our cash balances continue to move higher in the March quarter, and we expect them to remain elevated for the upcoming quarter.

Loan growth is expected to improve in the June quarter and the ability to earn better investment yields has convinced us to begin putting a modest amount of cash to work in the investment portfolio, although we want to do so at a measured pace over a period of time. Our expectations is that public unit balances will not follow the normal pattern this year, which would have been drawing down over the June quarter. Finally, we continue to work to fully integrate the team members and locations from our Fortune partnership and the processes that we are doing there. We are also continuing to look at other opportunities in the marketplace. And as always, we want to take advantage of any opportunities when they come available while maintaining disciplined pricing and evaluation. Matt?

All right. Thank you, Greg. At this time, Alex, we're ready to take questions from our participants. So if you would, please remind them how they can queue for questions.

(Operator Instructions) Our first question for today comes from Andrew Liesch of Piper Sandler.

I got some questions on the margin here. So obviously, the deal added a lot of cash, rates are higher. It sounds like you want to put some of that to work in the securities book, loan growth going to improve here. How should we be looking at it on a core basis, the trend seems up from this 338 level or so just from those dynamics alone, but then as rate hikes on top of that, that should be beneficial. So how are you guys looking at the margins for the next couple of quarters?

Some of it is going to be driven by how fast the Fed ultimately goes. We think these next couple of quarters as the Fed maybe moves 100, 150 basis points. We're generally positive to -- stable to a little bit positive there. Beyond that, it becomes a little cloudier, influenced by deposit competition more so, anything further you'd say, Greg.

Yes. And then just some -- how the shape of the yield curve is going to change as the Fed continues to raise rates, what happens on the other parts of the yield curve and the loans, so we would be putting on the portfolio at that time.

Just given where the March quarter usually comes in with the day count issue and everything, we would expect the reported numbers to look a little better as we look at it on a core basis, we'd expect maybe just marginal improvement there.

Got it. Okay. That's helpful. And then the cost saves related to Fortune with the conversion done, how are those tracking? Do you think they're all going to be in the run rate to start your next fiscal year? Or will there be any spillover into July?

I don't think there'll be anything significant from the data processing side. I think we should have most of that cleared up by July. I think we'll probably be at that point.

We've been progressing well on the numbers and we're within our target range as we estimated. There's still going to be some hangover this quarter of just some different items, but we're pleased with where we're coming at.

Got it. Yes. That makes sense. Then I remember part of Fortune's business was SBA loan sales. How has that business been tracking since the deal closed? And how is the outlook for that progressing so far this quarter?

Their pipeline of loans that are for the SBA is tracking ahead of what our internal estimates were upon the acquisition and everything seems to be tracking in line at the present time.

(Operator Instructions) Our next question is from Eleanor Hagan from KBW.

Thanks for the question and having me sub in for Kelly today. So just, I guess, thinking about loan growth, I know you highlighted that is expected to continue in June and the pipeline is looking good. How should we think about loan growth looking out to the rest of 2022 and some of the drivers behind that?

Well, can you tell us how much demand we're going to have from customers after rates go higher? Now right now, our pipeline is really strong, and we're looking at it compared to where we were a year ago. I mean, I think we had some pretty strong tailwinds behind us for the present quarter. And so the June quarterly growth, we're optimistic. Historically, the September quarter will do pretty well as we have a lot more ag draws and advances. So I think we'll have some line draws during the September quarter. As you get further out into the course of the year, I think a lot of it's going to depend upon how successful the Fed is with some of their goals of timing inflation, what impact that's going to have borrower activity. I would expect the latter part of the year to be slower in loan growth than what we historically have seen. Matt, do you have any?

Yes. I think what we're hearing from the origination side is maybe a little bit of pessimism about whether we can keep up the rates from last year, we will see a little bit of benefit probably from prepays slowing compared to where they were 2020-2021.

And we are seeing some good signs from the Fortune acquisition on lending activity from the team members acquired there, and that should have a positive impact on overall portfolio balances in the latter part of the year. So continuing to adapt to our lending practices.

Great. That's helpful. And I guess, jumping around a little bit. Now with Fortune closed, what is your appetite for M&A looking forward? And if you are -- if you do have an appetite, how are conversations progressing and all of that.

Well, we definitely have an appetite. So we are always in the process of talking and discussing with other people. With fortune behind us, we would like to find the right partnership to put in place. And so we always have the conversations going along, and now we're just hopeful that they'll reach a positive conclusion.

We have no further questions. So I'll hand back to Matt Funke for any closing remarks.

Okay. Thank you again, Alex, and thank you, everyone, for joining us. Appreciate your interest always, and we'll speak with you again in about 3 months. Have a good day.

Thank you for joining today's call. You may now disconnect.