Southern Missouri Bancorp Inc (SMBC) 2022 Q2 法說會逐字稿

Hello, everyone, and welcome to the Southern Missouri Bancorp quarterly earnings call. My name is Victoria, and I'll be coordinating your call today. (Operator Instructions)

I'll now pass over to your host, CFO, Matt Funke, to begin. Matt, please go ahead.

Thank you, Victoria, and good morning, everyone. This is Matt Funke, 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, January 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 President and CEO. Greg will lead off our conversation today with commentary on our current operations, lending activity and credit quality measures.

Thank you, Matt, and good morning, everyone. This is Greg Steffens, and thank you for joining us today. Since our last call, in most of the United States, our market areas have seen a resurgence in COVID, reported cases and hospitalizations moved steadily higher in November and through most of December before spiking right after the holidays in our market areas. We're seeing many more team members reporting infection or exposure, and it has been problematic in terms of keeping staff on the job where our lobby is open for walk-in business. But we appreciate all of our team members who are at times working remotely or with limited staff to continue meeting our customer needs. We continue to see very few restrictions on business activity in our primary markets, and we feel like the light is close to the end of the tunnel.

We continue to feel very good about our current credit profile and borrower performance. We continue to closely monitor and work with 2 hotel industry relationships totaling just under $24 million with borrowers whose locations or business models were particularly impacted by the pandemic. We're hopeful that this recent wave of COVID recedes quickly, and there seems to be some reason for optimism for that. We're hopeful that as we move into the later parts of the year, these properties' occupancy rates will move back closer to historical levels.

PPP forgiveness slowed in the December quarter with a little more than half of the remaining balances forgiven since September 30. We have $11.5 million still outstanding at 12/31, which is comprised of just 33 loans. We've now received forgiveness or repayment of 99% of our PPP loans from rounds 1 and 2 by loan count and 94% in dollar terms. We're hopeful to get most of those remaining closed out in the March quarter. Accelerated fee recognition dropped off significantly in the December quarter, and there remains only about $300,000 that is still deferred.

Nonperforming loans dropped quite a bit during the December quarter, down $3.2 million with the largest contributor being the return to accrual status of a relationship secured by single-family residential rental property. In addition, we also had a larger credit that was paid off. Adversely classified loans continued to move lower, down from the prior quarter by $1.8 million to $15.3 million. A year ago, they totaled $24.8 million. The hotel loans we mentioned that we're closely monitoring are not adversely classified but are considered special mention status. Watch and special mention credits totaled a combined $35.9 million at December 31, down $3.5 million this quarter and as compared to $60.8 million a year earlier.

We're also pleased with past due loans, which have moved lower and remain at very low historical levels. At $3.3 million in loans past due 30 days or more, they represent 14 basis points of total loans, which is down from 21 basis points last quarter and 35 basis points or $7.7 million 1 year ago.

Turning to our ag portfolio and agricultural update. Our ag production and other loans to farmers were down $22.7 million in the quarter and up $5.4 million compared to this time last year, while ag real estate balances were up $10.5 million over the quarter and are up $10.2 million compared to December last year. Our agricultural borrowers didn't only had a very good 2021 with higher yields and better pricing, working capital positions for these borrowers, mostly strengthened and are some of the best levels we've seen.

Corn, rice and soybean harvest were well underway when we updated you last quarter. And generally, our borrowers' final yields per acre were pretty much in line with what has been projected. Cotton harvest is just underway but yields came in as expected around 1,200 pounds an acre in less productive ground and 1,400 pounds per acre on the more productive ground. Cotton prices moved higher into the calendar year-end, helping these farmers to a very good 2021.

Looking ahead to 2022, we anticipate that some of our borrowers will rotate out of corn, which was our largest concentration in 2021 due to the higher input costs given fertilizer requirements for that particular crop. They may move some of the less productive ground or some acreage where they need crop rotations to soybeans, cotton, popcorn or peanuts. Some rice acreage could also be diverted to soybeans as well for the same reasons.

In general, the outlook for pricing on crops remained strong relative to our underwriting as we move into 2022, but we would cautionarily note input costs are being pressured and are pressuring margins. Additionally, our borrowers continue to see some supply chain issues with suppliers for parts and equipment and logistics for moving grain and livestock to market. Still overall, the picture for 2022 looks reasonably strong, coming off a very good 2021, and we would expect the vast majority of our loan production lines to be renewed. Matt?

Thanks, Greg. We earned $1.35 diluted in the December quarter. That's the second quarter of our fiscal year. That figure is down $0.08 from the linked September quarter and it's up $0.03 from the $1.32 diluted that we earned in the December 2020 quarter. In the year ago period, we had a charge to earnings for provision for credit losses as compared to no charge in the current period and as compared to a modest negative provision in the linked September quarter.

Our net interest margin in the December quarter was 3.77, which included about 6 basis points of contribution from fair value discount accretion on acquired loan portfolios or $381,000 in dollar terms. Also, as forgiveness of PPP loans continued, accelerated accretion of deferred origination fees on those loans added another $890,000 to interest income, which was 13 basis points of contribution to the margin.

In the year ago period, our margin was 3.92%, of which 9 basis points resulted from fair value discount accretion, $516,000, and PPP forgiveness caused us to accelerate accretion of $968,000 in deferred origination fees, which contributed 16 basis points to the margin. On what we see as a core basis then, our margin was down 9 basis points. Comparing the December '21 quarter to the December '20 quarter, we see our core loan yields as being down 23 basis points, while what we view as our core cost of deposits is down 26 and our total core cost of funds down 28.

Higher average cash balances drove the decline in the margin, reducing our total interest earning asset yield, which dropped by 35 basis points outside of accretion or accelerated recognition of PPP fees.

In the linked September quarter, we had reported a margin of 4.01%, which included a similar benefit from fair value discount accretion, 6 basis points but we also saw a significantly more accelerated recognition of deferred PPP fees in that quarter, which had contributed 34 basis points. So on what we consider a core sequential basis, we see a decrease of about 3 basis points, again, attributable to increased average cash balances.

Our noninterest income was down $435,000 compared to the year ago period. So we saw a continued decline in gains on sales of residential loans originated for that purpose and the related servicing income as well as normalized earnings on bank-owned life insurance as compared to onetime benefits included a year ago.

Increases in other income, which included an abnormally strong quarter for wealth management revenues, up $568,000 from a year ago, due primarily to one significant transaction and also a gain on our exit from our renewable energy tax credit investment. Increases in deposit service charges, other loan fees and bank card interchange income helped to offset the decline as well. Compared to the linked quarter, noninterest income was up mostly due to the other income items noted. The tax credit investment benefit was $278,000, while wealth management revenues were higher by $395,000 on a linked-quarter basis.

Noninterest income -- I'm sorry, noninterest expense was up $2 million compared to the year ago quarter. That included just over $200,000 in M&A charges, mostly legal and professional at this point, $130,000 charge to write down the value of our legacy facility in Cairo, Illinois, where we consolidated our operations to a new facility picked up in a branch purchase and assumption. We also had increased foreclosed property expenses as we took a write-down on the valuation of a single foreclosed property and also had some losses on dispositions with that expense category of $264,000 compared to a year ago.

Other increases were attributable to occupancy, data processing and compensation with compensation due to above-trend increases in compensation during 2021, a modest uptick in head count and, in this quarter, higher wealth management commissions resulting from their unusually strong quarter. Compared to the linked quarter, noninterest expense was up about $850,000 mostly due to the items already commented on.

The company reported minimal net charge-offs in the December quarter with little change from roughly 0 in the September quarter. Our trailing 12-month net charge-offs now stands at just 1 basis point, which is 275,000 in dollar terms. Loan growth picked up from the December quarter. Even so, our continued positive credit metrics, along with a stabilized projection for economic recovery, indicated that no provision for credit losses was appropriate for the quarter after a modest recovery in the September quarter and as compared to a charge of $1 million in the December quarter a year ago.

In the last 12 months, we've recorded a total negative provision of $3.3 million as compared to a total charge of $7.2 million for the prior 12 months ended 12/31/2020, as we built reserves heading into the pandemic.

On the balance sheet, gross loan balances were up $109 million in the December quarter, net of PPP balances, declining by $15 million. An immaterial amount was picked up from the Cairo branch purchase. Compared to December 31 a year ago, gross balances were up $234 million or almost 11%. Over those 12 months, PPP balances are down $84 million. So adjusted for that, our annual rate of growth would be a little more than 15% outside PPP.

The investment portfolio declined slightly over the December quarter but has also been above trend over the last 12 months. The quarter's loan growth, while we didn't make a provision for credit losses, moved our allowance as a percentage of gross loans down 7 basis points from the linked quarter to 1.36% at December 31. As a percentage of gross loans, excluding PPP loans, it was also down 7 basis points from the linked quarter to 1.37%. Maybe this will be the last quarter we have to give those percentages separately.

Deposits had a very strong December quarter with more than $180 million in growth. This was impacted by the Cairo branch purchase and assumption adding $28.5 million as well as public unit funding inflows. Brokered funding was down $5 million during the quarter, while public unit deposits in total were up $101 million, which included $15 million in public unit funds from the Cairo deposit assumption. We also saw seasonal public unit inflows and a new public unit relationship accounting for the significant portion of that growth.

In the current quarter, time deposits were basically unchanged as balances assumed from Cairo were offset by a maturity of a broker deposits. Over the last 12 months, time deposits are down $68 million, inclusive of a $16 million decrease in brokered funding. Non-maturity deposits meanwhile, are up $355 million over the last 12 months, which includes a little more than $100 million in public unit funds. FHLB borrowings declined $10 million from the prior quarter and were down almost $27 million from 12 months earlier.

And finally, our tangible equity ratio decreased by about 34 basis points during the quarter, as our total asset growth picked up. Our risk-based ratios declined also as we grew the lending portfolio faster than capital, but we do remain well above regulatory expectations and buffers. Greg, final comments?

Thanks, Matt. Our loan growth in the first half of the fiscal year was very strong, but we wouldn't expect it to repeat that during the second half. We saw strong growth this quarter in our commercial real estate, multifamily, residential and construction loan portfolios. Our commercial balances actually increased modestly despite $15 million in PPP loan forgiveness. Activity in our West region centered in Springfield, Missouri led the way in the current quarter and over the last 12 months.

Our outlook for the March quarter would be more in line with historical trends. Our pipeline for loans to fund in 90 days was $158 million at 12/31, down from $181 million at September 30 but well above the $85 million we reported at this time last year. While we saw ag paydowns begin in the December quarter, we'll see some further reductions in the March quarter and, of course, as we mentioned, a modest amount of PPP repayment yet to come. For the current quarter, we anticipate modest loan growth in total, followed by what is typically a better June quarter for growth.

Our nonowner-occupied CRE concentration was approximately 288% of regulatory capital at 12/31, up 17 basis points compared to September 30 and 263% 1 year ago. During the quarter, our loan growth in all relevant categories outstripped our consolidated capital growth.

Our volume for loan originations was about $335 million in the December quarter, up from the September quarter and up from the first half of the calendar year when our totals were elevated due to second round PPP activity. In the same quarter a year ago, we originated $229 million by comparison.

Our December and March quarters are usually our best for deposit growth, and this December quarter was exceptionally strong. We did add $28 million in deposits from the branch acquisition and consolidation in Cairo, and our public unit balances increased.

Time balances continue to stabilize in the second half of the calendar year after significant declines in the prior 4 quarters. Our excess reserves continue to move higher in the December quarter, and we expect them to remain elevated for the coming quarter. Our East region, which includes the Cairo market, has been our leader in growth in the current quarter and over the last 12 months. Adjusted for Cairo, the East region would be basically comparable to the West for year-over-year growth. And those 2 regions is where we've seen the largest pickup in public unit balances.

Finally, our team has been working hard to complete the transition for our branch assumption while also preparing for the simultaneous legal and system mergers of FortuneBank headquartered in Arnold, Missouri, which is in Jefferson County portion of the St. Louis MSA; and with the second facility in Oakville, which is in the south part of St. Louis County. The merger is set for February 25, and we received approval from the Federal Reserve to proceed on that time frame. We also continue to look for additional acquisition opportunities, but this market has been relatively quiet recently.

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

(Operator Instructions) And our first question comes from Andrew Liesch from Piper Sandler.

On the margin, and it seems like pretty obvious we're going to be giving a few rate hikes over the next 12 to 24 months. How should we expect the margin to react, say, from the first rate hike and then the subsequent rate hikes, assuming that there's a ramp-up in Fed funds?

Our modeling, we generally expect that our deposit pricing has been somewhat of a floor here recently with the overnight rates as low as they are, so some benefit. As rates move up, of course, the cash position is helpful in that regard. We do have loans that are at floors as well. So that will offset some of what we see on the deposit side. Got a little bit of benefit from the fact that our time deposits are lower as a percentage of our total funding, but we may see some shift back into those as well as the rate curve steepens.

So we feel reasonably confident we should do well in that first 100 basis points. If rate increases continue beyond there, we would probably see some margin pressure.

Got it. It sounds like you think you'll be able to keep your deposit betas pretty low for the first handful -- or first few rate hikes. Does that seem fair?

I think that's right. That's what we're hoping for.

Got it. Got it. Good. And Greg, obviously, loan growth here in the first half of your fiscal year, well above what your guidance was. I mean what's driving that? Is it just more calling efforts, just more demand from customers? Is it market share gains? Is it actual business activity? What is -- what's been driving that? And why do you think that's going to slow down here in the next 6 months?

We had several customers of some larger size that went back into the market again. One of the big things that has led to increased growth over the first 6 months was we really had a drop in prepayment activity. And we've had some -- new team members have joined that have helped really contribute and increased calling efforts given cash balances that we had that was picking up. We just had a -- a lot of things all work together to contribute to a really strong first 6 months.

And we do -- and we will have a really good quarter this quarter for production, but we do anticipate higher rates of repayment this quarter than what we've had with -- both with our ag portfolio and some of our commercial portfolio. But overall, we're definitely exceeding our loan growth estimates of what we had at the beginning of our fiscal year, and we're definitely going to exceed our budgeted results for the year.

(Operator Instructions) And our next question comes from Kelly Motta from KBW.

I just want to ask the question. I wanted to get -- to ask about expenses. We're hearing from a lot of banks across the country about upward pressure on expenses, just inflationary pressure as well as increased expense. Can you maybe articulate what you're seeing if there's any inflationary pressures higher than what you've typically seen as well as any plans for investment over the next 12 months?

What's the second part? Any plans for investment?

Tech investments for the next 12 months?

Well, on the first part of the question, we're definitely seeing wage pressure. We probably really began seeing it late in 2019. We pulled some levers trying to address that over the last couple of years, and we'll continue to see some increase as we move into calendar '22, probably a little bit more of an increase this year than what we've had to recognize over the first couple. But no, that's definitely the case in our market.

Tech investment, that's -- I wouldn't say it's anything new to us, but it's obviously an even more important priority as we look at how to accomplish more with fewer head count wherever possible.

Great. And then I just saw that your excess cash, looking at your average balance sheet built quite a bit this quarter. Just any thoughts on what a normalized level of cash looks like for you guys? And what's a reasonable pace in order to get there either via deployment into loans or securities? Just trying to get a better sense of the size of the balance sheet.

Greg wants that number to be as low as possible, Kelly. With the size of our balance sheet now, long-term, normal, we'd like to see it well below $100 million. How to get there from where we're at, we still think at some point we'll see some deposit outflows. Over the course of the year, we do expect to have continued loan growth. And as we see opportunities in the yield curve, we would look more at deployment into the investment portfolio. The limitation there is we've always been relatively limited in what we had in our balance sheet in total in the investment portfolio. So really moving the needle there is pretty tough. But those 3 things would be our goal.

We do anticipate picking up, as Andrew was hinting at, some benefit as rates do go up with the Fed raising rates. What we expect in March that we would pick up some more cash is going to be hurting us next quarter as much as it has this quarter. Cash balances are going to remain above targeted levels for the foreseeable future at this point.

And at this point, there are no further questions. And I'd like to pass back over to Matt for any final remarks.

Okay. Thank you again, Victoria. Thank you, everyone, for joining us. We appreciate your interest, as always, and we'll speak with you again in 3 months. Have a good day.

Thank you, everybody, for joining today's call. You may now disconnect your lines.