Southern Missouri Bancorp Inc (SMBC) 2022 Q1 法說會逐字稿

Hello, and welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. My name is Lauren, and I will be coordinating your call today. (Operator Instructions) I will now hand you over to your host, Matt Funke, to begin. Matt, please go ahead.

Thank you, Lauren. Good morning, everyone. This is Matt Funke, CFO of Southern Missouri. Thank you for joining us. The purpose of our call this morning is to review the information and data presented in our quarterly earnings release dated Monday, October 25, 2021, 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, and Greg will lead off our conversation with commentary on our current operations, our lending activity and our credit quality measures.

Thank you, Matt, and good morning, everyone. Again, I'm Greg Steffens, and I want to thank you for joining us this morning. Since our last call, public health authorities in our region did report a peak in COVID cases from mid- to late August and have now been reporting substantial declines over the last 8 weeks. We continue to see few restrictions on business activity in our primary markets, and our operations have been much less impacted since our prior call.

We again remain positive about our credit profile and borrower performance. We continue to see limited number of relationships operating under modified terms under the CARES Act. We have 4 loans continuing under interest-only modifications are to borrowers in the hotel industry and totaled just under $24 million. We continue to analyze this portfolio closely, and we have continued to see improvement by most of these customers.

PPP forgiveness continued in the September quarter. The release notes that we received, almost $37 million in PPP forgiveness during the September quarter, down slightly from the prior 2 quarters. And $26 million in PPP loans remain outstanding. Accelerated fee recognition picked up some in the September quarter as the average fee was higher on second round loans that made up a larger percentage of those loans forgiven.

As of September 30, 87% of our PPP loans originated in both rounds 1 and 2 had been forgiven. Our nonperforming loans were slightly higher this quarter, up about $300,000. But offsetting that was our adversely classified loans were slightly lower, down from the prior quarter by $1 million to $17.1 million. A year ago, they were $25 million. Past due loans were higher, but only modestly so. They totaled $4.8 million, which represented 21 basis points on our loan portfolio, which is up from 17 basis points in the prior quarter. A year ago, they totaled $6.9 million or 32 basis points.

Any loans still requiring relief under the CARES Act are included as special mention credits and along with watch credits. These combined categories were at $39.3 million at September 30, down from $48.4 million at June 30 and $50.9 million a year ago.

For our agricultural update, ag production and other loans to farmers were up almost $22 million in the quarter and up $5 million compared to this same period of last year, while ag real estate balances were up about $5 million over the quarter and $3 million compared to the September 30 of last year. Our agricultural borrowers are in the middle of harvest season, and lenders note average to higher yields in their fall progress reports.

Our corn harvest is mostly complete and yielding 175 to 200 bushels an acre for nonirrigated ground, and then a 215-bushel an acre for irrigated ground. Pricing has been at $5.50 to $6 a bushel. Rice is mostly complete and yielding in the 180-bushel an acre for conventional rice varieties and 220 for our hybrid varieties. Pricing at this time is from $6 to $6.25 a bushel.

The soybean harvest is about halfway complete, yielding 45 to 60 bushels an acre for nonirrigated ground and as high as 80 bushels an acre for irrigated ground. Pricings range from $12 to $13 a bushel, and some farmers are actually running into issues with elevators not accepting soybeans until they ship out corn or rice by rail or barge. Some farmers have on-farm storage, but others may be slower to complete the harvest if they can't deliver directly to the elevators.

The cotton harvest is just beginning, but we expect results in line with the last several years at 1,200 pounds an acre on the less productive ground and 1,400 pounds an acre on the more productive ground. And pricing is $0.78 to $0.82 a pound. Pricing remained well above where we completed our underwriting for corn, soybeans and cotton specifically and modestly above underwriting for rice. The most significant downside risk for our borrowers that we see at this time is 2022 production cost and higher input costs or supply chain issues may cause some farmers to alter their crop production schedule from corn to soybeans over the next year.

Overall, even with reduced government payments this year, we expect our farmers to have a more profitable 2021 than 2020, where they performed well. Matt, would you like to give us an update on our financial results?

Okay, Greg. We earned $1.43 diluted in the September quarter. September is the first quarter of our fiscal year. And that result is down $0.10 from the linked June quarter, but up $0.34 from the $1.09 that we earned in the September 2020 quarter.

A year ago, we had a charge to earnings for our provision for credit losses as compared to a modest recovery with a negative provision in the current period, although it's down from a larger negative provision in the linked June quarter. Our net interest margin in the September quarter was 4.01%, which is about -- which included about 6 basis points of contribution from fair value discount accretion on acquired loan books or $376,000 in dollar terms. Also, as forgiveness of PPP loans continued, we accelerated the origination fee accretion on those loans, adding another $2.2 million to interest income, which contributed 34 basis points to the margin.

In the year ago period, our margin was 3.73%, of which 6 basis points resulted from fair value discount accretion that was $339,000, and PPP loans weren't yet in the forgiveness process at that time. So on what we see as a core basis, our margin was down almost 7 basis points comparing September '21 to September of '20. We see our core loan yield as declining 28 basis points while our core cost of deposits was down 47 and our core total cost of funds down a similar 48 basis points, but higher average cash balances drove the decline in the margin reducing our total interest earning asset yield, which dropped by 39 basis points outside of discount accretion or accelerated recognition of PPP origination fees.

In the linked June quarter, we reported a margin of 3.74%. That included a bit more discount accretion than the current quarter, adding 7 basis points to margin, but we also saw less contribution than this quarter from accelerated recognition of PPP fees. And it had contributed 20 basis points in that quarter. So on what we would consider a core sequential basis, we see an increase of about 14 basis points. And we would note that about 1/3 of that improvement is due to the current 92-day quarter as compared to the 91-day quarter in June. Noninterest income was down $426,000 compared to the year ago period. We saw continuing declines in gains on sale of residential loans originated for that purpose and their related servicing income.

Increases in deposit service charges and bank card interchange income offset some of that decline. A net gain on fixed assets of $137,000 was recorded on the sale of bank properties. And compared to the linked quarter, deposit service charges were higher, while interchange income was lower and servicing income was lower on the inclusion in June's results of a positive fair value adjustment to our mortgage servicing rights.

Noninterest income was up $1 million compared to the year ago quarter. Increases were mostly attributable to compensation, occupancy, data processing and advertising. Compared to the linked quarter, noninterest expense was little changed as higher compensation and occupancy was offset by lower legal and professional charges and advertising expenses.

We reported no net charge-offs in the September quarter, down even from the very low net charge-off figure in the June quarter. Our trailing 12-month figure moved lower to 2 basis points, which is just under $0.5 million in dollar terms of net charge-offs over the last year. Loan growth was a bit slower in the current quarter but remained at a solid annualized pace for a second consecutive quarter. And even though we realized loan growth, our continued positive credit metrics, along with the stabilized projection for economic recovery indicated that a negative provision for credit losses was appropriate for the quarter. Although as we noted, it was quite a bit lower at $305,000 in recovery, down from $2.6 million in the June quarter.

On the balance sheet, gross loan balances were up $49 million in the September quarter, getting us off to a good start for the new fiscal year, even while PPP balances dropped almost $37 million. Compared to September 30 of '20, gross loan balances were up $96 million or 4.4%. PPP balances were down $107 million over the same 12 months. So if you adjusted for that, our annualized rate of growth or our annual rate of growth for the year would be close to 10% outside of PPP.

Investment portfolio growth slowed this quarter but did remain positive. The negative provision along with our loan growth moved our allowance as a percentage of gross loans, down 6 basis points from the linked quarter to 1.43% at September 30. As a percentage of gross loans outside of PPP, it was down 9 basis points over the linked quarter to 1.44%.

Deposits rebounded in the September quarter with $41 million in growth reversing the June quarter's decline. Our brokered funding was unchanged, while public unit deposits were down more than $9 million. Nonmaturity balances were up $49 million in the quarter after a modest decline in the June quarter, but following on strong growth in the December and March quarters.

Outside of brokered, they're at $297 million over the last 12 months, which is almost a 20% rate of growth. Time deposits still moved lower, down $8 million, but this was a notably slower pace than in recent periods. And over the last 12 months, they're down $77 million outside of brokered, which is a 12% decline. FHLB borrowings declined $11 million from the prior quarter and are down almost $39 million from 12 months earlier. Our tangible equity ratio increased by about 20 basis points during the quarter as repurchase activity remains limited, income remained strong and total asset growth was limited.

Our risk-based ratios are relatively stable as we generally redeployed 0 risk-weighted assets, cash and SBA-guaranteed loans into 100% risk-weighted loans. Greg, final comment?

Thanks, Matt. Overall, we're very pleased with the loan growth totals that you've mentioned, and we feel like we're off to a good start for the new fiscal year. Seasonal ag growths were helpful again this last quarter. And we also retained about $6 million of residential loans that we normally would have sold in the secondary market.

Single and multifamily residential combined for about $41 million of our loan growth, commercial balances dropped on the PPP forgiveness payments and we also saw construction lines pay off. Our East region saw some of the largest PPP payments received. And outside of that factor, all 3 regions contributed strongly to loan growth, led by our South region.

Our outlook for the December quarter remains quite strong as our pipeline for loans to fund in 90 days was $181 million at September 30, higher than where we stood at June 30 and about 50% higher than at the same time last year. With ag paydowns coming, we'll see some seasonal offset for the next several quarters, and we should see PPP payments continue to come in over this time frame. We budgeted for between 4% to 5% growth outside of PPP forgiveness in fiscal 2022, but we currently believe there's a good chance that we will exceed those figures.

Our nonowner CRE concentration was approximately 272% of regulatory capital at September 30, relatively unchanged as compared to June 30, and as compared to 267% 1 year ago. In the current quarter, our loan growth in the relevant categories in total was in line with our consolidated capital growth. Strong growth in multifamily was offset by construction payoffs.

Our volume of loan originations was about $219 million in the September quarter, down from higher levels in the June and March quarters when we reported some second round PPP activity. In the same quarter of a year ago, we originated $205 million by comparison. We continue to expect some deposit runoff in the near term as depositors utilize some of their additional liquidity that they're sitting on. Traditionally, we do see the September quarters as our weakest for deposit growth, and December and March quarters to be much stronger. So seasonal factors may offset some anticipated runoff over the next several quarters.

Time deposit balances showed some signs of stabilization after 4 quarters or more significant declines. Our excess reserves trended back a bit higher in October and remains somewhat above where we would normally want to see them. First quarter growth in non-maturity deposits was strongest in the West region, but outside our public unit, deposits was positive across all 3 of our regions.

Finally, we are pleased that we recently announced our definitive agreement to partner with Fortune Bank, which is headquartered in Arnold, Missouri, which is in the Jefferson County portion of the St. Louis MSA, and with the second facility in Oakville, which is in the south St. Louis County. We are looking forward to serving Fortune customers into the growth opportunity supported to us in that market as we work with the Fortune team, as well as utilizing their team members to help improve our services offered across our legacy footprint. We do expect this transaction to close in mid-February, subject to all customary regulatory requirements.

In Cairo, Illinois, we did reach an agreement to acquire the branch location of First National Bank, which will provide a modest amount of funding in core deposits. And as we consolidate locations, provide a more sustainable footprint in that community. We expect to close on that transaction in mid-January.

At this time, we are open to look at other potential partnerships if something attractive comes along and fits our expansion plans. Matt?

Thank you, Greg. And Lauren, at this time, we're ready to take questions from our participants. So if you would remind folks on how they can queue for questions.

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

A question on the loan pipeline. Up nicely year-over-year, what do you think is driving that? That's typically stronger than you might normally see this time of the year.

We've had a lot of people that decided to redeploy cash where we were receiving a lot of prepayment activity from some of our customers in our West region. They have become more active at reacquiring properties again. A lot of the pipeline has been in multifamily, a lot of low-income housing tax credit projects that they're buying that they are converting to market rents.

It's good to hear the loan demand there. And then obviously, some bouncing around on the different noninterest income categories from quarter-to-quarter. How do you see that -- I mean if you take out the gain on the sale of the former branches, how do you see that $4.4 million total playing out? It seems like there's like maybe service charges might be a little bit higher as it was this quarter, but how do you see interchange in gain on loan sales playing out over the next 2 quarters?

I think that, that secondary market activity, we probably are obviously well past the peak on that. So don't want to overestimate where we may be able to run on that. I think deposit service charges, bank card interchange income, those are probably sustainable numbers, nothing particularly unusual. As we get into the new calendar year, we generally see a little bit of a drop-off on deposit service charges.

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

My first one has to do with the capital and buybacks. It looks like buybacks slowed a bit this quarter. Just wondering your approach to employing the buyback while the deal is currently pending. I know you have a ton of capital, but just wanted to know kind of thoughts with employing that, where valuation is and with the deals you've got on the table?

With the pending acquisition, giving stock in that, we do have to be conscious of when that proxy solicitation period begins. As we exit from our quiet period, our understanding is that we can be active and we're always going to look at the relative value of acquiring that stock and what the payback period is on that versus holding on to that capital for some potential future use as well.

Great. And then maybe if you could add a few comments on the Cairo branch acquisition. Just what motivated that, if there's potential saves from changing your location there. Just anything to kind of help us out.

On the Cairo location, there's 2 banks in Cairo, us and First National. And our facility was in need of some significant rehabilitation, and they actually approached us about us acquiring their location. And they have a bigger location that would more fit a consolidated operation. And then on top of that, they have close to $30 million in deposits, which was very similar in size to what we have. And we felt like that there's some efficiencies that can be gained by combining the 2 operations into one.

Great. Maybe just one last one on expenses. They were really well controlled this quarter. Can you remind me any seasonality you have with the start of the year and kind of how to think about that progression? Clearly, done a nice job getting some positive operating leverage with expense control, but just wondering kind of how to -- maybe you could remind me on the seasonality of expenses. That would be helpful.

Sure. We do generally reassess employee compensation beginning in January. That, along with resetting the clock on payroll taxes usually does cause us to pick up a bigger percentage of our annual compensation expense built there.

And then like everybody, we're dealing with competition for talent right now. And so I would expect that compared to normal, we would see maybe a little more of a build on that line item than what we have over the previous years.

(Operator Instructions)

We now have a follow-up question from Andrew Liesch from Piper Sandler.

Just on the core margin. Obviously, it's a nice expansion here. How do you see that playing out for the next couple of quarters? What are some of the puts and takes driving that? And is more expansion possible?

I think that will be driven a lot by cash position. There is some upside there for redeployment. We've done a good job bringing our deposit costs down a little faster than what we've seen on the loan book. We appreciate what we're seeing on the yield curve right now with the longer term moving up. That should be beneficial to our loan pricing 2 months ago, where the yield curve was. We would have thought there might have been more potential for downward repricing on the loan book than what we would see on the deposit portfolio. So I think we're more optimistic now than we probably -- for the 12- to 18-month period than what we were a couple of months ago. Really, I think our #1 goal on it would just be maintaining.

Okay. We currently have no further questions. I will now hand back over to the host for any closing remarks.

Okay. Thank you, Lauren, and thank you, everyone, for joining us. We always appreciate your interest in the company, and we'll speak again in 3 months. Have a good day.

This concludes today's call. Thank you for joining, and I hope you have a lovely rest of your day. You may now disconnect your lines.