Southern Missouri Bancorp Inc (SMBC) 2021 Q3 法說會逐字稿

Good day, and welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Matt Funke, Executive Vice President, Chief Financial Officer. Please go ahead.

Thank you, Andrew. Good afternoon, everyone. This is Matt Funke, CFO of Southern Missouri. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, April 26, 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. So thanks, again, for everyone joining us. Greg will start our conversation today with some commentary on our current operations, our lending activity and credit as we proceed, hopefully, towards economic recovery and out of the COVID-19 environment. Greg?

Thank you, Matt, and good afternoon, everyone, and thanks for joining us today. Since our last call, the most recent public data indicates that we've seen substantial reductions in COVID transmission in our market area since a peak between November and January. The relatively few business activity restrictions that we reported on a quarter ago have only been reduced further, and we're hopeful that improving activity and reduced transmissions will continue at the current level or it improve over time.

Within our organization, we've had far fewer temporary closings or team member quarantines and our facilities are open for business. We continue to feel positive about our credit profile and borrower performance. At March 31, we remained at about $40 million in modifications under the CARES Act, consistent with the prior quarter and about 1/10 of the figure from 9 months earlier. Nearly all of these balances require at least interest-only payments and the majority of these dollars are loans to borrowers in the hotel industry. We expect the hotels, in particular, may require continued relief in the near term, and we are continuing to analyze this portfolio more closely. We do expect that nearly half of the remaining balance of modifications we have to return to full payment status around the middle of the year.

Since we last spoke, PPP forgiveness maintained a pretty good pace earlier in the March quarter, then slowed late in the quarter and that's continued into the June quarter thus far. Until we see the SBA approve some of the larger balances we have submitted, we may be approaching somewhat of a limit for the time being. The release notes that we've received $42 million in PPP forgiveness during the quarter, but that was offset by the second round of PPP second draw funds during the March quarter. We're still originating some of these loans, but we wouldn't expect them to have a meaningful impact on loan growth in the current quarter.

Forgiveness on the second round of loans has also been submitted as we've had just approximately 46 loans submitted for $2.5 million and we had 37 loans from the first round of PPP, totaling $21 million waiting on our SBA approval. And we have not received any approval on any loans over $2 million at this point.

Our nonperforming loans were reduced further during the quarter, adversely classified loans were also reduced to about $21 million and past due loans were down by more than 40% to $4.3 million, which is about 20 basis points of our total loans. We would note that some of the modifications we've made for COVID might be masking some of our current level of delinquencies. But right now, loan delinquencies are approaching all-time lows for the organization.

Focusing on our ag portfolio. Ag real estate loan balances were down $3.9 million over the quarter and down $3.3 million for the fiscal year-to-date, while production in other loans to farmers were down $8.6 million in the quarter and down $10.5 million for the fiscal year-to-date. Our own crop borrowers are generally well into their planting season. We expect favorable commodity prices, which may lead some of our borrowers to ship acreage from soybeans to corn, and corn production will likely be above 30% of our total operating line balances, while soybeans may drop below 20%. Rice and cotton allocations are in the 20% to 25% range and they're likely to be steady with prior experience.

Through this point in April, we had yet to see any noticeable uptick in operating line balances. Whereas last year, at this time, we had begun to see draws. This is due in part to a more liquid position by some of our farmers after having a good 2020 crop year. And it's been impacted some by rainy weather conditions and some cold weather that has kept some farmers from doing some of their normal work.

In comparison to our prices used for 2021 loan underwriting, corn prices have now reached a 40% higher level than where they were, and it's been trending higher each week it seems. Soybeans are more than 30% higher, rice is about 7% higher and cotton is more than 20% higher. The mood among our farmers remains very positive for the 2021 production year with the strong improvements in pricing. The outlook for 2022 is less certain as input costs may increase substantially given various increases in commodity prices.

Matt, could you go ahead and update us on our financial results?

Sure. Thanks, Greg. We did earn $1.27 diluted in the March quarter, that's the third quarter of our fiscal year, and it's down $0.05 from the linked December quarter as well as being up $0.72 from $0.55 in March of 2020. March of 2020 included a large provision for loan losses and also recognition of impairments on our mortgage servicing rights.

From the December quarter, we saw net interest income decrease, primarily as loan interest declined by more than deposit costs, even though we recognized about $300,000 more between discount accretion and PPP deferred origination fees that were accelerated. The 90-day quarter was a contributor to the decline in loan interest.

Noninterest income decreased mostly due to the inclusion in the prior quarter of a nonrecurring item and a reduction in secondary market residential loan sales. Noninterest expense was up about $0.5 million and provision for credit losses moved to a recovery of $409,000 in March from a charge of $1 million between provision for credit losses on our loan portfolio and our off-balance sheet credit exposure related to our lines of credit, which does represent a change in classification on our income statement from the prior quarter for consistency with new call report instructions.

Our net interest margin in the March quarter was 3.68%, which included about 10 basis points of contribution from fair value discount accretion on our acquired loan portfolios or about $614,000 in dollar terms. Also, accelerated origination fees on PPP loans as forgiveness was received. That added another $1.2 million to interest income, contributing 18 basis points to the margin.

In the year ago period, our margin was 3.63%, of which 8 basis points resulted from fair value discount accretion or $410,000. So on what we see as a core basis, our margin was down about 15 basis points comparing March of '21 to March of '20. We see our core loan yield being down 51 basis points and our core cost of deposits down 65 basis points. Overall, core cost of funds, down 66. Higher average cash balances drove the decline in the margin as they reduced our interest-earning asset yield, which dropped by 79 basis points outside of any discount accretion or accelerated PPP origination fees with forgiveness.

In the December quarter, our margin was 3.92%, including a little bit less discount accretion than in the March quarter, and that added 9 basis points of benefit to the margin. We also saw a little bit less contribution from accelerated PPP origination fee recognition in the December quarter, and that contributed 16 basis points. So on a core sequential basis, we see about a 27 basis point decline and about 1/4 of that decline would be due to the 90-day quarter as compared to 92 days in December. And again, the larger cash balances driving the majority of the decline.

Noninterest income was up about $1.3 million compared to the year ago period as gains on residential loan sales were almost $700,000 higher and loan servicing, which had included the mortgage servicing right -- mortgage servicing rights write-down a year ago, was up by $500,000. We're seeing bank card interchange improvement that offsets a decrease in deposit service charges, and in the current quarter, we also had a $90,000 available-for-sale securities gain. Compared to the linked December quarter, the BOLI benefit that was included in the prior quarter and a decrease in residential loan sales accounted for the decline.

Noninterest expense was down about $40,000 compared to the same quarter a year ago and up about $0.5 million as compared to the linked quarter, with the December quarter's charge for provision for off-balance sheet credit exposure moved to the provision for credit losses line, while the year ago charge remained in noninterest expense. In the same quarter a year ago, we had $76,000 in nonrecurring M&A charges that we identified with none in the current or linked quarter.

Compared to the year ago March quarter, our FDIC insurance premiums are up as we benefited then from onetime assessment credits. Our foreclosed property expenses are down and data processing compensation and occupancy are up.

Net charge-offs in the March quarter were $244,000, modestly higher than our linked December quarter and that's 5 basis points on average loans slightly above the 4 basis points we've seen in our trailing 12 months and a little less than $900,000 over the last 12 months in dollar terms. A year ago, our trailing 12-month charge-offs were averaging 3 basis points on our loan portfolio. With limited loan growth, positive credit metrics and an expectation for economic recovery, we did not make a provision for credit losses for our outstanding loan balances and our required allowance for off-balance sheet credit exposure was reduced by $409,000.

Our effective tax rate was 21.3%, up a bit from the linked quarter and up by a little more as compared to the year ago quarter when additional provisioning for loan losses moved pretax income notably lower. On the balance sheet, gross loan balances were up a little more than $13 million in the March quarter as PPP balances grew modestly, up $5 million. Gross loan balances compared to March 31 a year ago were up by $179 million, and that figure would include $51 million from our Central Federal acquisition and $101 million in remaining PPP loan balances. So that would leave us at a little above 1% at a core growth rate.

Last year at this time, without any noncore items to adjust for, we were at a little more than 8% growth rate. Our investment portfolio grew modestly again as cash flows on mortgage-backed securities appear to be slowing a bit, but the decline is from a very high level. We're continuing to be cautious about putting too much cash into securities all at once.

The allowance as a percentage of our gross loans declined by 2 basis points to 1.62% at March 31 and was also down 2 basis points to 1.7% as a percentage of gross loans, excluding our PPP loans. Deposits were up almost $104 million in the March quarter after a similar level of growth in the December quarter. Brokered funding was down by almost $6 million, while public unit deposits were up about $12 million. Outside of brokered funding, time deposits were down by more than $23 million in the quarter. That's similar to our last several quarters and they're a little more than 10% below our balances 1 year ago outside of the Central Federal acquisition.

Non-maturity balances are up $133 million in the quarter and they're up by almost 33% as compared to 1 year earlier, even excluding the Central Federal acquisition. No substantial change in our FHLB borrowings, and at this point, we're not expecting to utilize the federal reserve's PPP liquidity facility. Greg?

Thanks, Matt. I want to wrap up, talking a little bit about loan growth, which would have been basically flat this quarter outside of new PPP funding offsetting forgiveness. And our retention of some loans that we normally would have sold in the secondary market, which helped us add about $10 million to our loan balances. Ag lines and ag real estate paydowns noted earlier were offset by growth in multifamily real estate and construction loan draws. Our South region has been our largest contributor to loan growth in the current fiscal year.

Our outlook for the June quarter is much better for loan growth as our loan pipeline for loans to be funded within 90 days was $146 million at March 31, up from $85 million at December 31 and as compared to $77 million 1 year earlier. The figure noted at March 31 ended December 31 did not include any impact from second draw PPP loans. And while we're still completing some of those, we don't expect it will meaningfully impact the June quarter.

Over the near to medium term, however, we expect that organic loan growth opportunities will be more limited than what we have experienced in prior years. We would anticipate organic growth over the medium term to be in the 3% to 5% range. One unknown on our future for loan growth will be really what is the impact on C&I balances as we returned from pre-COVID levels. Will borrowers draw their balances up to where they were pre-COVID? Or will they be permanently lowered as what they are right now? And we just don't have clarity on where that is going at present.

And looking at our non-owner commercial real estate concentrations, they totaled approximately 262% of regulatory capital at March 31 as compared to 263% at December 31 and 282% 1 year ago. In the current quarter, both loans and capital grew at roughly 2% levels. Our volume of loan originations was a little over $250 million in the March quarter, which remains elevated, up from $220 million in the year ago quarter and $229 million in the December quarter. We would be down year-over-year outside the secondary market production and PPP originations.

Obviously, like the rest of the industry, we're blessed with a little much of a too -- too much of a good thing in regards to deposit growth over the last year. We continue to expect that, eventually as the economy reopens, some of this outsized growth will worse out as customers spend some of their deposit money. And we also are cautious about moving too much of this excess liquidity or dollars into our investment portfolio at this time.

Growth in our nonmaturity deposits has come from all 3 of our market regions, and CD balances have declined across all regions and are expected to continue to decline. Overall, we are in a much more liquid position than historically and more likely than we would prefer.

On the M&A front, as we see economic and credit environment stabilize, we are definitely becoming more interested in pursuing acquisitions. But we currently have not seen any opportunities that we have been interested in pursuing. We sincerely hope to see a pickup of additional activity in our rates during this calendar year.

Lastly, in the March quarter, we repurchased approximately 94,000 shares of our stock at an average price of $36.35. And at quarter end, we had 48,000 shares remaining available for repurchase under our existing plan. Unless imminent opportunities to manage our capital growth through an M&A would develop, we would expect to continue repurchase activity, assuming profitability remains strong and asset growth is limited, especially risk-weighted asset growth.

All right. Thank you, Greg. At this time, Andrew, we'd like to take any questions our participants may have. So if you would remind them how they can queue for questions, and we'll be ready.

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

I don't think we've -- a question on the expenses here. I think we spoke on it last quarter. I thought maybe they rise a little bit more than they did. Is this a good run rate to you going forward? Or should there be more expense growth from here?

Really, there's been a few things that kind of went against us just from a timing standpoint on occupancy. We're running probably more positions vacant than we would like to long term. So we might see a little bit of a pickup in some compensation there. I don't think there's anything unusual to warn you off of on there other than maybe a little bit higher vacancy rate than normal.

Got it. Well, good expense control there. And then, Greg, on M&A, obviously, nice improvement in the stock price. Currency has come back a little bit. It doesn't sound like you've seen anything that might be interesting to you right now. But I guess, what's the are there deals out there that you'd be interested in right now? Do you think you could afford them with the currency that you have? I guess just a little more comments on your M&A outlook would be appreciated.

We would really like the opportunity to participate in some M&A. Stock price has definitely improved from where it has. But a lot of it's going to depend upon seller expectations and whether they're able to accept stock similar to the tangible book value ratios that we're trading at. But we're definitely interested in M&A., it's just people have to be interested in selling our market footprint. There's definitely been increases in activity around the country, but we have not seen as many nondisclosure agreements as what we would have maybe anticipated at this point, but we are anticipating receiving some in the near future.

Got it. Do you think that's driven despite what those private banks might be seeing in the market? Or what do you think might be driving the slower pace of prospective deal activity?

I think Missouri and Arkansas have just been less active or a little slower than some parts of the country on proceeding with M&A. I would expect more M&A to occur in some of our market footprint over the next 6 months.

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

I was hoping -- I appreciate the color on loan growth. You mentioned 1 factor that could determine growth going forward is whether or not line utilization comes back. I was wondering if you had any stats on where line utilization stands now relative to perhaps historical norms?

We don't have any overall numbers, but we have a variety of industries to where part of our businesses have not been able to get inventory, especially like car dealers, boat dealers, anybody selling all-terrain vehicles. A lot of that type of product has not been near as available. So a lot of balances are well more than 50% below the usage that we typically would have seen.

But -- and then we have a variety of seasonal businesses that are below levels where they would have been before. But some of what we're not clear about is how many balances are temporarily related to PPP loans than they would have received or EIDL Advances or other things that have helped also keep line usage lower. We would anticipate C&I balances to move higher. We just don't know and we don't know when inventories will get back to historic levels either. So I talked a lot and [you must have heard] a lot.

This concludes our question-and-answer session. I would like to turn the conference back over to Matt Funke for any closing remarks.

Thank you, again, Andrew, and thank you, everyone. We appreciate your interest, and we look forward to talking again in about 3 months. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.