Southern Missouri Bancorp Q1 2024 Earnings Call Transcript

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October 24, 2023

There are 6 speakers on the call.

Operator

Good morning or good afternoon all. Welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. My name is Adam and I'll

Speaker 1

be your operator for today.

Operator

I will now hand the call over to CFO Stefan Jakovich to begin. So Stefan,

Speaker 1

Thank you, Adam. Good morning, everyone. This is Stefan Chkadovich, 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, October 23, 2023, Thank you for taking your questions.

Speaker 1

We may make certain forward looking statements during today's call, and we refer you to our cautionary statement regarding forward Statements contained in the press release. I'm joined on the call today with Greg Stephens, 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.

Speaker 2

Thank you, Stefan, and good morning, everyone. This is Matt Funke. Thanks for joining us. I'll start off with highlights on our financial results from the September quarter, which is the Q1 of our fiscal year. Quarter over quarter, we did show some pressure in profitability as higher cost of funds as well as lower fees, kind of the loans, mortgage And transaction accounts weighed on results, but for this current environment, we're relatively pleased with those.

Speaker 2

Offsetting some of this pressure was lower reported non interest expense from lower merger related costs as well as other operating expenses in the September quarter. Despite challenges, the bank is still able to report an 11.5% year over year increase in diluted EPS, Due primarily to the reduction from the larger provision for credit losses posted in September of 2022. That diluted EPS figure for the current quarter was $1.16 down $0.21 from the linked June quarter, but up $0.12 from the year ago September quarter. Our annualized return on average assets was 1.2%, while annualized return on average common equity It was 11.7%. Those compared to 1.16% ROA And 11.7% ROE in the same quarter a year ago and 1.44% ROA and 14.1% ROE in the linked June quarter.

Speaker 2

Net interest margin for the quarter was 3.44%, down from the 3.65% reported For the year ago period and down from the 3.60 percent reported for the Q4 of fiscal 'twenty three, the linked quarter. Net interest income was down 2% quarter over quarter and up 24% year over year as we deleverage earning asset balances. We had a similar amount of margin impact from non core items in the current quarter as compared to the linked quarter, but our reported margin was improved on a year over year basis By the non core items compared to September of 2022. On the balance sheet, Gross loan balances increased by almost $81,000,000 during the Q1 and by $723,000,000 over the prior 12 months. The 12 month figure including a $447,000,000 increase outside of inclusive of fair value adjustments, Those were attributable to the Citizens merger, which had closed in the Q3 of fiscal 'twenty three.

Speaker 2

Loans anticipated to fund in the next 90 days were $158,000,000 at September 30. Deposit balances increased by $115,600,000 during the Q1 of 'twenty four, And they increased by $990,000,000 over the prior 12 months, which included $851,000,000 attributable to the Citizens merger during the Q3 of Fiscal 2023. Solid growth in deposits this quarter was the result of CD and savings account increases We'll receive special rates offered during the quarter, and we did utilize some brokerage funding early in

Speaker 1

the quarter.

Speaker 2

FHLB advances were $114,000,000 at September 30, a decrease of just under $20,000,000 from June 30, as we repaid all our overnight borrowings And lower the bank's reliance on non core funding. We took a net increase of about $14,000,000 in term FHLB borrowings during the quarter. But compared to a year ago, our FHLB balances are down by $111,000,000 I'll now hand it over to Brent for some discussion on credit.

Speaker 3

Thank you, Matt, and good morning, everyone. Overall, our asset quality remained strong at September 30th With adversely classified assets standing at $42,500,000 or 1.15 percent of total loans, This represents a decrease of around $3,800,000 or 13 basis points during the quarter. Non performing loans were $5,700,000 at September 30, down $2,000,000 compared to June 30, And decreasing to 0.16 percent of gross loans. In comparison to September 2022, The outperforming loans increased $1,800,000 and are up 3 basis points on total loans. Loans past due 30 to 89 days were $26,700,000 up $19,700,000 from June And at 72 basis points on gross loans.

Speaker 3

This is an increase of 53 basis points compared to the linked quarter And 57 basis points compared to a year ago. Of this increase, 96% relates to a single borrower group relationship With notes that are past maturity and not renewed due to a dispute among the partnership, which prevented timely renewal. We expect this dispute to be resolved and the delinquency to be resolved during the December quarter. The relationship is not criticized or classified and we do not anticipate any loss to the bank resulting from this dispute. Guarantor's strength provides substantial network and liquidity.

Speaker 3

Overall, total delinquent loans at September 30 were $28,400,000 up $17,700,000 from June. From June 30, ag real estate balances were up $1,800,000 over the quarter We're up $22,300,000 compared to the same quarter a year ago, while agricultural production loans increased $26,300,000 for the quarter and $24,200,000 over the prior year. Our agricultural customers They made great progress on their 2023 crop harvest and we'll likely see many of them finish their Corn and rice harvest in October and have a significant amount of soybeans and cotton harvested by months in, Perhaps into mid November. Very dry conditions this fall have allowed our borrowers to move Forward more quickly than normal winter harvest. For the most part, we feel that our farmers were able to get through this year's drought conditions Lenders are reporting average to above average yields on most crops on their irrigated farmland.

Speaker 3

However, this did drive expenses higher. Farmers continue to face higher seed, fuel, fertilizer and chemical costs this growing season. And unlike last year, prices have now trended above the levels they received for the prior year crops. Farmers that have on farm storage will likely be delayed hauling their grain To fulfill contracts due to lower Mississippi River terminal levels until river stages return to a more normal level. Fortunately, farmers can utilize the USDA CCC loan program to get loans on store grain so that they can at least Pay down a portion of their traditional borrowing lines until grain can be marketed.

Speaker 3

The farmers holding a good portion of their Quarter soybean crops until spring, we anticipate we may see smaller pay downs than normal on some of our borrowing lines for the quarter ending in December. For the crop year, profit mix was about 30% corn, 25% soybeans, 20% rice and cotton and 5% other specialty crops. Corn prices have dropped since earlier this year, especially on the spot market. It may stay lower until The Mississippi River levels come back up for full broad traffic. Rice has strong pricing, And it's too early to project how slow things will end up this year.

Speaker 3

Generally, we expect our farm lines will pay out for 2023 We anticipate lower working capital positions. There may be a small number of farmers that suffered yield loss It's on the dry land farms this year that may struggle to meet some of their term payments. However, should they not meet all their term payments, Most will have sufficient equity to be able to successfully restructure any shortfall. Speaking in the loan portfolio as a whole, The portfolio grew $79,500,000 or 8.9 percent annualized, net of ACL during the quarter. This loan growth is led by our East region, where we have much of our agricultural activity.

Speaker 3

Our South region was just behind Good growth in those markets. We are continuing to focus on making credit available to our core clients. Between that and seasonal likewise paying down, we wouldn't expect to see much net loan growth In the December quarter, even though we will continue to fund construction on drugs. Our pipeline for loans to fund in the next 90 days Totals $158,000,000 at quarter end as compared to $135,000,000 at June 30 And $230,000,000 1 year ago. Providing the loan originations was approximately $230,000,000 in the September quarter, A decrease of $43,000,000,000 as compared to the June quarter.

Speaker 3

In the September quarter a year ago, we originated 436,000,000 in loans. The leading categories this quarter for low production were commercial, Non residential real estate and Ag production. Our non owner occupied CRE concentration levels at the bank level It's approximately 324 percent of Tier 1 capital and the allowance for credit losses at September 30, Down by 6 percentage points as compared to 2 30%. Stefan?

Speaker 1

Thanks, Greg. Going into a little more detail on the income statement. Matt mentioned our margin of 3.44%. Net interest income for the quarter was $35,400,000 an increase of $6,900,000 or 24.2 percent as compared to the same quarter a year ago. The increase was attributable to a 31.6% increase in the average balance of interest earning assets Compared to the same period a year ago, partially offset by a 21 basis point decrease in net interest margin As we work to improve on balance sheet liquidity leading to a higher cost of funds.

Speaker 1

Net interest income from loan discount accretion and Deposit amortization resulting from the company's acquisitions contributed 16 basis points to net interest margin in the current quarter, Unchanged from the impact in the Q4 of fiscal 2023, the linked quarter, and up from a 7 basis Contribution in the same quarter a year ago. Recognition of deferred origination fees on PPP loans was immaterial across these periods. On what we view as core, we then see margin down 30 basis year over year and down 16 basis points sequentially. Compared to June, the 92 day quarter in September helped add about 3 basis points Non interest income was up a little more than 6% compared to the year ago period, but down 34.6% compared to the linked quarter. We saw significant reduction in MSF charges as we changed policy on how we assess fees for some items.

Speaker 1

Bank Holiday interchange income was back down to a more normalized level after seasonal benefits in the quarter. So non reoccurring charges related to lending Some application fee income in the quarter as well. We'll show a bounce back for those, but the NSF charges will be a headwind. Mortgage banking activity also remains low. Non interest expense was up 40.1 as compared to the year ago period, but down 4.7% from the linked quarter as non recurring merger charges dropped to 134,000 As compared to $829,000 in the linked quarter, the year ago quarter also included a modest amount of M and A charges At $169,000 there wasn't a lot in the quarter that we consider unusual.

Speaker 4

We'll see an

Speaker 1

uptick in compensation beginning in January, We will have a little bit of occupancy cost increase in the coming quarters as we relocate some personnel into better position offices in our newer metro markets. Our provision for credit losses was $900,000 in the quarter ended September 30, 2023, As compared to a PCL of $5,100,000 in the same period of the prior fiscal year. In the linked June quarter, it was 795,000. The PCL in the year ago period was impacted by substantial loan growth during that quarter, as well as a modest decline in the model's economic outlook. The company's assessment of the economic outlook at September 30, 2023 was little changed as compared to the assessment of the June 30, 2023.

Speaker 1

Qualitative adjustments in our ACL model were slightly decreased based on a reduced pace of loan growth, but we Did increase adjustments relative to a small group of classified hotel loans. Net charge offs remained at low levels during the quarter Our trailing 12 month net charge offs running at 3 basis points. The allowance for credit losses At September 30, 2023, totaled $49,100,000 representing 1.33 percent of gross loans And 856 percent of non performing loans as compared to an ACL of $47,800,000 which represented 1.32 percent of gross loans 625 percent of non performing loans that are June 30, 2023 fiscal year end. Our earnings release included a more detailed table of deposit trends over the last year. On a quarterly basis for total deposits, exclusive of brokered funds, We had solid growth.

Speaker 1

This was primarily due to well received rate special brand in the quarter for savings and CDs. We're also pleased to see more stable non interest bearing deposit levels. We used core growth and brokered funding to meet seasonal loan demand, While reducing reliance on FHLB funding during this quarter. Matt noted earlier the elimination of our overnight position And reduction from a year ago in FHLB borrowings. It's especially notable that we did so in September quarter as we currently are at a peak loan demand And trough deposits funding position on the calendar.

Speaker 1

Going into the 4th calendar quarter, we are entering a period which we see Further deposit growth from ag, the general business cycles and public funds, which is based on the tax cycle in our areas. While we want to remain cautious about the liquidity outlook in the current quarter, if normal trends hold, we may look at further reductions in non core funding, such as brokered deposits. Looking into full year fiscal 2024, we anticipate continued solid levels of profitability. Though the lagged effect of the Fed's rate increases will still pressure margin over the next quarter or so. We're optimistic if the Fed is done with significant rate hikes we saw over the prior period that we should see a trough over the next two quarters.

Speaker 1

Greg, any closing thoughts?

Speaker 3

Thanks, Stefan. Right now, we're now 9 months past our merger with Citizens Bancshares At 8 months past the systems conversion, we remain focused on deposit retention in those markets and elsewhere and have seen steady improvements Over the last quarter and how we're integrating those team members into our operations and procedures. The team is doing a fine job. We have achieved the cost savings we'd anticipated in the merger, and from here forward, we are Repositioning some of our office locations, as Stefan noted, and we're also looking to recruit Community bankers in some of our new markets, so there could be modest incremental upticks in non interest expense. We are 100% committed to providing our excellent services in the more rural and middle market communities We added to our partnership with Citizens, in addition to the Kansas City metro area.

Speaker 3

We're not currently actively Pursuing additional merger opportunities, I would expect that other than under very unique circumstances, We'll stay on the sidelines for a bit longer. That said, continued regulatory and macroeconomic factors Pressuring banks could eventually lead to an uptick in potential interested partners.

Speaker 1

Thank you, Greg. At this time, Adam, we're ready to take questions from our participants. So if you would, please remind folks how we may queue for questions at this time.

Operator

And our first question today comes from Andrew Liesch from Piper Sandler. Andrew, your line is open. Please go ahead.

Speaker 4

Thanks. Good morning, guys, and welcome, Stefan. Thanks for taking the questions here. The TV specials that you were running, any more details on those? What were you what was The rates and returns and how those ongoing here into this quarter?

Speaker 2

Hey, Arun Bill and Andrew. We were primarily marketing shorter term CDs, 15 months and in, With rates up to 5.5%, where we had taken some brokered funding in the

Speaker 1

Prior quarter, early in this quarter, some

Speaker 2

of that was some longer term broken funding that we would have added to try to balance out the ladder there.

Speaker 4

Got it. And because those campaigns are continuing, so we expect to see more CV growth here this quarter. And is that Kind of leading to that margin compression that you talked about with the guidance in the near term? Yes.

Speaker 2

It certainly Has contributed and will continue to contribute there. Has continued into this quarter. We've dialed it back just a little bit. We'll continue to look at How aggressive we need to be on that pricing relative to our funding position.

Speaker 4

Got you. And then looking out To the rest of the fiscal year, on loan growth, decent growth here, but it sounds like pipeline is down Certainly compared to a year ago, I guess what sort of growth rate do you And what are your clients telling you for like their credit demand and needs for the next 12 months?

Speaker 3

We're really looking at muted growth for the current quarter and the following quarter, which are traditionally our Lowest growth quarters. And then we'll have a fair amount of uptick in activity again in the Final quarter of our fiscal year, as ag lines draw again, we draw about $20,000,000 a month in construction You all said we'll maintain a lot of our current balances for the next 6 months.

Speaker 2

Overall for the year, Andrew, probably in the mid single digits for percentage growth.

Speaker 4

Got it. Yes, makes sense. Thanks for taking my questions here. I'll get back.

Speaker 2

Thank you.

Operator

The next question comes from Kelly Martin from KBW. Kelly, your line is open. Please go ahead.

Speaker 5

Hey, good morning. Nice to hear from both of you, Greg and Matt as always, and nice You have Stephan joining us. Welcome. I was hoping you could refresh us a bit on Long portfolio repricing, about how much of that portfolio Comes due this year and can you provide where new loans are coming on, just so we can get a sense of what further lift we might See on the loan yield

Speaker 3

side? Well, it says loan production is coming on primarily 8 point Quarter 8.5 percent for new production and monthly, I would Anticipate on average, we would have roughly $50,000,000 a month maturing That would be repricing higher.

Speaker 2

Prepayments could add to that, Kelly.

Speaker 5

Got it. That's helpful. And then in your prepared remarks, Greg, I think you mentioned that Looking to add new teams to certain markets, can you provide kind of are there any particular markets In particular that you're looking to add talented and where are you seeing the greatest opportunities For growth, either through the addition of new teams or through current organic production?

Speaker 3

When we partnered with Citizens, there were several of their rural outstate markets or The Kansas City area that they did not have any lending teams in place. We are looking for Lending personnel in several of those more rural markets, so that would include Potentially, Chillicothe, Brookfield, Macon, Booneville or Trenton, Missouri, We probably would not tell someone in all those markets, but we are looking for Talon, at present, we're just in the looking for stage.

Speaker 5

Got it. That's helpful. And then in terms of capital, I mean levels are pretty solid here. In terms of capital priorities, it seems like M and A might there may not be that many Near term, although you're looking, can you just walk us through your priorities for capital? Is the idea there really to save any dry powder for what deals may lie ahead in addition to organic growth?

Speaker 5

Or is there any appetite for buyback here?

Speaker 3

I would really not anticipate us to initiate any type of buyback. I would see us building more of a Capital war test, so to speak, for deployment in future acquisitions.

Speaker 5

Got it. That's helpful. Maybe last question for me. Looking at these, I know you had the Kind of non recurring benefit last quarter, It looks like one area on a core basis that may have pulled back was deposit service charges. Was there is that just a function of activity or Was there any re pricing of on your side that kind of drove that lower?

Speaker 5

Just Trying to get a sense of that if that's a good number to start off as or if we should kind of have that snapping back to where it was The prior two quarters of your last 3 quarters? Yes.

Speaker 2

We would expect that So you probably moved lower than what those last couple of quarters were, Kelly, we've adopted some policy changes on the items That we do charge for, so that will be a downtick in the run rate there.

Speaker 5

Got it. Thank you so much for the color. I'll step back.

Speaker 2

You're very welcome.

Operator

As we have no further questions, I'll hand the call back to the management team for any concluding remarks.

Speaker 2

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

Operator

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.

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Earnings Conference Call
Southern Missouri Bancorp Q1 2024
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