Southern Missouri Bancorp Q3 2023 Earnings Call Transcript

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May 2, 2023

There are 6 speakers on the call.

Operator

Hello, everyone, and welcome to the Southern Missouri Bangkok Quarterly Earnings Conference Call. My name is Daisy, and I'll be coordinating your call today. I would now like to hand the call over to your host, Laura Dave, the CFO of Southern Missouri Bancorp to begin. So Laura, please go ahead.

Speaker 1

Thank you, Daisy. Good morning, everyone. This is Laura Dace, CFO for 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, May 1, 2023, and to take 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 looking statements contained in the press release. I'm joined on the call today by Greg Stephens, Our Chairman and CEO and by Matt Funke, President and Chief Administrative Officer. Matt will lead off our conversation today with some highlights from our most recent quarter fiscal year. Matt?

Speaker 2

Thank you, Laura, and good morning, everyone. This is Matt Psunke. Thanks for joining us. We'd like to touch first on our completed merger with Citizens Bancshares and Citizens Bank and Trust. We completed the legal merger in late January And the operational merger 5 weeks later at the end of February.

Speaker 2

We're pleased to be participating in the life of these new communities, and we look forward to serving their financial needs. Of course, the merger had a lot of impact on this quarter's income segment and on our balance sheet. Our one time costs look to be tracking in line with our modeling. Loan portfolio marks were in line with expectations as was the day 1 provision for credit losses under CECL. These non recurring charges accounted for $10,300,000 pretax and are estimated to have reduced diluted EPS by $0.73 Inclusive of those charges, our EPS declined to $0.22 for the March quarter.

Speaker 2

That figure compares to $1.26 from the linked December quarter entered $1.03 from the March 2022 quarter, which also included merger related charges, although they were significantly smaller. Net interest margin for the quarter was 3.48%. That was unchanged from the year ago period and up from 3.45 For the Q2 of fiscal 2023, the linked quarter, net interest income from loan discount accretion and deposit amortization Relating to the company's acquisitions resulted in a 14 basis point increase to the net interest margin compared to 6 basis contributed in the Q2 of fiscal 'twenty three, the linked quarter, and 6 basis points in the 1 year ago period also. Net interest income resulting from accelerated accretion of deferred origination fees on PPP loans Had no impact to the net interest margin this quarter compared to less than one basis point in the linked quarter and as compared to 2 basis points in the 3rd quarter 1 year ago. Our average interest earning cash and cash equivalent balances increased compared to the linked quarter as a result of the Citizens merger, And they declined from the year ago period as loan growth outpaced deposit growth over the intervening quarters prior to the merger.

Speaker 2

Our net interest income for the quarter was $33,800,000 an increase of $8,700,000 or 34.5 percent as compared to the same period of For our fiscal year, with no change in our reported margin, the increase was attributable simply to the increase in the average balance of interest earning assets. On the balance sheet, our gross loan balances increased $485,000,000 during the Q3 with Citizens contributing $447,000,000 Net of fair value adjustments. Compared to March of 2022, gross loans were up 867,000,000 The investment portfolio was up $198,000,000 over the quarter, primarily attributable to the Citizens merger, while cash and equivalents increased 60,000,000 Deposit balances increased by almost $750,000,000 in the 3rd quarter, with Citizens contributing $851,000,000 Deposits are up $900,000,000 compared to March 31st of the prior year. FHLB borrowings decreased $16,500,000 compared to the linked quarter end As the company utilized cash acquired in the Citizens merger, there were no overnight borrowings or short term repo balances at March 31. I'll hand it over now to Greg for some additional discussion.

Speaker 3

Thanks, Matt, and good morning, everyone. I'd like to say again how pleased we are to have completed our merger with Citizens and how key we believe our continued service to the communities in that footprint Will be for our continued success. The merger brings with us a very talented team of bankers, I personally enjoyed getting to know many of them over the last several months and look forward to what we'll be able to accomplish together. Of course, in our industry, liquidity and quality of deposits have been forefront in the mind of many people over the last several months, And we are glad to have merged with the strong deposit franchise and bolstered our balance sheet with modest solution and tangible book value. We did see increases in adversely classified loans and non performers this quarter, but continue to feel Really good about our overall credit profile and borrower performance.

Speaker 3

Even though the upticks are mostly attributable to the Citizens portfolio, We do feel really good about the acquired credit quality from Citizens as well. Adversely classified loans were 47,000,000 We're 1.35 percent of total loans at March 31 compared to $38,000,000 at December 30 Citizens accounted for most of the increase. Watson's special mention credits totaled a combined $44,000,000 at March 31, Up from $29,000,000 at December 31, and these balances would have been down a little bit outside of the Citizens merger. Non performing loans were $7,400,000 or 0.21 percent of gross loans at threethirty 1, Up almost $3,000,000 and 5 basis points from twelvethirty one. A little more than half the increase was attributable to Citizens.

Speaker 3

Foreclosed property was also up $3,400,000 with the majority of that attributable to Citizens. Loans past due 30 days or more were lower over the quarter at 21 basis points On average loans, strong performance in our legacy group offset a modestly higher past due ratio for the acquired book. This was an increase of 9 basis points from twelvethirty one for the linked quarter and an increase of 4 basis points Compared to the very low levels from 1 year ago. We have seen a handful of SBA loans from a prior merger With modest unguaranteed balances that have experienced credit stress, and we reserved a modest amount Additional ACL on those loans. We noted in recent calls that we hold a couple of hotel loans that we've been monitoring very closely Since the pandemic and with the expiration of the payment modifications we'd allowed for a period of time, This continued to improve over the last quarter, paying as agreed, but not quite at the pace that we have been projecting, and we did set aside A modest amount of additional ACL as a result.

Speaker 3

Agricultural loan balances have Relatively little impact from the Citizens merger, although we do look to expand that activity in the rural areas of the markets there. From December 31, ag production and other loans to farmers increased $2,000,000 during the quarter and are up almost 24,000,000 Compared to this time last year, West Citizens contributed a little bit more than $10,000,000 to both. AG real estate balances were up $7,000,000 over the quarter and up $28,000,000 compared to March of last year With Citizens accounting for the quarterly growth. Our agricultural customers are off to a good start In 2023, we'll get capital positions and more planning progress than where we were at this time last year. However, they do anticipate continued cost pressures in operations this year.

Speaker 3

Our renewals included Conservative underwriting for those expenses compared to projected commodity prices and stress scenarios. We do anticipate some additional borrowing needs in 2023 to carry these increased costs And we've worked proactively with borrowers to address that through the renewal process. With the exception of cotton, other Our other crops demands include corn, soybeans and rice and are generally seeing prices move Modestly higher from where we conducted our underwriting. Good pricing available on soybeans has led some borrowers To lock that in pricing and even consider diverting some Codman rice acreage to soybeans, Reversing prior expectations. Last year, crops carried to harvest consisted of 30% corn, 25% is soybeans, 20% rice, 20% cotton and 5% Other crops, including popcorn, peanuts and soy.

Speaker 3

Laura, would you provide some additional details on our financial performance, please?

Speaker 1

Thank you, Greg. Going into a little more detail on some of the items. Thinking through our net interest margin, year over year, we No change in margin as we're steady at 3.48%, but we do have some additional benefit this quarter from holding the Citizens book for a couple of months and recognizing discount accretion. In total, from all recent acquisitions, that benefits margin by 14 basis points. A year ago, discount accretion plus SBA origination fee accretion benefited us 9 basis points.

Speaker 1

On a core basis, we had assessed that margin is down about 5 basis points. Compared to the December quarter when we had 6 basis points A benefit from discount accretion included in the reported margin of 3.45 percent that would indicate we're also down about 5 basis points. But the drop from a 92 day quarter to a 90 day quarter accounts for all of that and we'd actually have been up a couple of basis Point sequentially if we adjusted for that. Compared to the December quarter, we viewed our core asset yield as increasing 22 basis Point resulting from higher securities and loan yields, including the securities book that we brought over at current market yields from the Sotisland acquisition, Well, our cost of funds was up 20 basis points. Net interest income was up 1,400,000 or 28.1 percent as compared to the year ago period attributable to our inclusion of Citizens results Since January 20th.

Speaker 1

Compared to the linked quarter, we're up $828,000 or 15.2%. We did note in prior calls that the linked December quarter had a little more than $300,000 in gain on sale of fixed assets, while the year ago March Quarter had little more than $150,000 in non reoccurring wealth management income, so the comps would look a little better adjusted for those items. Non interest expense was up $10,200,000 compared to the year ago quarter, Including $3,300,000 we identified as non recurring merger charges this year compared to $1,100,000 in similar charges in the year ago Period. Compared to the linked December quarter, non interest expense is up $9,400,000 and that quarter included a little more than 6 1,000 in non recurring merger expenses. Outside the non recurring items, primary drivers Of the core increase is compensation, occupancy, data processing, legal and professional and intangible amortization.

Speaker 1

Our net charge offs moved back down during the quarter, dropping to 1 basis point on average loans and are holding the trailing 12 month figure to 2 basis Our provision for credit losses, or PCL, totaled $10,100,000 for the quarter as compared to 1.6 $1,000,000 in the same quarter a year ago and $1,100,000 in the linked December quarter. Of that, $7,000,000 was attributable to the Citizens merger as we booked an allowance for the loans not designated as purchase credit deteriorated or PCD loans and for credit commitments. The remaining PCL attributable to our legacy operations We're split between about $1,900,000 attributable to outstanding loans and $1,100,000 attributable To credit commitments, Greg mentioned the additional allowance or ACL that we consider attributable to a couple of specific pools That we had considered to have higher than normal risk, and those were less than $1,000,000 in total. We also recorded a modest Increase in qualitative adjustments based on industry trends. With that, our ACL at March 31 was 40 $5,700,000 or 1.31 percent of gross loans and 6 18 percent of non performing loans And compare that to $37,500,000 or 1.25 percent of gross loans And 7 83 percent of nonperforming at December 31.

Speaker 1

Our tangible common equity increased 42 basis points during the quarter due to the intangible created with the merger. Our accumulated other comprehensive loss On the AFS portfolio declined from $18,800,000 at December 31 to $18,100,000 at March 31. Our tangible book value per share declined from $32.91 at December 31 to $31.46 at March 31, also reflecting the intangible from the merger. Matt, would you like to have other comments?

Speaker 2

Thanks, Laura. Our legacy loan growth of about $38,000,000 during the quarter was led by our West region centered in Springfield, Missouri, and our South region was a very close second. Our East region, which includes much of our ag activity, saw further declines in loan balances this quarter, We should begin to see some seasonal rebound in the June quarter. Our outlook for organic loan growth remains relatively moderated at this time Outside of the seasonal book, although we do report an uptick in the pipeline for loans defined in 90 days at $164,000,000 at March 31, Up from $122,000,000 a quarter earlier and down from $182,000,000 reported at this time last year. Our non owner CRE concentration at the bank level was approximately 3 34 percent of regulatory capital at March 31, Down 6 percentage points compared to December 31 and up from 3 10% 1 year ago.

Speaker 2

Our volume of loan originations was approximately $212,000,000 in the March quarter, down from $281,000,000 in the December quarter. In the March quarter a year ago, we originated $268,000,000 The leading categories this quarter were commercial construction, single family residential, Primarily non owner occupied, multifamily residential real estate and commercial, but construction was the only one in that group to expand much quarter over quarter. Last quarter, we had utilized brokered CDs to lay off an overnight borrowing position that resulted from strong loan growth in the June September quarters. This quarter, we saw small broker deposit outflows, of course, offset with the Citizens growth. Public funding, Public unit funding, exclusive to Citizens, declined primarily due to rate shopping on some excess balances accumulated in operating accounts.

Speaker 2

Overall, we saw a decline of little more than 2% from the December 31 balances, inclusive of Citizens deposits at that time. 3 months ago, we were hopeful that as the Fed was anticipated the slowest pace of increases, we might see a slowing in the pace of increases to bank cost of funds. But we now expect competition for deposits to remain stronger in the near term and to continue to pressure bank's cost of funds even if the Fed would pause in the next quarter. Rui, any closing thoughts?

Speaker 3

Yes. Thanks, Matt. In addition to the immediate benefits of additional liquidity and an asset sensitive balance sheet From combining Citizens' balance sheet and ours, we're really looking forward to the long term opportunities In these markets, both in Metro Kansas City and St. Joe as well as the more rural markets as well for both Deposits and loans. We're going to concentrate on integration and meeting customer expectations and merger process And we're really looking forward to the opportunity to grow a good franchise.

Speaker 3

With that being said, We expect to have plenty on our plate for the time being, and we do not expect to be looking for new M and A opportunities in the near term. From a cost savings basis, we expect most of our cost savings to be achieved by the end of the June quarter, and We're well on our way to our internal projections for cost savings.

Speaker 4

Laura?

Speaker 1

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

Operator

Our first question today comes from Kelly Mota from KBW. Kelly, please go ahead. Your line is open.

Speaker 5

Hi. Thanks so much for the question. Good morning, everyone. I think maybe starting off with the commentary on cost saves and I appreciate the commentary that you're well on your way for achieving your internal projections for the Citizens deal. Can you remind us on the cost saves front what has been done so far as well as kind of what's left to be realized in terms of the dollar amount Causte to be recognized and where those are being driven by?

Speaker 2

In terms of dollars, that's hard for me to respond to immediately. We had estimated 65% I'm sorry, 35% that were running, I think, about $6,500,000 per quarter on their income statement. We're probably 75% of the way through picking those up at this point, but that would be In April.

Speaker 5

Got it. Understood. And then This deal came at a time when liquidity was ever more valuable. So, it seems very well timed. Just wanted to get a sense of I know cash balances are higher than they were pre quarter, If this is a good level or if these are going to continue to be worked down from here, as well as a sense of The liquidity got your borrowings down, but on the flip side of the balance sheet, how you anticipate funding growth Is it through deposits or potentially using additional borrowings?

Speaker 2

So from a seasonal aspect, we would expect the June quarter to be A little less positive for deposits, a little more positive on the loan side. That continues through September typically for us. So over that Period of time, we would expect probably cash to move down. We would love to rely as fully as we could on core deposits. We do anticipate that growth to be tough over the next over the near term, let's say, and Would not be surprised if we do have some wholesale reliance in the next year.

Speaker 5

Great. And then also kind of Speaking with the point of margin, what is new loan production coming on at and where are you Still seeing good risk adjusted returns in this market.

Speaker 3

We're seeing a lot of our low Production coming in and around the 7% number depending on Term and repricing characteristics on up to Towards the 8% mark, overall I would anticipate a little north of 7. And again, this is a normally a good growth quarter for us as our Seasonality of our agricultural portfolio is drawn that type of thing. So we definitely would plan on Some loan growth this quarter.

Speaker 5

Great. And a Final question for me. Everybody has been hyper focused on office loans. Can you remind us what your exposure is To Office CDRE, any characteristics of that portfolio as well as any other kind of Higher focused portfolios, say, I know you've had some hotel rooms you've been watching.

Speaker 3

We have a very limited exposure to office space. We have less than $20,000,000 in Loans secured by office properties, other loans that we have in office, they're Predominantly smaller in size, they're not big office space and that's just not an area that we have Had much exposure to most of the office exposure we have was picked up by the Citizens merger. Prior to that, we had less than $10,000,000 The other portfolios that we're paying closest Attention to, you mentioned the hospitality. We have Roughly $80,000,000 of hospitality loans, Of which they're performing as agreed and we've seen upfix in their performance. We have the 2 classified Relationships have mentioned earlier that we provided a little more for in the ACL, but they're paying as agreed and their occupancy trends are Moving positively.

Speaker 3

Other portfolios that we're monitoring, we're monitoring our strip centers, our Single tenant buildings that we have, lots secured by discounters, we're really not seeing There are really any negative performance trends in any of those portfolios. A lot of our Strip centers, a lot of that are in more rural communities and we're not relying on very many large tenants In a lot of our strip centers and that portfolio has been performing very well.

Speaker 5

Thank you. Thank you. I appreciate all the color. I'll step back.

Speaker 3

Thanks, Scott. Thanks, Kelly.

Speaker 1

Thank you.

Operator

Our next question is from Andrew Liesch from Piper Sandler. Andrew, please go ahead. Your line is now open.

Speaker 4

Thanks. Good morning, everyone. So I'm going to circle back back to the year. So it sounds like expenses here are Kind of trending as expected with Citizens, but was there anything outside from the legacy Southern Bank expense base that might have caused It's expected to be

Speaker 2

a little bit higher this quarter? Nothing particularly noteworthy. There There's always a little bit of seasonality in our March quarter as we have compensation adjustments work through That hits our payroll taxes, that hits our paid time off accruals and things like that.

Speaker 3

A little

Speaker 2

bit additional legal expense on some miscellaneous stuff, not particularly related to the merger that we wouldn't have identified in that that Should not be recurring, but it's not to the level that we would go into a lot of detail about it. Got it.

Speaker 4

So it seems like you take off the merger expenses, you're $23,400,000 maybe from the seasonal cost drop out here this Quarter and I think it's the cost saves from the deal. So maybe just a high mark going forward with 22.4?

Speaker 2

Well, that total number I hope is a high mark. And the other side of what you're Talking through there, though, we wouldn't have had their expense structure in for most of the month of January?

Speaker 4

For the full quarter, yes, right. Got it.

Speaker 2

Yes.

Speaker 4

Okay. And then it sounds like you've given some good yields on the loan, Margins have been a little bit better than I was expecting. This balance sheet considered certainly helpful. Obviously, some discount accretion in there, but at 348 in the quarter, 335, a little bit of discount accretion. How do you guys think it trends from here?

Speaker 2

We're hopeful that it can stabilize. We're keeping a close eye on the cost of funds and what we're going to have to pay for deposits to retain. We certainly timed the acquisition well with the high level of adjustable rate securities, Short duration, so we're hopeful that can offset, but don't have any specific guidance for you on anything other than continued cost of funds pressure.

Speaker 3

Andrew, first of all, this is the best on what's going to happen with competition on deposit pricing and how the new world operates With liquidity premiums.

Speaker 4

Certainly. Well, it's tough. I can recognize that and appreciate it. So But thanks for taking the questions here. I will step back.

Speaker 1

Thank you. If no other questions, then we appreciate everyone. Thank you, Daisy. If no further questions, then we appreciate everyone's And questions for today's call, and thank you very much for joining us.

Operator

Thank you, everyone, for joining today's call. You may now disconnect your lines and have a lovely

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Earnings Conference Call
Southern Missouri Bancorp Q3 2023
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