Southern Missouri Bancorp, Inc. (NASDAQ:SMBC) Q4 2022 Earnings Conference Call July 26, 2022 10:30 AM ET
Company Participants
Lora Daves – CFO
Matt Funke – President and Chief Administrative Officer
Greg Steffens – President and CEO
Conference Call Participants
Andrew Liesch – Piper Sandler
Kelly Motta – KBW
Operator
Good morning or good afternoon all and welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. My name is Adam and I will be your operator today. [Operator Instructions]
I will now hand the floor over to Lora Daves to begin. So, Laura, please go ahead when you are ready.
Lora Daves
Thank you, Adam. Good morning everyone. This is Lora Daves, 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, July 25th, 2022 and to take your questions.
We may make certain forward-looking statements during today’s call and we may 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 newly named Chairman and CEO and by Matt Funke, President and Chief Administrative Officer.
Matt will lead our conversation today with some highlights from our most recent quarter and fiscal year.
Matt Funke
Thank you, Lora and good morning, everyone. This is Matt Funke. Thank you for joining us. We’re happy to report this morning that the June quarter, the final quarter of our fiscal year, provided strong profitability and continued growth. We earned $1.41 diluted in the June quarter, which is the fourth quarter of our fiscal year, that’s up $0.38 from the linked March quarter and down $0.12 from the June 2021 quarter when we had a larger negative provision for credit losses and strong PPP income.
The company’s stockholders equity ended the year at $320.8 million, an increase of $37 million or 13.2% as compared to June 30, 2021, that’s attributable to almost $23 million in equity issued to Fortune shareholders, as well as earnings retained after cash dividends paid and partially offset by a $20 million reduction and accumulated other comprehensive income, and by almost $6 million utilized for repurchases of 132,000 shares of our common stock over the course of the fiscal year. We paid an average of just over $44 for those repurchases.
We grew our tangible book value by 5% and our book value by 9% as we had some impact from the goodwill created from the Fortune acquisition as well as the decline in the market value of the investment portfolio.
Our net interest margin for the quarter was 3.66% compared to 3.74% for the same quarter a year ago, and 3.48% for the third quarter of the fiscal year. We did see net interest income from the accelerated accretion on the PPP loans significantly reduced as compared to the year ago period. We viewed our core margin is expanding quarter-over-quarter and year-over-year.
Average interest earning cash and cash equivalent balances decreased by more than a third compared to the year ago period and by almost half compared to the linked quarter.
Net interest income from the quarter was almost $28 million, an increase of $3.8 million or almost 16% as compared to the same period of the prior fiscal year. The increase was attributable to an 18.4% increase in the average balance of interest earning assets, partially offset by the decrease noted in the net interest margin.
On the balance sheet, our gross loan balances were up more than $106 million in the June quarter and compared to the prior fiscal year end, gross balances are up $486 million or almost 22%.
Fortune added $202 million, so adjusted for the acquisition items, our annual rate of growth for the year would be almost 13%. The fair value of the investment portfolio increased by $9 million over the quarter, while cash and equivalents decreased by almost $162 million.
Deposit balances did decreased by almost $40 million in the fourth quarter, but they increased by $484 million over the course of the fiscal year. The year-over-year increase was attributable in part to the February Fortune merger, providing $218 million in deposits at fair value and we also had more than $28 million that we picked up in a mid-year branch acquisition.
Greg’s planning to speak with us today on some key credit things. Greg?
Greg Steffens
Thank you, Matt and good morning everyone. Our borrowers’ credit performance remains strong. We noted in April that we were working with two hotel industry relationship loans totaling just under $24 million with business models that were particularly impacted by the pandemic.
We continue working with those borrowers and both are scheduled to transition the principal and interest payments in the first quarter of our fiscal 2023. $9 million in these loans are considered special mention, while the other $15 million is considered substandard.
Overall, adversely classified loans were a little over $27 million and remained relatively unchanged from the March quarter end. A year ago, adversely classified assets totaled $18 million.
Watch and special mention credits totaled a combined $24.4 million at June 30th, down $21 million during the quarter, primarily due to the payoff, which was anticipated of a single construction loan in the light tech industry.
Non-performing loans were just over $4 million or 0.15% of gross loans at June 30th as compared to almost $6 million or 0.26% of gross loans a year ago. The reduction in non-performing loans was attributed primarily to the return in accrual status of one relationship secured by a single family residential rental property, partially offset by an increase of about $650,000 related to the Fortune merger.
Non-performing assets were $6.3 million or 0.2% of total assets at June 30th as compared to $8 million or 0.3% of total assets a year ago. In addition to the reduction in non-performing loans, we sold a legacy foreclosed property that picked up some additional repossessed property with the Fortune merger.
Past due loans continue to remain at very low levels. At June 30th, past due loans remained at 17 basis points of our loan portfolio, which was similar to a year ago and down slightly from the prior quarter.
Turning to the Ag portfolio, agricultural production and other loans to farmers were up $30 million in the quarter and up almost $38 million compared to this time last year. while Ag real estate balances were up $11 million over the quarter and $32.5 million compared to one year ago.
We noted on prior quarterly calls that our farmers had a really strong 2021 and entered 2022’s crop year in really strong positions. Our farmers are dealing with high heat and dry conditions requiring substantial irrigation. Thankfully a lot of our farmers are all irrigated, but it has increased input costs substantially.
Our lenders maintained close contact with our borrowers and we’re seeing expenses running 15% to 20% above early year projections. We’re also seeing increased line usage at a earlier time than prior years.
Farmers have been able to contract at a more favorable price than what they could receive in prior years and above levels where we had underwrote those loans, which should offset most of the increased cost of production.
Our crop mix for 2022 is approximately 30% soybeans, 25% corn, 20% cotton, 20% rice, and the additional 5% is in a mix of specialty crops. Our corn is top selling, but we could see some negative impact on yields from hot weather that were — have been experienced.
Soybeans are still too early to tell. Cotton was a little late getting in the field, but it’s doing well with the hot dry weather, and our rice looks to be in pretty good condition.
Lora, would you provide some additional details on our financial performance?
Lora Daves
Thank you, Greg. As Matt mentioned earlier, we earned $1.41 diluted in the June quarter, which is the fourth quarter of our fiscal year, that’s up $0.38 from the linked March quarter and down $0.12 from the $1.53 diluted that we earned in the June 2021 quarter.
Our net interest margin in the June quarter was 3.66%, which included about eight basis points of contribution from fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits or $606,000 in dollar terms.
As PPP loan balances and forgiveness repayment diminished, accelerated accretion of deferred origination fees on those loans dropped significantly to recognition of $72,000 to interest income, which had no material impact to the margin.
In the year ago period, our margin was 3.74% of which seven basis point resulted from fair value discount creation of $470,000 and PPP forgiveness caused us to accelerate accretion of $1.3 million in deferred origination fees, contributing 20 basis points to the margin.
And what we see is our core basis than our margin was up 11 basis points comparing to the June 2020 quarter — to the — from the June 2022 quarter to the June 2021 quarter.
We see our core loan yield is being down nine basis points, while what we view is our core cost of deposit is down five basis points, and our total core cost of funds is down six basis points.
Average cash balances were significantly lower in the current quarter compared to the year ago quarter and securities yields were better helping our overall earning asset yield to increase about 10 basis points exclusive of the accretion of PPP, deferred fees, or discounts on acquired loan.
In the linked March quarter, we reported a margin of 3.48%, which included a similar benefit from the fair value discount accretion of six basis points and accelerated recognition of deferred PPP origination fees on forgiveness in the March quarter, which contributed two basis points in that quarter. We see sequential core margin improvement at about 16 basis points, but a couple of those basis points are due to the 91 day quarter.
Non-interest income was up $1.6 million compared to the year ago period, attributable to wealth management and insurance increases, due in part to the Fortune merger. Loan fees increased 53% compared to the year ago period and deposit service charges are up 33% compared to the year ago period.
Gains on the sale of secondary market residential originations declined 53% as compared to the year ago period, but we did offset that gain on sale of the — with the gain on sale of the guaranteed portion of new originations in government guaranteed loans, which contributed more than $400,000 in non-interest income for the quarter. Compared to the linked quarter, non-interest income was up 32.5%.
Non-interest expense was up $3.1 million compared to the year ago quarter. That included $117,000 in M&A charges, mostly data processing and legal, while we didn’t have any a year ago.
Other increases were attributable mostly to compensation of $1.8 million and occupancy of almost a $0.5 million. Compared to the linked quarter, non-interest expense was at $574,000 as we had the Fortune expenses included for a full quarter, but benefited from a more favorable comparison to the high M&A charges included in the March quarter.
The company had very low net charge-offs again in the June quarter, little change from the last several. Our trailing 12 months figure is now less than $100,000 less than one basis point.
Matt already highlighted loan growth totals, I’d add that the PPP loan balances our company originated declined by almost $60 million during the fiscal year-to-date, and we picked up $2.4 million in the Fortune merger. Total remaining PPP balances at June 30th were just over $3 million, while unrecognized deferred fee income on these funds was immaterial.
The company recorded a provision for credit losses, PCL charge of $240,000 in the three-month period ended June 30th, 2022, as compared to a PCL recovery of $2.6 million in the same period of the prior fiscal year.
Our allowance or ACL at June 30 totaled a little over $33 million or 1.22% of gross loans. Little change in dollar terms from a year ago, but down in percentage terms from 1.49% of gross loans for the prior fiscal year end. Our tangible equity ratio remained relatively unchanged during the quarter.
Matt, any other comments?
Matt Funke
Thanks Lora. Our loan growth did pick back up to a faster pace in the June quarter increasing by $106.6 million, that includes the impact of some modest PPP paydowns. Single family real estate, Ag, and non-owner occupied commercial real estate, commercial — C&I and Ag production loans all contributed to the quarters of growth, partially offset by larger multifamily payoff.
The strongest growth this quarter was in our West region centered in Springfield, Missouri and it was complemented by good levels of growth in the East and South regions that mirrors our results for the overall fiscal year.
Our new North region created with the Fortune merger has not yet contributed, but we looked for good results there in the coming year. We expect growth to continue in the next quarter with our pipeline for loans to fund in 90 days at $235 million at June 30, up from $182 million a quarter earlier, and $142 million reported at this time last year.
Our consolidated non-owner CRE concentration was approximately 305% of regulatory capital at June 30th, up about 5.5 percentage points as compared to March 31st, and as compared to 272% one year ago. At the bank level, the concentration was 313% of regulatory capital, up from 277% a year ago.
Our volume of loan originations was about $308 million in the June quarter, up about $40 million from the March quarter. In the same quarter a year ago, we originated $286 million, which included about $10 million in PPP originations.
Our June and September quarters are usually our softest for deposit growth and on a core basis, we saw outflows this quarter that were larger than normal. But that’s been something we’ve been expecting for a while as the consumer stimulus was withdrawn. We did see outflows in both time deposits and non-maturity.
Public non-maturity balances grew, while retail and commercial balances declined. Public funds have made up about 45% of our non-maturity growth over the fiscal year and we expect this source of growth may peak in the September quarter.
Public unit CDs declined in the June quarter and over the fiscal year. Deposit growth in the fiscal year was broad based across our regions with our East region leading in dollar terms for non-maturity deposit aside from public units; the South region leading in percentage terms outside of public units; and the West region leading in terms of growth that includes our public units.
Our cash balances decreased further in the June quarter as expected and we’ve probably realized most of the benefit of asset redeployment available to our margin there.
Given the reduction in cash and continued expectations for loan growth in the September quarter, we’ll expect limited additions to the investment portfolio. We expect that our increases in the cost of funds may negatively impact our margins in the coming fiscal year, but we’ll work to hold those increases down and ultimately, our results will depend greatly on the competitive environment for deposit pricing.
We expect non-interest income may be impacted by some tweaks to our NSF program to reduce fees assessed consumers for small overdraft balances. We think these more forgiving policies will mostly offset the additional revenues that we would have expected from activity on new accounts or the additional NSF activity we might have seen from a more strained economic environment. We are continuing to look at additional changes we may make later in the calendar year that could reduce service charge revenue further.
Also Lora mentioned our gains on residential and SBA guaranteed loans in the current quarter. We expect future quarters in the near term won’t be as strong on those items, as we had a very good SBA pipeline we acquired from the Fortune merger that hasn’t been as substantial since. And of course, we’ve seen residential activity dry up in recent months.
Finally, on the expense side, we continue to face competitive pressure on the compensation front. And we are regularly reviewing our comp structure to be sure we’re competitive and able to retain our team members in this unusual market.
Greg, any final comments?
Greg Steffens
Yes. Thanks, Matt. Just like to close out by noting that since our last quarterly call, we’ve had a reduction in the number of contacts regarding M&A opportunities within our region. However, we continue to visit with some potential partners.
We do want to take advantage of opportunities when they become available, while as always maintaining discipline and how we evaluate partnerships to ensure they drive long-term shareholder value. And IBIP [ph] deal partner would have lower loan-to-deposit ratios and excess liquidity and be larger than $250 million. Lora?
Lora Daves
Thank you, Greg. At this time, Adam, we’re ready to take questions from our participants. So, if you would please remind folks how they may queue for questions at this time.
Question-and-Answer Session
Operator
Of course. [Operator Instructions]
Our first question today comes from Andrew Liesch from Piper Sandler. Andrew, please go ahead. Your line is open.
Andrew Liesch
Hi, good morning, everyone.
Matt Funke
Good morning Andrew.
Andrew Liesch
Just a question if you look at — good morning. If you look at the loan pipeline where it is today and what your clients have been telling you and what your lenders have been telling you, how do you think long growth is going to trend out over the next fiscal year, just given the environment that we’re in?
Matt Funke
I think with that pipeline that we’re reporting at June 30, we would definitely expect growth to continue through the September quarter. I think as you get further into the fiscal year, we may see that slowed down a little bit. Our December-March quarters are always a little bit slower. Greg, overall, for the coming fiscal year?
Greg Steffens
For the fiscal year, we would anticipate that we’re probably going to have growth from 5% to 7% would be in a rough number. We are expecting economic downturns to impact loan growth in the latter part of the year. But our crystal ball is in fact clear.
Andrew Liesch
Make sense. And then on the funding side with the declining deposits, loan-to-deposit ratio is up to 97%. Sounds like this quarter could also be softer deposit growth, like what’s the thought on funding there? Are there any promotional plans? Or do we tap the wholesale market, what do are you thinking on the funding side?
Matt Funke
Yes, we are looking at different CD specials. At the Fed meeting this week, we’ll take a look at our deposit pricing overall, what changes we may need to make there. September is typically a tougher quarter for us on the deposit side. Even with the Ag line draws, we’re seeing corresponding balance declines with our farm depositors, too. So, yes, we’ll look at what we may offer in terms of additional specials over and above what we’re offering currently. And of course, wholesale would be the backup, though it’s not preferred.
Andrew Liesch
Got you. So, just kind of rolling that together, seems like getting better yields on your loans, but funding costs may rise as well. So, are you expecting the pace of margin expansion to slow from here?
Matt Funke
Yes.
Andrew Liesch
Got it. All right, that covers my questions. I’ll step back. Thank you.
Matt Funke
Thanks Andrew.
Operator
The next question comes from Kelly Motta from KBW. Kelly, please go ahead.
Kelly Motta
Hey, good morning. Thanks so much for the questions.
Matt Funke
Good morning, Kelly.
Kelly Motta
Maybe — good morning Matt. Maybe carrying on with the deposit side to be — you talked about the public funds and that contribution, can you just remind me how big of that is relative to your total deposit base?
Matt Funke
I think overall, it’s — maybe it’s 6% — less than 20%, but probably just above 15%.
Kelly Motta
Got it. Thanks for the clarification, Matt.
Matt Funke
And that’s a little higher than what we’ve traditionally ran. We’ve seen some inflows over this year, obviously.
Kelly Motta
Understood. Thank you. And then maybe turning to fees, I think you — with the gain on sale of loans, I think you mentioned in the prepared remarks that was partly SBA, not just mortgage. Can you confirm and maybe size — how big the SBA gains are — were this quarter, so that we can, kind of, understanding that those will be lower on a go forward basis?
Matt Funke
I think you said that were a little more than $400,000.
Lora Daves
Correct. Yes, a little over $400,000 is what we had on this quarter.
Kelly Motta
Got it. And then with expenses, I know you had the full quarters contribution from Fortune. Can you remind us any cost savings that have yet to be realized with the merger, as well as maybe talk about any inflationary pressures you’re seeing on a go forward basis in your market?
Matt Funke
Cost savings over and above where we were in the June quarter would probably be pretty limited. I think just as you kind of normalize operations, you sometimes find some additional savings later on. We had a little more than $100,000 that we specifically identified during the quarter but nothing real major there. Generally, in terms of inflationary impact, I think we’ll continue to see some pressure on compensation side.
Kelly Motta
Okay, understood. Thanks very much. And maybe a last one on credit, you guys have always been really good at managing asset quality. And reserves ticked lower with some minor improvement out of MPAs. Just wondering given where we are in the cycle and everything with this 123 basis points reserved, is that is that a bottom or is there still room for improvement that could kind of keep that lower near-term?
Matt Funke
Well, that’s going to depend a lot on what the economic projections that we feed into the CECL model would show. My gut feeling would be that you’re not going to get improvement from here on those projections. So, I’d be surprised if it would move down any lower than that, but that’s just me sticking my finger into the wind as far as what the economy is going to do.
Greg Steffens
We would anticipate our credit profiles will remain very consistent to what we have at this point. But it would be — I would be shocked if our ratio would fall much lower than 122 now. I would tend to say would new — maybe creep a little higher as economic activity slows down.
Kelly Motta
Got it. Thank you so much for the time today. I really appreciate it. Thank you.
Matt Funke
Absolutely. Thanks Kelly
Operator
Nothing further in the queue at present. [Operator Instructions] As we have no further questions, I’ll hand back to the management team for any closing remarks.
Matt Funke
All right. Thank you Adam. Thank you, everyone, for joining us. Appreciate your interest in the company and we’ll speak with you again in three months.
Greg Steffens
Have a good day.
Lora Daves
Thank you.
Operator
This concludes today’s call. Thank you very much for your attendance. You may now disconnect your lines.
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