Southern Missouri Bancorp Inc

NASDAQ:SMBC

Earnings Call Analysis

Dip in Earnings and Margin Challenges

In the December quarter, earnings per diluted share (EPS) dropped to $1.07, a decrease compared to the previous quarter and the year before. Excluding a strategic loss from a bond trade, adjusted EPS would have been $1.12. The bank's net interest margin (NIM) declined to 3.25%, mainly due to higher deposit costs and surplus cash levels, pressuring interest income. Loans and deposits showed healthy year-over-year growth, partly fueled by the Citizens merger. Asset quality remained solid with low nonperforming loans. Looking ahead, modest loan growth and a hopeful stabilization in margins are anticipated, especially if interest rates decline, potentially relieving some pressure on NIM.

Profitability Tendencies Amidst a Challenging Interest Rate Environment

The company reported a decrease in profitability for the December quarter, with earnings per diluted share falling to $1.07, representing a $0.09 drop from the linked September quarter and $0.19 from the same quarter the previous year. A contributing factor to this decline was a strategic securities loss trade, resulting in a $682,000 loss, which was intended to be offset by reinvestment into higher rate bonds within two years. While net interest income showed a commendable year-over-year growth of 22.1%, bolstered by a larger balance sheet from the acquisition of Citizens loan and securities portfolio, quarter-over-quarter saw a slight dip by 2.6% due to a higher cost of funds impacting the net interest margin.

Loan and Deposit Growth Trends

The bank showcased a robust 25% year-over-year growth in gross loan balances, partly due to the Citizens merger and an underlying organic growth rate of around 10%. The increase in deposit balances by nearly $989 million compared to the prior year also signifies a successful period of attracting customer deposits through special rate offerings and organic growth. Loan originations in the December quarter rose to approximately $242 million, indicating a vibrant lending environment despite the slight slowdown in agricultural sector activity.

Liquidity and Interest Rate Repricing Dynamics

A heightened asset repricing lag, relative to liabilities in an environment of rising rates, exerted pressure on net interest margins, bringing it to 3.25% for the quarter. However, with deposit competition showing signs of easing and the possibility of rate cuts, there's optimism for margin stabilization in future quarters. The management also expects a beneficial impact if the Federal Open Market Committee begins reducing rates this year.

Noninterest Income and Expense Fluctuations

Noninterest income was affected by the aforementioned securities loss, yet it would have marked a 16% increase from the year ago period if the loss was excluded. Noninterest expenses increased substantially year-over-year due to the Citizens merger but remained fairly stable quarter-over-quarter. A slight uptick in credit losses was noted, albeit the overall credit quality remains solid with modest provisions for credit losses recorded for the quarter.

Post-Merger Efficiencies and Expansion Plans

A year on from its merger with Citizens Bankshares, the bank has not only realized expected cost-savings but is also focusing on retention and expansion in metropolitan markets and anticipates slight increases in noninterest expenses as it builds upon new and existing market positions.

Guidance on Loan Growth and Deposit Stability

Management provided guidance of a 3% to 5% annual loan growth over the course of calendar year '24 and expects stability in funding costs as long as interest rates remain flat or decline. The increased cash balances at year-end will be strategically used to manage seasonal deposit outflows and support agricultural lending, indicating planned liquidity management.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone, and welcome to the Southern Missouri Bancorp Earnings Call. [Operator Instructions] I would now like to turn the conference call over to Stefan Chkautovich, CFO of Southern Missouri Bancorp. Please go ahead.

[Stefan Chkautovich, executive]

Thank you, Kathy. Good morning, everyone. This is Stefan Chkautovich, 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, January 29, 2024, 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 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.

[Matthew Funke, executive]

Thank you, Stefan, and good morning, everyone. This is Matt Funke. Thanks for joining us. I'll start off with the highlights from our December quarter, the second quarter of our fiscal year. Quarter-over-quarter profitability was down a bit as a higher cost of funds weighed on our margin, but for this current environment, we remain relatively pleased with the results and the outlook ahead. We believe we’ve -- excuse me we've absorbed the largest part of the impact of the prior year's sharp increase in short-term rates, and we've seen 22.1% net interest income growth year-over-year due to a larger balance sheet, with the addition of the Citizens loan and securities portfolio early in the third quarter of the prior fiscal year, along with continued solid deposit and loan growth so far this fiscal year.

We earned $1.07 diluted in the December quarter, that's down $0.09 from the linked September quarter and down $0.19 from the December 2022 quarter. During the quarter, the bank executed a securities loss trade, selling bonds with a book value of $12.4 million, realizing a loss of $682,000 or $0.05 of earnings per fully diluted share after tax. These proceeds were reinvested into $11.9 million of higher rate bonds, which are expected to result in an earn back of the realized loss in less than 2 years.

Excluding this loss for the quarter, noninterest income would have been $6.3 million, net income after tax $12.7 million, earnings per diluted share $1.12, and our return on average assets would have been 1.12%. Book value per share was $41.66 and has increased by $4.98, or 13.6%, over the last 12 months with AOCI roughly unchanged since the year ago period.

Net interest margin for the quarter was 3.25%, as compared to 3.45% reported for the year ago period, and 3.44% reported for the first quarter of fiscal '24, the linked quarter. This decrease was attributable to a higher cost of deposits as well as an increase in cash balances. Net interest income was down 2.6% quarter-over-quarter, and up 22.1% year-over-year as we grew average earning asset balances. We had a slightly lower amount of margin benefit from accretion of purchase accounting marks in the current quarter as compared to the linked quarter, and a larger benefit as compared to the year ago period, which was just in advance of the Citizens merger.

On the balance sheet, gross loan balances increased by $32 million (sic) [$32.2 million] during the second quarter. Compared to 1 year ago at December 31, 2022, gross balances are up $737 million (sic) [$736.9 million], or 25%. The Citizens merger, which closed during the third quarter of fiscal '23 accounted for $447 million (sic) [$447.4 million] of net year-over-year growth, and our adjusted annual growth rate over those 12 months adjusting out the acquired Citizens loans would be a little under 10%. Due to strong deposit growth quarter-over-quarter cash and equivalents grew $128 million (sic) [$127.9 million], and compared to December 31, 2022, cash and equivalents are up $162 million (sic) [$161.9 million].

Deposit balances increased by almost $154 million (sic) [$153.8 million] in the second quarter and increased by $989 million (sic) [$989.1 million] compared to December 31 of the prior year. That included an $851 million (sic) [$851.1 million] increase net of fair value attributable to the Citizens merger, which again was during the third quarter of fiscal '23. Strong growth in deposits this quarter was a result of CD and savings account growth from well-received special rates offered during the quarter, as well as seasonal deposit inflows. With all that, I'll hand it over to Greg for some discussion on credit.

[Greg Steffens, executive]

Thank you, Matt, and good morning, everyone. I'm pleased to report overall our asset quality remains strong as of December 31 with adversely classified assets at $39 million or a little over 1% of total loans, a decrease of about $3 million or 10 basis points, over the last quarter. Nonperforming loans were $5.9 million in 12/31, which was relatively flat compared to last quarter and totaled 0.16% of gross loans. In comparison to December of 2022, the nonperforming loans increased a little over $1 million, but in line as a percentage of total loans outstanding. Loans past due 30 to 89 days were $7 million, down nearly $20 million from September and at a low 19 basis points on gross loans. This is a decrease of 53 basis points compared to the linked quarter and down 5 basis points from 1 year ago. Total delinquent loans were $0.3 million, down $20 million from September.

This quarter's drop in past due in delinquent loans is primarily from the cure of the large relationship that was delinquent that we noted in last quarter's call. As compared to the prior quarter ended September 30, ag real estate balances were down nearly $2 million, and they were up $15 million compared to December 31 a year ago. Ag production and equipment loan balances were down $18 million over the quarter due to normal seasonality, but they were up $33 million year-over-year due in part to Citizens acquired loans and slower marketing periods for some of our farmers this year.

In the 2023 agricultural season, our farmers experienced a successful harvest with above-average yields, particularly in cotton, rice and corn. Despite facing a similar drought in most markets, water availability for irrigation contributed to better-than-average yields. Looking ahead to 2024, we anticipate our farmers will diversify their crop, specifically away from corn due to the combination of lower corn prices, the impact of the 2023 drought on river levels, and higher input costs that all have contributed to more anticipated expense for that crop. While rice cultivation is expected to increase; cotton farmers aim to maintain production levels, and soybean acres will likely remain stable.

Financial reviews indicate that most farmers will meet their 2023 obligations that are entering 2024 with somewhat lower working capital than the prior year, attributed to declining commodity prices, drought impacts and increased input costs. Still, we feel good about the agricultural segment of our portfolio. During the renewal season, we conduct stress tests on our farm cash flows, ensuring strong underwriting of these credits as we move into new production lines. Looking at the loan portfolio as a whole, gross loans grew $32 million (sic) [$32.2 million] or 3.5% annualized during the quarter. We are in the slowest part of the year for loan growth due to seasonal factors, especially related to agriculture.

The bank experienced some well-rounded growth stemming from multi-payable and nonowner-occupied CRE, C&I, construction and owner-occupied 1 to 4 family. This loan growth was led by our West and South regions, which are in good growth markets. We are continuing to prioritize making credit available to our core clients, in-between that and normal winter seasonality, we would not anticipate seeing much net loan growth during the March quarter, even though our pipeline continues to include many construction line draws. That said, due to improved liquidity, stable credit and increasing commercial demand, we expect to opportunistically evaluate additional high-quality credits that could lead to a real pickup in loan growth this summer. Our pipeline for loans to fund in the next 90 days totaled $141 million (sic) [$140.5 million] at quarter end, as compared to $158 million (sic) [$158.2 million] in September 30 and $122 million (sic) [$121.6 million] 1 year ago.

Our volume of loan originations was approximately $242 million in the December quarter, an increase of $12 million as compared to the September quarter. In the December quarter a year ago, we originated $281 million. The leading categories this quarter for lending were C&I and multifamily. Our nonowner-occupied CRE concentration at the bank level was approximately 323% of Tier 1 capital and allowance for credit losses at 12/31, down by 1 percentage point as compared to September 30. Stefan?

[Stefan Chkautovich, executive]

Thanks, Greg. Matt hit some of the key financial items already, but I wanted to share a few details. Looking at this quarter's net interest margin of 3.25% and included about 14 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits compared to the linked September quarter of 16 points -- 16 basis points, and the prior year's December quarter of 6 basis points. The primary contributor to the net interest margin compression compared to the linked quarter was the increase in the cost of deposits by 42 basis points to 2.61% primarily led by CDE and savings specials, which partially offset from lower FHLB balances. At the end of last quarter, we paid off all overnight borrowings.

In total, the cost of liabilities increased 38 basis points to 3.11%. In comparison, our yield-on-average earning assets was up only 15 basis points in the same period. As our asset repricing lags the impact of higher rates more than our liabilities, we continue to see some net interest margin pressure through the quarter, which resulted in the net interest margin for the month of December being modestly lower than the quarter average. The monthly compression has slowed as a significant percentage of the CD portfolio now rolling over each month has already been impacted by higher rates offered in periods following the [ sharp ] move higher in short-term rates. Also, we have reduced special deposit rates offered, as we balance availability of liquidity and near-term loan growth expectations as we have seen an inflection point in the competitive landscape for deposits.

Looking at our liabilities that are repricing in comparison to our earning assets, we could continue to see some additional pressure. With this coming spring, we are optimistic that we should see our margins low point if deposit competition does not re-escalate. The reduced day count in March quarter will have a small negative impact on quarterly net interest income.

Lastly, on the net interest margin and net interest income, we are liability sensitive. If the FOMC does start cutting rates this year, we would expect to be a net beneficiary of those cuts, especially if the slope of the yield curve would normalize somewhat. Noninterest income had some noise in the quarter from the loss trade we executed, with the resulting loss of $682,000. Excluding this, noninterest income would have been up almost 16% as compared to the year ago period, primarily due to the Citizens merger in fiscal 3Q and up 8% compared to September linked quarter. For the linked quarter, the increase was from several categories of loan fees and other noninterest income increased as a result of a settlement of legals fees settled in the bank's favor with total impact of $85,000. This was partially offset by lower wealth and trust management income.

Although not impacting the quarterly comparison, we will continue to have a drag on year-over-year comparisons due to NSF policy changes we adopted in July 2023, our first fiscal quarter, on how we assess fees for some items that resulted in a reduction of fee income. Noninterest expense was up 35.3% compared to the year ago quarter due to the larger expense base with the addition of the Citizens, and up 0.6% compared to the linked quarter. In comparison to the linked quarter, the bank benefited from having no material merger charges. Last quarter, we had about $134,000 mostly in our other expense line. That benefit was more than offset by higher compensation and benefits from an increased head count and the associated expenses with higher FTE. We would expect to see another quarterly increase in compensation expense in the March quarter as annual merit increases and cost of living adjustments take effect.

As indicated on the last earnings call, we had a slight uptick in occupancy expense as we relocated personnel to better positioned offices in our Kansas City market. As Greg mentioned, credit remains benign, but we did see an uptick in net charge-offs for the quarter to 10 basis points annualized, still a very solid performance by comparison to historical industry figures. About half of these charge-offs were related from one real estate relationship from the Citizens merger. Our provision for credit losses was $900,000 in the quarter as compared to $1.1 million in the same period for the prior year, and in line with the linked quarter. Our allowance for credit losses at December 31, 2023, was $50.1 million or 1.34% of gross loans and 846% of nonperforming loans, as compared to an ACL of $49.1 million or 1.33% of gross loans and 856% of nonperforming loans at September 30, 2023, the linked quarter.

The current period PCL was the result of a $1.9 million provision, attributable to the ACL for loan balances outstanding, partially offset by a recovery of $1 million and provision attributable to allowance for off-balance sheet credit exposure. This was due to the construction draws reducing the available credit and increasing our balance -- our on-balance sheet exposure. Our assessment of the economic outlook was little changed. Despite some of the challenges over the last few quarters, as the bank navigated this higher interest rate environment, impacting our margin, slowing the overall economy and resulting in lower loan originations and secondary market fees, we feel optimistic about margin and overall earnings for the June quarter and beyond if we remain in a benign credit revise. Greg, any closing thoughts?

[Greg Steffens, executive]

Thanks, Stefan. We're now a year past our merger with Citizens Bankshares and 11 months past the systems conversion. We remain focused on core deposit retention in those markets and elsewhere and have seen steady improvements over the quarters and how we're integrating those team members into our operations and procedures, and our team is doing a great job. We have achieved the cost savings we'd anticipated at the merger, and from here forward, we are looking to expand in our metro markets. As Stefan noted, and we are also looking to recruit community bankers in some of our new markets, so there could be modest incremental upticks in noninterest expense. We are 100% committed to providing our excellent services in the more rural and middle-market communities we added through the Citizens merger, in addition to the Kansas City metro area. We're not currently actively pursuing additional merger opportunities. That being said, continued regulatory and macroeconomic factors pressuring other banks could eventually lead to an uptick in potential interested partners.

[Stefan Chkautovich, executive]

Thank you, Greg. At this time, Kathy, 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.

[Operator]

[Operator Instructions] So our first question comes from the line of Kelly Motta of KBW.

[Kelly Motta, analyst]

I think, maybe, starting out, you noted that you repositioned a small portion of your securities book during the quarter. Just wondering -- the timing of it, relative, within that December quarter 1, as well as to appetite for, you know, at the margin potentially doing another piece as we look ahead?

[Greg Steffens, executive]

We completed the repositioning of those securities in mid- to late December. So, we didn't see much of an impact in the December's results at all from the securities transaction, and we would anticipate that we're going to continue to evaluate whether we do a little more.

[Matthew Funke, executive]

Kelly, it's pretty limited as to the dollar amount of securities that we have that's at a low enough yield where it's made a lot of sense for it. But there is a little bit additional that we could clean up there.

[Kelly Motta, analyst]

Got it, appreciate it. And then, I think when we last spoke last quarter at this time, you were looking for mid-single-digit loan growth. It seems like near term, the ag seasonality might be slow, but you noted you expect to pick up in the summer. Just wondering is mid-single-digits over -- for the full fiscal year, still something that you think is a reasonable expectation?

[Greg Steffens, executive]

Yes. I think going forward, we would anticipate somewhere between 3% to 5% annual growth. So, if you look at our 12/31 figures, we'd look at another 3% to 5% over the course of calendar year '24.

[Kelly Motta, analyst]

Got it. Appreciate it. Maybe 1 or 2 more from me. On the deposit side, it looks like 0.33% of the growth was from public deposits. Can you remind us, any seasonality with that? And as we look ahead, you mentioned that margin the month-over-month trends appear to be stabilizing, which is good. Just kind of where incrementally you're adding on the rate at which you're adding on new deposits? And do you think in order to get a stabilization in the cost, does it take a rate cut? Or provided that were likely done with rate cuts, would you still expect a stabilization there in funding costs?

[Matthew Funke, executive]

So, on the public units, yes, we did have some dollars come in this quarter. We would expect some of those to go back out. It's always a little tricky to know exactly how that will play out. We do have some new public unit customers from our merger that was - just at a year ago now. So, we're not 100% familiar with what their flows would be. But definitely, some of that growth would wash back out in the March quarter. Margin overall, we have reduced our CD specials a little bit. Some savings products are really stable. But where we look at how much in CDs has already absorbed the higher pricing. We really feel pretty good that we're past an inflection point on the pace of those increases, and really ought to see -- as long as rates stay here or move lower, that we ought to see a decrease in the uptick on cost of funds.

[Operator]

Our next question comes from the line of Andrew Liesch of Piper Sandler.

[Andrew Liesch, analyst]

I guess this might be related to the public funds question, but cash balances were a little bit elevated at year-end. I'm just curious what -- is that what drove that? And any plans for these funds or for this cash here going forward?

[Matthew Funke, executive]

Yes, we would expect, obviously, to use some of that to fund outflows on any of those seasonal deposits. Some of it would fund our seasonal ag book as we move through the first half of calendar '24; some of it is just we did a little better than we had anticipated in the second half of calendar '23 with deposit specials. So, we're pulling the reins back a little bit on that. It wouldn't surprise us if we have some deposit outflows as some of those specials reprice again. But we do have some brokered funding that long term, we wouldn't like to maintain at the same levels we are. And then Stefan and Greg both noted, we would look to be incrementally a little more optimistic about loan growth as we get into the middle of calendar '24.

[Andrew Liesch, analyst]

Got it. All right. That's helpful. And then Stefan, did you quantify what each 25 basis point reduction in the Fed funds rate could do to the margin? I'm just sorry if I missed that, if you did?

[Matthew Funke, executive]

Policy...

[Stefan Chkautovich, executive]

No, I didn't quantify 25 basis points. But on a big picture, 100 basis points on a static balance sheet would be about a mid-single-digit benefit to net interest income. And with our sort of budgeted growth, it would be about low single-digit benefit.

[Operator]

As there are no additional questions waiting at this time, I'd like to hand the conference back over to Southern Missouri Bancorp's CFO, Stefan Chkautovich, for closing remarks.

[Stefan Chkautovich, executive]

Thanks, Kathy, and thanks, everyone, for joining us. Appreciate your interest in the company and speak again in about 3 months. Have a good day.

[Matthew Funke, executive]

Everybody, have a good day.

[Operator]

Ladies and gentlemen, thank you for joining us for today's call. Have a great rest of your day. You may now disconnect your lines.