Southern Missouri Bancorp Inc

NASDAQ:SMBC

Earnings Call Analysis

Earnings Call Transcript 2024-Q4

[Operator]

Hello, and welcome to the Southern Missouri Bancorp First Quarterly Earnings Call. My name is Alex, I will be coordinating the call today. [Operator Instructions] I'll now hand it over to your host, Stefan Chkautovich, CFO, to begin. Please go ahead.

[Greg Steffens, executive]

Thank you, Alex. 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, July 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 Matt Funke, President and Chief Administrative Officer; Greg Steffens, our Chairman and CEO, is attending an investor conference today. Matt will lead off our conversation today with some highlights from our most recent quarter and fiscal year.

[Matthew Funke, executive]

Thank you, Stefan. Good morning, everyone. This is Matt Funke. Thank you for joining us. I'll start off with some highlights on our financial results for the June quarter, which is the final quarter of our fiscal year. Quarter-over-quarter, profitability was up a bit as we saw our net interest margin move higher in combination with an increase in noninterest income and a small decrease in expenses.

Despite the challenging higher rate environment and its impact on our cost of deposits, we are pleased to report that we grew tangible book value per share by 13.4% during our fiscal 2024 year. In the June quarter, we earned $1.19 diluted. That's up $0.20 per share from the linked March quarter but it's down $0.18 from the June 2023 quarter.

For full fiscal year '24, we earned $4.42 compared to $3.85 in fiscal 2023. Excluding losses realized on the sale of securities, we would have earned about $0.11 more in fiscal '24, so $4.53 while in 2023, if we had excluded the Citizens merger-related provision for credit losses and noninterest expenses, we would have earned $0.95 more or about $4.80.

The decrease from last year's figure on an adjusted basis is primarily due to core expense growth that exceeded our net interest income growth as a result of margin compression. Expense growth also exceeded our noninterest income growth due to reduced loan fee income and NSF revenues. Tangible book value per share was $36.68 and has increased by $4.34 or that 13.4% that we mentioned over the last 12 months.

If we were to back out the after-tax impact of both the loss trades we executed and the year-over-year improvement in our AOCI, our tangible book value would have increased by about $4.05 or 11.8%. Due to our strong capital position, with the earnings release, we also announced a $0.02 or 9.5% increase in our quarterly dividend, bringing it to $0.23 a share which is just over 20% of our fiscal year 2024 results as an annualized rate.

Net interest margin for the quarter was 3.25%, as compared to 3.15% reported for the linked third quarter of fiscal '24. Due to the increase in deposit costs, however, our net interest margin compared to the same quarter a year ago, is down by 35 basis points. Net interest income was up 1.7% quarter-over-quarter as the net interest margin expansion more than offset the 1.3% decrease in average earning assets but it's down 3.1% year-over-year, primarily due to the decrease in margin.

Noninterest income for the quarter was up $2.2 million or 39.1% compared to the linked quarter, partially due to losses realized on the sale of securities in the prior quarter and other seasonal fee income realized this quarter. Year-over-year fee income was down 13.2% due to reduced loan fee income, including the gain on sale of loans. Noninterest expense was down 0.2% for the current quarter compared to the linked quarter and up just 0.5% compared to the same quarter a year ago.

Stefan will give more detail later on some of the moving parts within operating expenses. The big picture, we feel like our team has done a good job of expense control. On the balance sheet, gross loan balances increased by $79 million or 8.3% annualized compared to March 31 and by $231 million or 6.4% compared to June 30 a year ago.

Cash equivalent balances as of June 30 decreased by $107 million compared to March 31, due to outflows of seasonal deposits and the strong loan growth. During the quarter, we had some opportunistic stock repurchase activity utilizing $3.7 million to acquire about 88,000 shares at an average price of just over 41.5% or a little more than 95% of our June 30, 2024 book value.

In addition to our improved sequential quarterly earnings, credit quality has remained strong, with adversely classified loans of $41 million or 1.06% of total loans a decrease of about $1.5 million or 6 basis points during the quarter. Nonperforming loans were $6.7 million at June 30 down a little more than $700,000 compared to last quarter, and they totaled 0.17% of gross loans.

By comparison, at June 30, '23, nonperforming loans were $7.7 million and 21 basis points on total loans. Loans past due 30 to 89 days were $6.1 million, up a little more than $600,000 from March and 16 basis points on gross loans, 1 basis point higher than March compared to a year ago. Total delinquent loans were $9.2 million or 24 basis points on gross loans up 1 basis point compared to March 31 and down 6 basis points compared to June 30 a year ago.

This quarter, our ag real estate balances totaled $233 million or just over 6% of total loans and ag production and equipment loans were $176 million or a little more than 4.5% of total loans. Compared to the prior quarter end, ag real estate balances were down $1 million and they were down ag real estate balances were down about $6 million compared to June 30 a year ago.

Our production and equipment loans were up $36 million quarter-over-quarter due to normal seasonality mostly, and they were also up $38 million year-over-year. Our lenders report that the majority of our ag borrowers began planting earlier in 2024 due to more favorable weather conditions corn and soybeans were planted as early as March and are maturing well with some corn expected to be harvested in August and soybeans in September.

Despite heavy rains in June that required some replanting of cotton and soybeans, the damage was manageable with crop insurance. The wetter weather through June helped to hold down irrigation costs for a while, but as summer progresses, hot dry conditions are leading to increased fuel costs for irrigation and chemicals for weed control.

We are seeing increased loan draws to cover higher costs, with some farmers already returning for draws on supplemental lines of credit that were preapproved when we renewed annual lines ahead of this crop year. The earlier start to this planting season also means that our balances at June 30 this year are a little higher than last and also the lines could be paid down earlier this fall.

Although we could see some of our borrowers delay sales of their crop to take advantage of the most advantageous delivery dates for pricing given overall commodity pricing challenges this year. Lower corn prices this spring led to a decrease in corn acreage with farmers hoping for better prices in '25. Rice acreage increased slightly and is in good condition.

Cotton is reported to be an average condition with hopes for a good yield if the dry weather continues. Specialty crops like popcorn, are in better condition than last year and early planted soybean show promise of a higher yield compared to '23. Farm equipment prices remain high, but used equipment prices are falling and real estate values are generally stable.

The '24 crop year could be challenging for our farmers due to high production costs and lower commodity prices, helping to offset this yields in our area looks set to come in quite strong. Our lenders are making their farm progress inspections over the next few months, which should give us a reliable projection on estimated yields and a better indicator of the outcome of the '24 crop by early fall.

Due to our stringent underwriting, including stressed commodity pricing and assumed higher operating costs, we anticipate that our borrowers would generally be able to navigate this challenging year. Looking at the loan portfolio overall, it was a good, well-rounded quarter for loan growth, stemming from nonowner-occupied commercial real estate loans, residential real estate loans and drawn construction loan balances.

This loan growth was also spread through our footprint with good growth in our South, Northwest and East regions. And for the overall fiscal year, our South, East and West regions led the way. We're continuing to prioritize growing our credit portfolio with full banking relationships.

We're optimistic about keeping the mid-single-digit pace of loan growth we experienced in '24 going into fiscal '25 as we look to increase our market share. Producers that we have brought on are adding to the pipeline. At quarter end, our pipeline for loans to fund in the next 90 days totaled $157 million as compared to $117 million at March and $135 million one year ago.

Our volume of loan originations was approximately $205 million in the June quarter compared to $241 million in the linked March quarter. And in the June quarter a year ago, originations totaled $272 million. The leading categories in the current quarter were construction, 1-4 family, CRE and C&I. Our nonowner CRE concentration at the bank level was approximately 318% of Tier 1 capital and allowance for credit losses at June 30 down from 327% at March 31 and 330% at June 30 a year ago.

On a consolidated basis, our nonowner-occupied CRE ratio is about 305%. Our intent would be to hold relatively steady on this measure and to grow CRE commensurate with capital. As pointed out in the earnings release, our office portfolio is minimal, with 35 loans totaling $25 million or 0.65% of total loans.

The remainder of our CRE is rather diverse, and our multifamily lending is primarily either in our Midwest footprint or with developers who operate from our footprint. Stefan, would you provide some additional details on the financial numbers.

[Stefan Chkautovich, executive]

Thanks, Matt. You 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%, it included about 10 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits compared to the linked March quarter of 11 basis points and 16 basis points in the prior year's June quarter.

The net interest margin expanded as the yield on interest-earning assets increased 14 basis points, primarily due to loan yield expansion, while the cost of interest-bearing liabilities increased 8 basis points. As we have indicated on prior calls, we continue to see a net benefit of high-cost CDs raised in calendar 2023, repricing slightly lower while our fixed rate loan portfolio yields steadily and modestly increase with renewals.

In addition, the margin should benefit from any increase in new loan production at higher interest rates next quarter. With this, we could continue to see some additional margin expansion but not at the same rate we experienced this quarter. If the FOMC does cut rates this year, we could also see further net interest margin expansion.

100 basis points of cuts to the Fed funds rate is projected to result in low to mid-single-digit percentage growth of net interest income over the 12 months following the rate cut depending on our rate of growth.

As Matt mentioned, noninterest income was up 39.1% compared to the linked quarter, and excluding the $807,000 of realized losses from the March quarter bond sales, it would have increased by 21.5%, but it was down 13.2% year-over-year. The year-over-year comparison was negatively impacted by lower gains on sale of loans and other loan fees this quarter, but also due to NSF policy changes we adopted in July 2023 at the beginning of our fiscal year on how we assess fees for some items, resulting in a reduction of fee income.

With the completion of this fiscal year, the negative impact from this change will not be a drag on the year-over-year comparison anymore. For the linked quarter, the increase excluding the loss trade was from the recognition of $675,000 from tax credit benefits and other noninterest income, $379,000 from additional card network fees based on annual volume incentives and $131,000 from the change in fair value of mortgage servicing rights. Going forward, we will be estimating and recognizing the card volume incentives as well as the tax credit benefits more evenly throughout the year.

Noninterest expense was up 50 basis points compared to the year ago quarter and down 20 basis points compared to the linked quarter. We did utilize some onetime credits with a vendor totaling 60,000 in the quarter that we will not benefit from in the quarters to come, and we expect operating costs to continue to increase as the bank grows.

I do also want to point out that in the quarter, we had reclassifications of some expenses that resulted in about a $200,000 decrease in data processing and a corresponding $100,000 increase in both occupancy and equipment and legal and professional fees. As Matt mentioned, credit remains benign, and net charge-offs were 6 basis points annualized for the current quarter and 5 basis points in the trailing 12 months which is a very solid performance by comparison in historical industry figures.

Our provision for credit losses was $900,000 in the quarter as compared to $795,000 in the same period of the prior year and in line with the linked quarter. Our allowance for credit losses at June 30, 2024, was $52.5 million or 1.36% of gross loans and 786% of nonperforming loans as compared to an ACL of $51.3 million or 1.36% of gross loans and 693% of nonperforming loans at March 2024 linked quarter.

The current period provision for credit loss was the result of $1.8 million provision attributable to the ACL for loan balances outstanding partially offset by a recovery of $875,000 and provision attributable to allowance for off-balance sheet credit exposure as construction draws reduced available credit and increased on-balance sheet exposure.

Our assessment of the economic outlook has improved, but reserves were modestly increased due to qualitative factors and individually evaluated credits. Despite some of the challenges over our fiscal 2024 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 fiscal 2025 and beyond if we remain in a stable credit environment.

With our anticipated earnings and similar loan growth to 2024, we should see our capital level and ratios continue to increase. We will expect to primarily manage our equity levels through the dividend and periodic M&A activity. The current stock price has made repurchase activity a little less attractive as a capital management tool than it was a few weeks ago, but we'll remain opportunistic about repurchase activity when anticipated earn-back periods would justify it.

Matt, any closing thoughts?

[Matthew Funke, executive]

Thank you, Stefan. We have remained focused in the past fiscal year on core deposit retention, expansion in our Kansas City and St. Louis markets and taking care of our relationships. We've made some additions to our teams in a variety of markets, and we're seeing progress on the business development front.

The M&A conversations with potential partners in the first half of the calendar year, they remain somewhat preliminary and medium- to longer-term prospects, but we do continue to look to further explore opportunities to achieve scale in target markets. Additionally, we continue to look at other financial service providers we could partner with.

We expect the uptick in bank valuations could lead to further discussions with some potential partners. As it's been well over a year since our last merger, we've been focused recently on identifying operational efficiencies and fostering a strong culture so that we're better able to serve our clients, our local communities and shareholders and positioned for potential M&A activity in the future.

[Stefan Chkautovich, executive]

Thank you, Matt. At this time, Alex, 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] Our first question for today comes from Matt Olney from Stephens.

[Matt Olney, analyst]

Stefan, I think you mentioned that CD pricing dynamics was favorable this past quarter. And I guess this could be a nice tailwind for you going forward. Any more color on just the overall amount or just the level of CDs maturing in the next few months? And what are some of those renewal rates and how those compare to what's coming off?

[Matthew Funke, executive]

Yes. In the next 12 months, we have around $1 billion of CDs repricing. And on average, currently, the average renewal rate is about $4.79.

[Stefan Chkautovich, executive]

And then on the flip side, we have a 12.5% of our loan book renewing from fixed rate.

[Matt Olney, analyst]

12% renewing over the next 12 months. Any color on just the roll-off, roll-on rates there of the loan portfolio?

[Stefan Chkautovich, executive]

Yes. Right now, they're renewing at about [ $815, $817 ] or so, and that 12.5% of the loan book is just our fixed rate that's renewing.

[Matt Olney, analyst]

Okay. And then on the expense side, Stefan, you mentioned a few moving parts during the quarter as you weigh those moving parts against just the natural growth of the bank, where would you put us for forecasting expenses more near term?

[Stefan Chkautovich, executive]

They would still probably continue to grow in line with the bank's rate. So it could be somewhere in the mid-single digits plus depending on how much we're growing.

[Matthew Funke, executive]

Matt, our normal pattern is with compensation adjustments, mostly affected in January that would be the quarter when we see a little bit of catch-up to our growth rate.

[Matt Olney, analyst]

Okay. And then you gave us some good details as far as the rate sensitivity on any kind of Fed cut. So I appreciate the details there. On the credit front, this allowance ratio, I think it's in the mid-$130 range. I know that the CECL model handcuffs you here to a certain degree, but it looks like credit trends are -- remain really, really strong.

Just curious if you think there could be an opportunity over the next year or so to move this lower if there's no real change to macro. Just curious any thoughts there.

[Matthew Funke, executive]

I don't want to commit to any kind of decrease in that percentage. But we do feel like we're reasonably conservative on that. So we hope not to have any surprises on the upside with provisioning.

[Operator]

Our next question is from Andrew Liesch of Piper Sandler.

[Andrew Liesch, analyst]

Question on the loan growth this quarter. Matt, you mentioned residential was part of it was that single family or multi-family?

[Matthew Funke, executive]

I think what we would have described in the call as growth is single family.

[Andrew Liesch, analyst]

Got it. Then if you look at the pipeline, how is that weighted right now as far as loan types? Anything that's specifically driving it stronger than other areas?

[Matthew Funke, executive]

Still a fair amount of construction draw anticipated over the next 90 days, some commercial real estate. Anything. There's probably not a whole lot of additional ag draws within that, but there could be some.

[Andrew Liesch, analyst]

Got you. And then if we could just kind of look at like the next 12 months, do you think that the growth pace might be something similar to what you had in fiscal '24 with stronger or with weaker growth in the winter quarters and a little bit stronger in the spring and summer?

[Matthew Funke, executive]

Yes, we would anticipate that to continue. If anything, with ag being a little above where we were last year, it might even be a little more pronounced.

[Stefan Chkautovich, executive]

Yes. So we could see on that front.

[Andrew Liesch, analyst]

Yes. Yes. Makes sense. And then with the -- some of the commentary on the fee income side, if you could just kind of back out the mortgage servicing gains towards like 7-point or the fair value there, $7.6 million, but the other things you mentioned might be more spread out throughout the year.

So do you think fee income could be north of $7 million on a run rate here going forward?

[Matthew Funke, executive]

Probably not a crazy number. It is manageable.

[Andrew Liesch, analyst]

Wonderful. All right, guys, you've answered all my other questions.

[Operator]

[Operator Instructions] Our next question comes from Kelly Motta from KBW.

[Kelly Motta, analyst]

Maybe carrying on that thought about the fees, it looks like mortgage has been running gain on sale has been running pretty low. And you had mentioned production there had picked up. Just wondering what your outlook is for that line item potentially returning to a more normalized rate of gain on sale.

[Matthew Funke, executive]

Kelly. Long term, we would anticipate that to pick back up at some point. What we've seen probably on the residential side, that's been a little stronger as our in-house, which would include some owner-occupied some rental properties that we maintained in the portfolio. Really not any indication right now that we're seeing stronger secondary market activity.

But hopefully, we will, at some point, see a turnaround is folks have to make a move at some point or we do see a little bit of longer-term rate movement improvement.

[Kelly Motta, analyst]

Got it. Maybe turning back to the M&A. I appreciate commentary that it's more medium to longer term at this point. Just strategically, from a high level, can you remind us the markets that you're interested in, where you potentially like to add more density or expand out your footprint too?

[Operator]

Speakers. Can you hear us?

[Unknown Attendee]

Yes, I can. I don't know why I'm on this call. I've got to notice to be on this call, who is this and what is this call? [Technical Difficulty]

[Operator]

Thank you for your patience we have reconnected with our speakers. Kelly, your line is now open. If you should just remind us your question, please.

[Kelly Motta, analyst]

I'm not sure if that got caught up with the last transcripts. I was just asking about M&A if you could remind us about where you're looking to add density to the footprint or potentially expand out.

[Matthew Funke, executive]

Kelly, yes. Our priorities, we've always talked about kind of a circle from St. Louis over to Kansas City down through Springfield and Southwest Missouri, Northwest Arkansas, Little Rock over to Memphis. With entry to St. Louis, that would definitely have some interest to us.

We've got a little bit more density already in Kansas City, but we'd love to add there Northwest Arkansas is an attractive market. We feel the same way about Little Rock.

[Kelly Motta, analyst]

Got it. And maybe last question for me, just housekeeping with the balance sheet. It looks like average cash is down significantly quarter-over-quarter. Wondering if call it, $39 million level is a good run rate for liquidity? Or is there any consideration with that and the size of the balance sheet as we consider your mid-single-digit loan growth ahead.

[Stefan Chkautovich, executive]

Yes. Total cash and due from should probably range in the $50 million plus range, that's probably more of a lower point.

[Operator]

[Operator Instructions] At this time, we currently have no registered questions. So I'll hand back to Matt Funke for any further remarks.

[Matthew Funke, executive]

Thank you, Alex, and thanks to everyone for participating. I apologize for our technical snafu there. But I appreciate your interest in the company. We're looking forward to fiscal '25. And to speaking again with you in 3 months. Have a good day.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.