Southern Missouri Bancorp, Inc. Q4 FY2020 Earnings Call

Hello and welcome to Southern Missouri Bancorp Quarterly Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, today’s event is being recorded. I would now like to turn the conference over to Matt Funke. Mr. Funke, please go ahead.

Thank you, Keith, and good afternoon, everyone. This is Matt Funke, CFO of Southern Missouri Bancorp. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, July 27, 2020, 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 such forward-looking statements contained in the press release. I’m joined on the call today by Greg Steffens, our President and CEO. So thank you to all of you for joining us today and to start out, we want to just provide a quick update on the Bank’s operations in the COVID-19 environment. While the states where we primarily operate have significantly loosened restrictions since April, we have seen increased COVID cases and positivity rates. Some of our communities are ratcheting back up some restrictions. The Bank did reopen lobbies in May and we continue to remain fully open. Although, we do encourage our customers to continue to utilize drive-throughs when possible and we’re also seeing continued higher usage of our interactive teller machines and our mobile and online channels. We’re continuing to encourage a number of our administrative team to work remotely at least some of the time and we’re trying to use good judgment about the necessity of business travel. Greg?

Thanks, Matt. Good afternoon, everyone. I want to provide a brief update on our lending activities under the SBA PPP program. Since our last call in late April, the Bank has withstood an additional $23 million in PPP loans and we have a total of $132 million outstanding as of June 30th. We are also continuing to originate a relatively small amount of loans under the program and we anticipate beginning the forgiveness process around mid-August. We’re continuing to follow regulatory guidelines, working with our borrowers affected by the pandemic by providing modifications and deferrals to loans that were otherwise current or performing, and anticipate difficulties due to the pandemic. Through June 30th, we’ve approved deferrals and modifications totaling $380 million to assist these customers. Almost all deferrals are for a three-month period, while our interest-only modifications have been for six-month periods. Approximately $35 million of our deferrals and modifications are in our single-family portfolio, $30 million in multifamily, $81 million in owner-occupied commercial real estate (CRE), $119 million is in our non-owner-occupied CRE, and $23 million in commercial loans. Within owner-occupied CRE, 42% of deferrals and modifications by dollar volume pertain to bars and restaurants, 18% to convenience stores, 10% to manufacturers, and 9% to retail. Within non-owner-occupied CRE, 34% pertain to hotels, and 30% of deferrals and modifications are for multi-tenant retail. Additionally, in the context of commercial and industrial loans, 26% of deferrals and modifications are related to transportation warehousing, 15% to manufacturing, 13% to accommodation or food service, 12% to retail trade, 9% to administrative support or waste management services, and 7% to healthcare or social systems firms. I also want to touch at this time on credit quality. Our non-performing loans were down approximately $2.8 million or about 17 basis points on gross loans since March 31st, and we saw a good improvement in loans greater than 90 days past due, which are down approximately $3.6 million, and classified loans, which are down $3.9 million. Loans past due 30 days to 89 days were down $5.9 million, and at $6.4 million, all past due loans were 29 basis points as compared to $15.9 million on March 31st and $11.6 million, or 62 basis points, one year ago. We have also provided a detailed breakdown of our loan portfolios on page 10 of the earnings release. Overall, we are quite pleased with the underlying performance of our loans. For loans that we granted deferrals or modifications, our primary area of concern at this time relates to our hotel portfolio for which we downgraded several loans during the quarter due to low occupancy during the pandemic. Our restaurant and multi-tenant retail portfolios have been performing better than we anticipated three months ago, and we’re not anticipating problems within these portfolios at this time. We continue to monitor these portfolios closely to determine how they are performing as we continue to endure the impacts of the pandemic. We remain comfortable with our initial loan underwriting on these loans, and we believe we generally have loan-to-value ratios in this portfolio that will weather the downturn reasonably well. Now for our agricultural update, our first round of crop inspections is underway. But during the quarter, agricultural real estate balances were down $1.6 million over the quarter, about $2.6 million for the fiscal year, while agricultural production loan balances increased by $13 million for the quarter and $4.5 million for the fiscal year. Our agricultural customers are in mid-stages of their crop production, with all crops including double crop soybeans planted and growing well. Our overall crop mix consists of 30% soybeans, 25% corn, 25% cotton, 15% rice, and 5% in specialty crops, including popcorn and peanuts. Some crops had a late start due to spring rains. However, we estimate that our farmers planted 75% of their planned corn acreage, and the majority of the corn is in good condition. Yields are expected to exceed historical averages. Some of the 2020 corn acreage was diverted to popcorn, when farmers were able to contract popcorn at an attractive price. Rice planting has gone well for this crop year, with the majority of our farmers planting most of their planned acreage. The crop is growing well, and if weather conditions remain favorable, yields are expected to be at or above historical averages. Our cotton farmers have planted approximately 75% of their planned acreage for 2020. The crop is growing well and looks good at this time, with expected yields at or above historical averages. Our farmers planted 100% of the planned soybeans for this year, plus some extra due to an increase in acreage that was diverted from corn and cotton. In comparison to our prices for 2020 underwriting, corn prices are trending approximately 10% lower, soybeans are running approximately 3% higher, rice is trending slightly lower, and cotton is approximately 13% lower than projected. Livestock prices are also trending below underwriting prices for our cattle farmers, as they are continuing to hold cattle to put on additional weight before sending them to market. The majority of our cattle farmers had to hold their cattle longer this spring than usual due to the pandemic, with livestock auctions being closed. However, additional aid came to our livestock farmers in the form of government payments from the Coronavirus Food Assistance Program that helped offset lower livestock prices. There’s still instability in some of our markets related to the pandemic and uncertainties that it brings to the agricultural economy that we still can’t fully foresee. Overall, we think our farmers will have an average to above average crop for 2020, and most of our farmers are expecting at least a breakeven year. Farmers are also hoping for additional assistance from government payments similar to what they received in 2019 under the Market Facilities Program that would help them greatly with trending lower commodity prices. Matt, would you go ahead with our financial results?

Sure. Thanks, Greg. We earned $0.76 diluted in the June quarter, which is the fourth quarter of our fiscal year. That’s up $0.21 from the linked March quarter, and it’s down $0.05 from the $0.81 we earned in the June 2019 quarter. Provision for loan losses remained relatively high compared to our normal levels, but it was down from the linked quarter. We had significant charges related to the acquisition of Central Federal Bancshares, good results on margin, and good results on non-interest income. We also saw good results on our non-performing loans this quarter; non-performing asset balances were down $2.8 million to end at 40 basis points on gross loans, and NPAs were down $3.6 million to end at 44 basis points on total assets. Both are down by more than half since the prior fiscal year end, and that’s because we have worked to resolve problem loans from the Gideon acquisition that took place in the middle of the prior fiscal year. Net charge-offs were up a bit in the June quarter; they were 4 basis points annualized, which is the same as our trailing 12-month figure. A year ago, our trailing 12-month figure was 2 basis points. Outside of the Central Federal acquisition, our loan portfolio shrank just slightly, excluding the 100% SBA guaranteed Paycheck Protection Program loans. But we still provisioned at a higher than normal level due to the continued economic uncertainty surrounding the COVID-19 pandemic, and we provisioned $1.9 million, which increased the allowance by $1.6 million. As a percent of gross loans, our allowance decreased to 1.16% at June 30th, down 2 basis points from March 31st, but up 9 basis points from June 30th a year ago. Outside of the PPP loans, the allowance would have been 1.24% as a percent of gross loans. We do continue to work towards implementation of the current expected credit loss accounting standard or CECL, which under FASB pronouncements is effective for the company on July 1, 2020. The CARES Act provides for an extension of time for us to adopt, though not beyond calendar year-end, and while we’re evaluating that option, we continue to work towards adoption on July 1st. Our net interest margin in the fourth quarter was 3.75%, which included about 6 basis points of benefit from fair value discount accretion on our acquired loan portfolios, or about $361,000 in dollar terms. We also realized benefits of about $159,000 on a limited number of loans that had previously been classified as non-accrual, which benefited the margin by another 3 basis points. A year ago in the June quarter, our margin was 3.77%, of which 12 basis points resulted from fair value discount accretion. So on what we see as a core basis, our margin was up about 1 basis point comparing the June ‘20 quarter to the June ‘19 quarter. We see our core asset yield dropping by 45 basis points, core cost of deposits also dropping by 45 basis points, and our total core cost of funds down by 47. Compared to the linked March quarter, when our reported margin was 3.63%, and we had an 8 basis point benefit from discount accretion, we see our core margin up about 11 basis points sequentially. Last quarter, we were cautiously optimistic about margin in the near term, as we expected that the rate reductions we made early in the June quarter on non-maturity accounts would lower cost of funds significantly. From here, I think we’d be pleased if we could report limited margin compression, as we would expect re-pricing activity on loans may outpace any further reductions in the cost of funds we’re able to realize. Non-interest income was up significantly compared to the year-ago period, as declines in deposit service charges were more than offset by better gains on secondary market residential loans that were originated and sold. We saw better loan servicing income compared to the year-ago and linked periods, each of which included recognition of impairment charges of $207,000 and $391,000, respectively, on the value of our mortgage servicing rights. In this June quarter, we increased our loans under servicing by about 13%, or $20 million. Bank card interchange income increased compared to the year-ago period, with a 14% increase in dollar volume and incentive benefits under a new processing contract. We’re remaining cautious about our expectations for the coming year on interchange income as spending could have benefited from the CARES Act payments to depositors and unemployment benefits, which look to be at least reduced. Relatedly, our deposit service charges, which include NSF charges, declined year-over-year, despite a 12% per annum increase in the charge, and they declined sequentially, which is unusual for our normal seasonal pattern. The Central Federal acquisition resulted in no goodwill and a $123,000 bargain purchase gain contributing to non-interest income. As a percent of average assets, non-interest income annualized was 80 basis points, which is 12 basis points higher than the same quarter a year ago and 14 basis points higher compared to the linked quarter, and that bargain purchase gain contributed 2 points to the improvement. Non-interest expense showed a significant increase compared to the same quarter a year ago or the linked quarter, up almost 27% and 14%, respectively. In this current quarter, we had $1.1 million in merger and acquisition expense, none in the same period a year ago, and just $76,000 in the linked quarter. We also had $149,000 in non-recurring losses from the disposition of vacant bank property acquired during the Capaha acquisition. We recorded a charge for provision for off-balance sheet credit exposure at $132,000, as compared to a recovery of $46,000 in the same quarter a year ago but down from a charge of $300,000 in the linked quarter. Looking at ongoing items and non-interest expense, we saw increases in our expenses and losses on foreclosed properties. Our FDIC deposit insurance assessments increased, as assessment credits were mostly utilized in the prior quarter. We saw some modest increases quarter-over-quarter in compensation due to added personnel and adjusted compensation year-over-year. We are seeing higher data processing expenses under a new data processing contract that took effect early in fiscal 2020, higher bank card expenses, and higher expenses on foreclosed properties. On a core basis, we’re seeing consistent non-interest expense outside of M&A, fixed asset losses, and outside of the charges or recoveries for off-balance sheet credit exposure. Over to the balance sheet, we saw much stronger loan growth in the June quarter. The PPP loans more than offset what would have otherwise been a modest decline in the portfolio outside of the acquisition. Compared to a year ago, we’re up almost $250 million, and if you back out the PPP loans, we would have been up about $117 million or about 6.3%, down from 8.9% last year, both exclusive of M&A. Deposits, meanwhile, were up $213 million in this June quarter. Outside of the Central Federal acquisition, we would have been up $166 million, almost all from non-maturity deposits. We noted in the earnings release that some of this growth is likely attributable to businesses holding funds after their PPP loans or deferring tax payments as allowed under the CARES Act. Brokered funding was up by about $6 million in the current quarter, with public unit deposits increasing by $13 million. Outside of brokered funding, time deposits were up very modestly this quarter and are roughly flat year-over-year after growing almost 14% last year. Non-maturity balances were up 21% this year, compared to about 3% last year outside of brokered activity or acquisitions. Greg, let me hand it back over to you here.

Okay. Thanks, Matt. In regards to our loan growth, our portfolio would have grown slightly outside of the acquisition and the PPP loans, but we remain reasonably pleased with our rate of loan growth for the fiscal year. Looking forward, we would expect growth to be limited outside the impact of PPP loan forgiveness. Our organic growth for the year was led by increases in single-family, multifamily, residential, non-owner-occupied CRE loans and construction loans. Residential property loans, including multi-family and single-family loans, have grown faster over recent quarters. During recent periods, our CRE concentration has moved from 255% of regulatory capital at June 30, ‘19 to 280% at March 31, ‘20, and has been relatively stable at 278% at June 30, 2020. Our volume of originations was strong in the June quarter, totaling $310 million, which includes PPP loans, up $186 million compared to the same period of the prior year. For the fiscal year, loan originations totaled $848 million, up $242 million from the prior fiscal year. Our loan pipeline for loans to fund in 90 days was at $86.6 million at June 30th, compared to $83 million at June 30, 2019, and $77 million at March 31st. The pipeline continues to be diverse in nature and fairly similar to our existing portfolio mix. We continue to evaluate the expected growth within the pipeline, considering changes in economic conditions. However, we do expect slower loan growth in the next several quarters. Again, we’re pleased with the deposit growth for the year, and we’re just really wondering what will happen with some of those balances as time goes on. When we look at M&A activity, we have not looked at any potential partners over the last quarter, as anyone we were talking with has put partnership plans on hold since the outbreak of the pandemic. The company completed its acquisition of Central Federal on May 22nd, but the data systems conversion was completed over the weekend of June 5th to 7th. We don’t expect to hear much about M&A opportunities or to be pursuing any for the time being. We did announce our stock repurchase plan for 450,000 shares in November 2018. During the June quarter, there were no purchases under this plan, as we suspended activity at the close of business on March 26th. Repurchases during the fiscal year totaled 182,598 shares of the company’s stock at an average price of $31.61. The company will continue to evaluate whether to resume activity under this repurchase plan, as the impact of the pandemic is more fully understood. We continued at our previous dividend level of $0.15 per share for the August quarterly dividend, and the intention would be to continue paying regular dividends as long as it is safe and sound to do so. That concludes my remarks.

All right. Thank you, Greg. At this time, Keith, we’d like to take any questions our participants may have, so if you would, please remind folks how they can queue for questions, and we’ll answer what we can.

Yes. Thank you. And the first question comes from Andrew Liesch with Piper Sandler.

Good afternoon, guys.

Good afternoon, Liesch.

Hi. So a couple of questions here. Just on the cost of fund and the cost of deposits declining in the quarter. Do you have what those figures were for the fourth quarter?

Fourth quarter, one second, thinking they were just slightly below 1 in both cases.

Okay. So if that’s the case, then it sounds like with the margin now that you’d expect earning assets to re-price faster than funding costs. But it seems like with the cost of deposit just below 1, there’s still some room to go, just given the rate environment. Is there any re-pricing or are there some higher-priced CDs in there that are going to remain on the balance sheet? What’s to prevent further reductions in funding costs this quarter?

I don’t think there’s anything that would prevent some further reductions, and the CD portfolio is not particularly long or concentrated in any way. It’s just that generally we’ve had competition locally that has prevented us from going as low as maybe what you’ve seen with some of the larger regional banks in terms of their overall cost of deposits. I certainly don’t want to say we won’t continue to work to lower that further, but I wouldn’t expect continued declines like we had in this most recent quarter.

Got it. Okay. That’s helpful. And then of the $132 million of PPP, you said, sounds like you’re going to start working through the forgiveness process next month. When we get to the end of this calendar year, how much of that $132 million do you think is still around? Do you think 80% is left? How much spillover do you think remains in the next year? Just what’s your outlook given your conversations with the PPP customers?

We would anticipate that somewhere between 80% and 90% of the PPP balances extended would be repaid by the end of the year or forgiven by the end of the calendar.

Okay. Got you. That’s helpful. And then just of the $5.1 million in total non-interest income for the quarter, what was the mortgage banking gain on sale piece of that $5.1 million?

It would have been, Andrew, on your other question, cost of funds was 97 basis points for the quarter. Cost of deposits was 91 basis points.

Okay.

And the gains on loan sales have been a little less than $1 million.

Okay. Great. That covers my question. I’ll step back. Thanks.

Thank you. And the next question comes from Kelly Motta with KBW.

Hi. Hi. Good afternoon, everyone. And I wanted to ask you about the PPP recognition, that’s the fee recognition. About how much contribution was that this quarter to NII?

In dollar terms, it’s running, I think, about $200,000 a month, Kelly, and in terms of the yield on those loans, it’s with a 1% coupon. It’s an effective yield of about 3% on those loans.

Okay. Let's see. With CECL, you mentioned that you seem prepared to adopt as initially planned on July 1st. Are you at a point where you have a preliminary estimate on the reserve bill that would come under CECL as you moved to that standard?

No. Unfortunately, we’re not.

Got it. All right. Thank you.

Thanks, Kelly.

Thank you. As there are no more questions at the present time, I would like to turn the floor to management for any closing comments.

All right. Thank you again to everyone for joining us. Appreciate your interest, and we’ll speak again in three months.

Thank you so much. And thank you for attending today’s presentation. You may disconnect your lines.