Southern Missouri Bancorp, Inc. Q2 FY2021 Earnings Call

Good day, and welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Matt Funke. Please go ahead.

Thank you, and good afternoon, everyone. This is Matt Funke, CFO with Southern Missouri Bancorp. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, January 25, 2021, 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 today on the call by Greg Steffens, our President and CEO. And to lead us off, Greg is going to provide a quick update on the bank's operations in the continuing pandemic environment.

Thank you, Matt, and good afternoon, everyone. This is Greg Steffens, and thank you for joining us today. I want to start again this quarter with an update on our operations as we continue to deal with the pandemic. When we spoke a quarter ago, we noted that our communities, in general, were seeing increasing virus cases and hospitalizations. Today, the most recent data indicates that we're at similar levels as we were three months ago for new cases and hospitalizations, but we are thankfully currently trending lower from peak levels noted four to eight weeks ago in most of our markets. While the virus remains an issue for business activity, we're hopeful that we will continue trending in the right direction. And as the vaccine distribution ramps up, we're hopeful for the end of this difficult time being in sight. We continue to have limited restrictions on actual activity in most of our markets, and our schools are generally open. We continue to have limited instances where we have needed to temporarily close a facility or move to drive-through-only service for a period of time, and our facilities have generally remained open for business. For an update on our loans that have been deferred or modified, our borrowers have continued to make good progress in returning to their originally contracted payment terms and obligations. As you noted in the final table of the earnings release, since June 30, when the modifications under the CARES Act that we had agreed to reached $380 million, we're down to approximately $40 million at December 31 at the end of the quarter. All of those were also at least requiring interest-only payments. We continue to remain in discussion with a limited number of borrowers who may need additional relief or concessions in the coming quarter for a period of time. We expect that in some instances, we will agree to some concessions where operations have been significantly impacted. Overall, we remain very pleased with the underlying performance of our loans in the environment that we've experienced. For an update on PPP, the new round of PPP lending is expected to provide some additional relief to our borrowers who are facing difficulty as a result of the pandemic. We're quite hopeful that the relief, limited concessions on our part, and good news on the vaccine front will provide some optimism to the later part of the calendar year. Since we spoke last, PPP forgiveness has picked up significantly. The release notes that we saw a $38 million decrease in PPP balances. The pace of forgiveness has been really steady since early November, and we are nearing 50% of the dollars extended for forgiveness. We've also begun processing some applications for the second draw PPP loans early in the calendar year, but they've been relatively limited in amount, and we don't have a good projection today of the amount that we may be able to originate for existing customers or other borrowers. Presently, new PPP loans are roughly equaling the PPP loans that are being forgiven. For an update on our nonperforming loans, they were very little changed over the last quarter and remained at good levels. Adversely classified loans were also unchanged at about $25 million, and past-due loans were only up by a little less than $1 million to $7.7 million, which is about 35 basis points of total loans. We remain cognizant of the fact that some of the modifications may be affecting past-due figures for ourselves and the industry. For borrowers who haven't yet been able to return to their originally scheduled payments, we're including them on our watch list, which has added about $39 million to the figures since the CARES Act modification started. In addition to adversely classified credits, our watch list includes $61 million in loans at December 31, which is up about $32 million from a year ago, but is less than the $39 million that's been added for the CARES Act. Focusing on our ag portfolio and giving our ag update, our borrowers are in the harvest season. Agriculture real estate loan balances were up a little more than $3 million over the quarter and are little changed for the fiscal year. While production and other loans to farmers dropped by $23 million in the quarter and are lower by about $2 million for the fiscal year-to-date. Our ag borrowers have completed their 2020 harvest, and lenders report a strong year for yields and expect substantially all borrowers to repay their annual obligations and many to notably improve their working capital positions as overall, it was a successful year.

In the December quarter, we earned $1.32 per share, which is an increase from $0.23 per share in the September quarter and up $0.48 from $0.84 in the same quarter a year ago. Sequentially, net interest income rose mainly due to the acceleration of deferred fee accretion on PPP loans as those balances were forgiven. Noninterest income also increased, primarily due to nonrecurring factors, while the provision for loan losses declined modestly, and noninterest expenses remained relatively stable. Year-on-year, noninterest income rose by just over $2 million, with gains from residential loan sales contributing $1.2 million more, and a nonrecurring benefit from bank-owned life insurance adding nearly $700,000. Compared to the prior quarter, the BOLI benefit made up most of the noninterest income increase of about $800,000, while an increase in secondary market gains was largely offset by a nonrecurring wealth management benefit in the previous quarter. Year-on-year, excluding that one-time item, there were increases in interchange and servicing income that were partially offset by lower deposit service charges. In the mortgage segment, our volume of originations was more than four times higher compared to a year ago, and the average gain per loan has remained slightly elevated. We're also seeing a significant rise in mortgage servicing income as the total dollars under servicing increased sharply, and we've generated new mortgage servicing rights with this surge in originations. Compared to last year, our loans under servicing grew by about $80 million, representing a 50% increase.

Matt, would you go ahead and update our financial results?

We also recorded a charge for provision for off-balance sheet credit exposure at $388,000 in the current quarter, up from $362,000 in the same quarter a year ago and compared to a charge of $226,000 in the linked quarter. Compared to the year-ago December quarter, significant changes on what we see as a core basis are compensation and occupancy up 8% and 5%, respectively; data processing, up 34%; deposit insurance, up to $218,000 in the current quarter from 0 in the same quarter a year ago; and advertising remains below trend and core deposit and tangible amortization is lower by about $100,000 per quarter as a couple of CDIs from some older acquisitions have rolled off. As a percent of average assets, noninterest expense is down about 20 basis points compared to the same quarter a year ago. Excluding fixed asset losses in that year-ago period, we'd be down about 11 basis points and most of that decrease would be attributable to our higher-average assets resulting from the PPP loans.

When we assess the current quarter and our expectations for loan growth, we would have seen modest loan growth in the previous quarter if it weren't for PPP forgiveness. Looking ahead, we expect challenges in maintaining balances for March quarterly growth, which is uncertain and will depend on the occurrence of second draw PPP loans. Regarding our specific portfolios, our nonowner-occupied CRE concentration was at 264% of capital on December 31, down from 272% on September 30 and 274% a year ago. In the current quarter, loan balances increased slightly while regulatory capital levels grew at a slightly faster rate. Our loan originations volume was nearly $230 million in the December quarter, which is relatively high and an increase from $205 million in the September quarter. A year ago, originations were $195 million in the same quarter. In comparison to the previous year, we saw a $45 million rise in secondary market residential production, so we would be slightly down excluding that product.

Yes, you are correct. We are optimistic about maintaining a solid performance as we progress through this year despite the challenges. I'm glad to hear that feedback.

On the M&A front, we remain in a wait-and-see mode, happy to look at any opportunities, but really not expecting much in the early part of this year. We do continue to expect things will pick up eventually over the course of the year. In an 8-K filing last week, reiterated in our earnings release, we announced a modest increase in our dividend. Given our core profitability, we generally would have looked to increase our dividend yields in July, but we decided to forgo that at that time due to the pandemic. With 91,000 shares repurchased in the December quarter, we have about 141,000 shares remaining available for repurchase under the repurchase plan that we entered into the new calendar year.

Okay. Thanks, Greg. And at this time, we'd like to take questions from any of our participants. So if our operator would remind folks how they might queue for questions, we'll do that at this time.

The first question comes from Andrew Liesch with Piper Sandler.

Greg, just a follow-up question on one of your comments here. It sounds like you're willing to retain some of the 15- and 20-year fixed rate residential mortgages. Within the last year here, did I hear you correctly that you actually think the securitized mortgages present a better opportunity to retain on the balance sheet. Was I hearing that right?

We believe that we won't be securitizing them. We're originating them with secondary standards, but we're planning to keep them in our portfolio instead of selling them at this time.

Got it. Okay. Helpful. Then I just want to then talk about the margin trajectory, certainly benefited from the PPP origination fees. I guess as those go away, do you think that the core margin is going to shake out kind of near this 3.67%, 3.68% level, where it's been the last couple of quarters once those fees dissipate?

We've really been a little positively surprised that it's held up through the December quarter so far. When we were looking at this in May, June, we anticipated our asset yields would have dropped a little bit faster than this, a little faster than we could bring down our core cost of funds in the second half of the year, but we've really kept pace on that side. It still seems to me, just intuitively, that there's a little bit further to fall on the asset side than what we'll be able to bring the cost of funds down, but we'll do our best to maintain.

Got it. All right. I have a follow-up regarding expenses. There has been effective expense control this quarter, and it shows improvement compared to the last two quarters and the end of your previous fiscal year. Is the current figure of $13.4 million a solid baseline to build upon?

We always see some upward pressure as we enter the new year, especially on the compensation front. I don't feel like there's really anything else significant out there to warn you about just between benefits and compensation adjustments, which take effect for us in January. Payroll taxes and things like that, we always have a tougher quarter in March. We have to kind of grow into it over the calendar year.

The next question comes from Kelly Motta with KBW.

Maybe going to capital. You obviously repurchased some shares in the quarter and did the penny dividend increase. What is your appetite for continued share repurchases given where your stock is trading?

Well, we have to complete this one before we will elect to opt for a new one, but that's something that we regularly would talk about once this buyback is completed.

As long as we don't see a huge run-up in pricing, I think we would have some appetite just to deploy capital more so than considering where pricing is on it. But if we're not able to achieve much in the way of asset growth over the coming year and if these levels of profitability hold up, we'll certainly be building capital faster than we're wanting to.

Got it. Yes. Okay. I just wanted to make sure you're going to continue to use your current authorization. With the reserve, we've seen a lot of banks release reserves this quarter. You kind of held steady if you strip out the PPP loans. Assuming the outlook continues to improve, do you think you might start to release reserves in the coming quarters?

We feel like at our present level of 1.72%, we're at the high end of reserve levels needed. Given that we're expecting loan growth to be pretty muted, we would anticipate additional provisioning to be limited. And depending upon how our portfolio performs, it may drop a little.

Got it. And then I just want to make sure I'm understanding your commentary about mortgage. I appreciate that you're going to portfolio some of the mortgage that you would have otherwise originated for sale. Are you going to continue to sell a portion of those loans still?

The two-thirds of the loans we originate for sale in the secondary market are our 30-year fixed-rate mortgages, so we are going to be continuing to sell those. We just will be retaining the 15- and 20-year production, and that will offset some of our loan shrinkage.

This concludes our question-and-answer session. I would like to turn the conference back over to Matt Funke for any closing remarks.

Okay. Thank you again. Thanks for your interest in the company and participation in the call, and we'll speak with you again in about three months. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.