Q4 2020 Southern Missouri Bancorp Inc Earnings Call

All participants will be in listen only mode.

Should you need assistance please.

Specialist for pressing the star <unk>, followed by zero.

After todays presentation, so well be an opportunity to ask questions to ask a question anyway Press Star then one then you touched on phone.

Well try to question. Please press Star then true. Please note today's event is being recorded.

Oh, no teleconference overt about funky Mr. Faqih. Please go ahead.

Thank you Keith and good afternoon, everyone. This is Matt Funky 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 July 27 2020.

And to take your questions. We may make any we may make certain forward looking statements during today's call. When we refer you to our cautionary statement regarding forward looking statements.

And then the press release.

I'm joined on the called the day by Greg Stephens, 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 banks operation in the cobot 19 environment.

While the states, where we primarily operate have significantly loosened restrictions since April we have seen increased kobin cases and positivity rate.

Some of our communities are ratcheting back up some restrictions.

Bank did reopen lobbies and May and we continue to remain fully opened although we do encourage our customers to continue to utilize drive throughs when possible and we're also seeing a 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 will provide a brief update on our lending activities under the S.P.A.P.P.P. program since our last colon late April the bank originated in an additional 23 million MPP be loans and we have a total of 132 million outstanding at June Thirtyth.

We're also continuing to originate a relatively small amount of loans under the program and we anticipate getting the forgiveness process around mid August.

Were continuing to follow regulatory guidelines working with our borrowers affected by the and then Mike.

I, providing modifications and deferrals to loans that were otherwise car or performance.

But anticipate difficulties to the pandemic through June Thirtyth, we've approved deferrals of modifications totaling 380 million to assess the Scott.

Almost all deferrals or for a three month period, while our interest only modifications.

For six month period.

Approximately 35 million of our deferrals the modifications are under a single family portfolio.

30 million in multifamily 81 million, an owner occupied see our eight 190 million instead, our non owner occupied CRT and 23 million in commercial loans.

Within owner occupied theory, 42% or deferrals that modifications.

Our volume bars restaurants, 18% or maybe in stores Tempur center manufactures that 9% our retail.

The non owner occupied see Ari.

Corporate center to hotels, 30% or deferrals that modifications or multi tenant retail 12% weren't restaurant paper. So we're just care facilities.

They've been saying I loans, 26% had to borrow some modifications are to.

Cretaceous warehousing, 15% manufacturing, 13% or two commendation, or foodservice, 12% to retail trade, 9% or to administrative support for waste management services, and 7% where to health care Socialist systems firms.

Also I wanted to touch it this time on credit quality, our nonperforming loans were down approximately 2.8 million, where about 17 basis points on gross loans since March 31st and we saw good improvement in loans greater than 90 days past due.

Sure down approximately 3.6 million in class five phones, which are down 3.9 million.

Well, it's best to 30 to 89 days were down 5.9 billion.

At 6.4 billion, all past due loans or.

29 basis points as compared to 15.9 million at March 31st.

11.6 million worth 62 basis points, one year ago.

We've also provided a detailed breakdown of our loan portfolios on page 10, a burden Israelis overall, we're quite pleased with the underlying performance of our loans or loans. So we granted deferrals or modifications are primary area of concern at this time.

Relates to our hotel portfolio for which we downgraded several loans during the quarter due to poor occupancy during the pandemic.

Our restaurant in multi tenant retail portfolios had been performing better than we anticipated three months ago.

Where it says they the limited problems within these portfolios at this time.

We continue to monitor these portfolios closely to determine how they're performing as we continue to endure the impact of 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.

Well, whether the downturn reasonably well.

Now for agricultural update.

First round the crop inspections is underway.

During the quarter agricultural real estate balances were down 1.6 million over the quarter up 2.6 billion for the fiscal year, well agricultural production loan balances increased 13 million for the quarter in Florida have they put the fiscal year, alright, good cultural customers or.

Ms phase or their crop production with all crops, including double crops libbeys planner to growing well our overall crop bags consists of 30% soybean, 25% corn, 25% Todd.

15% rise.

And 5% in specialty crops, including popcorn and peanuts.

Some crops that are let's start in the spring rates. However, we estimate that our farmers plan and 75% under plan corn acreage in the majority of the corn is causal the drilling well it looks to be in favorable to better than average.

Conditions yields are expected to exceed historical averages some of the 2020 corn acreage was diverted popcorn farmers were able to contract popcorn at attractive prices.

<unk> planning has went well for this problem here, but the majority of our farmers planning most of their planned acreage.

The crop is growing well and if weather conditions.

Her pollination yields are expected to be at or above historical averages.

Farmers by the 75% approximate live their planned acreage for 2020, the crop is growing well.

That's good at this time cotton yields at this time are expected to be at or above.

Historical averages.

Our farmers planted 100% other plans soybeans for this year plus some extra as part of the increase in acreage. So it was diverted from corn and cotton due to weather conditions in the spring.

In comparison to our prices for.

2020 underwriting corn prices are trending approximately 10% lower sorbent soybeans are running.

Approximately 3% higher price is trending slightly lower and cotton is approximately 13% lower than projected.

A lot of stock prices are also trending below underwriting prices for cattle farmers as they're continuing to continuing to.

Cattle, putting on additional away before sending them to mark the majority of our.

I don't farmers had the older cattle longer this spring than usual due to the and Devon.

With livestock boxes being closed in the pandemic. However, additional eight came to our livestock farmers in the form with government payments.

Thrown a virus food assistance program that helped offset lower livestock prize.

There's still instability and some of our markets related to the pandemic uncertainties that breaks that agricultural economy that was still came totally foresee overall, we think our farmers will have an average student above average crop for 2020.

Most of our farmers are expecting at least a breakeven year.

Farmers are also hoping for additional assistance or government payments on the U.S.D.A. become similar to what they received in 2019 under the market facilities program.

What helped and greatly with.

Trending lower commodity prices.

That would you go ahead with our financial results.

Sure. Thanks, Greg.

[laughter], we earned 76 cents diluted in the June quarter, which is the for the fourth quarter of our fiscal year. That's up from that's up 21 cents from the linked March quarter and its down five cents from the 81 cents. 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 noninterest income.

We.

Also saw good results on our non nonperforming loans nonperforming asset balances. This quarter Npls were down 2.8 million to end up 40 basis points on gross loans and then ph were down 3.6 million to end up 44 basis points on total assets.

Both are down by more than half since the prior fiscal year end.

And that's because we've 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, and they were four basis points annualized which is the same as our trailing 12 month figure a year ago. Our trailing 12 month figure was two basis points.

Outside of the Central Federal acquisition, our loan portfolio shrink just slightly excluding the 100% SBK guaranteed paycheck protection program loans.

But we still provision that at a higher than normal level due to the continued economic uncertainties surrounding the cove at 19 pandemic.

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 Thirtyth down two basis points from March 31st, but up nine basis points from June Thirtyth a year ago.

Outside of the PPP loans, the allowance would've 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 Cecil.

Which under Fas be pronouncements is effective for the company on July 1st 2020.

He cares that provides for an extension of time for us to adopt for us to adopt though not beyond calendar year end and while we're evaluating that option. We continue to work towards a adoption on July 1st.

Our net interest margin in the fourth quarter was 3.75%, which included about six basis points, a benefit from fair value discount accretion on our acquired loan portfolios.

Or about 361000 in dollar terms, we also realized benefits of about 159000 on a limited number of loans that had previously been classified as non accrual.

So that benefited the margin by another three 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 one basis point comparing the June 20 quarter to the June 19 corridor, we see our core asset yield.

Dropping by 45 basis points core cost of deposits also dropping 45 basis points and our total core cost of funds down 47.

Compared to the linked March quarter, when our reported margin was 3.63% and we had eight basis points of benefit from discount accretion, we see our poor margin up about 11 basis points sequentially.

Last quarter, we were cautiously optimistic about margin in the near term as we expected the rate reductions. We had made early in the June quarter on non maturity accounts with lower cost of funds significantly.

From here I think we'd be pleased if we could report limited margin compression as we would expect repricing activity on loans may outpace any further reductions in the cost of funds were able to realize.

Noninterest 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 we originate in cell.

We saw better loan servicing income as compared to the year ago and linked period.

Each of which included recognition of impairment charges of 207390 1000, 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 increase 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 depositors and unemployment benefits, which looked to be at least reduced.

Related Lee our deposit service charges, which include NSF charges declined year over year. Despite a 12% per item increased in the charge and they declined sequentially, which is unusual for our normal seasonal pattern.

Central Federal that acquisition resulted in no goodwill and a 123000 dollar bargain purchase gain contributing to noninterest income.

As a percent of average assets noninterest income annualized was 80 basis points, which is 12 basis points higher than the same quarter, a year ago, and 14 basis points higher as compared to the linked quarter and that bargain purchase gain contributed two points of the improvement.

Noninterest 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 quarter. This current quarter, we had 1.1 million in merger and acquisition expense none in the same period, a year ago, and just 76000 in the linked quarter.

We also in the current quarter had 149000 and nonrecurring losses from the disposition of a vacant bank property that we had acquired in the cap all acquisition and we also recorded a charge for provision for off balance sheet credit exposure at 132000 as compared to reach a Rick.

Covering 46000 in the same quarter, a year ago, but down from a charge of 300000 in the linked quarter.

Looking at ongoing items and noninterest expense, we saw increases in our expenses and losses on foreclosed properties, our FDIC deposit insurance assessment as the assessment credits for mostly utilized in the prior quarter saw modest increases quarter over quarter in compensation.

Increases due to bank card network expenses on higher volumes and higher occupancy in data processing compared to the same quarter a year ago, we saw a larger compensation increases as we've added personnel and adjusted compensation year over year, we're seeing higher data processing expenses.

Under a new data processing contract that took effect early in fiscal 2020, we saw again higher bank card expenses and higher expenses on foreclosed properties.

On a on what we look at as a core basis were seen pretty consistent.

Noninterest expense outside as M&A, the fixed asset losses and outside of the charges or recoveries for off balance sheet credit exposure.

[noise] over to the balance sheet, we saw much stronger loan growth in the June quarter is the PPP loans more than offset what of what would have otherwise been a modest decline in the portfolio outside of the acquisition.

Compared to a year ago were up almost 250 million.

And if you back out the PPP loans, we would've 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 and this June quarter outside of the Central Federal acquisition, we would've been up 166 million almost all of that coming from non maturity deposits. We noted in the earnings release that some of this growth is likely attributable to businesses holding holding funds after their PPP.

Loans are deferring tax payments as allowed under the cares Act.

Brokered funding was up by about 6 million in the current quarter public unit deposits up 13 million.

Outside of any 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.

As compared to about 3% last year outside of brokered activity or acquisitions.

Greg Let me hand, it back over to you here.

Okay. Thanks.

Regarding our loan growth our portfolio would have strong slightly outside of the acquisition in the PPP levels, 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 ER.

Organic growth for the year.

Was led by increases in single family multifamily.

Residential non owner occupied salary loads and construction loans residential property.

Once including multi family and single family loans have grown faster over recent quarters.

During recent periods are CRT concentration has moved from 255% of regulatory capital at June Thirtyth 19.

280% at March 30, Onest 20.

It has been relatively stable at 278 at June.

Started 2020, our volume of originations was strong in the June quarter totaling 310 million, which includes BPP loans, which is up 186 million compared to the same period to the prior year for the fiscal year loan originations totaled 848 million up 240.

2 million from the prior fiscal year.

Our loan pipeline for loans to funded 90 days was at 86.6 million at June Thirtyth as compared to 83 million at June Thirtyth 2019, and 77 million at March 31st the pipeline continues to be diverse in nature, that's fairly similar to our.

Consistent portfolio mix.

We continue to black and good read at this time as to what we should expect for growth within the pipeline.

Knowing what will ultimately close what may fall out what changes in economic conditions, but again, we would expect slower loan growth in the next several quarters.

Again, we're pleased with their deposit growth for the.

Here and we're just really wondering what will happen with some of those balances as time progress.

When we look at M&A activity, we have not looked at any potential partners over the last quarter.

Anyone that we were talking with but any plans for a partnership on hold since the.

Outbreak endemic.

The company that completed its acquisition of central Federal on May 22nd with the data systems conversions completed.

Over the weekend in June to sub.

We don't expect to Airbus their way of M&A opportunities or to be pursuing any for the time be.

We did announce our stock repurchase plan a 450000 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 26.

Repurchases during the fiscal year to over 182598.

Shares to the company stock.

At an average price at 31 61.

Company will continue to evaluate whether resumes activity under this repurchase plan has impacted the pandemic is more fully understood.

We continued.

At our previous dividend level of 15 cents per share for the August quarterly dividend and our 10 intense who would be to continue to pay regular dividends as long as safe and sound to do so.

That concludes my remarks, alright. Thank you Greg This time, Keith we'd like to take any questions. Our participants may have so if you would please remind folks how they can Q for questions and will.

Answer what we can.

Yes. Thank you well now begin the question and answer session to ask a question you. If a star then one on your touched on phone.

Speakerphone, please pick up your handset before passing the gaze to withdraw your question. Please press Star then too.

At this time, we'll pause momentarily to assemble the roster.

And the first question comes from Andrew let us with Piper Sandler.

Good afternoon guys.

Good afternoon editor.

Hi, I'm so couple of questions here.

Just on that.

Mentioned, the cost of funds and the cost of deposits declining in the quarter.

Do you have what those those figures work for the fourth quarter.

Fourth quarter.

One second.

Thinking there were just slightly below one in both case.

Okay. So.

That's the case me it sounds like with the margin though.

They do you expect journey, earning assets to reprice faster than the then they've been funding cost, but I heard that have been funding, but it seems like what the cost of deposits just below one, but there's still some room to go.

Given the rate environment.

Is there any repricing or others, some higher prices, even that are going to remain on the balance sheet what.

To prevent some for some further reductions and funding cost this quarter.

I don't think Theres anything that would prevent some further reductions and the CD portfolio is not not particularly long are concentrated in any way. It's just that generally we've had 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 and.

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.

Then of the hundred 32 million of Pvp It sounds like.

Let me start working through the forgiveness process next month.

When we get to.

The end of this calendar year, then how much that 132 do you think thats still around do you think.

80% of its left how much spillover do you think remains in the next year, that's what's your outlook given the conversations.

With the Pvp customers.

We would anticipate that somewhere between 80% to 90% of PPP balances extended would be repaid by the end the year yes.

End of the county.

Gotcha.

That's helpful. And then just of the 5.1 million in a total non interest income for the quarter what was the mortgage banking the gain on sale piece of that 5.1.

It would have been.

Andrew on your other question.

Cost of funds was 97 basis points for the quarter Casa deposits was 91.

Okay.

And the.

Gains on loan sales.

We've been a little less than a million.

Okay.

Great that covers my question I'll step back thanks.

Thank you and the next question comes on Kelly Motta with KBW.

Hi, Hi, good afternoon, everyone.

I wanted to ask you about.

The PDP recognition that the fee recognition about much.

Contribution we thought that this quarter.

Yes.

Hi Inn in dollar terms its run and I think about 200000, a month Kelly and.

In terms of the yield on those loans its.

Along with the 1% coupon, it's been effective yields about 3% on those loans.

Okay and.

Got it.

Let's see and then.

We see so.

You mentioned that Gary your it seems like you're.

Preparing to meet docs and as I said initially planned.

Well I first.

Are you at a point, where you have a preliminary estimate on on the reserve build that would come under Stifel has seen its that standard.

No Unfortunately were not.

Got it alright, thank you.

Thanks Kelly.

Thank you and once again. Please press Star then one if you would like to ask a question.

All right as there are no more questions that present, how I would like to return the for the management for any closing comments.

Alright. Thank you again to everyone for joining us appreciate your interest and we'll speak again in three months.

Thank you so much and thanks for attending today's presentation may not a centralized.