Q2 2021 Southern Missouri Bancorp Inc Earnings Call
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Good day, and welcome to day, Southern Missouri Bancorp quarterly earnings Conference call.
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Net funky. 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 on our quarterly earnings release dated Monday January 25th 2021 and to take your questions. We may make certain forward looking statements during today's call. When we refer you to.
A 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.
The latest soft Greg is going to provide a quick update on the bank's operations and the continuing pandemic environment.
Thank you, Matt and good afternoon, everyone. This is Greg Steffens and thank you for joining US today I wanted 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 saying precinct virus cases in hospitalizations.
Today. The most recent data indicates that were at similar levels as we were three months ago per new cases.
And hospitalizations.
And thankfully currently trending lower from peak levels that were noted four day weeks ago, when most of our markets.
On the virus remains an issue per business activity. We're hopeful that we will continue trending in the right direction and that's the vaccine distribution ramps up.
Hopeful for the end of this difficult time being on site.
We continue to have limited restrictions on actual activity in most of our markets and our schools are generally hope.
We continue to have limited instances, where we have needed to temporary closed that facility are moved to drive through only service for a period of time.
And our facilities have generally remained open per business.
For an update on our loans that had been deferred or modified our borrowers have continued to make good progress in returning to their originally contracted payment.
Payment terms and obligations as you noted on the vinyl table on the earnings release.
Since June 30 is when the modification center of the cares Act that we had agreed to reach 380 million per day.
Now on to approximately $40 million at December 31st at the end of the quarter on.
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 where concessions in the coming quarter for a period of time.
And I expect that in some instances, we will agree to some concessions where operations have been significantly impact.
Overall, we remain very pleased with the underlying performance of our loans in the environment that we've experienced.
For an update on P. P P. The new round of P. P lending.
This is expected to provide some additional relief to our borrowers are facing difficulty as a result of the pandemic.
And we're quite hopeful that the relief.
Weighted concessions on our part and good news on the vaccine from will provide some optimism for the later part of the calendar year.
Since we spoke last P. P. P forgiveness has picked up significantly.
The release notes that we saw a $38 million decrease in P. P P balances.
The pace of forgiveness has been really steady since early November and we are nearing in at 50% EBITDA dollars extended for forgiveness.
We've also begun processing some applications for the second draw P. P. P loans early in the calendar year.
They've been relatively limited in the amount and we don't have a good projection today is.
As the amount that we may may be able to originate from existing customers or other borrowers.
President late New P. P. P 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 <unk>.
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 two figures for ourselves and the industry and so for borrowers who haven't yet been able to return to the originally scheduled payments, we're including them on our watch list, which has added about $39 million to the figures.
On the cares Act modification started.
In addition to adversely classified credits or watch list includes 621 million in loans at December 31st which is up about $32 million from a year ago, but is less than the $39 million. That's been added to the cares Act.
Focusing on our AG portfolio, and giving our AG update our borrowers are in the harvest season agricultural real estate loan balances were up a little more than $3 million over the quarter on or little changed for the fiscal year Bob.
While production in other loans to farmers dropped by $23 million in the quarter.
And our 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 per yields and expects is essentially all borrowers to repay their annual obligations.
On many too notably improve their working capital positions as overall it was a successful year for.
For crops carried to harvest.
Our portfolio mix was approximately 30% soybeans, 25% corn, 25% cut.
15% rise and 5% other specialty crops, we may see some shift in 2021 away from cotton to corn or soybeans to two favorable pricing.
For those that haven't fully contracted the pricing generally improve their profitability for the year.
At present with corn prices moving higher as some of our borrowers sold their harvest sooner than expected and resulted in an earlier pay down on their operating lives than we previously expected affecting our overall loan balances.
Pricing remains elevated we may see a number of borrowers also contract through 2021 production earlier than normal which could affect next fall's repayment schedule as well.
In comparison to our price is used for loans are already underwritten per 2021, corn prices are trending 18% higher soybeans or roughly 30% higher.
Rice and cotton.
Our excuse rice is trending about even in cottons trending 17% higher.
Our farmers are looking forward to the 'twenty one production here with the strong improvements in pricing the way input costs are beginning to rise as well, we're seeing more borrowers also prepaying some of their input cost to lock in price.
There remains some instability in the market due to COVID-19, but our farmers generally.
Had an average to better than average year end.
Looking forward to 'twenty, one production was stronger.
Expected working capital positions.
Matt would you go ahead and update our financial results sure. Thanks, Greg.
Well in the December quarter, we earned $1 32 diluted.
December is the second quarter of our fiscal year and that's an increase from 23 diluted in the September quarter.
And it's up 48 cents from the same quarter a year ago. When we earned <unk> 84.
Sequentially net interest income increase due mostly to acceleration of deferred fee accretion on PPP loans as those balances were forgiven.
Noninterest income increased due mostly to nonrecurring factors provision for loan losses declined modestly and noninterest expense was little changed.
Compared to a year ago noninterest income was up a little more than $2 million as gains on residential loan sales were $1 2 million higher and that nonrecurring bank on life insurance benefit added almost 700000.
In the as compared to the linked quarter that bully item.
Counted from most of the noninterest income increase of almost 800000.
While an increase in secondary market gains was mostly offset by the inclusion in the linked quarter of a nonrecurring wealth management benefit.
Year over year, excluding the onetime item, we saw higher interchange income and servicing income, partially offset by lower deposit service charges.
In mortgage our volume of originations was more than four times the year ago period, and the average gain per loan remains slightly higher as well.
We're also generating more on mortgage servicing income as the dollars under servicing continue to increase sharply and we generated new mortgage servicing rights with our increase in originations compared to a year ago, our loans under servicing are up by about $80 million, which is a 50% increase.
Debit card interchange and deposit service charges continue to follow similar trends from recent quarters.
And as a percentage of average assets. Our noninterest income annualized was 89 basis points of which 11 basis points was attributed to the boldly benefit.
In the same quarter a year ago, we were at 65 basis points annualized with nothing identified as non recurring and then and then the linked quarter. We showed 78 basis points of which three basis points was the nonrecurring wealth management items.
Noninterest expense was up three 1% compared to the same quarter, a year ago and down 5% as compared to the linked quarter a year ago, we had a $350000 nonrecurring items total mostly due to loss on a fixed asset disposal.
And in the linked quarter, we had 150000 nonrecurring compensation expense related to wealth management.
We also recorded a charge for provision for off balance sheet credit exposure at 388000 in the current quarter up from 362000 in the same quarter, a year ago and as compared to a charge of 226000 in the linked quarter.
Compared to the year ago December quarter significant changes on what we see as a core basis, our compensation and occupancy up 8% and 5% respectively.
Data processing up 34% deposit insurance up to 218000 in the current quarter from zero in the same quarter a year ago.
And advertising remains below trend and core deposit and tangible amortization is lower by about 100000 per quarter as a couple of CDI from some older acquisitions have rolled off.
As a percentage of average assets noninterest expenses 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.
Our net interest margin in the December quarter was 392%, which included about eight basis points of contribution from fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits.
Which were about 478000 in dollar terms on.
Also the accelerated origination fee accretion on the PPP loans.
Those were forgiven added another 968000 to interest income, which contributed 16 basis points to the margin.
A year ago in December our margin was 370 of which 10 basis points resulted from fair value discount accretion and we also had some benefits in that quarter from loans that had previously been on non accrual.
And returned to accrual status or resolved otherwise those added another four basis points to the reported margin. So on what we see as a core basis. Our margin is up about 11 basis points from December 2008.
2019 to December 2020, we see our core asset yield down 55 basis points core cost of deposits down, 66% and total core cost of funds down 68.
Making that same comparison to the September quarter. When we had a reported margin of $3 73, we had less discount accretion, which had added six basis points of benefit to that margin and we didn't have any impact from TPP forgiveness. So on a core sequential basis, we saw less than a one basis point decline.
Greg noted nonperforming loans and assets were stable in the current quarter at about $11 million nonperforming assets are down about $3 million from the same quarter a year ago due primarily to a reduction in problem loans and assets from the Gideon acquisition from November 2018.
At 224000, net charge offs were a bit higher in the December quarter as compared to the linked September quarter, and there are four basis points annualized on average loans. That's the same as our trailing 12 month figure.
We've had about 800000 in net charge offs over the last 12 months.
A year ago that trailing 12 month figure was three basis points on average loans with limited loan growth stable credit metrics and our outlook and.
Required provisioning remains limited we set aside just over 600000, which is 11 basis points annualized looking back over the last 12 months provisioning has totaled $6 1 million or 29 basis points on average loans over that period.
The effective tax rate was 27% down a bit from the linked quarter and up a bit from the year ago quarter over the last 12 months. Our effective tax rate has also been 27% and were trending higher from 19, 8% on a trailing 12 month basis a year ago.
Looking at the balance sheet gross loan balances were down in the December quarter, as PPP forgiveness more than offset growth elsewhere.
Gross balance is down about $29 million, while PPP balances declined 38.
Compared to 12 months ago gross loan balances are up 162 million outside of the central Federal acquisition and up about $66 million outside of both the acquisition and PPP loans, which would translate to about a three 4% core growth rate.
Last year at this time without any non core growth to adjust for we were running at about six 8% on a 12 month basis.
The investment portfolio was up modestly and we continued to see cash flow from our mortgage backed securities. Some municipal calls we're picking up more on cash balances. In total then we want to but we're being cautious about locking in asset yields also total assets were up $82 million on the December quarter with cash up more then.
<unk> $100 million.
The allowance as a percentage of our gross loans increased to $1, 64% at December 31 up significantly since June 30, primarily due to the adoption of the seasonal standard.
While provisioning in excess of net charge offs has also added another $1 million.
The allowance would have been $1, 72% as a percentage of gross loans outside of Pvp up one basis point from the linked quarter.
Deposits were up $97 million on the December quarter. Following a decline in the September quarter, which was the only quarter of the calendar year, where we didn't post strong deposit growth.
Brokered funding was down $5 million on the current quarter, while public unit deposits were up $32 million more than reversing the decrease we had seen in the September quarter and public units.
Time deposits outside brokerage funding were down by $25 million this quarter similar to what we saw on the September quarter, and almost 9% lower than our balance as one year ago outside central Federal acquisition.
We've seen strong growth in Cds through mid 2019, while rates were headed higher non maturity deposits were up $122 million in this most recent quarter and they were up 29% as compared to 12 months ago outside of the central Federal acquisition non.
Non maturity growth had slowed in late 2018 into early 2019 as depositors has shown a preference for time deposits and now that is in full reversal.
<unk> advances are down $22 million in the December quarter, as we don't really have a need for the funding compared to December 31, a year ago advances are down about $51 million.
Greg I'll hand, it back over to you for some strategic comments alright, thanks, Pat when we're looking at the present quarter and just where we are anticipating loan growth, where really we would've had modest loan growth in the last quarter of who would not have been per PPA.
P. P. P forgiveness as we're looking forward, we're anticipating march quarterly growth to be tough to maintain balances.
That is really unclear depending upon how much second draw PPP loans occur.
When I look at some of our specific portfolios or non owner occupied CRE concentration was at 264% of capital at 12, 31, as compared to 272% at 930, and 274% a year ago.
In the current quarter loan balances were up modestly while regulatory capital levels grew a little faster.
Our volume of loan originations was almost $230 million in December quarter, which is relatively high and up from $205 million in the September quarter a.
On a year ago originations were $195 million on a comparable quarter.
Compared to the year ago quarter, we saw a $45 million increase.
Secondary market residential production, so it would be slightly down outside of that product.
Our loan pipeline for loans to fund in 90 days was at $85 million or $12 31 day.
Now from a $123 million at September 30, as compared to 73 million one year earlier.
The current figure doesn't include any impact from second draw PPP loans, which we would expect that those could have a modest impact on production, but again, we really don't have good insight there yet.
Right at 25% of our pipeline at 12 31 was loans that were targeted for sale in the secondary market.
As we move into the new calendar year, we are looking to hold.
And our loan portfolio some of those 15, and 20 year fixed rate residential loans.
<unk> have been originated for sale over.
Over the last several quarters, we would estimate that might have been $10 million to $15 million per quarter.
Up to a third of our secondary market lending, although we wouldn't expect that level of origination or portfolio on and of those loans to continue far into the mid calendar year <unk>.
Given our cash position and the yields available on securitized mortgages, we think that the better.
Better option for us for the current period of time given returns on cash balances.
We remain pleased with our deposit growth over the last year and while we expect that there will come a time when some of the outsized growth will but out of our balances.
We are maintaining additional on balance sheet liquidity to be ready for that eventuality.
Growth in non maturity deposits over the last 12 months is coming from all of our regions, while our CD balances are declining across all of our regions on.
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 <unk>.
Eventually over the course of the year.
And on an 8-K filing last week, we reiterated in our earnings release, we announced a modest increase on our dividend given our core profitability. We generally would have look to increase our dividend yields and.
In July, but we've decided to forego debt.
At that time due to the pandemic.
With 91000 shares repurchase in the December quarter, we have about 141000 shares remaining available for repurchase under.
The repurchase plan that we entered into the new calendar year.
That concludes my remarks, Matt.
Okay. Thanks, Greg and at this time, we'd like to take questions from many of our participants so if our operator would remind folks how they might queue for questions. We'll do that at this time.
We will now begin the question and answer session.
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The first question comes from Andrew Liesch with Piper Sandler. Please go ahead.
Good afternoon guys.
Good afternoon.
Greg just a follow up question on one of your comments here.
It sounds like you are.
Willing to retain some of the 15 and 20 year fixed rate residential mortgages.
Within the vascular 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 just feel like the look we wouldn't be securitizing them, we're originating with secondary Greg.
Standards, but we're just going to.
Put them on our portfolio instead of selling them at the present time.
Got it okay.
Hum.
Helpful. Then.
I just wanted to talk about the margin trajectory certainly benefited from the Pvp origination fees.
I guess Ed.
As those go away do you think that the core margin is going to shake out kind of near this $3 67 368 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 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 theres, a little bit further to fall on the asset side, and then what we'll be able to bring the cost of funds down but.
We'll do our best to maintain.
Got it and then just one.
I'll have a quick follow up from me on expenses. Some good expense control here this quarter.
Yes.
And then below where it was last.
The last two quarters at the end of year last fiscal year. So this $13 $4 million on so a good run rate to build off of.
We always see some upward pressure as we enter the new year, especially on the compensation front.
I don't feel like Theres really anything.
L significant out there.
To warn you about that.
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.
To kind of grow intuitive calendar year right right.
Thank you for taking my questions I'll step back <unk>.
Absolutely.
As a reminder, if you have a question. Please press star then one to be joined into the queue.
The next question comes from Kelly Motta with K B W. Please go ahead.
Hi, guys.
Thanks for the question.
Maybe I'm going to capital.
You obviously your purchase some shares in the quarter and did the penni dividend increase.
What is your appetite for continued share repurchases.
Given where your stock's trading.
Well you have to complete this was 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 long as as long as we don't see a huge run up in pricing I think we would we would have some appetite to deploy capital.
More so than even <unk>.
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 holdup, we'll certainly be building capital faster than we're wanting to.
Got it yeah, Okay, I just wanted to add.
Make sure Youre going to continue day.
On your current authorization.
Yeah.
Sure.
Sure.
We spent a lot of banks release.
Or is there to this quarter.
You kind of held steady if you strip out that the PPP loans.
I'm assuming.
The outlook continues to improve do you think.
You might start to release reserves.
Cutting corners.
We feel like is our present level of 172 were at the high end of reserve levels needed given that we're expecting loan growth to be pretty muted.
Would anticipate additional provisioning to be limited and depending on 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.
Got it portfolio.
Some of that mortgage that you would've otherwise.
On originated for sale.
Are you going to continue to sell a portion of those loans self.
The two thirds is a long time weighted.
Two thirds of the loans, we originate for sale in the secondary market or a 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 alright.
That will offset some of our loan shrinkage.
Thanks Kelly.
This concludes our question and answer session.
I would like to turn the conference back over to Matt from key for any closing remarks.
Okay. Thank you again, thanks for your interest in the company and participation on the call and we'll speak with you again in about three months.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
Okay.