Q3 2021 Southern Missouri Bancorp Inc Earnings Call
Good day and welcome to the Southern Missouri Bancorp quarterly earnings Conference call.
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I'd now like to turn the conference over to Matt Funky Executive Vice President Chief Financial Officer. Please go ahead.
Thank you Andrew and good afternoon, everyone. This is Matt Funky CFO of southern Missouri. The purpose for this call Let's review the information and data presented in our quarterly earnings release dated Monday April 26, 2021 and to take your questions. We may make certain forward looking statements during today's call. When we refer you to our cautionary statement.
Regarding forward looking statements contained in the press release I'm joined on the call today by Greg Steffens, our president and CEO.
So thanks again for everyone. Thanks, again for everyone joining us Greg will startup conversation today with some commentary on our current operations our lending activity in credit as we proceed hopefully towards economic recovery and out of the COVID-19 environment, Greg. Thank you, Matt and good afternoon, everyone.
And thanks for joining us today since our last call. The most recent public data indicates that we've seen substantial reductions in COVID-19 transmission in our market area. Since a peak between November and January the relatively few business activity restrictions that we reported on a quarter ago.
<unk> have only been reduced further and we're hopeful that improving activity and reduce transmissions.
We'll continue with the.
Current level or even improve overtime within our organization we've had.
Far fewer temporary closings, where team member quarantines and our facilities are open for business.
We continue to feel positive about our credit profile and borrower performance at March 31st we remained at about $40 million in modifications under the cares act consistent with the.
Prior quarter and about a 10th of the figure from nine months earlier.
Really all of these balances.
Acquire at least interest only payments.
And the majority of these dollars are loans to borrowers in the hotel industry low.
We expect our hotels in particular may require continued relief in the near term and we're continuing to analyze this portfolio more closely.
We do expect that nearly half of the remaining balance of modifications we have to return to.
Full payment status.
Around the middle of the year.
Since we last spoke PPP forgiveness maintained a pretty good pace earlier in the March quarter that slowed late in the quarter and that's continued into the June quarter, thus far.
See the SBA approved some of the larger balances we have submitted when he may be.
Approaching somewhat of a limit from the time between.
The release notes that we've received $42 million in P. P. P forgiveness during the quarter, but that was offset by the second round of PPP second draw funds.
During the March quarter, we're still originating some of these loans, but we wouldn't expect them to have a meaningful impact on loan growth in the current quarter.
Forgiveness on the second round of <unk>.
Loans has also been submitted as we've had just approximately 46 loans submitted for two and a half million dollars.
We have 37 loans from the first round of PPP totaling 21 million waiting on.
Our SBA approval.
And we have not received any approval on any loans over $2 million at this point.
Our nonperforming loans were reduced further during the quarter adversely classified loans were also reduced to about $21 million in past due loans were down by more than 40% to $4 $3 million, which is about 20 basis points of our total loans.
We'd note that sounds about applications, we've made for COVID-19.
Might be masking some of our current level of delinquencies, but right now.
Loan delinquencies are approaching all time lows for the organization.
Yeah.
Focusing on our AG portfolio AG.
AG real estate loan balances were down $3 9 million over the quarter and down $3 3 million for the fiscal year to date, while production in other loans to farmers were down $8 6 million in the quarter and down 10, and a half million dollars for the fiscal year to day IRA.
Our row crop borrowers are generally well into their planting season.
We expect favorable commodity prices, which may.
Some of our borrowers to shift acreage from soybeans to corn.
And corn production will likely be above 30% of our total.
Operating line balances, while soybeans may dropped below 20%.
Rice and cotton allocations are in the 20% to 25% range and that are likely to be steady with.
Prior experience.
So at this point in April we have yet to see any noticeable uptick in operating line balances, whereas last year. At this time, we had begun to see draws this is due in part to a.
Liquid position by some of our farmers after having a.
Good 2020 crop here and it's been impacted some by rainy weather conditions.
And some cold weather that has kept some farmers from doing some of their normal work.
In comparison to our price is used for 2021 loan underwriting core prices have now.
<unk>, a 40% higher level than where they were and it's been trending higher each week, it seems soybeans from more than 30% higher.
This is about 7% higher and cotton has more than 20% higher the mood among our farmers remains very positive for the 2021 production here.
With the strong improvements in pricing the outlook for 2022 is less certain as input costs may increase substantially given various increases in commodity prices.
Matt would you go ahead and update us on our financial results sure. Thanks, Greg.
We did earn a $1 27 diluted in the March quarter as the third quarter of our fiscal year and it's down a nickel from the linked December quarter as well as being up 72 from 55 cents in March of 2020.
March of 2020 included a large provision for loan losses, and also recognition of impairment on our mortgage servicing rights.
From the December quarter, we saw net interest income decrease primarily.
As loan interest declined by more than deposit cost, even though we recognized about 300000 more between discount accretion of PPP.
FERC origination fees that were accelerated.
The 90 day quarter was a contributor to the decline in loan interest.
Noninterest income decreased mostly due to the inclusion in the prior quarter of a nonrecurring item and a reduction in secondary market secondary market residential loan sales noninterest.
<unk> expense was up about a half million dollars and provision for credit losses moved to a recovery of 409000 in March from a charge of $1 million between provision for credit losses on our loan portfolio and our off balance sheet credit exposure related to our lines of credit, which does represent a change in.
Classification on our income statement from the prior quarter for consistency with new call reported instructions.
Our net interest margin in the March quarter was $3 68, which included about 10 basis points of contribution from fair value discount accretion on our acquired loan portfolios or.
Or about 614000 in dollar terms.
Also accelerated origination fees on PPP loans as forgiveness.
Was received that added another $1 2 million to interest income contributed 18 basis points to the margin.
In the year ago period, our margin was $3 63 of which eight basis points resulted from fair value discount accretion or 410000.
So on what we see as a core basis, our margin was down about 15 basis points comparing March of 'twenty, one to March of 'twenty, we see our core loan yield being down 51 basis points.
And our core cost of deposits down 65 basis points overall core cost of funds down 66.
Higher average cash balances growth the decline in the margin as they reduced our interest, earning asset yield which dropped by 79 basis points outside of any discount accretion or accelerated TTP origination fees with forgiveness.
In the December quarter, our margin was 392, including a little bit less discount accretion that in the March quarter and that added nine basis points of benefit to the margin. We also saw a little bit less contribution from accelerated PPP origination fee recognition in the December quarter and that.
We did 16 basis points.
So on a core sequential basis, we see about a 27 basis point decline.
And about a fourth of that decline would be due to the 90 day quarter as compared to 92 days in December.
Larger cash balances driving the majority of the decline.
Noninterest income was up about $1 3 million compared to the year ago period.
As gains on residential loan sales were almost 700000 higher and loan servicing which had included the mortgage servicing right.
Mortgage servicing rights write down a year ago was up by $5 million.
We're seeing bank card interchange improvement that offsets a decrease in deposit service charges and in the current quarter. We also had a 90000 available for sale securities gain.
Compared to the linked December quarter, the bully benefit that was included in the prior quarter and a decrease in residential loan sales accounted for the decline.
Noninterest expense was down about 40000 compared to the same quarter, a year ago and up.
About a half million dollars as compared to the linked quarter with the December quarter's charge for provision for off balance sheet credit exposure moved to the provision for credit losses line, while the year ago charge remained in noninterest expense.
In the same quarter a year ago, we had 76000 in nonrecurring M&A charges that we identified with none in the current from linked quarter.
Compared to the year ago March quarter, our FDIC insurance premiums are up as we benefited from one time assessment credits.
Our foreclosed property expenses are down and data processing compensation and occupancy era.
Net charge offs in the March quarter were 244000 modestly higher than our linked to December quarter, and Thats five basis points on average loans slightly above the four basis points, we've seen in our trailing 12 months.
And a little less than 900000 over the last 12 months in dollar terms.
A year ago, our trailing 12 month charge offs were averaging three basis points on our loan portfolio.
With limited loan growth positive credit metrics in an expectation for economic recovery, we did not make a provision for credit losses for our outstanding loan balances in our required allowance for off balance sheet credit exposure was reduced by 409000.
Our effective tax rate was 21, 3% up a bit from the linked quarter and up by a little more as compared to the year ago quarter, when additional provisioning for loan losses pre tax income, notably lower.
On the balance sheet gross loan balances were up a little more than $13 billion in the March quarter as PPP balances grew modestly up 5 million.
Gross loan balances compared to March 31, a year ago or up by 179 million and that figure would include $51 million from our central Federal acquisition and $101 million and remaining PPP loan balances. So that would leave us at a little above 1% at a core growth rate.
Last year at this time without any noncore items to adjust for we were a little more than 8% growth rate.
Our investment portfolio grew modestly again as cash flows on mortgage backed securities appear to be slowing a bit but the decline is from a very high level, we're continuing to be cautious about putting too much cash into securities all at once.
The allowance as a percentage of our gross loans declined by two basis points to 162% at March 31.
It was also down two basis points to one 7% as a percentage of gross loans, excluding our PPP loans.
Deposits were up almost $104 million in the March quarter. After a similar similar level of growth in the December quarter brokered funding was down by almost $6 million, while public unit deposits were up about $12 million.
Outside of brokered funding time deposits were down by more than $23 million in the quarter. That's similar to our last several quarters and they're a little more than 10% below our balances one year ago outside of the central Federal acquisition.
Non maturity balances are up $133 million in the quarter and they're up by almost 33% as compared to one year earlier, even excluding the central federal acquisition.
No substantial change in our <unk> borrowings and at this point, we're not expecting to utilize the federal reserve's PPP liquidity facility.
Greg.
Thanks, Pat I wanted to wrap up talking a little bit about loan growth, which would have been basically flat this quarter outside of new PPP funding offsetting forgiveness and our retention of some loans that we normally would have sold in the secondary market, which helped us add about $10 million to our loan balances.
Sure.
AG lines and AG real estate Paydowns noted earlier were offset by growth in multifamily real estate and construction loan drops our south region has been our largest contributor to loan growth in the current fiscal year.
Our outlook for the June quarter is much better for loan growth as our loan pipeline for loans to be funded within 90 days was 146 million at March 31 up from $85 million at December 31.
And as compared to 77 million one year earlier.
<unk> noted at March 31 ended December 31 did not include any impact from second draw PPP loans and while were still completing some of those we don't expect it will meaningfully impact the June quarter.
Over the near to medium term. However, we expect that organic loan growth opportunities will be more limited than what we have experienced in prior years.
We would anticipate organic growth.
The medium term to be in the 3% to 5% range.
Under known on our future for loan growth will be really what is the impact on C&I balances as we return from free.
COVID-19 levels will borrowers draw their balances up to where they were pre COVID-19 or will they be permanently lowered as what they are right now and we just don't have clarity on where that is going at present.
And looking at our non owner commercial real estate concentrations. The total of approximately 262% of regulatory capital at March 31, as compared to 263% at December 31, and 282%.
One year ago.
In the current quarter.
Both loans and capital grew at roughly 2% levels are.
Our volume of loan originations was a little over $250 million in the March quarter, which remains elevated up from $220 million in the year ago quarter and $229 million in the December quarter.
We would be down year over year outside of the secondary market production in PPP originations.
Obviously like the rest of the industry, we're blessed with a little much of it.
Too much of a good thing in regards to deposit growth over the last year, we continue to expect that eventually as the economy reopens.
Some of this outsized growth will wash out as customers spend some of their deposit money.
And we also are cautious about moving too much of this excess liquidity or dollars into our investment portfolio at this time.
Growth in our non maturity deposits has come from all three of our market regions.
And CD balances have declined across all regions and are expected to continue to decline overall, we are in a much more liquid position than historically.
More liquid than we would prefer.
On the M&A front as we see economic.
Credit environment stabilized, we are definitely becoming more interested in pursuing acquisitions.
We currently have not seen any opportunities that we have been interested in pursuing.
We sincerely hope to see a pickup of additional activity in our rates during this calendar year.
Lastly, in the March quarter, we repurchase of <unk>.
Approximately 94000 shares of our stock at an average price of 36 35.
And at quarter end, we had 48000 shares remaining available for repurchase under our existing plan.
Unless eminent opportunities to manage our capital growth through M&A with develop we would expect to continue repurchase activity.
Assuming profitability remained strong and asset growth is limited.
Specialty risk weighted asset growth.
Alright. Thank you Greg this time, Andrew we'd like to take any.
We'd like to take any questions. Our participants may have so if you would remind them how they can queue for questions and we'll be ready.
Yes, Sir we will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Andrew Liesch with Piper Sandler.
Please go ahead.
Hey, good afternoon, guys how are you.
Good afternoon Andrew.
I do think we can.
A question on the expenses here I think we spoke on the last quarter or maybe they did rise a little bit more than they did is this a good run rate to use going forward or.
There'll be more expense growth from here.
Really theres been a few things that kind of went against US just from a timing standpoint on an occupancy.
We're running probably more positions vacant than we would like to long term. So we might see a little bit of a pickup in some compensation there.
I don't think Theres anything unusual to warn you off on there other than maybe a little bit higher vacancy rate in the normal.
Got it alright, good expense control there.
And then Greg on M&A, obviously.
Nice improvement in stock price currency has come back a little bit it doesn't sound like you've seen anything that.
It might be interesting to you right now, but I guess, what's the.
Are there deals out there that you'd be interested in right. Now you think you can afford them with the currency that you have I guess, just a little more comment on your M&A outlook would be appreciated.
We would really like the opportunity to participate in some M&A.
<unk> stock price has definitely improved from where it has but.
So a lot of it's going to depend upon seller expectations and whether they are able to.
Except the stock from the similar to the tangible book value ratio. So we're trading in.
Okay.
<unk>.
It's just.
People have to be interested in selling our market footprint.
Definitely been increases in activity around the country, but we have not seen as many.
Non disclosure agreements as what we would have maybe anticipated at this point, but we are anticipating receiving some in the near future.
Got it do you think that's driven by what those private banks might be seeing in the market or what do you think might be.
We're driving maybe a slower pace of prospective deal activity.
Thank Missouri, Arkansas, just been less active are little slower than some parts of the route of the country.
Proceeding with M&A I would expect more M&A to occur.
And some of our market footprint over the next six months.
Got it cool.
That actually covered all my other questions in your prepared comments well. Thanks, so much I'll step back.
Thanks, Andrew.
Again, if you have a question. Please press Star then one.
Next question comes from Kelly Motta with <unk> W. Please go ahead.
Good afternoon.
Greg and Matt.
I was hoping I appreciate the color on loan growth you mentioned.
One factor that could determine growth coming forward is whether.
Whether or not line utilization comes back I was wondering if you had any thoughts on.
Line utilization stands now relative to perhaps historical norms.
We don't have any overall numbers, but we have a variety of industries to wear.
Part of our businesses have not been able to.
Inventory, especially like car dealers.
Both dealers.
And by selling.
All terrain vehicles.
A lot of that type of.
Product has not been there is available so a lot of balances are well more than.
50% below the usage that we typically would have seen.
<unk>.
And then we have a variety of seasonal businesses that are below <unk>.
Level, where they would have been before but some of what we're not clear about is how many.
Balances are temporary related to PPP loans.
Would've received or idle advances.
Or other things that have helped also key line usage lower we would anticipate C&I balances to move higher we just.
We just don't know and we don't know when inventories will get back to historic levels either.
So I've talked a lot.
A lot.
Thank you.
As always Andrew tightening got my question So I.
I'm all set thank you.
Thanks, Kevin Thanks Kelly.
This concludes our question and answer session I would like to turn the conference back over to Matt <unk> for any closing remarks.
Thank you again, Andrew and thank you everyone. We appreciate your interest and we'll look forward to talking again in about three months have a good day.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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