Q1 2022 Southern Missouri Bancorp Inc Earnings Call
Hello, and welcome to the Southern Missouri Bancorp quarterly earnings Conference call My.
My name is Lauren and I'll be coordinating your call today.
If you would like to ask a question during the presentation. You may do so by pressing star followed by one on your telephone keypad I will now hand, you bite to chew hoist funky to begin ma'am. Please go ahead.
Thank you Lauren good morning, everyone. This is Matt Funky CFO of southern Missouri. Thank you for joining us for the purpose of our call. This morning is to review the information and data presented in our quarterly earnings release.
They did Monday October 25th Twenty-twenty wanted 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 and Greg will lead off our conversation with commentary on our current operations our lending activity in our credit quality measures.
Thank you, Matt and good morning, everyone again, I'm, Greg Steffens and I want to thank you for joining us this morning.
Since our last call public health authorities in our region.
We did report a peak in Covid cases from mid to late August and now been reporting substantial declines over the last eight weeks, we continue to see few restrictions on business activity in our primary markets.
Our operations have been much less impacted since our prior call.
We again remain positive about our credit profile and borrower performance. We continue to see limited number of relationships out operating under modified terms under the cares Act.
We have four loans continuing under interest only modifications are to borrowers in the hotel industry and totaled just under $24 million. We continue to analyze this portfolio closely and we have continued to see improvement by most of these customers.
Ppb forgiveness continued in the September quarter. The release notes that we received almost $37 million in PPP forgiveness. During the September quarter down slightly from the prior two months two quarters and $26 million in PPP loans remain outstanding.
Accelerated fee recognition picked up some in the September quarter.
As the average fee was higher in the second round loans that made up a larger percentage of those loans forgiven.
As of September 30th 87% of our PPP loans originated.
Both brands, one and two had been forgiven.
Our nonperforming loans were slightly higher this quarter up about 300000.
But offsetting that was our adversely classified loans were slightly lower down from the prior quarter by $1 million to $17 1 million a.
A year ago, they were $25 million.
Has two loans were higher but only modestly so they totaled $4 8 million.
Which represented 21 basis points on our loan portfolio, which is up from 17 basis points in the prior quarter a year ago, they totaled $6 9 million or 32 basis points.
Any loans still requiring relief under the cares Act are included as special mention credits.
And along with watch credits. These combined categories were $39 3 million at September 30 down from $48 4 million at June 30th and $50 9 million a year ago.
For agricultural update egg production and other loans to farmers were up almost $22 million in the quarter.
<unk> 5 million compared to this same period of last year, while AG real estate balances were up about $5 million over the quarter and $3 million compared to the September 30 of last year.
Our agricultural borrowers are in the middle of harvest season, and lenders node average to higher yields and their fall progress reports.
Our corn harvest is mostly complete.
And yielding a 175 to 200 bushels, an acre for non irrigated ground and then the 250 bushel an acre for air to ground.
Pricing has been at five and a half to $6 a bushel.
Rise is mostly complete and yielding in the hundred and 80 bushel an acre for conventional rice varieties and 220 for hybrid varieties.
At this time is from 6% to 625 a bushel.
The soybean harvest is about halfway complete yielding 45 to 60 bushels, an acre for non air graded ground.
Yes.
As high as $80 or 80 bushels, an acre for irrigated ground pricing range from 12 to $13 a bushel.
And some farmers are actually running into issues with elevators, not accepting soybeans until they ship out.
Corna rise by rail or barge.
Some farmers have on farm storage.
But others may be slower to complete the harvest if they can't deliver directly to the elevators.
The cotton harvest is just beginning but we expect results in line with the last several years.
1200 pounds, an acre on the less productive ground in 1400 pounds, an acre on the more productive drought and pricing is 78 to 82 a pound.
Pricing remained.
Well above where we completed our underwriting for corn, soybeans, and cotton, specifically and modestly above underwriting for rice.
The most significant downside risks for our borrowers that we see at this time is 2022 production cost.
And higher input costs or supply chain issues Bay caused some farmers to alter their crop production scheduled from corn to soybeans over the next year.
But overall, even with reduced government payments. This year, we expect our farmers to have a more profitable 2021, and 2020, where they performed well.
Matt would you like to give us an update on our financial results.
Okay, Great. We earned $1 43 diluted in the September quarter September is the first quarter of our fiscal year and that result is down 10% from the linked June quarter.
But up 34 cents from the dollar nine that we earned in the September 2020 quarter.
A year ago, we had to we had a charge to earnings for our provision for credit losses as compared to a modest recovery with a negative provision in the current period, although it's down from a larger negative provision in the linked June quarter.
Our net interest margin in the September quarter was 4.01%, which is about which included about six basis points of contribution from fair value discount accretion on acquired loan books or $376000 in dollar terms.
Also as forgiveness of PPP loans continued we accelerated the origination fee accretion on on those loans, adding another $2 2 million to interest income, which contributed 34 basis points to the margin.
In the year ago period, our margin was 373% of which six basis points resulted from fair value discount accretion. It was 339000 and PPP loans werent yet in the forgiveness process at that time.
So on what we see as a core basis, our margin was down almost seven basis point comparing September 21 to September of 'twenty.
We see our core loan yield as declining 28 basis points, while our core cost of deposits was down 47, and our core total cost of funds down a similar 48 basis points.
But higher average cash balances drove the decline in the margin, reducing our total interest, earning asset yield which dropped by 39 basis points outside of discount accretion or accelerated recognition of PPP origination fees.
In the linked June quarter, we reported a margin of $3 74 that included a bit more discount accretion in the current quarter, adding seven basis points to margin, but we also saw less contribution in this quarter from accelerated recognition of PPP fees and it had contributed 20 basis points in that quarter.
So on what we would consider a core sequential basis, we see an increase of about 14 basis points.
And we would note that about a third of that improvement is due to the current 92 day quarter as compared to the 91 day quarter in June.
Noninterest income was down 426000 compared to the year ago period, we saw continuing declines in gains on sale of residential loans originated for that purpose and their related servicing income.
Increases in deposit service charges and bank card interchange income offset some of that decline.
A net gain on fixed assets of 137000 was recorded on the sale of bank properties.
And compared to the linked quarter deposit service charges were higher while interchange income was lower in servicing income was lower on the inclusion in june's results of a positive fair value adjustment to our mortgage servicing rights.
Noninterest income was up $1 million compared to the year ago quarter increases are mostly attributable to compensation occupancy data processing and advertising.
Compared to the linked quarter noninterest expense was little changed as higher compensation and occupancy was offset by lower legal and professional charges and advertising expenses.
We reported no net charge offs in the September quarter down even from the very low net charge off figure in the June quarter.
Trailing 12 month figure moved lower to two basis points, which is just under a $5 million in dollar terms of net charge offs over the last year.
Loan growth was a bit slower in the current quarter, but remained at a solid annualized pace for a second consecutive quarter and even though we realized loan growth. Our continued positive credit metrics along with the stabilized projection for economic recovery indicated that a negative provision for credit losses was appropriate for the quarter, Although as we noted it was.
Right a bit lower at 305000 and recovery down from $2 6 million in the June quarter.
On the balance sheet gross loan balances were up $49 million in the September quarter, getting us off to a good start for the new fiscal year.
Even while PPP balances dropped almost $37 million.
Compared to September 30 of 'twenty.
Gross loan balances were up $96 million or four 4% PPP balances were down $107 million over those same 12 months. So if you adjusted for that our annualized rate of growth our annual rate of growth for the year would be close to 10% outside of PPP.
Investment portfolio growth slowed this quarter, but did remain positive.
The negative provision along with our loan growth moved our allowance as a percentage of gross loans down six basis points from the linked quarter to 143% at September 30.
As a percentage of gross loans outside of the PPP It was down nine basis points.
Over the linked quarter to 144%.
Yeah.
Deposits rebounded in the September quarter with $41 million in growth reversing the June quarter's decline our brokered funding was unchanged while public unit deposits were down more than $9 million.
Non maturity balances were up $49 million in the quarter after a modest decline in the June quarter.
Following on strong growth in the December and March quarters.
Outside of brokered theyre up $297 million over the last 12 months, which is almost a 20% rate of growth.
Time deposits still moved lower down $8 million, but this was a notably slower pace than in recent periods and over the over the last 12 months, they're down 77 million outside of brokered which is a 12% decline.
<unk> borrowings declined $11 million from the prior quarter and are down almost $39 million from 12 months earlier.
Our tangible equity ratio increased by about 20 basis points during the quarter as repurchase activity remained limited income remains strong and total asset growth was limited.
Our risk based ratios are relatively stable as we generally redeploy zero risk weighted assets cash and SBA guaranteed loans into 100% risk weight.
Loans.
Greg final comments.
Thanks, Matt overall, we're very pleased with the loan growth total so you've mentioned and we feel like we're off to a good start for the new fiscal year.
So he is just a lag draws we're hopeful again this last quarter and we also retained about $6 million of residential loans that we normally would have sold in the secondary market.
Single and multifamily residential.
Buying for about $41 million of our loan growth commercial balances.
Dropped on the P. P P forgiveness payments and we also saw construction loans pay off our east region saw some of the largest PPP payments received and outside of that fact, you. All three regions contributed strongly to loan growth led by our South region.
Our outlook for the December quarter remains.
Quite as strong as our pipeline for loans to fund in 90 days was.
And $81 million at September 30th.
Here than where we stood at June 30th and about 50% higher than at the same time last year.
With AG pay downs coming we will see some seasonal offset for the next several quarters and we should see P. P. P.
<unk> continue to come in over this timeframe, we budgeted for between 4% to 5% growth outside of PPP forgiveness in fiscal 2022.
We currently believe Theres, a good chance it will well exceed those figures.
Our non owner CRE concentration was approximately 272% of regulatory capital at September 30th relatively unchanged as compared to June 30th and as compared to 267% one year ago.
In the current quarter of loan growth and the relevant categories.
In total was in line with our consolidated capital growth.
Strong growth in multifamily was offset by construction payoffs.
Our volume of loan originations was about $219 million in the September quarter.
Down from higher levels in the June and March quarters, when we reported.
Some second round PPP activity.
In the same quarter of a year ago, we originated $205 million by comparison.
We continue to expect some deposit run off in the near term as depositors utilize some of the additional liquidity that they are sitting on traditionally we do see the September quarter is our weakest for deposit growth in December and March quarters to be much stronger.
So seasonal factors may offset some anticipated run off over the next several quarters.
Time deposit balances showed some signs of stabilization after four quarters or more of a significant declines.
Our excess reserves trended back a bit higher in October and remain somewhat above where we would normally want to see them.
First quarter growth in non maturity deposits was strongest in the west region, but outside our public unit.
Deposits was positive across all three of our regions.
Finally, we're pleased that we recently announced our definitive agreement to partner with Fortune Bank, which is headquartered in Arnold, Missouri, which is in the Jefferson County portion of the St. Louis MSA and with a second facility in Oakville, which is in the south St. Louis County.
We are looking forward to serving fortune customers into the growth opportunities supported to us in that market as we work with the fortune team.
As well as utilizing their team members to help improve our services offered across our legacy footprint.
We do expect this transaction to close in mid February subject, all customary regulatory requirements.
And KBR, Illinois, we did reach an agreement to acquire the branch location of first National Bank.
Rich will provide a modest amount of funding in core deposits.
And as we consolidate locations provide a more sustainable footprint in that community.
We expect to close on that transaction in mid January.
At this time, we are open to look at other potential partnerships is something attractive comes along and fits our expansion plans.
Thank you Greg.
Lauren at this time, we're ready to take questions from our participants. So if you would remind folks on how they can queue for questions.
Of course.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
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We're preparing to ask your questions. Please ensure you will find is on reaches lately.
Our first question comes from Andrew Liesch from Piper Sandler I'm sorry.
Your line is now open.
Thank you Hey, good morning, everyone. How are you.
Good morning <unk>.
A question on the loan pipeline.
Up nicely year over year, what do you think is driving that.
Typically stronger than you might normally see this time of year.
We've had a lot of people that decided to redeploy cash.
There we were receiving a lot of prepayment activity from.
Some of our customers in our West region.
They've become more active re acquiring properties again.
A lot of the pipeline has been in multifamily a lot of.
Low income housing tax credit projects that theyre buying that they are converting the market rents.
Good to hear.
Loan demand there.
And then obviously some bouncing around.
Non interest income categories from quarter to quarter.
How do you see that.
If you take out the gain on the sale of the former branches how do you see that.
$4 million total playing out it seems like there maybe service charges might be a little bit higher.
This quarter, but how do you see or change in gain on loan loan sales playing out for the next two quarters.
I think that.
Secondary market activity, we probably are obviously well past the peak on that so.
Don't want to don't want to overestimate, where we may or may be able to run on that I think deposit service charges bank charge.
Bank card interchange income those are probably sustainable numbers.
Nothing, particularly unusual as we get into.
The new calendar year, we generally see a little bit of a drop off on deposit service charges.
Got it.
That covers my questions I'll step back thanks.
Thank you Andrew.
As a reminder to ask any further questions. Please press star followed by one on your telephone keypad.
Our next question comes from Kelly Motta from KBS Obligate Kelly Your line is now <unk> 10.
Hi, Thanks for the question.
My first one has to do with it.
The capital and buybacks it looks like.
Buybacks.
This quarter.
Just wondering your approach to them.
Pinpoint the buyback while the deal is currently pending I know you have a ton of capital, but just wanted to know.
Kind of thoughts of employing that.
Our valuation is and with the deal.
On the tape.
With the with the pending acquisition, giving stock in that we do have to be conscious of when that proxy solicitation period begins.
As we as we exit from our quiet period, our understanding is that we can be active and we're always going to look at the relative value of acquiring that stock and what the payback period is on that.
Versus holding on to that capital for some potential future use as well.
Great and then maybe if you could add a few comments on the Cairo branch acquisition.
Jeff.
What motivated that.
Potential.
Changing your location there just anything to kind of help us out.
On the camera location.
Theres two banks in Cairo, us and first national and our facility was in need of some.
Significant.
Rehabilitation.
And they actually approached us about.
As acquiring their location.
They have a bigger location that was more of a consolidated operation.
And then on top of that they have close.
Close to $30 million in deposits, which was very similar in size to what we have and we felt like that there are some efficiencies that can be gained by <unk>.
Combining the two operations into one.
Great. Thanks, Thanks for the color Greg maybe.
Just one one last one on expenses they were really well controlled this quarter can you remind me.
Any seasonality you have.
With the start of the year and kind of how to think about that progression.
Clearly done a nice job getting some positive operating leverage.
With expense control, but just wondering kind of how that.
If you could remind me on the seasonality of expenses that would be helpful. Thank you.
Sure, we do generally reassessed employee compensation beginning in January.
That along with resetting the clock on payroll taxes, usually does caused us to pick up a bigger percentage of our annual compensation expense built there.
And then like everybody we're dealing with.
Sure.
Competition for talent right now and so I would expect that compared to normal.
We would see maybe a little more of a build on that line item, then and what we have over the over previous years.
Thanks, Matt I appreciate it.
Youre welcome.
As a final reminder to ask any further questions. Please press star followed by one on your telephone keypad.
We now have a follow up question from Andrew Liesch from Piper Sandler I'm sorry your.
Your line is my wife pen.
Well I think thats, taking my follow up just.
On the core margin, obviously, a nice expansion here.
How do you see that.
Playing out for the next couple of quarters, what are some of the puts and takes driving that.
Our expansion possible.
I think that'll be driven a lot by cash position there is some upside there for redeployment.
We've done a good job, bringing our deposit costs down a little faster than what we've seen on the loan book.
We appreciate what we're seeing on the yield curve right now with the longer term moving up that should be beneficial to our loan pricing.
Two months ago, where the yield curve was we would have thought there might have been more potential for downward repricing on the loan book than what we would see on the deposit portfolio.
So I think we're more optimistic now than we've probably for the.
12 to 18 month period, and what we were a couple of months ago.
Really I think our number one goal on it would just be maintaining.
Got it.
Turning to follow up.
Thank you for for product.
I'll step back.
Thanks, Andrew.
We currently have no further questions. So I'll now hand back over to the highest for any closing remarks.
Okay. Thank you Lauren and thank you everyone for joining us we always appreciate your interest in the company and we'll speak again in three months.
Have a good day.
This concludes today's call. Thank you for joining and I Hope you have a lumpy rest of your day you may now disconnect your lines.
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