Q4 2022 Southern Missouri Bancorp Inc Earnings Call
Good morning, Good afternoon, and welcome to the Southern Missouri Bancorp Quarterly earnings Conference call. My name is Adam and nobody ever are priced at today.
So I'll ask a question during the Q&A portion of today's call you may do so by pressing star followed by one or no telephone keypad now.
I'll hand, the floor over to liberate takes to begin to Laura. Please go ahead when you're ready.
Thank you and good morning, everyone. This is Laura Davis CFO with Southern Missouri Bancorp. Thank you for joining us.
This call is to review the information and data presented in our quarterly earnings release dated Monday July 25th 2022 and to take your questions. We may make certain forward looking statements. During today's call. We may refer them 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 newly named Chairman and CEO and by Matt Funky, President and Chief administrative officer.
Matt will lead our conversation today with some highlights from our most recent quarter and fiscal year.
Thank you Lori Thank you Laura and good morning, everyone. This is Matt Funky. Thank you for joining US we're happy to report this morning that the June quarter. The final quarter of our fiscal year provided strong profitability and continued growth.
We earned $1 41 diluted in the June quarter, which is the fourth quarter of our fiscal year.
Thats up 38 cents from the linked March quarter, and down 12 cents from the June 2021 quarter. When we had a larger negative provision for credit losses and strong PPP income.
The company's stockholders' equity ended the year at $328 million.
An increase of $37 million or 13, 2% as compared to June 30, 'twenty one.
That's attributable to almost 23 million and equity issued a fortune shareholders as well as earnings retained after cash dividends paid and partially offset by a $20 million reduction in accumulated other comprehensive income and by almost 6 million utilized for repurchases of 132000 shares of our common stock over the course of the.
Fiscal year, we paid an average of just over $44 for those repurchases.
We grew our tangible book value by 5% and our book value by 9% as we had some impact from the goodwill created from the fortunate acquisition as well as the decline in the market value of the investment portfolio.
Our net interest margin for the quarter was $3 66, compared to $3 74 for the same quarter, a year ago and $3 48 for the third quarter of the fiscal year.
We did see net interest income from the accelerated accretion on the PPP loans significantly reduced as compared to the year ago period.
We viewed our core margin is expanding quarter over quarter and year over year.
Average interest, earning cash and cash equivalent balances decreased by more than a third compared to the year ago period and by almost half compared to the linked quarter.
Net interest income from the quarter was almost $28 million, an increase of $3 8 million or almost 16% as compared to the same period of the prior fiscal year. The increase was attributable to an 18, 4% increase in the average balance of interest earning assets, partially offset by the decrease noted in the net interest margin.
On the balance sheet, our gross loan balances were up more than $106 million in the June quarter and compared to the prior fiscal year end gross balances are up $486 million or almost 22%.
Fortunately <unk> 202 million so adjusted for the acquisition items, our annual rate of growth for the year would be almost 13%.
The fair value of the investment portfolio increased by $9 million over the quarter, while cash and equivalents decreased by almost $162 million.
Deposit balances did decrease by almost $40 million in the fourth quarter, but they increased by $484 million over the course of the fiscal year. The year over year increase was attributable in part to the February fortune merger, providing $218 million in deposits at fair value and we also had more than $28 million that we picked up in a mid year.
<unk> branch acquisition.
Greg spending to speak with us today on some key credit things Greg. Thank you Matt.
And good morning, everyone. Our borrowers credit performance remains strong we noted in April that we were working with two hotel industry relationship loans totaling just under $24 million with business models that were particularly impacted by the pandemic.
We continue working with those borrowers and both are scheduled to transition their principal and interest payments in the first quarter of our fiscal 2023.
$9 million and these loans are considered special mentioned, while the other $15 million is considered sub standard.
Overall adversely classified loans were a little over 27 million and remained relatively unchanged from the March quarter and a.
A year ago adversely classified assets totaled $18 million.
Watson Special mentioned credits totaled a combined $24 4 million at June 30th down $21 million during the quarter, primarily due to the pay off.
Which was anticipated of a single construction loan and the life Tech industry.
Nonperforming loans were just over $4 million or one 5% of gross loans at June 30th.
As compared to almost $6 million or two 6% of gross loans a year ago.
The reduction in nonperforming loans was attributed primarily to the return to accrual status.
One relationship secured by single family residential rental property.
Partially offset by an increase of about $650000 related to the <unk> merger.
Nonperforming assets were $6 3 million or 2% of total assets at June 30th.
As compared to $8 million or 3% of total assets a year ago.
In addition to the reduction in nonperforming loans with Solvay legacy foreclosed property that picked up some additional <unk>.
Repossessed property with supports a merger.
Past due loans continue to remain at very low levels at June 30 of this past due loans remained at 17 basis points of our loan portfolio.
Similar to a year ago and down slightly from the prior quarter.
Turning to the AG portfolio agricultural production and other loans to farmers were up $30 million in the quarter and up almost $38 million compared to this time last year.
Ill estate balances were up $11 million over the quarter and $32 5 million compared to one year ago.
We noted on prior quarterly calls that our.
Farmers.
Had a really strong in 'twenty, one and enter 2020 twos crop year in really strong position our farmers are dealing with.
Hi, Heath and dry conditions, requiring substantial irrigation.
Hopefully a lot of our farmers are all irrigated, but it has increased input costs substantially.
Our lenders maintain close contact with our borrowers and were seeing expenses rising 15% to 20% above early year projections.
We're also.
Seeing increased line usage at a earlier time than prior years.
Farmers have been able to contract at a more favorable price and well thank.
Thank you received in prior years and above levels, where we add.
Underwrote those loans, which should offset most of the increased cost of production.
Our crop mix for 2022 is approximately 30% soybeans, 25% corn, 20% cotton, 20% rise and the additional 5% is in a mix of specialty crops.
Our corn is toddling, but we could see some negative impact.
Yields from the hot weather that were have been experiencing.
Soybeans are still too early to tell cotton was little late getting in the field, but it's doing well with the hot dry weather and our rice looks to be in pretty good condition.
Laura would you provide some additional details on our financial performance. Thank you Greg.
As Matt mentioned earlier, we earned $1 41 diluted in the June quarter, which is the fourth quarter of our fiscal year. That's up 38 cents from the linked March quarter and down 12 cents from the $1 53 diluted that we earned in the June 2021 quarter.
Our net interest margin in the June quarter with $3, six 6%, which included about eight basis points of contribution from fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits or $606000 in.
Dollar terms.
As PPP loan balances and forgiveness repayment diminished accelerated accretion of deferred origination fees on those loans dropped significantly to recognition of $72000 to interest income, which had no material impact to the margin and.
In the year ago period, our margin was 374% of which seven basis points resulted from fair value discount accretion of 470000, and PPP forgiveness caused us to accelerate accretion of $1 3 million in deferred origination fees contributing 20 basis.
To the margin.
What we see as our core basis, then our margin was up 11 basis points comparing to the June 2020 quarter.
From the June 2022 quarter to the June 2021 quarter, we see our core loan yield as being down nine basis points, while what we view as our core cost of deposit is down five basis points and our total core cost of funds is down six basis points.
Average cash balances were significantly lower in the current quarter compared to the year ago quarter and securities yields were better helping our overall, earning asset yield to increase about 10 basis points exclusive.
The accretion of PPP deferred fees or discounts on acquired loans.
In the linked March quarter, we reported a margin of 348%, which included a similar benefit from the fair value discount accretion of six basis points and accelerated recognition of deferred PPP origination fees on forgiveness in the March quarter, which contributed two basis points in that quarter.
<unk>.
We see sequential core margin improvement at about 16 basis points, but a couple of those basis points are due to the 91 day quarter.
Non interest income was up one 6 million compared to the year ago period attributable to wealth management and insurance increases due in part to the.
Fortune merger.
<unk> fees increased 53% compared to the year ago period, and deposit service charges are up 33% compared to the year ago period.
Gains on the sale of secondary market residential originations declined 53% as compared to the year ago period, but we did offset that gain on sale of the with the gain on sale of the guaranteed portion of new originations and government guaranteed loans, which.
We did more than $400000 in non interest income for the quarter.
Compared to the linked quarter non interest income was up 32, 5%.
Non interest expense was up $3 1 million compared to the year ago quarter that included 117000 in M&A charges, mostly data processing and legal while we didn't have any a year ago.
Other increases were attributable mostly to compensation.
One $8 million and occupancy up almost a half a million dollars compared.
Compared to the linked quarter non interest expense was at 574000 as we had the <unk> expenses included for a full quarter, but benefited from a more favorable comparison to the high M&A charges included in the March quarter.
The company had very low.
Net charge offs again in the June quarter Little change from the last several our trailing 12 month figure is now less than 100000 less than one basis point.
<unk> already highlighted loan growth hurdles I'd add that the PPP loan balances our company originated declined by almost $60 million during the fiscal year to date and we picked up two four in the fortune merger.
Total remaining PPP balances at June 30 were just over $3 million, while unrecognized deferred fee income on these funds with the material.
The company recorded a provision for credit losses PCL charge of 240000 in the three month period ended June 32022, as compared to a PCL recovery of $2 6 million in the same period of the prior fiscal year.
Our allowance our ACL at June 30 totaled a little over $33 million or 122% of gross loans little change in dollar terms from a year ago, but down in percentage terms from 149% of gross loans for the prior fiscal year end.
Our tangible equity ratio remained relatively unchanged during the quarter.
Matt any other comments thanks.
Thanks, Laura.
Our loan growth did pick back up to a faster pace in the June quarter, increasing by $106 6 million and that includes the impact of some modest PPP Paydowns single family real estate AG and non owner occupied commercial real estate.
C&I and AG production loans, all contributed to the quarter's growth, partially offset by a larger multifamily pay off.
The strongest growth this quarter was in our west region centered in Springfield, Missouri, and it was complemented by good levels of growth in the east and south regions that mirrors, our results for the overall fiscal year.
Our new North region created with the Fortune merger has not yet contributed but we look for good results there in the coming year.
We expect growth to continue in the next quarter with our pipeline for loans to fund in 90 days at 235 million at June 30 up from $182 million a quarter earlier and $142 million reported at this time last year.
Our consolidated non owner CRE concentration was approximately 305% of regulatory capital at June 30 up about five five percentage points as compared to March 31.
And as compared to 272% one year ago at the bank level. The concentration was 313% of regulatory capital up from 277% a year ago.
Our volume of loan originations was about $308 million in the June quarter up about $40 million from the March quarter in the same quarter a year ago, we originated $286 million, which had included about $10 million in PPP originations.
Our June and September quarters are usually our softest for deposit growth and on a core basis. We saw outflows this quarter that were larger than normal.
It's something we've been expecting for a while as the consumers' stimulus was withdrawn we.
We did see outflows in both time deposits and non maturity.
Public non maturity balances grew while retail and commercial balances declined.
Public funds have made up about 45% of our non maturity growth over the fiscal year and we expect this source of growth may peak in the September quarter.
Public unit Cds declined in the June quarter and over the fiscal year.
Deposit growth in the fiscal year was broad based across our regions with our east region, leading in dollar terms for non maturity deposit aside from public units.
The south region, leading in percentage terms outside of public units and the West region, leading in terms of growth that includes our public units.
Our cash balances decreased further in the June quarter as expected and we've probably realized most of the benefit of asset redeployment available to our margin there.
Given the reduction in cash and continued expectations for loan growth in the September quarter, We will expect limited editions to the investment portfolio.
We expect that our increases in the cost of funds may negatively impact our margin in the coming fiscal year, but we will work to hold those increases down and ultimately our results will depend greatly on the competitive environment for deposit pricing.
We expect noninterest income may be impacted by some tweaks to our NSF program to reduce fees assessed consumers for small overdraft balances.
We think these more forgiving policies will mostly offset the additional revenues that we would've expected from activity on new accounts or the additional NSF activity, we might have seen from our more strained economic environment.
We are continuing to look at additional changes we may make later in the calendar year that could reduce service charge revenue further.
Also lower mentioned our gains on residential and SBA guaranteed loans in the current quarter.
We expect future quarters in the near term won't be as strong on those items as we had a very good SBA pipeline, we acquired from the fortune merger that hasnt been as substantial sense and of course, we've seen residential activity dry up in recent months.
Finally on the expense side, we continue to face competitive pressure on the compensation front and we are regularly reviewing our comp structure to be sure were competitive and able to retain our team members in this unusual market.
Greg any final comments.
Thanks, Matt.
Just wanted to close out by noting that since our last quarterly call. We've had a reduction in the number of context regarding M&A opportunities within our reach however, we continue to visit with some potential partners. We do want to take advantage of opportunities when they become available while there's always more.
<unk> discipline in how we evaluate partnerships to ensure they drive long term shareholder value and.
And our deal partner.
Who would have lowered loan to deposit ratios and excess liquidity and be larger than $250 million.
Laura.
Thank you Greg at this time of Adam we're ready to take questions from our participants. So if you would please remind folks how they may queue for questions at this time.
Cool.
A reminder, if you'd like to ask a question today. Please press star followed by one or no telephone keypad now from the parent to ask a question. Please ensure you are on mute locally.
Followed by one on your telephone keypad.
Our first question today comes from Andrew Liesch from Piper Sandler. Please go ahead. Your line is open.
Hi, good morning, everyone.
Good morning, Andrew Good question, if you look at.
Wondering if you if you look at it.
The loan pipeline, where it is today and what would your clients have been telling you and what your lenders have been telling you. How do you think loan growth is going to trend out over the next fiscal year.
Given the environment that we're in.
I think with that with that pipeline that we're reporting at June 30, we would definitely expect growth to continue through the September quarter.
As you get further into the fiscal year, we may see that slow down a little bit our December March quarters are always a little bit slower.
Greg overall for the coming fiscal year.
For the fiscal year, we would anticipate that were probably going to have growth from.
5% to 7% Libyan a rough number.
We are.
Cannot make.
Downturns to impact loan growth in the latter part of the year.
But our crystal ball is that clear.
Makes sense.
And then on the funding side with the decline in deposits loan to deposit ratio is up to 97%. It sounds like this quarter can also be.
Software deposit growth like what the <unk>.
On funding there are there any promotional plans.
Or would you tap the wholesale market what are you thinking on the funding side.
Yes, we are looking at different CD specials with fed meeting. This week, we'll take a look at our deposit pricing overall, what changes we may need to make their September is typically a tougher quarter for us on the deposit side.
Even with the.
The AG line draws were seeing corresponding balance.
Balanced declines with our farm depositors too.
So yes, we will look at what we may offer in terms of additional specials over and above what we're offering currently and of course wholesale would be the backup though it's not preferred.
Gotcha.
On a rolling that together it seems like they're getting better yields on your loans, but funding costs may rise as well so.
Are you expecting the pace of margin expansion to slow from here.
Yes.
Got it.
Alright that does it.
Most of my questions I'll step back thank you.
Thanks, Andrew.
The next question comes from Kelly Motta from K B W. Kelly. Please go ahead.
Hey, good morning, Thanks, so much for the question.
Good morning, Kelly maybe.
Matt maybe carrying on with the deposit side to be.
You talked about the public funds and that contribution can you just.
Remind me how big of.
That is relative to your total deposit base.
I think overall it.
Maybe its sixth.
Less than 20%, but probably just above 15%.
Got it thank you and thanks for the clarification, Matt and that's a little higher that's a little higher than what we've traditionally ran we've seen some inflows over this year obviously.
Understood. Thank you.
And then.
Maybe turning to fees I think you.
With the gain on sale of loans I think you mentioned in the prepared remarks that was partly SBA not just mortgage.
Can you confirm and maybe.
<unk>.
How how big the SBA gains are worse this quarter, so that we can.
Kind of understanding that those will be lower on a go forward basis.
I think you said there were a little more than 400 correct. Yeah, a little over 400000 is what we had on this quarter.
Got it.
Got it and then.
<unk> expenses I know you had the full quarter's contribution from fortune.
Can you remind us any cost saves.
That have yet to be realized with with the merger as well as maybe talk about any inflationary pressures you're seeing.
On a go forward basis.
In your market.
Cost saves over and above where we were in the June quarter would probably be pretty limited I think just as you kind of normalize operations, sometimes find some additional savings later on.
We had a little more than 100000 that we specifically identified during the quarter, but nothing rural rural.
<unk> major there.
Generally in terms of inflationary impact I think we will continue to see some pressure on the compensation side.
Okay understood.
Understood. Thanks, very much and maybe maybe a last one on credit you guys have always been really good at managing.
Asset quality.
And reserves ticked lower with.
Semi improvement out of M. P. As just wondering given where we are in the cycle and everything.
With this 123 basis points.
<unk> is that is that a bottom or.
Or is there still room for improvement that could.
Hi, guys keep that lower near term.
Well, that's going to depend a lot on what the economic projections that we feed into the seasonal model would show.
My gut feeling would be that youre not going to get improvement from here on the on those projections. So.
I'd be surprised if it would move down any lower than that but thats just.
Thats just me sticking my finger into the wind as far as what the economy is going to do.
We would anticipate our credit profiles remain very consistent to what we have at this point.
It would be I would be shocked if our ratio would fall.
But slower than the 122 now I would tend to say, new maybe creep a little higher as economic activity slows down.
Got it. Thank you so much for the time today I really appreciate it appreciate it thank you.
Absolutely Thanks, Kevin.
Nothing further in the queue at present, but as a reminder, that portfolio, probably one or no telephone keypad now.
Hi, Thanks for the questions I'll hand back to the management team for any closing remarks.
Alright, Thank you Ed and thank you everyone for joining us I appreciate your interest in the company and we'll speak with you again in three months.
Have a good day. Thank you.
This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.
Okay.
Okay.
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Okay.