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00:08 Hello and welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. My name is Lauren, and I will be coordinating your call today. 0:26 I will now hand you over to host, Matt Funke to begin. Matt, please go ahead..
00:32 Thank you, Lauren. Good morning, everyone. This is Matt Funke, CFO with Southern Missouri. Thank you for joining us. The purpose of our call this morning is to review the information and data presented in our quarterly earnings release dated Monday, October twenty five, twenty twenty one and to take your questions.
00:48 We may make certain forward-looking statements during today's call, and 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 and our credit quality measures..
01:10 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 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 and our operations have been much less impacted since our prior call. 01:42 We again remain positive about our credit profile and borrower performance. We continue to see limited number of relationships operating under modified terms under the CARES Act.
We have four loans continuing under interest only modifications and are to borrowers in the hotel industry and totaled just under twenty four million dollars. We continue to analyze this portfolio closely and we have continued to see improvement by most of these customers. 02:13 PPP forgiveness continued in the September quarter.
The release notes that we received almost thirty seven million dollars in PPP forgiveness during the September quarter, down slightly from the prior two months -- two quarters and twenty six million dollars in PPP loans remain outstanding.
Accelerated fee recognition picked up some in the September quarter as the average fee was higher on second round loans that made up a larger percentage of those loans forgiven. As of September thirty, eighty seven percent of our PPP loans originated in both rounds one and two had been forgiven.
02:56 Our non-performing loans were slightly higher this quarter, up about three hundred thousand, but offsetting that was our adversely classified loans were slightly lower down from the prior quarter by one million dollars to seventeen point one million dollars, a year ago, they were twenty five million dollars.
Past due loans were higher, but only modestly, so they totaled four point eight million dollars, which represented twenty one basis points on a loan portfolio, which is up from seventeen basis points in the prior quarter, a year ago, they totaled six point nine million dollars or thirty two basis points.
03:37 Any loans still requiring relief under the CARES Act are included as special mention credits and along with watch credits. These combined categories were at thirty nine point three million dollars at September thirty down from forty eight point four million dollars at June thirty and fifty point nine million dollars a year ago.
03:59 For agricultural update, ag production and other loans to farmers were up almost twenty two million dollars in the quarter and up five million dollars compared to this same period of last year.
While ag real estate balances were up about five million dollars over the quarter and three million dollars compared to the September thirty of last year. Our agricultural borrowers are in the middle of harvest season and lenders node average to higher yields in their fall progress performance.
04:30 Our corn harvest is mostly complete and yielding one hundred and seventy five to two hundred bushel an acre for non-irrigated ground, and in the two fifty bushels an acre per irrigated ground. Pricing has being at five point five dollars to six dollars a bushel.
Rice is mostly complete and yielding in the one hundred and eighty bushel am acre for conventional rice varieties and two twenty for our hybrid varieties. Pricing at this time is from six to six twenty five a bushel.
05:03 The soybean harvest is about halfway complete, yielding forty five to sixty bushel an acre for non-irrigated ground and as high as eighty dollars or eighty bushels an acre for irrigated ground.
Pricings range from twelve dollars to thirteen dollars a bushel and some farmers are actually running into issues with elevators not accepting soybeans until they ship out corn and rice by rail or barge. Some farmers have on farm storage, but others may be slower to complete the harvest that they can't deliver directly to the elevators.
05:40 The cotton harvest is just beginning that we expect results in line with the last several years at twelve hundred pounds an acre on the less productive ground and fourteen hundred pounds an acre on the more productive ground. And pricing is zero point seven eight dollars to zero point eight two dollars a pound.
Pricing remained well above where we completed our underwriting from corn, soybeans and cotton specifically and modestly above underwriting from rice.
06:07 The most significant downside risk for our borrowers that we see at this time is twenty twenty two production costs and higher input costs or supply chain issues may cause some farmers to alter their crop production scheduled from corn to soybeans over the next year.
But we're all even with reduced government payments this year, we expect our farmers to have a more profitable twenty twenty one and twenty twenty where they performed well.
06:41 Matt, would you like to give us an update on our financial results?.
06:45 Okay, Great. We earned a one point four three dollars diluted in the September quarter. September is the first quarter of our fiscal year. And that resulted down zero point one zero dollars from the linked June quarter, but up zero point three four dollars from the one point nine dollars that we earned in the September twenty twenty quarter.
A year ago, 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.
07:17 Our net interest margin in the September quarter was four point zero one percent which is about, which included about six basis points of contribution from fair value discount accretion on acquired loan books or three hundred and seventy six thousand dollars in dollar terms.
Also as forgiveness of PPP loans continued, we accelerated the origination fee accretion on those loans adding another two point two million dollars to interest income which contributed thirty four basis points to the margins.
07:51 In the year ago period, our margin was three point seven three percent of which six basis points resulted from fair value discount creation and has three hundred and thirty nine thousand and PPP loans weren't yet in the forgiveness process at that time.
So, on what we see as a core basis, our margin was down almost seven basis points comparing September twenty one to September of twenty.
We see our core loan yield as declining twenty eight basis points, while our core cost of deposits was down forty seven and our core total cost of funds down a similar forty eight basis points, but higher average cash balances drove the decline in the margin reducing our total interest earning asset yield, which dropped by thirty nine basis points outside of discount accretion or accelerated recognition of PPP origination fees.
08:44 In the linked June quarter, we reported a margin of three seventy four that included a bit more discount accretion than the current quarter, adding seven basis points to margin, but we also saw less contribution than this quarter from accelerated recognition of PPP fees and it had contributed twenty basis points in that quarter.
So on what we would consider of course sequential basis, we see an increase of about fourteen basis points and we would note that about a third of that improvement is due to the current ninety two day quarter as compared to the ninety one day quarter in June.
09:20 Non-interest interest income was down four hundred twenty six thousand dollars 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 one hundred and thirty seven thousand dollars was recorded on the sale of bank properties and compared to the linked quarter deposit service charges were higher while interchange income was lower, and servicing income was lower on the inclusion in June’s results of a positive fair value adjustment to our mortgage servicing rights.
10:00 Non-interest income was up one million dollars compared to the year ago quarter, increases were mostly attributable to compensation, occupancy, data a processing and advertising.
Compared to the linked quarter, non-interest 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.
Our trailing twelve month figure moved lower to two basis points, which is just under zero point five million dollars in dollar terms of net charge offs over the last year.
10:42 Loan growth was a bit slower in the current quarter, but remained at solid annualized pace for a second consecutive quarter and even though we realized loan growth are 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 quite a bit lower at three hundred and five thousand in recovery down from two point six million dollars in the June quarter.
11:09 On the balance sheet, gross loan balances were up forty nine million dollars in the September quarter, getting nuts off to a good start for the new fiscal year, even while PPP balances dropped almost thirty seven million dollars.
Compared to September thirty of twenty, gross loan balances were up ninety six million dollars or four point four percent.
PPP balances were down one hundred and seven million dollars over the same twelve months, so if you adjusted for that, our annualized rate of growth or annual rate of growth for the year would be close to ten percent outside of PPP. 11:43 Investment portfolio grows slowed this quarter, but did remain positive.
The negative provision along with our loan growth moved our allowances of percentage of gross loans down six basis points from the linked quarter to one point four three percent at September thirty, as a percentage of gross loans outside of PPP, it was down nine basis points over the linked quarter to one point four four percent, 12:09 Deposits rebounded in the September quarter with forty one million dollars in growth reversing the June quarters decline.
Our brokerage funding was unchanged while public unit deposits were down more than nine million dollars. Non-maturity balances were up forty nine million dollars in the quarter after a modest decline in the June quarter, but following on strong growth in the December and March quarters.
Outside of broker, there were at two ninety seven million dollars over the last twelve months, which is almost a twenty percent rate of growth. 12:39 Time deposits still moved lower down eight million dollar that this was a notably slower pace than in recent periods.
And over the last twelve months, they're down seventy seven million dollars outside of brokered, which is a twelve percent decline. FHLB borrowings declined eleven million dollars from the prior quarter and are down almost thirty nine million dollars from twelve months earlier.
13:02 Our tangible equity ratio increased by about twenty basis points during the quarter, as repurchased activity remained limited, income remains strong and total asset growth was limited.
Our risk based ratios are relatively stable as we generally redeployed zero risk weighted assets, cash and SBA guaranteed loans into one hundred percent risk weight loans. 13:27 Greg, final comments..
13:29 Thanks, Matt. Overall, we're very pleased with the loan growth totals that you've mentioned, and we feel like we're off to a good start for the new fiscal year. Seasonal lag draws were helpful again this last quarter and we also retained about six million dollars of residential loans that we normally would have sold in the secondary market.
13:49 Single and multi-family residential combined for about forty one million dollars our loan growth. Commercial balances dropped on the PPP forgiveness payments and we also saw construction lines payoff.
Our East region saw some of the largest PPP payments received and outside of that factor all three regions contributed strongly to loan growth led by our South region. 14:17 Our outlook for the December quarter remains quite strong as our pipeline for loans to fund in ninety days was one hundred and eighty one million dollars at September thirty.
Higher than where we stood at June thirty and about fifty percent higher and at the same time last year. With ag paydowns coming, we'll see some seasonal offset for the next several quarters and we should see PPP payments continue to come in over this timeframe.
14:48 We budgeted for between four percent to five percent growth outside of PPP forgiveness in fiscal twenty twenty two, but we currently believe there's a good chance that we will exceed those figures.
Our non-owner CRE concentration was approximately two hundred and seventy two percent of regulatory capital at September thirty, relatively unchanged as compared to June thirty and as compared to two hundred and sixty seven percent one year ago.
15:17 In the current quarter, our loan growth in the relevant categories in total was in line with our consolidated capital growth. Strong growth in multi-family was offset by construction payoffs.
Our volume of loan originations was about two hundred and nineteen million dollars 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 two zero five million dollars that compares.
15:51 We continue to expect some deposit runoff in the near term as depositors utilize some of their additional liquidity that they're sitting on. Traditionally, we do see that September quarter is our weakest for deposit growth in December and March quarters to be much stronger.
So seasonal factors may offset some anticipated runoff over the next several quarters. Time deposit balances showed some signs of stabilization after four quarters or more of 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.
16:46 Finally, we pleased that we recently announced our definitive agreement to partner with Fortune Bank, which is headquartered in Arnold, Missouri, which is in Jefferson County portion of the St. Louis MSA and with the second facility in Oak Hill, 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 to all customary regulatory requirements. 17:30 In Cairo Illinois, we did reach an agreement to acquire the branch location of First National Bank, which 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 if something attractive, comes along and fits our expansion plans.
Matt?.
18:01 Thank you, Greg. And 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..
18:31 Of course. Our first question comes from Andrew Liesch from Piper Sandler. Andrew, your line is now open..
18:38 Thank you. Good morning, everyone.
How are you?.
18:37 Good morning, Andrew..
18:45 Question on the loan pipeline up nicely year-over-year, what do you think driving that, that typically stronger and you might normally see this time of the year?.
18:57 We've had a lot of people that decided to redeploy cash where we were receiving a lot of prepayment activity from some of our customers in our West region.
They’ve become more active at reacquiring properties, again, a lot of the pipeline has been in multi-family, a lot of low income housing tax credit projects that they're buying that they are converting to market rents..
19:30 Okay. Good to hear the loan demand there. And then obviously, some bounding round on the different non-interest income categories from quarter-to-quarter.
How do you see that I mean, if you take out the gain on the sale of the former branches, how do you see that four point four million dollars total playing out? It seems like there's -- maybe service charges might be a little bit higher as it was this quarter, but how do you see interchange in gain on loan sales playing also next two quarters?.
20:05 I think that secondary market activity, we probably or obviously will pass the peak on that. So don't want to overestimate where we may be able to run on that.
I think deposit, service charges, bank charge and 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 the drop off on deposit service charges..
20:39 Got it. Those are my questions I'll step back. Thanks..
20:44 Thank you, Andrew..
20:56 Our next question comes from Kelly Motta from KBW. Kelly, your line is now open..
21:04 Hi. Thanks for the question. My first one has to do with the capital and buybacks. It looks like buybacks slowed a bit this quarter.
Just wondering your approach to deploying the buyback, while the deal is currently pending, I know you have a ton of capital, but just wanted to know kind of thoughts with employing that where valuation is and with the deal is that on the table?.
21:38 With the pending acquisition, giving stock in that we do have to be conscious of when that proxy with solicitation period begin, as we exit from our 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 payback period is on that versus holding onto that capital for some potential future use as well..
22:07 Great. And then maybe if you could add a few comments on the branch acquisition, just we'll motivated that if there's potential saves from changing your location there or just anything to kind of help us out? Thanks..
22:27 On the location, There's two banks in First National and our facility was in need of some significant rehabilitation and they actually approached us about us acquiring their location and they have a bigger location that would more fit a consolidated operation.
And then on top of that, they have close to thirty million dollars in deposits, which was very similar in size to what we have and we felt like that there's some efficiencies that can be gained by combining the two operations into one..
23:12 Great. Thanks for the color, Greg. Maybe just one last one on expenses, they were really well controlled on this quarter.
Can you remind me any seasonality you have with the start of the year and kind of have you think about that progression, clearly done a nice job getting some positive operating leverage with expense control, but just wondering kind of how to -- if you could remind me on the seasonality of expenses would be helpful? Thank you..
23:44 Sure. We do generally reassess employee compensation beginning in January, that along with resetting the clock on payroll taxes, usually does cause us to pick up a bigger percentage of our annual compensation expense build there.
And then like everybody we're dealing with 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 than what we have over previous years..
24:20 Thanks, Matt. Appreciate it..
24:23 You're welcome..
24:37 We now have a follow-up question from Andrew Liesch from Piper Sandler. Andrew, your line is now..
24:45 Thanks guys for taking my follow-up. Just on the core margin, obviously, it’s a nice expansion here.
How do you see that that playing out for the next couple of quarters? What are some of the puts and takes driving that in this large expansion possible?.
25:03 I think that will 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 reprising on the loan book than what we would see on the deposit portfolio.
So, I think we're more optimistic now than we probably for the twelve to eighteen month period. And what we were a couple of months ago, really, I think our number one go on, it would just be maintained..
25:52 Got it. Cool. Thanks for taking the follow-up. Thank you for the call today. I'll step back..
25:59 Thanks, Andrew..
26:04 Okay. We currently have no further questions. I'll now hand back over to the host for any closing remarks..
26:10 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..
26:23 This concludes today's call. Thank you for joining and I hope you have a lovely rest of your day. You may now disconnect your lines..