Southern Missouri Bancorp, Inc.

Good day and welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I'd now like to turn the conference over to Matt Funke, Chief Financial Officer. Please go ahead, sir.

Thank you, Rocco. 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 in our quarterly earnings release dated Monday, July 26, 2021, and to take your questions. 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. So thank you to all for joining us. Greg's going to lead off our conversation today with some commentary on our current operations, our lending activity, and credit quality measures. Greg?

Thank you, Matt, and good afternoon, everyone. Again, I'm Greg Steffens, and I thank you for joining us. I'm going to start off with just a brief COVID update. Since our last call, we've seen most of our market areas reporting a fairly significant increase in COVID transmissions, and we understand from our public health authorities that this is largely attributed to what they are referring to as the Delta variant. To date, we are not seeing renewed business activity restrictions in our primary markets, but unfortunately, we've seen an uptick in cases within our team members and just our general communities. And we have had to move some of our locations to drive-through only service for short periods of time. Moving on to credit, we remain quite positive about our credit portfolio and borrower performance. At June 30th, we saw a further reduction in the balance of modifications under the CARES Act. All of those loans that have been modified are now requiring at least interest-only payments and nearly all of the dollars on loans to borrowers are in the hotel industry. We continue to analyze this portfolio closely, and through June we have continued to see steady improvement for most of our borrowers and underlying properties. We're hopeful that they won't be impacted significantly by the current increase in COVID cases in our area, but it does remain a risk that we are monitoring. Moving to PPP, our forgiveness has picked up in the latter parts of the June quarter. The release notes that we received 37.5 million in PPP forgiveness during the June quarter, down a little bit from 42 million in the March quarter. At June 30th, we had 63 million in PPP loans remaining outstanding, of which 13 million were from the first round and $50 million were from the second round of PPP loans. We're currently expecting from $25 to $30 million in additional forgiveness during the September quarter, which would probably hold the accelerated accretion of origination fees at a similar level to those of the June quarter. Based on the average fee for the second round loans being a higher percentage and a little larger than those in the first round. We hope to have most of the first round of PPP forgiveness completed by the end of August. We noted in the release that our non-performing loans moved lower again during the June quarter. Adversely classified loans moved lower as well, dropping to $18.1 million. And our past due loans were at a level we're very proud of at totaling only $3.8 million, which is 18 basis points of our total loans outstanding. Some of the modifications we've made for borrowers for COVID and the CARES Act have not been able to return yet to their originally scheduled payments and are probably reducing what our true level of past due loans would be in a normal environment. And so we have generally been including those loans subject to relief on our watch list or special mention credits. And those combined categories are at $48 million at June 30th, which is down from $64.5 million at the end of March and $56.7 million a year ago. Now moving on to our ag portfolio and our update, agricultural production and other loans to farmers were up nearly $15 million in the quarter and are up $4.4 million for the fiscal year, while ag real estate balances were down $1.5 million for the quarter and $4.8 million for the fiscal year. Our lenders have reported that our row crop borrowers have 95% of their anticipated crops planted. A wet spring delayed some planting of acres intended for corn, some of which was diverted into soybeans. But that's worked out pretty well with the recent price increases of soybeans. Some of our farmers on ground in the eastern part of our markets near the Mississippi River experienced further heavy rainfall after their crops were planted and had to replant or did not plant some of their acreage. Otherwise, most of our farmers look to be well positioned as well or better than compared to 2020. As the weather has dried out recently, we'll see some impacts on our farmers for additional irrigation costs and maintenance and the impact of higher fuel costs. Our team estimates that corn will utilize 30% of the acres we've financed. Soybeans will be at 25%. Rice and corn allotments will be at roughly 20%, with a mixture of other crops making up the remainder. In comparison to the prices used for our 2021 loan underwriting, corn prices are 40% to 50% higher now, soybeans have ranged from 35% to 50% higher, rice is about 7% higher, and cotton 25% to 30% higher. Our lenders report that our borrowers have contracted for sale a substantial portion of their 21 crop, running a little bit ahead of where they were last year at this time. as they have been able to lock in pricing at strong prices. And the overall outlook for this year remains quite favorable. Currently, the most significant downside risk for our ag borrowers to their 22 is production is overall cost. Matt, would you provide an update on our financial results?