Southern Missouri Bancorp, Inc.

Good day and welcome to the Southern Missouri Bank Corp 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 any 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 Bank Corp. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, July 26th, 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 Stephens, 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 Stephens, and I thank you for joining us. Gonna 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're 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%, but the 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?

Thanks, Greg. We earned $1.53 diluted in the June quarter. That's the fourth quarter of our fiscal year, and that figure is up 26 cents from the linked March quarter. It's also up 77 cents from the 76 cents diluted that we earned in the June 2020 quarter. The improvement from a year ago is primarily attributable to the swing from a relatively large provision for loan losses in the year ago period to a negative provision in the current period. Additionally, a year ago, we had significant M&A charges. From the March quarter, the biggest change was a larger negative provision and net interest income increased while we saw limited change to the combined effect of discount accretion on acquired loans and our PPP deferred origination fees. Our net interest margin in June was, in the June quarter was 374, which included about seven basis points of contribution from fair value accretion on acquired loans. And that was $470,000 in dollar terms. Also accelerated origination fee accretion on PPP loans as forgiveness continued, added another 1.3 million to interest income, which was 20 basis points of our margin. A year ago in June, our margin was 375, of which six basis points resulted from fair value discount accretion or 361,000. On what we see as a core basis, then our margin was down about 21 basis points comparing the June 21 quarter to the June 20 quarter. We see our core loan yield down 36 basis points and our core cost of deposits down 38. Our overall cost of funds on a core basis is down the same. Higher average cash balances drove the decline in the margin as they reduced our interest earning asset yield, which dropped by 60 basis points outside of discount accretion or accelerated PPP origination fees. In the linked March quarter, we had reported a margin of 368. That included a bit more discount accretion than the current quarter, adding 10 basis points of benefit to the margin, but also a little less contribution from accelerated recognition of PPP origination fees on forgiveness, which contributed 18 basis points. So on what we would consider a core sequential basis, we see an increase of almost seven basis points and almost half of that improvement is due to the current 91 day quarter, current meaning June, as compared to the 90 day quarter in March. Non-interest income was up a half million compared to the June quarter a year ago as loan servicing income improved on an upward mortgage servicing rights valuation adjustment. Bank card interchange income continued to run strong, offsetting a decline in gains on secondary market loan sales. Deposit service charges were up compared to a year ago and little changed compared to the March quarter. Non-interest expenses were down 1.3 million compared to the year ago quarter when we included a 1.1 million charge for M&A expenses. And also a year ago, we had 132,000 in provision for off balance sheet credit exposure, which in the current period is a component of our combined provision for credit losses. The year ago period also included higher charges for foreclosed properties and intangible amortization. Compensation and occupancy have increased year over year compared to the linked quarter non-interest expenses which was up almost 700,000 and included a pickup in compensation, including year end bonus accruals, advertising, which is returning to trend and legal accounting and consulting charges. Net charge-offs in the June quarter were less than a basis point and down from the contained levels that we'd seen in the linked March quarter and in the year ago period, which were four to five basis points on average loans. Our trailing 12-month figure ticked lower to three basis points, which is about $650,000 in dollar terms. Loan growth was stronger in the current quarter, but with our positive credit metrics and building expectations for an economic recovery, our allowance for credit losses estimate indicated a negative provision was appropriate for the quarter, including 2 million in negative provision related to loan balances outstanding and 600,000 related to our off balance sheet credit exposures. On the balance sheet, gross loan balances were up 63 million in the June quarter, accounting for most of the fiscal year's growth, and that came even as PPP balances dropped by more than 37 million. Compared to June of 2020, our gross balances are up 66 million or 3.1%. PPP loans were down 69 million over that same time period. So if you adjusted for that, our annual rate of growth for the year would have been a little above 6% outside PPP. We continued to grow the investment portfolio a little faster than what we'd prefer, utilizing some of our excess cash balances, but we're trying to remain opportunistic about when we put dollars to work, and the recent move lower in investment yields is disappointing. The allowance as a percentage of our gross loans declined by 13 basis points to .49% at June 30, and was down 17 basis points to .53% as a percentage of gross loans excluding our PPP balances. That reflected strong growth outside of our PPP activity as well as the negative provision. Deposits were down by 38 million in the June quarter with most of the runoff in time deposits. Brokered funding was down by 5 million in the quarter, and public unit deposits were down by almost 6 million. Outside of brokered funding, time deposits were down by more than 25 million this quarter, similar to pretty much every quarter during this last fiscal year, and they're off by more than 93 million from our year ago levels, which is a 14% decline. Non-maturity balances are down almost 8 million in the quarter after strong growth in the December and March quarters. Outside of brokered, they're up 258 million for the fiscal year or 17%. Public unit growth is just over 27 million of that non-maturity growth for the fiscal year. FHLB borrowings declined a bit from the prior quarter, and they're down about 12.5 million from a year earlier. Tangible equity to assets grew by about 50 basis points during the quarter as our repurchase activity slowed a little bit, income improved, and total asset growth was limited. Our risk-based ratios would be less impacted. Greg, final comments?

Thanks, Matt. I wanna wrap up talking a little bit about growth. Loan growth finished the year on a strong note in the June quarter. Seasonal lag draws that we had discussed earlier were helpful, as was retention this quarter of about 14 million of residential mortgages that we normally would have sold in the secondary market. Our largest category of growth in the quarter was multifamily, which grew $48 million. And we also saw construction draws that were related to multifamily. Our West region was the largest contributor to our quarterly growth, while the South region was a leader for the fiscal year. Our outlook for the September quarter also remained strong as our pipeline for loans to fund within the next 90 days was 141 million at June 30th, similar to where we were at March 31st, and about 60% higher than at the same time last year. We do expect this to be somewhat seasonal, and we wouldn't look for the pace to continue for the fiscal year 22. We're budgeting for about 4% growth outside of PPP forgiveness. So we are expecting growth to decline in the latter parts of the year. One other factor that we have seen recently is we've seen a drop in prepayment rates, and those drops, we don't know if those will continue to stabilize or where prepayment rates will go from here, but that did contribute to growth over the last quarter. Our non-owner CRE concentrations was approximately 272% of regulatory capital at June 30th as compared to 262% at March 31st and down from 280% one year ago. In the current quarter, our loan growth and relevant categories, especially multifamily, outpaced our consolidated capital growth. Our volume of loan originations was 286 million in the June quarter, which remained elevated as compared to 251 million in the March quarter, but down from 310 million in the June quarter of a year ago, which is when the bulk of our PPP loans were funded. For the fiscal year, we originated 972 million in loans, which is up from 848 million last year. Outside of PPP, those originations would have been 912 million versus 711 million respectively. On the M&A front, we are seeing considerably more opportunities of late and have had more in-depth discussions and have several bids outstanding. We're more optimistic than when we spoke last quarter about our chances of putting something together in the relatively near future. In the June quarter, we completed the repurchase plan originally announced in late 2018 for 450,000 shares and announced a new repurchase plan for 445,000 shares. For the quarter, we repurchased about 54,000 shares at an average price of $42.53, only a minimal number of which were under the newly announced plan. As we're a little more optimistic about M&A currently, we would anticipate possible utilization of our current repurchase plan to be a little less during the current quarter.

Matt? Thanks, Greg. And Rocco, at this time, we're ready to take questions from our participants. So if you would please remind folks how they can queue for questions at this time.

Absolutely, sir. If you'd like to ask a question, please press star the one on your touch-tone phone. If you're using a speaker phone, we do ask you please pick up your hands set before pressing the keys. To withdraw your question, please press star the two. Today's first question comes from Andrew Lysch with Piper Sound Loader. Please go ahead.

Good afternoon, guys. How are you? Good, Andrew. Good

afternoon.

Good. Thanks. I just want to talk about the loan pipeline here, comparable level to last quarter. What's the mix of it? I mean, how much is residential? How much is multifamily? Is that much different from a quarter ago?

It's really pretty similar to where we were last quarter. It continues to have a lot of multifamily in it. The level of residential loans in the portfolio pipeline have dropped some as we anticipate seeing a drop-off in secondary market originations.

So we have pretty different- That's helpful.

Pipeline and we're pretty happy to have it at this point.

Got it, great. And then on the roughly seven basis points of core margin expansion, how should we be looking about that trending from here with the loan growth that you guys had in the quarter? I mean, presumably we could have an improved earning asset mix as we move into your next fiscal year. So how do you think that margin can trend?

Yeah, we're optimistic in the near term. Cash ought to make up a lower percentage of the average earning assets for the next couple of quarters, we're hopeful. And we'll see asset yields continue to come down, but we've got a little bit of room left on the cost of funds too. So we're reasonably optimistic for the next couple quarters.

Great, I will step back. Thanks for taking the question.

Thank you, Andrew. That was great. Our next question today comes from Kelly Matto with KBW. Please go ahead.

Hi, this is Matt Rank stepping in for Kelly Matto. I hope everybody's having a good day.

Thanks, Matt. Doing well,

Matt. Yeah, you don't sound like Kelly. I think that's a good thing probably, but just one question about the provision and the reserve level. Do you guys have a target reserve level? And if it's below where it is now, do you see yourselves just trying to grow into that reserve for releasing more in the future?

Thanks. We always wanna be conservative as we are releasing, but we've got a follow gap to really where the level is now is appropriate based on what the economic conditions were that we modeled through the software at June 30. If we continue to see economic stabilization, we're hopeful that maybe that can trend lower, but no one target in mind there.

Great, thank you. I'll step back.

And ladies and gentlemen, as a brief reminder, if you'd like to ask a question, please press star than one. Our next question comes from David Cowen, a private investor. Please go ahead.

Hey, Greg, I do have a couple of questions, but I just wanna congratulate you on another great quarter, another great year. Congratulate not only to you, but to your entire team. Hey, if you could do me a favor here and maybe talk to me about the preventative measures that Southern Missouri is taking toward hacking against some of these thieves from Russia or wherever. And what can you do to protect the bank against that?

We provide, we have third parties that are continually trying to access our system to test what defenses we have in place. And we have testing done on a quarterly basis. And we're continuing to add updates. We have a variety of security protocols and testing that we provide all of our team members. And we have training on security every quarter as well. And then our regulatory friends come in and they look at security on a regular basis as well. And we feel like we are as well-secured as we can. In addition, we carry a lot of cyber liability coverage.

Okay, good. Also, can you give me an idea about how successful your mobile banking app is? Have customers adopted that significantly?

We are continuing to see more and more adoption all the time. Our quarterly numbers continue to trend higher every quarter on mobile deposits and utilization. The advent of COVID increased a lot of the mobile activity quite a bit, and it's just continued to increase over time. And we would anticipate that to continue to grow. Okay, outstanding. Good job, keep

up the good work.

Thank you. Yeah, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

Okay, well, thank you again, everyone. We appreciate your interest in Southern Missouri and your time today. And we'll talk with you again in three months.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.