Southern Missouri Bancorp, Inc.

Hello and welcome to the Southern Missouri Bancorp quarterly earnings conference call. My name is Lauren and I will 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 over to your host Matt Funke to begin. Matt please go ahead.

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 25th, 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, And Greg will lead off our conversation with commentary on our current operations, our lending activity, and 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 did report a peak in COVID cases from mid to late August and now have 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. 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 are to borrowers in the hotel industry and total just under $24 million. We continue to analyze this portfolio closely, and we have continued to see improvement by most of these customers. PPP 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 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 on second round loans that made up a larger percentage of those loans forgiven. As of September 30th, 87% of our PPP loans originated in both rounds one and two had been forgiven. Our non-performing loans were slightly higher this quarter, up about $300,000, but offsetting that was our adversely classified loans were slightly lower, down from the prior quarter by $1 million to $17.1 million. A year ago they were $25 million. Past due 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 at 39.3 million in September 30th, down from $48.4 million at June 30th and $50.9 million a year ago. For our agricultural update, ag production and other loans to farmers were up almost $22 million in the quarter and up $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 30th of last year. Our agricultural borrowers are in the middle of harvest season, and lenders note average to higher yields in their fall progress reports. Our corn harvest is mostly complete in yielding 175 to 200 bushels an acre for non-irrigated ground and in the 250 bushel an acre for irrigated ground. Pricing has been at $5.50 to $6 a bushel. Rice is mostly complete and yielding in the 180 bushel an acre for conventional rice varieties and 220 for our hybrid varieties. Pricing at this time is from 6 to 6.25 a bushel. The soybean harvest is about halfway complete, yielding 45 to 60 bushels an acre for non-irrigated ground and as high as 80 bushels an acre for irrigated ground. Pricings range from $12 to $13 a bushel, and some farmers are actually running into issues with elevators not accepting soybeans until they ship out corn or rice 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 at 1,200 pounds an acre on the less productive ground and 1,400 pounds an acre on the more productive ground. And pricing is 78 to 82 cents 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 risk for our borrowers that we see at this time is 2022 production costs, And higher input costs or supply chain issues may cause some farmers to alter their crop production schedule from corn to soybeans over the next year. Overall, even with reduced government payments this year, we expect our farmers to have a more profitable 2021 than 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 cents from the length June quarter, but up 34 cents from the $1.09 that we earned in the September 2020 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. Our net interest margin in the September quarter was 4.01%, which included about six basis points of contribution from fair value discount accretion on acquired loan books, or $376,000 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 3.73%, of which six basis points resulted from fair value discount accretion. That was $339,000. 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 21 to September of 20. 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 374. 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 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. Non-interest income was down $426,000 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 $137,000 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. Non-interest income was up $1 million compared to the year-ago quarter. Increases were mostly attributable to compensation, occupancy, data 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 12-month figure moved lower to two basis points, which is just under a half 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 quite a bit lower at 305,000 in 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 20, Gross loan balances are up 96 million or 4.4%. PPP balances were down 107 million over those same 12 months. So if you adjusted for that, our annualized rate of growth or 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 1.43% at September 30th. As a percentage of gross loans outside of PPP, it was down nine basis points over the linked quarter to 1.44%. 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, but following on strong growth in the December and March quarters. Outside of brokered, they're 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 last 12 months, they're down 77 million outside of brokered, which is a 12% decline. FHLB 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 remained strong and total asset growth was limited. Our risk-based ratios are relatively stable as we generally redeployed zero risk-weight assets, cash, and SBA-guaranteed loans into 100% risk-weight loans. Greg, final comment?

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 ag draws were helpful 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 combined for about $41 million of our loan growth. Commercial balances dropped on the PPP forgiveness payments, and we also saw construction lines pay off. 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. Our outlook for the December quarter remains quite strong as our pipeline for loans to fund in 90 days was $181 million in September 30th, higher than where we stood at June 30th and about 50% 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. We budgeted for between 4% to 5% growth outside of PPP forgiveness in fiscal 2022, but we currently believe there's a good chance that we'll 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, our loan growth in 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 runoff in the near term as depositors utilize some of their additional liquidity that they're sitting on. Traditionally, we do see the September quarter as our weakest for deposit growth, and 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 decline. 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 are 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 the second facility in Oakville, which is in the South St. Louis County. We are looking forward to serving Fortune customers and to the growth opportunities afforded 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. In Cabro, Illinois, we did reach an agreement to acquire the branch location of First National Bank, which will provide a modest amount of funding and 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 plan. Matt?

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.

Of course. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question comes from Andrew Leach from Piper Sandler. Andrew, your line is now open.

Thank you. Hey, good morning, everyone. How are you? Good morning, Andrew. A question on the loan pipeline. Up nicely year over year. What do you think is driving that? It's typically stronger than you might normally see this time of year.

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 multifamily, a lot of low-income housing tax credit projects that they're buying that they are converting to market rents.

Good to hear the loan demand there. And then, obviously, some bouncing around 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 $4.4 million total playing out? It seems like maybe service charges might be a little bit higher as it was this quarter, but how do you see interchange and gain on 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 overestimate where we may be able to run on that. I think deposit service charges, bank card interchange income, those are probably sustainable numbers, nothing particularly unusual. As we get into the 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 KBW. Kelly, your line is now open.

Hi, thanks for the question. My first one has to do with capital and buybacks. It looks like buybacks float a bit this quarter. I'm just wondering your approach to employing 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 deals you've got on the tape.

With the pending acquisition, giving stock in that, we do have to be conscious of when that proxy solicitation period begins. 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, just what motivated that, if there's potential saves from that. changing your location there. Just anything to kind of help us out. Thanks.

On the Cairo location, there's two banks in Cairo, us and 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 $30 million 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.

Great. Thanks for the color, Greg. Maybe just one last one on expenses. They were really well controlled this quarter. Can you remind me Um, any, um, seasonality you have, um, with the start of the year and kind of how to think about that progression, um, clearly done a nice job getting some positive operating leverage, um, with expense control, but just wondering on kind of how to, um, if you could remind me on, on the seasonality of, of expenses, that'd be helpful. Thank you.

Sure. We, 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 bill 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.

Thanks, Matt. Appreciate it.

You're 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 Leash from Piper Sandler. Andrew, your line is now open.

Thanks, Kat, for taking the follow-up. Just on the core margin, obviously it's 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 in as far as expansion possible?

I think that'll be driven a lot by cash position. There is some upside there for redeployment. You know, 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 probably for the, you know, 12 to 18 month period than what we were a couple months ago as Really, I think our number one goal on it would just be maintaining.

Got it. Cool. Thanks for the follow-up. Thank you for the call today. I'll step back.

Thanks, Andrew.

Okay. We currently have no further questions, so I'll now hand back over to the host for any closing remarks.

Okay. Thank you, Lauren, and thank you, everyone, for joining us. 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 lovely rest of your day. You may now disconnect your lines.