Southern Missouri Bancorp, Inc.

Hello and welcome to Southern Missouri Bank Corp Earnings Conference Call. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during today's event, please press star followed by one on your telephone. And I'd like to hand over to Matt Funke, President. The floor is yours. Please go ahead.

Thank you, Elliot. Good morning, everyone. This is Matt Funke, President with Southern Missouri. Thanks for joining us. The purpose of this call is to review the information and data presented in our quarterly earnings release, dated Monday, July 24th, 2023, 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 chairman and CEO, and I'll start off with some highlights on our financial results. We're happy to report this morning that the June quarter, the final quarter of our fiscal year, showed a rebound in what we would call headline profitability, as the March quarter had included large non-recurring charges related to our merger with Citizens Bank shares. We still had some smaller charges related to the merger in the June quarter and some other noise on the expense side, but we also had some benefits in non-interest income to mostly offset those. Earnings per common share diluted in the June quarter were $1.37, down 4 cents, or 2.8%, as compared to the same quarter a year ago, and up $1.15, or 523%, from the third quarter of fiscal 23, the linked quarter. The impact from 829,000 pre-tax in merger-related charges this quarter was approximately 6 cents per common share, as compared to approximately a penny in the year-ago period due to similar charges. Our annualized return on average assets was 1.44%, while annualized return on average common equity was 14.1%. Those are compared to 1.62% ROA and 16.2% ROE, respectively, in the same quarter a year ago. And in the March quarter, impacted by the larger merger charges, our ROA was 0.23%, and the ROE was 2.3%. Net interest margin for the fourth quarter was 3.60%, down from the year-ago period of 3.66, and up from 3.48 reported for the third quarter. The company's net interest income for the three-month period into June 30 was $36.2 million, which is up $8.5 million, or 30.5% as compared to the same period a year ago, and up $2.5 million, or 7.3% compared to the third quarter of fiscal 23, the linked quarter. Year over year, that increase was attributable to an increase of about a third in the average balance of our interest earning assets due in large part to the citizens merger and was partially offset by the six basis point decline in margin. Net interest income from loan discount accretion contributed 16 basis points in the current quarter compared to 14 basis points contribution in the third quarter, the linked quarter. And a year ago, similar accretion contributed eight basis points. Also, net interest income resulting from accelerated accretion of deferred origination fees on PPP loans had no impact on the net interest margin in the current quarter or in the March quarter. And last year, in the fourth quarter, 70,000 of income contributed about one basis point to the margin. and I am going to stop reporting on PPP origination fee income from here on out. The last time we have to comment on that one. On what we view, on what we would view as a core basis then, we see margin down about 14 basis points year over year, and up about 10 basis points sequentially. Compared to March, the 91-day quarter in June would add about four basis points to our reported margin. And additionally, the full quarter impact of citizens' merged balance sheet was a benefit for this quarter relative to last. Non-interest income for the three-month period was $9 million, an increase of $2.5 million, or 37.7% compared to a year ago, and a $2.7 million, or 42.5% compared to the linked quarter. What we categorize as other income was up on some annual adjustments to tax credit investments, as well as due to trust and wealth management. We had an improvement in the loan servicing line item on an MSR, Mortgage Servicing Rights Evaluation, adjustment ahead of our year end. This adjustment was a little larger this year compared to last. And generally, in the June quarter, we report some additional interchange income resulting from incentives and reimbursements from our payment processor. Non-interest expense for the three-month period was $25 million, an increase of $7.5 million or 43.5% compared to the same period of the prior year, and down a little more than $2 million or almost 8% compared to the linked quarter. Direct charges totaling $829,000 related to merger and acquisition activity reflected primarily in our data processing line item, compensation benefits, and some other miscellany. In the March quarter, they had totaled $3.3 million, and in the year-ago period, similar charges were just a little more than $100,000. Our provision for credit losses, or PCL, totaled just under $800,000 for the quarter. That was as compared to $240,000 in the same quarter a year ago and more than $10 million in the linked March quarter. As we discussed previously in the March quarter, $7 million was attributable to the citizens merger as we booked an allowance for the loans that were not designated as purchase credit deteriorated and for credit commitments. The components of the PCL in the current June quarter were $2.3 million attributable to outstanding loans and a recovery of $1.5 million attributable to credit commitments. We modestly decreased adjustments related to a couple of classified hotel relationships we've talked about over the last several years as they've been slow to recover from COVID-19. And we modestly increased the ACL due to a small number of individually evaluated loans. Net charge-offs remained at low levels during the quarter, holding the trailing 12-month figure to two basis points, which is consistent with our previous several quarters. The allowance for credit losses, or ACL, at June 30 totaled $47.8 million, which was 1.32% of gross loans and 625% of non-performers, as compared to $45.7 million, which was 1.31% of gross loans and 618% of non-performers at March 31. A year ago, our ACL of $33.2 million represented 1.22% of gross loans and just over 800% of non-performers. On the balance sheet, our gross loan balances increased by almost $139 million during the fourth quarter and by $900 million for all the fiscal 23. That included $447 million net of fair value adjustments from the citizens merger, which was added during the third quarter of the fiscal year. Organic growth was approximately 16.5%. And that was somewhat front loaded early in fiscal 23, although we did have strong growth numbers in this final quarter of the year too. Our June and September quarters are usually soft for our deposit growth. Deposit balances decreased by almost 30 million during the fourth quarter. And they increased by 910 million for all of fiscal 23, which included an 851 million increase net of fair value adjustments attributable to citizens. We have seen depositors migrate to time deposits, and we've supplemented growth we've seen in our branch-generated CDs with wholesale funding this quarter to maintain available liquidity. We'll touch on that in a little more detail later. I'll now hand it over to Greg for some discussion on credit.

Thank you, Matt, and good morning, everyone. Overall, our asset quality remains quite strong with adversely classified loans at $46.3 million or 1.28% of total loans in June 30th, decreasing a little more than a half million dollars or seven basis points during the quarter. Non-performing loans were 7.7 million in June 30th, up slightly in dollar terms, but overall steady at 0.21% of gross loans. In comparison to fiscal year 2022, non-performing loans increased 3.5 million or six basis points, with a significant majority of the increase resulting from our merger with Citizens. Loans past two 30 days or more were 10.7 million or up 3.4 million from March 31st. And at 30 basis points on gross loans, they were up nine basis points compared to the link quarter and up 13 basis points compared to the very low levels of the prior year. Most of our increase, again, is attributed to the citizens' merger. From March 31st, ag real estate loans and other loans to farmers increased by a total of $31.6 million, with ag real estate balances up a little more than $8 million over the quarter, and ag production balances up $23.5 million. Compared to a year ago, combined balances are up $53 million. Split pretty evenly between real estate and operating loans. And then some of the increase was attributable to the citizens acquisition. For an update on our customers, they are in the mid season for the 2023 crop production year. Our lenders are reporting that farmers were able to get off to an earlier than usual planning season. due to a drier spring and most crops were in the ground by the end of May. Dry conditions have continued, but fortunately most of our ag customers have irrigated land to help mitigate drought conditions. However, this does drive expenses higher and requires a lot more manual effort for managing the irrigation. Other expenses are higher for the year as well. due to fuel, fertilizer, and chemicals all being upgrown costs in 2022. Farm suppliers are spending more to maintain inventories and paying more to do so, which has also been passed along to the farmer. We completed underwriting this year conservatively, estimating these impacts and worked with our borrowers to make sure their financial position would support additional lines if needed. We are seeing that in many situations as they are now utilizing these additional lines driven especially by the aforementioned irrigation cost. This year we see a consistent mix of our crop acreage this year with about 30% of our acres in corn, 25% soybeans, 20% rice, 20% cotton, and then roughly 5% in other specialty crops including popcorn, peanuts, sorghum. Rice and soybean crops at this time are looking at least as good or slightly better than last year at this point. With corn, we're monitoring closely the hot temperatures that we've expected, which may have some negative effect on pollination. But at this point, most of our farmers feel good about the corn crop and do expect an early harvest. We're still too early in the year to get a good read on cotton, but at this stage, it's looking comparable to prior years. Pricing compared to our underwriting is as expected on cotton, a little bit lower than expected on corn, and 10% or more above expectations for soybeans and rice. Overall, our borrowers feel pretty good about the current crop year and have been contracting for some of this year's production to lock in prices and gains to offset some of the higher expenses. Speaking to the loan portfolio as a whole, the portfolio grew again 136 million net of ACL during the quarter and increased 437.5 million during the fiscal year, excluding the citizens merger. So organic growth was a little over 16%. This loan growth was led by our west region centered in Springfield, Missouri, and our south region was very close second. Our east region, which includes much of our ag activity, saw increased loan balances during the quarter due to the seasonal pickup in ag, and it's expected for that trend to continue into the fall. Other than ag, we expect growth to slow somewhat in the next quarter for the current quarter that we're in today, with our pipeline for loans to fund in the next 90 days totaling $135 million at June 30th as compared to $164 million at March 31st and $122 million at June 30th, 2022. Speaking of growth in the quarter just ended, much of our growth was primarily in owner-occupied commercial real estate, of $40 million, non-owner-occupied commercial real estate of $50 million, and then the aforementioned growth in ag representing most of the remainder of our growth during the quarter. Our volume of loan originations was approximately $272.5 million in the June quarter, an increase of $61 million from the $212 million originated in the March quarter. In the June quarter a year ago, we originated $308 million. The leading categories, again, for growth this quarter were non-residential real estate and the ag we mentioned earlier. Our non-owner-occupied CRE concentration at the bank level was approximately 327% of regulatory capital at June 30th, down seven basis points compared to March 31st, and as compared to 313% one year ago. Matt, other comments?