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?

Thanks, Greg. Our earnings release did include a more detailed table on deposit trends over the last year. Of course, in March, it showed a jump with the citizens merger, but we did see outflows as compared to December 31st outside of the merger impact. on a monthly basis for total deposits outside of the merger and outside of any brokered funding. We had positive months in January and February, followed by negative months in March and April, and then relatively stable balances in May and June. We were up a little bit for the year outside of the merger, but down just a little for the year if you exclude brokered funding. Given this rate environment, we're pleased to see our non-interest-bearing balances are behaving pretty well. Our interest-bearing transaction accounts have moved down, and we see consumers and businesses alike holding lower average balances than they did a year ago. We don't have hard stats on it, but tax payment outflows this year in both April and June seem to maybe to catch up after a few years of stimulus. We do have a lot of customer migration to time deposits within our portfolios. Public units have been the most notable outflows. Some of that is seasonal. Some of it is cyclical. We had some public units that were holding excess funds. They've invested some of those with deposit brokers or in short-term securities. And others who were holding some grant funds over the last few years have deployed some of those balances. And unfortunately, we did lose a couple of relationships over the first half of the year as well. We have picked up even more relationships in number terms recently, but the total balance picked up will probably be about a wash as far as those old relationships versus several more new ones. But those new relationships generally hadn't moved their balances by June 30th. So while September is always a tougher quarter for us on public unit balances just due to seasonality, some of these new inflows may help offset some of those seasonal drawdowns. Any closing thoughts, Greg?

Yes. Just an update on the Citizens Bank shares. We're now six months past our merger and five months past the system's conversion. We continue to remain focused on integration, expansion of service, and deposits for those markets and elsewhere. We're not currently actively pursuing additional merger opportunities and would expect that, other than a very unique circumstance, we'll stay on the sidelines for a little bit longer. We have basically achieved most of the cost savings we'd anticipated in the merger. And from here forward, there could actually be a slight pickup in compensation as we look to recruit community bankers in some of the new markets that we've entered. We're looking forward to achieving the same success we've achieved in banking rural and middle market communities, as well as in the Kansas City market area.

Thanks, Greg. Elliot, at this time, we're ready to take questions from participants. So, if you would please remind them how they can queue for questions, we'll be ready for those.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask a question, please ensure your device is unmuted locally. Our first question comes from Andrew Lausch with Piper Sandler. Your line is open. Hey, good morning, guys.

Good morning, Andrew. I just wanted to focus on the margin here. Surprising to see the increase. Nice to see there. But is the benefit for the full quarter benefit from the Citizens Deal already played itself out? And do you think just with what you're seeing on funding costs, that's going to result in the margin turning down from here?

Yeah, there wouldn't be any additional benefits as far as the timing of the merger going forward. You know, their balance sheet was set up a little better than ours for rising rates, so we'll have some continued benefit from the fact that the merger has happened, as the Fed maybe raises rates tomorrow or further from there. But on an ongoing basis, yeah, we would be looking to the deposit costs as the big driver in any changes from here.

Got it. All right. And then there are a few one-time items that ran through fee income that you mentioned. I guess what should be the right run rate on this line on non-interest income going forward, backing up some of the seasonal or one-time items that may have affected your fourth quarter results?

Yeah, so while we don't want to provide any forward guidance, the number that we reported here would be probably a little heavy than what's sustainable. We tried to lay those out in the release as far as what those impacts are. I expect it would trend down from here a little bit over the near term.

Yeah, because like interchange was up quite a bit, and then so was the other loan fees. So, did it go through and trend back down too? where they were before this quarter, or is there some benefit from citizens that might flow through there?

There would be some benefit from citizens. Their trust in wealth management was an add for us. I think that interchange income benefit was north of $300,000. We had the tax credits. I think we're $700,000. Some of the mortgage servicing rights, that was 300,000 plus this year up from last year. Loan fees were a little heavy this quarter compared to our normal run rate.

Gotcha. All right. I will step back. Thanks for taking the questions. Absolutely.

As a reminder, if you'd like to ask any further questions, please press star 1 on your telephone keypad now. We now turn to Kelly Motto with KBW. Your line is open.

Hey, good morning, guys. Thanks for the questions, and congrats on a really strong quarter. Thank you, Kelly. I'm wondering if the loan growth just finished a year really strong and was really strong through the fourth quarter. I'm just wondering if you're starting to see higher rates impact borrower demand in any maybe potential markets. pullback you might be having in terms of tightening up underwriting in this environment as we think about the growth rate ahead?

We have definitely tightened our underwriting criteria some. And, you know, we are – loans are much harder to get today than what they were six months ago, three months ago. know in part due to liquidity and then just concerns about the future we're not looking at near as many loan opportunities for people that we have not banked before we're limiting more activity to customers we have a relationship with and then just overall we're taking a tougher look at credit, you know, underwriting requirements, more equity down payments than what we've done before. We do have a fair construction pipeline that is still working through the process that we anticipate a lot of those loans will be funding over the next three to six months. While we'll be having less, you know, new originations, we'll have more draw activity. And then we also are anticipating a little bit slower prepayment activity on our existing book than what we had before. So when we're looking forward, I would anticipate that we'll have more front-end loaded growth for this current fiscal year, and then growth will taper off as the year goes on.

Great. That's super helpful. Got it. And then with margin, margin definitely surprised the upside this quarter and rebounded nicely. At this higher level of profitability, I did see you maintained your dividend this month, but just wondering any high-level thoughts on capital return and how you're viewing capital. I know in your commentary you mentioned the M&A might be slowing, but wondering if you have any updated thoughts on as well as buybacks, especially for what you recently issued in the citizens' deal.

I didn't quite catch the end of that, Kelly, but just speaking to the maintaining of the dividend, we spent a lot of time talking about that with our board. Just decided that in the current environment, it was best to, you know, maintain that and be a little more conservative. We do have an approved share repurchase program out there. Should we see balance sheet growth slow a lot, capital ratios pick up too much, we could always deploy that. But we just want to maintain a strong balance sheet and be a little bit cautious in this current environment.

Got it. Appreciate that.

We like having higher capital ratios at the moment.

Understood. last question from me you really benefited from that higher level of liquidity from citizens and you brought your loan to deposit ratio up and cash levels are down are you comfortable with this level of cash and any more room on the loan to deposit side especially with you know deposits being more under pressure at least across the industry.

Well, overall, we would like to have more deposits. We just have to be mindful of what the costs of the deposits are versus wholesale funding. Yeah. But, you know, overall, I mean, our loan to deposit ratio is reaching higher levels than, you know, where... where we would like to be in this environment, but I think that, you know, we're likely to, you know, continue to maintain levels at this level or maybe even grow slightly over the, you know, near term.

Gotcha. Okay, I'll step back. Thank you so much for the additional color.

Thanks, Kelly. Thank you. This concludes our Q&A. I'm going to hand back to Matt Funke, President, for closing remarks.

Thank you again, Elliot, and thank you everyone for joining us. We appreciate interest and pleased to report on the quarter, and we'll talk to you again in three months.

Thank you all. Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.