Southern Missouri Bancorp, Inc.

Hello, and welcome to the Southern Missouri Bancorp Cursed Quarterly Earnings Call. My name is Alex. I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, please press star, followed by one on your pad. And I'll hand it over to our host, Stephan Chikotovich, CFO, to begin. Please go ahead.

Thank you, Alex. Good morning, everyone. This is Stephan Chikotovich, CFO with Southern Missouri Bancorp. Thank you for joining us. The purpose of this call is to review the information and data presented in our quarterly earnings release, dated Monday, July 29th, 2024, 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 Matt Funke, President and Chief Administrative Officer. Greg Stephens, our Chairman and CEO, is attending an investor conference today. Matt will lead off our conversation today with some highlights from our most recent quarter and fiscal year.

Thank you, Stephan. Good morning, everyone. This is Matt Funke. Thank you for joining us. I'll start off with some highlights on our financial results for the June quarter, which is the final quarter of our fiscal year. Quarter over quarter, profitability was up a bit as we saw our net interest margin move higher in combination with an increase in non-interest income and a small decrease in expenses. Despite the challenging higher rate environment and its impact on our cost of deposits, we are pleased to report that we grew tangible book value per share by 13.4% during our fiscal 2024 year. In the June quarter, we earned $1.19 diluted. That's up 20 cents per share from the linked March quarter, but it's down 18 cents from the June 2023 quarter. For full fiscal year 24, we earned $4.42 compared to $3.85 in fiscal 2023. Excluding losses realized on the sale of securities, we would have earned about 11 cents more in fiscal 24, so $4.53, while in 2023, if we had excluded the citizens' merger-related provision for credit losses and non-interest expenses, we would have earned 95 cents more or about $4.80. The decrease from last year's figure on an adjusted basis is primarily due to core expense growth that exceeded our net interest income growth as a result of margin compression. Expense growth also exceeded our non-interest income growth due to reduced loan fee income and NSF revenues. Tangible book value per share was $36.68. It has increased by $4.34, or that 13.4% that we mentioned over the last 12 months. If we were to back out the after-tax impact of both the lost trades we executed and the year-over-year improvement in our AOCI, our tangible book value would have increased by about $4.05, or 11.8%. Due to our strong capital position with the earnings release, we also announced a $0.02 or 9.5% increase in our quarterly dividend, bringing it to $0.23 a share, which is just over 20% of our fiscal year 2024 results as an annualized rate. Head interest margin for the quarter was $3.25% as compared to 3.15% reported for the linked third quarter of fiscal 24. Due to the increase in deposit costs, however, our net interest margin compared to the same quarter a year ago is down by 35 basis points. Net interest income was up 1.7% quarter over quarter as the net interest margin expansion more than offset the 1.3% decrease in average earning assets, but it's down 3.1% year over year primarily due to the decrease in margin. Non-interest income for the quarter was $2.2 million or 39 was up $2.2 million or 39.1% compared to the linked quarter, partially due to losses realized on the sale of securities in the prior quarter and other seasonal fee income realized this quarter. Year over year, fee income was down 13.2% due to reduced loan fee income, including the gain on sale of loans. Non-interest expense was down 0.2% for the current quarter compared to the linked quarter and up just 0.5% compared to the same quarter a year ago. Stephan will give more detail later on some of the moving parts within operating expenses, but big picture, we feel like our team has done a good job at expense control. On the balance sheet, gross loan balances increased by $79 million or 8.3% annualized compared to March 31st. and by $231 million, or 6.4%, compared to June 30 a year ago. Cash equivalent balances as of June 30 decreased by $107 million compared to March 31 due to outflows of seasonal deposits and the strong loan growth. During the quarter, we had some opportunistic stock repurchase activity, utilizing $3.7 million to acquire about 88,000 shares at an average price of just over 41.5, or a little more than 95% of our June 30, 2024 book value. In addition to our improved sequential quarterly earnings, credit quality has remained strong with adversely classified loans at 41 million or 1.06% of total loans, a decrease of about 1.5 million or six basis points during the quarter. Non-performing loans were 6.7 million at June 30, down a little more than 700,000 compared to last quarter, and they totaled 0.17% of gross loans. By comparison, at June 30, 23, Non-performing loans were 7.7 million and 21 basis points on total loans. Loans passed due 30 to 89 days were 6.1 million, up a little more than 600,000 from March, and 16 basis points on gross loans, one basis point higher than March compared to a year ago. Total delinquent loans were 9.2 million or 24 basis points on gross loans, up one basis point compared to March 31st, and down six basis points compared to June 30 a year ago. This quarter, our ag real estate balances totaled $233 million, or just over 6% of total loans, and ag production and equipment loans were $176 million, or a little more than 4.5% of total loans. Compared to the prior quarter end, ag real estate balances were down $1 million, And they were down, ag real estate balances were down about $6 million compared to June 30 a year ago. Our production and equipment loans were up $36 million quarter over quarter due to normal seasonality mostly. And they were also up $38 million year over year. Our lenders report that the majority of our ag borrowers began planting earlier in 2024 due to more favorable weather conditions. Corn and soybeans were planted as early as March and are maturing well. with some corn expected to be harvested in August and soybeans in September. Despite heavy rains in June that required some replanting of cotton and soybeans, the damage was manageable with crop insurance. The wetter weather through June helped to hold down irrigation costs for a while, but as summer progresses, hot, dry conditions are leading to increased fuel costs for irrigation and chemicals for weed control. We are seeing increased loan draws to cover higher costs with some farmers already returning for draws on supplemental lines of credit that were pre-approved when we renewed annual lines ahead of this crop year. The earlier start to this planting season also means that our balances at June 30 this year are a little higher than last and also that lines could be paid down earlier this fall. Although we could see some of our borrowers delay sales of their crop to take advantage of the most advantageous delivery dates for pricing given overall commodity pricing challenges this year. Lower corn prices this spring led to a decrease in corn acreage with farmers hoping for better prices in 25. Rice acreage increased slightly and is in good condition. Cotton is reported to be in average condition with hopes for a good yield if the dry weather continues. Specialty crops like popcorn are in better condition than last year, and early planted soybeans show promise of a higher yield compared to 23. Farm equipment prices remain high, but used equipment prices are falling and real estate values are generally stable. The 24 crop year could be challenging for our farmers due to high production costs and lower commodity prices. Helping to offset this, yields in our area look set to come in quite strong. Our lenders are making their farm crop progress inspections over the next few months, which should give us a reliable projection on estimated yields and a better indicator of the outcome of the 24 crop by early fall. Due to our stringent underwriting, including stressed commodity pricing and assumed higher operating costs, we anticipate that our borrowers will generally be able to navigate this challenging year. Looking at the loan portfolio overall, it was a good, well-rounded quarter for loan growth, stemming from non-owner-occupied commercial real estate loans, residential real estate loans, and drawn construction loan balances. This loan growth was also spread through our footprint with good growth in our south, northwest, and east regions. And for the overall fiscal year, our south, east, and west regions led the way. We're continuing to prioritize growing our credit portfolio with full banking relationships. We're optimistic about keeping the mid-single-digit pace of loan growth we experienced in 24 going into fiscal 25 as we look to increase our market share. Producers that we have brought on are adding to the pipeline. At quarter end, our pipeline for loans to fund in the next 90 days totaled $157 million. as compared to $117 million at March and $135 million one year ago. Our volume of loan originations was approximately $205 million in the June quarter, compared to $241 million in the linked March quarter. And in the June quarter a year ago, our originations totaled $272 million. The leading categories in the current quarter were construction, one-to-four family, CRE, and CNI. Our non-owner CRE concentration at the bank level was approximately 318% of Tier 1 capital and allowance for credit losses at June 30, down from 327% at March 31st and 330% at June 30 a year ago. On a consolidated basis, our non-owner occupied CRE ratio is about 305%. Our intent would be to hold relatively steady on this measure and to grow CRE commensurate with capital. As pointed out in the earnings release, our office portfolio is minimal, with 35 loans totaling $25 million, or 0.65% of total loans. The remainder of our CRE is rather diverse, and our multifamily lending is primarily either in our Midwest footprint or with developers who operate from our footprint. Stephan, would you provide some additional details on the financial numbers?

Thanks, Matt. You hit some of the key financial items already, but I wanted to share a few details. Looking at this quarter's net interest margin of 3.25%, it included about 10 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits compared to the linked March quarter of 11 basis points and 16 basis points in the prior year's June quarter. The net interest margin expanded as the yield on interest-earning assets increased 14 basis points, primarily due to loan yield expansion, while the cost of interest-bearing liabilities increased 8 basis points. As we have indicated on prior calls, we continue to see a net benefit of high-cost CDs raised in calendar 2023 repricing slightly lower, while our fixed-rate loan portfolio yields steadily and modestly increase with renewals. In addition, the margin should benefit from any increase in new loan production at higher interest rates next quarter. With this, we could continue to see some additional margin expansion, but not at the same rate we experienced this quarter. If the FOMC does cut rates this year, we could also see further net interest margin expansion. 100 basis points of cuts to the Fed funds rate is projected to result and low to mid-single digits percentage growth of net interest income over the 12 months following the rate cut, depending on our rate of growth. As Matt mentioned, non-interest income was up 39.1% compared to the linked quarter, and excluding the $807,000 of realized losses from the March quarter's bond sales, it would have increased by 21.5%. but it was down 13.2% year-over-year. The year-over-year comparison was negatively impacted by lower gains on sale of loans and other loan fees this quarter, but also due to NSF policy changes we adopted in July 2023 at the beginning of our fiscal year on how we assess fees for some items resulting in a reduction of fee income. With the completion of this fiscal year, the negative impact from this change will not be a drag on the year-over-year comparison anymore. For the linked quarter, the increase excluding the loss trade was from the recognition of $675,000 from tax credit benefits and other non-interest income, $379,000 from additional card network fees based on annual volume incentives, and $131,000 from the change in fair value of mortgage servicing rights. Going forward, we will be estimating and recognizing the card volume incentives as well as the tax credit benefits more evenly throughout the year. Non-interest expense was up 50 basis points compared to the year-ago quarter and down 20 basis points compared to the linked quarter. We did utilize some one-time credits with a vendor totaling $60,000 in the quarter that we will not benefit from in the quarters to come, and we expect operating costs to continue to increase as the bank grows. I do also want to point out that in the quarter we had reclassifications of some expenses that resulted in about a $200,000 decrease in data processing and a corresponding $100,000 increase in both occupancy and equipment and legal and professional fees. As Matt mentioned, credit remains benign, and net charge-offs were six basis points annualized for the current quarter and five basis points in the trailing 12 months, which is a very solid performance by comparison in historical and industry figures. Our provision for credit losses was $900,000 in the quarter as compared to $795,000 in the same period of the prior year and in line with the linked quarter. Our allowance for credit losses at June 30, 2024, was $52.5 million, or 1.36% of gross loans, and 786% of non-performing loans, as compared to an ACL of $51.3 million, or 1.36% of gross loans, and 693% of non-performing loans at March 31, 2024, the linked quarter. The current period provision for credit loss was the result of 1.8 million provision attributable to the ACL for loan balances outstanding, partially offset by a recovery of 875,000 in provision attributable to the allowance for off-balance sheet credit exposure as construction draws reduced available credit and increased on-balance sheet exposure. Our assessment of the economic outlook has improved but reserves were modestly increased due to qualitative factors and individually evaluated credits. Despite some of the challenges over our fiscal 2024, as the bank navigated this higher interest rate environment, impacting our margin, slowing the overall economy, and resulting in lower loan originations and secondary market fees, we feel optimistic about margin and overall earnings for fiscal 2025. and beyond if we remain in a stable credit environment. With our anticipated earnings and similar loan growth to 2024, we should see our capital level and ratios continue to increase. We will expect to primarily manage our equity levels through the dividend and periodic M&A activity. The current stock prices made repurchase activity a little less attractive as a capital management tool, than it was a few weeks ago, but will remain opportunistic about repurchase activity when anticipated earn-back periods would justify it.

Matt, any closing thoughts? Thank you, Stephan. We have remained focused in the past fiscal year on core deposit retention, expansion in our Kansas City and St. Louis markets, and taking care of our relationships. We've made some additions to our teams in a variety of markets, and we're seeing progress on the business development front. The M&A conversations with potential partners in the first half of the calendar year, they remain somewhat preliminary and medium to longer-term prospects, but we do continue to look to further explore opportunities to achieve scale in target markets. Additionally, we continue to look at other financial service providers we could partner with. We expect the uptick in bank valuations could lead to further discussions with some potential partners. As it's been well over a year since our last merger, we've been focused recently on identifying operational efficiencies and fostering a strong culture so that we're better able to serve our clients, our local communities and shareholders, and position for potential M&A activity in the future.

Thank you, Matt. At this time, Alex, we're ready to take questions from our participants. So if you would, please remind folks how they may queue for questions at this time.

Thank you. As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to remove your question, you may press star followed by two. Our first question for today comes from Matt Olney from Stevens. Your line is now open. Please go ahead.

Hey, great. Good morning, everybody. Morning, Matt. Stefan. Good morning. Stephan, I think you mentioned that CD, their pricing dynamics was favorable this past quarter. And I guess this could be a nice tailwind for you going forward. Any more color on just the overall amount or just the level of CDs maturing the next few months? And what are some of those renewal rates and how those compare to what's coming off? Thanks.

Yeah. The next 12 months, we have around a billion of CDs repricing. And on average, currently, the average renewal rate is about $479. And then on the flip side, we have about 12.5% of our loan book renewing from fixed rate.

12% renewing of the next 12 months. Any color on just the roll-off, roll-on rates there of the loan portfolio?

Yeah, right now they're renewing at about 815, 817 or so. And that 12.5% of the loan book is just our fixed rate that's renewing.

Okay. Okay, thanks for that. And then... on the expense side, Stephan, you mentioned a few moving parts during, during the quarter as you, as you weigh those moving parts against just the natural growth of the bank, where would you put us for forecasting expenses more, more near term?

Um, they would still probably continue to grow in line with the bank's, um, rate. So, um, It could be somewhere in the mid-single digits plus, depending on how much we're growing.

Matt, our normal pattern is with compensation adjustments mostly effective in January. That would be the quarter when we see a little bit of catch-up to our growth rate.

Okay. And then you gave us some good details as far as the rates go. sensitivity on any kind of Fed cut, so appreciate the details there. On the credit front, this allowance ratio, I think it's in the mid-130 range. I know that the CESA model handcuffs you here to a certain degree, but it looks like credit trends remain really, really strong. Just curious if you think there could be an opportunity over the next year or so to to move this lower if there's no rule to change the macro. Just curious, any thoughts there?

I don't want to commit to any kind of decrease in that percentage, but we do feel like we're reasonably conservative on that. So we hope not to have any surprises on the upside with provisioning.

Okay. Okay, I'll step back. Thank you, guys.

Thank you.

Thank you. Our next question is from Andrew Leash of Piper Sandler. The line's now open. Please go ahead.

Morning, guys. Hey, question on the loan growth this quarter. Matt, you mentioned residential was part of it. Was that single-family or multi-family?

I think what we would have described in the call as growth is single-family. And good morning, Andrew. Got it. Okay. Got it.

Then if you look at the pipeline, how is that weighted right now as far as loan types? Anything that's specifically driving it stronger than other areas?

Still a fair amount of construction draw anticipated over the next 90 days. Some commercial real estate. There's probably not a whole lot of additional ag draws within that, but there could be some. Gotcha.

And then if you just kind of look at the next 12 months, do you think that the growth pace might be something similar to what you had in fiscal 24 with weaker growth in the winter quarters and a little bit stronger in the spring and summer?

Yeah, we would anticipate that to continue. If anything, with ag being a little... Above where we were last year, it might even be a little more pronounced. Yeah, so we can see the paydowns on that front.

Yeah, yeah, makes sense. And then with some of the commentary on the fee income side, if we just kind of back out the mortgage servicing gains toward like 7.6 million, but the other things you mentioned might be more spread out throughout the year or so. Do you think fee income could be north of $7 million on a run right here going forward?

Probably not a crazy number. That's manageable.

Okay. Got it. Wonderful. All right, guys. You've answered all my other questions. Thanks so much. Thank you, Andrew.

Thank you. As a reminder, if you'd like to ask a question, that's star followed by one on your telephone keypad. Our next question comes from Kelly Motta from KBW. The line is now open. Please go ahead.

Hey, good morning. Thanks for the question. Maybe carrying on that thought about the fees, it looks like mortgage has been running, jade on sale has been running pretty low. And I think you had mentioned production there had picked up. Just wondering what your outlook is for that line item potentially returning to a more normalized rate of jade on sale.

Good morning, Kelly. Long-term, we would anticipate that to pick back up at some point. What we've seen probably on the residential side that's been a little stronger is our in-house, which would include some owner-occupied, some rental properties that we maintain in portfolio. Really not any indication right now that we're seeing stronger secondary market activity, but hopefully we will at some point see a turnaround as well. folks have to make a move at some point, or we do see a little bit of longer-term rate movement improvement.

Got it. Maybe turning back to the M&A, I appreciate commentary that it's more medium to longer term at this point, but just strategically from a high level, can you remind us the markets that you're interested in, where you'd potentially like to add more density or expand out your footprint to? Thanks.

Who is this?

Hi, speakers. Can you hear us?

Yes, I can. I don't know why I'm on this call. I've got a notice to be in this call. Who is this? What is this call? Thank you.

Thank you for your patience. We have reconnected with our speakers. Kelly, your line is now open. If you could just remind us of your question, please.

Hi, thanks for that. I'm not sure if I got caught up with the last transcript. I was just asking about M&A, if you could remind us about where you're looking to add density to the footprint or potentially expand out.

Hi, Kelly. Yeah, our priorities, we've always talked about kind of a circle from St. Louis over to Kansas City, down through Springfield and southwest Missouri, northwest Arkansas, Little Rock over to Memphis. With entry to St. Louis, that would definitely have some interest to us. We've got a little bit more density already in Kansas City, but we'd love to add there. Northwest Arkansas is an attractive market. We feel the same way about Little Rock.

Got it. That's helpful. Maybe last question for me, just housekeeping with the balance sheet. Looks like average cash is down significantly quarter over quarter. Wondering if this $39 million level is a good run rate for liquidity or in any consideration for

with that and the size of the balance sheet as we consider your mid-single-digit loan growth ahead.

Yeah, total cash and due from should probably range in the $50 million plus range. That's probably more of a lower point.

Got it. Thanks, Stefan. Appreciate that. I'll step back.

Thanks, Kelly.

Thank you. As a final reminder, if you'd like to ask a question, please press Star 1 on your telephone keypad. Okay, at this time, we currently have no registered questions, so I'll hand back to Matt Funke for any further remarks.

Thank you, Alex, and thanks to everyone for participating. Apologize for our technical snafu there. But appreciate your interest in the company. We're looking forward to fiscal 25 and to speaking again with you in three months. Have a good day.

Thank you for joining today's call. You may now disconnect your lines.