Southern Missouri Bancorp, Inc.

Hello, and welcome to the Southern Missouri Bancorp Earnings Conference Call. My name is Alex, and I'll be coordinating the call today. If you'd like to ask a question once the presentation is finished, please press star followed by one on your telephone keypad. I'll now hand it over to your host, Stefan Cikatovich, CFO to begin. Please go ahead.

Thank you, Alex. Good morning, everyone. This is Stefan Cikatovich, CFO with Southern Missouri Bancorp. Thank you for joining us today. The purpose of this call is to review the information and data presented in our quarterly earnings release, dated Monday, October 28, 2024, and to take your questions. We may make certain forward-looking statements during today's call, and we may 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. Matt, We'll lead off our conversation today with some highlights from our most recent quarter.

Thanks, Stephan, and thanks, everyone. This is Matt Funke. Appreciate you joining us today. I'll start off with some highlights on our financial results for the September quarter, the first quarter of our fiscal year. Quarter over quarter, we showed some pressure in profitability as a larger provision for credit losses, an increase in non-interest expense, and lower non-interest income weighed on earnings and profitability. Offsetting some of this pressure was an increase in net interest income, which stemmed from loan growth and further net interest margin expansion. And despite the lower reported earnings, there were several underlying highlights that caused us to view the quarter favorably and to remain optimistic about future periods. The diluted EPS figure for the current quarter was $1.10, down 9 cents from the linked June 2024 quarter, and down 6 cents from the September quarter a year ago. During the quarter, the bank realized one-time costs of $840,000 associated with a performance improvement project reported as legal and professional fees to enhance the bank's operations and revenues. Recognition of this expense during the quarter reduced after-tax net income by $652,000, diluted EPS by $0.06, and ROA by six basis points. At this time, we're still in the early stages of the performance improvement project, but we're looking forward to considering the recommendations in future quarters with the ultimate goal of improving our customer and team member experience and creating greater long-term value for shareholders. Reported non-interest expense was up 3.4% compared to the linked quarter, but excluding those one-time performance review costs, expenses would have been flat quarter over quarter. Net interest margin for the quarter was 337, down from the 344 reported for the year-ago period, but up from 325 for the fourth quarter of fiscal 24, the linked quarter. Net interest income was up 4.5% quarter-over-quarter and about 3.5% year-over-year as we grew average earning asset balances. On the balance sheet, gross loan balances increased by 117 million, or 3%, during this first quarter. and they increased by 267 million or 7.2% over the prior 12 months. Loans anticipated to fund in the next 90 days totaled 168 million at September 30th. Deposit balances increased by 97 million during the first quarter and by 208 million over the prior 12 months. Due to attractive pricing in comparison to local markets, we utilized 89 million in broker CDs in the first quarter. In total, we have $60 million in brokered CDs maturing by the end of the calendar year when we anticipate a seasonal inflow of funds from ag customers and public units. Tangible book value was $38.26, and that reflected an increase of $5.14, or 15.5%, over the prior 12 months. That's attributed to both earnings retention and improvement in the bank's unrealized loss in the investment portfolio from the decrease in market interest rates. Our asset quality remains strong at September 30th with adversely classified loans at about 40.5 million or just over 1% of total loans, a decrease of about 400,000 or four basis points during the quarter. Non-performers, non-performing loans were 8.2 million at September 30th, up a million and a half compared to June 30, and up to 0.21% on gross loans. Roughly 40% of the increase in non-performing loans was due to one loan collateralized by single-family residents. Loans passed due 30 to 89 days were 7 million, up a million three from June, and at 18 basis points on gross loans. This was an increase of three basis points compared to the linked quarter. Total delinquent loans were $13.4 million or 34 basis points, up $4.1 million or 10 basis points from June. This increase is primarily due to an increase on past due loans in construction, loans secured by one to four family residences, and commercial and industrial loans. From June 30th, our ag real estate balances were up about $7 million for the quarter and but flat compared to September 30th a year ago, while our ag production loan balances increased $24 million for the quarter, and they're up $35.5 million year over year. We have seen a general increase in ag production line utilization due to increased input costs. Our farmers are making good progress with their harvest, having completed their corn and rice into soybeans and cotton. Early planting and favorable dry fall weather led to a strong start and quicker harvest. While some have experienced drought, it had minimal impact on irrigated crops, with yields reported as average to above average. Corn yields are strong, especially for irrigated farms, but pricing remains low. We're hopeful that the better yields will mostly offset the low price levels. Rice yields are promising and prices are stable, so we're optimistic about profitability there. Cotton farmers are optimistic despite some weather impacts with contracted prices hovering around 75 cents a pound. Soybean yields vary with prices fluctuating, though farmers who can may benefit from holding some of the crop in storage until 2025. Overall this year, farmers faced higher input costs, but early planting helped with fuel savings and USDA loans on stored grain may assist with cash flow at this late point in the year. We could see less paid down next quarter on credit lines due to crop storage. Equipment values are softening, and lenders are preparing to help any distressed farmers restructure loans, as our farmers generally have strong equity positions to allow them to withstand a tough period. 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. Speaking to the loan portfolio as a whole, the growth mentioned earlier would equate to 12% annualized led by construction, ag production lines, and one to four family loans. We experienced strong growth in our east region where we have much of our ag activity, and our south region was just behind with good growth in those markets too. The September quarter is historically our strongest period of loan growth, and we would expect to see this pace slow next quarter as we start receiving ag line paydowns and a general slowing in new projects in the winter months. That said, we had a great quarter of loan growth, and we feel optimistic about achieving at least the mid-single-digit level of loan growth that we've discussed for the fiscal year. Stephan, I know you have some thoughts on our performance.

Thanks, Matt. Going into a little more detail on the income statement, looking at this quarter's net interest margin of 337, up 12 basis points quarter over quarter, and it included about nine basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits, compared to the linked June quarter of 10 basis points and 16 basis points in the prior year September quarter. Now that we are well past the citizens merger, we would expect to see these lower levels of discount accretion going forward. The net interest margin expanded as the yield on interest-earning assets increased 21 basis points, primarily due to loan yield expansion, while the cost of interest-bearing liabilities increased 11 basis points. In addition, the net interest margin benefited from an increase in the loan-to-deposit ratio. Also, as we annualize it, the NIM benefited by four basis points compared to the linked quarter due to the higher 92-day count in the quarter. With the improvement in the margin and growth of our earning asset base, we expect to see continued net interest income growth through the year. Recall that the December quarter for the company, we historically see a slowdown in loan growth and an increase in deposits that will weigh on the margin. But we still expect positive improvement in net interest income overall. As we have indicated on prior calls, our liability-sensitive balance sheet should benefit from rate cuts, and we expect to see this benefit in net interest income and the NIM next quarter due to the 50 basis point Fed funds cut in September. Looking at the drivers of near-term impacts, we have about 23% of our deposits are close to $950 million tied to the 91-day Treasury compared to loans of close to $500 million index to adjust within the month, mostly tied to prime. Although our balance sheet has changed a little for better quantification, looking at the last interest rate cutting cycle in 2019, our deposit beta was about 39% compared to loan beta of about 23%. With the increase in index deposits since then, I would expect a slightly higher deposit beta this cycle. Looking at non-interest income, we're up 22.6% compared to the year-ago period, but down 7.6% compared to the linked quarter. The decrease in fee income compared to the linked quarter is primarily due to the seasonal increase we have historically recognized in the fourth quarter for tax credit benefits and additional card network payouts tied to card volume incentives. In fiscal 2025, the fees associated with these items will be more evenly realized through the year. The year-over-year increase was primarily due to an increase in other loan fees, deposit account charges and related fees, and higher gain on sale of SBA loans. Non-interest expense was up 9% as compared to the year-ago period and up 3.4% from the linked quarter. Excluding the $840,000 expense associated with the performance review, operating expenses would have been up 5.4% year-over-year and flat compared to the length quarter. The increase for the year-over-year comparison stems primarily from the increase in compensation benefits due to a trend increase in employee headcount, as well as annual merit increases. The bank has experienced less turnover this year and has also had more success in filling open positions. Our provision for credit losses was $2.2 million in the quarter ended September 30, 2024, as compared to a PCL of $900,000 in both the same period of the prior fiscal year and the linked June quarter. The increase in the provisions quarter was due to an increase in reserves for individually evaluated loans, loan growth, and a slight increase in modeled expected losses. We had a small increase in the provision attributable to off-balance sheet credit exposure due to a modest uptick in our calculated expectations for line utilization. The individually reviewed loans that require additional reserves this quarter are primarily collateralized by two Metro hotels. The allowance for credit loss as of September 30, 2024, totaled $54.4 million, representing 1.37% of gross loans and 663% of non-performing loans. As compared to an ACL of $52.5 million, which represented 1.36% of gross loans and 786% of non-performing loans at June 30, 2024, our fiscal year end. Net charge-offs in the first quarter remained low at one basis point compared to the linked quarter of three basis points. An uptick in our construction lending increased our non-owner CRE concentration as defined by regulatory guidance at the bank level by 2.6 percentage points quarter-over-quarter to 320% of our regulatory capital. A decrease in our multifamily loan portfolio partially offset other CRE growth. On a consolidated basis, our CRE ratio was 307.5% at September 30th. Our intent would be to hold relatively steady on this measure and grow CRE in line with capital, but we expect it may uptick a little bit somewhat over the next few quarters with construction draws. As Matt touched on earlier, total broker deposits increased about $99 million in the first quarter to fund the strong level of loan growth while we lost a larger public unit depositor. In addition, the decrease in rates during the quarter led to more attractive pricing of broker CDs compared to our local markets that did not move as swiftly. Since the FOMC cut rates in September, we have seen local deposit pricing decrease, and though and we expect to see a little bit better results on deposit growth in our local markets since the FOMC rate cuts and local competition has decreased a bit in pricing. To wrap up, we started off the fiscal year 2025 on a good foot with strong loan growth, and with the September rate cuts, we're optimistic about both earnings and profitability for the fiscal year.

Matt, any closing thoughts? Thank you, Stephan. Last week, we held our annual leadership meeting with market leaders from across our footprint and within our administrative functions. It was great to hear from them about their activities, to get feedback on initial results from our efforts to improve our organizational culture, and to visit about the work we're beginning on our performance improvement project. We're really excited about performance improvement, not only because we think it can make us better at quickly and effectively meeting our customers' needs, but also because this project represents a great professional development opportunity for our team. They've embraced the entire process with enthusiasm. We're optimistic that the improving yield curve slope, continued strong business activity in our markets, and credit quality that remains pretty strong across the industry by historical standards, that all of that will provide a good setting for our fiscal 25 results. Finally, we're continuing to see small incremental pickup in M&A conversation, but we'd still say that everything remains preliminary for us. We do think it's reasonable to look for more interest from potential sellers as regional bank valuations have improved pretty significantly so far this calendar year.

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, thanks. Good morning, everybody. Good morning, Matt. Good morning. I want to ask you about just local competition there in your footprint. Start on the deposit side. And Stephan, you made a comment a few minutes ago about just deposits and seeing some of the competition move their pricing down. Just in general, looking for some commentary about how much the competition is lowering pricing and how well you've been able to successfully lower some of your more promotional rates. Thanks.

Yeah, Matt. So I guess prior to rate cuts, when treasury yield curve started to decrease in the midpoint and longer end, we were able to lower our rates and sort of our local markets were not as swift. But after the FOMC cuts, we were seeing them move them down. So our rates became a little bit more competitive in line with them. But we've been able to drop them significantly. in line with sort of where treasuries have gone over time.

Okay, I appreciate that. And then what about on the other side, on the loan pricing side? Any notable data points there as far as kind of competitive pressures?

I would say that we were... We were probably on the high end of our asking rates for loans two to three months ago. We're seeing the market come back to us a little bit right now with the uptick on the longer end of the Treasury curve. I've heard some commentary from some of our lenders that we're doing a better job being competitive with the rate sheet, even though we haven't really adjusted it here recently. But really, with our pretty strong demand, where we're at on loan to deposit ratio and everything. There's not a lot of reason for us to try to be a whole lot more aggressive on the loan rate side than what we are right now.

Okay. Thanks for that, Matt. And then I guess on the margin and the NII commentary, just want to make sure I understand kind of the guidance here. It sounds like you expect continued NII growth, but seasonally in the December quarter end, it sounds like that margin is could move sideways or down just from a liquidity build that we typically see in the quarter. But outside of that, it sounds like with lower rates, you've got some nice tailwinds there to continue to grow the margin in the NII maybe over the next year or so.

Is that reasonable? The trajectory should continue that way. I'm hopeful that sideways at worst in the December quarter would be what we see. But, yeah, long-term, we're pretty optimistic there.

Yeah, Matt, just for a frame of reference, our deposit uptick in the December quarter has sort of been in the low to lower end of the mid-single digit sort of growth quarter over quarter. So looking at a normalized period, that's sort of what we could expect.

Okay. That's helpful. And just lastly for me, you mentioned in the prepared commentary and in the earnings release, the performance improvement project. It sounds like it's still early to go into too much detail, but maybe just big picture. We'd love to kind of maybe appreciate kind of what your expectations are and what parts of the bank that the consultants are reviewing. And then from a financial standpoint, what are maybe the goals of kind of the review?

Yeah, they're really reviewing just about everything but internal audits, compliance and some risk management, um, but, but everything we do to serve customers is, is on the table for them. Um, our goal really in the short term is to pay for itself, you know, over the course of a year or so, uh, longer term, we, we would hope to do a little better than that, uh, on a run rate. But I think what they're talking about would be low single digit percentage of our non-interest expense spend. Is that about right, Stefan? Um, Now, whether we'll get there, whether we'll decide everything is feasible as far as the recommendations, we'll see that it's not just a financial play. We really want to use this to improve our operations, be better positioned for the next merger opportunity, be able to implement effectively, and just keep the team members satisfied about the tools we're giving them to serve the customer.

Okay. Well, thanks for taking my questions, and I'll step back.

Thank you, Matt. Thank you. Our next question comes from Kelly Motta of KPW. Your line is now open. Please go ahead.

Hey, good morning. Thanks for the question. Good morning, Kelly. Following up on the margin, it looks like loan yields popped pretty significantly. Just – and I appreciate all the moving color that you guys gave in the prepared remarks. That's really helpful as we look to forecast ahead. I was wondering, though, if this September quarter included any, you know, outside loan fees or non-accrual interest recoveries in there just as we're thinking about – you know, normalizing the loan yields ahead, or if that, what you reported is a pretty good run rate number for the last quarter.

There might have been a couple of basis points of impact from non-accrual, but it wasn't significant enough that we thought we should comment on it in the release. Really, if you look at what we've seen quarter over quarter with the loan yields repricing over the last, I don't know, five, six quarters, If anything, it's been trending down just a little bit, the sequential improvement. We'd expect that trend to continue since we've topped out and even now as we've begun to turn around a little bit. But hopefully by maintaining the pricing expectations we have, we'll continue to see some loan yield improvement quarter over quarter in December.

Yeah, Kelly, looking at some of our fixed rate loans that are repricing around the corner, This next quarter, there really isn't a material upside to yields when they repriced, but sort of looking in the March quarter, there may be a little benefit there, but nothing too big. I wouldn't expect a material increase from here on that front.

Got it. You preemptively answered my follow-up question. Thanks, Stephan. Maybe a last one from me. I didn't hear any commentary on M&A on the prepared or marked. Your currency has improved here. And I'm just wondering if there's any update on you guys have been a pretty skillful acquirer in your past couple of deals. Wondering if you could provide any color on the landscape here.

Yeah, still nothing beyond preliminary conversations. We do think it's likely it'll pick up a little bit. We've seen a few more conversations taking place, but nothing that's imminent.

Understood. Thank you. I'll step back. Nice quarter.

Thank you, Kelly. Thank you. As a reminder, if you'd like to ask a question, you can press Start, followed by 1 on your telephone keypad. Our next question comes from Andrew Leash of Piper Sandler. Your line is now open. Please go ahead.

Thanks. Morning, guys. Just want to ask, you mentioned 60 million of brokered that mature here this quarter, I guess. Do you have the runoff rate of what those are and what you think those are going to be replaced with? And then if you have any, the numbers handy, what matures in the next quarter or two?

Yeah, as far as those yields, they came around with a four handle on them that we sort of did a structure. Four plus. Yeah, they range. So we bridge some to the shorter end, the longer end, but these are coming off the probably higher fours. And then after that... That $60 million is the biggest bucket that we have sort of coming up here in the near term. I think after that, it looks like maybe in the 7- to 12-month bucket, we have another $18 million, $20 million overall.

Andrew, we took it to mature when it does because we're expecting seasonal inflows to allow us to repay that without going back to brokerage.

Yeah, Matt, and it looks like that rate, that average rate on that, what's coming due this quarter is 464. Gotcha. All right.

Very helpful. Then just on fee income, it sounds like some of the items will be more smoothed out throughout this year, but is this $7 million, $7.2 million number a decent place to begin with here going into the second quarter?

Yeah, I think that $7 million that we sort of gave as a guideline is still a good run rate to use from here.

Great, great. Thanks. You've covered all my other questions. I'll step back. Thanks.

Thanks, Andrew. 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 further questions, so I'll hand back to Matt Funke for any further remarks.

Thanks, Alex, and thanks, everyone, for joining us. We appreciate your interest in the company, and we'll speak again in January. Have a good day.

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