Southern Missouri Bancorp, Inc.

Hello, and welcome to the Southern Missouri Bancorp Earnings Conference Call. My name is Alex. I'll be coordinating the call today. If you'd like to ask a question once the presentation has ended, please press star, followed by one on your telephone keypad. I'm going to hand it over to your 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, January 27, 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 Greg Steffen, our Chairman and CEO and by Matt Funke, President and Chief Administrative Officer. Matt will lead off our conversation today with some highlights from our most recent quarter.

Thanks, Stephan, and good morning, everyone. This is Matt Funke. Thanks for joining us. I'll start off with some highlights on our financial results for the December quarter, which is the second quarter of our fiscal year. Quarter over quarter, earnings and profitability improved due to a larger earning asset base driving an increase in net interest income in combination with a lower provision for credit losses and a decrease in non-interest expense. With the earnings and profitability improvement we have seen in the first half of our fiscal year, we feel we have good momentum and see positive trends going into the second half. We earned $1.30 diluted in the December quarter. That's up 20 cents from the linked September quarter, and it's up 23 cents from the December 2023 quarter. Net interest margin for the quarter was 3.36% as compared to 3.25% recorded for the year-ago period and was relatively flat compared to the first quarter of fiscal 25 when it was 3.37%. Net interest income was up 4% quarter over quarter and about 10.5% year over year. In the second quarter of our fiscal year, we generally receive inflows of seasonal deposits from our agricultural customers and public unit depositors. which can drive some net interest margin compression with those funds held in higher cash balances. However, this year, with FOMC rate cuts of 100 basis points driving down short-term rates and reducing the cost of our variable rate deposits, which have grown over recent periods, we were able to expand our net interest spread by four basis points in the quarter due to decreased funding costs, and that helped hold the net interest margin relatively steady quarter over quarter. On the balance sheet, gross loan balances increased by just over 60 million during the second quarter compared to a year ago at December 31st, 2023, gross balances are up 295 million or just under 8%. Deposit balances increased by about 170 million in the second quarter and increased by 225 million or about 5.5% compared to December 31st of the prior year. Strong growth in deposits this quarter was a result of non-maturity deposit accounts from seasonal deposit inflows and core CD growth from well received special rates offered during the quarter. Due to strong deposit growth, cash equivalents grew 70 million quarter over quarter and our available for sale securities portfolio grew about 48 million or 11% as we took advantage of a better spread environment to purchase bonds and add on balance sheet liquidity. Tangible book value per share was $38.91 and increased by $4.26 or 12% during the last 12 months. I'll now hand it over to Greg for some discussion on credit.

Thanks, Matt, and good morning, everyone. Overall, our asset quality remains strong at December 31st with adversely classified loans totaling $40 million or 98 basis points of total loans a decrease of about 849,000 or four basis points compared to the link quarter. Non-performing loan balances increased slightly by 103,000 to 8 million at 1231, but in line is a percentage of total loans at 21 basis points, which is up five basis points from the prior year end. Non-performing asset balances dropped to 22 basis points down from 26 basis points last quarter due to the sale of several parcels of other real estate owned. Loans past due 30 to 89 days totaled $7 million, which was stable compared to September 30, and at a low 17 basis points on gross loans. This is a decrease of one basis point compared to the linked quarter and down two basis points compared to a year ago. Total delinquent loans were $13 million, and also flat from September. Net charge-offs remain benign at two basis points annualized. Overall, although credit quality has remained strong due to the recent period of sustained higher interest rates, we do expect problem loans and net charge-offs could increase modestly, but we expect them to remain manageable and below industry averages. As compared to the prior end, As compared to the prior quarter end of September 30th, agricultural real estate balances were little changed, and they were up $2 million compared to December 31st a year ago. Ag production and equipment loan balances were down $12 million quarter over quarter following our normal seasonal pattern. But paydowns have been relatively limited so far, and balances are up $42 million year over year. In calendar year 2024, our agricultural customers demonstrated resilience despite facing several weather-related challenges, including spring rains and required replanting, followed by a hot, dry summer. But thanks to robust irrigation infrastructure, most farmers reported yields that exceeded expectations. However, commodity prices declined throughout the year, pressuring profitability particularly for cotton, soybeans, and corn, which have experienced limited price recoveries more recently. Looking ahead to calendar 2025, we expect shifts in crop acreage as farmers respond to weaker market conditions and higher input costs. Corn acreage may decline in favor of soybeans and rice, and cotton acreage is likely to be reduced unless prices improve. Many farmers have carried over 2024 crops in hopes of higher pricing this spring, which has delayed paydowns on agricultural lines that should result in stronger repayments in the March quarter. While working capitals are lower across much of our farm customer base, we are proactively working to address any potential shortfalls by leveraging FSA guarantee programs or restructuring loans. And we expect some customers will be supported through government price support programs. Despite these challenges, our discipline lending practices, stress testing of farm cash flows, and deep customer relationships should ensure satisfactory performance on these credits. Looking at the loan portfolio as a whole, gross loans grew 60 million or 6.1% annualized during the quarter. We're in the slower part of our fiscal year for loan growth due to the seasonal factors including ag. The bank experienced some well-rounded growth stemming from construction, C&I, 104 family residential real estate, and multifamily. Loan growth was led by our south region as well as our new regions based out of St. Louis and Kansas City. As our new lenders, that we have added over the last year have started to add to production totals. Our pipeline for loans to fund in the next 90 days totaled 173 million at quarter end as compared to 168 million at September 30th and 141 million one year ago. Although we are currently in a slower growth period with our normal winter seasonality due to the strong first half of loan growth the building pipeline, we feel optimistic about achieving at least mid-single-digit loan growth for the fiscal year. Now, Stephan, would you provide some additional details on our financial performance?

Thanks, Greg. Matt hit some of the key financial items already, but I'll note a few additional details. Looking at this quarter's net interest margin of $336, it included about nine basis points of fair value discount accretion on acquired loan portfolios, and premium amortization on assumed deposits, which was static compared to the linked September quarter, but down from the prior year's December quarter addition of 14 basis points. Although this can vary based on prepayment activity, we would expect this to trend lower by about a basis point a quarter. The primary contributor to the one basis point compression of the net interest margin compared to the linked quarter was the increase in lower yielding assets as the average balance of the investment portfolio and interest earning cash equivalents increased by almost 80 million quarter over quarter. This was mostly offset by an 11 basis point decrease in our cost of interest bearing liabilities to 3.33%. Looking into the March quarter through January, we have continued to see increases in seasonal deposits, which have further elevated our cash equivalent balances which are primarily being held at the Federal Reserve. This, in addition to seasonally slower quarter for loan growth, could compress the net interest margin. But we would expect the net interest spread, which is the difference between our earning asset yield and cost of interest bearing liabilities, to improve slightly as loans reprice higher at renewal and CDs continue to reprice down. In addition, the reduced day count in the March quarter will have a small negative impact on the quarterly net interest income. Net interest income was down 4.3% compared to the linked quarter due to reduced gain on sale of loans, primarily SBA. A decrease in interchange income as of September quarter's results included receipt of additional card network fees based on annual volume incentives, and as we saw, a decrease in interchange per transaction. and lower other loan fees. Non-interest expense was down 3.7% quarter over quarter, primarily due to lower compensation and legal professional fees. The lower compensation expense in the December quarter is primarily due to the timing of accruals. Legal and professional expense have decreased due to the one-time payment in the September quarter associated with the performance improvement initiative of 840,000. These decreases were partially offset by an increase in other non-interest expense due to expenses associated with SBA loans and costs for employee travel and training. We would expect to see a quarterly increase in the compensation expense run rate in the March quarter as annual merit increases and cost of living adjustments take effect, for which we awarded mid-single-digit percentage increase, including the cost of benefits. Our provision for credit losses was $932,000 in the quarter as compared to $2.2 million in the linked quarter. The September quarter provision was elevated to support strong loan growth and an increase in credit reserves for individually reviewed loans. Our allowance for credit losses at December 31st, 2024 was $55 million or 1.36% of gross loans and 659% of non-performing loans as compared to an ACL of $54 million or 1.37% of gross loans and 663% of non-performing loans at September 30, 2024, the linked quarter. The current period PCL was the result of $501,000 provision attributable to the ACL for loan balances outstanding and $431,000 provision attributable to the allowance for off-balance sheet credit exposures. Our assessment of the economic outlook was little changed. Our non-owner-occupied CRE concentration at the bank level was approximately 317% of Tier 1 capital and allowance for credit losses at December 31, 2024, down about 3 percentage points as compared to September 30, due to growth in our Tier 1 capital outpacing our non-owner-occupied CRE. On a consolidated basis, our CRE ratio was 306% at December 31st. Our intent would be to hold relatively steady on this measure and grow our CRE in line with capital, but we expect it may pick up somewhat in the next few quarters with construction draws. The effective tax rate was 23.7% in the quarter as compared to 21.3% in the linked quarter and 20.6% in the same quarter of the prior fiscal year. The effective tax rate for the second quarter of fiscal 2025 was elevated due to an adjustment of tax accruals of $380,000 attributable to completed merger activity. We would expect the effective tax rate to return to our normal range in the second half of the fiscal year. To conclude, the first half of the fiscal year 2025 has been a strong one, characterized by robust loan growth, and improved profitability. With a healthy loan pipeline and favorable underlying trends, we are optimistic about the remainder of the year. Greg, any closing thoughts?

Thanks, Stephan. We're currently in the final stages of receiving recommendations from the Performance Improvement Initiative that we launched last quarter. This initiative is not only a pivotal step in enhancing our ability to meet our customer needs quickly and effectively, but it's also an opportunity to improve our longer run efficiency. And it also serves as a valuable professional development tool for our team. I'm immensely proud of how our employees and team members have embraced the process with energy and dedication. And some of these enhancements are already being implemented across our organization. The timeframe for full adoption of the recommendations that we intend to move forward with will run over several years, but we're really optimistic about longer-term results. Alongside the contributions from our incredible team, we have been actively expanding our talent pool, particularly in our newer markets in Kansas City and St. Louis. These efforts are already yielding positive results. More recently, we welcomed a new director of wealth management and trust services, and we're excited to see her take on trust and brokerage services as we move to a higher and improved level. We are also optimistic about the remainder of fiscal 25 as the improving yield curve slope and strong business activity in our markets create a favorable environment for earnings growth. Lastly, we deserve small but encouraging signs of increased M&A conversations. While these remain in preliminary stages, we believe the improvement in bank valuations will drive more interest from potential sellers in the intermediate future.

Stefan? Thanks, Greg. At this time, Alex, we're ready to take questions from our participants. So if you would, please remind the callers 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 of Stevens. Your line is now open. Please go ahead. Hey, guys. Good morning.

Good morning, Matt.

Thanks for taking the question. Just want to ask kind of a more of a broad question first on your question operating markets. You operate in some rural markets and maybe on the edge of some more larger metro markets. I'm just curious about what you're seeing on deposit competition in the recent weeks and months. Any differences you're seeing in those various types of markets within your footprint?

I don't know that I could point to a specific difference between rural and metro right now. It's kind of a mixed bag on the competition front overall. I think it's pretty clear there's been a decreased fight for funds in the last six months compared to where we were towards the end of 23, or I guess maybe for most of 23. But we still see some outliers up there with rates that are in the very high fours. It's kind of puzzling to us, but we do see it in some one-off situations, and it does drive some activity.

In a variety of markets, we have some banking brethren that have higher loan-to-deposit ratios that do seem to drive deposit pricing in different markets, but I wouldn't say it would be consistent from rural versus metro.

Okay. Okay. Appreciate that. And then I guess on the liquidity front, it sounds like you feel good about the liquidity you're bringing in and you were opportunistic and bought some securities during the December quarter end. Any more color on just that decision to buy securities and then just more color on what you purchased in terms of durations and yields?

Yeah, thanks, Matt, for the question. So, yeah, we took a bit of a, I guess, we took what the market gave us. We had some higher market rates, so we took, opportunistically purchased about $50 million in CDs and paired that with some broker deposits. Net, we didn't see any real growth in broker deposits.

CDs, we didn't buy CDs.

We took CDs for funding, but on the purchase side, pass-throughs.

We funded the purchases with brokered CDs, but it was a mix about 50-50 of available for sale, variable and fixed rate, mostly CMOs and mortgage-backed securities.

Okay. That's helpful. And then just lastly, I guess on the expense side, nice performance on the just cost controls just more broadly in this past quarter. Any more color on just what we should expect on expenses over the next few quarters?

Nothing real significant. We do have kind of our seasonal compensation adjustments Stefan mentioned on the prepared remarks. That'll hit in March and then kind of grow into it over the remainder of the year. We've been doing pretty well bringing down some of our data connectivity costs. That's been a tailwind for us. Occupancy, there shouldn't be anything really new going on there for a while. We've got a new branch coming on, but that'll be just over time. Nothing really to note there, Matt.

Okay. Okay, guys. Thanks. I'll have Buck on the queue.

Thank you.

Thank you. Our next question comes from Andrew Leash of Piper Sandler. Your line is now open. Please go ahead.

Hey, guys. Good morning. Good morning, Andrew. I just want to ask about the cadence of the loan growth here. It seems like maybe you have some elevated agriculture payoffs coming this quarter. but the pipeline looks good. Do you think that you'd see, could balances possibly decline here this quarter and then accelerate to end the fiscal year?

I would anticipate that we would have stable balances to slightly higher balances. I could see us doing roughly half the growth that we did this last quarter.

Got it. All right. That makes sense. But then looking into, call it, your last fiscal quarter, which is usually one of your strongest quarters, do you think some of the growth might be pulled forward? Because it seems like high single digits is certainly doable this year, at least to beat the 6.5% or so from last year, just given where you are right now. So do you think that maybe the mid-single digits could be surpassed?

I think it's definitely a possibility. The growth of the, in the June quarter will be in part predicated by agricultural planning conditions and when do the farmers plant their crop to where, you know, where is part of that growth going to occur? Will some of it be leaning towards in the June quarter or will part of it move later? But it's impossible in no weather conditions at this point for that. But if everything tracks, we don't feel like it definitely could be mid to higher single digits.

Got it. All right. Very helpful. And then looking at the margins past this quarter or the current quarter that we're in, maybe they're recognizing we could see some pressure. Is the bigger factor right now this liquidity? It seems like you have some good opportunities on the funding side, and as that liquidity kind of right-sizes to the margin step higher, is that a good way to think about it?

Yes, sir. That's a great way to look at it, Andrew. So it's a little bit of a balancing act for NII there, depending on the outflows of some of these seasonal deposits from the public unit and the ag clients. So basically, I wouldn't expect a whole lot of net interest income growth in the quarter. But if the average balances hang around longer, you would see a little bit more pressure on the NIM. Should give us a little bit more NII than reverse if the balances go out quicker. We would expect to see a little bit of NIM improvement maybe or hang in there a little bit better.

Got it. All right. That's very helpful. Thanks, guys. I'll step back. Thanks, Ian. Thank you.

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

Hi, this is Charlie. I'm for Kelly Motta. Good morning. Good morning, Charlie. Just to dig into the loan growth some more, it was really healthy this quarter supported by growth in construction. Just curious what you're seeing there. Are you seeing more projects being funded and more activity in those markets?

Thanks. Really, we're seeing a continuation of projects that we had underway. So we have a stable pipeline of construction draws that are occurring. Would expect that some of the rate of that growth will slow as the quarter progresses, as existing projects do get completed and paid off. So we've had a little over $100 million in construction land development growth since June 30th. The pace of that will slow down and would anticipate that balances might moderate a little bit in the latter part of our fiscal year.

That's helpful. Thank you. And then given this growth, you said CRE is just over 306% as of December and possibly increasing throughout 2025. Just wondering where your comfort level is with current concentrations and how you expect this concentration to trend longer and shorter term.

Thanks. Our internal limit is a fair amount higher than this. Our internal limit is 375%. We anticipate our balances to basically fluctuate between 300 and 325 is kind of where we target that ratio.

Awesome. That's helpful. Thank you. I'll step back.

Thank you. At this time, we currently have no further questions. So I'll hand back to Stefan for any further remarks.

Appreciate everyone jumping on the call, and have a great afternoon. Thanks, all.

Thanks, everyone. Talk to you next quarter.

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