Good day and welcome to the Southern Missouri Bancorp, Inc. quarterly earnings conference call. [Operator Instructions] Please note that this event is being recorded..

I would now like to turn the conference over to Matt Funke. Please go ahead, sir. .

Thank you, Chuck, and good afternoon, everyone. This is Matt Funke, CFO with Southern Missouri Bancorp. The purpose of this call is to review the information and data we presented in our quarterly earnings release dated Monday, October 26, 2020, 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 Steffens, our President and CEO. And Greg is going to provide a quick update on the bank's operations in the continuing pandemic environment. .

Thank you, Matt, and good afternoon, everyone. Thanks for joining us today, and we're going to provide a brief update on our operations as we continue to deal with COVID-19. We're pleased to report that our communities are continuing to work to get back towards normal. .

Although we are currently seeing increasing virus cases and hospitalizations, we currently have very few restrictions on actual activity in most of our markets. Schools remain open. And we're hoping that the spread is brought under control soon before significant activity restrictions will be required.

While we've had a few situations where some of our team members were affected by the virus and we have needed to temporarily close a facility or move to drive through-only service for a period of time, all of our facilities remain open for business at this time..

We can -- we have focused a good deal of our earnings release on the loan payment deferrals and interest-only modifications that we began to make as early as March, as provided under the CARES Act without TDR designations and with the encouragement of our regulators.

Those loans over the last few months have made substantial progress towards resuming amortizing payments, and we are continuing to see that in October..

We've seen a significant reduction since June 30 levels when we had $380 million in such modifications, and we were below $94 million at September 30, and we expect a substantial majority of that to move back to contractual terms by the end of October.

And most importantly, loans that are in full deferral were down to less than $10 million at September 30, from $141 million at June 30. On PPP, we have funded very few loans since our last call and have submitted a relatively small number of forgiveness applications to the SBA, and they've approved and funded only a handful of those.

Balances are basically flat at $134 million..

Also, I want to touch on credit quality. Our nonperforming loans were little changed and remained at good levels at quarter end, as we saw just a few basis points of increase in past dues and classified loans.

Classified loans were up about $0.5 million at the end of the quarter at $25 million, and past due loans were up by a similar amount at $7 million. We have provided a detailed breakdown of our loan portfolio at the back of our earnings release. I would encourage you to review that..

We remain very pleased with the underlying performance of our loans in our current environment. We continue to work closely with the borrowers in our hotel portfolio, and we did downgrade several loans in the June quarter due to poor occupancy during the pandemic, and some of those loans were in more urban areas and continue to struggle.

Our restaurant and multi-tenant retail portfolios continued to perform better than we could have anticipated at the outset of the pandemic and we remain guardedly optimistic about those loan portfolios. .

Now for agricultural portfolio update. Our borrowers are generally in the harvest season and making good progress.

Agricultural real estate balances were down a little bit over $3 million over the quarter, while ag production loans to our farmers increased by $21 million, which is a little bit stronger than our seasonal draws over the past several years.

Our lenders are reporting average to higher yields on most of our crops, with their fall crop progress reports..

Corn yield reports are averaging from 175 to 210 bushels an acre with some reports up to 250 bushels an acre on better, more productive ground. Rice producers are reporting yields in the 175-bushel range and hybrid varieties are going for up to 200 bushels an acre.

Producers are reporting early soybeans, yielding around 60 bushels an acre and with some longer season varieties ranging from 70 to 80 bushels an acre. Cotton producers are reporting some lower yields in comparison to previous years, coming in around the 1,200 pound an acre range with more productive land coming in at 1,300 to 1,400 pounds an acre..

For a few of our farmers who still farm non-irrigated land, they've reported much higher-than-average yields on their crops such as soybeans and corn compared to what they normally do. Overall, our crop mix ended up being 30% soybeans, 25% corn, 25% cotton, 15% rice and then 5% of specialty crops, which include primarily popcorn and peanuts..

Our rice harvest is approximately 75% complete, with producers expecting to market their price in the $5.25 to $5.40 a bushel range, which, along with improved yields and pricing, should improve their incomes on their crops delivered.

Our cotton farmers are approximately 50% complete with their harvest with producers estimating cotton sales in the $0.60 to $0.62 a pound range, but it's a little early to determine how cotton is going to be [ graded urgent ] this season yet. .

Our corn harvest is 95% complete, with producers reporting sales averaging the $3.75 to $4.15 a bushel range. We're seeing typical harvest season spikes in corn prices at this time that may help some of our people move more bushels to market that aren't fully contracted.

Our soybean farmers are approximately 60% complete with their harvest, with several farmers contracting soybeans earlier in the year in the $9.25 to $9.50 range. Overall, we're seeing seasonal spikes for soybean prices that should allow farmers to sell noncontracted beans in the $10 or more range per bushel..

In comparison to our price issues for 2020 underwriting, corn prices are trending 11% higher, soybeans are trending 12% higher, rice is about even, and cotton is trending about 14% lower.

Overall, with improved pricing on some of our crops, combined with higher-than-anticipated yields, we maintain an optimistic outlook for the majority of our farm customers..

Livestock prices are still trending 10% below our underwriting prices for most of our cattle farmers, and they are continuing to hold cattle, hoping to gain additional weigh-in prices before selling to market.

As we noted in last quarter's call, many of our cattle farmers had to hold their cattle longer this spring than usual with the pandemic and the livestocks being closed. But we did see government payment assistance that helped offset a good portion of this problem. Farmers are optimistic that prices will increase through the fall.

There is considerable demand for locally-grown beef, with families purchasing cattle for slaughter and processing locally to restock their freezers, helping to improve farm-to-table demand that we're seeing improve as a direct result of the pandemic..

We do see lingering instability in the agricultural markets related to the pandemic, but currently expect our farmers will have an average to above average crop for 2020, and most are expecting a better year than when we spoke 3 months ago.

Farmers are also anticipating possible additional assistance and government payments from the USDA later this year or early next, similar to what they received in 2019 from the Market Facilities Program (sic) [ Market Facilitation Program ] that would help offset the increased cost of production we're seeing in agriculture relative to commodity prices.

FSA is now distributing some CFAP 2 payments to area farmers, but it's too early to determine yet how those payments will impact overall income..

Matt, would you go ahead and update us with our financial results?.

Sure. Thanks, Greg. We earned $1.09 diluted in the September quarter. That's the first quarter of our fiscal year, and that's an increase of $0.33 from the linked June quarter and it's up $0.24 from the $0.85 diluted that we earned in the September 2019 quarter.

Provision for loan losses declined somewhat as we had relatively slow loan growth compared to the year ago quarter, and we did not see much change in the economic outlook following our July 1 CECL adoption..

Noninterest income remained strong, and we saw a reduction in noninterest expense from last quarter's elevated levels that included charges from the Central Federal acquisition and expenses and write-downs related to foreclosed property. Noninterest income continued to show significant increases compared to the year ago period.

Gains on secondary market residential loan sales continued to lead the way. The volume of originations is more than 3x the year ago period, and the average gain per loan is a little bit better as well. .

We're also generating more in mortgage servicing income as the dollars under servicing continue to increase sharply, and we generated new mortgage servicing rights with our increase in originations. Compared to a year ago, loans under servicing were up by about 30% over $45 million.

If you follow components of our noninterest income and expense reporting closely over time, you may notice that we've changed how we account for the debit card to interchange expenses, netting those now against interchange income instead of reporting them separately as noninterest expense..

Compared to the year ago period, debit card income is up on an adjusted basis there, a little more than 10%, which is from a 9% increase in transactions and 17% increase in dollar volume. We still have some concern. The outlook here may be a little tougher as consumers respond to the ongoing pandemic and government stimulus presumably fades.

On a similar note, our deposit service charges, including NSF, those are down about 6% year-over-year despite a 12% per item increase in the NSF charge..

Finally, we saw a nonrecurring benefit in our wealth management income as an agreement with broker-dealer to bring services to a new market area produced about $187,000 in onetime income.

Noninterest expense was up 9.3% compared to the same quarter a year ago and down 13% compared to the linked quarter when we had $1.1 million in M&A expenses with no material charges in the current or year ago periods.

In the current quarter, we had $150,000 we would call nonrecurring, which was compensation related to the same wealth management market expansion.

We also recorded a charge for provision for off-balance sheet credit exposure at $226,000 in the current quarter as compared to a recovery of $146,000 in the same quarter a year ago and a charge of $132,000 in the linked quarter..

On an ongoing basis, exclusive of those items, we saw increases this quarter compared to the June quarter in only a couple of categories.

One was occupancy, as we've added a couple of additional facilities; and the other was FDIC assessment premiums, as we had an increased assessment base after the Central Federal acquisition and a lower leverage capital ratio as a result of the PPP loan growth..

Meanwhile, we saw declines in foreclosed property expenses, where we took an unusually large hit in the June quarter. Marketing charges, as we expect the current quarter's expenses, were somewhat lower than intended just due to the timing of some of the marketing departments projects, data processing.

The timing of some ongoing projects there probably also influenced our spend in a way that should not be repeatable either, and compensation and benefits where we'd return to a more regular level outside of the nonrecurring item we noted earlier compared to the June quarter when bonus accruals had inflated the figure somewhat at our fiscal year-end..

Compared to September a year ago, the September quarter a year ago, significant changes on what we see as a core basis are compensation and occupancy, which are both up a little more than 6% on a core basis; data processing, which is running about 20% higher on a core basis; and deposit insurance, which was 0 at this time last year due to the FDIC's onetime credits.

We're up to $200,000 in the current quarter..

Net interest margin in the September quarter was 3.73%, which included about 6 basis points of contribution from fair value discount accretion. A year ago, our margin was 3.81%, and we had about 10 basis points from fair value accretion.

We also had some other benefits from loans returning to accrual status are being resolved that were on nonaccrual status and had some deferred interest income on those that we recognized.

Also in the linked quarter, when we had a margin of 3.75%, we had about 6 basis points of fair value discount accretion and then another 3 basis points attributable to loans returning to accrual status were being resolved..

On a sequential basis, we see about 2 basis points of improvement in our core margin, but that's somewhat due to the 92-day quarter. And if you adjust for the number of days in the June quarter versus the September quarter, on a core basis, day adjusted, we might see ourselves as down 2 basis points.

We're pleased with margin performance to date, but we do expect going forward, it may be hard to match asset repricing with lower cost of funds. Nonperforming balances -- nonperforming loans and asset balances were stable since the prior quarter. NPAs remained at 40 basis points on gross loans -- NPLs remained at 40 basis points on gross loans.

NPAs at 44 basis points on total assets. Both showed improvement compared to a year ago as we reduced problem loans from the Gideon acquisition in November 2018..

Net charge-offs, just $162,000, $841,000 over the last 12 months. That's a trailing 12-month figure of about 4 basis points. A year ago, we were running about 2 basis points. But as far as provisioning in the September quarter, down to $774,000, which is 14 basis points for the quarter.

But again, looking back over the last 12 months, provisioning has been at almost $6 million or 29 basis points. We did see our effective tax rate tick up a little bit to 21.6% as our higher pretax income, combined with a slight decline in tax-advantaged investments..

Over on the balance sheet, gross loan balances up $18 million, but net loans up just $8.5 million because of the CECL adoption. We had about 8.5 -- I'm sorry, $9.5 million increase in our provision, of which almost $9 million was due to the CECL adoption.

Outside of the Central Federal acquisition and PPP loans, we see about a 5.5% core growth rate over the last 12 months. A year ago at this time, outside of M&A, core growth rate was running about 6.5%. So a little bit of a slowdown there. Allowance as a percentage of gross loans at 1.59% at September 30.

That's -- would be 1.69% if you excluded PPP loans from the calculation..

Deposits, we did see move down a little bit in the September quarter after a couple of very strong quarters in March and June. Public unit deposits were back down this quarter by $17 million after they were up last quarter by about $13 million.

Brokered funding was down a couple of million as well, but really what we're seeing in the numbers this quarter, a little bit of a washout of some of the growth we had over the last couple of quarters, specifically in time deposits as the positive preferences seems to be moving towards just sitting on cash in nonmaturity accounts..

Greg, let me hand it back over to you for some strategic items. .

Thanks, Matt. In terms of loan growth, our pace of growth is relatively slow over this last quarter, and that was roughly in line with our expectations.

And with PPP loan forgiveness, with it getting started, we're going to anticipate gross declines that are fairly modest over the next quarter, depending upon the speed at which the SBA approves forgiveness..

At 9/30, our nonowner-occupied CRE concentration was approximately 270% of regulatory capital, which is down from 280% at June 30, and up from 253% 1 year ago. Our volume of loan originations was lower in the September quarter than where we were in June.

The June was artificially inflated by all the PPP lending, but we were up substantially from the same period of the prior year. Our loan pipeline for loans to fund in 90 days was $123 million at September 30, notably higher from where we were at June 30 when it was $87 million, and $102 million compared to a year ago..

Our pipeline remains diverse in nature and similar to prior periods, but it does include a little bit more on secondary market production for loans that will be sold after they are closed.

Even though our pipeline is larger than where it was last quarter, our expectation is for limited growth in the coming quarter due to the PPP forgiveness, expected seasonal pay downs on our ag operating balances and increased loan prepayment activity that we're seeing at present..

In regard to M&A, we continue to not expect many opportunities over the upcoming months. We do believe that ultimately, disruption will lead to some deals. But for the moment, we aren't hearing the phone ring very often.

In an 8-K filing last week and reiterated in our earnings release, we announced that our Board approved a resumption of our stock repurchase plan, originally announced in late 2018. We have around 232,000 shares remaining for repurchase under the plan.

And given our current outlook on the credit portfolio and expectation for limited growth and few M&A opportunities, we believe that repurchasing shares near-term at current levels could represent a relative attractive use of capital. We maintained the quarterly dividend of $0.15 per share for the November quarter as well..

Thanks, Matt. .

Okay. Thanks, Greg. And Chuck, at this time, we'd like to take any questions that our participants may have. If you wouldn't mind reminding them how to queue for questions, and we'll do so. .

[Operator Instructions] And our first question will come from Andrew Liesch with Piper Sandler. .

Greg, in -- I think maybe in just last quarter's conference call, you spoke about a few hotel loans that you're monitoring as maybe having potential weakness. How do those stand right now? Where is occupancy at? Were these some of the credits that were downgraded? Just any sort of update on those few relationships. .

We had 3 hotel relationships that we moved to watch list status. They remain in watch list status. The markets where they're at continue to struggle. They cater primarily to the business community and business travel, and they are struggling. They are currently on repayment status.

We are monitoring how they are performing and we will make any adjustments as necessary, but we're presently negotiating with those customers. .

Okay.

And then beyond maybe these 3 -- the hospitality loans, are there any other areas of the portfolio that are -- that are giving you pause right now? Any other targeted areas of concern?.

We really aren't seeing much. We do have one restaurant customer that is struggling, but they are making interest-only payments, but just their level of -- they're very limited on the amount of occupancy that they can allow in their restaurant, and it's relatively small. Really, the 3 hotels are our primary area of concern. .

Got you. Got it. And then, Matt, just on your expense commentary, it sounds like there are a few line items that might have been a little bit below a natural run rate here in the quarter.

So pretty safe to assume that you're seeing increase in expenses going as we head into this upcoming quarter?.

Yes. We would probably see some of those bounce back to a more normalized level on the items we noted. Nothing huge there. But you probably see a little tick up in the December quarter. And then generally, into the March quarter, we have a little bit of expense build with our new calendar year. .

[Operator Instructions] Our next question will come from Kelly Motta with KBW. .

I wanted to ask about mortgage revenues, Matt. In your prepared comments, I believe you noted that volumes were 3x year-over-year what they had been. I was just wondering with what you're seeing in your markets, if you expect another couple of quarters of outsized mortgage banking revenues. .

Kelly, we're seeing that the pipeline right now for what we have for mortgage production is really running pretty similar to where it was last quarter. We would anticipate after the end of the calendar year that some of those balances would start to wind down a little bit.

But at present, the pipeline is really maintaining the same level where we were before. .

At some point, those refi opportunities will go away. But right now, we're -- it seems like we're taking some market share just with the amount of increase in the loans under servicing. And just one -- Greg mentioned balances, but I think he means originations will wind down as the refi opportunities. Yes. .

Understood.

Do you have how much was refi this quarter?.

And I don't add that in front of me. I think it's about 2/3, is probably refi. .

We've been running about 64% refi and 36% purchase. .

Got it. And then maybe if I could turn to credit. You obviously built your loan loss allowance a lot with CECL adoption. I was just wondering if your assumptions include any potential stimulus down the line, and kind of how we should be thinking about if any further reserve build is needed, if conditions kind of stay here without further deterioration.

.

So within the CECL model we're working from, we're looking primarily at GDP expectations and looking between the FOMC and a couple of outside economists for what their expectations are for GDP going forward, presuming that there -- I think most of those parties are presuming that there is some sort of stimulus in there.

And as that would -- as those hopes would fade, you might see some downgrade in their expectations, but I don't know how to really quantify that. .

This concludes our question-and-answer session. I would like to turn the conference back over to Matt Funke for any closing remarks. Please go ahead, sir. .

Okay. Thanks, Chuck, and thank you, everyone, for participating. We appreciate your interest, and we'll talk again in 3 months. .

Thank you, all. .

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..