Hello everyone, and welcome to the Southern Missouri Bancorp Quarterly Earnings Call. My name is Victoria and I will be coordinating your call today. I will now pass over to your host, CFO, Matt Funke to begin. Matt, please go ahead.

Thank you, Victoria. Good morning, everyone. This is Matt Funke, 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 24th, 2022, 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. Greg will lead off our conversation today with commentary on our current operations, lending activity and credit quality measures.

Thank you, Matt and good morning everyone. This is Greg Steffens and thank you for joining us today. Since our last call in most of the United States, our market areas has seen a resurgence in COVID. Reported cases and hospitalizations moves steadily higher in November and through most of December before spiking right after the holidays in our market areas. We're seeing many more team members reporting infection or exposure, and it has been problematic in terms of keeping staff on the job or lobbies open for walk-in business. But we appreciate all of our team members who are at times working remotely or with limited staff to continue meeting our customer needs. We continue to see very few restrictions on business activity in our primary markets, and we feel like the light is close to the end of the tunnel. We continue to feel very good about our current credit profile and borrower performance. We continue to closely monitor and work with two hotel industry relationships totaling just under $24 million with borrowers whose locations or business models were particularly impacted by the pandemic. We're hopeful that this recent wave of COVID recedes quickly and there seems to be some reason for optimism for that. We're hopeful that as we move into the later parts of the year, these properties occupancy rates will move that closer to historical levels. PPP forgiveness slowed in the December quarter with a little more than half of the remaining balances forgiven since September 30th. We have 11.5 million still outstanding at 12-31, which is comprised of just 33 loans. We've now received forgiveness or repayment of 99% of our PPP loans from rounds 1 and 2 by loan count, and 94% in dollar terms. We're hopeful to get most of those remaining…

Thanks, Greg. We earned $1.35 diluted in the December quarter. That's the second quarter of our fiscal year. That figure is down $0.08 from the linked September quarter and it's up $0.03 from the $1.32 diluted that we earned in the December of 2020 quarter. In the year-ago period, we had a charge to earnings for provision for credit losses as compared to no charge in the current period and as compared to a modest negative provision in the linked September quarter. Our net interest margin in the December quarter was 3.77, which included about 6 basis points of contribution from fair value discount accretion on acquired loan portfolios, or $381,000 in dollar terms. Also as forgiveness of PPP loans continued, accelerated accretion of deferred origination fees on those loans added another $890,000 to interest income, which was 13 basis points of contribution to the margin. In the year-ago period, our margin was 3.92% of which 9 basis points resulted from fair value discount accretion of $516,000. And PPP forgiveness caused us to accelerate accretion of $968,000 and deferred origination fees which contributed 16 basis points to the margin. On what we see as a core basis then, our margin was down 9 basis points comparing the December 2021 quarter to the December 2020 quarter, we see our core loan yields as being down 23 basis points, while what we view as our core cost of deposits is down 26, and our total core cost of funds down 28. Higher average cash balances drove the decline in the margin, reducing our total interest earning asset yield which dropped by 35 basis points outside of accretion or accelerated recognition of PPP fees. In the linked September quarter, we had reported a margin of 4.01% which included a similar benefit from fair…

Thanks, Matt. Our loan growth in the first half of the fiscal year was very strong, but we wouldn't expect it to repeat that during the second half. We saw a strong growth this quarter in our commercial real estate multi-family, residential and construction loan portfolios. Our commercial balances actually increased modestly, despite $15 million in PPP loan forgiveness. Activity in our West region centered in Springfield, Missouri led the way in the current quarter and over the last 12 months. Our outlook for the March quarter would be more in line with historical trends. Our pipeline for loans to fund in 90 days was $158 million at 12-31, down from $181 million at September 30th, the well above the $85 million we reported at this time last year. While we saw AG paydowns begin in the December quarter, we'll see some further reductions in the March quarter and of course, as we've mentioned, a modest amount of PPP repayment yet to come. For the current quarter, we anticipate modest loan growth in total followed by what is typically a better June quarter for growth. Our non-owner occupied CRE concentration was approximately 288% of regulatory capital at 12-31, up 17 basis points compared to September 30th, and 263% one year ago. During the quarter, our loan growth in all relevant categories outstripped our consolidated capital growth. Our volume per loan originations was about $335 million in the December quarter, up from the September quarter and up from the first half of the calendar year when our totals were elevated due to second round PPP activity. In the same quarter a year ago, we originated $229 million by comparison. Our December and March quarters are usually our best for deposit growth and this December quarter was exceptionally strong. We did add…

Thanks, Greg. At this time, Victoria, we're ready to take questions from our participants. So if you would please remind folks how they can queue for questions at this time.

For a fact, thank you, Matt. We'll now open up for our Q&A session. . And our first question comes from Andrew Liesch from Piper Sandler. Please go ahead, your line is open.

Hi. Good morning, everyone.

Good morning, Andrew.

Morning, question on the margin, and seems like it's pretty obvious we're going to be getting a few rate hikes over the next 12 to 24 months. How should we expect the margin to react say from the first rate hike and then subsequent rate hikes assuming those ramp-up in some funds?

Our modeling, we generally expect that our deposit pricing has been somewhat at the floor here recently with the overnight rates as low as they are. So some benefit as rates move up, of course, the cash position is helpful in that regard. We do have loans that are at floors as well, so that will offset some of what we see on the deposit side. Got a little bit of benefit from the fact that our time deposits are lower as a percentage of our total funding but we may see some shift back into those as well as the rate curve steepens. We feel reasonably confident we should do well in that first 100 basis points. If the rate increases continue beyond there, we would probably see some margin pressure.

Got it. It sounds like you think you'll be able to keep your deposit pay. That's pretty low for the first handful -- the first few rate hikes, does that seem fair?

I think that's right. That's what we're hoping for.

Got it. Got it. Good. Greg, obviously loan growth year in the first half, your fiscal year, well above what your guidance was. What's driving that? Is it just more calling efforts, it's more demand from customers, is it market share gains, is it actual business activity? What's been driving that and why do you think that's going to slowdown here in the next 6 months?

We had several customers of some larger size that went back into the market again. One of the big things that has led to increased growth over the first six months was we really had a drop in prepayment activity and we've had some team members that joined that have helped really contribute and increased calling efforts given cash balances that we had and was picking up. We just had a lot of things all work together to contribute to a really strong first 6 months. And we do -- we will have a really good quarter this quarter for production, but we do anticipate higher rates of repayment this quarter than what we've had with both with our ag portfolio and some of our commercial portfolio. Then overall, we're definitely exceeding our loan growth estimates of what we had at the beginning of our fiscal year and we're definitely going to exceed our budgeted results for the year.

Certainly. Cool. Thank you for taking the questions, I'll step back. Very helpful.

Thanks Andrew.

Thank you Andrew for your question. . And our next question comes from Kelly Motta from KBW. Your line is open.

Hi. Good morning

Good morning, Kelly.

I just want to go into the question. I wanted to ask about expenses. We're hearing from a lot of banks across the country about upward pressure on expenses, just inflationary pressure as well as increased tax spends. Can you maybe articulate what you're seeing if there's any inflationary pressures higher than what you've typically seen as well as any plans for investment over the next 12 months?

The second part, any plans for investment?

Second, Tech investment for the next 12 months,

Well, on the first part of the question, we're definitely seeing wage pressure. We probably really began seeing it late in 2019. We pulled some levers trying to address that over the last couple of years. And we'll continue to see some increase as we move into calendar 2022. Probably a little bit more of an increase this year than what we've had to recognize over the first couple. But now that's definitely the case in our markets. Tech investment, that's -- I wouldn't say it's anything new to us, but it's obviously an even more important priority as we look at how to accomplish more with fewer head count wherever possible.

Great. And then I just saw that your excess cash looking at your average balance sheet, built quite a bit this quarter. Just any thoughts on what a normalized level of cash looks like for you guys and what's the reasonable pace in order to get there, either via deployment into loans or securities, just trying to get a better sense for the size of the balance sheet.

Greg likes that number to be as low as possible, Kelly. With the size of our balance sheet now, long-term normal, we would like to see it well below $100 million. How to get there from where we're at. We still think at some point we'll see some deposit outflows over the course of the year, we do expect to have continued loan growth. And as we see opportunities in the yield curve, we would look more at deployment into the investment portfolio. The limitation there as we've always been relatively limited in what we had in our balance sheet in total, in the investment portfolio. Really moving the needle there is pretty tough, but those 3 things would be our goal.

We would do anticipate picking up as Andrew was hinting at some benefit as rates do go up with the Fed raising rates. What we expect in March, that we would pick up some more cashes are going to be hurting us next quarter as much as it has this quarter. But cash balances are going to remain above targeted levels for the foreseeable future at this point.

Got it. Thanks.

Thanks, Kelly.

Perfect thank you Kelly for your question. And at this point, there are no further questions and I would like to pass back over to Matt (ph) for any final remarks.

Okay. Thank you again, Victoria. Thank you, everyone for joining us. We appreciate your interest as always, and we'll speak with you again in three months. Have a good day.

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