Southern Missouri Bancorp, Inc.SMBCNASDAQ
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Operator: Hello everyone, and thank you for joining us today for the Southern Missouri Bancorp Earnings Conference Call. My name is Sammy and I'll be coordinating your call today. [Operator Instructions]. I would now like to hand over to your host, Stefan Chkautovich, Executive Vice President and CFO, to begin. Please go ahead, Stefan.
Stefan Chkautovich: Thank you, Sammy. Good morning, everyone. This is Stefan Chkautovich, CFO of 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 Wednesday, October 22, 2025 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 Chairman and CEO; and Matt Funke, President and Chief Administrative Officer. Matt will lead off our conversation today with some highlights from our most recent quarter.
Matthew Funke: Thanks, Stefan. Good morning, everyone. This is Matt Funke. I'll start off with some highlights on our financial results for the September quarter, which is the first quarter of our fiscal year. Compared to the June linked quarter, we had relatively stable earnings and profitability with solid growth in net interest income, which stemmed from loan growth and further net interest margin expansion and the decline in operating expenses. These improvements were offset by a larger provision for credit losses and a decrease in fee income. The larger provision was attributable to the evolving economic environment, additions to individually renewed loans and loan growth. We feel we have good momentum on pre-provision net revenue to start the year, and we're optimistic about how we'll perform in the new fiscal year. The diluted EPS figure for the current quarter was $1.38, down $0.01 from the linked June '25 quarter but up $0.28 from the September quarter a year ago. During the quarter, we continued working with the consultant to complete the renegotiation of a significant contract. We have recognized some expenses on this renegotiation in the linked quarter. But because this was on a contingency basis and because the renegotiation worked out well for us, we had additional expense to recognize in the current quarter. These totaled $572,000, reducing after-tax net income by $444,000 or $0.04 per fully diluted common share. Between the linked quarter and the current quarter, we have recognized right at $1 million in consulting expenses related to the contract renegotiation. But with the expected increase in revenues, which will flow through bank card interchange income, we estimate a less than 18-month earn back of the expense. Reported noninterest income was down by 9.7% or $707,000 compared to the linked quarter, but was more than offset by lower noninterest expense of $925,000 or a 3.6% decrease quarter-over-quarter. Stefan will give some more color on these drivers in a bit. Net interest margin for the quarter was 3.57%, up from 3.47% and for the fourth quarter of fiscal '25, the linked quarter and from 3.34% in the year ago quarter. Net interest income was up 5.2% quarter-over-quarter due to the NIM expansion and loan growth. As we indicated last quarter, we have updated our quarterly NIM calculation to annualized results for the actual day count, which should reduce volatility in the reported NIM due to differences in quarterly day counts. Under the old methodology, the current quarter's NIM would have been reported at 3.60%, but we're reporting at 3.57% due to the September quarter having 92 days. By contrast, the June quarter is reported at 347 under the new methodology, but under the old methodology was 91 days, it was originally reported at $346 and we've carried this updated annualization method over to all our profitability ratios for the current and historical periods in the earnings release. On the balance sheet, gross loan balances increased by $91 million or 2.2% during this first quarter, which would be 8.8% annualized. Loan balances increased by $225 million or 5.7% over the last 12 months. Growth in the quarter was led by nonowner-occupied CRE, 1-4 family residential, C&I and multifamily 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. Even with solid loan growth for the last 2 quarters, our loan pipeline anticipated to fund in the next 90 days remain strong, totaling about $195 million at September 30. 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 feel optimistic about achieving mid-single-digit loan growth in the fiscal year. Deposit balances were relatively flat compared to the linked quarter, but up $240 million or 5.9% over the last 12 months. Due to good deposit growth over the last year, we've been able to be less aggressive on promotional deposit pricing, and we've called some higher-priced brokered CDs prior to maturity. Looking at our core deposit base, excluding broker, we had an increase of about $14 million this quarter, driven mainly by savings account growth. We have $20 million in additional brokerage CDs maturing by the end of the calendar year and about $18 million in brokered money market deposits expected to move out in October at the beginning of this new quarter. We'd expect to replace that with seasonal inflow of funds from ag customers and public units in the second quarter. Tangible book value was $43.35 per share and increased by $5.9 or 13.3% over the last 12 months. This was mostly attributed to earnings retention, while improvement in the bank's unrealized loss in the investment portfolio from the decrease in market interest rates contributed a little less than $0.20 of that year-over-year improvement. Additionally, in the current quarter, we've repurchased just over 8,000 shares at an average price of just under $55 for a total of $447,000. The average purchase price was 127% of tangible book value at September 30. I'll hand it over now to Greg for some additional discussion.
Greg Steffens: Thank you, Matt, and good morning, everyone. I'm going to start off with credit quality. Overall, problem asset levels have increased slightly since last quarter but remain at modest levels with adversely classified loans at $55 million or 1.3% of total loans, up $5 million or 0.1% since last quarter. Nonperforming loans were $26 million at September 30 and totaled 0.62% of gross loans, an increase of $3 million or 6 basis points compared to last quarter. This was primarily attributed to 1 commercial relationship consisting of 2 loans collateralized by owner-occupied commercial real estate and equipment as well as 3 unrelated loans secured by 1 to 4 family residential properties, all of which were placed on nonaccrual status during the first quarter of our fiscal year. Nonperforming assets were about $27 million and increased about $3.4 million quarter-over-quarter, which most of the increase due to the increase in nonperforming loans. As reported last quarter, we are continuing to work with the borrowers on the 2 specific purpose, nonowner-occupied CRE properties in different states with guarantors and common and originally leased to a single tenant who has since become installed. As of June 30, the balances on those loans totaled $6.2 million, but are now down to $2.8 million at September 30 after charging off the collateral shortfall with the appraisal on the other parcel of CRE this quarter. As we indicated last quarter, we had provisioned for these anticipated charge-offs on the relationship. And during this quarter, they accounted for roughly 75% of our total of $3.7 million in net charge-offs. Another item of note is one of these properties was recently leased at a higher rate than what was assumed in the appraise loans past due 30 to 89 days were about $12 million, up $6 million from June and 30 basis points on gross loans. This is an increase of 15 basis points compared to the linked quarter. Overall, total delinquent loans were $29 million, up $4 million from the June quarter. The increase in the 30- to 89-day past due bucket was due to an increase in past due loans under 60 days, primarily in our owner-occupied CRE and C&I loan segments. In the owner-occupied segment, the largest loan, 30 to 59 days totals $3.6 million. And then C&I, the largest is $2.1 million. These 2 loans are the relationship discussed earlier that went to nonperforming status during the quarter. Despite the increase in problem loans experienced over the last 2 quarters, these issues remain at modest levels, and our asset quality has moved to be more in line with industry averages. In combination with strong underwriting and adequate reserves, we feel comfortable with our ability to work through our problem credits and any potential wider deterioration that could occur as a byproduct from the general economic conditions. So I don't want to give the impression that we're accepting of these trends, and we have been focusing on improving our credit quality. Our agricultural update, from June 30, our ag real estate balances were up about $11 million over the quarter and up $16 million compared to the same quarter a year ago. While production loan balances increased $23 million for the quarter and are up $29 million year-over-year, we have seen a general increase in ag production line utilization due to increased input cost. Our agricultural customers experienced a mixed growing season in 2025. Early planting was possible as a result of favorable weather but heavy rains in several markets delayed progress on crops such as cotton and soybeans. As the summer turned dry, growing conditions improved for early planted crops, though irrigation costs rose adding to an already expensive production year. Harvest has progressed well with most corn and rice acres complete and significant progress on soybeans and cotton. Yields have generally been above to -- have been average to above average on most of our ground, especially on the irrigated ground. The dryer fall has allowed our farmers to begin field work early in preparation for the 2026 crop season. Our overall crop mix for consisted of roughly 30% soybeans, 30% corn, 20% cotton, 15% rice and 5% specialty crops. Commodity prices, however, remained a headwind across most sectors. Lower future pricing for soybeans, corn, rice and cotton, combined with elevated input and interest costs, has pressured producers' margins despite generally strong yields. Many farmers are relying on storage strategies, which could lead to some reduction in what might have normally been paid down in the current quarter on credit lines and USDA programs such as CCC loans to bridge cash flow gaps, make required payments on credit lines. At present, we are hoping for government support payments to help provide needed relief later in the year. Land values are currently stable while equipment values have softened slightly as producers scale back on capital purchases. Our ag lenders are working proactively with borrowers to assess their current positions, plan for restructuring where necessary and utilize FSA and USDA programs to mitigate risk and maintain strong long-term relationships with our farm customers as they plan for '26. Due to our stringent underwriting, including stress commodity pricing and assumed higher operating costs. We anticipate that our borrowers were generally be able to navigate this challenging year and should ensure satisfactory performance of these credits over the near term. In addition, due to prolonged weakness in the agricultural segment, we started to increase reserves for watch list ag borrowers in the March '25 quarter in our calculation for our allowance for credit losses. I'll pass things on to Stefan to add more color on our results.
Stefan Chkautovich: Thanks, Greg. Going into a little more detail on the income statement. Looking at this quarter's net interest margin of 3.57%, that's up 10 basis points quarter-over-quarter and included about 7 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed liabilities. That impact is up compared to the linked June quarter of 5 basis points and down from 9 basis points in the prior year September quarter. As stated in prior quarters, we would expect to see the level of fair value accretion decline over time. The current quarter's bump resulted from a payoff of a relationship that had a larger amount of accretable yield. The net interest margin expanded over the linked quarter as the yield on interest-earning assets increased 8 basis points, primarily due to loan yield expansion, while the cost of interest-bearing liabilities declined 1 basis point. In addition, the net interest margin benefited from an increase in the loan-to-deposit ratio. Although our spread has improved meaningfully over the last 2 years, we still see some room for incremental improvement as over the next 12 months, we have about $550 million of fixed rate loans maturing with an average rate of about 6.5% compared to our origination rates for the month of about 70%. On the deposit side, we have almost 1.2 billion CDs maturing next 12 months with an average rate of $4.10 compared to our average new and renewed CD rate of about $3.90. With the improvement in the margin, growth of our earning asset base and the market outlook for further rate cuts, we expect to see continued net interest income growth through the year. That said, I do want to remind our audience that starting in the December quarter and peaking in the March quarter, we historically see a slowdown in loan growth and an increase in deposits that will weigh on the margin, but we still expect to see positive improvement in net interest income overall. Our average loan-to-deposit ratio for the March 2025 quarter was 94.2% for some perspective. Also with this, our balance sheet becomes more neutral from an interest rate risk perspective in these quarters due to the increase in interest-bearing cash. But overall, through the seasonal cycle, we expect to remain liability sensitive and a net beneficiary of rate cuts over a full year period. Noninterest income was down $707,000 or 9.7% compared to the linked quarter, driven by lower other loan fees and bank card interchange income. The prior quarter included $537,000 of annual card network [indiscernible]. Excluding that item, noninterest income would have been down about 2.5%. Other loan fees declined $723,000, primarily reflecting a refinement in our fee recognition under ASC 310-20 with a greater portion of loan fees now recognized in interest income over the life of loan. In total, for the first quarter of fiscal 2026, about $1.6 million of additional fee income is being deferred, but is more than offset by $1.9 million of deferred expenses, which drove a decline in compensation and benefits. Overall, we saw a decrease of $925,000 or 3.6% in noninterest expense quarter-over-quarter. The net expense that was deferred had a negative impact in interest income of $176,000 or a 1 basis point drag on the net interest margin. In total, these changes had a limited impact of recognizing 55,000 in additional net income in the quarter as we deferred more expenses than fee income, which will be realized through interest income over the life of a loan. With these changes, year-over-year comparisons are not truly comparable, but our first quarter results should serve as a baseline starting point for noninterest income and expenses. The allowance for credit losses at September 30, 2025, totaled $52.1 million, representing 124 gross loans and 200% of nonperforming loans, as compared to an ACL of $51.6 million, which represented $126 million of gross loans and 224% of nonperforming loans at our June 30, 2025 fiscal year-end. Net charge-offs in the first quarter were 36 basis points annualized compared to the linked quarter of 53 basis points. Both quarters experienced elevated net charge-offs, primarily due to the special purpose CRE relationship mentioned previously. The current quarter's charge-off on this relationship was previously reserved for in the prior fiscal year with no additional provision for credit loss attributed to it in the first quarter of fiscal 2026. Our provision for credit loss was $4.5 million in the quarter ended September 30, 2025, as compared to a PCL of $2.2 million in the same period of the prior fiscal year and $2.5 million in the linked June quarter. The increase in the provision this quarter, as Matt mentioned earlier, was due to our outlook on the current macro environment, as well as to provide for individually reserved loans, loan growth and a slightly higher reserve required for pool loans. Due to the charge-offs realized on a special purpose CRE relationship attributable to individually reviewed loans decreased compared to the linked quarter. Our non-owner CRE concentration at the bank level as defined by regulatory guidance decreased by just over 6 percentage points quarter-over-quarter to $2.96 of our regulatory capital. Although our CRE balances grew compared to the linked quarter and was surpassed by greater growth of Tier 1 capital reserves. On a consolidated basis, our CRE ratio was 285% at September 30. To wrap up, despite some carryover cleanup of problem loan relationship from the prior fiscal year, our strong pre-provision earnings led by expanding net interest margin and disciplined expense management have driven improved core profitability and we remain optimistic about sustaining this positive momentum and delivering earnings growth through the remainder of fiscal year 2026. Greg, any closing thoughts?
Greg Steffens: Thanks, Stefan. I would like to highlight that we delivered another strong quarter of earnings, reflecting the strength and consistency of our core operations. While charge-offs and nonperforming loans have remained elevated over the last 2 quarters off of very low levels. Our level of nonperforming loans remains comparable to national averages for banks under $10 million. Our underlying earnings momentum remains solid and that strength has allowed us to prudently reserve for potential problems in the future quarters. We will remain diligent in monitoring and measuring risk, ensuring sound underwriting practices across the portfolio to support strong risk adjusted returns for our shareholders. Also, since last quarter, we've seen a modest uptick in M&A discussions, while market conditions have stabilized somewhat. We remain optimistic about the potential for attractive opportunities and with our solid capital base and proven financial performance, I believe we are well positioned to act when the right partner is ready. Notably, there are approximately 50 banks headquartered in Missouri and 24 in Arkansas with assets between $500 million and $2 billion, along with another meaningful number of others in adjacent markets, providing a broad landscape for potential partnerships. Lastly, with the profitability and earnings improvement over the last 2 years, we have continued to build capital in the absence of M&A activity. We were able to repurchase a modest number of shares in the first quarter of our fiscal year with a reasonable earn-back period. And with the recent market sell-off in bank stock prices, it has created a positive environment for us to potentially be able to repurchase additional shares. Thanks.
Stefan Chkautovich: Thanks, Greg. At this time, Sammy, 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.
Operator: [Operator Instructions]. Our first question comes from Matt Olney from Stephens.
Matt Olney: I want to start on credit. And we saw some migration this quarter that you noted and that, of course, comes after some migration the previous quarter. So when you take a step back on credit, it feels like we're just seeing some broader deterioration. What color would you give us as far as an outlook for provision expense charge-offs from here? Should we just anticipate these metrics could remain a little higher the next few quarters, likely what we saw in the last 2 quarters? Any color would be appreciated.
Greg Steffens: We would be surprised if charge-off activity remained at the level of the last 2 quarters. We would expect that to drop. We have seen rising trends in delinquent loans back to our current delinquency levels are running similar to what they did in 2018, 2019. And so I think we've basically trended back to more of a historical range on delinquencies. Charge-offs are just hard to totally predict. Would expect them to be down from what they were in the last 2 quarters Economically, we're just -- we're not certain what holds in the future. But we definitely hope for better charge-off ratios and would not anticipate based on what we know today, charge-off or provisioning to be as high as it was this quarter.
Matt Olney: Okay. I appreciate that, Greg. And then I guess, shifting over towards the margin, Stefan, some really nice expansion that you noted this quarter. It sounds like there's a tailwind there from the repricing dynamics that you mentioned. Any other color you can provide as far as the bank's rate sensitivity. It sounds like you're still liability-sensitive, but can be volatile quarter-to-quarter. Just we're trying to size what the impact of additional Fed cuts, what that could mean for the margin at the bank.
Stefan Chkautovich: Yes. Overall, as I stated earlier, we should still be overall liability sensitive. That could change a little bit with the positioning of our balance sheet. So given the influx that we're expecting in deposits, which will add to our Fed funds essentially. That will make us a little bit more neutral for a quarter or 2. But overall, we'll still be a net beneficiary of, call it, 1% to 3% net interest income per 100 basis points of rate cuts.
Matt Olney: Okay. Perfect. So it sounds like for the margin, there's still the repricing dynamic tailwinds with flat rates. And if we want to assume additional rate cuts, that would be I guess, incremental from that dynamic?
Stefan Chkautovich: Yes, sir.
Matt Olney: Okay. And then I guess just lastly, Stefan, you hit on expenses briefly, really good just overall cost controls this quarter. And it sounds like this is a good run rate to go off of. Any more color on just what the drivers of the cost controls were in the third quarter?
Stefan Chkautovich: Yes. The ASC 310-20 changes that we made were the main driver there for expenses. So this is a good baseline to use. We will see a little bit of a step-up come our 3Q with merit increases, but this is a good baseline to start from.
Operator: Our next question comes from Nathan Race from Piper Sandler.
Nathan Race: Curious just to get an update, and I apologize if you already touched on this as I hopped on late, but just an update just in terms of where the pipeline stands coming out of the quarter and just how you're thinking about kind of net loan growth and if you have any visibility if you're expecting any increase in payoffs as rates continue to come down in the short end at least over the next handful of quarters?
Matthew Funke: Pay down? Yes, Nathan, we've got a pretty consistent pipeline September compared to where we've been in the last few quarters. We would expect things to slow down just seasonally into the December quarter, probably trailing into the March quarter as well, but still feeling good at that mid-single-digit growth for the fiscal year. And then as far as any payoff potential due to additional rate cuts, I wouldn't really see anything material on that generally, the stuff that we have that at a lower rate not as eager to pay us off. It's not going to be affected by 25, 50 basis points.
Greg Steffens: The biggest unknown we have in potential payoff activity would be from the ag portfolio. We really don't know what's going to happen with ag prices and how soon farmers will market their crops. So that could have a $10 million, $20 million impact on loan growth one way or the other.
Nathan Race: Got you. Okay. And then just given loan deposit ratio around 96%, 97% coming out of the quarter. Matt, is the expectation that deposit gathering can largely keep pace with that kind of mid-single-digit loan growth outlook for this fiscal year? Just curious to maybe get your thoughts on kind of opportunities to increase on the right side of the balance sheet from a deposit gathering perspective.
Matthew Funke: Yes, I think we feel pretty good about our opportunity to maintain loan-to-deposit ratios where they've been over the last couple of years, seasonally adjusted, but we do look to reduce our broker reliance a little bit. We've worked on that so far, and we expect that to continue into the new year.
Nathan Race: Okay. Great. And then is there any additional appetite on the buyback front, at least over the near term, it sounds like you're having a nice pickup in M&A discussions but just curious how you're thinking about allocating excess capital. Obviously, organic growth remains a priority, but I would love to just hear any updated thoughts on how you're thinking about the buyback over the next quarter or 2? And Greg, I would appreciate any commentary in terms of the size of potential deals you're considering and what that potential timing looks like.
Greg Steffens: Buyback activity, we would anticipate to be more active given current pricing. We kind of target earnback on buying shares back of around that 3-year horizon, with current pricing, we would be within that 3-year earn-back period or a little less than that. So I would anticipate us being more aggressive buying shares back. We still have -- Stefan?
Stefan Chkautovich: 200,000.
Greg Steffens: 200,000 roughly of shares authorized for repurchase. So we would anticipate buying back some of those shares based on current pricing and earn back. Generally, on the M&A front, our ideal size would be more in that $1 billion asset range. And that's where we're most interested. And we are talking with some people, but I'm not anticipating anything to be immediately forthcoming.
Nathan Race: And then I apologize if I could ask one more. I appreciate you guys cleaned up some of the commercial real estate loans that have been discussed over the last handful of quarters. So are those loans marked at a level coming out of the quarter where you don't see additional charge-offs? I believe you had mentioned earlier that you're expecting charge-offs to decline going forward, closer to your historical well below average levels, but just want to make sure I'm thinking about the future charge-off trajectory early in light of those 2 commercial loans.
Greg Steffens: I mean we expect that the trajectory on charge-offs to move lower, absent any unforeseen circumstances. And we don't have -- we don't have anything that we know that's a problem coming up, but you never know.
Matthew Funke: And specifically with those 2 loans, Nathan, those charge-offs have been fully realized as far as we know.
Operator: We currently have no further questions. So at this time, I'd like to hand back to Matt for some closing remarks.
Matthew Funke: Thanks, Sammy. Thank you all for joining us. I appreciate your interest, and we'll speak again in about 3 months. Have a good day.
Operator: This concludes today's call. We thank everyone for joining. You may now disconnect your lines.