Southern Missouri Bancorp - Earnings Call - Q2 2025

Executive Summary

• Q2 FY2025 EPS was $1.30, up 21.5% year over year and up 18.2% sequentially; net income rose to $14.7M on higher net interest income and stable net interest margin at 3.36% despite seasonal liquidity build.
• ROAA/ROE improved to 1.21%/11.5% (vs 1.07%/10.0% in Q1), with deposits up $170.5M QoQ and loan balances up $60.5M; tangible book value per share increased to $38.91 (+12.3% YoY).
• Credit quality remained strong: NPL ratio 0.21%, ACL coverage ~659% of NPLs; non-owner occupied CRE concentration ~317% of Tier 1 capital and ACL at bank level, within internal target (300–325%).
• Management flagged near-term NIM pressure in March quarter due to elevated cash (seasonal deposits) but expects net interest spread to improve slightly as loans reprice and CDs reprice lower; effective tax rate (23.7%) was temporarily elevated due to merger accrual adjustment.
• Consensus estimates from S&P Global were unavailable at time of writing; no beat/miss assessment provided. Estimates unavailable due to data access limits.

What Went Well and What Went Wrong

What Went Well

• Net interest income rose $3.7M YoY (+10.6%) and $1.5M QoQ (+4.0%), driving EPS/ROE improvement; NIM held at 3.36% with net interest spread expanding 4 bps QoQ despite higher seasonal cash balances.
• Deposit growth (+$170.5M QoQ) and funding mix (core CDs and savings) supported liquidity and AFS purchases; TBV/share increased to $38.91 (+12.3% YoY).
• Credit remained benign: net charge-offs at 2 bps (annualized), NPLs stable at 0.21% of loans, and ACL coverage ~659% of NPLs.

Management quotes:

• “We were able to expand our net interest spread by 4 basis points... and that helped hold the net interest margin relatively steady quarter-over-quarter.” — President Matt Funke.
• “We are optimistic about the remainder of the year... favorable underlying trends.” — CFO Stefan Chkautovich.
• “We... target [non-owner CRE] ratio... between 300 and 325%.” — CEO Greg Steffens.

What Went Wrong

• Noninterest income fell 4.3% QoQ (seasonal factors and lower SBA gains/interchange), and legal/professional fees elevated in prior quarter due to consulting project; current quarter’s effective tax rate rose to 23.7% on a $380k merger-related accrual adjustment.
• NPLs ticked up YoY (0.21% vs 0.16% a year ago) and qualitative ACL adjustments increased versus June due to macro uncertainty and specific portfolio factors (e.g., hotels).
• Management guided to potential NIM compression in the March quarter due to elevated cash from seasonal deposits; compensation expense to step up with mid-single-digit merit/cost-of-living adjustments.

Transcript

Operator (participant)

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 has ended, please press star followed by one on your telephone keypad, and I'll hand it over to your host, Stefan Chkautovich, CFO, to begin. Please go ahead.

Stefan Chkautovich (CFO)

Thank you, Alex. Good morning, everyone. This is Stefan Chkautovich, 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 Steffens, 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.

Matt T. Funke (President and Chief Administrative Officer)

Thanks, Stefan, 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 Q2 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 $0.20 from the linked September quarter, and it's up $0.23 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 Q1 of fiscal 2025 when it was 3.37%. Net interest income was up 4% quarter-over-quarter and about 10.5% year over year. In the Q2 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 Q2. Compared to a year ago at December 31, 2023, gross balances are up $295 million or just under 8%. Deposit balances increased by about $170 million in the Q2 and increased by $225 million or about 5.5% compared to December 31 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.

Greg A. Steffens (Chairman and CEO)

Thanks, Matt, and good morning, everyone. Overall, our asset quality remained 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 linked quarter. Non-performing loan balances increased slightly by $103,000 to $8 million at 12/31, but in line, as 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 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.

The 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 that 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 disciplined 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, one to four 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 in the building pipeline, we feel optimistic about achieving at least mid-single-digit loan growth for the fiscal year. Now, Stefan, would you provide some additional details on our financial performance?

Stefan Chkautovich (CFO)

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 3.36%, 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 in 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 points 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 the 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 a 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 30th, 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 31st, 2024, down about three percentage points as compared to September 30th due to growth in our Tier 1 capital outpacing our non-owner-occupied CRE. On a consolidated basis, our CRE ratio was 306% on 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 Q2 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?

Greg A. Steffens (Chairman and CEO)

Thanks, Stefan. 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 2025 as the improving yield curve slope and strong business activity in our markets create a favorable environment for earnings growth. Lastly, we've observed 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?

Stefan Chkautovich (CFO)

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.

Operator (participant)

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 Stephens. Your line is now open. Please go ahead.

Matt C. Olney (Managing Director)

Hey, guys. Good morning.

Matt T. Funke (President and Chief Administrative Officer)

Good morning, Matt.

Matt C. Olney (Managing Director)

Thanks for taking the question. Just want to ask kind of more of a broad question first on your 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?

Matt T. Funke (President and Chief Administrative Officer)

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 2023, or I guess maybe for most of 2023. But we still see some outliers up there with rates that are in the very high fours, which is kind of puzzling to us, but we do see it in some one-off situations, and it does drive some activity.

Greg A. Steffens (Chairman and CEO)

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.

Matt C. Olney (Managing Director)

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?

Stefan Chkautovich (CFO)

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 brokered deposits. Net, we didn't see any real growth in brokered deposits.

Greg A. Steffens (Chairman and CEO)

CDs? We didn't buy CDs.

Matt T. Funke (President and Chief Administrative Officer)

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

Stefan Chkautovich (CFO)

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.

Matt C. Olney (Managing Director)

Okay. That's helpful. And then just lastly, I guess on the expense side, nice performance on 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?

Matt T. Funke (President and Chief Administrative Officer)

Nothing real significant. We do have kind of our seasonal compensation adjustment 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 got a new branch coming on, but that'll be just over time. Nothing really to note there, Matt.

Matt C. Olney (Managing Director)

Okay. Okay, guys. Thanks. I'll hop back in the queue.

Greg A. Steffens (Chairman and CEO)

Thank you.

Operator (participant)

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

Andrew Liesch (Senior Equity Research Analyst)

Hey, guys. Good morning.

Stefan Chkautovich (CFO)

Morning, Andrew.

Andrew Liesch (Senior Equity Research Analyst)

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

Greg A. Steffens (Chairman and CEO)

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.

Andrew Liesch (Senior Equity Research Analyst)

Got it. All right. So 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?

Greg A. Steffens (Chairman and CEO)

I think it's definitely a possibility. The growth in the June quarter will be in part predicated by agricultural planting conditions and when do the farmers plant their crop to 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 to know 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.

Andrew Liesch (Senior Equity Research Analyst)

Got it. All right. Very helpful. And then looking at the margin just 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 just liquidity? It seems like you have some good opportunities on the funding side. And as that liquidity kind of right-sizes, we should see the margin step higher. Is that a good way to think about it?

Stefan Chkautovich (CFO)

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. Then 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.

Andrew Liesch (Senior Equity Research Analyst)

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

Greg A. Steffens (Chairman and CEO)

Thanks, Andrew.

Matt T. Funke (President and Chief Administrative Officer)

Thank you.

Operator (participant)

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

Hi. This is Charlie on for Kelly Motta. Good morning.

Greg A. Steffens (Chairman and CEO)

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.

Operator (participant)

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

Stefan Chkautovich (CFO)

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

Matt C. Olney (Managing Director)

Thanks, all.

Greg A. Steffens (Chairman and CEO)

Thanks, everyone. Talk to you next quarter.