Southern Missouri Bancorp - Earnings Call - Q4 2025

Executive Summary

• Diluted EPS of $1.39 was flat sequentially but up 16.8% YoY, driven by higher net interest income and a lower tax rate; noninterest expense included $0.43M one-time consulting cost, implying underlying EPS of ~$1.42 if excluded.
• Net interest margin expanded to 3.46% (3.47% on annualized-day-count basis), supported by lower funding costs and higher loan yields; management expects further margin tailwinds from CD repricing and easing deposit competition.
• Credit costs rose: PCL increased to $2.5M on higher net charge-offs, including a $3.8M write-down within special-purpose CRE and a $0.74M C&I charge-off; NPLs increased to 0.56% of loans, while ACL coverage remained robust at 224% of NPLs.
• Dividend was raised 8.7% to $0.25 (125th consecutive quarterly dividend), signaling confidence in capital and earnings durability.
• Outlook: pipeline to fund in 90 days rose to $224.1M; management targets mid-single-digit loan growth for FY26; near-term prepayments could temper net growth, but margin and fee initiatives are incremental catalysts.

What Went Well and What Went Wrong

What Went Well

• “We have seen improvement in the net interest margin this year with continued loan growth and moderate operating expense growth,” supporting EPS growth and improved efficiency (54.6%).
• Margin drivers include loan yield expansion and easing deposit competition; average loan origination ~7.3% vs ~6.3% for loans maturing in the next 12 months, positioning for further NIM expansion.
• Fee upside: card network volume incentives added $0.54M in the quarter; annual bonuses will be accrued in FY26 to smooth noninterest income.

What Went Wrong

• Credit costs elevated: $5.3M net charge-offs including a $3.8M special-purpose CRE charge-off; PCL rose to $2.5M, lifting YoY and sequential credit provisioning.
• Noninterest income fell 6.3% YoY due to accounting for tax credits shifting from fee income to direct tax reduction under ASU 2023-02 and a $0.11M MSR fair value hit.
• Legal/professional expenses were elevated by $0.43M consulting costs to negotiate a large vendor contract, temporarily pressuring operating leverage.

Transcript

Speaker 3

Hello everyone, and thank you for joining the Southern Missouri Bancorp earnings conference call. My name is Sammy, and I'll be coordinating your call today. During the presentation, you can register a question by pressing star followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2 to remove yourself from the questioning queue. I'd now like to hand over to our host, Stefan Chkautovich, CFO, to begin. Please go ahead, Stefan.

Speaker 2

Thank you, Sammy. Good morning everyone, 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 Wednesday, July 23, 2025, and to take your questions. We may make certain forward-looking statements during today's call, and we refer you to our comparative 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 the conversation today with some highlights from our most recent quarter of the fiscal year.

Speaker 1

Thank you, Stefan. Good morning everyone. This is Matt Funke. Thanks for joining us. I'll start off with some highlights from our financial results for the June quarter, the final quarter of our fiscal year. Quarter over quarter, earnings rose slightly, as we saw our net interest margin and net interest income move higher, along with an increase in non-interest income and a lower provision for income tax expense. This was partially offset by increases in provisions for credit losses. We have seen improvements in the net interest margin this year, with continued loan growth and moderate operating expense growth, which improved overall earnings and profitability in fiscal 2025. Despite problem credits moving higher during the year, off the very low levels we've seen across the industry in the last few years, we do feel we have good momentum and see positive trends going into the next fiscal year.

We are in the $1.39 balloon in the June quarter, which remained unchanged from the late March quarter, but up $0.20 from the June 2024 quarter, or about 17% growth year over year. During the quarter, we realized $425,000 in consulting expenses associated with the negotiation of a large long-term business contract, which will begin benefiting results in fiscal 2026. Including these costs, we would have earned $1.42 for the quarter. For full-year fiscal 2025, we earned $5.18 compared to $4.42 in fiscal 2024. The increase year over year was predominantly driven by stronger net interest income, which stems from almost 7% earning asset growth and net interest margin expansion as our funding costs declined and the loan portfolio adjusted up with higher market rates. With this earnings growth, tangible book value per share has increased by $5.19, which is above 14% over the last 12 months, to $41.87.

Due to our strong capital position, with the earnings release, we also announced a $0.02 or 8.7% increase in our quarterly dividend, bringing it to $0.25 a share. Net interest margin for the quarter was 3.46%, up from 3.39% reported for the third quarter of fiscal 2025, the late quarter. As we saw some spread increases, loan yields increased, and we benefited from deploying lower yielding excess interest earnings cash balances into higher yielding loans. Stefan will go over more details, but in fiscal 2026, we do plan to change our reported quarterly NEM calculation to be based off the annualized day count, which should reduce the volatility in the NEM due to the differences in each quarter's total days.

If we calculated the net interest margin by annualizing the day count in the fourth quarter, it would have been 3.47% as compared to 3.44% in the late quarter calculated similarly. Gross loan balances increased during the quarter by $76 million, or 7.6% annualized, and by $250 million, or 6.5% as compared to June 30 a year ago. Provision for credit losses was $2.5 million, up $1.6 million over the late quarter. The increase was primarily attributable to providing for net charge-offs and to support loan growth, in addition to an increase in available balances and an increase in the expected funding rate on those available balances. Greg will go into more detail on credits, and Stefan will talk about the allowance for credit losses in a bit. Deposit balances as of June 30, 2025, increased by $20 million, or about 2% annualized compared to the late quarter.

This is a seasonally slower period for deposits due to seasonal outflows from our public units, and as our agricultural clients deployed funds for the crop year. I'll hand it over now to Greg for some additional discussion.

Speaker 0

Thanks, Matt, and good morning everyone. I'd like to start off talking about credit quality. Consistent with our discussions last quarter, credit quality has deteriorated somewhat from the very low levels of the last several years. It remains relatively strong on June 30, with adversely classified loans totaling $50 million, or 1.2% of total loans, an increase of about $830,000. Finally, the percentage of total loans during the quarter. Non-performing loans were $23 million on June 30, which increased $1.1 million compared to last quarter and totaled 0.56% of gross loans. In comparison to June 2024, non-performing loans were up about $16 million or 39 basis points higher as a percentage of total loans. Non-performing assets were about $100,000 lower compared to a year ago, as we sold a parcel of other real estate in the fourth quarter. The other real estate reduction was mostly offset by additional non-performing loans.

The increase in non-performing loans this quarter was mostly due to a participation that we originated, of which our balance is $5.7 million on the construction loan related to the development of a senior living facility in Kansas, which was placed on non-accrual status. This loan was acquired through the Citizens merger and we're currently working through the foreclosure process. We are still having discussions with the borrower with the hopes to avoid foreclosure as the project included very significant capital investment by them, actually exceeding our outstanding balance. As reported last quarter, we are continuing to work with borrowers on two specific-purpose non-owner occupied commercial real estate loans in different states, with terms towards in common and originally leased to a single tenant that has since become insolvent. Last quarter, these balances totaled $10 million and were placed on non-accrual.

Based on updated appraisals, we took a $3.8 million debt charge in the quarter on one of the three loans, taking the balance to $6.2 million as of June 1. As of year-end in total, we have about 45% of the perfect reserve remaining on the balance equity slot. Loans past due 30 to 89 days were $6.1 million, down $9 million from March at 15 basis points on gross loans. This is a decrease of 23 basis points compared to the prior quarter and in line compared to a year ago. Delinquent loans were $25.6 million, up $1.2 million from the March quarter, and up $16.4 million from the June 2024 loans. The decrease in loans 30 to 89 days past due was primarily due to the special purpose CRE loans mentioned earlier, with the partial charge-off and migration to 90 days or more past due.

Despite the increase in problem loans, these issues remain at modest levels, and asset quality compares favorably to the industry. In combination with strong underwriting and adequate reserves, we feel comfortable with our ability to work through these credits and any potential wider deterioration that could occur as a byproduct of general economic conditions. I don't want to give the impression that we're accepting these trends, and we're redoubling efforts to improve our client quality results. Fifth quarter ag real estate balances totaled $245 million, or 6% of gross loans, and ag production and equipment loans totaled $206 million, or 5% of gross loans. As compared to the prior quarter end, ag real estate balances were down $2 million, but they were up $12.5 million compared to June 30, 2023.

Ag production loan balances were up $20 million quarter over quarter due to normal seasonality and higher operating costs, and up $30 million year over year. Our ag estimates began in 2025 with an early planting window due to mild weather, but heavy spring rains soon delayed progress, especially for cotton and soybeans, requiring some replanting. Early planting corn and soybeans are progressing well, with early corn harvest likely to begin in August and early soybeans in September, both earlier than normal. Later planted crops have improved over the past month. Overall, nearly all of our farmers' acres were planted. Crop mix projections for 2025 are 30% soybeans, 30% corn, 20% cotton, 15% rice, and 5% specialty crops. Corn acreage is up slightly and may yield well, but weak pricing could prompt farmers to store grain again this year. Soybean acres grow modestly as producers diverted acres from other crops.

Specialty and rice crops are in good condition, though price pressure is lowering expected returns. Cotton is showing average progress with improvement tied to drier weather conditions. Across the board, farmers face rising input costs and expenses for insurance, labor, and repairs, expenses which continue to climb. Dry weather is also pushing out fuel and chemical usage for irrigation and weed control upfront. Farmers are drawing more heavily on credit lines, with some tapping into pre-approved contingency lines. About 95% of our 2024 profits have been sold in the flight to debt. The lower commodity prices this spring have reduced expected profitability for this year. While economic commodity assistance program payments from the government have helped many farmers, they are anticipating a difficult margin year this year. Future pricing for key crops remains soft relative to underwriting assumptions.

Corn, rice, soybeans, cotton, and wheat are each down 6% to 8%, and many producers remain pessimistic about positive returns from 2025. They confirmed about entering 2026 in a weakened position. We have seen some instances of farmers deciding to voluntarily wind down their operations earlier this year. I anticipate that trend continues as the profitability outlook does improve. Farm equipment prices fell this spring, as dealers moved to clear inventory with lower rates, though most producers are deferring purchases of equipment. While 2024 was a strong production year, high costs and big prices left many borrowers with lower working capital positions and in some instances needing restructuring. Farmland values remain firm, particularly for irrigated acres. New investor demand, not farmer demand, is driving the market. With equipment values falling and cash flow tight, lateral coverage is weaker.

Lenders are actively inspecting 2025 crop progress and will deliver yielded lateral analysis by October to get an early understanding of the outlook for our borrowers as they enter 2026. We are also monitoring the potential for further federal aid under the recently passed Big Beautiful Bill of President Trump, which could be critical in supporting our farmers through what may be another financially challenging year. We are proactively working to address any potential shortfalls by leveraging FSA guarantee programs and restructuring loans. Despite these challenges, our disciplined living practices, stress testing the farm cash flows, and the excess fertilization shifts should ensure satisfactory performance of these funds. In addition, due to the prolonged weakness in the agricultural segment, we've heard an increased reserve for watch list ag borrowers in the March quarter in our calculation for allowance for credit losses.

Looking at the loan portfolio as a whole, gross loans increased $76 million during the quarter. The quarter was led by growth in commercial & industrial, multifamily, and ag production loans. The stronger growth out of our south, west, and east regions all contributed to a great quarter for loan growth. The fourth and first quarter is seemingly the strongest part of our year for loan growth due to seasonal factors, including ag. Our pipeline for loans to fund in the next 90 days is strong and totaled $224 million as compared to $163 million in the March quarter and $157 million a year ago. Despite the strong interim origination pipeline, we expect to have a higher than usual first quarter of prepayment activity that could slow some of the net loan growth.

Although there remain some uncertainty surrounding the economy, due to our strong pipeline, as we've looked into fiscal 2026, we feel optimistic about achieving another year of mid-single digits loan growth for the upcoming year. Our non-owner occupied commercial real estate loans concentration at the bank level was approximately 302% of tier one capital and allowance at June 30, down about 2 percentage points compared to the March quarter due to almost $9 million in net paydowns with non-owner occupied commercial real estate loans and growth in tier one capital. On a consolidated basis, our commercial real estate loans ratio was 291% at the end of the quarter. Through the year, we would expect our commercial real estate loans ratio to increase somewhat, but should stay in the 300% to 325% range. Stefan?

Speaker 2

Thanks, Greg. Matt said some of the key financial items already, but I wanted to share a few details. Looking at this quarter's net interest margin of 3.46% and cleared about 5 basis points, a fair value discount increase on acquired loan portfolios contributing to amortization on assumed deposits compared to the late quarter of 13 basis points and 10 basis points in the prior year's June quarter. The net interest margin expanded as the yield on interest earning assets increased 4 basis points, primarily due to loan yield expansion, while the cost of interest paying liabilities decreased 1 basis point. Although the Fed funds rate hasn't been reduced further this calendar year, we are seeing opportunities to lower our CD stubs as local deposit costs have been infused during the fourth quarter.

With this, in addition to our loan portfolios still repricing up to current market rates and originating loans at a higher than a portfolio rate, we're optimistic we could see more margin expansion in fiscal 2026. As of June, our average loan origination rate was about 7.3% compared to the average loans we have maturing over the next 12 months of 6.3%. If the FOMC does cut rates later this year, we believe there is further opportunity for the net interest margin expansion as our deposit pricing strategy leaves us well positioned to reduce funding costs if further rate cuts do occur. Looking at non-interest income, we're up about 9.2% compared to the late quarter. This increase was largely driven by an internal card network bonus, which is based on annual buying incentives. Total bonus received in the fourth quarter was $537,000.

In fiscal 2026, the estimated C income for these annual bonuses will be accrued through the year. This item was partially offset by a $108,000 charge to reduce the fair value of our mortgage purchasing rights, which stems from a decrease in market rates and associated expectations of increased prepayments. As noted in the release, we have adopted ASU 2023-02 and now account for renewable energy tax credit benefits through a direct reduction to income taxes. This has resulted in lower C income for fiscal 2025 of $701,000 as it was moved to reduce tax provisions. Non-interest expense was up 2.3% compared to the late quarter. This was primarily attributable to $425,000 consulting expenses captured in legal and professional fees, so it goes towards the new contract with our debit card network. In addition, we saw increased expenses in data processing due to third-party ancillary product expense.

This is an area where we're trying to manage to stay commensurate with our earnings growth. The investment in these systems could be a net benefit in the longer term as we work to create more efficient processes and manage the growing complexities of the business and customer expectations. The allowance for credit losses at June 30, 2025, totaled $51.6 million, representing 1.26% of gross loans and 224% of non-performing loans, as compared to an allowance for credit losses of $54.9 million, or 1.37% of gross loans and 250% of non-performing loans in the prior quarter. $5.3 million of net charge-offs were realized in the quarter, with $4.2 million of the increase from the prior quarter primarily due to the special purpose commercial real estate relationship mentioned previously and $742,000 commercial & industrial credit related to a commercial contractor.

Despite the increase in charge-offs for the quarter and overall year, our net charge-off ratio for fiscal 2025 was only 17 basis points and still compared well versus banks under $10 billion. The decrease in the allowance for credit losses was primarily attributable to net charge-offs, which reduced the required reserve for individually evaluated loans, as well as a decline in further qualitative adjustments relevant to assessing expected credit losses. This decrease was partially offset by higher model losses following our annual methodology update for pooled loans, reflecting management's updated view of a deteriorating economic outlook compared to the prior quarter's assessment. Due to these drivers, the company recorded a provision for credit losses of $2.5 million compared to $932,000 in the March quarter. Given where we see the economic cycle and our asset quality trends, we would expect to see an uptick in the normal quarterly provisions.

Despite some additional credit charges during fiscal 2025, we delivered strong earnings growth for the year, increasing profitability to a 1.21% return on average assets and an 11.4% return on average equity. Looking back over the past five years, even with the margin pressure experienced in 2024, we have compounded tangible book value by 10% annually while returning an average of 17% of earnings to shareholders through cash dividends. With this track record, we remain focused on driving continued growth for fiscal 2026 and sustaining the long-term value creation for our shareholders. Greg, any closing thoughts?

Speaker 0

Yes, Stefan. We are proud of our accomplishments in fiscal 2025, highlighted by the progress on our performance improvement initiative, a key project that is already beginning to show positive results thanks to the dedication of our exceptional team. We have continued to reinvest in the company, adding new talent to support our legacy growth, with the goal of translating these investments into sustained earning strength and improved profitability in the years ahead. Since the 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 with our solid capital base and proven financial performance. I believe we are well positioned to act when the right transaction arrives.

Notably, there are approximately 50 banks headquartered in Missouri and 24 in Arkansas, with assets between $500 million and $2 billion, along with a meaningful number of others in adjacent markets, providing a broad landscape for potential partnerships.

Speaker 2

Thank you, Greg. At this time, Sammy, we're ready to take questions from our participants. If you would, please remind folks how they may queue for questions at this time.

Speaker 3

Thank you very much. To ask a question, please press star followed by one on your telephone keypad now. To change your mind, please press star followed by two. If your parents will ask you a question, please use your device unmuted locally. Our first question comes from Matt Funke from Stephens Inc. Your line is open. Please go ahead.

Speaker 2

Great, thanks. Good morning. Appreciate you taking my question. I want to start on the loan growth. Really good results as you saw. I'm curious, just as the loan growth developed throughout the quarter, did it strengthen throughout the quarter or was it steady? Just trying to get a better idea about the momentum you guys have into the upcoming October quarter. Greg mentioned, I think, potentially higher prepayments in the near term. I just want to dig into that statement. Is that something that you're already seeing early on in the quarter or something that borrowers have indicated that they could do? Just put your finger in the color. Thanks.

Speaker 0

Our loan growth was pretty steady over the entire quarter, and loans in the pipeline were steadily added over the quarter. In regard to prepayment expectations, they have not occurred yet, but we do have several larger credits that have indicated that they plan to pay off in the very near term, which would increase our prepayment activity. They are primarily in our non-owner occupied commercial real estate.

Speaker 2

Okay.

Speaker 0

I'm just basically, Greg.

Speaker 2

No, I think you hit on that. I appreciate it. I guess changing gears over towards the margin, it sounds like stuff in the margin gets some nice tailwinds from here. Any more color you can provide about kind of expectations more near term within the margin? If we do get those Fed cuts that you mentioned, kind of what the impact's going to look like for the bank?

Speaker 3

Yeah, I guess starting with the Fed cuts, we are a bit more neutral to rate movements right now due to the higher levels of excess cash compared to prior years. As that cash is deployed through loan growth, we do become a little more liability sensitive, I guess. Part of the sort of driving forces is on just the natural net interest margin expansion that we could see just from the loan origination activity and renewals, repricing, and higher rates in our current portfolio.

Speaker 2

Okay. It sounds like within the deposit competition, it sounds like you've done good enough this quarter. I think you mentioned you recently took down some promotional offerings. It sounds like the overall competitive levels on the deposit side remain reasonable.

Speaker 1

It's been more reasonable over the last six to nine months. We just see a little bit of a tick up in competition in July. That might stall out a bit, but it's still not at the relatively high levels compared to Fed funds that we've seen a year ago at this time.

Speaker 2

Okay. On the credit front, I think you covered the charge-off this quarter, and it sounds like that's the same loan that we discussed last quarter. I think I heard in the prepared remarks that the appraisal on one of the properties came in lower. I just want to dig in on that appraisal and just trying to appreciate the collateral behind that and why it experienced the deterioration that it did. I think you mentioned that was just one of the appraisals. Are there still other appraisals on the other remaining loans from the same borrower that we're still waiting on?

Speaker 0

We had to run down the balance on one of them after the appraisal came in. With it being a special purpose entity that was operating it, we had a much higher than normal advance rate or lease rates that we advanced on. That was more above market conditions. That specialty provider going away from that market term, market rents to replace that tenant are much lower than what our original balance was, resulting in the large charge-off. It would not surprise me if we would have additional charge-off on the other remaining building. We're still doing some negotiation with the year-end floors on that, on where we end up. It would not surprise me to have an additional price.

Speaker 2

Greg, on the potential for those additional appraisals coming in, is there any specific provision or reserve already allocated towards that, or would that be incremental from what you have now as far as the allowance?

Speaker 0

We have 42% of the balance in specific reserve.

Speaker 2

Got it. Okay, great. I'll step back. Thanks for your help.

Speaker 1

Thanks, Matt.

Speaker 0

Thank you, Matt.

Speaker 3

As a reminder, to ask a question, please press star followed by one on your telephone keypad. Our next question comes from Kelly Mosser from KVW. All right, your line is open. Please go ahead.

Good morning. This is Charlie on for Kelly. Thanks for the question. Just high level on the funding side, I know you mentioned a seasonally slow quarter for deposits. Do you still expect to fund near-term growth with CDs mainly, or anything you expect from clients on deposits lists?

Speaker 1

We wouldn't expect growth to be as heavily weighted towards CDs this year as what it's been over the last couple of years. Also, just given the strong funding position we're entering the year with, we'll probably be able to be a little less aggressive on the CD side. That might drive a little bit slower growth on the CD side relative to the non-maturity side.

Thank you. Can you give some specifics on the certificates of deposit you have rolling off this quarter and the rates that are going to be replaced there?

Yes. About on average over the next 12 months, the CD rates that we have are about 4.24%. On average, we're rating at about 4%.

you tend to curve the difference in the next three months?

I guess more towards the first half of our fiscal year, we have some higher rates rolling off. Towards the back end, those become more in line with the current market rate.

Okay. Thank you, that's great. Just on the M&A environment, kind of picking up, are you guys seeing the pace of compensation increase at all? How are you hearing kind of the buyback here in this environment? With prices where they're at?

Speaker 0

We are having, you know, there are more calls according to investment bankers. We haven't really seen a big uptick in actionable items, but I think that that could be coming up here over the next quarter.

Buyback.

On the stock buyback, it's just going to depend upon where we are trading at relative to our tangible book value. At this time, we believe that a potential M&A transaction could have a shorter earn-back period than if we were repurchasing.

Okay, that's great. Thank you. I'll step back.

Speaker 3

We currently have no further questions. I would like to hand back to Matt Funke for his closing remarks.

Speaker 1

Thank you, Sammy, and thank you everyone for your interest and attendance today. I appreciate the chance to visit with you, and we'll talk again in three months. Have a good day.

Speaker 3

This concludes today's call. Thank you everyone for joining. You may now disconnect your lines.