SMBC - NASDAQ

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. [Operator Instructions] I will now hand over to your host, Stefan Chkautovich, CFO, to begin. Please go ahead.

Thank you, Sammy. 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, April 21, 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 by Matt Funke, President and Chief Administrative Officer. Matt will lead off our conversation today with some highlights from our most recent quarter and fiscal year.

Thank you, Stefan. Good morning, everyone. Thanks for joining us. I'll start off with some highlights on our financial results for the March quarter, the third quarter of our fiscal year. Quarter-over-quarter, earnings and profitability improved as we benefited from a larger earning asset base, driving an increase in net interest income, along with an expanded reported net interest margin, which resulted from a lower cost of funds and elevated fair value accretion income, all this despite the short day count in the quarter. With the earnings and profitability improvement in the first 3 quarters of our fiscal year, we continue to see positive trends going into the last quarter as we close out fiscal '25. We earned $1.39 diluted in the March quarter. That's up $0.09 from the linked December quarter and up $0.40 from the March 2024 quarter. Net interest margin for the quarter was 3.39% as compared to 3.15% reported for the year ago period and up from 3.36% reported for the second quarter of fiscal '25, the linked quarter. The reported margin benefited from the payoff of a loan from a prior acquisition that had a large purchase accounting mark. The net interest margin included 12 basis points benefit from fair value accretion. Excluding fair value accretion, the net interest margin would have been approximately 3.26%, which would be down 1 basis point from a comparable measure for the linked quarter. However, if we normalize the core margin for the day count, we believe we actually would have had a mid-single-digit increase quarter-over-quarter. Stefan will run through more of the moving parts of the NIM in a bit. Net interest income was up 3.5% quarter-over-quarter and up 14.4% year-over-year due to the increase in average earning asset balances and NIM expansion. On the balance sheet, gross loan balances decreased by $3.5 million compared to the December quarter, but increased by $252 million as compared to March 31, 2024. Year-over-year, that's growth of almost 7%, and we are going into what is historically a stronger fourth quarter for our loan growth with a healthy pipeline. Deposit balances increased by about $51 million in the third quarter and increased by $275 million or about 7% year-over-year. Strong deposit growth through the year has been primarily led by core CDs from well-received rate specials. Due to the lower short end of the curve, we've been able to originate or renew these CDs at lower rates, which has helped our margin. Largely due to the strong deposit growth, cash equivalents grew $81 million or 56% quarter-over-quarter, setting us up well for the next 6 months when we normally see stronger loan growth. Tangible book value per share was $40.37 and has increased by $4.86 or almost 14% over the last 12 months. If you back out modest improvement in the security portfolio's mark-to-market, we'd still be up almost 12% since this time last year. I'll now hand it over to Greg for some additional discussion.

Thank you, Matt, and good morning, everyone. As we've been anticipating, credit quality has normalized a little bit this quarter, but remains relatively strong at March 31, with adversely classified loans at $49 million or 1.2% of total loans, an increase of about $9 million or 23 basis points during the quarter. Nonperforming loans were $22 million, which increased $14 million compared to last quarter and totaled 0.55% of gross loans. In comparison to March 2024, NPLs were up about $15 million and 35 basis points higher as a percentage of total loans. The increase in NPLs this quarter was mostly due to loans totaling $10 million, primarily collateralized by 2 specific purpose nonowner-occupied CRE properties in different states with guarantors in common and originally leased to a single tenant who has since become insolvent. Those loans are on nonaccrual status, and we are working with the borrowers and guarantors to improve our position. Loans past due 30 to 89 days were $15 million, up $8 million from December and 38 basis points of gross loans. This is an increase of 21 basis points compared to the linked quarter and up 23 basis points compared to 1 year ago. Total delinquent loans were $24 million, up $11 million from December. The increase in loans 30 to 89 days past due was primarily driven from NPLs I previously mentioned, and the remaining loans over 90 days delinquent are a mixture of loans collateralized by ag real estate, CRE, C&I and 1-4 family residences with an average loan size of around $120,000 and no single loan larger than $1.5 million. Despite the increase in problem loans, these issues remain at modest levels as compared favorably to the industry. In combination with strong underwriting and reserves, we feel comfortable with our ability to work through these credits and any potential wider deterioration that could occur as a byproduct from the recently announced tariffs. Still, I don't want to give the impression that we're accepting these trends, and we're redoubling efforts to improve our credit quality results. This quarter, ag real estate balances totaled $247 million or 6% of gross loans and ag production equipment loans totaled $186 million or 5% of gross loans. As compared to the prior quarter end December 31, ag real estate balances were up $7 million and up $13 million compared to 1 year ago. Ag production and equipment loan balances were down $2 million quarter-over-quarter due to normal seasonality, but up $47 million year-over-year. In early '25, ag operating balances reflected a slower pace of paydowns due to farmers continuing to hold a larger portion of their 2024 crop, resulting in an estimated $53 million in balances that should pay down over the next several months. although that will be offset by new draws on this year's crop production. Additionally, we've seen about $15 million in growth from new ag credit lines extended this spring. Most farmers have completed loan renewals and a tough 2024 did result in tighter working capital, but that was anticipated. Several customers amortized shortfalls, secured debt with real estate or sold assets to reduce liabilities while a few opted for retirement. Despite strong yields last year, income pressures from declining commodity pressures and prices, weather-related losses and higher input costs have strained profitability. Farmers are adjusting their 2025 planning strategies based on anticipated market prices and cost structures. Corn acreage is expected to decline in favor of soybean and rice as corn prices remain flat and input costs high. Soybeans, while offering lower margins remain a viable alternative due to lower production costs. Cotton farmers enjoyed strong yields in 2024, but poor market prices may prompt a reduction in acreage unless prices improve. Rice having performed well both in yield and market value is poised for expanded acreage. Meanwhile, wheat acreage has stabilized with some farmers returning due to modest price improvements. Favorable early weather conditions in March allowed many to begin planting early, though severe storms in April have since slowed progress. Farmers are also benefiting from a new emergency commodity assistance program, which provides per acre payments that may help offset 2024 losses. However, declining equipment values and cautious real estate activity indicate a tight financial environment and many producers remain concerned about profitability, hoping for higher commodity prices and meaningful legislative support in the next [farm bill]. While working capital levels are lower across much of our farm base, we are proactively working to address any potential shortfalls by leveraging FSA guaranteed programs or restructuring loans, and we expect some customers will be supported through government price support programs. Despite the challenges, our disciplined lending, stress testing of farm cash flows and deep customer relationships should ensure satisfactory performance on our ag credits. In addition, due to the prolonged weakness in the agricultural segment, we started to utilize a new qualitative factor in our calculation for our allowance for credit losses on loans to reserve more for our ag-related exposure. Looking at the loan portfolio as a whole, gross loans declined $3.5 million during the quarter, which is seasonally a slower part of our loan growth for the year. Additionally, our construction and development segments had net paydowns of almost 18%. Our pipeline for loans to fund in the next 90 days remains strong and totaled $163 million at quarter end as compared to $173 million at December 31 and $117 million 1 year ago. Although the March quarter was slow due to the strong first half of the year with loan growth, we are at 4.5% growth fiscal year-to-date with a good pipeline, and we feel optimistic about achieving at least mid-single-digit loan growth for the fiscal year. Our volume of loan originations was approximately $188 million in the March quarter, which was down almost $100 million compared to the December quarter. In the March quarter, a year ago, we originated $241 million, which was a stronger-than-usual quarter that had elevated originations of CRE. The leading categories this quarter were nonowner-occupied CRE, land and ag real estate compared to the linked quarter when we saw growth primarily in CRE, construction, 1-4 family and C&I. Our nonowner-occupied CRE concentration at the bank level was approximately 304% of Tier 1 capital in ACL at 3/31, down about 13 percentage points as compared to 12/31. On a consolidated basis, our CRE ratio was 2.93% at the end of the quarter. In the fourth quarter of our fiscal year, we expect our CRE ratio to increase, but would stay in the 300 to 325 range with our intent to grow CRE in line with capital from there. Stefan?

Thanks, Greg. Matt hit on some of the key financial items already, but I wanted to share a few details. Looking at this quarter's net interest margin of 3.39% it included about 13 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits compared to the linked December quarter of 9 basis points and the prior year's March quarter of 11 basis points. During the current quarter, we realized $756,000 in interest income mostly related to the purchase accounting mark on an individual paid off loan from a past acquisition. This accounted for about 6 basis points in this quarter's net interest margin. Also, the 90-day March quarter compared to the 92-day December quarter impacted reported margin to the downside with a swing of as much of 7 basis points. Adjusting for the day count and the material accretion from the identified loan, we view our run rate net interest margin for the quarter to be about 3.40%. Due to the decrease in short-term rates, we continue to see deposits reprice down, benefiting our net interest margin as a result of our liability-sensitive balance sheet. We continue to see positive signs for an improving net interest margin as our interest-bearing liability costs decreased to 3.14%, down 19 basis points. Without further FOMC cuts, the pace of improvement on the cost of funds could slow in future quarters. Looking at asset yields, the lower short to midpoint of the curve has led to a decrease in these yields with our third quarter down to 6.01% compared to the linked quarter of 6.12%. This was impacted by a reduced pace of upward loan repricing. And in the March quarter, we had an average balance of $143 million in interest-bearing cash balances, up $78 million quarter-over-quarter, which hampered the net interest margin. Looking into the next 2 quarters, these interest-bearing cash balances should decrease with the outflow of seasonal deposits as we remix into higher-yielding loans, which will benefit the net interest margin. Noninterest income was down 2.9% compared to the linked quarter, primarily due to lower deposit account fees, primarily from lower NSF income due to less transaction accounts and overdrafts and other loan fees, which stem from lower origination volumes. It is not unusual for us to see lower NSF charges in the March quarter. On a year-over-year basis, fee income was up $1.1 million or 19.4%, which was largely due to the $807,000 realized loss in our available-for-sale portfolio from a bond loss trade that was executed in the third quarter of 2024. Noninterest expense was up 2.1% quarter-over-quarter, primarily due to higher occupancy and equipment expenses and data processing costs. The increase in occupancy and equipment expenses were primarily from repairs, weather treatment and elevated property taxes. The linked quarter increase in data processing is partly related to seasonal outsourcing of customer tax documents by our core provider and an increase in third-party ancillary software increases with renewals and credit expirations. I would note that compensation and benefits were relatively flat compared to the linked quarter due to 2 less days in the March quarter and a decrease in bonus and health insurance accruals. Accounting for the day count, the compensation and benefits expense would have been up 2% quarter-over-quarter. The lower bonus accrual and the medical insurance claims funding for the fourth quarter is expected to be in line with third quarter, but there can be some variability to the medical insurance expense based on claims activity. Our allowance for credit losses at March 31, 2025, was $54.9 million or 1.37% of gross loans and 250% of nonperforming loans as compared to an ACL of $54.7 million or 1.36% of gross loans and 659% of nonperforming loans at December 31, 2024, the linked quarter. Net charge-offs for the quarter were $1.1 million or annualized 11 basis points of average loans compared to $198,000 and 2 basis points, respectively, in the linked quarter. Despite the increase in charge-offs for the quarter, our annualized fiscal year-to-date net charge-off ratio is only 5 basis points. Our provision for credit losses was $932,000 in the quarter, which was in line with the linked quarter. The current period PCL was the result of a $1.3 million provision attributable to the ACL for loan balances outstanding and a $368,000 negative provision attributable to the allowance for off-balance sheet credit exposures. Both the ACL and reserve for off-balance sheet credit exposure were positively impacted by a decrease in our modeling and precision qualitative factor, but this was offset by required reserve increases for the negative migration and problem loans that Greg previously mentioned. Also, an update to our methodology and how we reserve for overdrawn deposit accounts and to provide for the net charge-offs, which were elevated primarily due to a single agricultural relationship with suspected fraudulent activity. As we enter a period of potential economic uncertainty due to the changes in economic policy, our provision for credit losses and allowance for credit losses could expand in future quarters due to conceivable changes in the economic forecast, specifically lower GDP and higher unemployment, driving a higher probability of default and required reserves under our CECL methodology. Despite recent volatility in markets, we are happy with the improvement we have seen in earnings and profitability year-to-date. We feel optimistic these trends continuing through our fiscal year 2025. Greg, any closing thoughts?

Thanks, Stefan. Yes, our fiscal 2025 has been a great year so far in both our financial metrics and culturally. Since last quarter, consultants have completed their evaluation of our organization as part of the performance improvement initiatives we launched in the fall. This initiative is not only a pivotal step in enhancing our ability to meet our customers' needs quickly and effectively, but it also serves as a valuable professional development opportunity for our team. I'm immensely proud of how our team members have embraced this process and are beginning to make progress on the recommended enhancements with the goal to be fully implemented within the next several years. As a result of this initiative, our West Region's Regional President and EVP, Justin Cox, was appointed to our newly created position of Chief Banking Officer. Effective May 1, Justin will be primarily responsible for overseeing business development and customer experience efforts for our lending, deposit and other fee income teams across the bank. Speaking of new additions, in January, we acquired a new insurance brokerage partner who is based out of our Southwest Missouri market, and we are excited to welcome a new agent to help support our customers' insurance needs. Lastly, we've had limited conversations about M&A since the drop-off in bank stock valuations and increased market turmoil. We remain hopeful for good opportunities, but nothing is likely in the near term, and we'd anticipate that the market may need to settle for a few months one way or the other before conversations would pick back up meaningfully. We believe that with our strong capital base and positive track record of financial performance, we're in a good position to capitalize on the right opportunity when it presents itself. There are approximately 50 banks headquartered in Missouri and 24 in Arkansas with assets between $500 million and $2 billion and a significant number in other surrounding states. So we should have M&A opportunity in the intermediate future. Stefan?

Thanks, Greg. At this time, Sammy, we are 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 Instructions] We now have a question from Andrew Liesch, Piper Sandler.

Just wanted to start with the margin. Stefan, just wondering if you have some specifics on what -- how many CDs might be rolling off over the next couple of quarters and at what rates and what they're going to be replaced at?

Yes. So looking at our CD portfolio, renewing in the next 3 months, we have about, call it, $215 million that are rolling off at a rate of about 4.25% and being replaced by current renewal rates are averaging around 4.10%. This quarter is a little bit slower on that side. But over the next 12 months, we have about $1.2 billion in CDs renewing with an average rate of 4.26%. So still a net benefit there over repricing. But this quarter, that dynamic slows down a little bit and picks up after that.

Got it. So -- when you look out at the funding for the next several months, are CDs going to be the primary source of growth? Or do you have any other accounts that you're focusing on right now that you might try to encourage clients to shift into?

We do have an attractive platinum savings rate. But as we go through this next quarter or 2, we will see our non-maturity deposit accounts start to roll off as some of those seasonal funds roll off from ag and public unit accounts. So CDs will probably start increasing as a percentage of the portfolio.

Got it. And then just on the agriculture front, maybe it's too early to tell, but have you assessed how much of the commodities are exported and what the effect of tariffs might be?

Well, the effective tariffs wouldn't be good. We don't have any real visibility once our farmers go to market where that winds up necessarily. Prices have been relatively low already. So at some point, the government price supports kick in. We don't have a lot of exposure to the downside on that.

The forecast where our grain commodities are shipped, it's -- we don't really have focus on that.

Kind of an overall impact on the pricing in the market, though.

But overall, global markets are going to drive a lot of that price. There's only a finite amount of grain that is produced around the globe and those supplies them -- carryovers are going to still have to be absorbed whether it's produced in South America or whether it's produced here. It's going to be -- there's only a certain amount of grain available. So there will be someone that needs the grain.

Our next question comes from Matt Olney from Stephens.

I want to go back to the discussion around the net interest margin. I guess the core was moved sideways during the quarter, but it still seems like there's some good momentum here. Stefan, I think you mentioned that 3.40% range as a run rate. It sounds like that could be a good starting point for the June quarter end. Is that the right interpretation? And was that a reported NIM or a core NIM?

That was a reported NIM. But yes, overall, there's some good underlying dynamics here as we sort of shift out of those excess cash balances that we mentioned that increased about $78 million. Those will start to flow out over the next 2 quarters. Overall, average earning asset balances shouldn't really grow all that much, but there are some positive NIM dynamics there from the essentially cash that we're holding in the Federal funds going into loans over the next 2 quarters.

Okay. And then I guess the other tailwind on the margin is just the repricing of some of those fixed loans. Just any commentary on renewal rates you're seeing there versus your internal expectations?

Yes. I would say, on average, our renewal rates have been in the ballpark of 7.25% to 7.50%. Overall, over the next 12 months, we have about $610 million that are renewing at a rate of 6.45%. So there's still positive shift there too. This following quarter, the renewal rates are on the higher end. So you won't see as much positive impact. But after that, it should start to shift back up.

Okay. Perfect. And then shifting over towards on the credit front, the NPLs ticked higher, and I think you mentioned that release, it was mostly about $2 million from single borrower. Any more color you can share as far as the collateral on these loans? Have you had a chance to take a good look at that collateral and any recent appraisals on that? Just trying to get an idea of what any kind of loss exposure could be to this borrower.

One of the properties is located in a -- they're both medical-related lease space or they were leased to the tenant when insolvent. So really, it's going to be dependent upon what other type of medical tenant we can find for those buildings. We do anticipate a fair amount of charge-off on these credits at a given -- at some point. We do have them marked to roughly 35% in our ACL of their balance.

[Operator Instructions] Our next question comes from Kelly Motta from KBW.

I appreciate the color, Greg, on M&A conversations flowing with the market volatility. In the interim, with the stock going back, can you remind us your priorities for capital and how you may be viewing the buyback here? Are you kind of just keeping dry powder for M&A? Or could we see you step in and become more active on that like you've been in the past?

We would anticipate depending on stock price, potentially using some of our excess capital to repurchase shares. We do target having tangible common equity of 8% to 9%. We are over those ratios a little right now. We do view that if we can repurchase our shares and have a tangible earn-back period of around 3 years that it is appropriate at that time to repurchase shares. So our repurchase activity will really depend upon our stock price and what happens with the -- just general market price for our stock. And at the current trading prices, we're right around where it would be opportunistic for us to repurchase some shares.

Got it. That's helpful. Maybe a last question from me, circling back on the credit side of things. Just from a high level, you're obviously closer to the ground than we are. Wondering kind of how you're viewing your borrower base right now? Are you seeing any -- I appreciate the color on that one relationship that drove the NPLs higher this quarter. But just from a higher level, are you seeing any additional signs of stress from your borrower base here? And kind of what are you baking into your ACL at this point based on what you're seeing today?

We're seeing a little more difficulty chasing payments. Mid-month, the past due level has continued to creep a little bit higher. There is sign that the consumers are having a little bit of stress, small businesses having a little bit of stress. Still, we're not seeing a lot that translates into loss expectation outside of kind of these limited situations, which really haven't been economically driven for the most part. Some of the things that have smaller loans that we've seen migrate to substandard or nonaccrual recently, it's not economic conditions that are driving them the factors particular to a specific business by and large.

And just an overall viewpoint, lower-end consumers seem to be struggling a little bit more. We could see our residential loan portfolio have slight upticks yet in delinquency. But we're not seeing any real trends in our CRE book or anything with really any broad-based deterioration. Primary segments where we're seeing other stress, the trucking industry continues to exhibit some weakness. And then we see periodic weakness across some of our SBA portfolio of loans we acquired from several of our acquisitions. But those trends haven't really changed any over the last several quarters.

We currently have no further questions. So I'll hand back to Matt for some closing remarks.

Okay. Thank you, Sammy, and thank you, everyone. We appreciate your interest in results, and we'll talk to you again in 3 months. Have a good day.

Thank you all.