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 would now like to hand over to your host, Stefan Chkautovich, CFO, to begin. Please go ahead, Stefan.

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 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 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 the conversation today with some highlights from our most recent quarter and fiscal year.

Thank you, Stefan, and 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 were up slightly as we saw our net interest margin and net interest income move higher, along with an increase in noninterest income and a lower provision for income tax expense. This was partially offset by an increase in provision for credit losses. We have seen improvement in the net interest margin this year with continued loan growth and moderate operating expense growth, which improved overall earnings and profitability in fiscal '25. 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 earned $1.39 diluted in the June quarter, which remained unchanged from the linked 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 vendor contract, which will begin benefiting results in fiscal '26. Excluding these costs, we would have earned $1.42 for the quarter. For full year fiscal '25, we earned $5.18 compared to $4.42 in fiscal '24. The increase year-over-year was predominantly driven by stronger net interest income, which stemmed 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 or just 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 '25, the linked quarter, as we saw some spread increase as loan yields increased, and we benefited from deploying lower yielding excess interest-earning cash balances into higher-yielding loans. Stefan will go over more details, but in fiscal '26, we do plan to change our reported quarterly NIM calculation to be based off the annualized day count, which should reduce the volatility in the NIM 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 linked quarter, if 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 linked 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 details on credit, and Stefan will talk about the allowance for credit losses in a bit. Deposit balances as of June 30, '25, increased by $20 million or about 2% annualized compared to the linked quarter. This is a seasonally slower period for deposits due to seasonal outflows from our public units and as our agricultural clients deploy funds for the crop year. I'll hand it over now to Greg for some additional discussion.

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, but remains relatively strong at June 30 with adversely classified loans totaling $50 million or 1.2% of total loans, an increase of about $830,000 and flat as a percentage of total loans during the quarter. Nonperforming loans were $23 million at June 30, which increased $1.1 million compared to last quarter and totaled 0.56% of gross loans. In comparison to June '24, NPLs were up about $16 million or 39 basis points higher as a percentage of total loans. Nonperforming assets were about $100,000 lower compared to a year ago as we sold a parcel of other real estate in the fourth quarter, but the other real estate reduction was mostly offset by additional nonperforming loans. The increase in NPLs 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 senior living facility in Kansas, which was placed on nonaccrual status. This loan was acquired through the Citizens merger, and we're currently working through the foreclosure process. But 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 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. Last quarter, these balances totaled $10 million and were placed on nonaccrual. But based on updated appraisals, we took a $3.8 million net charge in the quarter on one of the 3 loans, taking the balance to $6.2 million as of June 30. As of year-end in total, we have about 45% specific reserves remaining on the balances of these [loans]. Loans past due 30 to 89 days were $6.1 million, down $9 million from March and 15 basis points on gross loans. This is a decrease of 23 basis points compared to the linked quarter and in line compared to a year ago. Total delinquent loans were $25.6 million, up $1.2 million from the March quarter and up $16.4 million from the June 2024. The decrease in loans 30 to 89 days past due was primarily due to the special purpose CRE loans mentioned earlier with a 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. 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 $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 a year ago. 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 customers began 2025 with an early planning window due to mild weather, but heavy spring rains soon delayed progress, especially for cotton and soybeans requiring some replanning. Early planted 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 rose 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 of which continue to climb. Dry weather is also pushing up fuel and chemical usage for irrigation and we control of present. Farmers are drawing more heavily on credit lines with some tapping into preapproved contingency lines. About 95% of our 2024 crop has been sold and applied to debt, but 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 are anticipating a difficult margin year this year. Future pricing for key crops remains soft relative to underwriting assumptions. Corn, rice, soybeans, and cotton and wheat are each down 6% to 8%, and many producers remain pessimistic about positive returns for '25 and concerned about entering 2026 in a weakened position. We have seen some instances of farmers deciding to voluntarily wind down their operations earlier this year and could see that trend continue if the profitability outlook doesn't 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 cost and weak prices of many borrowers with lower working capital positions or in some instances, needing restructuring. Farmland values remain firm, particularly for irrigated acres, though investor demand, not farmer demand is driving the market. With equipment values falling and cash flow tight, collateral coverage is weaker. Lenders are actively inspecting 2025 crop progress and will deliver yield and collateral 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 with 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 guaranteed programs or restructuring loans. Despite these challenges, our disciplined lending practices, stress testing of farm cash flows and deep customer relationships should ensure satisfactory performance of these credits. In addition, due to the prolonged weakness in the agricultural segment, we started to increase reserves for watch list ag borrowers in the March quarter in our calculation for our 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 C&I, multifamily and ag production loans with stronger growth out of our South, West and East regions. It all contributed to a great quarter for loan growth. The fourth and first quarter is seasonally 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 near-term 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 remains some uncertainty surrounding the economy due to our strong pipeline as we look into fiscal '26, we feel optimistic about achieving another year of mid-single-digit loan growth for the upcoming year. Our nonowner-occupied CRE concentration at the bank level was approximately 302% of Tier 1 capital and allowance at June 30, down about 2 percentage points compared to the March quarter, due to almost $9 million in net paydowns of nonowner-occupied CRE and growth in Tier 1 capital. On a consolidated basis, our CRE ratio was 291% at the end of the quarter. Through the year, we would expect our CRE ratio to increase somewhat, but should stay in the 300% to 325% range. Stefan?

Thanks, Greg. Matt hit 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% included about 5 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits compared to the linked 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-bearing 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 specials as local deposit competition eased during the fourth quarter. With this, in addition to our loan portfolio still repricing up to current market rates and originating loans at higher than the 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 noninterest income, we're up about 9.2% compared to the linked quarter. This increase was largely driven by an additional card network bonus, which is based on annual buying incentives. The total bonus received in the fourth quarter was $537,000. In fiscal 2026, the estimated fee income for these annual bonuses will be accrued through the year. This item was partially offset by $108,000 charge to reduce the fair value of our mortgage servicing rights, which stems from the 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 the renewable energy tax credit benefits through a direct reduction to income taxes. This has resulted in lower fee income for fiscal 2025 of $701,000 as it was moved to reduce tax provisions. Noninterest expense was up 2.3% compared to the linked quarter. This was primarily attributable to $425,000 consulting expense captured in legal and professional fees to negotiate a 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 ACL at June 30, 2025, totaled $51.6 million, representing 1.26% of gross loans and 224% of nonperforming loans as compared to an ACL of $54.9 million or [1.37%] of gross loans and 250% of nonperforming loans in the linked quarter. $5.3 million of net charge-offs were realized in the quarter with $4.2 million of the increase from the linked quarter primarily due to the special purpose CRE relationship mentioned previously and $742,000 C&I 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 compares well versus banks under $10 billion. The decrease in the ACL was primarily attributable to net charge-offs, which reduced the required reserve for individually evaluated loans as well as a decline in certain 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 linked 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 provision. 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 5 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 in fiscal 2026 and sustaining long-term value creation for our shareholders. Greg, any closing thoughts?

Yes, Steph. We're proud of our accomplishments in fiscal '25, 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 of growth with the goal of translating these investments into sustained earnings 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 and with our solid capital base and proven financial performance, believe we are well positioned to act when the right transaction arises. 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.

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 Instructions] Our first question comes from Matt Olney from Stephens.

I want to start on the loan growth. Really good results we just 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. And then Greg mentioned, I think, potentially higher prepayments in the near term. Just want to dig into that statement. And is that something that you're already seeing early on in the quarter or something that borrowers have indicated that they could do? Just looking for any color.

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. And they're primarily in our nonowner-occupied commercial real estate.

Okay. Perfect. No, I think you hit on that. I appreciate it. And I guess changing gears over towards the margin. It sounds like, Stefan, the margin has got some nice tailwinds from here. Any more color you can provide about kind of expectations more near term within the margin? And then if we do get those Fed cuts that you mentioned, kind of what the impact could look like for the bank?

Yes. 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. But as that cash is deployed through loan growth, we do become a little more liability sensitive again. And part of the sort of driving forces is on just the natural NIM expansion that we could see is just from the loan origination activity and renewals repricing at higher rates than our current portfolio.

Yes. Okay. And it sounds like within the deposit competition, it sounds like you felt good enough this quarter. I think you mentioned you recently took down some promotional offerings. So it sounds like the overall competitive levels on the deposit side remains reasonable.

It's been more reasonable over the last 6 to 9 months. We did see a little bit of a tick up in competition in July. So that might stall out a bit, but it's still not at the relatively high levels compared to Fed funds that we were seeing a year ago at this time.

Okay. And then 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 on the last quarter. And I think I heard on the prepared remarks that the appraisal on one of the properties came in lower. Just want to dig in on that appraisal and just trying to appreciate just the collateral behind that and just kind of why experienced the deterioration that it did. And then 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?

We have -- we wrote down the balance on one of them after the appraisal came in. And with it being a special purpose entity that was operating it, we had a much higher than normal advance rate or lease rate that we advanced on that was more above market conditions with 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 an additional charge-off on the other remaining building, and we're still doing some negotiation with the guarantors on that on where we end up. But it would not surprise me to have an additional write-down.

And 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?

We have 42% of the balance in specific reserve.

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

This is Charlie on for Kelly. 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 like anything you expect from clients on deposit flows?

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. So that might drive a little bit slower growth on the CD side relative to the non-maturity side.

Okay. And then could you give some specifics on the CDs you have rolling off this quarter and the rates that are going to be replaced that?

Yes. So about on average over the next 12 months, the CD rates that we have are about [4.24%]. And on average, we're replacing at about 4%.

Anything materially different in the next 3 months?

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

Okay. That's great. And then just on the M&A environment kind of picking up, are you guys seeing the pace of conversations increase at all? And how are you viewing kind of the buyback here in this environment and then with prices where they're at?

We are having -- 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.

And then buyback.

And 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 our shares.

We currently have no further questions. So I'd like to hand back to Matt Funke for closing remarks.

Thank you, Sammy, and thank you, everyone, for your interest and attendance today. We appreciate the chance to visit with you, and we'll talk again in 3 months. Have a good day.