SMBC

I'd like to welcome everyone to Southern Missouri Bancorp Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Stefan Chkautovich, Chief Financial Officer. You may begin.

Thank you, Bella. Good morning, everyone. This is Stefan Chkautovich, CFO with Southern Missouri Bancorp. Thank you for joining us today. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Wednesday, April 22nd, 2026, and to take your questions. We may make certain forward-looking statements during today's call, and we refer you to our cautionary statement regarding forward-looking statements contained in the press release. I'm joined on the call today by Greg Steffens, our Chairman and CEO, and Matt Funke, President and Chief Administrative Officer. Matt will lead off our conversation today with some highlights from our most recent quarter and fiscal year.

Thank you, Stefan. Good morning, everyone. This is Matt Funke. 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, our earnings and profitability were down a bit from an increase in operating expenses and a modest uptick in provision for credit losses, primarily driven by loan growth and higher reserve for pooled loans. This was partially offset by a lower provision for income taxes, better non-interest income, and slightly higher levels of net interest income.

Although earnings and profitability were down slightly, the March quarter is typically our weakest quarter from a profitability perspective, and we actually had less impact from the seasonality than we typically see due to lower average cash balances as we decreased our brokered funding compared to the year-ago quarter, and because we experienced stronger loan growth. While maintaining an ROA above 1.40% the last two quarters, we feel good about what we've been able to achieve in earnings and profitability this fiscal year, and we're optimistic about continuing this trend into the final quarter. We earned $1.60 diluted in the March quarter. That's down $0.02 from the linked December quarter, but it's up $0.21 from the March 2025 quarter.

Net interest margin for the quarter was 3.67% as compared to 3.44% reported for the year-ago period and up from 3.57% reported for the second quarter of fiscal 2026. Net interest income was up just under 1% quarter-over-quarter and up just over 9% year-over-year due to the increase in average earning asset balances and net interest margin expansion. Stefan will run through more of the moving parts of the NIM in a bit. On the balance sheet, gross loan balances increased by $96 million during the third quarter, and compared to March 31st of the prior year, gross loan balances are up just under $300 million or 7.4%.

Growth in the quarter was primarily in our loans collateralized by real estate, with all segments up with the exception of construction and land development loans, as we had a larger project move to a term financing facility. In addition, we also saw some growth in C&I and ag production loans as borrowers began the planting season later in the quarter. We experienced strong growth in our South region, followed by good growth in our North region. We had another good quarter for loan originations, generating about $282 million, which was seasonally strong, up $94 million from the same quarter a year ago. As we enter the fourth quarter, which has historically been a stronger quarter for loan originations, our expected loan pipeline for the next 90 days has increased to $178 million, up from $159 million expected at December 31st.

Due to some anticipated larger loan payoffs in the fourth quarter, we could see a bit more muted loan growth, but with achieving 5.4% loan growth in the fiscal year to date thus far, we're in a good position to reach the higher end of our anticipated mid-single-digit loan growth range for fiscal 2026. Deposit balances increased by about $33 million in the third quarter and increased by $80 million or about 2% year-over-year. As we've been less competitive this year on local deposit rate specials, the quarter-over-quarter growth was primarily driven by brokered deposits. Year-over-year, brokered deposits have declined just over $9 million, but they increased $36 million compared to the linked quarter-end as local deposit rate competition was stiff and wholesale sources offered much more cost-effective funding.

We plan to launch a new business account in the coming quarter, which, if successful over time, along with tweaks to our team member incentives, could help increase our balances in lower-cost operating accounts at the bank. Tangible book value per share was $45.80 at March 31st and has increased by $5.43, or 13.5%, over the last 12 months. Finally, in the second quarter, in the third quarter, excuse me, we repurchased 156,000 shares at an average price of $61.97 per share for a total of $9.7 million. The average purchase price was 135% of our tangible book value as of March 31st. I'll now hand it over to Greg for some additional discussion.

Thank you, Matt, and good morning, everyone. Starting with credit quality, adversely classified loans improved some since last quarter, totaling $56 million for 1.3% of gross loans, down $3 million or 11 basis points as a percent of gross loans since last quarter. Non-performing loans were around $30 million at March 31st and totaled 0.7% of gross loans, an increase of $480,000 compared to the prior quarter. Non-performing assets were around $32 million and increased $757,000 quarter-over-quarter, with no material non-performing loans or other real estate being added this quarter.

Loans past due 30 to 89 days were $10.5 million, down $1.3 million from December and totaled 24 basis points of gross loans. This is a decrease of four basis points compared to the linked quarter and down 13 basis points compared to a year ago. Total delinquent loans were $32 million, which was essentially flat from December and represented 74 basis points as a percentage of total loans.

While Non-Performing Assets, non-accrual loans remain elevated compared to our historical levels, overall problem asset levels remain manageable, and our earnings are sufficient to cover potential reserves while maintaining above-average profitability. In combination with our underwriting standards and reserve position, we remain comfortable with our ability to work through existing credits and to manage any broader pressures that could emerge from economic conditions. That said, we're not complacent with current levels of problem assets. We remain focused on improving credit quality, and we feel good about progress being made across several problem credits as workout strategies continue to move forward. Turning to ag. This quarter, ag real estate balances totaled $279 million, or 6% of gross loans, and ag production and equipment loans were $204 million, or 5% of gross loans.

As compared to the prior quarter end, December 31, ag real estate balances were up $17 million and up $32 million compared to 3/31 a year ago. Agricultural production and equipment loan balances were up $2 million quarter over quarter and up $18 million year-over-year, with expectations for these balances to increase in the coming quarter as planting season ramps up. Farm liquidity improved with many line paydowns, but many producers deferred sales in 2026 due to weak commodity prices last fall and utilized Commodity Credit Corporation stored grain loans to generate liquidity. A significant portion of 2025 rice and cotton production remains unsold, while most corn and soybean stores have been liquidated.

Depressed prices and some yield pressure in 2025 resulted in borrower shortfalls in our portfolio, driving restructurings, which contributed to growth in our ag real estate balance as mentioned before, as we used our strong borrowers' equity position to satisfy operating shortfalls. Despite elevated carryover debt levels and tighter repayment capacity, our impacted borrowers were successfully repositioned to continue operations this year. Looking ahead, the 2026 crop year is shaping up to be another high-cost environment, though commodity prices have improved modestly relative to our conservative underwriting assumptions. Producers are actively managing input costs and shifting acreage towards lower-cost crops, particularly soybeans. While lenders have maintained disciplined underwriting through stress testing, both cash flows and collateral values. Early planning progress has been favorable. While we're optimistic that government support and stronger market prices will provide some relief, 2026 is expected to be another challenging year, largely dependent on commodity prices.

Despite these challenges, we expect to see satisfactory performance of our customers. In addition, due to prolonged weakness in the agricultural segment, we have taken the prolonged pressure in ag into consideration in our calculation of our allowance for credit losses to reserve more for our agricultural exposure. Stefan?

Thanks, Greg. Matt hit some of the key financial items already, but I wanted to share a few details. This quarter's net interest margin of 3.67% was up 10 basis points compared to the linked December quarter. The NIM included about three basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits, compared to five in the linked December quarter and down from the prior March year's March quarter addition of 13 basis points, as we had a larger marked loan prepay in that quarter. The linked quarter improvement in the NIM was primarily driven by a nine basis point improvement in our cost of funds to 2.52%, benefiting from the December 2025, 25 basis point rate cut and a small benefit from a one basis point increase in average earning asset yields. Loan yields were flat quarter over quarter at 6.26%.

As mentioned last quarter, our loan portfolio has largely repriced up to where we are seeing current market rate originations. Over the next 12 months, we have $646 million of fixed-rate loans repricing with an average rate of 6.33%, compared to new and renew loans coming on around 6.50%. Most of these loans with lower rates are maturing in fiscal 2027 or starting in July. Our fourth quarter 2026 average rate for maturing fixed-rate loans is 7%, so we could see some pressure next quarter on our loan yields. On the CD front, we have about $1.1 billion maturing over the next 12 months with an average rate of 3.84%, with new origination rates in the 3.80s and renewals moderately lower.

With these dynamics, we do not expect to see material near-term expansion of the NIM, as we saw this last quarter, without further rate cuts by the FOMC. Non-interest income was up $314,000, or 4.6%, compared to the linked quarter, primarily due to higher other non-interest income from the gain on sale of membership interest of a tax credit investment and increased earnings on bank-owned life insurance from a mortality benefit realized in the quarter.

On a year-over-year basis, fee income was up $424,000 or 6.4%, which in addition to the benefit from the sale on the tax credit investment and BOLI, the bank had elevated levels of fee income from deposit account charges and related fees, as well as bank card interchange income, which was partially offset by lower other loan fees, reflecting a refinement of our fee recognition under ASC 310-20, with a greater portion now recognized in interest income over the life of the loan. The increase in deposit account charges was primarily a result of higher non-sufficient fund income from increased overdrafts, in addition to growth in wire volume from the addition of several cash management clients. Non-interest expense was up 3.8% quarter-over-quarter, primarily due to higher compensation and benefits expenses, other non-interest expense and occupancy and equipment expenses.

The increase in compensation and benefits expense was primarily due to annual merit increases, which took effect in January. Other non-interest expense increased largely due to expenses for lending activities, loan collection and management of foreclosed real estate. Lastly, occupancy and equipment expense growth was primarily driven by elevated maintenance and repairs costs, remodel projects and equipment purchases. The allowance for credit loss at March 31st, 2026, totaled $55.9 million, representing 1.29% of gross loans and 186% of non-performing loans, as compared to an ACL of $54.5 million, representing 1.29% of gross loans and 184% of NPLs at December 31st, 2025. The increase in the ACL was primarily attributable to higher reserves required for pooled loans, driven largely by increased reserves on agricultural loans, reflecting ongoing pressure in the ag sector and loan growth.

As a percentage of average loans outstanding, the company recorded net charge-offs of four basis points annualized as compared to net recoveries of seven basis points during the linked quarter. The net recoveries in the December quarter were primarily driven by the workout of the specialty CRE relationship that we've discussed in prior quarters. Our provision for credit losses was $2.1 million in the quarter, which was a $400,000 increase compared to the linked quarter. The current period PCL was the result of a $1.8 million provision attributable to the ACL for loan balances outstanding and $234,000 provision attributable to the allowance for off-balance sheet credit exposure to support an increase in unfunded loan commitments.

Our non-owner occupied CRE concentration at the bank level was approximately 291% of Tier 1 capital and allowance for credit losses at March 31st, 2026, up by about two percentage points as compared to December 31st. On a consolidated basis, our CRE ratio was 283%, up one percentage point quarter-over-quarter. Both CRE concentration ratios increased due to growth of non-owner occupied CRE and multifamily loans, which was partially offset by a decrease in construction and land development loans, which outpaced growth in our Tier 1 capital. The last item I wanted to touch on is our effective tax rate. Our effective tax rate for the quarter was 19.1% compared to the linked quarter of 20%, and the same period last year of 20.9%.

This fiscal year, we have benefited from lower state tax rates and revised apportionment methodology, as well as ongoing benefits from the recognition of tax credits under the proportional amortization method in accordance with ASU 2023-02. Structurally, this has led to a slightly lower tax rate year-over-year, but this quarter, we also had a catch up in recognition of tax-exempt interest income. With that, we see our run rate effective tax rate to be in the range of 19.5%-20%. Overall, we're encouraged by the meaningful improvement in earnings and profitability year to date, particularly over the past two quarters as provision for credit losses has returned to more normalized levels. We remain optimistic that these positive trends will continue through the fourth quarter of fiscal 2026 and extend into fiscal 2027. Greg, any closing thoughts?

Thanks, Stefan. With our return on assets exceeding 1.4% over the past two quarters, we continue to build capital, enhancing our flexibility to return capital to shareholders, reduce higher cost debt, and fund future growth opportunities. This quarter, we repurchased shares at attractive levels while maintaining excess capital to deploy into accretive opportunities, and we have the capacity to retire $7.5 million of subordinated debt as it becomes callable in May. On M&A, discussions have remained active since last quarter. Within our footprint alone, there's approximately 75 banks with $500 million-$2 billion in assets, along with additional institutions in adjacent markets, providing a broad pipeline of potential opportunities. Coupled with our improved trading multiples and strong capital position, we believe we are well-positioned to act when the right partner and deal structure emerges. In closing, we're pleased with the quarter and confident in our trajectory.

Our focus remains on disciplined execution, prudent risk management, and thoughtful capital deployment to deliver sustained attractive returns to our shareholders.

Thanks, Greg. Bella, at this time, would you remind callers how they can queue for questions, and we'll be ready to take those.

All right. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Charlie Driscoll with KBW. Your line is now open. Please go ahead.

Hi, guys. Thanks for the question. This is Charlie on for Kelly Motta. Given the loan-to-deposit ratio around 100% coming out of the quarter, I know it's a seasonally strong quarter for loan growth. Is the expectation that deposit gathering can largely keep up with your loan growth outlook? Just curious maybe to get your thoughts on the opportunities to increase on the right side of the balance sheet from a deposit gathering perspective. Thanks.

Well, Charlie, we normally see March as our slower quarter for the lending side and a little bit stronger quarter on the deposit side. That flipped back a little bit this year. Deposit growth is gonna be a governing factor in how fast we can grow loans. We can grow deposits quickly. The question is growing them at a low cost. That is our challenge as an organization and something we are focused very much on. We still feel confident we can achieve that mid-single digit for the foreseeable future on both sides of the balance sheet.

Great. Thank you. Just on capital allocation, is there any additional appetite on the buyback over the near term? Or do you view this quarter's activity as a good run rate or kind of taking advantage of market volatility?

Yeah, it's probably a little higher than what we would like to see quarter-over-quarter or on a consistent quarterly basis, I guess is what I should say. The market volatility definitely played a role. If prices would improve from here, we'd expect activity to be a little bit more muted.

Generally, we anticipate a three to 3.5-year earn back on repurchased shares. Price will determine how active we would be in the stock repurchases.

All right, great. Thanks, guys. That's all I had. Thanks.

Thank you, Charlie.

Your next question comes from the line of Nathan Race with Piper Sandler. Please go ahead.

Hey, guys. Good morning. Thanks for taking the questions. I was wondering if you could just, maybe Greg or Matt, just expand a little bit on kind of what's driving the strength in the pipeline. It looked like your loans slated to close are up about 12% versus last quarter. Just curious if this is largely coming from share gains or if you guys are adding some producers or just kind of generally what you're seeing in terms of pipeline strength recently.

We added several people six months ago, and we're seeing some of them hit their strides now, getting through periods of when they were getting acclimated, getting deals closed. Some of it is for people that have been on staff three to six months, and we're just having an increased number of looks out there from what we did have. We really haven't changed really much of any of our underwriting guidelines or structure. We're just having more deals come to fruition, and our people are performing well. We're happy with our loan production volume and generally happy with the pricing of it.

Okay, that's great. Then one maybe for Stefan on the fee income outlook. If we take out the tax credit gains within other, it's something closer to $6.9 million or $7 million of better run rate for the June quarter. Just generally, any kind of fee income initiatives you want to highlight as you look out to maybe growth aspirations in fiscal year 2027?

Yeah. The tax credit gain was about $305,000 and then we had the full gain of about $130,000. That wouldn't be expected to be in our sort of core run rate going forward. Nothing near term on the fee income side. That is an area of focus for us sort of going forward on wealth management, insurance, and some other aspects that we're working on in the background.

Okay, got it. Then maybe one last one for you as well, Stefan, just on kind of the margin trajectory from here. I'm not sure how you guys are thinking about maybe the magnitude of additional expansion, with the Fed on pause, obviously, I think additional Fed cuts would help from a funding cost perspective and just given that you have kind of less repricing on the left side of the balance sheet. Just kind of any thoughts on just kind of how the margin can trend over the next few quarters?

Yeah. This coming quarter, our fourth quarter, would expect sort of limited NIM expansion. As I stated on the call earlier on some remarks, we have some higher-rate, fixed-rate loans that are maturing, and our average sort of repricing is a little bit lower by about 50 basis points or so. That could be a little bit of pressure. To start our new fiscal year, we see some benefits on that side picking up. On the sort of deposit pricing side, don't really see anything in the near term for a large incremental benefit without further rate cuts.

Okay, perfect. Maybe just one last one actually for Greg. Any thoughts on just maybe the timing and kind of magnitude of some resolutions of non-performers? Obviously, you guys are still running at higher levels relative to your historical track record. Just curious if you have any visibility in terms of when we could start to see some of these non-performers cure?

We're really pretty optimistic that we'll start trending lower this quarter. This quarter and the following quarter, we would expect to see some improvement in NPA numbers. Some of it may result in being other real estate, but several deals are reaching conclusion this quarter. We feel good about where we're at on most of them.

Okay. It sounds like, based on existing reserves and marks, you're not really expecting a material rise in charge-offs as some of these loans cure.

There could be some charge-offs related to one, but I don't anticipate it to have any impact on ACL or on our provisioning.

Good. Got it. I appreciate all the color. Congrats on the nice quarter, guys.

Thank you.

Thank you.

Your last question comes from the line of Jordan Ghent with Stephens Inc. Please go ahead.

Hey, good morning. Thanks for taking my question. Most of them have been answered, but I just had one on the expenses. Kind of what's a good run rate kind of going forward? I think you talked about higher occupancy expenses in this last quarter. If we take those out, would that be kind of a good run rate over the next few quarters?

I would think this quarter's run rate would be good to use for going forward. There wasn't a whole lot of one-time events in there on the expense side.

Got it. Okay. Thanks for that, and that's it for me.

Thanks, Jordan.

That concludes our Q&A session. I will now turn the call back over to Matt Funke, President, for closing remarks.

Well, thank you, Bella, and thank you everyone for joining us. We appreciate your interest in the company, and we look forward to visiting again here in three months. Have a good day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect. Everyone, have a great day.