Southern Missouri Bancorp Q2 2025 Earnings Call Transcript

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January 28, 2025
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Operator

Hello, and welcome to the Southern Missouri Bancorp Earnings Conference Call. My name is Alex, and I'll be coordinating the call today. I'll hand it over to your host Stefan Chkotovich, CFO to begin. Please go ahead.

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

Thank you, Alex. Good morning, everyone. This is Stefan Chkotovich, CFO with Southern Missouri Bancorp. Thank you for joining us. The purpose of this call is to review the information and data presented in our quarterly earnings release, dated Monday, January 27, 2024, and to take your questions.

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

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 Steffen, our Chairman and CEO and by Matt Funke, President and Chief Administrative Officer. Matt will lead off our conversation today with some highlights from our most recent quarter.

Matt Funke
Matt Funke
President and Chief Administrative Officer at Southern Missouri Bancorp

Thanks, Stefan, and good morning, everyone. This is Matt Funke. Thanks for joining us. I'll start off with some highlights on our financial results for the December quarter, which is the Q2 of our fiscal year. Quarter over quarter, earnings and profitability improved due to a larger earning asset base driving an increase in net interest income in combination with a lower provision for credit losses and a decrease in non interest expense.

Matt Funke
Matt Funke
President and Chief Administrative Officer at Southern Missouri Bancorp

With the earnings and profitability improvement we have seen in the first half of our fiscal year, we feel we have good momentum and see positive trends going into the second half. We earned $1.30 diluted in the December quarter, that's up $0.20 from the linked September quarter and it's up $0.23 from the December 2023 quarter. Net interest margin for the quarter was 3.36% as compared to 3 point 2 5% recorded for the year ago period and was relatively flat compared to the Q1 of fiscal 'twenty five when it was 3.37%. Net interest income was up 4% quarter over quarter and about 10.5% year over year. In the Q2 of our fiscal year, we generally receive inflows of seasonal deposits from our agricultural customers and public unit depositors, which can drive some net interest margin compression with those funds held in higher cash balances.

Matt Funke
Matt Funke
President and Chief Administrative Officer at Southern Missouri Bancorp

However, this year with FOMC rate cuts of 100 basis points driving down short term rates and reducing the cost of our variable rate deposits, which have grown over recent periods, We were able to expand our net interest spread by 4 basis points in the quarter due to decreased funding costs and that helped hold the net interest margin relatively steady quarter over quarter. On the balance sheet, gross loan balances increased by just over $60,000,000 during the Q2. Compared to a year ago at December 31, 2023, gross balances were up $295,000,000 or just under 8%. Deposit balances increased by about $170,000,000 in the 2nd quarter and increased by $225,000,000 or about 5.5% compared to December 31st the prior year. Strong growth in deposits this quarter was a result of non maturity deposit accounts from seasonal deposit inflows and core CD growth from well received special rates offered during the quarter.

Matt Funke
Matt Funke
President and Chief Administrative Officer at Southern Missouri Bancorp

Due to strong deposit growth, cash equivalents grew $70,000,000 quarter over quarter and our available for sale securities portfolio grew about $48,000,000 or 11% as we took advantage of a better spread environment to purchase bonds and add on balance sheet liquidity. Tangible book value per share was $38.91 and increased by $4.26 or 12% during the last 12 months. I'll now hand it over to Greg for some discussion on credit.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

Thanks, Matt, and good morning, everyone. Overall, our asset quality remained strong at December 31st with adversely classified loans totaling $40,000,000 or 98 basis points of total loans, a decrease of about $849,000 or 4 basis points compared to the linked quarter. Non performing loan balances increased slightly by $103,000 to $8,000,000 at twelvethirty one, but in line as a percentage of total loans at 21 basis points, which is up 5 basis points from the prior year end. Non performing asset balances dropped to 22 basis points, down from 26 basis points last quarter due to the sale of several parcels of other real estate owned. Loans past due 30 days to 89 days totaled $7,000,000 which was stable compared to September 30th and at a low 17 basis points on gross loans.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

This is a decrease of 1 basis point compared to the linked quarter and down 2 basis points compared to a year ago. Total delinquent loans were $13,000,000 and also flat from September. Net charge offs remained benign at 2 basis points annualized. Overall, although credit quality has remained strong due to the recent period of sustained higher interest rates, we do expect problem loans and net charge offs could increase modestly, but we expect them to remain manageable and below industry averages. As compared to the prior end at as compared to the prior quarter end of September 30, agricultural real estate balances were little changed and they were up $2,000,000 compared to December 31, a year ago.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

Ag production and equipment loan balances were down 12,000,000 dollars quarter over quarter following our normal seasonal pattern. The paydowns have been relatively limited so far and balances are up $42,000,000 year over year. In calendar year 2024, our agricultural customers demonstrated resilience despite facing several weather related challenges, including spring rains and required replanting followed by a hot dry summer. But thanks to robust irrigation infrastructure, most farmers reported yields that exceeded expectations. However, commodity prices declined throughout the year, pressuring profitability, particularly for cotton soybeans and corn, which have experienced limited price recoveries more recently.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

Looking ahead to calendar 2025, we expect shifts in crop acreage as farmers respond to weaker market conditions and higher input costs. Corn acreage may decline in favor of soybeans and rice and cotton acreage is likely to be reduced unless prices improve. Many farmers have carried over 20 24 crops in hopes of higher pricing this spring, which has delayed pay downs on agricultural lines that should result in stronger repayments in the March quarter. While working capitals are lower across much of our farm customer base, we are proactively working to address any potential shortfalls by leveraging FSA guarantee programs or restructuring loans. And we expect some customers will be supported through government price support programs.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

Despite these challenges, our disciplined lending practices, stress testing of farm cash flows and deep customer relationships should ensure satisfactory performance on these credits. Looking at the loan portfolio as a whole, gross loans grew $60,000,000 or 6.1 percent annualized during the quarter. We're in the slower part of our fiscal year for loan growth due to the seasonal factors including ag. The bank experienced some well rounded growth stemming from construction, C and I, 1 to 4 family residential real estate and multifamily. Loan growth was led by our South region as well as our new regions based out of St.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

Louis and Kansas City. As our new lenders that we have added over the last year have started to add production totals. Our pipeline for loans to fund in the next 90 days totaled $173,000,000 at quarter end as compared to $168,000,000 at September 30 and $141,000,000 1 year ago. Although we are currently in a slower growth period with our normal winter seasonality, due to the strong first half of loan growth in the building pipeline, we feel optimistic about achieving at least mid single digit loan growth for the fiscal year. Now Stefan, would you provide some additional details on our financial performance?

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

Thanks, Greg. Matt hit some of the key financial items already, but I'll note a few additional details. Looking at this quarter's net interest margin of 3.36 and included about 9 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits, which was static compared to the linked September quarter, but down from the prior year's December quarter addition of 14 basis points. Although this can vary based on prepayment activity, we would expect this to trend lower by about a basis point a quarter. The primary contributor to the 1 basis point compression in the net interest margin compared to the linked quarter was the increase in lower yielding assets as the average balance of the investment portfolio and interest earning cash equivalents increased by almost $80,000,000 quarter over quarter.

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

This was mostly offset by an 11 basis point decrease in our cost of interest bearing liabilities to 3.33%. Looking into the March quarter through January, we have continued to see increases in seasonal deposits, which have further elevated our cash equivalent balances, which are primarily being held at the Federal Reserve. This, in addition to seasonally slower quarter for loan growth, could compress the net interest margin. But we would expect the net interest spread, which is the difference between our earning asset yield and cost of interest bearing liabilities to improve slightly as loans reprice higher at renewal and CDs continue to reprice down. In addition, the reduced day count in the March quarter will have a small negative impact on the quarterly net interest income.

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

Non interest income was down 4.3% compared to the linked quarter due to reduced gain on sale of loans, primarily SBA, a decrease in interchange income as the September quarter's results included receipt of additional card network fees based on annual volume incentives and as we saw a decrease in interchange per transaction and lower other loan fees. Non interest expense was down 3.7% quarter over quarter, primarily due to lower compensation and legal professional fees. The lower compensation expense in the December quarter is primarily due to the timing of accruals. Legal and professional expense have decreased due to the one time payment in the September quarter associated with the performance improvement initiative of 840,000 dollars These decreases were partially offset by an increase in other non interest expense due to expenses associated with SBA loans and costs for employee travel and training. We would expect to see a quarterly increase in the compensation expense run rate in the March quarter as annual merit increases and cost of living adjustments take effect, for which we awarded mid single digit percentage increase including the cost of benefits.

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

Our provision for credit losses was $932,000 in the quarter as compared to $2,200,000 in the linked quarter. The September quarter provision was elevated to support strong loan growth and an increase in credit reserves for individually reviewed loans. Our allowance for credit losses at December 31, 2024 was $55,000,000 or 1.36 percent of gross loans and 6.59 percent of non performing loans as compared to an ACL of $54,000,000 or 1.37 percent of gross loans and 6.63% of non performing loans at September 30, 2024, the linked quarter. The current period PCL was the result of $501,000 provision attributable to the ACL for loan balances outstanding and $431,000 provision attributable to the allowance for off balance sheet credit exposures. Our assessment of the economic outlook was little changed.

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

Our non owner occupied CRE concentration at the bank level was approximately 3 17 percent of Tier 1 capital and allowance for credit losses at December 31, 2024, down about 3 percentage points as compared to September 30 due to growth in our Tier 1 capital outpacing our non owner occupied CRE. On a consolidated basis, our CRE ratio was 3 0 6 percent at December 31. Our intent would be to hold relatively steady on this measure and grow our CRE in line with capital, but we expect it may pick up somewhat in the next few quarters with construction draws. The effective tax rate was 23.7% in the quarter as compared to 21.3% in the linked quarter and 20.6% in the same quarter of the prior fiscal year. The effective tax rate for the Q2 of fiscal 2025 was elevated due to an adjustment of tax accruals of 380,000 attributable to completed merger activity.

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

We would expect the effective tax rate to return to our normal range in the second half of the fiscal year. To conclude, the first half of the fiscal year twenty twenty five has been a strong one, characterized by robust loan growth and improved profitability. With a healthy loan pipeline and favorable underlying trends, we are optimistic about the remainder of the year. Craig, any closing thoughts?

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

Thanks, Stefan. We're currently in the final stages of receiving recommendations from the performance improvement initiative that we launched last quarter. This initiative is not only a pivotal step in enhancing our ability to meet our customer needs quickly and effectively, but it's also an opportunity to improve our longer run efficiency. And it also serves as a valuable professional development tool for our team. I'm immensely proud of how our employees and team members have embraced the process with energy and dedication, and some of these enhancements are already being implemented across our organization.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

The timeframe for full adoption of the recommendations that we intend to move forward with will run over several years, and we're really optimistic about longer term results. Alongside the contributions from our incredible team, we have been actively expanding our talent pool, particularly in our newer markets in Kansas City and St. Louis. These efforts are already yielding positive results. More recently, we welcomed a new Director of Wealth Management and Trust Services, and we're excited to see her take on trust and brokerage services as we move to a higher and improved level.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

We are also optimistic about the remainder of fiscal 'twenty five as the improving yield curve slope and strong business activity in our markets create a favorable environment for earnings growth. Lastly, we've observed small but encouraging signs of increased M and A conversations. While these remain in preliminary stages, we believe the improvement in bank valuations will drive more interest from potential sellers in the intermediate future. Stefan?

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

Thanks, Greg. At this time, Alex, we're ready to take questions from our participants. So if you would, please remind the callers how they may queue for questions at this time.

Operator

Thank you. Our first question for today comes from Matt Olney of Stephens. Your line is now open. Please go ahead.

Matt Olney
Managing Director at Stephens Inc

Hey, guys. Good morning.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

Good morning, Matt.

Matt Olney
Managing Director at Stephens Inc

Thanks for taking the question. Just want to ask kind of a more of a broad question first on your operating markets. You operate in some rural markets and some maybe on the edges of more larger metro markets. I'm just curious about what you're seeing on deposit competition in the recent weeks months. Any differences you're seeing in those various types of markets within your footprint?

Matt Funke
Matt Funke
President and Chief Administrative Officer at Southern Missouri Bancorp

I don't know that I could point to a specific difference between rural and metro right now. It's kind of a mixed bag on the competition front overall. I think it's pretty clear there's been a decreased fight for funds in the last 6 months compared to where we were towards the end of 'twenty three or I guess maybe for most of 'twenty three. But we still see some outliers up there with rates that are in the very high 4s, which is kind of puzzling to us. But we do see it in some one off situations and it does drive some activity.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

In a variety of markets, we have some banking brethren that have higher loan to deposit ratios that do seem to drive deposit pricing in different markets. But I wouldn't say it would be consistent from rural versus metro.

Matt Olney
Managing Director at Stephens Inc

Okay. Okay. Appreciate that. And then, I guess, on the liquidity front, it sounds like you feel good about the liquidity you're bringing in and you're opportunistic and bought some securities during the December quarter end. Any more color on just that decision to buy securities?

Matt Olney
Managing Director at Stephens Inc

And then just more color on what you purchased in terms of durations and yields?

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

Yes. Thanks, Matt, for the question. So, yes, we took a bit of a I guess, we took what the market gave us. We had some higher market rates. So we took opportunistically purchased about $50,000,000 in CDs and paired that with some broker deposits.

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

Net, we didn't see any real growth in

Matt Olney
Managing Director at Stephens Inc

broker deposits. CDs, we didn't buy CDs.

Matt Funke
Matt Funke
President and Chief Administrative Officer at Southern Missouri Bancorp

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

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

We funded the purchases with brokered CDs, but it was mixed about fifty-fifty

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

available for sale variable and fixed rate, mostly CMOs and mortgage backed securities.

Matt Olney
Managing Director at Stephens Inc

Okay. That's helpful. And then just lastly, I guess, on the expense side, nice performance on the just cost controls just more broadly in this past quarter. Any more color on just what we should expect on expenses over the next few quarters?

Matt Funke
Matt Funke
President and Chief Administrative Officer at Southern Missouri Bancorp

Nothing real significant. We do have kind of our seasonal compensation adjustments Stefan mentioned on the prepared remarks that will hit in March and then kind of grow into it over the remainder of the year. We've been doing pretty well bringing down some of our data connectivity costs, that's been a tailwind for us. Occupancy, there shouldn't be anything really new going on there for a while. We've got a new branch coming on, but that'll be just over time.

Matt Funke
Matt Funke
President and Chief Administrative Officer at Southern Missouri Bancorp

Nothing really to note there, Matt.

Matt Olney
Managing Director at Stephens Inc

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

Matt Funke
Matt Funke
President and Chief Administrative Officer at Southern Missouri Bancorp

Thank you.

Operator

Thank

Operator

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

Andrew Liesch
Andrew Liesch
MD & Senior Research Analyst at Piper Sandler Companies

Hey, guys. Good morning.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

Good morning, Andrew.

Andrew Liesch
Andrew Liesch
MD & Senior Research Analyst at Piper Sandler Companies

I just

Andrew Liesch
Andrew Liesch
MD & Senior Research Analyst at Piper Sandler Companies

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

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

I would anticipate that we would have stable balances to slightly higher balances. I could see us doing roughly half the growth that we did this last quarter.

Andrew Liesch
Andrew Liesch
MD & Senior Research Analyst at Piper Sandler Companies

Got it. That makes sense. Then looking into, call it, your last fiscal quarter, that's which is usually one of the strongest quarters. Do you think some of the growth might be pulled forward? Because it seems like high single digits is certainly doable this year, at least to beat the 6 0.5% or so from last year, just given where you are right now.

Andrew Liesch
Andrew Liesch
MD & Senior Research Analyst at Piper Sandler Companies

So do you think that maybe the mid single digits could be surpassed?

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

I think it's definitely a possibility. The growth in the June quarter will be in part predicated by agricultural planting conditions and when do the farmers plant their crop to where is part of that growth going to occur? Will some of it be leaning towards in the June quarter or will part of it move later? But it's impossible to know weather conditions at this point for that. But if everything tracks, we don't feel like it definitely could be mid to higher single digits.

Andrew Liesch
Andrew Liesch
MD & Senior Research Analyst at Piper Sandler Companies

Got it. All right. Very helpful. And then looking at the margins past this quarter or the current quarter that we're in, maybe they're recognizing we could see some pressure. Is the bigger factor right now just liquidity?

Andrew Liesch
Andrew Liesch
MD & Senior Research Analyst at Piper Sandler Companies

It seems like you have some good opportunities on the funding side. And has that liquidity kind of rightsizes to the margin step higher? Is that a good way to think about

Andrew Liesch
Andrew Liesch
MD & Senior Research Analyst at Piper Sandler Companies

it?

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

Yes, sir. That's a great way to look at it, Andrew. So it's a little bit of a balancing act for NII there, depending on the outflows of some of these seasonal deposits from the public unit and the ag clients. So basically, I wouldn't expect a whole lot of net interest income growth in the quarter.

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

But if the average balances hang around longer, you would see a little bit more pressure on the NIM, should give us a little bit more NII than reverse if the balances go out quicker, we would expect to see a little bit of NIM improvement maybe or hang in there a little bit better.

Operator

Our next question comes from Kelly Motta of KBW.

Analyst

This is Charlie on for Kelly Motta.

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

Good morning, Charlie.

Analyst

Just to dig into the loan growth some more, it was really healthy this quarter, supported by growth in construction. Just curious what you're seeing there? Are you seeing more projects being funded and more activity in those markets? Thanks.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

Really, we're just we're seeing a continuation of projects that we had underway. So we have a stable pipeline of construction draws that are occurring. We'd expect that some of the rate of that growth will slow as the quarter progresses as existing projects do get completed and paid off. So we've had a little over $100,000,000 in construction land development growth since June 30th. The pace of that will slow down and would anticipate that balances might moderate a little bit in the latter part of our fiscal year.

Analyst

That's helpful. Thank you. And then given this growth, you said CRE is just over 3 0 6 percent as of December and possibly increasing throughout 2025. Just wondering where your comfort level is with current concentrations and how you expect this concentration to trend longer and shorter term?

Analyst

Thanks.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

Our internal limit is a fair amount higher than this. Our internal limit is 3.75%. We anticipate our balances to basically fluctuate between $300,000,000 $325,000,000 is kind of where we target that ratio.

Operator

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

Stefan Chkautovich
Stefan Chkautovich
Executive VP, CFO & Principal Accounting Officer at Southern Missouri Bancorp

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

Matt Funke
Matt Funke
President and Chief Administrative Officer at Southern Missouri Bancorp

Thanks all.

Greg Steffens
Greg Steffens
Chairman & CEO at Southern Missouri Bancorp

Thanks everyone. Talk to you next quarter.

Executives
    • Stefan Chkautovich
      Stefan Chkautovich
      Executive VP, CFO & Principal Accounting Officer
    • Matt Funke
      Matt Funke
      President and Chief Administrative Officer
    • Greg Steffens
      Greg Steffens
      Chairman & CEO
Analysts
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