Southern Missouri Bancorp Q3 2025 Earnings Call Transcript

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April 20, 2025

Key Takeaways

  • Southern Missouri Bancorp reported $1.39 diluted EPS for the quarter, up $0.09 QoQ and $0.40 YoY, driven by a 3.5% QoQ increase in net interest income and a 3.39% net interest margin.
  • Management expects a run-rate NIM of about 3.4% in upcoming quarters as $143 M of excess cash is redeployed into higher-yielding loans and deposit costs remain low.
  • Loan balances grew 7% YoY (despite a $3.5 M QoQ dip) and deposits rose 7% YoY, with a $163 M loan pipeline supporting mid-single-digit loan growth guidance.
  • Nonperforming loans climbed to $22 M (0.55% of gross loans), led by two non-owner-occupied CRE credits, though the allowance covers 250% of NPLs and reserves were bolstered for agricultural exposure.
  • Capital strength remains robust with tangible book value per share at $40.37 (+14% YoY), tangible common equity above targets, and management open to opportunistic share repurchases.
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Earnings Conference Call
Southern Missouri Bancorp Q3 2025
00:00 / 00:00

There are 7 speakers on the call.

Operator

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. I will now hand over to your host, Stefan CFO, to begin. Please go ahead.

Speaker 1

Thank you, Sammy. Good morning, everyone. This is Stefan Chkotovic, 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, 04/21/2025, and to take your questions.

Speaker 1

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 Craig 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.

Speaker 2

Thank you, Stefan. Good morning, everyone. Thanks for joining us. I'll start off with some highlights on our financial results for the March, 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.

Speaker 2

With the earnings and profitability improvement in the three quarters of our fiscal year, we continue to see positive trends going into the last quarter as we close out fiscal twenty twenty five. We earned $1.39 diluted in the March, that's up $09 from the linked December and up $0.40 from the March. 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 twenty twenty five, 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.

Speaker 2

Excluding fair value accretion, the net interest margin would have been approximately 3.26%, which would be down one 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 $3,500,000 compared to the December, but increased by $252,000,000 as compared to 03/31/2024.

Speaker 2

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 $51,000,000 in the third quarter and increased by $275,000,000 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 $81,000,000 or 56% quarter over quarter, setting us up well for the next six months when we normally see stronger loan growth.

Speaker 2

Tangible book value per share was $40.37 and has increased by $4.86 or almost 14% over the last twelve months. If you back out modest improvement in the security portfolios 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.

Speaker 3

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 in March 31, with adversely classified loans at $49,000,000 or 1.2% of total loans, an increase of about $9,000,000 or 23 basis points during the quarter. Non performing loans were $22,000,000 which increased $14,000,000 compared to last quarter and totaled 0.55% of gross loans. In comparison to March 2024, NPLs were up about $15,000,000 and 35 basis points higher as a percentage of total loans. The increase in NPLs this quarter was mostly due to loans totaling $10,000,000 primarily collateralized by two specific purpose non owner occupied CRE properties in different states with guarantors in common and originally leased to a single tenant who has since become insolvent.

Speaker 3

Those loans are on nonaccrual status, and we are working with the borrowers and guarantors to improve our position. Loans past due thirty to eighty nine days were 15,000,000 up $8,000,000 from December and 38 basis points on gross loans. This is an increase of 21 basis points compared to the linked quarter and up 23 basis points compared to one year ago. Total delinquent loans were $24,000,000 up $11,000,000 from December. The increase in loans thirty to eighty nine days past due was primarily driven from NPLs I previously mentioned, and the remaining loans over ninety days delinquent are a mixture of loans collateralized by Ag real estate, CRE, C and I and one to four family residences, with an average loan size of around $120,000 and no single loan larger than $1,500,000 Despite the increase in problem loans, these issues remain at modest levels as compared favorably to the industry.

Speaker 3

In combination with strong underwriting 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 $247,000,000 or 6% of gross loans, and Ag production equipment loans totaled 186,000,000 or 5% of gross loans. As compared to the prior quarter end December 31, Ag real estate balances were up $7,000,000 and up $13,000,000 compared to one year ago. Ag production and equipment loan balances were down 2,000,000 quarter over quarter due to normal seasonality, but up $47,000,000 year over year.

Speaker 3

In early twenty twenty five, ag operating balances reflected a slower pace of pay downs due to farmers continuing to hold a larger portion of their 2024 crop, resulting in an estimated $53,000,000 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 $15,000,000 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.

Speaker 3

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. Price having performed well both in yield and market value is poised for expanded acreage.

Speaker 3

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 twenty twenty four losses. However, declining equipment values and cautious real estate activity indicate a tight financial environment and many producers remain concerned about profitability, hopefully 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 for restructuring loans, and we expect some customers will be supported through government price support programs.

Speaker 3

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 allowance for credit losses allows to reserve more for our ag related exposure. Looking at the loan portfolio as a whole, gross loans supplied $3,500,000 during the quarter, which is seasonally a slower part of our loan growth for the year. Additionally, our construction and development segments had net pay downs of almost 18%. Our pipeline for loans to fund in the next ninety days remains strong and totaled $163,000,000 at quarter end as compared to $173,000,000 at December 31 and $117,000,000 one year ago.

Speaker 3

Although the March was slow due to the strong 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 $188,000,000 in the March, which was down almost $100,000,000 compared to the December. In the March a year ago, we originated $241,000,000 which was a stronger than usual quarter that had elevated originations of CRE. The leading categories this quarter were non owner occupied CRE, land and ag real estate compared to the linked quarter, when we saw growth primarily in CRE construction, one to four family and C and I. Our non owner occupied CRE concentration at the bank level was approximately three zero four percent of Tier one capital in ACL at threethirty one, down about 13 percentage points as compared to twelvethirty one.

Speaker 3

On a consolidated basis, our CRE ratio was two ninety three 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 three twenty five range, with our intent to grow CRE in line with capital from there. Stefan?

Speaker 1

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% that 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 of nine 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 six basis points in this quarter's net interest margin.

Speaker 1

Also, the ninety day March quarter compared to the ninety two day December quarter impacted reported margin to the downside with a swing of as much of seven 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 3.4%. Due to the decrease in short term rates, we continue to see deposits repriced 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 cost 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.

Speaker 1

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 6.1% compared to the linked quarter of 6.12%. This was impacted by a reduced pace of upward loan repricing, And in the March, we had an average balance of $143,000,000 in interest bearing cash balances, up $78,000,000 quarter over quarter, which hampered the net interest margin. Looking into the next two 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. Non interest 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.

Speaker 1

On a year over year basis, fee income was up $1,100,000 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 twenty twenty four. Non interest 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 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 two less days in the March and a decrease in bonus and health insurance accruals.

Speaker 1

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 03/31/2025 was $54,900,000 or 1.37% of gross loans and 250% of non performing loans as compared to an ACL of $54,700,000 or 1.36% of gross loans and $6.59 percent of non performing loans at 12/31/2024 of the linked quarter. Net charge offs for the quarter were $1,100,000 or annualized 11 basis points of average loans compared to $198,000 and two 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 five basis points.

Speaker 1

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 $1,300,000 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 or 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.

Speaker 1

Despite recent volatility in markets, we are happy with the improvement we have seen in earnings and profitability year to date. We feel optimistic to see trends continuing through our fiscal year 2025. Greg, any closing thoughts?

Speaker 3

Thanks, Stefan. Yes, our fiscal twenty twenty five has been a great year so far in both our financial metrics and culture. 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.

Speaker 3

As a result of this initiative, our West Regions 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 and 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.

Speaker 3

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 $500,000,000 and $2,000,000,000 and a significant number in other surrounding states. So we should have M and A opportunity in the intermediate future. Stephanie?

Speaker 1

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

Thank you, Stefan. We now have a question from Andrew Liesch, Piper Sandler.

Speaker 4

Just wanted to start with the margin. Stefan, just wondering if you have some specifics on what's 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?

Speaker 1

Yes. So looking at our CD portfolio, reviewing in the next three months, we have about, call it, dollars $215,000,000 that are rolling off at a rate of about $425,000,000 and being replaced by current renewal rates that are averaging around $410,000,000 This quarter is a little bit slower on that side, but over the next twelve months, we have about $1,200,000,000 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.

Speaker 4

Got it. So are when you look out at the funding for the next several months, are

Speaker 5

CDs going to

Speaker 4

be the primary source of growth? Or do you have any other accounts that you're focusing on right now that might try to encourage clients to shift into?

Speaker 1

We do have an attractive platinum savings rate. But as we go through this next quarter or two, 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.

Speaker 4

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 effective tariffs might be?

Speaker 2

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.

Speaker 3

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

Speaker 2

Kind of an overall impact on the pricing in

Speaker 3

the market though. 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 and 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, you know, there's only a certain amount of grain available. So there will be someone that needs the grain.

Speaker 4

It. Okay. That's very helpful. I will step back. Thanks.

Speaker 2

Thanks, Andrew.

Operator

Our next question comes from Matt Olney from Stephens. Your line is open. Please go ahead.

Speaker 5

Hey, thanks. Good morning, guys. I want to go back to the discussion around the net interest margin. I guess the core was moved sideways during the quarter, but still seems like there's some good momentum here. Stefan, I think you mentioned that 3.4% range as a run rate.

Speaker 5

It sounds like that could be a good starting point for the June end. Is that the right interpretation? And was that a reported NIM or a core NIM?

Speaker 1

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 78,000,000 Those will start to flow out over the next two 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 they were holding in the federal funds going into loans over the next two quarters.

Speaker 5

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

Speaker 1

Yes, I would say on average, our renewal rates have been in the ballpark of seven twenty five to seven fifty. Overall, over the next twelve months, we have about $610,000,000 that are renewing at a rate of six forty five. So there's still positive shift there to this following quarter. So 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.

Speaker 5

Okay, perfect. And then shifting over towards on the credit front, the NPLs ticked higher, and I think you mentioned that release moves mostly about $2,000,000 from single borrower. Any more color you

Speaker 4

can share as far as the

Speaker 5

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.

Speaker 3

One of the properties is located in a they're both medical related lease space or they were leased till the tenant went in solving. So really, it's gonna 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 that they give them at some point. We do have them marked to roughly 35% in our ACL of their balance.

Speaker 2

Thanks, Matt.

Operator

Our next question comes from Kelly Motta from KBW. Your line is open. Please go ahead.

Speaker 6

Hey, good morning, guys. Thanks for the question. I appreciate the color, Greg, on M and A conversations flowing with the market volatility. In the interim with the stock pulling 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 and A?

Speaker 6

Or could we see you step in and become more active on that like you've been in the past? Thanks.

Speaker 3

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 three 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.

Speaker 3

And at the current trading prices, we're right around where it would be opportunistic for us to repurchase some shares.

Speaker 6

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?

Speaker 6

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, 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?

Speaker 2

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 non accrual recently, it's not economic conditions that are driving them.

Speaker 2

They're factors particular to a specific business by and large.

Speaker 3

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.

Speaker 3

But those brands haven't really changed any over the last several quarters.

Operator

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

Speaker 2

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

Operator

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

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