Southern Missouri Bancorp 2027 Q1 Earnings Call

Morning, everyone, and thank you for joining us to discuss Southern Missouri Bancorp's results for the first quarter of fiscal 2027. This is Stefan Chkautovich, CFO of 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 am joined by Greg Steffens, our Chairman and CEO, and Matt Funke, our President and Chief Administrative Officer. Matt will begin with an overview of the quarter.

Well, thank you, Stefan, and good morning, everyone. We reported another quarter of strong profitability with diluted earnings per share of $1.73 compared with $1.83 in the linked June quarter. Return on average assets was 1.44%, return on average common equity was 12.7%, and tangible book value per share increased 2.3% during the quarter to $48.52. Net interest margin expanded three basis points to 3.70%, while net interest income increased 3.5% from the linked quarter. Provision for credit losses was $3 million down $240,000 from the June quarter. Gross loans increased $64 million or 1.5% during the quarter. Growth remained solid, but moderated from last year as we maintained our focus on appropriate credit spreads and full banking relationships.

Growth was led by one to four family residential real estate, ag production, commercial and industrial, ag real estate, and construction and land development loans, partially offset by declines in multifamily and commercial real estate categories. Our 90-day loan pipeline was little changed at $185 million at quarter end, up from $182 million at June 30. Quarterly loan originations were approximately $296 million, down from $335 million in the June quarter. This was largely driven by a decrease in owner-occupied CRE originations as we prioritized opportunities that met our return and relationship objectives, in addition to decreases in ag real estate and ag production originations due to normal seasonality, with total volume roughly in line with the September of 2025 quarter. We continue to expect mid-single-digit loan growth for fiscal 2027, although quarterly results will reflect our normal seasonality.

We have begun to see some ag operating line paydowns in October, and we expect that net loan growth will be softer in the second quarter, the December quarter. As a reminder, our third fiscal quarter or the March quarter is historically our softest quarter for net loan growth, reflecting both ag seasonality and the seasonal slowing in residential and commercial real estate lending, typically followed by a seasonal ramp-up in the fourth quarter. Deposits increased $66 million or 1.5% during the quarter. Certificates of deposit led the increase driven by $95 million of growth in core CDs, partially offset by a $35 million reduction in brokered CDs. Given the meaningful increase in brokered CD rates, local CDs provided a more cost-effective source of funding. We remain focused on funding loan growth with core customer deposits and deepening full banking relationships.

Non-maturity deposits grew modestly by approximately $6 million, and again, our September quarter is generally one of our toughest from a transaction account balance standpoint. Our new business deposit accounts continued to gain traction, reaching $42 million at September 30. However, that growth was partially offset by the expected runoff of short-term, seasonal, and transaction-related non-interest-bearing balances held by several larger clients at the end of June. Our stockholders' equity increased just over $10 million or 1.8% during the quarter, despite about a $5 million increase in accumulated other comprehensive loss. We also repurchased approximately 19,000 shares for $1.4 million during the quarter while maintaining our quarterly dividend at $0.27 per share. I will turn it over now to Greg for a discussion on credit.

Thanks, Matt, and good morning, everyone. Credit metrics improved modestly during the quarter. Adversely classified loans declined nearly $1 million from the linked quarter to $53 million, while remaining stable at approximately 1.2% of gross loans. Non-performing loans also declined by $1 million to $27 million or 0.6% of gross loans from 0.63% at June 30. Non-performing assets declined just over $1 million to $32 million or 0.61% of total assets from 0.64% at June 30. We are continuing to work through the agricultural production relationship downgraded to non-accrual in last year's fourth quarter, and overall, we see positive progress toward resolution on several of our larger non-performing loans. Against that backdrop, generally improving Credit. Performing modifications increased approximately $20 million during the quarter to $51 million, primarily due to the modification of a commercial industrial loan totaling approximately $21 million.

The modification included a modest interest rate concession to support the borrower's working capital needs associated with a new contract. The loan remains performing, is watch rated, and no individual reserve has been established. Given our longstanding relationship with this borrower and our current expectations for his performance, we anticipate the modification will be resolved by the end of fiscal 2027. Our non-owner occupied commercial real estate concentration declined during the quarter as Tier 1 capital growth outpaced CRE growth. At quarter end, the concentration was approximately 278% at the bank and 266% on a consolidated basis. Agriculture represents approximately 12% of gross loans. Our agricultural customers generally appear to be having a better year. An early planting season and dry fall weather accelerated harvest activity. Rice and corn harvests are complete. Early soybeans are approximately 70% harvested. Double-crop soybeans are approximately 50% harvested. Cotton is also approximately 50% harvested.

Lenders are reporting average to above average yields on many of our crops, particularly irrigated acreage, and current or contracted prices for corn, soybeans, rice, and cotton are generally above the assumptions we used under spring underwriting. Higher seed, fuel, fertilizer, chemical, interest, and equipment costs continue to pressure farm profitability, but stronger yields and commodity pricing should support improved repayment capacity compared with last year. Our loan officers are not currently reporting projected shortfalls for the 26th crop year, and most customers appear well-positioned to pay as agreed, although working capital positions will remain an important focus through year-end. We continue to monitor watchlist Ag credits closely, and our lenders are completing crop and livestock inspection summaries and preparing for the upcoming renewal cycle. Stefan, would you provide additional details on our financial performance?

Thanks, Greg. Net interest margin was 370 basis points, up 3 basis points from the linked quarter. Fair value accretion and liability premium amortization contributed 5 basis points to margin, compared to 3 basis points in the June quarter. The increase in fair value accretion was primarily caused by the payoff of a loan carrying about a $500,000 credit mark. We would expect in the coming quarters for the accretion to return to around 3 basis points and slowly decrease from there. The September quarter also included approximately $200,000 of interest recovery on a non-accrual ag relationship. Excluding both the larger fair value accretion and the noted interest recovery, adjusted net interest margin would have been 365 basis points, representing modest compression from the linked quarter. Looking ahead, we could see some near-term pressure on net interest margin following the recent increase in rates, reflecting the liability-sensitive nature of our balance sheet.

Based on our current interest rate risk model and assuming a static balance sheet, a 100 basis point parallel increase in rates is estimated to reduce net interest income by about 1% over the next 12 months. Over time, however, we believe the positively sloped yield curve should be supportive of margin as fixed-rate loans mature and reprice at current market rates. Non-interest income was $7.1 million, down $212,000 or 2.9% from the linked quarter. Deposit account charges and other non-interest income increased, with other non-interest income benefiting from a $189,000 revenue guarantee payment from a merchant services provider and an $85,000 gain on sale of a membership interest in a tax credit investment. These increases were more than offset by lower wealth management fees, insurance commission, gain on sale of loans, bank card interchange income, and BOLI income.

BOLI income included a $150,000 mortality benefit in the current quarter, compared with a $231,000 mortality benefit in June. Non-interest expense was $26.6 million, up $1 million or 4% from the linked quarter. The full increase was attributable to three categories. Compensation and benefits increased $460,000, primarily due to higher salaries and bonus accruals and lower deferred loan origination costs, partially offset by lower employee benefit expense. Other non-interest expense increased $345,000, largely reflecting higher loan collection and payoff fees, as well as deposit operation and card fraud costs. Occupancy and equipment expense increased $223,000, primarily due to seasonally higher utilities security costs, and one-time facility setup costs. Advertising expense also included a one-time $100,000 charitable contribution through the FHLB Member Impact Fund. Lower legal and professional fees and postage and office supplies provided the largest offsets.

The allowance for credit losses increased $3.4 million to $58.3 million, or 1.31% of gross loans and 219% of non-performing loans. Net charge-offs were $494,000, or four basis points of average loans on an annualized basis. The increase in the allowance primarily reflected management's assessment of reserve adequacy amid an evolving economic environment and to support loan growth. The current quarter provision included a $3.9 million provision for outstanding loan balances and a $902,000 negative provision for off-balance sheet credit exposures, primarily reflecting a lower required reserve rate on unfunded commitments. With that, Greg, I'll turn it back to you for some closing comments.

Thanks, Stefan. We are pleased with our strong profitability and solid loan growth during the quarter, which allow us to continue investing in the people and capabilities needed to support our long-term growth. That includes our new Kansas City branch, which opened at the beginning of October and replaced our existing nearby facility, which was truly in need of an upgrade. Initial customer feedback has been positive, and we're excited for the new branch to serve as a flagship location for us in the Kansas City market. We also continued supporting our communities through the FHLB Member Impact Fund. Our contribution generated an additional $300,000 match, bringing the total distributed to 22 charitable organizations to $400,000.