Southern Missouri Bancorp, Inc.

Hello, everyone, and welcome to the Southern Missouri Bancorp earnings call. My name is James, and I'll be your operator for today. If you would like to ask a question during the presentation, you may do so by pressing star followed by the number one on your telephone keypads. The conference call will now start, and I'll hand it over to our host, Chief Financial Officer of Southern Missouri Bancorp, Stephan. Please go ahead.

Thank you, James. Good morning, everyone. This is Stephan Chakotovich, CFO with Southern Missouri Bank Corp. 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, January 21st, 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.

Thank you, Steffen, 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, the second quarter of our first quarter. Quarter over quarter, our earnings and profitability improved due to a lower provision for credit losses a larger earning asset base, which drove an increase in net interest income, as well as an increase in non-interest income. With the earnings and profitability improvement we've seen in the first half of our fiscal year, we feel we have good momentum and see positive trends continuing into the second half. We earned $1.62 per share diluted in the December quarter. That's up 24 cents or 17.4% from the linked September quarter. and it's 32 cents or 24.6% from the December 2024 quarter. Provision for credit loss expense was about $1.7 million, a decrease of $2.8 million when compared to the linked September quarter. As we stated on the last earnings call, we expected the provision to decrease this quarter and some positive movement with the workout of the specialty CRE loans we've discussed in prior quarters. Greg will give some more details on that next. On the balance sheet, gross loan balances increased by $35 million during the second quarter. Compared to December 31st of the prior year, our gross loan balances are up almost $200 million, or 5%. Growth in the quarter was led by 1-4 family residential, C&I, and construction and loan development loans. We experienced strong growth in our east region, followed by good growth in our west region. We had a great quarter for loan originations generating almost $312 million, our strongest quarter over the last several years. But growth was slowed by seasonal ag paydowns and some larger loan payoffs. With the strong production and as we enter a slower season for ag and real estate loans, our loan pipeline for the next 90 days decreased somewhat but remains healthy at $159 million at December 31st. Due to normal seasonality, we would expect limited net loan growth in the March quarter, but having grown just above 3% in our fiscal year today and expecting a typical pickup of growth in our fourth quarter, we're still in a good position to achieve mid-single-digit growth for the fiscal year of 26. Deposit balances increased by about $28 million in the second quarter and by $98 million, or 2.3%, compared to December 31st of the prior year. Over the last 12 months, we've had a reduction of $72 million in broker deposits, so we put our core deposit growth at about $170 million, or 4.3% over that 12-month period. Net interest margin for the quarter was 3.57%, unchanged from the linked September quarter, and as compared to 3.34% reported for the year-ago period. Interest income was up just over 1% quarter over quarter and up 12.4% year over year. Stephan will get into the details on the NIM in a bit, but I wanted to point out that with 50 basis points of FOMC cuts in the December quarter, we have seen some positive underlying improvement in the NIM, although that was hampered this quarter by two credit relationships that were placed on non-accrual. Adjusting for $678,000 of this reversed interest income related to these credits The NIM would have been 3.63% in the December quarter. Tangible book value per share was $44.65 and increased by $5.74 or almost 15% during the last 12 months. Lastly, in the second quarter, we repurchased 148,000 shares at an average price of $54.32 per share for a total of $8.1 million. The average purchase price was 122% of our tangible book value as of December 31st, 25. I'll now hand it over to Greg for some discussion on credit.

Thank you, Matt, and good morning, everyone. Starting with credit quality, overall problem asset levels have increased slightly since last quarter, but remain at modest levels with adversely classified loans totaling $59 million or 1.4% of gross loans. of $4 million or eight basis points as a percentage of gross loans since last quarter. Non-performing loans were about $30 million in 12-31 and totaled 0.7% of gross loans, an increase of $3.6 million compared to last quarter. Non-performing assets were about $31 million and increased $4 million quarter over quarter, with most of the increase due to the increase in MPLs. Both the increase in classified and non-accrual loans were primarily attributed to two borrowing relationships, one consisting of multiple loans collateralized by commercial real estate and equipment, and separately, two related agricultural production loans secured by crops and equipment, all of which were placed on non-accrual status during the second quarter and accounted for the 678,000 interest reversal Matt noted earlier. The CRE and equipment loan relationship totals 5.8 million. The borrower operates a seasonal business, and we expect increased cash flows during the spring and summer operating periods. And we are also working with the borrower to add additional collateral support. The total relationship currently has a 23% specific reserve. The ag-related relationship totals $2.2 million and we're working through formal resolution processes with the assistance of council with the goal of achieving repayment or refinancing and limited potential losses. Despite the modest increase in non-performing assets this quarter, we continue to see positive progress and our specialty CRE relationship that we've discussed the last several quarters. During the second quarter, we received a 2 million recovery on this overall relationship, which contributed to an overall net recovery for the quarter of 704,000. One of the properties has a new tenant in place with a strong one-year letter of credit guaranteeing rental payments and the related loan has returned to accrual status and is no longer classified. The other loan is in the foreclosure process that was materially charged down during a prior quarter, so we do not expect any significant additional impact in that relationship. The combined carrying value of the two loans is $2.7 million. Loans past due 30 to 89 days were $12 million, down $692,000 from September, and 28 basis points on gross loans, a decrease of two basis points compared to the linked quarter. Total delinquent loans were $32 million, up $2.7 million from the September quarter. The increase in total delinquent loans was mostly due to the CRE and equipment loan relationship discussed earlier. While non-performing assets and non-accrual loans were up modestly this quarter, overall problem assets remain at manageable levels, and our earnings are sufficient to cover potential reserves while maintaining above-average profitability. Importantly, we made meaningful progress on the specialty CRE relationship we have discussed in prior quarters, meaningfully reducing our exposure and the resulting net recovery for the quarter. In combination with our underwriting standards and reserve position, we remain comfortable with our ability to work through existing credits and manage any broader pressures that could emerge from economic conditions. That said, we are not complacent with recent trends and 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. As compared to the prior quarter in September 30th, ag real estate balances were up about 6 million, and they were up to 21 million compared to December 31st a year ago. Ag production equipment load balances were down 26 million during the quarter, following their normal seasonal pattern, but are up close to 15 million year over year. Our agricultural customers have completed harvest, and we are now in the process of underwriting their 26 operating lines. While weather conditions and heat stress affected yields in certain areas of crops, most producers reported an average to above-average production across the majority of our acres. Corn and soybean yields were generally solid, while rice and cotton experienced more variability and, in some cases, lower yield and quality. Overall, our crop mix remains diversified, led by soybeans and corn, with smaller concentrations in cotton, rice, and specialty crops. Looking ahead in 26, we expect some acreage to shift away from higher-cost crops, such as cotton and rice, more towards corn and soybeans, given current future prices and input cost dynamics. From a financial standpoint, Lower commodity prices and elevated production costs are expected to result in operating shortfalls for a portion of our farm customers from the 25 crop year, with projected shortfalls concentrated among a relatively small number of larger producers. Most borrowers continue to have meaningful equity in land and equipment, and we are utilizing a combination of restructurings government guarantee programs, and conservative underwriting assumptions as we move into our renewal season. Our 26 cash flow projections using pricing that is generally consistent with current futures and FSA assumptions and includes stress testing of our cash flow to assess downside risk. Based on our stringent underwriting, including stressed commodity pricing when assumed higher operating costs. We anticipate that our borrowers will generally be able to navigate another challenging year and expect satisfactory performance of these credits over the near term. Also this quarter, our ag borrowers will generally be eligible for new farmer bridge assistance program. And later in 26, our borrowers should benefit from higher payments under the ag risk coverage, our price loss coverage programs, based on changes to those programs adopted in the One Beautiful Bill in 25. All that said, reflecting our continued prudence given the prolonged weakness in the agricultural segment, we began increasing reserves for watch list agricultural borrowers in the March 25 quarter as part of our ACL calculation. Stephan, would you update us on our financial performance?

Thanks, Greg. Matt hit some of the key financial items already, but I'll note a few additional details. This quarter's net interest margin of 357 was flat compared to the linked September quarter. The NIM included about five basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits compared to seven in the linked September quarter and down from the prior year's December quarter addition of nine basis points. As Matt mentioned earlier, excluding the interest income reversed from the two non-accrual loans, we see the December quarter's run rate net interest margin at 363, which is six basis point increase, quarter over quarter. This was primarily due to a 16 basis point decrease in the cost of funds as we benefited from our indexed non-maturity deposit accounts repricing down through the quarter. These index deposits account for about 27% of total deposits at December 31st. Looking ahead to the March quarter, declining interest rates are beginning to pressure loan needs as loans mature, with approximately $619 million of fixed-rate loans maturing over the next 12 months at rates closer to current origination levels of around $650. That said, we continue to see an opportunity for further improvement in funding costs as roughly 1.2 billion of CDs will mature over that same period, with an average rate near 4% compared to current originations at approximately 3.6%, which should help support overall spreads. In addition, we are carrying lower levels of excess liquidity, which is somewhat atypical for this time of year when public unit balances and agricultural deposits are usually at seasonal highs. Those inflows have been partially offset by reductions in broker deposits, reflecting our continued focus on optimizing our funding mix rather than building liquidity through higher-cost wholesale sources. Year-to-date, broker deposits have declined $53 million, of which $38 million was reduced this quarter. Non-interest income was up 3.1% compared to the linked quarter due to higher wealth management fees as we have benefited from market appreciation of AUM and net new inflows, increased interchange income, as the bank benefited from lower issuer expenses, which are netted in this line, and deposit account charges, primarily from increased income from non-sufficient fund charges and check order fees. Non-interest expense was up less than 1% quarter over quarter, primarily due to higher compensation expense, other non-interest expense, and data processing expenses. Compensation expense was up in the quarter primarily due to less deferred loan origination expense and a seasonal increase in paid time off realized. Other non-interest expense increased quarter over quarter primarily due to increased employee travel and training, as well as other smaller costs, and higher data processing expenses from an increase in transaction volumes and software licensing costs. This was partially offset by a decrease in legal and professional expenses, which were elevated in the September quarter due to $572,000 associated with the use of a consultant to assist in renegotiating a significant contract with a card processor. Looking forward, 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 a mid-single-digit percentage increase, including the cost of benefits. The allowance for credit losses at December 31, 2025, totaled $54.5 million, representing 1.29% of gross loans and 184% of non-performing loans, as compared to an ACL of $52.1 million, representing 1.24% of gross loans and 200% of NPLs, at September 30th, 2025. The increase in the ACL was primarily attributable to additions to individually reviewed loans and net recoveries, which was partially offset by a small decrease in required reserve for pooled loans. As a percentage of average loans outstanding, the company recorded net recoveries of seven basis points annualized during the current quarter. as compared to net charge-offs of 36 basis points during the linked quarter. As Greg mentioned previously, the current quarter's net recoveries and the linked September quarter's net charge-offs were primarily impacted by the specialty CRE relationship we have discussed over the last couple of quarters and accounts for the $2.8 million decrease in provision for credit loss quarter over quarter. Our non-owner-occupied CRE concentration at the bank level was approximately 289% of Tier 1 capital and allowance at December 31, 2025, down by about 6 percentage points as compared to September 30, due to growth in Tier 1 capital and ACL outpacing owner-occupied CRE growth. On a consolidated basis, our CRE ratio was 282% at December 31, To conclude, we remain focused on resolving problem loans and further reducing non-performing assets. This quarter's results with a more normalized provision for credit losses better reflects the company's underlying earnings power, generating a return on assets of just over 1.4%. We are pleased with the strength and quality of this performance, and absent any unexpected deterioration in credit, we believe the operating trends we are seeing today support continued solid profitability as we move into the second half of the year. Greg, any closing thoughts?

Thanks, Stephan. I would echo those comments and say we are very pleased with the level and quality of our earnings this quarter. The results we delivered reflect the strength of our franchise, the consistency of our operating performance, and the discipline of our teams bring to both growth and risk management. While we remain vigilant on credit, we believe our current profitability levels are sustainable, and we are encouraged by the trajectory of the business as we move forward. Importantly, this level of performance continues to build capital, which gives us flexibility to return capital to the shareholders while also preserving capacity to fund future growth. Over the last quarter, that allowed us to repurchase shares at attractive levels, while still maintaining excess capital to deploy accretively through acquisitions as opportunities arise. With the near completion of our prior share repurchase authorization, our board approved a new program to repurchase up to 550,000 shares, or approximately 5% of shares outstanding. As with past programs, we intend to remain disciplined and opportunistic Deploying capital with our stock meets our internal investment and return share thresholds. In addition, since last quarter, we have continued M&A discussions as market conditions have stabilized and general M&A activity has picked up in the industry. We remain optimistic about the potential for attractive opportunities and with our strong capital position and proven financial performance, we believe we are well positioned to act when the right partner is ready. Notably, there are about 75 banks headquartered in our footprint with assets between $500 billion and $2 billion, along with a meaningful number of additional institutions in adjacent markets, which provides a broad and active landscape for potential partnerships. In closing, we are proud of this quarter's performance and confidence in the long-term fundamentals of our company. Our focus remains focused on discipline execution, prudent risk management, and thoughtful capital deployment, all with the objective of continuing to deliver consistent, attractive returns for our shareholders.

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

Of course. Thank you. Our lines are now open for questions. And as a reminder for our audience, if you would like to ask a question, you may do so by pressing star followed by the number one on your telephone keypads. And when preparing to ask your questions, please ensure your devices are unmuted locally. And we will now have our first question from Matt Olney from Stevens. Go ahead, please. Your line is now open.

Hey, thanks. Good morning. I wanted to start off on loan growth, a two-part question. I heard Matt mention that the loan paydowns this past quarter were higher, and part of it was the ag paydowns that were expected. But I also heard Matt mention additional paydowns. beyond the ag. So just trying to appreciate if that was a surprise or if that was expected, the other paydowns. And then part two, would just love to appreciate any general commentary on loan pricing competition in your marketplace. Thanks.

In regard to the paydowns, we had several unexpected paydowns that we were not really fully anticipating, but we weren't disappointed to see several of those. One of them was a larger C&I relationship that really had outgrown us, that contributed, and they moved to a larger bank for their operating lines. But overall, you know, loan prepayment rates have been higher than what we've historically seen. And we did, basically, we anticipate prepayment rates to Be a little higher than historically.

But we wouldn't say that what we've had in this quarter that was a little unexpected was rate driven. Certainly, it was just kind of a mixed bag. Yes. And Matt, as far as competition, you know, treasuries have been bouncing quite a bit here lately. We were seeing some talk in the low sixes, high fives. Expect that to kind of move back. a little bit higher for, you know, your top-flight credit quality. But, you know, definitely there still is some aggressive competition out there.

We do still feel good about our mid-single-digit loan growth projections for our fiscal year.

Okay. That's great. Appreciate the color there. And then as far as the outlook on the net interest margin, I think I heard Stephan say that that 363 level, in December is probably the better run rate to start with. Any more color on where you see them in the March quarter? I know we usually see the seasonal headwinds in March quarter, but I was unclear on the commentary if we should anticipate additional headwinds in the March quarter. Thanks.

Thanks for the question, Matt. So, we don't give specific guidance on the NIM, but underlying, we do still see potential for increased spread. to pick up in the March quarter due to decrease in deposit costs. So right now on the loan side, there's sort of that break even from what we're seeing maturing off versus where we're seeing new origination rates.

Okay. And just to follow up there, does that imply the liquidity bill that we usually see will happen this year or will happen less?

Yeah, we're seeing less impact there. Basically, the inflows that we see seasonally have been partially offset by the decrease in broker deposits.

Okay, that's helpful. And then just one more follow-up on the margin, Stephan. Just big picture, the next several quarters, the margin, it sounds like you still see additional tailwinds to support the margin from current levels, but it sounds like it's going to be much more driven on the deposit cost side. and much less driven on the loan repricing side compared to the last year or so. Is that right?

Yes, sir. That's correct.

Okay. Thanks for your help.

Thank you, Matt, for that question. Next up, we have Nathan Race from Piper Sandler. Go ahead, please. Your line is now open.

Hey, guys. Good morning. Thanks for taking the questions, and I hope you're all doing well. Stephen, I think you mentioned, you know, you're expecting to see an increase in personnel costs in the March quarter, just in light of the increases that you alluded to. I wonder if you could just put a guidepost around the run rate that you're expecting over the next couple quarters overall.

Yeah, so I guess this is just a seasonal adjustment for annual merit increases. So that's in the ballpark of mid-single-digit increase there.

Okay, but otherwise you're not expecting any major deviations in the run rates?

Nothing material at this point, just general trend.

Okay, great. Correctly, we've had real merit increases, and they have 4% to 5% of rate.

Understood. That's helpful. And I appreciate the updated. or refresh buyback authorization. Can you guys just maybe touch on what the appetite is over the next quarter or so to remain active? Obviously, you know, activity on the buyback stepped up in the second quarter, but I imagine, you know, there's a balance there between, you know, building capital for additional acquisition opportunities, which, you know, hopefully it sounds like there's some opportunities that could emerge there later this calendar year.

Yeah, we are hopeful that some of those do emerge. As far as buyback activity, we're going to be somewhat price dependent, thinking about how useful it is to deploy the capital there versus retaining it, waiting for another opportunity. We always look at that as, you know, similar to an outside acquisition and what our earn back is on the premium that we're paying there. So we'll continue to be disciplined on that.

Okay, great. And then just lastly, you know, curious if there's any additional tail to the charge off on the commercial real estate loan that we saw in the December quarter here. And just, you know, absent, you know, maybe any additional recoveries, just how you're thinking about kind of a more normalized charge off range over the next several quarters?

We would anticipate being more to historical averages over the upcoming quarters. Would not anticipate any. much of the way of a tailwind behind us. You know, I think just historical results would be, you know, how we did in prior years, not the last six, nine months.

And, Nathan, specific to the one relationship, if that's what you were asking about, we don't anticipate anything material further on that.

Okay. Got it. I appreciate all the color. Thanks, guys.

Thanks, Nathan. Thank you, Nathan, for that question. Again, a reminder for our audience, if you'd like to send your questions in, that will be star followed by the number one on your telephone keypads, please. Moving on, we have Charlie Driscoll from KBW. Go ahead, please. Your line is now open.

Hi, this is Charlie on for Kelly Moda. Thanks for taking my question. I'm just Digging into the margin, wondering your expectations for terminal betas for deposits. I'm not sure if you look at total deposits or interest bearing, but any updated thoughts on the downward repricing from here, like maybe sizing the impact of cuts. You mentioned the CDs and index deposits trending downward for nice tailwinds, but maybe if you could help piece it together in general.

Yeah, so overall on the deposit side, we've seen betas around the 40% level. That would probably be something good to use for modeling purposes.

Great. Appreciate it. And then you seem optimistic about M&A. You mentioned plenty of banks in your footprint. If you could maybe narrow in on any preference you have for any sort of size, and if you're looking for something within your footprint or adjacent, any additional color there would be great.

We would prefer M&A within our footprint, You know, if something is right adjacent to us, I mean, that's something we definitely would look at. We look at each one individually as far as what's the underlying performance of the bank, what do we think we can do with it to grow, and we look at each opportunity individually and how well does it contribute to our overall shareholder return looking forward. So... You know, we will consider either in our footprint or adjacent. It just really depends upon each deal and what they bring to the table on who we more aggressively pursue.

Great. Thank you. That's all I have.

Thank you for that question. Thank you. Yep, our questions queue are now clear. I'll hand it back to Matt Funke for final remarks. Mark, Matt?

Thank you, James, and thank you, everyone, for participating. We appreciate your interest in the company, happy to report on a good quarter for the company, and we'll talk to you again in three months. Have a good day.

Thank you, everyone. And this concludes today's call. Thank you all for joining. You may now disconnect your lines and have a great day.