Southern Missouri Bancorp, Inc.

Hello and thank you for standing by. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Southern Missouri Bancorp earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the call over to the company's CFO, Stefan Chkautovich. Please go ahead.

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

Thanks, Stefan, and good morning, everyone. This is Matt Funke. Thanks for joining us. I'll start with a few highlights from our financial results for the June quarter, which marked the final quarter of our fiscal year. Compared to the prior quarter, earnings increased as we recognized a lower provision for income taxes, primarily reflecting a benefit from tax credit investments, along with higher net interest income, lower non-interest expenses, and higher non-interest income. These positive drivers were partially offset by an increased provision for credit losses. In fiscal 2026, we continue to expand our net interest margin while generating solid loan growth and maintaining disciplined control over operating expenses. Those factors drove improved earnings and profitability, resulting in a return on assets of 1.41% for the fiscal year. While problem credits increased modestly during the year, our strong pre-provision net revenue More than absorbed the associated elevated costs and still allowed us to deliver strong profitability. We are pleased with the financial performance we achieved in fiscal 26, and we're optimistic that we'll maintain healthy profitability metrics in fiscal 27. We earned $1.83 diluted in the June quarter, which was an increase of 23 cents, or about 14%, from the linked March quarter. and up 44 cents or about 32% from the June 2025 quarter. For full year fiscal 2026, we earned $6.43 compared to $5.18 in fiscal 25. The 24% increase year over year was predominantly driven by stronger net interest income, which stemmed from net interest margin expansion as funding costs declined, coupled with almost 5% average earning asset growth. Net interest margin for the quarter was 3.67%, remaining unchanged from the third quarter of fiscal 26, the linked quarter, but up from 347 reported for the year-ago period. Net interest income was up almost 3% quarter-over-quarter and up about 10% year-over-year. Stefan will run through more of the moving parts of the NIM in a bit. Provision for credit loss was $3.2 million during the fourth quarter, a $1.1 million increase from the linked quarter. The increase was primarily driven by higher net charge-offs, higher reserves required for pulled loans, which was driven largely by the bank's annual ACL methodology update, and to support loan growth. Greg will go into a bit more detail on credit, and Stefan will talk about the allowance for credit losses in a bit. On the balance sheet, gross loan balances increased by $69 million during the fourth quarter. Compared to June 30 a year ago, gross loan balances are up $291 million, or 7.1%. Growth in the quarter was largely driven by loans collateralized by construction and land development, one-to-four family residential real estate, multifamily, and ag real estate and production from the planting season as that kicked off. We experienced strong loan growth in our east region driven by seasonal ag lending, followed by solid growth in our northwest region as our newer lenders in the Kansas City market continued to build and expand portfolios. We had another good quarter for loan originations, generating about $335 million, which was seasonally strong, up $85 million from the year-ago period. This strong quarter of originations was partially muted by several larger loan payoffs. Our expected pipeline for the next 90 days remains healthy, increasing approximately $4 million from the prior quarter to $182 million. Looking ahead to fiscal 27, we continue to expect mid-single-digit loan growth, reflecting strong customer demand. However, as we prioritize funding new loan production with core deposit relationships rather than with wholesale funding, we expect loan growth to moderate somewhat from the 7% achieved in fiscal 2026. Deposit balances increased by about $67 million in the fourth quarter, or 1.5%, and increased by roughly $126 million, or about 3% year-over-year. As this is a seasonally slower period for deposits due to seasonal outflows from our public units and as our agricultural clients deploy funds to the property, the quarter-over-quarter growth was primarily driven by broker deposits. Year-over-year, broker deposits have increased just under $56 million, moderate but more than we would like, as local deposit rate competition has increased and wholesale sources offered more cost-effective funding. We recently started the rollout of a new business account, a new suite of business accounts, which along with tweaks to our team number incentives could help us increase our balances in lower-cost operating accounts over time. Tangible book value per share was $47.43, having increased by $5.56, or 13%, as compared to June 30 a year ago. And during the fourth quarter of fiscal 26, we repurchased 4,000 shares of common stock at an average price of just over $69 per share, representing a total investment of approximately $291,000. For the full fiscal year, we repurchased 317,000 shares, were almost 3% of the average common shares outstanding at the beginning of the fiscal year at an average price of $58.59, utilizing about $19 million in capital. Those shares were repurchased at an average price equal to 124% of our June 30, 2026 tangible book value per share. Lastly, due to our strong capital position, with the earnings release, we also announced a $0.02 or 8% increase in our quarterly dividend, bringing it to $0.27 per share. So I'll now hand it over to Greg for some discussion on credit.

Thank you, Matt, and good morning, everyone. Speaking to our credit quality, adversely classified loans improved from the prior quarter, declining to $54 million or 1.2% of gross loans, a decrease of just under $2 million or six basis points. Non-performing loans also improved, decreasing $2.5 million to approximately $28 million, or 0.63% of gross loans, at June 30. Non-performing assets totaled about $33.5 million, an increase of $1.5 million from the prior quarter, primarily reflecting an increase in other real estate owned. resulted from the foreclosure of a previously disclosed commercial loan relationship consisting of multiple loans secured by commercial real estate and equipment during the quarter. The equipment held as collateral was liquidated and the commercial real estate was transferred to other real estate owned. The $1.2 million charge-off was recognized upon the transfer resulting in a remaining carrying value of approximately $3.6 million. The property is currently being actively marketed for sale. Although classified and non-performing loans decline quarter over quarter, we also downgraded a separate agricultural lending relationship to non-accrual status during the quarter. The relationship consists of multiple agricultural production loans Secured by crop insurance claims, restricted cash, crops, and equipment. We recognized a $2.6 million charge-off during the quarter, leaving a remaining exposure of $5.9 million, which is supported by additional specific reserves. The borrower has filed Chapter 7 bankruptcy, and we are actively pursuing available recovery avenues including enforcement of our collateral rights and continued engagement with the primary guarantor. Loans passed through 30 to 89 days were 13.4 million or 30 basis points of gross loans, up 2.9 million from March. This is an increase of six basis points compared to the link quarter and up 15 basis points compared to a year ago. Total delinquent loans were 27.6 million representing 63 basis points as a percentage of gross loans. There was a $4.4 million decrease from the link quarter. The decrease was primarily due to the commercial loan previously mentioned being transferred to other real estate in addition to the partial charge-off of the ag relationship discussed previously. While non-performing assets and non-accrual loans remain elevated, Thank you. In combination with our underwriting standards and reserve position, we remain confident in our ability to work through existing credits and to manage any broader pressure that could emerge from economic conditions. That said, we are not satisfied with current levels of Thank you for joining us today. We are also encouraged about the progress being made across several problem credits as workout strategies continue to advance. Looking at credit concentrations, our non-owner CRE concentration at the bank level was roughly 288% of Tier 1 capital loan allowance at June 30th, down by about 5 percentage points compared to March 31st. On a consolidated basis, our CRE ratio was 276%, down about 8 percentage points quarter over quarter. Both CRE concentration ratios decreased due to growth in Tier 1 capital, outpacing CRE growth. This quarter, ag real estate balances totaled 296 million, or 7% of gross loans, and Ag Production and Equipment Loans were $219 million or 5%. As compared to the prior quarter end, March 31st Ag Real Estate Balances were up $17 million and up $51 million compared to June 30th of last year. Agricultural Production and Equipment Loan Balances were up $15 million quarter over quarter due to normal seasonality associated with the planting season and higher operating costs, and up $13 million year over year. Since our last earnings call, the 2026 renewal season has been completed and crop conditions have continued to improve. With planting now complete across all our markets, our projected crop mix for the 26th production year consists of roughly 30% soybeans, 30% corn, 20% cotton, 15% rice, and 5% specialty crops. Favorable production and timely rainfall have positioned most major crops for above average yield potential. In addition, both current commodity prices and expected yields are running approximately 10% to 15% above our underwriting assumptions, partially offsetting elevated production costs and improve projected farm profitability. Producers also expect higher USDA price loss coverage and agricultural risk coverage program payments this fall related to the 25 production year, which should also provide additional liquidity for many of our farmers. Given the earlier planting season this year, We could see harvest activity and corresponding operating line paydowns begin somewhat earlier than normal. However, we continue to expect the majority of seasonal paydowns to occur during our December quarter. Although farm profitability will ultimately depend on harvest yield and commodity prices, the agricultural portfolio continues to perform in line with our expectations. We remain comfortable with its overall credit quality and related allowance levels. Despite the modest improvements in the outlook, we continue to maintain elevated reserves for our agricultural production portfolio in recognition of the prolonged pressure facing the ag sector.

Stefan? Thanks, Greg. Matt hit some of the key financial items already, but I wanted to share a few details. This quarter's net interest margin of $367 was in line with the linked quarter of March. The NIM included about three basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits, unchanged from a benefit in the linked March quarter of three basis points and five basis points in the prior year's June quarter. As reported in our earnings release, This quarter's net interest income included a $603,000 reversal of accrued interest income, which weighed on the NIM and average earning asset yield by about five basis points. With this adjustment, our earning asset yield would have been up three basis points, while our cost of interest-bearing liabilities decreased one basis point quarter over quarter. Although we generated 22 basis points of net interest margin expansion during fiscal 2026, primarily driven by lower-cost deposits from the declining rate environment, we could see some pressure on our core margin in the coming quarters as short-term rates have recently increased and deposit competition has elevated. Approximately 25% of our total deposits are indexed to the 91-day Treasury bill, and the increase in short-term rates could pressure funding costs. To continue strengthening our deposit franchise, we recently launched a new suite of business deposit accounts that are focused on tracking operating accounts and expanding our relationships with commercial customers. In addition, we are further aligning our sales initiatives and incentive structure to place greater emphasis on deposit growth, and we're reinforcing the importance of capturing operating deposits with new loan relationships and renewals. While we expect adoption of these initiatives to build over time, we believe they provide an opportunity to improve our deposit mix, deepen customer relationships, and support our long-term funding strategy. Looking at non-interest income, we saw an increase of 3.8% compared to the linked quarter. The improvement was primarily driven by higher interchange income resulting from increased transaction activity, earnings on bank-owned life insurance, higher levels of gain on sale of SBA loans, and growth in wealth management fees. Bank-owned life insurance income was elevated during the quarter due to a $231,000 mortality benefit recognized in the period. These increases were partially offset by lower other non-interest income, as the linked March quarter included a $315,000 gain on sale of a membership interest in tax credit investment that did not recur in the June quarter. For the full fiscal year, we generated $27.8 million of non-interest income, down a little less than 1% from the prior year, primarily due to lower other loan fees, following our refinement of fee recognition practices under ASC 310-20, which results in a greater portion of these fees being recognized in interest income over the life of related loans. Non-interest expense was down 2.6% compared to the linked quarter, primarily attributable to a decrease in other non-interest expense, occupancy and equipment expense, and data processing costs. Other non-interest expense decreased largely due to lower expenses for lending activities, loan collection, and management of foreclosed real estate. Occupancy and equipment expense declined due to lower maintenance, equipment, utility, lease expense, and depreciation costs. Data processing expense was down primarily due to lower third-party and usage-based costs, along with favorable timing of seasonal processing and technology-related expenses. Non-interest expense totaled $102.1 million in both fiscal 2026 and 2025, as we benefited from our refined accounting for loan origination expenses under ASC 310-20. In addition to realizing about a $1.2 million benefit over the year from our medical insurance claims funding. Looking forward to fiscal 2027, we would expect to see operating expenses re-accelerate as we continue to reinvest in both new team members and technology as we look to escalate growth in various business segments and further expand our presence in the Kansas City market. The allowance for credit losses at June 30, 2026 totaled $54.9 million, representing 1.25% of gross loans and 199% of non-performing loans, as compared to an ACL of $55.9 million, representing 1.29% of gross loans and 186% of non-performing loans at March 31, 2026. $4.3 million of net charge-offs were realized in the quarter, which was a $4 million increase compared to the linked quarter, primarily related to the ag production loan placed on non-accrual in the quarter and a previously identified non-performing commercial loan relationship that was transferred to OREO. The $1 million decrease in ACL was primarily driven by net charge-offs, reduced allowances for individually evaluated loans, as well as a decline in certain qualitative adjustments relevant to assessing expected credit losses. This decrease was partially offset by higher model losses following our annual methodology update for pooled loans. Due to these drivers, the company recorded a provision for credit loss of $3.2 million compared to $2.1 million in the March quarter. The last item I'd like to touch on is our effective tax rate, which for the quarter was 11.9% compared to 19.1% in the link quarter and 17.5% in the same quarter last year. The decline was primarily driven by a $1.7 million tax benefit related to two tax credit investments, including a larger transferable tax credit investment. While our effective tax rate can fluctuate based on timing, size, and mix of tax credit investments, these transactions have historically been concentrated in our fourth fiscal quarter. We continue to expect a normalized effective tax rate in the 19% to 20% range and do not anticipate past benefits of this magnitude in fiscal 2027.

Greg, any closing thoughts? Yes, Stefan. We're very proud of our accomplishments in fiscal 26, highlighted by strong earnings growth and achieving a 1.41% return on average assets and 15% return on tangible equity. This year we have started to see the positive results of our performance improvement initiative, Bancorp, Inc. and support sustainable growth and profitability in the years ahead. On the M&A front, discussions have remained active since last quarter. Within our footprint alone, there are approximately 75 banks with $500 million to $2 billion in assets along with additional institutions in adjacent markets providing a broad pipeline of potential opportunities Thanks, Greg.

At this time, Dennis, we're ready to take questions from our participants. So if you would, please remind folks how they may queue for questions at this time.

At this time, I would like to remind everyone in order to ask a question, simply press star, then the number one on your telephone keypad. Any more first questions from the line of Matt Olney with Stevens, Inc.? Please go ahead.

Hey, thanks for taking my question, guys. I want to start with the net interest margin. Good performance again this quarter. It sounds like there could be some pressure in the near term. Let's hope Stefan can maybe quantify this for us. And then I guess the second part, over the last few years, we've talked about that tailwind from the fixed loan repricing for the bank. Any more kind of remaining from that? Thanks.

Yeah, thanks for the question, Matt. So to start on sort of what we're seeing on the NIM front, right now there's been an increase in short-term rates. The 91-day from the start of July for us is about 14 basis points on those index deposits. So seeing a little bit of pressure on that front to start the quarter and year. So from that 372 sort of core net interest margin adjusting for that non-accrual loan, we could see some compression from there. And then on the repricing sort of, what we're seeing on that front, we have about 550 million of fixed rate loans maturing. And on that front, originating loans are about 25 basis points over what Maturing on the loan front. And then on the CD front, we have about 1.3 billion repricing over the next 12 months. But on that front, we're seeing about new rates on the three to five basis points above maturing CD rates. So a little give and take, some benefit on the loan front, but seeing some cost pressure on the CD front.

Yep. Okay. Appreciate that, Stefan. And then I guess switching gears on the credit side, quite a bit of noise this quarter. I think there was a reference to the bank's annual ACL methodology update. As I think about kind of that credit noise that we've had this past quarter but also a year ago, any more color there? Just trying to appreciate what that would mean for a provision expense for 2027. Thanks.

Yeah, we could see some increase in provision expense going forward. We did have our annual model adjustment, which that alone, just from looking at our lost drivers, will increase expenses on that front. We could probably look at a range of ACL, about 125 to 135 range. That's sort of depending on the amount of problem assets. And then on sort of the ag front, we did increase, we have been for the last year and a half, having additional reserve for ag watch loans. And that's also increased with this methodology update. So for ag production, we're actually reserving about 17% for watch loans. And on the ag real estate front, we're reserving, call it 4 to 5%.

We do feel pretty good about The direction of where problem asset levels are headed, we are optimistic that there is going to be some improvement over the next seven quarters. Okay.

All right, guys, I'll step back. Thank you very much for the call.

Thanks, Matt.

Your next question is from the line of Nathan Race with Piper Sandler. Please go ahead. Hey, guys. Good morning.

Thanks for taking the question. Just going back to the credit discussion, you know, it sounds like, you know, there's not much lost content in terms of what migrated to not performing, you know, within the last year or so when you guys kind of cleaned up that one ag relationship. So just, you know, curious as you look out to fiscal year 27, you know, what's maybe a better charge-off range kind of underpinning Stefan's comments around kind of a 125 to 135 reserve going forward?

We would anticipate overall charge-off balances to decline from the rate of the last several years, which I think we were 17 in the 18 basis points the last two fiscal years. We're targeting that to improve from where we have been. So, roughly, you know, we're hoping that we'll be Moving halfway back to historical levels, historically we've been in that three to five basis points a year range.

Okay, got it. That's helpful. Thanks, Greg. And Stefan, just to confirm, I heard you on kind of the margin factors going forward. You know, it sounds like maybe a little bit of pressure from the kind of 371 Adjusted margin, extra reversals in this quarter, and then it's kind of, you know, maybe a stable outlook thereafter, just given some of the factors on both loans and deposits that you described.

Yeah, the next quarter, just the loan likely sees some pressure, and then sort of on the outlook just from the fixed rate loan repricings. We could see a small net benefit, maybe a basis point or so just on that front if you sort of do the math there, but it isn't a whole lot of incremental benefit as we have, you know, over two times the amount of CDs renewing in that period versus loans.

Okay, great. We do still have the occasional payoff of the larger credit, which kind of surprises you with a handle that is a little Thank you for watching.

Okay, got it. And then you guys alluded to in your comments around some of the hires you've made on the fee income front. You know, just curious, you know, what you think some of those hires and some of the other niches you guys are undertaking in terms of how that can translate to kind of year-over-year fee income growth in 27 relative to, you know, call it adjusted 27.5 in the fiscal year 26.

I didn't catch the 27 and a half?

Yeah, 27 and a half million revenue. Oh, okay.

Yeah. It's probably something with a little bit longer lead time than we'd feel comfortable guiding to. There's always going to be some time for them to get their feet under them. We're not necessarily counting on anything significant, certainly in the first half of our fiscal year. And then, you know, hopefully by the end of the fiscal year you start to see some impact, but it's a multi-year kind of earn out on that type of investment probably.

Okay, got it. And then just lastly, Stefan, any perspectives or kind of guidance around kind of the expense growth rate that we can expect in 27? I imagine it's probably more consistent with kind of the 3% range we're historically accustomed with.

Yeah, so a bigger picture with some of these investments, and last year was a little bit of an anomaly with flat expenses due to some of the changes we've had with deferral accounting, as well as the $1.2 million benefit we had with our health medical costs. So bigger picture, depending on the timing of the investments, We could see somewhere mid-single digits, maybe low into high single digits, year-over-year growth on that operating expenses, with most of that being on the compensation and benefits front.

And I apologize if I could sneak one more in. Greg, it sounds like you're a little bit more optimistic on the acquisition front these days. So just want to confirm some of that optimism. And is it fair to assume, you know, buybacks are probably less likely going forward just given the stock price these days?

You know, where we're trading at on a price potential book value, we feel like M&A offers a much quicker return or earn back period Plus with the improved multiples that we're trading at now, we have a little better currency that makes M&A a little more attractive between buyer and seller expectations. We would really like to have that right partner that would provide a little liquidity to us.

Got it. Makes sense. I appreciate all the color. Thanks, guys.

Thank you. At this time, there are no further questions. I will now turn the call over to Matt for closing remarks.

Okay. Thank you, Dennis, and thank you, everyone, for joining us. We appreciate your interest in southern Missouri, and we'll speak again in about three months. Have a good day.

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