Southern Missouri Bancorp Q2 2026 Earnings Call - Earnings Rebound as Credit Recoveries and Deposit Repricing Support Margin

James, Conference Operator: The conference call will now start, and I’ll hand it over to our host, Chief Financial Officer of Southern Missouri Bancorp, Stephen. Please go ahead.

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: Thank you, James. Good morning, everyone. This is Stephen Chkautovich, 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 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.

Matt Funke, President and Chief Administrative Officer, Southern Missouri Bancorp: Thank you, Stephen, 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 fiscal year. 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 $0.24, or 17.4%, from the linked September quarter, and it’s up $0.32, 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 as we had 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 one-to-four 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 lending, 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 to date 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 2026. 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 brokered 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. Net interest income was up just over 1% quarter over quarter and up 12.4% year over year. Stephen 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, 2025. I’ll now hand it over to Greg for some discussion on credit.

Greg Steffens, Chairman and CEO, Southern Missouri Bancorp: 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, up $4 million, or 8 basis points as a percentage of gross loans since last quarter. Non-performing loans were about $30 million at 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 NPLs.

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 counsel with the goal of achieving repayment, loan refinancing, and limited potential losses.

Despite the modest increase in non-performing assets this quarter, we continue to see positive progress in 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 and was materially charged down during a prior quarter, so we do not expect any significant additional impact from 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 2 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 end, September 30th, ag real estate balances were up about $6 million, and they were up $21 million compared to December 31st a year ago. Ag production and equipment loan balances were down $26 million during the quarter, following our 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 2026, 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 2025 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 2026 cash flow projections use pricing that is generally consistent with current futures and FSA assumptions and include stress testing of borrower cash flow to assess downside risk. Based on our stringent underwriting, including stress commodity pricing and 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 2026, our borrowers should benefit from higher payments under the ag risk coverage or price loss coverage programs based on changes to those programs adopted in the One Beautiful Bill in 2025. 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 2025 quarter as part of our ACL calculation. Stephen, would you update us on our financial performance?

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: 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 3.57 was flat compared to the linked September quarter. The NIM included about 5 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits compared to 7 in the linked September quarter and down from the prior year’s December quarter addition of 9 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 3.63, which is a 6 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 indexed 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 yields 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 link 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 % increase, including the cost of benefits.

The allowance for credit losses at December 31st, 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 7 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 losses quarter over quarter. Our non-owner-occupied CRE concentration at the bank level was approximately 289% of Tier 1 Capital and allowance at December 31st, 2025, down by about 6 percentage points as compared to September 30th 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 31st. 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. In the absence of 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?

Greg Steffens, Chairman and CEO, Southern Missouri Bancorp: Thanks, Stephen. 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 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, where approximately 5% of shares outstanding. As with past programs, we intend to remain disciplined and opportunistic, deploying capital when our stock meets our internal investment and return 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 million 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 confident in the long-term fundamentals of our company. Our focus remains focused on disciplined execution, prudent risk management, and thoughtful capital deployment, all with the objective of continuing to deliver consistent, attractive returns for our shareholders.

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: 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.

James, Conference Operator: 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 the 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 Stephens. Go ahead, please. Your line is now open.

Matt Olney, Analyst, Stephens: Hey, thanks. Good morning. I want 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 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.

Greg Steffens, Chairman and CEO, Southern Missouri Bancorp: In regard to 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, loan prepayment rates have been higher than what we’ve historically seen, and basically, we anticipate prepayment rates to be a little higher than historically.

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: But we wouldn’t say that what we’ve had in this quarter that was a little unexpected was rate-driven necessarily. It was just kind of a mixed bag.

Greg Steffens, Chairman and CEO, Southern Missouri Bancorp: Yes.

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: Matt, as far as competition, treasuries have been bouncing quite a bit here lately. We were seeing some talk in the low sixes and high fives. Expect that to kind of move back a little bit higher for your top-flight credit quality. But definitely, there still is some aggressive competition out there.

Greg Steffens, Chairman and CEO, Southern Missouri Bancorp: We do still feel good about our mid-single-digit loan growth projections for our fiscal year.

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

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: 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, they’re sort of at break-even from what we’re seeing maturing off versus where we’re seeing new origination rates.

Matt Olney, Analyst, Stephens: Okay. And Stephen, just to follow up there, does that imply the liquidity build that we usually see will not happen this year? It will happen less?

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: Yeah. We’re seeing less impact there. Basically, the inflows that we see seasonally have been partially offset by the decrease in brokered deposits.

Matt Olney, Analyst, Stephens: Okay. That’s helpful. And then just one more follow-up on the margin, Stephen. 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 pricing side compared to the last year or so. Is that right?

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: Yes, sir. That’s correct.

Matt Olney, Analyst, Stephens: Okay. Thanks for your help.

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

Nathan Race, Analyst, Piper Sandler: Hey, guys. Good morning. Thanks for taking the questions, and hope you’re all doing well. Stephen, I think you mentioned 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 some kind of guideposts around the run rate that you’re expecting over the next couple of quarters overall.

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: 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.

Nathan Race, Analyst, Piper Sandler: Okay. But otherwise, you’re not expecting any major deviations in the run rates?

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: Nothing material at this point. Just general trend.

Nathan Race, Analyst, Piper Sandler: Okay. Great.

Greg Steffens, Chairman and CEO, Southern Missouri Bancorp: Historically, we’ve had.

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: Touch on the annual merit increases in that 4%-5% range.

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

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: 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 a better opportunity. We always look at that as similar to an outside acquisition and what our earnback is on the premium that we’re paying there. So we’ll continue to be disciplined on that.

Nathan Race, Analyst, Piper Sandler: Okay. Great. And then just lastly, curious if there’s any additional tail to the charge-offs on the commercial real estate loan that we saw in the December quarter here? And just absent maybe any additional recoveries, just how you’re thinking about kind of a more normalized charge-off range over the next several quarters?

Greg Steffens, Chairman and CEO, Southern Missouri Bancorp: We would anticipate being more to historical averages over the upcoming quarters. We would not anticipate much in the way of a tailwind behind us, but I think just historic results would be how we did in prior years, not the last six, nine months.

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: Nathan, specific to the one relationship, if that’s what you were asking about, we don’t anticipate anything material further on it.

Nathan Race, Analyst, Piper Sandler: Okay. Got it. I appreciate all the color. Thanks, guys.

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: Thank you.

Greg Steffens, Chairman and CEO, Southern Missouri Bancorp: Thanks, Nathan.

James, Conference Operator: 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.

Charlie Driscoll, Analyst, KBW: Hi. This is Charlie on for Kelly Motta. Thanks for taking my question. 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 the index deposits trending downward, which are nice tailwinds, but maybe if you could help piece it together in just general.

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: 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.

Charlie Driscoll, Analyst, KBW: 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 to any additional color, that would be great.

Greg Steffens, Chairman and CEO, Southern Missouri Bancorp: We would prefer M&A within our footprint, but 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 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.

Charlie Driscoll, Analyst, KBW: Great. Thank you. That’s all I have. Thank you.

James, Conference Operator: Thank you, Charlie, for that question. Thank you. Yep. Our question queue is now clear. I’ll hand it back to Matt Funke for final remarks. Mark? Matt?

Stephen Chkautovich, Chief Financial Officer, Southern Missouri Bancorp: 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.

Greg Steffens, Chairman and CEO, Southern Missouri Bancorp: Thank you, everyone.

James, Conference Operator: This concludes today’s call. Thank you all for joining. You may now disconnect your lines and have a great day.