SOUTHERN MISSOURI BANCORP, INC. Q3 FY2025 earnings call

• Financial Performance: Earnings improved quarter-over-quarter, net interest margin increased, net interest income grew, and loan and deposit balances showed growth.
• Credit Quality: Credit quality normalized but remained relatively strong, with adversely classified loans at $49 million (1.2% of total loans), nonperforming loans at $22 million (0.55% of gross loans). Ag real estate balances totaled $247 million (6% of gross loans) and ag production equipment loans totaled $186 million (5% of gross loans).
• Net Interest Margin: Included about 13 basis points of fair value discount accretion, with the run rate net interest margin viewed as about 3.40% when adjusting for day count and the identified loan. Interest-bearing liability costs decreased to 3.14%, down 19 basis points, but asset yields decreased due to lower short to midpoint of the curve.
• Noninterest Income/Expense: Noninterest income down QoQ primarily due to lower deposit account fees, while noninterest expense up QoQ due to higher occupancy, equipment, and data processing costs.
• Organizational Initiatives: Performance improvement initiatives ongoing, West Region's Regional President appointed Chief Banking Officer, acquired new insurance brokerage partner, and limited M&A conversations due to market conditions.

In the March quarter (third quarter of fiscal '25), earnings and profitability improved. Net interest income was up 3.5% quarter-over-quarter and 14.4% year-over-year due to a larger earning asset base and NIM expansion. The net interest margin was 3.39% for the quarter, up from 3.15% year ago and 3.36% in the second quarter of fiscal '25. Gross loan balances decreased by $3.5 million compared to the December quarter but increased by $252 million compared to March 31, 2024, with year-over-year growth of almost 7%. Deposit balances increased by about $51 million in the third quarter and $275 million or about 7% year-over-year. Tangible book value per share was $40.37, having increased by $4.86 or almost 14% over the last 12 months.

• Fiscal year-to-date loan growth at 4.5%, optimistic about achieving at least mid-single-digit loan growth for the fiscal year. CRE ratio expected to increase in Q4 but stay in 300-325 range. About $215 million in CDs rolling off in next 3 months at 4.25% replaced by ~4.10%, and $1.2 billion in CDs renewing over 12 months at 4.26%. Anticipate M&A opportunities in intermediate future.

• Credit Risks: Increase in NPLs, specific CRE loans with issues related to insolvent tenants. Potential credit deterioration from recent tariffs.
• Economic Uncertainty: Potential impact on provision for credit losses due to changes in economic forecast (lower GDP, higher unemployment).
• Market Volatility: Impact on M&A conversations and stock price, affecting capital deployment for buybacks.

Q: Just wondering if you have some specifics on what -- how many CDs might be rolling off over the next couple of quarters and at what rates and what they're going to be replaced at?

A: Looking at our CD portfolio, renewing in the next 3 months, we have about $215 million that are rolling off at a rate of about 4.25% and being replaced by current renewal rates are averaging around 4.10%. Over the next 12 months, we have about $1.2 billion in CDs renewing with an average rate of 4.26%.

Q: When you look out at the funding for the next several months, are CDs going to be the primary source of growth? Or do you have any other accounts that you're focusing on right now that you might try to encourage clients to shift into?

A: We do have an attractive platinum savings rate. But as we go through this next quarter or 2, we will see our non-maturity deposit accounts start to roll off as some of those seasonal funds roll off from ag and public unit accounts. So CDs will probably start increasing as a percentage of the portfolio.

Q: Have you assessed how much of the commodities are exported and what the effect of tariffs might be?

A: The effective tariffs wouldn't be good. We don't have any real visibility once our farmers go to market where that winds up necessarily. Prices have been relatively low already. So at some point, the government price supports kick in. We don't have a lot of exposure to the downside on that.

Q: It sounds like there's some good momentum here for the net interest margin. Is that the right interpretation? And was that a reported NIM or a core NIM?

A: That was a reported NIM. Overall, there's some good underlying dynamics here as we sort of shift out of those excess cash balances that we mentioned that increased about $78 million. Those will start to flow out over the next 2 quarters.

Q: Any more color you can share as far as the collateral on these loans with the NPLs?

A: One of the properties is located in a medical-related lease space or they were leased to the tenant when insolvent. So really, it's going to be dependent upon what other type of medical tenant we can find for those buildings. We do anticipate a fair amount of charge-off on these credits at a given -- at some point. We do have them marked to roughly 35% in our ACL of their balance.

Q: Are you kind of just keeping dry powder for M&A? Or could we see you step in and become more active on that like you've been in the past?

A: We would anticipate depending on stock price, potentially using some of our excess capital to repurchase shares. We do target having tangible common equity of 8% to 9%. We are over those ratios a little right now. We do view that if we can repurchase our shares and have a tangible earn-back period of around 3 years that it is appropriate at that time to repurchase shares. So our repurchase activity will really depend upon our stock price and what happens with the -- just general market price for our stock.

Q: Wondering kind of how you're viewing your borrower base right now? Are you seeing any -- additional signs of stress from your borrower base here?

A: We're seeing a little more difficulty chasing payments. Mid-month, the past due level has continued to creep a little bit higher. There is sign that the consumers are having a little bit of stress, small businesses having a little bit of stress. Still, we're not seeing a lot that translates into loss expectation outside of kind of these limited situations, which really haven't been economically driven for the most part.