Southern Missouri Bancorp, Inc. (SMBC) Earnings

Management highlights

- Overall Financial Performance * The June 2026 quarter closed out fiscal 2026, with higher year-over-year earnings driven by net interest margin expansion from declining funding costs and 5% average earning asset growth. * Full year 2026 return on assets hit 1.41%, and return on tangible equity reached 15%, with strong pre-provision net revenue absorbing elevated credit costs while maintaining profitability. * Tangible book value per share increased 13% year-over-year to $47.43, the company increased its quarterly dividend by 8% to $0.27 per share, and repurchased 317,000 shares (almost 3% of outstanding shares) for $19 million in FY2026. - Balance Sheet Activity * Gross loans grew $69 million in Q4, with growth concentrated in construction/land development, 1-4 family residential, multifamily, and seasonal agricultural lending; the loan pipeline stands at $182 million, up $4 million quarter-over-quarter. * Deposits grew $67 million in Q4, driven by broker deposits; the company has launched a new suite of business deposit accounts and adjusted team incentives to grow lower-cost core operating deposits over time, as local deposit rate competition has increased. - Credit Quality and Portfolio Composition * Adversely classified loans and non-performing loans declined quarter-over-quarter to 1.2% and 0.63% of gross loans respectively; non-performing assets increased slightly due to the transfer of a foreclosed commercial loan to other real estate owned (OREO). * Two charge-offs totaling $3.8 million were taken in Q4: one for the foreclosed commercial relationship, and one for an agricultural production relationship placed on non-accrual (the borrower filed Chapter 7 bankruptcy, and the bank is pursuing recovery of the remaining $5.9 million exposure). * Commercial real estate (CRE) concentration ratios declined quarter-over-quarter as Tier 1 capital growth outpaced CRE loan growth, reaching 276% on a consolidated basis. * Agricultural portfolio conditions have improved: 2026 crop planting is complete, with favorable weather positioning crops for above-average yields, and commodity prices/yields running 10-15% above underwriting assumptions; elevated reserves are still maintained for the agricultural production portfolio to account for ongoing sector pressure. - Strategic and Operational Updates * The company strengthened credit management practices in FY2026, including revising appraisal review processes, adding credit talent, increasing construction lending oversight, and implementing improved agricultural loan monitoring procedures for upcoming renewals. * Investments were made in growing teams across key lines of business: adding commercial lenders in the Kansas City market, a commercial insurance producer, and expanded wealth management and trust staff to diversify revenue streams. * M&A pipeline activity remains active, with a large pool of potential target banks in and adjacent to the company's footprint, and the company's strong capital position and improved trading multiple leave it well positioned to pursue attractive opportunities.

Guidance

- Loan growth: Management expects mid-single-digit loan growth in FY2027, a moderate slowdown from FY2026's 7% growth, as the company prioritizes funding new loans via core deposits rather than more expensive wholesale funding. - Net interest margin: Near-term margin pressure is expected in the first quarter of FY2027 from the recent increase in short-term rates (25% of total deposits are indexed to 91-day Treasury bills, which have risen 14 basis points since the start of Q1 FY2027); after initial compression, small net benefits from fixed rate loan repricing are expected, leading to a broadly stable outlook thereafter. - Allowance for credit losses (ACL): Management expects ACL to remain in a 125-135 basis points range (as a percentage of gross loans) in FY2027, depending on problem asset levels. - Charge-offs: Management expects annual charge-offs to decline from the 17-18 basis points range of the past two fiscal years, targeting a move halfway back to the historical 3-5 basis points annual range. - Non-interest income: Fee income growth from recent team hires is expected to be a multi-year process, with no material growth expected in the first half of FY2027, and potential modest impact emerging by the end of the fiscal year. - Operating expenses: Expense growth is expected to re-accelerate in FY2027 to a mid-single-digit to high single-digit year-over-year rate, driven by investments in new team members and technology, up from the flat expense result in FY2026 which benefited from one-time accounting and medical cost savings. - Effective tax rate: The low 11.9% effective tax rate in Q4 FY2026 reflects large one-time tax credit benefits; management expects a normalized effective tax rate of 19-20% in FY2027, with no large tax benefits of the same magnitude expected. - Capital allocation: M&A is prioritized over share repurchases at current price-to-tangible book valuation levels, as M&A offers a more attractive earn-back period and the company's improved trading multiple provides more valuable acquisition currency.

Segment performance

This transcript does not break out performance for distinct product segments. All financial results are reported on a consolidated company basis: Q4 FY2026 diluted EPS was $1.83, up 14% quarter-over-quarter and 32% year-over-year. Full year FY2026 diluted EPS was $6.43, up 24% from FY2025's $5.18. Net interest margin for Q4 was 3.67%, flat quarter-over-quarter and up 20 basis points year-over-year. Net interest income increased 3% quarter-over-quarter and 10% year-over-year. Non-interest income for Q4 rose 3.8% quarter-over-quarter; full year FY2026 non-interest income was $27.8 million, down ~1% from FY2025. Non-interest expense for Q4 fell 2.6% quarter-over-quarter; full year FY2026 non-interest expense was $102.1 million, flat year-over-year. As of June 30 2026, gross loans were $4.39 billion, up 7.1% year-over-year, with agriculture real estate comprising 7% of gross loans and agriculture production/equipment loans comprising 5% of gross loans. Total deposits were ~$4.33 billion, up 3% year-over-year.

Risks & headwinds

- Elevated short-term rates have created near-term pressure on net interest margin, as 25% of the company's deposits are indexed to 91-day Treasury bills. Intensified local deposit rate competition increases funding costs and has led to higher-than-desired growth in broker deposits. - Problem asset and non-performing loan levels remain elevated compared to historical norms, with ongoing exposure to potential volatility in agricultural sector profitability that depends on unpredictable final harvest yields and commodity prices, despite current favorable near-term conditions. - Credit risk remains in the existing non-performing loan portfolio, including the $5.9 million remaining exposure to the bankrupt agricultural borrower and the $3.6 million carrying value of the OREO commercial property that must be sold. - While management expects charge-offs to decline, elevated charge-off levels from the past two years could persist if broader economic weakness emerges or problem asset workouts underperform expectations.

Analyst Q&A

• Q: Can you quantify the expected near-term pressure on net interest margin, and are there any remaining tailwinds from fixed loan repricing? /

  A: 91-day Treasury rates (to which 25% of deposits are indexed) are up 14 basis points since the start of Q1 FY2027, which will create some near-term margin compression from the current adjusted core margin level. Looking at upcoming repricing, $550 million in fixed rate loans will mature over the next 12 months, with new originations pricing ~25 basis points above maturing loans, providing a small loan benefit. However, $1.3 billion in certificates of deposit will also reprice over the same period, with new rates only 3-5 basis points above maturing CDs, leading to net cost pressure that offsets most of the loan benefit.

• Q: What does the annual ACL methodology update imply for 2027 provision expense, what reserve range can be expected? /

  A: The annual methodology update itself increases modeled loss estimates, particularly for agricultural watch loans, where the company now reserves 17% for ag production watch loans and 4-5% for ag real estate watch loans. The ACL is expected to stay in a 125-135 basis points range as a percentage of gross loans, varying with actual problem asset levels. Management remains optimistic that overall problem asset levels will improve over the next several quarters.

• Q: What charge-off range is expected for FY2027, aligned with the new reserve range? /

  A: Management expects overall annual charge-off rates to decline from the 17-18 basis points level of the past two fiscal years, targeting a move halfway back to the company's historical 3-5 basis points annual charge-off range.

• Q: What is the outlook for expense growth in FY2027, and what is your current approach to capital allocation relative to M&A and buybacks? /

  A: After flat expenses in FY2026 driven by one-time accounting changes and a $1.2 million medical cost benefit, FY2027 operating expense growth is expected to hit a mid-single-digit to high single-digit year-over-year rate, driven mostly by compensation for new team and technology investments. At current price-to-tangible book valuations, M&A is prioritized over buybacks, as it offers a faster earn-back period, and the company's improved trading multiple provides more attractive currency for acquisitions.