Southern Missouri Bancorp: A Strong Fiscal Year, But the Tailwinds Are Ebbing

Southern Missouri Bancorp (SMBC) closed fiscal 2026 with a bang, delivering a 24% increase in full-year EPS to $6.43, driven by a net interest margin that expanded 22 basis points to 3.67% and a handful of one-time items. The fourth quarter alone saw EPS of $1.83, up 14% linked-quarter and 32% year-over-year. But beneath the headline numbers, the bank is navigating a more complex picture: deposit competition is heating up, agricultural credit costs remain elevated, and the biggest EPS driver this quarter — a tax-credit benefit — will not repeat.

A Strong Year, Driven by NIM and a Tax Surprise

The fiscal-year performance was underpinned by disciplined expense control and solid loan growth. “We earned $1.83 diluted in the June quarter, which was an increase of $0.23, or about 14%, from the linked March quarter, and up $0.44, or about 32%, from the June 2025 quarter.” — Matt Funke, Executive (likely CFO or similar senior management) · 2026-07-23 Net interest income rose 10% for the full year, and the bank's efficiency ratio remains among the best in its peer group, at 33.6%. But the quarter's reported net profit margin — which climbed to 22.8% — was flattered by a $1.7 million tax benefit from two tax credit investments, a transaction that CFO Stefan Chkautovich explicitly flagged as non-recurring:

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.

The bank's ability to expand margins comes from its strong deposit franchise, but that franchise is now being tested. “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.” — Stefan Chkautovich, Chief Financial Officer (CFO) · 2026-07-23 Indeed, short-term rates have crept up since the quarter end, and the company is responding by launching a new suite of business deposit accounts aimed at attracting operating balances. Management remains confident in its mid-single-digit loan growth guidance, but with funding costs likely to tick higher, the margin may come under modest pressure in fiscal 2027. As they noted in the April call, "“Deposit growth is going to be a governing factor in how fast we can grow loans.” — Matthew Funke, President · 2026-04-23"

Credit: Elevated but Improving

The biggest watch item remains the agricultural book. The bank took a $2.6 million charge-off on an agricultural production relationship tied to a Chapter 7 bankruptcy, and non-performing assets ticked up to $33.5 million after a commercial real estate foreclosure.

While non-performing assets and non-accrual loans remain elevated compared to historical levels, overall problem assets remain manageable, and our earnings are sufficient to cover potential reserves while maintaining above-average profitability.

The agricultural outlook has actually improved, with Agricultural production benefiting from favorable planting and rainfall, and crop prices running 10–15% above underwriting assumptions. Still, the bank is maintaining elevated reserves on its ag watch loans — reserving about 17% on production loans and 4–5% on ag real estate — in recognition of the sector's prolonged stress. “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.” — Greg Steffens, Executive (likely CEO or similar senior management) · 2026-07-23 The Provision for credit loss rose to $3.2 million in Q4, and the annual ACL methodology update added further to reserves, yet the bank still posted a return on assets of 1.41%.

Capital Allocation: Buybacks Take a Back Seat to M&A

With the stock trading near its tangible book value multiple (1.24x at fiscal year-end), management has signaled a shift in capital priorities. The bank repurchased $19 million of shares in fiscal 2026, but at the current price, they see M&A as offering a better return. “Where we're trading at on a price to tangible book value, we feel like M&A offers a much quicker return or earn back period.” — Greg Steffens, Executive (likely CEO or similar senior management) · 2026-07-23 This is a notable change from prior quarters, when buybacks were more aggressive at lower valuations. The bank's footprint includes roughly 75 banks with $500 million to $2 billion in assets, and management is actively pursuing opportunities. As Greg Steffens put it: “We would really like to have that right partner that would provide a little liquidity to us.” — Greg Steffens, Executive (likely CEO or similar senior management) · 2026-07-23

Looking ahead, fiscal 2027 will be a test of whether the bank can sustain its profitability without the tax-credit tailwind. Management expects operating expenses to re-accelerate into mid-single digits as they invest in technology and talent, and the margin faces modest headwinds from deposit repricing. The tax benefit that juiced Q4 will not repeat, and the provision will likely stay elevated as the bank works through its problem assets. Provision for loan losses has climbed from a 1% average in 2024 to a run rate of $2–3 million per quarter in 2026, a reflection of both ag stress and the bank's decision to hold a higher level of reserves.

The stock, which peaked at $79.33 on August 4, has since pulled back about 6%, possibly reflecting concerns about the non-recurring tax benefit and the margin outlook. But the bank's core franchise remains strong, with a low cost of funds, a solid deposit base, and a disciplined credit culture. If the ag cycle continues to improve and M&A delivers, SMBC could still generate above-average returns. The key will be whether the bank can manage the transition from a rate-benefit-driven earnings story to one built on organic growth and fee income — and whether the elevated credit costs truly abate as management expects.