Good morning or good afternoon, and welcome to the Southern Missouri Bank Quarterly Earnings Conference Call. My name is Adam, and I'll be your operator for today. [Operator Instructions] I will now hand the call over to CFO, Stefan Chkautovich to begin. Stefan, please go ahead, and you are ready.

Thank you, Adam. Good morning, everyone. This is Stefan 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 Monday, October 23, 2023, 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 with 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.

Thank you, Stefan, and good morning, everyone. This is Matt Funke. Thanks for joining us. I'll start off with highlights on our financial results from the September quarter, which is the first quarter of our fiscal year. Quarter-over-quarter, we did show some pressure in profitability at higher cost of funds as well as lower fees tied to loans, mortgage and transaction accounts weighed on results. But for this current environment, we're relatively pleased with those. Offsetting some of this pressure was lower reported noninterest expense from lower merger-related costs as well as other operating expenses in the September quarter. Despite challenges, the bank was still able to report an 11.5% year-over-year increase in diluted EPS, due primarily to a reduction from the larger provision for credit losses posted in September of 2022. That diluted EPS figure for the current quarter was $1.16, down $0.21 from the linked June quarter, but up $0.12 from the year ago September quarter. Our annualized return on average assets was 1.2%, while annualized return on average common equity was 11.7%. Those compared to 1.16% ROA and 11.7% ROE in the same quarter a year ago and 1.44% ROA and 14.1% ROE in the linked June quarter. Net interest margin for the quarter was 3.44%, down from the 3.65% reported for the year ago period and down from the 3.60% reported for the fourth quarter of fiscal '23, the linked quarter. Net interest income was down 2% quarter-over-quarter and up 24% year-over-year as we average earning asset balances. We had a similar amount of margin impact from non-core items in the current quarter as compared to the linked quarter, but our reported margin was improved on a year-over-year basis by the non-core items compared to September of 2022. On the balance sheet, gross loan balances increased…

Thank you, Matt. And good morning, everyone. Overall, our asset quality remained strong at September 30, with adversely classified assets standing at $42.5 million or 1.15% of total loans, which represents a decrease of around $3.8 million or 13 basis points during the quarter. Non performing loans were $5.7 million at September 30, down $2 million compared to June 30 and decreasing to 0.16% of gross loans. In comparison to September 2022, nonperforming loans increased $1.8 million and are up 3 basis points on total loans. Loans past due 30 to 89 days were $26.7 million, up $19.7 million from June and at 72 basis points of gross loans. This is an increase of 53 basis points compared to the linked quarter and 57 basis points compared to a year ago. Of this increase, 96% relates to a single borrower group relationship with notes that are past maturity are not renewed due to a dispute among the partnership, which prevented timely renewal. We expect this dispute to be resolved and the delinquency to be resolved during the December quarter. The relationship is not criticized or classified and we do not anticipate any loss to the bank resulting from this dispute. Guarantor's strength provides substantial network and liquidity. Overall, total delinquent loans at September 30 were $28.4 million, up $17.7 million from June. From June 30, Ag real estate balances were up $1.8 million over the quarter and up $22.3 million compared to the same quarter a year ago while agricultural production loans increased $26.3 million for the quarter and $24.2 million over the prior year. Our agricultural customers continue to make great progress on their '23 crop harvest, and we'll likely see many of them finish their corn and rice harvest in October and have a significant amount of their…

Thanks, Greg. Going into a little more detail on the income statement. Matt mentioned our margin of 3.44%. Our net interest income for the quarter was $35.4 million, an increase of $6.9 million or 24.2% as compared to the same quarter a year ago. The increase was attributable to a 31.6% increase in the average balance of interest-earning assets compared to the same period a year ago partially offset by a 21 basis point decrease in net interest margin as we work to improve on balance sheet liquidity, leading to a higher cost of funds. Net interest income from loan discount accretion and deposit amortization resulting from the company's acquisitions contributed 16 basis points to net interest margin in the current quarter. Unchanged from the impact in the fourth quarter of fiscal 2023, the linked quarter and up from a 7 basis point contribution in the same quarter a year ago. Recognition of deferred origination fees on PPP loans was immaterial across these periods. On what we view as core we then see margin down 30 basis points year-over-year and down 16 basis points sequentially. Compared to June, the 92-day quarter in September helped add about 3 basis points of reported margin. Noninterest income was up a little more than 6% compared to the year ago period, but down 34.6% compared to the linked quarter. We saw a significant reduction in NSF charges as we change policy on how we assess fees for some items. Bank card interchange income was back down to a more normalized level after seasonal benefits in the quarter. So nonrecurring charges related to lending offset some application fee income in the quarter as well. We'll show a bounce back from those, but the NSF charges will be a headwind. Mortgage banking activity also remains low.…

Thanks, Stefan. Right now, we're now 9 months past our merger with Citizens Bancshares and 8 months past the systems conversion. We remain focused on deposit retention in those markets and elsewhere and have seen steady improvements over the last quarter and how we're integrating those team members into our operations and procedures. The team is doing a fine job. We have achieved the cost savings we had anticipated in the merger. And from here forward, we are repositioning some of our office locations, as Stefan noted, and we are also looking to recoup community bankers in some of our new markets. So there could be modest incremental upticks in noninterest expense. We are 100% committed to providing our excellent services in the more rural and middle market communities we added to our partnership with Citizens in addition to the Kansas City metro area. We're not currently actively pursuing additional merger opportunities I would expect that other than under very unique circumstances, we'll stay on the sidelines for a bit longer. That said, continued regulatory and macroeconomic factors pressuring banks could eventually lead to an uptick in potential interest of partners.

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

[Operator Instructions] And our first question today comes from Andrew Liesch from Piper Sandler.

Welcome, Stefan. The CD specials that you were running, any more details on those what were you -- what was some of the rates and the terms and are those ongoing here into this quarter?

They are ongoing, Andrew. We were primarily marketing shorter-term CDs, 15 months and in which rates up to 5.5% where we had taken some broker funding in the prior quarter, early in this quarter, summed up with some longer-term brokered funding that we would have added to try to balance out the latter there.

Got it. And so both campaigns are continuing. So we expect to see more CD growth here this quarter? And is that kind of leading to that margin compression that you talked about with the guidance in the near term?

Yes, it certainly has contributed and will continue to contribute there. It has continued into this quarter. We've dialed it back just a little bit. We'll continue to look at how aggressive we need to be on that pricing relative to our funding position.

Got you. And then looking out to the rest of the fiscal year, on loan growth and decent growth here. But it sounds like the pipeline is down certainly compared to a year ago. What sort of growth rate do you expect? And what are your clients telling you for like for their credit demand and needs for the next 12 months?

We're really looking at muted growth for the current quarter and the following quarter, which are traditionally our lowest growth quarters, and then we'll have a fair amount of uptick in activity again in the final quarter of our fiscal year, as Ag lines grow again, we draw about $20 million a month in construction draws that will maintain a lot of our current balances for the next 6 months.

Overall for the year, Andrew, probably in the mid-single digits for percentage growth.

Got it. Yes, makes sense.

The next question comes from Kelly Motta from KBW. Kelly.

Nice to hear from both of you, Greg and Matt as always, and nice to have Stefan joining us. Welcome. I was hoping you could refresh us a bit on loan portfolio repricing about how much of that portfolio comes due this year? And can you provide where new loans are coming on just so we can get a sense of what further lift we might see on the loan yield side?

Loan production is coming on primarily 8.25%, 8.5% for link production and monthly, I would anticipate, on average, we would have roughly $50 million a month maturing that would be repricing higher.

Prepayments could add to that Kelly.

Got it. That's helpful. And then in your prepared remarks, Greg, I think you mentioned that you're looking to add new teams to certain markets. Can you provide kind of -- are there any particular markets in particular that you're looking to add talented and where are you seeing the greatest opportunity for growth, either through the addition of new teams or through current organic production.

When we partnered with Citizens, there were several other rural outstate markets are outside of Kansas City area that they did not have any lending teams in place. We are looking for lending personnel in several of those more rural markets. So that would include potentially Chilicothe, Brookfield, Macon, Boonville or Trenton, Missouri. We probably would not fill someone in all those markets, but we are looking for talent, but at present, we're just in the looking for stage.

Got it. That's helpful. And then in terms of capital, I mean, levels are pretty solid here. In terms of capital priorities, it seems like M&A might there may not be that many opportunities near term, although you're looking. Can you just walk us through your priorities for capital? Is the idea there really to save any dry powder for what deals may lie ahead in addition to organic growth? Or is there any appetite for buyback here?

I would really not anticipate us to initiate any type of buyback. I would see us building more of a capital work test, so to speak, for deployment in future acquisitions.

Got it. That's helpful. Maybe last question for me. Looking at these, I know you had the kind of nonrecurring benefit last quarter. It looks like one area on a core basis that may have pulled back was deposit service charges. Was there -- is that just a function of activity or was there any repricing of -- on your side that kind of drove that lower? Just trying to get a sense if that's a good number to start off as or if we should kind of have that snapping back to where it was in both prior 2 quarters of your last full year.

We would expect that to probably move lower than what those last couple of quarters would Kelly. We've adopted some policy changes on the items that we do charge for. So that will be downtick in the run rate there.

Got it.

[Operator Instructions] As we have no further questions, I'll hand the call back to the management team for any concluding remarks.

Thank you, Adam. And thank you, everyone, for joining us. We appreciate your interest, and we'll speak again in 3 months. Have a good day.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.