Hello, and welcome to the Southern Missouri Bancorp, Inc. Earnings Conference Call. My name is Alex. I'll be coordinating the call today. [Operator Instructions] I'll now hand it over to your host, Stefan Chkautovich CFO, to begin. Please go ahead.

Thank you, Alex. Good morning, everyone. This is Stefan Chkautovich, CFO with Southern Missouri Bancorp. Thank you for joining us today. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, October 28, 2024, and to take your questions. We may make certain forward-looking statements during today's call, and we may refer you to our cautionary statement regarding forward-looking statements contained in the press release. I'm joined on the call today by Matt Funke, President and Chief Administrative Officer. Matt will lead off our conversation today with some highlights from our most recent quarter.

Thanks, Stefan, and thanks, everyone. This is Matt Funke, I appreciate you joining us today. I'll start off with some highlights on our financial results for the September quarter, the first quarter of our fiscal year. Quarter-over-quarter, we showed some pressure in profitability as a larger provision for credit losses, an increase in noninterest expense, and lower noninterest income weighed on earnings and profitability. Offsetting some of this pressure was an increase in net interest income, which stemmed from loan growth and further net interest margin expansion. And despite the lower reported earnings, there were several underlying highlights that caused us to view the quarter favorably and remain optimistic about future periods. The diluted EPS figure for the current quarter was $1.10, down $0.09 from the linked June 2024 quarter and down $0.06 from the September quarter a year ago. During the quarter, the bank realized onetime cost of $840,000 associated with the performance improvement project reported as legal and professional fees to enhance the bank's operations and revenues. Recognition of this expense during the quarter reduced after-tax net income by $652,000, diluted EPS by $0.06 and ROA by 6 basis points. At this time, we're still in the early stages of the performance improvement project, but we're looking forward to considering the recommendations in future quarters with the ultimate goal of improving our customer and team member experience and creating greater long-term value for shareholders. Reported noninterest expense was up 3.4% compared to the linked quarter but excluding those onetime performance review costs, expenses would have been flat quarter-over-quarter. Net interest margin for the quarter was 3.37% down from the 3.44% reported for the year ago period, but up from 3.25% for the fourth quarter of fiscal '24, the linked quarter. Net interest income was up 4.5% quarter-over-quarter and…

Thanks, Matt. Going into a little more detail on the income statement. Looking at this quarter's net interest margin of 3.37%, up 12 basis points quarter-over-quarter and it included about 9 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits. Compared to the linked June quarter of 10 basis points and 16 basis points in the prior year September quarter. Now that we are well past the Citizens merger, we would expect to see these lower levels of discount accretion going forward. The net interest margin expanded as the yield on interest-earning assets increased 21 basis points, primarily due to loan yield expansion, while the cost of interest-bearing liabilities increased 11 basis points. In addition, the net interest margin benefited from an increase in the loan-to-deposit ratio. Also, as we annualize it, the NIM benefited by 4 basis points compared to the linked quarter due to the higher 92-day count in the quarter. With the improvement in the margin, and growth of our earning asset base, we expect to see continued net interest income growth through the year. Recall that the December quarter from the Company, we historically see a slowdown in loan growth and an increase in deposits that will weigh on the margin. But we still expect positive improvement in net interest income overall. As we have indicated on prior calls, our liability-sensitive balance sheet should benefit from rate cuts and we expect to see this benefit in net interest income and the NIM next quarter due to the 50 basis point Fed funds cut in September. Looking at the drivers of near-term impacts we have about 23% of our deposits or close to $950 million tied to the 91-day treasury compared to loans of close to $500 million indexed…

Thank you, Stefan. Last week, we held our annual leadership meeting with market leaders from across our footprint and within our administrative functions. It was great to hear from them about their activities to get feedback on initial results from our efforts to improve our organizational culture and to visit about the work we're beginning on a performance improvement project. We're really excited about performance improvement, not only because we think it can make us better at quickly and effectively meeting our customers' needs, but also because this project represents a great professional development opportunity for our team and they've embraced the entire process with enthusiasm. We're optimistic that the improving yield curve slope, continued strong business activity in our markets, and credit quality that remains pretty strong across the industry by historical standards, but all of that will provide a good setting for our fiscal '25 results. Finally, we're continuing to see small incremental pickup in M&A conversation, but we'd still say that everything remains preliminary for us. We do think it's reasonable to look for more interest from potential sellers as regional bank valuations have improved pretty significantly so far this calendar year.

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

[Operator Instructions] Our first question for today comes from Matt Olney from Stephens. Your line is now open. Please go ahead.

I want to ask you about just local competition there in your footprint, start on the deposit side. And Stefan, you made a comment a few minutes ago about just deposits and seeing some of the competition move the pricing down. Just in general, looking for some commentary about how much the competition is lowering pricing and how well you've been able to successfully lower some of your more promotional rates?

Matt. So I guess prior to rate cuts, when treasury yield curve started to decrease in the midpoint and longer end. We were able to lower our rates and sort of our local markets were not as swift. But after the FOMC cuts, we were seeing them move them down. So, our rates became a little bit more competitive in line with them. But we've been able to drop in line with sort of where treasuries have gone over time.

Okay. I appreciate that. And then what about on the other side, on the loan pricing side. Any notable data points there as far as kind of the competitive pressures?

I would say that we were probably on the high end of our asking rates for loans two to three months ago. We're seeing the market come back to us a little bit right now with the uptick on the longer end of the treasury curve. Heard some commentary from some of our lenders that we're doing a better job being competitive with the rate sheet even though we haven't really adjusted it here recently. But really with our pretty strong demand, where we're at on loan-to-deposit ratio and everything, there's not a lot of reason for us to try to be a whole lot more aggressive on the loan rate side than what we are right now.

Okay. And then, I guess on the margin and the NII commentary, I just want to make sure I understand kind of the guidance here. It sounds like you expect continued NII growth but seasonally in the December quarter end, it sounds like that margin could move sideways or down just from a liquidity build that we typically see in the quarter. But outside of that, it sounds like with lower rates, you've got some nice tailwinds there to continue to grow the margin and the NII maybe over the next year or so. Is that reasonable?

Trajectory should continue that way. I'm hopeful that sideways at worse in the December quarter would be what we see. But yes, long term, we're pretty optimistic there.

Yes, Matt, just for a frame of reference, our deposit uptick in the December quarter sort of been low to lower end of the mid-single-digit sort of growth quarter-over-quarter. So, looking at a normalized period, that's sort of what we could expect.

Okay. That's helpful. And just lastly for me, you mentioned in the prepared commentary and in the earnings release, the performance improvement project. It sounds like it's still early to go into too much detail. But maybe just big picture, we'd love to kind of maybe appreciate kind of what your expectations are and what parts of the bank that the consultants are reviewing? And then from a financial standpoint, what are the maybe the goal of kind of the review?

Yes, they're really reviewing just about everything, but internal audit, compliance, some are risk management. But everything we do to serve customers is on the table for them. Our goal really in the short term is to pay for itself over the course of the year or so. Longer term, we would hope to do a little better than that on a run rate, but I think what they're talking about would be low single-digit percentage of our noninterest expense spend. Is that about right, Stefan? Whether we'll get there, whether we'll decide everything is feasible as far as the recommendations, we'll see that -- it's not just a financial play. We really want to use this to improve our operations, be better positioned for the next merger opportunity, be able to implement effectively and just keep the team member satisfied about the tools we're giving them to serve the customer.

Thank you. Our next question comes from Kelly Motta of KBW. Your line is now open. Please go ahead.

Following up on the margin, it looks like loan yields popped pretty significantly. And I appreciate all the moving color that you guys gave in the prepared remarks. That's really helpful as we look to forecast ahead. I was wondering though if the September quarter included any outsized loan fees or nonaccrual interest recoveries in there, just ever thinking about normalizing the loan yields ahead or if that what you reported is a pretty good run rate number for the last quarter?

There might have been a couple of basis points of impact from nonaccrual, but it wasn't significant enough that we thought we should comment on it in the release really to look at what we've seen quarter-over-quarter with the loan yields repricing over the last, I don't know, five, six quarters. If anything, it's been trending down just a little bit the sequential improvement. We'd expect that trend to continue since we've topped out and now as we've begun to turn around a little bit. But hopefully, by maintaining the pricing expectations we have, we'll continue to see some loan yield improvement quarter-over-quarter in December.

Yes, Kelly, looking at some of our fixed rate loans that are repricing around the corner. This next quarter, there really isn't a material upside to yields when it repriced, but sort of looking in the March quarter, there may be a little benefit there, but nothing too big. I wouldn't expect a material increase from here on that front.

Got it. You preemptively answered my follow-up question. Maybe a last one from me. I didn't hear any commentary on M&A on the prepared remarks. Your currency has improved here and just wondering, if there's any update on -- you guys have been a pretty skillful acquirer in your past couple of deals. Wondering if you could provide any color on the landscape here?

Yes. Still nothing beyond preliminary conversations. We do think it's likely it will pick up a little bit. We've seen a few more conversations taking place, but nothing that nothing that's imminent.

Understood. I’ll set back. Nice quarter.

Thank you. [Operator Instructions] Our next question comes from Andrew Liesch of Piper Sandler. Your line is now open. Please go ahead.

Just wanted to ask -- you mentioned $60 million of brokered that mature this quarter, I guess, do you have the runoff rate of what those are and what you think those are going to be replaced with and then if you have any -- the numbers handy, what matures in the next quarter or two?

Yes. As far as those yields, they came around with a forward handle on them, that we sort of did a structure, it was four plus. Yes, they range. So, we bridge some of the shorter end, longer end, but these are coming off of probably higher fours. And then after the -- that $60 million is the biggest bucket that we have sort of coming up here in the near term. I think after that, it looks like we -- maybe in the 7- to 12-month bucket, we have another $18 million, $20 million overall.

Andrew, that we took it to mature when it does because we're expecting seasonal inflows to allow us to repay that without going back to brokered.

Yes, Matt. And it looks like that rate -- that average rate on the what's coming due this quarter is 464.

Got you. All right. Very helpful. Then just on fee income. It seems like some of the items have to be more smoothed out throughout this year. But is this $7 million, $7.2 million number. This in place to begin with here going into the second quarter?

I think that $7 million that we sort of gave as a guideline still a good run rate to use from here?

Great. Great. You've covered all my other questions. I'll step back.

Thanks, Andrew.

Thank you. [Operator Instructions]. Okay, at this time, we currently have no further questions. So, I'll hand back to Matt Funke for any further remarks.

Thanks, Alex, and thanks, everyone, for joining us. We appreciate your interest in the Company, and we'll speak again in January. Have a good day.

Thank you all for joining today's call. You may now disconnect your lines.