Q1 2027 Southern Missouri Bancorp Inc Earnings Call

October 22, 2026

Operator 2: Thank you for joining us, and welcome to the Southern Missouri Bancorp Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Stefan Chkautovich, chief financial officer. Please go ahead.

Speaker #1: If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. I will now hand the conference over to Stefan Chkautovich, Chief Financial Officer.

Speaker #1: Please go ahead.

Stefan Chkautovich: Thank you, Al. Morning, everyone, and thank you for joining us to discuss Southern Missouri Bancorp's results for the first quarter of fiscal 2027. This is Stefan Chkautovich, CFO of Southern Missouri Bancorp. 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 am joined by Greg Steffens, our chairman and CEO, and Matt Funke, our president and chief administrative officer. Matt will begin with an overview of the quarter.

Speaker #2: Thank you, Al. Good morning, everyone, and thank you for joining us to discuss Southern Missouri Bancorp's results for the first quarter of fiscal 2027.

Speaker #2: This is Stefan Chkautovich, CFO of SOUTHERN MISSORI BANCORP. 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.

Speaker #2: I'm joined by Greg Steffens, our Chairman and CEO, and Matt Funke, our President and Chief Administrative Officer. Matt will begin with an overview of the quarter.

Matt Funke: Well, thank you, Stefan, and good morning, everyone. We reported another quarter of strong profitability with diluted earnings per share of $1.73 compared with $1.83 in the linked June quarter. Return on average assets was 1.44%, return on average common equity was 12.7%, and tangible book value per share increased 2.3% during the quarter to $48.52. Net interest margin expanded 3 basis points to 3.70%, while net interest income increased 3.5% from the linked quarter. Provision for credit losses was $3 million, down $240,000 from the June quarter. Gross loans increased $64 million or 1.5% during the quarter. Growth remained solid, but moderated from last year as we maintained our focus on appropriate credit spreads and full banking relationships.

Speaker #3: Well, thank you, Stefan, and good morning, everyone. We reported another quarter of strong profitability with diluted earnings per share of $1.73 compared with $1.83 in the linked June quarter.

Speaker #3: Return on average assets was 1.44%, return on average common equity was 12.7%, and tangible book value per share increased 2.3% during the quarter, to $48.52.

Matt Funke: Net interest margin expanded 3 basis points to 3.70%, while net interest income increased 3.5% from the linked quarter. Provision for credit losses was $3 million, down $240,000 from the June quarter. Gross loans increased $64 million or 1.5% during the quarter. Growth remained solid, but moderated from last year as we maintained our focus on appropriate credit spreads and full banking relationships.

Speaker #3: Net interest margin expanded 3 basis points to 3.70%, while net interest income increased 3.5% from the linked quarter. Provision for credit losses was $3,000,000 down $240,000 from the June quarter.

Speaker #3: Gross loans increased $64,000,000 or 1.5% during the quarter, growth remained solid but moderated from last year as we maintained our focus on appropriate credit spreads and full banking relationships.

Matt Funke: Growth was led by one to four family residential real estate, ag production, commercial and industrial, ag real estate, and construction and land development loans, partially offset by declines in multifamily and commercial real estate categories. Our 90-day loan pipeline was little changed at $185 million at quarter end, up from $182 million at 30 June. Quarterly loan originations were approximately $296 million, down from $335 million in the June quarter. This was largely driven by a decrease in owner-occupied CRE originations as we prioritized opportunities that met our return and relationship objectives, in addition to decreases in ag real estate and ag production originations due to normal seasonality, with total volume roughly in line with the September of 2025 quarter. We continue to expect mid-single-digit loan growth for fiscal 2027, although quarterly results will reflect our normal seasonality.

Speaker #3: Growth was led by one- to four-family residential real estate, ag production, commercial and industrial, ag real estate, and construction and land development loans, partially offset by declines in multifamily and commercial real estate categories.

Speaker #3: Our 90-day loan pipeline was little changed at $185,000,000 at quarter end, up from $182,000 at June 30. Quarterly loan originations were approximately $296,000,000 down from $335,000,000 in the June quarter, this was largely driven by a decrease in owner-occupied CRE originations as we prioritized opportunities that met our return and relationship objectives, in addition to decreases in ag real estate and ag production originations due to normal seasonality.

Matt Funke: Quarterly loan originations were approximately $296 million, down from $335 million in the June quarter. This was largely driven by a decrease in owner-occupied CRE originations as we prioritized opportunities that met our return and relationship objectives, in addition to decreases in ag real estate and ag production originations due to normal seasonality, with total volume roughly in line with the September of 2025 quarter. We continue to expect mid-single-digit loan growth for fiscal 2027, although quarterly results will reflect our normal seasonality.

Speaker #3: With total volume roughly in line with the September of '25 quarter. We continue to expect mid-single-digit loan growth for fiscal '27, although quarterly results will reflect our normal seasonality.

Matt Funke: We have begun to see some ag operating line paydowns in October, and we expect that net loan growth will be softer in the second quarter, the December quarter. As a reminder, our third fiscal quarter or the March quarter is historically our softest quarter for net loan growth, reflecting both ag seasonality and the seasonal slowing in residential and commercial real estate lending. Typically followed by a seasonal ramp-up in the fourth quarter. Deposits increased $66 million, or 1.5% during the quarter. Certificates of deposit led the increase, driven by $95 million of growth in core CDs, partially offset by a $35 million reduction in brokered CDs. Given the meaningful increase in brokered CD rates, local CDs provided a more cost-effective source of funding. We remain focused on funding loan growth with core customer deposits and deepening full banking relationships.

Speaker #3: We have begun to see some ag operating line paydowns in October, and we expect that net loan growth will be softer in the second quarter of the December quarter.

Speaker #3: As a reminder, our third fiscal quarter or the March quarter is historically our softest quarter for net loan growth, reflecting both ag seasonality and the seasonal slowing in residential and commercial real estate lending, typically followed by a seasonal ramp-up in the fourth quarter.

Matt Funke: Deposits increased $66 million, or 1.5% during the quarter. Certificates of deposit led the increase, driven by $95 million of growth in core CDs, partially offset by a $35 million reduction in brokered CDs. Given the meaningful increase in brokered CD rates, local CDs provided a more cost-effective source of funding. We remain focused on funding loan growth with core customer deposits and deepening full banking relationships.

Speaker #3: Deposits increased 66,000,000 or 1.5% during the quarter, certificates of deposit led the increase driven by 95,000,000 of growth in core CDs, partially offset by a 35,000,000 dollar reduction in brokered CDs.

Speaker #3: Given the meaningful increase in brokered CD rates, local CDs provided a more cost-effective source of funding. We remain focused on funding loan growth with core customer deposits and deepening full banking relationships.

Matt Funke: Non-maturity deposits grew modestly by approximately $6 million, and again, our September quarter is generally one of our toughest from a transaction account balance standpoint. Our new business deposit accounts continued to gain traction, reaching $42 million on 30 September. However, that growth was partially offset by the expected runoff of short-term, seasonal, and transaction-related non-interest-bearing balances held by several larger clients at the end of June. Our stockholders' equity increased just over $10 million, or 1.8% during the quarter, despite about a $5 million increase in accumulated other comprehensive loss. We also repurchased approximately 19,000 shares for $1.4 million during the quarter while maintaining our quarterly dividend at $0.27 per share. I'll turn it over now to Greg for a discussion on credit.

Speaker #3: Non-maturity deposits grew modestly by approximately $6,000,000, and again, our September quarter is generally one of our toughest from a transaction account balance standpoint. Our new business deposit accounts continue to gain traction, reaching $42,000,000 at September 30.

Speaker #3: However, that growth was partially offset by the expected runoff of short-term seasonal and transaction-related non-interest-bearing balances held by several larger clients at the end of June.

Matt Funke: Our stockholders' equity increased just over $10 million, or 1.8% during the quarter, despite about a $5 million increase in accumulated other comprehensive loss. We also repurchased approximately 19,000 shares for $1.4 million during the quarter while maintaining our quarterly dividend at $0.27 per share. I'll turn it over now to Greg for a discussion on credit.

Speaker #3: Our stockholders' equity increased just over $10,000,000 or 1.8% during the quarter, despite about a $5,000,000 increase in accumulated other comprehensive loss. We also repurchased approximately $19,000 shares for $1.4 million during the quarter, while maintaining our quarterly dividend at $27 per share.

Speaker #3: Alternate over now to Greg for a discussion on credit.

Greg Steffens: Thanks, Matt, and good morning, everyone. Credit metrics improved modestly during the quarter. Adversely classified loans declined nearly $1 million from the linked quarter to $53 million, while remaining stable at approximately 1.2% of gross loans. Non-performing loans also declined by $1 million to $27 million, or 0.6% of gross loans, from 0.63% at 30 June. Non-performing assets declined just over $1 million to $32 million, or 0.61% of total assets, from 0.64% at 30 June. We are continuing to work through the agricultural production relationship downgraded to non-accrual in last year's Q4, and overall, we see positive progress toward resolution on several of our larger non-performing loans. Against that backdrop, generally improving credit, performing modifications increased approximately $20 million during the quarter to $51 million, primarily due to the modification of a commercial industrial loan totaling approximately $21 million.

Speaker #2: Thanks, Matt, and good morning, everyone. Credit metrics improved modestly during the quarter. Adversely classified loans declined nearly $1 million from the linked quarter to $53 million, while remaining stable at approximately 1.2% of gross loans.

Speaker #2: Nonperforming loans also declined by $1,000,000 to $27,000,000 or 0.6% of gross loans, from 0.63% at June 30. Nonperforming assets declined just over $1,000,000 to $32,000,000 or 0.61% of total assets, from 0.64% at June 30.

Greg Steffens: We are continuing to work through the agricultural production relationship downgraded to non-accrual in last year's Q4, and overall, we see positive progress toward resolution on several of our larger non-performing loans. Against that backdrop, generally improving credit, performing modifications increased approximately $20 million during the quarter to $51 million, primarily due to the modification of a commercial industrial loan totaling approximately $21 million.

Speaker #2: We are continuing to work through the agricultural production relationship that was downgraded to non-accrual in last year's fourth quarter, and overall, we see positive progress toward resolution on several of our larger nonperforming loans.

Speaker #2: Against that backdrop, generally improving credit, performing modifications increased approximately $20,000,000 during the quarter to $51,000,000, primarily due to the modification of a commercial and industrial loan totaling approximately $21,000,000.

Greg Steffens: The modification included a modest interest rate concession to support the borrower's working capital needs associated with a new contract. The loan remains performing, is watch rated, and no individual reserve has been established. Given our longstanding relationship with this borrower and our current expectations for his performance, we anticipate the modification will be resolved by the end of fiscal 2027. Our non-owner occupied commercial real estate concentration declined during the quarter as Tier 1 capital growth outpaced CRE growth. At quarter end, the concentration was approximately 278% at the bank and 266% on a consolidated basis. Agriculture represents approximately 12% of gross loans. Our agricultural customers generally appear to be having a better year. An early planting season and dry fall weather accelerated harvest activity. Rice and corn harvests are complete. Early soybeans are approximately 70% harvested. Double-crop soybeans are approximately 50% harvested. Cotton is also approximately 50% harvested.

Speaker #2: The modification included a modest interest rate concession, to support the borrower's working capital needs associated with a new contract. The loan remains performing, is watch-rated, and no individual reserve has been established.

Speaker #2: Given our longstanding relationship with this borrower, and our current expectations for its performance, we anticipate the modification will be resolved by the end of fiscal '27.

Speaker #2: Our non-owner-occupied commercial real estate concentration declined during the quarter, is Tier 1 capital growth outpaced CRE growth. At quarter end, the concentration was approximately $278% at the bank and $266% on a consolidated basis.

Greg Steffens: At quarter end, the concentration was approximately 278% at the bank and 266% on a consolidated basis. Agriculture represents approximately 12% of gross loans. Our agricultural customers generally appear to be having a better year. An early planting season and dry fall weather accelerated harvest activity. Rice and corn harvests are complete. Early soybeans are approximately 70% harvested. Double-crop soybeans are approximately 50% harvested. Cotton is also approximately 50% harvested.

Speaker #2: Agriculture represents approximately 12% of gross loans. Our agricultural customers generally appear to be having a better year. In early planning season and dry fall weather, accelerated harvest activity.

Speaker #2: Rice and corn harvests are complete. Early soybeans are approximately 70% harvested. Double-crop soybeans are approximately 50% harvested. Cotton is also approximately 50% harvested.

Greg Steffens: Lenders are reporting average to above-average yields on many of our crops, particularly irrigated acreage, and current or contracted prices for corn, soybeans, rice, and cotton are generally above the assumptions we used under spring underwriting. Higher seed, fuel, fertilizer, chemical interest, and equipment costs continue to pressure farm profitability, but stronger yields and commodity pricing should support improved repayment capacity compared with last year. Our loan officers are not currently reporting projected shortfalls for the 2026 crop year, and most customers appear well-positioned to pay as agreed, although working capital positions will remain an important focus through year-end. We continue to monitor watchlist ag credits closely, and our lenders are completing crop and livestock inspection summaries and preparing for the upcoming renewal cycle. Stefan, would you provide additional details on our financial performance?

Speaker #2: Lenders are reporting average to above average yields on many of our crops, particularly irrigated acreage and current or contracted prices for corn, soybeans, rice, and cotton are generally above the assumptions we used under spring underwriting.

Speaker #2: Higher seed fuel fertilizer chemical interest and equipment costs continue to pressure farm profitability, but stronger yields and commodity pricing should support improved repayment capacity compared with last year.

Greg Steffens: Our loan officers are not currently reporting projected shortfalls for the 2026 crop year, and most customers appear well-positioned to pay as agreed, although working capital positions will remain an important focus through year-end. We continue to monitor watchlist ag credits closely, and our lenders are completing crop and livestock inspection summaries and preparing for the upcoming renewal cycle. Stefan, would you provide additional details on our financial performance?

Speaker #2: Our loan officers are not currently reporting projected shortfalls for the '26 crop year. In most cases, customers appear well-positioned to pay as agreed, although working capital positions will remain an important focus through year-end.

Speaker #2: We continue to monitor watchlist ag credits closely and our lenders are completing crop and livestock inspection summaries and preparing for the upcoming renewal cycle.

Speaker #2: Stefan, would you provide additional details on our financial performance?

Stefan Chkautovich: Thanks, Greg. Net interest margin was 370, up 3 basis points from the linked quarter. Fair value accretion and liability premium amortization contributed 5 basis points to margin, compared to 3 basis points in the June quarter. The increase in fair value accretion was primarily caused by the payoff of a loan carrying about a $500,000 credit mark. We would expect in the coming quarters for the accretion to return to around 3 basis points and slowly decrease from there.

Speaker #1: Thanks, Greg. Net interest margin was 370, up 3 basis points from the linked quarter. Fair value creation and liability premium amortization contributed 5 basis points to margin, compared to 3 basis points in the June quarter.

Speaker #1: The increase in fair value accretion was primarily caused by the payoff of a loan carrying about a $500,000 credit mark. We would expect, in the coming quarters, for the accretion to return to around 3 basis points and slowly decrease from there.

Stefan Chkautovich: The September quarter also included approximately $200,000 of interest recovery on a non-accrual ag relationship. Excluding both the larger fair value accretion and the noted interest recovery, adjusted net interest margin would have been 365, representing modest compression from the linked quarter. Looking ahead, we could see some near-term pressure on net interest margin following the recent increase in rates, reflecting the liability-sensitive nature of our balance sheet. Based on our current interest rate risk model and assuming a static balance sheet, a 100 basis point parallel increase in rates is estimated to reduce net interest income by about 1% over the next 12 months. Over time, however, we believe the positively sloped yield curve should be supportive of margin as fixed-rate loans mature and reprice at current market rates.

Speaker #1: The September quarter also included approximately $200,000 of interest recovery on a non-accrual ag relationship. Excluding both the larger fair value accretion, and the noted interest recovery, adjusted net interest margin would have been 365, representing modest compression from the linked quarter.

Speaker #1: Looking ahead, we could see some near-term pressure on net interest margin following the recent increase in rates, reflecting the liability-sensitive nature of our balance sheet.

Stefan Chkautovich: Based on our current interest rate risk model and assuming a static balance sheet, a 100 basis point parallel increase in rates is estimated to reduce net interest income by about 1% over the next 12 months. Over time, however, we believe the positively sloped yield curve should be supportive of margin as fixed-rate loans mature and reprice at current market rates.

Speaker #1: Based on our current interest rate risk model, and assuming a static balance sheet, a 100-basis-point parallel increase in rates is estimated to reduce net interest income by about 1% over the next 12 months.

Speaker #1: Over time, however, we believe the positively sloped yield curve should be supportive of margin as fixed-rate loans mature and reprice at current market rates.

Stefan Chkautovich: Non-interest income was $7.1 million, down $212,000, or 2.9% from the linked quarter. Deposit account charges and other non-interest income increased, with other non-interest income benefiting from a $189,000 revenue guarantee payment from a merchant services provider and an $85,000 gain on sale of a membership interest in a tax credit investment. These increases were more than offset by lower wealth management fees, insurance commission, gain on sale of loans, bank card interchange income, and BOLI income. BOLI income included a $150,000 mortality benefit in the current quarter, compared with a $231,000 mortality benefit in June. Non-interest expense was $26.6 million, up $1 million or 4% from the linked quarter. The full increase was attributable to three categories.

Speaker #1: Non-interest income was $7.1 million, down $212,000, or 2.9%, from the linked quarter. The positive account charges and other non-interest income increased, with other non-interest income benefiting from a $189,000 revenue guarantee payment from a merchant services provider, an $85,000 gain on sale of a membership interest, and a tax credit investment.

Stefan Chkautovich: These increases were more than offset by lower wealth management fees, insurance commission, gain on sale of loans, bank card interchange income, and BOLI income. BOLI income included a $150,000 mortality benefit in the current quarter, compared with a $231,000 mortality benefit in June. Non-interest expense was $26.6 million, up $1 million or 4% from the linked quarter. The full increase was attributable to three categories.

Speaker #1: These increases were more than offset by lower wealth management fees, insurance commission, gain on sale of loans, bank, card interchange income, and bully income.

Speaker #1: Bully income included a $150,000 mortality benefit in the current quarter, compared with a $231,000 mortality benefit in June. Non-interest expense was $26.6 million, up $1 million, or 4%, from the linked quarter.

Speaker #1: The full increase was attributable to three categories: compensation and benefits increased $460,000, primarily due to higher salaries and bonus accruals; and lower deferred loan origination costs, partially offset by lower employee benefit expense.

Stefan Chkautovich: Compensation and benefits increased $460,000, primarily due to higher salaries and bonus accruals and lower deferred loan origination costs, partially offset by lower employee benefit expense. Other non-interest expense increased $345,000, largely reflecting higher loan collection and payoff fees, as well as deposit operation and card fraud costs. Occupancy and equipment expense increased $223,000, primarily due to seasonally higher utilities, security costs, and one-time facility setup costs. Advertising expense also included a one-time $100,000 charitable contribution to the FHLB Member Impact Fund. Lower legal and professional fees and postage and office supplies provided the largest offsets. The allowance for credit losses increased $3.4 million to $58.3 million, or 1.31% of gross loans and 219% of non-performing loans.

Speaker #1: Other non-interest expense increased by $345,000, largely reflecting higher loan collection and payoff fees, as well as deposit operation and card fraud costs. Occupancy and equipment expense increased by $223,000, primarily due to seasonally higher utilities, security costs, and one-time facility setup costs.

Stefan Chkautovich: Occupancy and equipment expense increased $223,000, primarily due to seasonally higher utilities, security costs, and one-time facility setup costs. Advertising expense also included a one-time $100,000 charitable contribution to the FHLB Member Impact Fund. Lower legal and professional fees and postage and office supplies provided the largest offsets. The allowance for credit losses increased $3.4 million to $58.3 million, or 1.31% of gross loans and 219% of non-performing loans.

Speaker #1: Advertising expense also included a one-time $100,000 charitable contribution through the FHLB Member Impact Fund. Lower legal and professional fees, as well as postage and office supplies, provided the largest offsets.

Speaker #1: The allowance for credit losses increased 3.4 million to 58.3 million, or 1.31% of gross loans and 219% of non-performing loans. Net charge-offs were 494,000 or 4 basis points of average loans on an annualized basis.

Stefan Chkautovich: Net charge-offs were $494,000, or 4 basis points of average loans on an annualized basis. The increase in the allowance primarily reflected management's assessment of reserve adequacy amid an evolving economic environment and to support loan growth. The current quarter provision included a $3.9 million provision for outstanding loan balances and a $902,000 negative provision for off-balance sheet credit exposures, primarily reflecting a lower required reserve rate on unfunded commitments. With that, Greg, I'll turn it back to you for some closing comments.

Speaker #1: The increase in the allowance primarily reflected management's assessment of reserve adequacy amid an evolving economic environment and a support loan growth. The current quarter provision included a 3.9 million provision for outstanding loan balances and a $902,000 negative provision for off-balance sheet credit exposures, primarily reflecting a lower required reserve rate on unfunded commitments.

Speaker #1: With that, Greg, I'll turn it back to you for some closing comments.

Greg Steffens: Thanks, Stefan. We are pleased with our strong profitability and solid loan growth during the quarter, which allow us to continue investing in the people and capabilities needed to support our long-term growth. That includes our new Kansas City branch, which opened at the beginning of October and replaced our existing nearby facility, which was truly in need of an upgrade. Initial customer feedback has been positive, and we're excited for the new branch to serve as a flagship location for us in the Kansas City market. We also continued supporting our communities through the FHLB Member Impact Fund. Our contribution generated an additional $300,000 match, bringing the total distributed to 22 charitable organizations to $400,000.

Speaker #2: Thanks, Stefan. We are pleased with our strong profitability and solid loan growth during the quarter, which allow us to continue investing in the people and capabilities needed to support our long-term growth.

Speaker #2: That includes our new Kansas City branch, which opened at the beginning of October, and replaced our existing nearby facility which was truly in need of an upgrade.

Greg Steffens: Initial customer feedback has been positive, and we're excited for the new branch to serve as a flagship location for us in the Kansas City market. We also continued supporting our communities through the FHLB Member Impact Fund. Our contribution generated an additional $300,000 match, bringing the total distributed to 22 charitable organizations to $400,000.

Speaker #2: Initial customer feedback has been positive and we're excited for the new branch to serve as a flagship location for us in the Kansas City market.

Speaker #2: We also continue supporting our communities through the FHLB Member Impact Fund. Our contribution generated an additional $300,000 match, bringing the total distributed to 22 charitable organizations to $400,000.

Greg Steffens: Turning to capital deployment, M&A conversations have become somewhat more active, and our strong capital position gives us the flexibility to pursue the right strategic partner while also returning capital to shareholders through share repurchases. As we evaluate these opportunities, we remain focused on disciplined organic growth, prudent risk management, deepening customer relationships, and thoughtful capital deployment. Stefan?

Speaker #2: Turning to capital deployment, M&A conversations have become somewhat more active and our strong capital position gives us the flexibility to pursue the right strategic partner while also returning capital to shareholders through share repurchases.

Speaker #2: As we evaluate these opportunities, we remain focused on disciplined organic growth, prudent risk management, deepening customer relationships, and thoughtful capital deployment. Stefan?

Stefan Chkautovich: Thank you, Greg. At this time, Al, we are ready to take questions. Please remind participants how to enter the queue.

Speaker #1: Thank you, Greg. At this time now, we're ready to take questions. Please remind participants how to enter the queue.

Operator 2: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brendan Nosal from Hovde Group. Your line is now open. Please go ahead.

Speaker #3: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand.

Speaker #3: To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality.

Speaker #3: If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brendan Nossal from HUVD Group.

Speaker #3: Your line is now open. Please go ahead.

Brendan Nosal: Hey, good morning, everybody. Hope you are doing well.

Speaker #4: Hey, good morning, everybody. Hope you're doing well.

Greg Steffens: Good morning.

Speaker #1: Good morning.

Brendan Nosal: Morning. Starting off here on the expense base. I guess costs were a little bit heavier than I was expecting for the quarter. Can you just talk about how we should think about the run rate on the core expense base as we move through the balance of the year?

Speaker #4: Good morning. Starting off here on kind of the expense base, I guess costs were a little bit heavier than I was expecting for the quarter.

Speaker #4: Can you just kind of talk about how we should think about the run rate on the core expense base as we move through the balance of the year?

Stefan Chkautovich: Yeah. Thanks for the question. I guess bigger picture, things are still progressing through the year as we originally expected. The light guidance we gave last quarter was sort of the mid-single digits to high single-digit expense growth for the fiscal year. We are still on track for that. And one of the larger contributions to that is going to be the salary and benefits line. There is a little bit of step up there we have sequentially. We will see a bigger pickup in one or I am sorry, our March quarter with our annual merit increases from there. But another newer contributor is the loan origination factor. One of the items I mentioned in the comments was a little bit of the increase from expenses was actually derived from a lower originations. So we had lower deferred expenses on that front.

Speaker #1: Yeah. Thanks for the question. So I guess bigger picture, things are still progressing through the year as we originally expected the light guidance we gave last quarter was sort of the mid-single digits to high single digit expense growth.

Speaker #1: For the fiscal year, we're still on track for that. And one of the sort of larger contributions to that is going to be the salary and benefits line.

Stefan Chkautovich: There is a little bit of step up there we have sequentially. We will see a bigger pickup in one or I am sorry, our March quarter with our annual merit increases from there. But another newer contributor is the loan origination factor. One of the items I mentioned in the comments was a little bit of the increase from expenses was actually derived from a lower originations. So we had lower deferred expenses on that front.

Speaker #1: There's a little bit of step up there we have sequentially. We'll see a bigger pickup in one or I'm sorry, our March quarter with our annual merit increases from there.

Speaker #1: But another sort of newer contributor is the loan origination factor. One of the items I mentioned in the comments was that a little bit of the increase in expenses was actually derived from lower originations.

Speaker #1: So we had lower deferred expenses on that front.

Brendan Nosal: Okay. All right. That is helpful. Thank you. Then maybe pivoting to this quarter's provision expense and reserve coverage. I think you took reserve coverage up 6 basis points to a buck 31. I know last quarter you were talking about 125 to 135 coverage range. Maybe just kind of walk through why specifically you wanted to bring that up this quarter. Is it just kind of reflecting the environment or is it perhaps in advance of any potential deterioration that you might see coming down the road?

Speaker #4: Okay. All right. That's helpful. Thank you. Then maybe pivoting to kind of this quarter's provision expense and reserve coverage, I think you took reserve coverage up six basis points to like a buck 31.

Speaker #4: I know last quarter you were talking about 125 to 135 coverage range. But maybe just kind of walk through why specifically you wanted to bring that up.

Speaker #4: This quarter, is it just kind of reflecting the environment, or is it perhaps in advance of any potential deterioration that you might see coming down the road?

Stefan Chkautovich: Nothing specific on potential deterioration. Of course, we do want to always take a more conservative stance with our provisioning and really just the way the numbers showed in the calculation. We had some availability to take some additional provision and decided to do that.

Speaker #1: Nothing specific on potential deterioration, but we do want to always take a more conservative stance with our provisioning. And really, just the way the numbers showed in the calculation, we had some availability to take some additional provision and decided to do that.

Greg Steffens: Yeah. We feel comfortable with the 1.31. We feel like that is an attractive place to be.

Speaker #2: Yeah, we feel comfortable with the 131. We feel like that is attractive place to be.

Brendan Nosal: Okay. That's helpful. Thanks for taking my questions.

Speaker #4: Okay. That's helpful. Thanks for taking my questions.

Operator 2: Your next question comes from the line of Jordan Ghent from Stephens. Your line is now open. Please go ahead.

Speaker #3: Your next question comes from the line of Jordan Gent from Stevens. Your line is now open please go ahead.

Jordan Ghent: Hey, good morning. Thanks for taking my question. I just kind of wanted to talk more about the margin. I know Stefan kind of talked about it. You guys are expecting some margin compression from here, given your liability sensitivity. Could you talk more about the fixed asset repricing, kind of when you expect that to start coming in?

Speaker #4: Hey, good morning. Thanks for taking my question. I just kind of wanted to talk more about the margin. I know Stefan kind of talked about it.

Speaker #4: You guys are expecting some margin compression. From here, given your liability sensitivity, could you maybe but could you talk more about the fixed asset repricing?

Speaker #4: When do you expect that to start coming in?

Stefan Chkautovich: Yeah. So at a high level, we have about $815 million in loans repricing over the next 12 months. That average roll-off rate is just at about 6.5% versus right now where our average loan renewal on the fixed side is around 7%. So there is some pickup there which is partially offset by the CD front. We have about $1.4 billion in CDs renewing over the next 12 months at an average rate of 3.82%. And that average current renewal and renewed rate is about 4.08%.

Speaker #1: Yeah. So I guess at a high level, we have about $815 million in loans repricing over the next 12 months. That sort of average rolloff rate is just at about 6 and a half percent versus right now our average loan renewal on the fixed side is around 7%.

Speaker #1: So there's some pickup there, which is sort of partially offset by the CD front. We have about 1.4 billion in CDs renewing over the next 12 months at an average rate.

Speaker #1: 382. And that's sort of average current renewal and renewed rate. It's about 408.

Jordan Ghent: Got it. Then just kind of going back to the deposit growth. So looks like past 2 quarters, you guys have seen some good growth in the non-interest bearing. Looks like it is a little bit bigger than kind of normal seasonal stuff. Can you kind of talk about what is driving that and then kind of where you see that going from here, if it will continue to go through the rest of the year or should it slow down?

Speaker #4: Got it. And then just kind of going back to the deposit growth, so it looks like past two quarters you guys have seen some good growth in the non-interest bearing.

Speaker #4: It looks like it's a little bit bigger than kind of normal seasonal stuff. Can you kind of talk about what's driving that? And then kind of where you see that going from here, if it'll continue to go through the rest of the year or should it slow down?

Stefan Chkautovich: We are emphasizing more carrying balances in non-interest bearing with our new deposit products. I think we may be a little early to say whether what we are seeing so far is maybe just some noise in the overall number versus true movement on that. It is something that we expect to focus on an ongoing basis. But just looking at the averages, we think we have got decent trends there, but the quarter-over-quarter numbers may just have a little noise in them. Anything additionally?

Speaker #1: Yeah, we are emphasizing more carrying balances in non-interest-bearing accounts with our new deposit products. I think we may be a little early to say whether what we're seeing so far is just some noise in the overall numbers versus true movement on that.

Speaker #1: It is something that we expect to focus on on an ongoing basis. But just looking at the averages, we think we've got decent trends there, but the quarter-over-quarter numbers may just have a little noise in them.

Speaker #1: Anything? Additionally?

Jordan Ghent: Okay. Then just maybe one more question. Could you talk a little bit more? Greg, I know you mentioned about the modified C&I loan. Is this kind of like idiosyncratic or do you guys, is there potential for additional rate concessions on other loans as we move into the higher rate cycle?

Speaker #4: Okay. And then just maybe one more question. Could you talk a little bit more Greg, I know you mentioned about the modified C&I loan.

Speaker #4: Is this kind of idiosyncratic, or is there potential for additional rate concessions on other loans as we move into the higher rate cycle?

Greg Steffens: No, I would say this is a one-off as far as what we have out there. It is somebody that we have dealt with for 20 years. Their business is actually expanding, and we are just trying to help facilitate some of the front-end cost of on working capital of the expansion they have to their business. But they are a watch-rated credit, so we are watching them, but our interest rate concession was they are at prime, so they are not significant.

Speaker #2: No, I would say this is a one-off as far as what we have out there. Somebody that we've dealt with for 20 years their business is actually expanding and we're just trying to help facilitate some of the front-end cost of on working capital of the expansion they have to their business.

Speaker #2: But they are a watch rated credit so we are watching them, but our interest rate concession was they are at prime, so they're not significant.

Jordan Ghent: Got it. Okay, thanks for taking my questions.

Speaker #4: Got it. Okay. Thanks for taking my questions.

Operator 2: Your next question comes from the line of Andrew Liesch with StoneX Financial. Your line is now open. Please go ahead.

Speaker #3: Your next question comes from the line of Andrew Leish with Stonex Financial. Your line is now open please go ahead.

Andrew Liesch: Greg, and morning, team. Question on M&A, I guess, where are you looking? If you look at your footprint right now, and where prospective deal conversations are taking place, where do you think is the most attractive place for you to expand to right now through M&A?

Speaker #5: Greg, our morning team. Question on M&A. I guess, where are you looking? If you look at your footprint right now and where prospective deals are taking or deal conversations are taking place, where do you think is most attractive place for you to expand to right now through M&A?

Greg Steffens: Yeah, we are really looking at more in-market activity. More of the people we are talking with are Missouri-oriented instead of outlying. Our footprint continues to. We are targeting Kansas City to St. Louis to Memphis to Little Rock. So it is basically that geographic area. We are adjacent there, too. But we are having several different conversations. I would say everything is more on the preliminary basis. But several of the companies-

Speaker #2: Yeah, we're really looking at more in-market activity. We're interested more in the more of the people we're talking with are Missouri-oriented. Instead of outlying but our footprint continues to we're targeting Kansas City to St.

Speaker #2: Louis to Memphis to Little Rock. So it's basically that geographic area we're adjacent there to. But we're having several different conversations I would say everything is more on the preliminary basis.

Speaker #2: But several of the companies they're Missouri-based.

Andrew Liesch: Got it.

Greg Steffens: they are Missouri-based.

Andrew Liesch: Got you. You have covered all my other questions, so I will step back. Thanks.

Speaker #5: Gotcha. You have asked or you've covered all my other questions, so I'll step back. Thanks.

Greg Steffens: Thanks, Andrew.

Speaker #1: Thanks, Andrew.

Andrew Liesch: Thanks, Andrew. Good hearing from you again.

Speaker #4: Thanks, Andrew.

Speaker #2: Good to hear from you again.

Operator 2: Your next question comes from the line of Nicholas Holowko with Raymond James. Your line is now open. Please go ahead.

Speaker #3: Your next question comes from the line of Nicholas Holoco with Raymond James. Your line is now open. Please go ahead.

Nicholas Holowko: Hey, guys. Good morning. Thanks for taking my questions. Maybe just to start, congrats on the new Kansas City branch. Maybe you could just update us on some of the momentum from the hires you've made there, and how that ties into your expectations for growth over the next year or so.

Speaker #6: Hey, guys. Good morning. Thanks for taking my questions. So, maybe just to start—yeah, congrats on the new Kansas City branch. Maybe you could just update us on some of the momentum from the hires you made there.

Speaker #6: And how that kind of ties into your expectations for growth over the next year or so.

Stefan Chkautovich: We feel really good about the team that we've assembled up there. Continuing to see good presentations out of that group and expect that momentum to continue. We got a really good team focused on both sides of the balance sheet.

Speaker #1: We feel really good about the team that we've assembled up there. Continuing to see good presentations out of that group and expect that momentum to continue.

Speaker #1: We got a really good team focused on both sides of the balance sheet.

Nicholas Holowko: Awesome. Then, I know you've highlighted the new business deposit account that you had talked a little bit about last quarter. Sounds like that's starting to gain some traction. Any expectations for that to continue to ramp up over the near term here, or more of a longer-term horizon there? Maybe just how that's performing relative to your initial expectations.

Speaker #6: Awesome. And then I know you highlighted the new business deposit account that you had talked about a little bit about last quarter. Sounds like that's starting to gain some traction.

Speaker #6: Are there any expectations for that to continue ramping up over the near term, or is it more of a longer-term horizon? And maybe, could you comment on how that's performing relative to your initial expectations?

Stefan Chkautovich: I'd say it's at least meeting our expectations in the early going. There can be a lot of noise with the rollout of that, and of course, our seasonality will probably overwhelm some of that over the next couple of quarters. But we do still feel good about it from a long-term perspective.

Speaker #1: I'd say it's at least meeting our expectations in the early going. There can be a lot of noise with the rollout of that. And of course, our seasonality will probably overwhelm some of that over the next couple of quarters.

Speaker #1: But we do still feel good about it from a long-term perspective.

Nicholas Holowko: Awesome. Maybe just a last question from me. Hear the comments around M&A. Hopefully, something can come to fruition on that front. Maybe just with, as we think about capital and valuation has come in a little bit, how you are thinking about potential further buybacks at this point and your sensitivity to the earn back at this point in time.

Speaker #6: Awesome. And maybe just the last question for me. Hear the comments around M&A. Hopefully, something can come to fruition on that front. Maybe just with as we think about capital and valuation has come in a little bit.

Speaker #6: How are you thinking about potential further buybacks at this point? Your sensitivity to the earn-back at this point in time?

Greg Steffens: With the valuation coming back in a little, that increases the attractiveness of us buying stock back. We did buy shares back at the 1.5 of tangible book value. As that value has become more attractive for repurchases, we would expect some modest improvement in repurchase activity.

Speaker #2: Yeah, with the valuation coming back in a little that increases the attractiveness of us buying stock back. We did buy shares back at the one and a half of tangible book value as that value has become more attractive for repurchases.

Speaker #2: We did expect some modest improvement in repurchase activity.

Nicholas Holowko: Great. Thanks for taking my questions.

Speaker #6: Great. Thanks for taking my questions.

Operator 2: Your next question comes from the line of Nathan Race from Piper Sandler. Your line is now open. Please go ahead.

Speaker #3: Your next question comes from Nathan Race of Piper Sandler. Your line is now open. Please go ahead.

Nathan Race: Hey, guys. Good morning. Thanks for taking the questions.

Speaker #7: Hey, guys. Good morning. Thanks for taking the questions.

Greg Steffens: Good morning.

Speaker #2: Good morning.

Nathan Race: Just thinking maybe a little bigger picture on the net interest margin. If we do get two more Fed rate hikes over the next few months, Stefan, just maybe any thoughts on what we could expect in terms of an exit margin coming out of this year? Is it something kind of the low 3.60s range, just given some of the index deposits you have and your other comments around the headwind on time deposits maturing?

Speaker #7: Just thinking maybe a little bigger picture on the margin. If we do get two more Fed rate hikes over the next few months, Stefan, just maybe any thoughts on what we could expect in terms of kind of an exit margin coming out of this year?

Speaker #7: Is it something kind of in the low 360s range, just given some of the index deposits you have and your other comments around the headwind on time deposits maturing?

Stefan Chkautovich: Well, that seems in the range of possibilities. So in the near term, like I said, we will see some compression just from the rates, but also another factor to consider is on the margin front over the coming two quarters, we will start seeing some compression there just from the buildup in deposits. As Matt mentioned earlier, we will start getting in some ag pay downs, so that will bring down the loan book a little bit on that portfolio, and that also brings in the deposit side of that. In the March quarter, we get a larger pickup from public units. So we will have a larger balance sheet ramp-up that will compress the margin a little bit from there. So on top of a little bit of compression just from the rate side, we will also see some from the mix of the balance sheet.

Speaker #1: Yeah. That seems in the range of possibilities. So in the near term, like I said, we'll see some compression just from the rates. But also another factor to consider is on the margin front, over the coming two quarters, we'll start seeing some compression there just from the build-up in deposits.

Speaker #1: As Matt mentioned earlier, we'll start getting in some ag pay down. So that will bring down the loan book a little bit. On that portfolio and that also brings in the deposit side of that.

Stefan Chkautovich: In the March quarter, we get a larger pickup from public units. So we will have a larger balance sheet ramp-up that will compress the margin a little bit from there. So on top of a little bit of compression just from the rate side, we will also see some from the mix of the balance sheet.

Speaker #1: And then in the March quarter, we get a larger pickup from public units. So we'll have a larger balance sheet ramp up that will compress the margin a little bit from there.

Speaker #1: So on top of a little bit of compression just from the rate side, we'll also see some from the mix of the balance sheet.

Stefan Chkautovich: But that exit range is a fair possibility. We will see that tick back up in Q4 as we loan up the balance sheet a little bit more, at higher spreads and rates as we are seeing right now.

Speaker #1: But that exit range is a fair possibility, and we'll see that tick back up in Q4 as we loan up the balance sheet a little bit more.

Speaker #1: And at higher spreads and rates, as we're seeing right now.

Nathan Race: Okay, great. Then just within that context, just given some of the seasonality you have in your deposit base and some of the episodic deposit flows you have within the agricultural arena, is there more opportunities to work down wholesale funding, just given some of the treasury management deposit growth items that you guys laid out? It was obviously nice to see some of the borrowings come down by $30 million or so sequentially.

Speaker #7: Okay. Great. And then just within that context, just given some of the seasonality you have in your deposit base and some of the episodic deposit flows you have, within the agricultural arena, is there more opportunities to kind of work down kind of wholesale funding just given some of the treasury management and deposit growth items that you guys laid out?

Speaker #7: Is it nice to see some of the borrowings come down by $30 million or so sequentially?

Matt Funke: Yeah, we definitely expect in the near term to be a little less reliant on wholesale. Then that would be a longer-term objective as well, to stay down into the mid-single digits on wholesale reliance.

Speaker #1: Yeah, we definitely expect in the near term to be a little less reliant on wholesale. And then that would be a longer-term objective as well to stay down into the mid-single digits on wholesale reliance.

Stefan Chkautovich: Yeah. Nate, there will be no real need in the near term for wholesale deposits with core deposits ramping up seasonally. In addition, we are sort of limited on the FHLB side from that side of the wholesale equation until some more maturities.

Speaker #2: Yeah, there'll be no real need in the near term for wholesale deposits with core deposits ramping up seasonally. In addition, we're sort of limited on the FHLB side from that side of the wholesale equation.

Speaker #2: Until some more maturities. Yes, sir. So we're sort of in a little bit of a lull there for maturities. I don't think the next one pops up until the spring.

Matt Funke: As far as what we would prepay.

Stefan Chkautovich: Yes, sir. We are sort of in a little bit of a lull there for maturities, and I do not think the next one pops up until the spring.

Nathan Race: Okay, got it. If I could just ask one more for Greg. I think you hit on it earlier a bit, but just in terms of some of the timing around some of the resolutions with non-performers, they are obviously still somewhat elevated relative to where we are used to seeing NPAs at your bank. Just curious if you can kind of speak to when we can expect non-performers to come down closer to the more historical levels we are used to seeing it.

Speaker #7: Okay. Got it. And if I could just ask one more for Greg, I think you hit on it earlier a bit, but just in terms of some of the timing around some of the resolutions with non-performers, they're obviously still somewhat elevated relative to where we're used to seeing MPAs at your bank.

Speaker #7: So just curious if you can kind of speak to when we can expect non-performers to come down close to kind of the more historical levels we're used to seeing it.

Greg Steffens: Well, I wish my crystal ball was totally clear on that. Workouts do take time. We have several larger relationships that are non-performing that we are at various stages of working out. We really do not know how soon those workouts could happen. Some could happen in this quarter. We are just really not certain. It is a fluid process that we are going through, but we do expect non-performing assets to be meaningfully lower by the end of this fiscal year.

Speaker #4: I wish my crystal ball was

Speaker #2: totally clear on that. Workouts do take time. We have several larger relationships that are non-performing that we're in various stages of working out. We really don't know how soon those workouts could happen.

Speaker #2: Some could happen in this quarter. We're just really not certain—that's a fluid process that we're going through. But we do expect non-performing assets to be meaningfully lower by the end of this fiscal year.

Nathan Race: Okay, great. But generally, it sounds like you are pretty comfortable with kind of the carrying values as you are having discussions to resolve these NPAs.

Speaker #7: Okay, great. But generally, it sounds like you're pretty comfortable with the carrying values as you're having discussions to resolve these MPAs.

Greg Steffens: We do at this time.

Speaker #2: We do at this time.

Nathan Race: Okay, great. I appreciate all the color. Thanks, guys.

Speaker #7: Okay. Great. I appreciate all the color. Thanks, guys.

Greg Steffens: Thanks, Nate.

Speaker #1: Thanks, Nate.

Operator 2: There are no further questions at this time. I will now turn the call back to Chief Financial Officer, Stefan Chkautovich, for closing remarks.

Speaker #3: There are no further questions at this time. I will now turn the call back to Chief Financial Officer, Stefan Chkautovich, for closing remarks.

Stefan Chkautovich: Thank you all for your time, and we look forward to updating you on our financials next quarter. Have a great day, all.

Speaker #1: Thank you all for your time. And we look forward to updating you on our financials next quarter. Have a great day, y'all.

Operator 2: This concludes today's call. Thank you for attending. You may now disconnect. This event has now concluded. Thank you for joining Southern Missouri Bancorp earnings conference call. The line will disconnect automatically.

Speaker #3: This concludes today's call. Thank you for attending. You may now disconnect. This event has now concluded. Thank you for joining SOUTHERN MISSOURI BANCORP EARNINGS CONFERENCE CALL.