Southern Missouri Bancorp Aktie

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to Southern Missouri Bancorp Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Stefan Chkautovich, Chief Financial Officer. You may begin.

Thank you, Bella. 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 Wednesday, April 22, 2026, 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 by 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 and fiscal year.

Thank you, Stefan. Good morning, everyone. This is Matt Funke. Thanks for joining us. I'll start off with some highlights on our financial results for the March quarter, the third quarter of our fiscal year. Quarter-over-quarter, our earnings and profitability were down a bit from an increase in operating expenses and a modest uptick in provision for credit losses primarily driven by loan growth and higher reserve for pooled loans. This was partially offset by a lower provision for income taxes, better noninterest income and slightly higher levels of net interest income.

Although earnings and profitability were down slightly, the March quarter is typically our weakest quarter from a profitability perspective, and we actually had less impact from the seasonality than we typically see due to lower average cash balances as we decreased our brokered funding compared to the year ago quarter and because we experienced stronger loan growth.

With maintaining an ROA above 1.40% the last 2 quarters, we feel good about what we've been able to achieve in earnings and profitability this fiscal year, and we're optimistic about continuing this trend into the final quarter. We earned $1.60 diluted in the March quarter. That's down $0.02 from the linked December quarter, but it's up $0.21 from the March 2025 quarter.

Net interest margin for the quarter was 3.67% as compared to 3.44% reported for the year ago period and up from 3.57% reported for the second quarter of fiscal '26. Net interest income was up just under 1% quarter-over-quarter and up just over 9% year-over-year due to the increase in average earning asset balances and net interest margin expansion. Stefan will run through more of the moving parts of the NIM in a bit.

On the balance sheet, gross loan balances increased by $96 million during the third quarter and compared to March 31 of the prior year, gross loan balances are up just under $300 million or 7.4%. Growth in the quarter was primarily in our loans collateralized by real estate with all segments up with the exception of construction and land development loans as we had a larger project move to a term financing facility. In addition, we also saw some growth in C&I and ag production loans as borrowers began the planting season later in the quarter.

We experienced strong growth in our South region, followed by good growth in our North region. We had another good quarter for loan originations, generating about $282 million, which was seasonally strong, up $94 million from the same quarter a year ago.

As we enter the fourth quarter, which has historically been a stronger quarter for loan originations, our expected loan pipeline for the next 90 days has increased to $178 million, up from $159 million expected at December 31. Due to some anticipated larger loan payoffs in the fourth quarter, we could see a bit more muted loan growth, but with achieving 5.4% loan growth in the fiscal year-to-date thus far, we're in a good position to reach the higher end of our anticipated mid-single-digit loan growth range for fiscal '26.

Deposit balances increased by about $33 million in the third quarter and increased by $80 million or about 2% year-over-year. As we've been less competitive this year on local deposit rate specials, the quarter-over-quarter growth was primarily driven by broker deposits. Year-over-year, brokered deposits had declined just over $9 million, but they increased $36 million compared to the linked quarter end as local deposit rate competition was stiff and wholesale sources offered much more cost-effective funding.

We plan to launch a new business account in the coming quarter, which, if successful over time, along with tweaks to our team member incentives could help increase our balances and lower cost operating accounts at the bank. Tangible book value per share was $45.80 at March 31 and has increased by $5.43 or 13.5% over the last 12 months. Finally, in the second quarter -- in the third quarter, excuse me, we repurchased 156,000 shares at an average price of $61.97 per share for a total of $9.7 million. The average purchase price was 135% of our tangible book value as of March 31.

I'll now hand it over to Greg for some additional discussion.

Thank you, Matt, and good morning, everyone. Starting with credit quality, adversely classified loans improved some since last quarter, totaling $56 million or 1.3% of gross loans, down $3 million or 11 basis points as a percent of gross loans since last quarter. Nonperforming loans were around $30 million at March 31 and totaled 0.7% of gross loans, an increase of $480,000 compared to the prior quarter. Nonperforming assets were around $32 million and increased $757,000 quarter-over-quarter with bill material nonperforming loans or other real estate being added this quarter.

Loans past due 30 to 89 days were $10.5 million, down $1.3 million from December and totaled 24 basis points of gross loans. This is a decrease of 4 basis points compared to the linked quarter and down 13 basis points compared to a year ago. Total delinquent loans were $32 million, which was essentially flat from December and represented 74 basis points as a percentage of total loans. While nonperforming assets, nonaccrual loans remain elevated compared to our historical levels, overall problem asset levels remain manageable, and our earnings are sufficient to cover potential reserves while maintaining above-average profitability.

In combination with our underwriting standards and reserve position, we remain comfortable with our ability to run through existing credits and to manage any broader pressures that could emerge from economic conditions. That said, we're not complacent with current levels of problem assets. We remain focused on improving credit quality, and we feel good about progress being made across several problem credits as workout strategies continue to move forward.

Turning to ag. This quarter, ag real estate balances totaled $279 million or 6% of gross loans and ag production and equipment loans were $204 million or 5% of gross loans. As compared to the prior quarter end December 31, ag real estate balances were up $17 million and up $32 million compared to [indiscernible] a year ago. Agricultural production and equipment loan balances were up $2 million quarter-over-quarter and up $18 million year-over-year with expectations for these balances to increase in the coming quarter as planting season ramps up.

Farmer liquidity improved with meaningful line pay downs, but many producers deferred sales in 2026 due to weak commodity prices last fall and utilized Commodity Credit Corporation stored grain loans to generate liquidity. A significant portion of 2025 rice and cotton production remains unsold, while most corn and soybean stores have been liquidated.

Depressed prices and some yield pressure in '25 resulted in borrower shortfalls in our portfolio, driving restructurings which contributed to growth in our ag real estate balance as mentioned before, as we used our strong borrowers' equity position to satisfy operating shortfalls. Despite elevated carryover debt levels and tighter repayment capacity, our impacted borrowers were successfully repositioned to continue operations this year.

Looking ahead, the '26 crop year is shaping up to be another high cost environment, though commodity prices have improved modestly relative to our conservative underwriting assumptions. Producers are actively managing input costs and shifting acreage towards lower-cost crops, particularly soybeans. Our lenders have maintained disciplined underwriting through stress testing both cash flows and collateral values.

Early planning progress has been favorable. While we're optimistic that government support and stronger market prices will provide some relief, '26 is expected to be another challenging year, largely dependent on commodity prices. Despite these challenges, we expect to see satisfactory performance of our customers. In addition, due to prolonged weakness in the agricultural segment, we have taken the prolonged pressure in ag into consideration in our calculation of our allowance for credit losses to reserve more for our agricultural exposure. Stefan?

Thanks, Greg. Matt hit some of the key financial items already, but I wanted to share a few details. This quarter's net interest margin of 3.67% was up 10 basis points compared to the linked December quarter. The NIM included about 3 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits compared to 5 in the linked December quarter and down from the prior March year's March quarter addition of 13 basis points as we had a larger marked loan prepay in that quarter.

The linked quarter improvement in the NIM was primarily driven by a 9 basis point improvement in our cost of funds to 2.52%, benefiting from the December 2025 25 basis point rate cut and a small benefit from a 1 basis point increase in average earning asset yields, but loan yields were flat quarter-over-quarter at 6.26%. As mentioned last quarter, our loan portfolio has largely repriced up to where we are seeing current market rate originations.

Over the next 12 months, we have $646 million of fixed rate loans repricing with an average rate of 6.33% compared to new and renewed loans coming on around 6.50%. But most of these loans with lower rates are maturing in fiscal 2027 or starting in July. Our fourth quarter 2026 average rate for maturing fixed rate loans is 7%. So we could see some pressure next quarter on our loan yields.

On the CD front, we have about $1.1 billion maturing over the next 12 months with an average rate of 3.84% with new origination rates in the 3.80s and renewals moderately lower. With these dynamics, we do not expect to see material near-term expansion of the NIM as we saw this last quarter without further rate cuts by the FOMC.

Noninterest income was up $314,000 or 4.6% compared to the linked quarter, primarily due to higher other noninterest income from the gain on sale of membership interest of the tax credit investment and increased earnings on bank-owned life insurance from a mortality benefit realized in the quarter.

On a year-over-year basis, fee income was up $424,000 or 6.4%, which in addition to the benefit from the sale on the tax credit investment and BOLI, the bank had elevated levels of fee income from deposit account charges and related fees as well as bank card interchange income, which was partially offset by lower other loan fees, reflecting a refinement of our fee recognition under ASC 310-20, with a greater portion now recognized in interest income over the life of the loan. The increase in deposit account charges was primarily a result of higher nonsufficient fund income from increased overdrafts in addition to growth in wire volume from the addition of several cash management clients.

Noninterest expense was up 3.8% quarter-over-quarter, primarily due to higher compensation and benefits expenses, other noninterest expense and occupancy and equipment expenses. The increase in compensation and benefits expense was primarily due to annual merit increases, which took effect in January. Other noninterest expense increased largely due to expenses for lending activities, loan collection and management of foreclosed real estate. Lastly, occupancy and equipment expense growth was primarily driven by elevated maintenance and repair costs, remodel projects and equipment purchases.

The allowance for credit loss at March 31, 2026, totaled $55.9 million, representing 1.29% of gross loans and 186% of nonperforming loans as compared to an ACL of $54.5 million, representing 1.29% of gross loans and 184% of NPLs at December 31, 2025. The increase in the ACL was primarily attributable to higher reserves required for pooled loans, driven largely by increased reserves on agricultural loans, reflecting ongoing pressure in the ag sector and loan growth.

As a percentage of average loans outstanding, the company recorded net charge-offs of 4 basis points annualized as compared to net recoveries of 7 basis points during the linked quarter. The net recoveries in the December quarter were primarily driven by the workout of the specialty CRE relationship that we've discussed in prior quarters.

Our provision for credit losses was $2.1 million in the quarter, which was a $400,000 increase compared to the linked quarter. The current period PCL was the result of a $1.8 million provision attributable to the ACL for loan balances outstanding and $234,000 provision attributable to the allowance for off-balance sheet credit exposure to support an increase in unfunded loan commitments.

Our nonowner-occupied CRE concentration at the bank level was approximately 291% of Tier 1 capital and allowance for credit losses at March 31, 2026, up by about 2 percentage points as compared to December 31. On a consolidated basis, our CRE ratio was 283%, up 1 percentage point quarter-over-quarter. Both CRE concentration ratios increased due to growth of nonowner-occupied CRE and multifamily loans, which was partially offset by a decrease in construction and land development loans, which outpaced growth in our Tier 1 capital.

The last item I wanted to touch on is our effective tax rate. Our effective tax rate for the quarter was 19.1% compared to the linked quarter of 20% and the same period last year of 20.9%. This fiscal year, we have benefited from lower state tax rates and revised apportionment methodology as well as ongoing benefits from the recognition of tax credits under the proportional amortization method in accordance with ASC 2023-02. Structurally, this has led to a slightly lower tax rate year-over-year. But this quarter, we also had a catch-up in recognition of tax expense interest income. With that, we see our run rate effective tax rate to be in the range of 19.5% to 20%.

Overall, we're encouraged by the meaningful improvement in earnings and profitability year-to-date, particularly over the past 2 quarters as provision for credit losses has returned to more normalized levels. We remain optimistic that these positive trends will continue through the fourth quarter of fiscal 2026 and extend into fiscal 2027.

Greg, any closing thoughts?

Thanks, Stefan. With our return on assets exceeding 1.4% over the past 2 quarters, we continue to build capital, enhancing our flexibility to return capital to shareholders, reduce higher cost debt and fund future growth opportunities. This quarter, we repurchased shares at attractive levels while maintaining excess capital to deploy into accretive opportunities, and we have the capacity to retire $7.5 million of subordinated debt as it becomes callable in May.

On M&A, discussions have remained active since last quarter. Within our footprint alone, there's approximately 75 banks with $500 million to $2 billion in assets, along with additional institutions in adjacent markets, providing a broad pipeline of potential opportunities. Coupled with our improved trading multiples and strong capital position, we believe we are well positioned to act when the right partner and deal structure emerges.

In closing, we're pleased with the quarter and confident in our trajectory. Our focus remains on disciplined execution, prudent risk management and thoughtful capital deployment to deliver sustained attractive returns to our shareholders.

Thanks, Greg. Bella, at this time, would you remind callers how they can queue for questions, and we'll be ready to take those.

[Operator Instructions] Your first question comes from the line of Charlie Driscoll with KBW.

This is Charlie on for Kelly Motta. Given the loan-to-deposit ratio around 100% coming out of the quarter, I know it's a seasonally strong quarter for loan growth. Is the expectation that deposit gathering can largely keep up with your pace -- with your loan growth outlook? Just curious maybe to get your thoughts on the opportunities to increase on the right side of the balance sheet from a deposit gathering perspective.

Well, Charlie, we normally see March as our slower quarter for the lending side and a little bit stronger quarter on the deposit side that flipped back a little bit this year. Deposit growth is going to be a governing factor in how fast we can grow loans. We can grow deposits quickly. The question is growing them at a low cost. So that is our challenge as an organization and something we are focused very much on. We still feel confident we can achieve that mid-single digit for the foreseeable future on both sides of the balance sheet.

Great. And then just on capital allocation, is there any additional appetite on the buyback over the near term? Or do you view kind of this quarter's activity as a good run rate or kind of taking advantage of market volatility?

Yes, it's probably a little higher than what we would like to see quarter-over-quarter or on a consistent quarterly basis, I guess, is what I should say. The market volatility definitely played a role if prices would improve from here, we'd expect activity to be a little bit more muted.

Generally, we anticipate a 3- to 3.5-year earnback on repurchase shares. And the price determinant will determine how active we would be in stock repurchases.

Your next question comes from the line of Nathan Race with Piper Sandler.

I wondering if you could just -- maybe Greg or Matt, just expand a little bit on kind of what's driving the strength in the pipeline. It looks like your loans slated to close are up about 12% versus last quarter. So I'm just curious if this has largely come from share gains or if you guys are adding some producers or just kind of just generally what you're seeing in terms of the pipeline strength recently?

I think we've just had -- we added several people 6 months ago, and we're seeing some of them hit their strides now getting through periods of when they were getting acclimated, getting deals flows. So some of it is for people that have been on staff 3 to 6 months. And we're just having an increased number of looks out there from what we did have. But we really haven't changed really much of any of our underwriting guidelines or structure. We're just having more deals come to fruition and our people are performing well. So we're happy with our loan production volume and generally happy with the pricing of it.

Okay. That's great. And then one maybe for Stefan on the fee income outlook. If we take out the tax credit gains with another, something closer to $6.9 million or $7 million a better run rate for the June quarter? And just generally, any kind of fee income initiatives you want to highlight as you look out to maybe growth aspirations in fiscal year '27?

Yes. So the tax credit gain was about $305,000, and we had the full gain of about $130,000. So that wouldn't be expected to be in our sort of core run rate going forward and nothing near term on the fee income side, but that is an area of focus for us sort of going forward on wealth management, insurance and some other aspects that we're working on in the background.

Okay. Got it. And then maybe one last one for you as well, Stefan, just on kind of the margin trajectory from here. I'm not sure how you guys are thinking about maybe the magnitude of additional expansion with the Fed on pause, obviously, I think additional Fed cuts would help from a funding cost perspective and just given that you have kind of less repricing on the left side of the balance sheet, but just kind of any thoughts on just kind of how the margin can trend over the next few quarters?

Yes. So this coming quarter, our fourth quarter, I would expect sort of limited NIM expansion. As I stated on the call earlier on some remarks, we have some higher rate -- fixed rate loans that are maturing and our average sort of repricing is a little bit lower by about 50 basis points or so. So that could be a little bit of pressure. But to start our new fiscal year, we see some benefits on that side picking up. And on the sort of deposit pricing side, I don't really see anything in the near term for a large incremental benefit without further rate cuts.

Okay. Perfect. Maybe just one last one actually for Greg. Any thoughts on just maybe the timing and kind of magnitude of some resolutions of nonperformers? Obviously, you guys are still running at higher levels relative to your historical track record. So just curious if you have any visibility in terms of when we could start to see some of these nonperformers cure.

We're really pretty optimistic that we'll start trending lower this quarter. This quarter and the following quarter, we would expect to see some improvement in NPA numbers. Some of it may result in being other real estate, really several deals are reaching conclusion this quarter. And we feel good about where we're at on most of it.

Okay. So it sounds like based on existing reserves and marks, you're not really expecting a material rise in charge-offs as some of these loans cure.

There could be some charge-offs related to one, but I don't anticipate it to have any impact on ACL or on our provision.

On our provisioning.

Your last question comes from the line of Jordan Ghent with Stephens Inc.

Most of them have been answered, but I just had one on the expenses. Kind of what's a good run rate kind of going forward? I think you talked about higher occupancy expenses in this last quarter. So if we take those out, would that be kind of a good run rate over the next few quarters?

We think this quarter's run rate will be good to use for going forward. There wasn't a whole lot of onetime events in there on the expense side.

That concludes our Q&A session. I will now turn the call back over to Matt Funke, President, for closing remarks.

Well, thank you, Bella, and thank you, everyone, for joining us. We appreciate your interest in the company, and we look forward to visiting again here in 3 months. Have a good day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect. Everyone, have a great day.

Hello, everyone, and welcome to the Southern Missouri Bancorp Earnings Call. My name is James, and I will be your operator for today. [Operator Instructions] The conference call will now start, and I'll hand it over to our host, Chief Financial Officer of Southern Missouri Bancorp. Stefan, please go ahead.

Thank you, James. 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 Wednesday, January 21, 2026, 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 by 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 some highlights on our financial results for the December quarter, the second quarter of our fiscal year. Quarter-over-quarter, our earnings and profitability improved due to a lower provision for credit losses, a larger earning asset base, which drove an increase in net interest income as well as an increase in noninterest income.

With the earnings and profitability improvement we've seen in the first half of our fiscal year, we feel we have good momentum and see positive trends continuing into the second half. We earned $1.62 per share diluted in the December quarter. That's up $0.24 or 17.4% from the linked September quarter and up $0.32 or 24.6% from the December 2024 quarter.

Provision for credit loss expense was about $1.7 million, a decrease of $2.8 million when compared to the linked September quarter. As we stated on the last earnings call, we expected the provision to decrease this quarter as we had some positive movement with the workout of the specialty CRE loans we've discussed in prior quarters. Greg will give some more details on that next.

On the balance sheet, gross loan balances increased by $35 million during the second quarter. Compared to December 31 of the prior year, our gross loan balances are up almost $200 million or 5%.

Growth in the quarter was led by 1-4 family residential, C&I and construction and loan development loans. We experienced strong growth in our East region, followed by good growth in our West region. We had a great quarter for loan originations generating almost $312 million, our strongest quarter over the last several years, but growth was slowed by seasonal ag paydowns and some larger loan payoffs.

With the strong production and as we enter a slower season for ag and real estate lending, our loan pipeline for the next 90 days decreased somewhat but remains healthy at $159 million at December 31.

Due to normal seasonality, we would expect limited net loan growth in the March quarter, but having grown just above 3% in our fiscal year-to-date and expecting a typical pickup of growth in our fourth quarter, we're still in a good position to achieve mid-single-digit growth for the fiscal year of '26.

Deposit balances increased by about $28 million in the second quarter and by $98 million or 2.3% compared to December 31 of the prior year. Over the last 12 months, we've had a reduction of $72 million in brokered deposits. So we put our core deposit growth at about $170 million or 4.3% over that 12-month period.

Net interest margin for the quarter was 3.57%, unchanged from the linked September quarter and as compared to 3.34% reported for the year ago period. Net interest income was up just over 1% quarter-over-quarter and up 12.4% year-over-year.

Stefan will get into the details on the NIM in a bit, but I wanted to point out that with 50 basis points of FOMC cuts in the December quarter, we have seen some positive underlying improvement in the NIM, although that was hampered this quarter by 2 credit relationships that were placed on nonaccrual.

Adjusting for $678,000 of this reversed interest income related to these credits, the NIM would have been 3.63% in the December quarter. Tangible book value per share was $44.65 an increased by $5.74 or almost 15% during the last 12 months. Lastly, in the second quarter, we repurchased 148,000 shares at an average price of $54.32 per share for a total of $8.1 million.

The average purchase price was 122% of our tangible book value as of December 31, '25. I'll now hand it over to Greg for some discussion on credit.

Thank you, Matt, and good morning, everyone. Starting with credit quality. Overall problem asset levels have increased slightly since last quarter but remain at modest levels with adversely classified loans totaling $59 million or 1.4% of gross loans, up $4 million or 8 basis points as a percentage of gross loans since last quarter.

Non-performing loans were about $30 million at 12/31 and totaled 0.7% of gross loans, an increase of $3.6 million compared to last quarter. Non-performing assets were about $31 million and increased $4 million quarter-over-quarter, with most of the increase due to the increase in NPLs.

Both the increase in classified and nonaccrual loans were primarily attributed to 2 borrowing relationships, one consisting of multiple loans collateralized by commercial real estate and equipment and separately, 2 related agricultural production loans secured by crops and equipment, all of which were placed on nonaccrual status during the second quarter and accounted for the $678,000 interest reversal Matt noted earlier.

The CRE and equipment loan relationship totals $5.8 million. The borrower operates a seasonal business, and we expect increased cash flows during the spring and summer operating periods and we are also working with the borrower to add additional collateral support.

The total relationship currently has a 23% specific reserve. The ag-related relationship totals $2.2 million, and we're working through formal resolution processes with the assistance of counsel with the goal of achieving repayment, no refinancing and limited potential losses.

Despite the modest increase in nonperforming assets this quarter, we continue to see positive progress in our specialty CRE relationship that we've discussed the last several quarters. During the second quarter, we received a $2 million recovery on this overall relationship, which contributed to an overall net recovery for the quarter of $704,000.

One of the properties has a new tenant in place with a strong 1-year letter of credit guaranteeing rental payments and the related loan has returned to accrual status and is no longer classified.

The other loan is in the foreclosure process and was materially charged down during the prior quarter, so we do not expect any significant additional impact from that relationship. The combined carrying value of the 2 loans is $2.7 million. Loans past due 30 to 89 days were $12 million, down $692,000 from September and 28 basis points on gross loans, a decrease of 2 basis points compared to the linked quarter.

Total delinquent loans were $32 million, up $2.7 million from the September quarter. The increase in total delinquent loans was mostly due to the CRE and equipment loan relationship discussed earlier. While nonperforming assets and nonaccrual loans were up modestly this quarter, overall problem assets remain at manageable levels and our earnings are sufficient to cover potential reserves while maintaining above-average profitability.

Importantly, we made meaningful progress on the specialty CRE relationship we have discussed in prior quarters, meaningfully reducing our exposure and the resulting net recovery for the quarter. In combination with our underwriting standards and reserve position, we remain comfortable with our ability to work through existing credits and manage any broader pressures that could emerge from economic conditions. That said, we are not complacent with recent trends and remain focused on improving credit quality, and we feel good about progress being made across several problem credits as workout strategies continue to move forward.

As compared to the prior quarter end September 30, ag real estate balances were up about $6 million, and they were up $21 million compared to December 31 a year ago. Ag production and equipment loan balances were down $26 million during the quarter following our normal seasonal pattern, but are up close to $15 million year-over-year.

Our agricultural customers have completed harvest, and we are now in the process of underwriting their '26 operating lines. While weather conditions and heat stress affected yields in certain areas of crops, most producers reported average to above average production across the majority of our acres.

Corn and soybean yields were generally solid, while rice and cotton experienced more variability and in some cases, lower yield and quality. Overall, our crop mix remains diversified, led by soybeans and corn with smaller concentrations in cotton, rice and specialty crops.

Looking ahead in '26, we expect some acreage to shift away from higher cost crops such as cotton and rice more towards corn and soybeans, given current future prices and input cost dynamics. From a financial standpoint, lower commodity prices and elevated production costs are expected to result in operating shortfalls for a portion of our farm customers from the '25 crop year, with projected shortfalls concentrated among a relatively small number of larger producers.

Most borrowers continue to have meaningful equity in land and equipment, and we are utilizing a combination of restructurings, government guarantee programs and conservative underwriting assumptions as we move into our renewal season.

Our '26 cash flow projections using pricing that is generally consistent with current futures and FSA assumptions and includes stress testing of borrower cash flow to assess downside risk. Based on our stringent underwriting, including stress commodity pricing and assumed higher operating costs, we anticipate that our borrowers will generally be able to navigate another challenging year and expect satisfactory performance of these credits over the near term.

Also this quarter, our ag borrowers will generally be eligible for new Farmer bridge assistance program and later in '26, our borrowers should benefit from higher payments under the ag risk coverage, our price loss coverage programs based on changes to those programs adopted in the One Beautiful Bill in '25.

All that said, reflecting our continued prudence given the prolonged weakness in the agricultural segment, we began increasing reserves for watch list agricultural borrowers in the March '25 quarter as part of our ACL calculation.

Stefan, would you update us on our financial performance?

Thanks, Greg. Matt hit some of the key financial items already, but I'll note a few additional details. This quarter's net interest margin of 3.57% was flat compared to the linked September quarter. The NIM included about 5 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits compared to 7 in the linked September quarter and down from the prior year's December quarter addition of 9 basis points.

As Matt mentioned earlier, excluding the interest income reversed from the 2 nonaccrual loans, we see the December quarter's run rate net interest margin at 3.63%, which is a 6 basis point increase quarter-over-quarter. This was primarily due to a 16 basis point decrease in the cost of funds as we benefited from our indexed non maturity deposit accounts repricing down through the quarter.

These index deposits account for about 27% of total deposits at December 31. Looking ahead to the March quarter, declining interest rates are beginning to pressure loan yields as loans mature with approximately $619 million of fixed rate loans maturing over the next 12 months at rates closer to current origination levels of around $650 million.

That said, we continue to see an opportunity for further improvement in funding costs as roughly $1.2 billion of CDs will mature over that same period with an average rate near 4% compared to current originations at approximately 3.6%, which should help support overall spreads.

In addition, we are carrying lower levels of excess liquidity, which is somewhat atypical for this time of year when public unit balances and agricultural deposits are usually at seasonal highs.

Those inflows have been partially offset by reductions in broker deposits, reflecting our continued focus on optimizing our funding mix rather than building liquidity through higher cost wholesale sources.

Year-to-date, broker deposits have declined $53 million, of which $38 million was reduced this quarter.

Non-interest income was up 3.1% compared to the linked quarter due to higher wealth management fees as we have benefited from market appreciation of AUM and net new inflows, increased interchange income as the bank benefited from lower issuer expenses, which are netted in this line and deposit account charges, primarily from increased income from non sufficient fund charges and check order fees.

Non-interest expense was up less than 1% quarter-over-quarter, primarily due to higher compensation expense, other noninterest expense and data processing expenses. Compensation expense was up in the quarter, primarily due to less deferred loan origination expense and a seasonal increase in paid time off realized.

Other noninterest expense increased quarter-over-quarter, primarily due to increased employee travel and training as well as other smaller costs and higher data processing expenses from an increase in transaction volumes and software licensing costs. This was partially offset by a decrease in legal and professional expenses, which were elevated in the September quarter due to $572,000 associated with the use of a consultant to assist in renegotiating a significant contract with a card processor.

Looking forward, we would expect to see a quarterly increase in the compensation expense run rate in the March quarter as annual merit increases and cost of living adjustments take effect for which we awarded a mid-single-digit percentage increase, including the cost of benefits.

The allowance for credit losses at December 31, 2025, totaled $54.5 million, representing 1.29% of gross loans and 184% of non-performing loans as compared to an ACL of $52.1 million, representing 1.24% of gross loans and 200% of NPLs at September 30, 2025.

The increase in the ACL was primarily attributable to additions to individually reviewed loans and net recoveries, which was partially offset by a small decrease in required reserve for pooled loans. As a percentage of average loans outstanding, the company recorded net recoveries of 7 basis points annualized during the current quarter as compared to net charge-offs of 36 basis points during the linked quarter.

As Greg mentioned previously, the current quarter's net recoveries and the linked September quarter's net charge-offs were primarily impacted by the specialty CRE relationship we have discussed over the last couple of quarters and accounts for the $2.8 million decrease in provision for credit loss quarter-over-quarter.

Our nonowner-occupied CRE concentration at the bank level was approximately 289% of Tier 1 capital and allowance at December 31, 2025, down by about 6 percentage points as compared to September 30 due to growth in Tier 1 capital and ACL outpacing owner-occupied CRE growth.

On a consolidated basis, our CRE ratio was 282% at December 31. To conclude, we remain focused on resolving problem loans and further reducing nonperforming assets. This quarter's results with a more normalized provision for credit losses better reflects the company's underlying earnings power, generating a return on assets of just over 1.4%.

We are pleased with the strength and quality of this performance. And absent any unexpected deterioration in credit, we believe the operating trends we are seeing today support continued solid profitability as we move into the second half of the year.

Greg, any closing thoughts?

Thanks, Stefan. I would echo those comments and say we are very pleased with the level and quality of our earnings this quarter. The results we delivered reflect the strength of our franchise, the consistency of our operating performance and the discipline of our teams bring to both growth and risk management.

While we remain vigilant on credit, we believe our current profitability levels are sustainable, and we are encouraged by the trajectory of the business as we move forward. Importantly, this level of performance continues to build capital, which gives us flexibility to return capital to shareholders while also preserving capacity to fund future growth.

Over the last quarter, that allowed us to repurchase shares at attractive levels while still maintaining excess capital to deploy accretively through acquisitions as opportunities arise. With the near completion of our prior share repurchase authorization, our Board approved a new program to repurchase up to 550,000 shares or approximately 5% of shares outstanding.

As with past programs, we intend to remain disciplined and opportunistic, deploying capital when our stock meets our internal investment and return thresholds. In addition, since last quarter, we have continued M&A discussions as market conditions have stabilized and general M&A activity has picked up in the industry.

We remain optimistic about the potential for attractive opportunities and with our strong capital position and proven financial performance, we believe we are well positioned to act when the right partner is ready.

Notably, there are about 75 banks headquartered in our footprint with assets between $500 million and $2 billion, along with a meaningful number of additional institutions in adjacent markets, which provides a broad and active landscape for potential partnerships.

In closing, we are proud of this quarter's performance and confident in the long-term fundamentals of our company. Our focus remains focused on disciplined execution, prudent risk management and thoughtful capital deployment, all with the objective of continuing to deliver consistent attractive returns for our shareholders.

Thanks, Greg. At this time, James, we're ready to take questions from our participants. So if you would, please remind the callers queue for questions.

[Operator Instructions] And we will now have our first question from Matt Olney from Stephens.

I wanted to start off on loan growth. A 2-part question. I heard Matt mention that the loan paydowns this past quarter were higher and part of it was the ag paydowns that were expected. But I also heard Matt mention additional paydowns beyond the ag. So just trying to appreciate if that was a surprise or if that was expected, the other paydowns.

And then part 2, I would just love to appreciate any general commentary on loan pricing competition in your marketplace.

In regard to paydowns, we had several unexpected paydowns that we were not really fully anticipating, but we weren't disappointed to see several of those. One of them was a larger C&I relationship that really had outgrown us that contributed and they moved to a larger bank for their operating lines.

But overall, loan prepayment rates have been higher than what we've historically seen. And we should -- basically, we anticipate prepayment rates to be a little higher than historically.

But we wouldn't say that what we've had in this quarter that was a little unexpected was rate driven necessarily. It was just kind of a mixed bag.

Yes.

And Matt, as far as competition, treasuries have been bouncing quite a bit here lately. We were seeing some talk in the low 6s, high 5s, expect that to kind of move back a little bit higher for your top flight credit quality. But definitely, there still is some aggressive competition out there.

We do still feel good about our mid-single-digit loan growth projections for our fiscal year.

Okay. That's great. I appreciate the color there. And then as far as the outlook on the net interest margin, I think I heard Stefan say that, that 3.63% level in December is probably the better run rate to start with. Any more color on where you see the margin in the March quarter? I know we usually see the seasonal headwinds in the March quarter, but I was unclear on the commentary if we should anticipate additional headwinds in the March quarter.

Thanks for the question, Matt. So we don't give specific guidance on the NIM. But underlying, we do still see potential for increased spread to pick up in the March quarter due to decrease in deposit costs. So right now, on the loan side, they're sort of at breakeven from what we're seeing maturing off versus where we're seeing new origination rates.

Okay. And Stefan, just to follow up there. Does that imply the liquidity build that we usually see will not happen this year or will happen less?

Yes. We're seeing less impact there. Basically, the inflows that we see seasonally have been partially offset by the decrease in broker deposits.

Okay. That's helpful. And then just one more follow-up on the margin, Stefan. Just big picture, the next several quarters on the margin, it sounds like you still see additional tailwinds to support the margin from current levels, but it sounds like it's going to be much more driven on the deposit cost side and much less driven on the loan repricing side compared to the last year or so. Is that right?

Yes, sir. That's correct.

Next up, we have Nathan Race from Piper Sandler.

Stefan, I think you mentioned you're expecting to see an increase in personnel costs in the March quarter just in light of the increases that you alluded to. I wonder if you could just put some kind of guidepost around the run rate that you're expecting over the next couple of quarters overall.

Yes. So I guess just this is just a seasonal adjustment for annual merit increases. So that's in the ballpark of mid-single-digit increase there.

Okay. But otherwise, expecting any major deviations in the run rates?

Nothing material at this point, just general trend.

Okay. Great. And then...

Historically, we've had annual merit increases in that 4% to 5% range.

Understood. That's helpful. And I appreciate the updated refresh buyback authorization. Can you guys just maybe touch on what the appetite is over the next quarter or so to remain active?

Obviously, activity on the buyback stepped up in the second quarter, but I imagine there's a balance there between building capital for additional acquisition opportunities, which hopefully, it sounds like there's some opportunities that could emerge there later this calendar year.

Yes, we are hopeful that some of those do emerge. As far as buyback activity, we're going to be somewhat price dependent, thinking about how useful it is to deploy the capital there versus retaining it, waiting for a better opportunity.

We always look at that as similar to an outside acquisition and what our earn back is on the premium that we're paying there. So we'll be -- we'll continue to be disciplined on that.

Okay. Great. And then just lastly, curious if there's any additional tail to the charge-offs on the commercial real estate loan that we saw in the December quarter here. And just absent maybe any additional recoveries, just how you're thinking about kind of a more normalized charge-off range over the next several quarters?

We would anticipate being more to historical averages over the upcoming quarters would not anticipate any much of the way of a tailwind behind us. But I think just historical results would be how we did in prior years, not the last 6, 9 months.

And Nathan, specific to the one relationship, if that's what you were asking about, we don't anticipate anything material further on it.

[Operator Instructions] Moving on, we have Charlie Driscoll from KBW.

This is Charlie on for Kelly Motta. Just digging into the margin, wondering your expectations for terminal betas for deposits. I'm not sure if you look at total deposits or interest-bearing, but any updated thoughts on the downward repricing from here, like maybe sizing the impact of cuts.

You mentioned the CDs and the index deposits trending downward, which are nice tailwinds. Maybe if you could help piece it together in general.

Yes. So overall, on the deposit side, we've seen betas around the 40% level. That would probably be something good to use for modeling purposes.

Great. Appreciate it. And then you seem optimistic about M&A. You mentioned plenty of banks in your footprint. If you could maybe narrow in on any preference you have for any sort of size and if you're looking for something within your footprint or adjacent, any additional color there would be great.

We would prefer M&A within our footprint, but if something is right adjacent to us, I mean, that's something we definitely would look at. We look at each one individually as far as what's the underlying performance of the bank, what do we think we can do with it to grow and we look at each opportunity individually and how well does it contribute to our overall shareholder return looking forward.

So we will consider either in our footprint or adjacent. It just really depends upon each deal and what they bring to the table on who we more aggressively pursue.

Our questions queue are now clear. I'll hand it back to Matt Funke for final remarks. Matt?

Thank you, James, and thank you, everyone, for participating. We appreciate your interest in the company. Happy to report on a good quarter for the company, and we'll talk to you again in 3 months. Have a good day.

Thank you, everyone.

And this concludes today's call. Thank you all for joining. You may now disconnect your lines, and have a great day.

Hello everyone, and thank you for joining us today for the Southern Missouri Bancorp Earnings Conference Call. My name is Sammy and I'll be coordinating your call today. [Operator Instructions]. I would now like to hand over to your host, Stefan Chkautovich, Executive Vice President and CFO, to begin. Please go ahead, Stefan.

Thank you, Sammy. Good morning, everyone. This is Stefan Chkautovich, CFO of 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 Wednesday, October 22, 2025 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 by 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.

Thanks, Stefan. Good morning, everyone. This is Matt Funke. I'll start off with some highlights on our financial results for the September quarter, which is the first quarter of our fiscal year. Compared to the June linked quarter, we had relatively stable earnings and profitability with solid growth in net interest income, which stemmed from loan growth and further net interest margin expansion and the decline in operating expenses. These improvements were offset by a larger provision for credit losses and a decrease in fee income.

The larger provision was attributable to the evolving economic environment, additions to individually renewed loans and loan growth. We feel we have good momentum on pre-provision net revenue to start the year, and we're optimistic about how we'll perform in the new fiscal year.

The diluted EPS figure for the current quarter was $1.38, down $0.01 from the linked June '25 quarter but up $0.28 from the September quarter a year ago. During the quarter, we continued working with the consultant to complete the renegotiation of a significant contract.

We have recognized some expenses on this renegotiation in the linked quarter. But because this was on a contingency basis and because the renegotiation worked out well for us, we had additional expense to recognize in the current quarter. These totaled $572,000, reducing after-tax net income by $444,000 or $0.04 per fully diluted common share.

Between the linked quarter and the current quarter, we have recognized right at $1 million in consulting expenses related to the contract renegotiation. But with the expected increase in revenues, which will flow through bank card interchange income, we estimate a less than 18-month earn back of the expense.

Reported noninterest income was down by 9.7% or $707,000 compared to the linked quarter, but was more than offset by lower noninterest expense of $925,000 or a 3.6% decrease quarter-over-quarter. Stefan will give some more color on these drivers in a bit.

Net interest margin for the quarter was 3.57%, up from 3.47% and for the fourth quarter of fiscal '25, the linked quarter and from 3.34% in the year ago quarter. Net interest income was up 5.2% quarter-over-quarter due to the NIM expansion and loan growth.

As we indicated last quarter, we have updated our quarterly NIM calculation to annualized results for the actual day count, which should reduce volatility in the reported NIM due to differences in quarterly day counts. Under the old methodology, the current quarter's NIM would have been reported at 3.60%, but we're reporting at 3.57% due to the September quarter having 92 days.

By contrast, the June quarter is reported at 347 under the new methodology, but under the old methodology was 91 days, it was originally reported at $346 and we've carried this updated annualization method over to all our profitability ratios for the current and historical periods in the earnings release.

On the balance sheet, gross loan balances increased by $91 million or 2.2% during this first quarter, which would be 8.8% annualized. Loan balances increased by $225 million or 5.7% over the last 12 months. Growth in the quarter was led by nonowner-occupied CRE, 1-4 family residential, C&I and multifamily loans.

We experienced strong growth in our East region where we have much of our ag activity and our South region was just behind with good growth in those markets. Even with solid loan growth for the last 2 quarters, our loan pipeline anticipated to fund in the next 90 days remain strong, totaling about $195 million at September 30.

The September quarter is historically our strongest period of loan growth, and we would expect to see this pace slow next quarter as we start receiving ag line paydowns and a general slowing in new projects in the winter months. That said, we had a great quarter of loan growth and feel optimistic about achieving mid-single-digit loan growth in the fiscal year.

Deposit balances were relatively flat compared to the linked quarter, but up $240 million or 5.9% over the last 12 months. Due to good deposit growth over the last year, we've been able to be less aggressive on promotional deposit pricing, and we've called some higher-priced brokered CDs prior to maturity.

Looking at our core deposit base, excluding broker, we had an increase of about $14 million this quarter, driven mainly by savings account growth. We have $20 million in additional brokerage CDs maturing by the end of the calendar year and about $18 million in brokered money market deposits expected to move out in October at the beginning of this new quarter. We'd expect to replace that with seasonal inflow of funds from ag customers and public units in the second quarter.

Tangible book value was $43.35 per share and increased by $5.9 or 13.3% over the last 12 months. This was mostly attributed to earnings retention, while improvement in the bank's unrealized loss in the investment portfolio from the decrease in market interest rates contributed a little less than $0.20 of that year-over-year improvement.

Additionally, in the current quarter, we've repurchased just over 8,000 shares at an average price of just under $55 for a total of $447,000. The average purchase price was 127% of tangible book value at September 30. I'll hand it over now to Greg for some additional discussion.

Thank you, Matt, and good morning, everyone. I'm going to start off with credit quality. Overall, problem asset levels have increased slightly since last quarter but remain at modest levels with adversely classified loans at $55 million or 1.3% of total loans, up $5 million or 0.1% since last quarter.

Nonperforming loans were $26 million at September 30 and totaled 0.62% of gross loans, an increase of $3 million or 6 basis points compared to last quarter. This was primarily attributed to 1 commercial relationship consisting of 2 loans collateralized by owner-occupied commercial real estate and equipment as well as 3 unrelated loans secured by 1 to 4 family residential properties, all of which were placed on nonaccrual status during the first quarter of our fiscal year.

Nonperforming assets were about $27 million and increased about $3.4 million quarter-over-quarter, which most of the increase due to the increase in nonperforming loans. As reported last quarter, we are continuing to work with the borrowers on the 2 specific purpose, nonowner-occupied CRE properties in different states with guarantors and common and originally leased to a single tenant who has since become installed.

As of June 30, the balances on those loans totaled $6.2 million, but are now down to $2.8 million at September 30 after charging off the collateral shortfall with the appraisal on the other parcel of CRE this quarter. As we indicated last quarter, we had provisioned for these anticipated charge-offs on the relationship. And during this quarter, they accounted for roughly 75% of our total of $3.7 million in net charge-offs.

Another item of note is one of these properties was recently leased at a higher rate than what was assumed in the appraise loans past due 30 to 89 days were about $12 million, up $6 million from June and 30 basis points on gross loans. This is an increase of 15 basis points compared to the linked quarter.

Overall, total delinquent loans were $29 million, up $4 million from the June quarter. The increase in the 30- to 89-day past due bucket was due to an increase in past due loans under 60 days, primarily in our owner-occupied CRE and C&I loan segments.

In the owner-occupied segment, the largest loan, 30 to 59 days totals $3.6 million. And then C&I, the largest is $2.1 million. These 2 loans are the relationship discussed earlier that went to nonperforming status during the quarter.

Despite the increase in problem loans experienced over the last 2 quarters, these issues remain at modest levels, and our asset quality has moved to be more in line with industry averages. In combination with strong underwriting and adequate reserves, we feel comfortable with our ability to work through our problem credits and any potential wider deterioration that could occur as a byproduct from the general economic conditions. So I don't want to give the impression that we're accepting of these trends, and we have been focusing on improving our credit quality.

Our agricultural update, from June 30, our ag real estate balances were up about $11 million over the quarter and up $16 million compared to the same quarter a year ago. While production loan balances increased $23 million for the quarter and are up $29 million year-over-year, we have seen a general increase in ag production line utilization due to increased input cost.

Our agricultural customers experienced a mixed growing season in 2025. Early planting was possible as a result of favorable weather but heavy rains in several markets delayed progress on crops such as cotton and soybeans. As the summer turned dry, growing conditions improved for early planted crops, though irrigation costs rose adding to an already expensive production year.

Harvest has progressed well with most corn and rice acres complete and significant progress on soybeans and cotton. Yields have generally been above to -- have been average to above average on most of our ground, especially on the irrigated ground.

The dryer fall has allowed our farmers to begin field work early in preparation for the 2026 crop season. Our overall crop mix for consisted of roughly 30% soybeans, 30% corn, 20% cotton, 15% rice and 5% specialty crops.

Commodity prices, however, remained a headwind across most sectors. Lower future pricing for soybeans, corn, rice and cotton, combined with elevated input and interest costs, has pressured producers' margins despite generally strong yields.

Many farmers are relying on storage strategies, which could lead to some reduction in what might have normally been paid down in the current quarter on credit lines and USDA programs such as CCC loans to bridge cash flow gaps, make required payments on credit lines. At present, we are hoping for government support payments to help provide needed relief later in the year.

Land values are currently stable while equipment values have softened slightly as producers scale back on capital purchases. Our ag lenders are working proactively with borrowers to assess their current positions, plan for restructuring where necessary and utilize FSA and USDA programs to mitigate risk and maintain strong long-term relationships with our farm customers as they plan for '26.

Due to our stringent underwriting, including stress commodity pricing and assumed higher operating costs. We anticipate that our borrowers were generally be able to navigate this challenging year and should ensure satisfactory performance of these credits over the near term.

In addition, due to prolonged weakness in the agricultural segment, we started to increase reserves for watch list ag borrowers in the March '25 quarter in our calculation for our allowance for credit losses. I'll pass things on to Stefan to add more color on our results.

Thanks, Greg. Going into a little more detail on the income statement. Looking at this quarter's net interest margin of 3.57%, that's up 10 basis points quarter-over-quarter and included about 7 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed liabilities.

That impact is up compared to the linked June quarter of 5 basis points and down from 9 basis points in the prior year September quarter. As stated in prior quarters, we would expect to see the level of fair value accretion decline over time. The current quarter's bump resulted from a payoff of a relationship that had a larger amount of accretable yield.

The net interest margin expanded over the linked quarter as the yield on interest-earning assets increased 8 basis points, primarily due to loan yield expansion, while the cost of interest-bearing liabilities declined 1 basis point. In addition, the net interest margin benefited from an increase in the loan-to-deposit ratio.

Although our spread has improved meaningfully over the last 2 years, we still see some room for incremental improvement as over the next 12 months, we have about $550 million of fixed rate loans maturing with an average rate of about 6.5% compared to our origination rates for the month of about 70%.

On the deposit side, we have almost 1.2 billion CDs maturing next 12 months with an average rate of $4.10 compared to our average new and renewed CD rate of about $3.90. With the improvement in the margin, growth of our earning asset base and the market outlook for further rate cuts, we expect to see continued net interest income growth through the year.

That said, I do want to remind our audience that starting in the December quarter and peaking in the March quarter, we historically see a slowdown in loan growth and an increase in deposits that will weigh on the margin, but we still expect to see positive improvement in net interest income overall.

Our average loan-to-deposit ratio for the March 2025 quarter was 94.2% for some perspective. Also with this, our balance sheet becomes more neutral from an interest rate risk perspective in these quarters due to the increase in interest-bearing cash. But overall, through the seasonal cycle, we expect to remain liability sensitive and a net beneficiary of rate cuts over a full year period.

Noninterest income was down $707,000 or 9.7% compared to the linked quarter, driven by lower other loan fees and bank card interchange income. The prior quarter included $537,000 of annual card network [indiscernible]. Excluding that item, noninterest income would have been down about 2.5%.

Other loan fees declined $723,000, primarily reflecting a refinement in our fee recognition under ASC 310-20 with a greater portion of loan fees now recognized in interest income over the life of loan. In total, for the first quarter of fiscal 2026, about $1.6 million of additional fee income is being deferred, but is more than offset by $1.9 million of deferred expenses, which drove a decline in compensation and benefits.

Overall, we saw a decrease of $925,000 or 3.6% in noninterest expense quarter-over-quarter. The net expense that was deferred had a negative impact in interest income of $176,000 or a 1 basis point drag on the net interest margin.

In total, these changes had a limited impact of recognizing 55,000 in additional net income in the quarter as we deferred more expenses than fee income, which will be realized through interest income over the life of a loan.

With these changes, year-over-year comparisons are not truly comparable, but our first quarter results should serve as a baseline starting point for noninterest income and expenses. The allowance for credit losses at September 30, 2025, totaled $52.1 million, representing 124 gross loans and 200% of nonperforming loans, as compared to an ACL of $51.6 million, which represented $126 million of gross loans and 224% of nonperforming loans at our June 30, 2025 fiscal year-end.

Net charge-offs in the first quarter were 36 basis points annualized compared to the linked quarter of 53 basis points. Both quarters experienced elevated net charge-offs, primarily due to the special purpose CRE relationship mentioned previously. The current quarter's charge-off on this relationship was previously reserved for in the prior fiscal year with no additional provision for credit loss attributed to it in the first quarter of fiscal 2026.

Our provision for credit loss was $4.5 million in the quarter ended September 30, 2025, as compared to a PCL of $2.2 million in the same period of the prior fiscal year and $2.5 million in the linked June quarter. The increase in the provision this quarter, as Matt mentioned earlier, was due to our outlook on the current macro environment, as well as to provide for individually reserved loans, loan growth and a slightly higher reserve required for pool loans.

Due to the charge-offs realized on a special purpose CRE relationship attributable to individually reviewed loans decreased compared to the linked quarter. Our non-owner CRE concentration at the bank level as defined by regulatory guidance decreased by just over 6 percentage points quarter-over-quarter to $2.96 of our regulatory capital. Although our CRE balances grew compared to the linked quarter and was surpassed by greater growth of Tier 1 capital reserves. On a consolidated basis, our CRE ratio was 285% at September 30.

To wrap up, despite some carryover cleanup of problem loan relationship from the prior fiscal year, our strong pre-provision earnings led by expanding net interest margin and disciplined expense management have driven improved core profitability and we remain optimistic about sustaining this positive momentum and delivering earnings growth through the remainder of fiscal year 2026. Greg, any closing thoughts?

Thanks, Stefan. I would like to highlight that we delivered another strong quarter of earnings, reflecting the strength and consistency of our core operations. While charge-offs and nonperforming loans have remained elevated over the last 2 quarters off of very low levels.

Our level of nonperforming loans remains comparable to national averages for banks under $10 million. Our underlying earnings momentum remains solid and that strength has allowed us to prudently reserve for potential problems in the future quarters. We will remain diligent in monitoring and measuring risk, ensuring sound underwriting practices across the portfolio to support strong risk adjusted returns for our shareholders.

Also, since last quarter, we've seen a modest uptick in M&A discussions, while market conditions have stabilized somewhat. We remain optimistic about the potential for attractive opportunities and with our solid capital base and proven financial performance, I believe we are well positioned to act when the right partner is ready.

Notably, there are approximately 50 banks headquartered in Missouri and 24 in Arkansas with assets between $500 million and $2 billion, along with another meaningful number of others in adjacent markets, providing a broad landscape for potential partnerships.

Lastly, with the profitability and earnings improvement over the last 2 years, we have continued to build capital in the absence of M&A activity. We were able to repurchase a modest number of shares in the first quarter of our fiscal year with a reasonable earn-back period. And with the recent market sell-off in bank stock prices, it has created a positive environment for us to potentially be able to repurchase additional shares. Thanks.

Thanks, Greg. At this time, Sammy, 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 comes from Matt Olney from Stephens.

I want to start on credit. And we saw some migration this quarter that you noted and that, of course, comes after some migration the previous quarter. So when you take a step back on credit, it feels like we're just seeing some broader deterioration. What color would you give us as far as an outlook for provision expense charge-offs from here? Should we just anticipate these metrics could remain a little higher the next few quarters, likely what we saw in the last 2 quarters? Any color would be appreciated.

We would be surprised if charge-off activity remained at the level of the last 2 quarters. We would expect that to drop. We have seen rising trends in delinquent loans back to our current delinquency levels are running similar to what they did in 2018, 2019. And so I think we've basically trended back to more of a historical range on delinquencies.

Charge-offs are just hard to totally predict. Would expect them to be down from what they were in the last 2 quarters Economically, we're just -- we're not certain what holds in the future. But we definitely hope for better charge-off ratios and would not anticipate based on what we know today, charge-off or provisioning to be as high as it was this quarter.

Okay. I appreciate that, Greg. And then I guess, shifting over towards the margin, Stefan, some really nice expansion that you noted this quarter. It sounds like there's a tailwind there from the repricing dynamics that you mentioned.

Any other color you can provide as far as the bank's rate sensitivity. It sounds like you're still liability-sensitive, but can be volatile quarter-to-quarter. Just we're trying to size what the impact of additional Fed cuts, what that could mean for the margin at the bank.

Yes. Overall, as I stated earlier, we should still be overall liability sensitive. That could change a little bit with the positioning of our balance sheet. So given the influx that we're expecting in deposits, which will add to our Fed funds essentially. That will make us a little bit more neutral for a quarter or 2. But overall, we'll still be a net beneficiary of, call it, 1% to 3% net interest income per 100 basis points of rate cuts.

Okay. Perfect. So it sounds like for the margin, there's still the repricing dynamic tailwinds with flat rates. And if we want to assume additional rate cuts, that would be I guess, incremental from that dynamic?

Yes, sir.

Okay. And then I guess just lastly, Stefan, you hit on expenses briefly, really good just overall cost controls this quarter. And it sounds like this is a good run rate to go off of. Any more color on just what the drivers of the cost controls were in the third quarter?

Yes. The ASC 310-20 changes that we made were the main driver there for expenses. So this is a good baseline to use. We will see a little bit of a step-up come our 3Q with merit increases, but this is a good baseline to start from.

Our next question comes from Nathan Race from Piper Sandler.

Curious just to get an update, and I apologize if you already touched on this as I hopped on late, but just an update just in terms of where the pipeline stands coming out of the quarter and just how you're thinking about kind of net loan growth and if you have any visibility if you're expecting any increase in payoffs as rates continue to come down in the short end at least over the next handful of quarters?

Pay down? Yes, Nathan, we've got a pretty consistent pipeline September compared to where we've been in the last few quarters. We would expect things to slow down just seasonally into the December quarter, probably trailing into the March quarter as well, but still feeling good at that mid-single-digit growth for the fiscal year.

And then as far as any payoff potential due to additional rate cuts, I wouldn't really see anything material on that generally, the stuff that we have that at a lower rate not as eager to pay us off. It's not going to be affected by 25, 50 basis points.

The biggest unknown we have in potential payoff activity would be from the ag portfolio. We really don't know what's going to happen with ag prices and how soon farmers will market their crops. So that could have a $10 million, $20 million impact on loan growth one way or the other.

Got you. Okay. And then just given loan deposit ratio around 96%, 97% coming out of the quarter. Matt, is the expectation that deposit gathering can largely keep pace with that kind of mid-single-digit loan growth outlook for this fiscal year? Just curious to maybe get your thoughts on kind of opportunities to increase on the right side of the balance sheet from a deposit gathering perspective.

Yes, I think we feel pretty good about our opportunity to maintain loan-to-deposit ratios where they've been over the last couple of years, seasonally adjusted, but we do look to reduce our broker reliance a little bit. We've worked on that so far, and we expect that to continue into the new year.

Okay. Great. And then is there any additional appetite on the buyback front, at least over the near term, it sounds like you're having a nice pickup in M&A discussions but just curious how you're thinking about allocating excess capital.

Obviously, organic growth remains a priority, but I would love to just hear any updated thoughts on how you're thinking about the buyback over the next quarter or 2? And Greg, I would appreciate any commentary in terms of the size of potential deals you're considering and what that potential timing looks like.

Buyback activity, we would anticipate to be more active given current pricing. We kind of target earnback on buying shares back of around that 3-year horizon, with current pricing, we would be within that 3-year earn-back period or a little less than that. So I would anticipate us being more aggressive buying shares back.

We still have -- Stefan?

200,000.

200,000 roughly of shares authorized for repurchase. So we would anticipate buying back some of those shares based on current pricing and earn back. Generally, on the M&A front, our ideal size would be more in that $1 billion asset range. And that's where we're most interested. And we are talking with some people, but I'm not anticipating anything to be immediately forthcoming.

And then I apologize if I could ask one more. I appreciate you guys cleaned up some of the commercial real estate loans that have been discussed over the last handful of quarters.

So are those loans marked at a level coming out of the quarter where you don't see additional charge-offs? I believe you had mentioned earlier that you're expecting charge-offs to decline going forward, closer to your historical well below average levels, but just want to make sure I'm thinking about the future charge-off trajectory early in light of those 2 commercial loans.

I mean we expect that the trajectory on charge-offs to move lower, absent any unforeseen circumstances. And we don't have -- we don't have anything that we know that's a problem coming up, but you never know.

And specifically with those 2 loans, Nathan, those charge-offs have been fully realized as far as we know.

We currently have no further questions. So at this time, I'd like to hand back to Matt for some closing remarks.

Thanks, Sammy. Thank you all for joining us. I appreciate your interest, and we'll speak again in about 3 months. Have a good day.

This concludes today's call. We thank everyone for joining. You may now disconnect your lines.

Hello, everyone, and thank you for joining the Southern Missouri Bancorp Earnings Conference Call. My name is [Sammy], and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to your host, Stefan Chkautovich, CFO, to begin. Please go ahead, Stefan.

Thank you, Sammy. 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 Wednesday, July 23, 2025, 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 by Greg Steffens, our Chairman and CEO; and Matt Funke, President and Chief Administrative Officer. Matt will lead off the conversation today with some highlights from our most recent quarter and fiscal year.

Thank you, Stefan, and good morning, everyone. This is Matt Funke. Thanks for joining us. I'll start off with some highlights from our financial results for the June quarter, the final quarter of our fiscal year.

Quarter-over-quarter, earnings were up slightly as we saw our net interest margin and net interest income move higher, along with an increase in noninterest income and a lower provision for income tax expense. This was partially offset by an increase in provision for credit losses. We have seen improvement in the net interest margin this year with continued loan growth and moderate operating expense growth, which improved overall earnings and profitability in fiscal '25. Despite problem credits moving higher during the year off the very low levels we've seen across the industry in the last few years, we do feel we have good momentum and see positive trends going into the next fiscal year.

We earned $1.39 diluted in the June quarter, which remained unchanged from the linked March quarter, but up $0.20 from the June 2024 quarter or about 17% growth year-over-year. During the quarter, we realized $425,000 in consulting expenses associated with the negotiation of a large long-term vendor contract, which will begin benefiting results in fiscal '26. Excluding these costs, we would have earned $1.42 for the quarter.

For full year fiscal '25, we earned $5.18 compared to $4.42 in fiscal '24. The increase year-over-year was predominantly driven by stronger net interest income, which stemmed from almost 7% earning asset growth and net interest margin expansion as our funding costs declined and the loan portfolio adjusted up with higher market rates.

With this earnings growth, tangible book value per share has increased by $5.19 or just above 14% over the last 12 months to $41.87. Due to our strong capital position, with the earnings release, we also announced a $0.02 or 8.7% increase in our quarterly dividend, bringing it to $0.25 a share. Net interest margin for the quarter was 3.46%, up from 3.39% reported for the third quarter of fiscal '25, the linked quarter, as we saw some spread increase as loan yields increased, and we benefited from deploying lower yielding excess interest-earning cash balances into higher-yielding loans.

Stefan will go over more details, but in fiscal '26, we do plan to change our reported quarterly NIM calculation to be based off the annualized day count, which should reduce the volatility in the NIM due to the differences in each quarter's total days. If we calculated the net interest margin by annualizing the day count in the fourth quarter, it would have been 3.47% as compared to 3.44% in the linked quarter, if calculated similarly.

Gross loan balances increased during the quarter by $76 million or 7.6% annualized and by $250 million or 6.5% as compared to June 30 a year ago. Provision for credit losses was $2.5 million, up $1.6 million over the linked quarter. The increase was primarily attributable to providing for net charge-offs and to support loan growth in addition to an increase in available balances and an increase in the expected funding rate on those available balances. Greg will go into more details on credit, and Stefan will talk about the allowance for credit losses in a bit.

Deposit balances as of June 30, '25, increased by $20 million or about 2% annualized compared to the linked quarter. This is a seasonally slower period for deposits due to seasonal outflows from our public units and as our agricultural clients deploy funds for the crop year.

I'll hand it over now to Greg for some additional discussion.

Thanks, Matt, and good morning, everyone. I'd like to start off talking about credit quality. Consistent with our discussions last quarter, credit quality has deteriorated somewhat from the very low levels of the last several years, but remains relatively strong at June 30 with adversely classified loans totaling $50 million or 1.2% of total loans, an increase of about $830,000 and flat as a percentage of total loans during the quarter.

Nonperforming loans were $23 million at June 30, which increased $1.1 million compared to last quarter and totaled 0.56% of gross loans. In comparison to June '24, NPLs were up about $16 million or 39 basis points higher as a percentage of total loans.

Nonperforming assets were about $100,000 lower compared to a year ago as we sold a parcel of other real estate in the fourth quarter, but the other real estate reduction was mostly offset by additional nonperforming loans. The increase in NPLs this quarter was mostly due to a participation that we originated, of which our balance is $5.7 million on the construction loan related to the development of senior living facility in Kansas, which was placed on nonaccrual status. This loan was acquired through the Citizens merger, and we're currently working through the foreclosure process. But we are still having discussions with the borrower with the hopes to avoid foreclosure as the project included very significant capital investment by them, actually exceeding our outstanding balance.

As reported last quarter, we are continuing to work with borrowers on 2 specific purpose nonowner-occupied CRE properties in different states with guarantors in common and originally leased to a single tenant who has since become insolvent. Last quarter, these balances totaled $10 million and were placed on nonaccrual. But based on updated appraisals, we took a $3.8 million net charge in the quarter on one of the 3 loans, taking the balance to $6.2 million as of June 30.

As of year-end in total, we have about 45% specific reserves remaining on the balances of these [loans]. Loans past due 30 to 89 days were $6.1 million, down $9 million from March and 15 basis points on gross loans. This is a decrease of 23 basis points compared to the linked quarter and in line compared to a year ago.

Total delinquent loans were $25.6 million, up $1.2 million from the March quarter and up $16.4 million from the June 2024. The decrease in loans 30 to 89 days past due was primarily due to the special purpose CRE loans mentioned earlier with a partial charge-off and migration to 90 days or more past due.

Despite the increase in problem loans, these issues remain at modest levels and asset quality compares favorably to the industry. In combination with strong underwriting and adequate reserves, we feel comfortable with our ability to work through these credits and any potential wider deterioration that could occur as a byproduct of general economic conditions. Still, I don't want to give the impression that we're accepting these trends, and we're redoubling efforts to improve our credit quality results.

This quarter, ag real estate balances totaled $245 million or 6% of gross loans and ag production and equipment loans totaled $206 million or 5% of gross loans. As compared to the prior quarter end, Ag real estate balances were down $2 million, but they were up $12.5 million compared to June 30 a year ago. Ag production loan balances were up $20 million quarter-over-quarter due to normal seasonality and higher operating costs and up $30 million year-over-year.

Our ag customers began 2025 with an early planning window due to mild weather, but heavy spring rains soon delayed progress, especially for cotton and soybeans requiring some replanning. Early planted corn and soybeans are progressing well with early corn harvest likely to begin in August and early soybeans in September, both earlier than normal. Later planted crops have improved over the past month. Overall, nearly all of our farmers' acres were planted. Crop mix projections for 2025 are 30% soybeans, 30% corn, 20% cotton, 15% rice and 5% specialty crops.

Corn acreage is up slightly and may yield well, but weak pricing could prompt farmers to store grain again this year. Soybean acres rose modestly as producers diverted acres from other crops. Specialty and rice crops are in good condition, though price pressure is lowering expected returns. Cotton is showing average progress with improvement tied to drier weather conditions.

Across the board, farmers face rising input costs and expenses for insurance, labor, and repairs, expenses of which continue to climb. Dry weather is also pushing up fuel and chemical usage for irrigation and we control of present. Farmers are drawing more heavily on credit lines with some tapping into preapproved contingency lines. About 95% of our 2024 crop has been sold and applied to debt, but lower commodity prices this spring have reduced expected profitability for this year.

While economic commodity assistance program payments from the government have helped, many farmers are anticipating a difficult margin year this year. Future pricing for key crops remains soft relative to underwriting assumptions. Corn, rice, soybeans, and cotton and wheat are each down 6% to 8%, and many producers remain pessimistic about positive returns for '25 and concerned about entering 2026 in a weakened position.

We have seen some instances of farmers deciding to voluntarily wind down their operations earlier this year and could see that trend continue if the profitability outlook doesn't improve. Farm equipment prices fell this spring as dealers moved to clear inventory with lower rates, though most producers are deferring purchases of equipment. While 2024 was a strong production year, high cost and weak prices of many borrowers with lower working capital positions or in some instances, needing restructuring.

Farmland values remain firm, particularly for irrigated acres, though investor demand, not farmer demand is driving the market. With equipment values falling and cash flow tight, collateral coverage is weaker. Lenders are actively inspecting 2025 crop progress and will deliver yield and collateral analysis by October to get an early understanding of the outlook for our borrowers as they enter 2026.

We are also monitoring the potential for further federal aid under the recently passed big beautiful bill with President Trump, which could be critical in supporting our farmers through what may be another financially challenging year. We are proactively working to address any potential shortfalls by leveraging FSA guaranteed programs or restructuring loans. Despite these challenges, our disciplined lending practices, stress testing of farm cash flows and deep customer relationships should ensure satisfactory performance of these credits.

In addition, due to the prolonged weakness in the agricultural segment, we started to increase reserves for watch list ag borrowers in the March quarter in our calculation for our allowance for credit losses.

Looking at the loan portfolio as a whole, gross loans increased $76 million during the quarter. The quarter was led by growth in C&I, multifamily and ag production loans with stronger growth out of our South, West and East regions. It all contributed to a great quarter for loan growth. The fourth and first quarter is seasonally the strongest part of our year for loan growth due to seasonal factors, including ag.

Our pipeline for loans to fund in the next 90 days is strong and totaled $224 million as compared to $163 million in the March quarter and $157 million a year ago. Despite the strong near-term origination pipeline, we expect to have a higher-than-usual first quarter of prepayment activity that could slow some of the net loan growth.

Although there remains some uncertainty surrounding the economy due to our strong pipeline as we look into fiscal '26, we feel optimistic about achieving another year of mid-single-digit loan growth for the upcoming year. Our nonowner-occupied CRE concentration at the bank level was approximately 302% of Tier 1 capital and allowance at June 30, down about 2 percentage points compared to the March quarter, due to almost $9 million in net paydowns of nonowner-occupied CRE and growth in Tier 1 capital.

On a consolidated basis, our CRE ratio was 291% at the end of the quarter. Through the year, we would expect our CRE ratio to increase somewhat, but should stay in the 300% to 325% range. Stefan?

Thanks, Greg. Matt hit some of the key financial items already, but I wanted to share a few details. Looking at this quarter's net interest margin of 3.46% included about 5 basis points of fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits compared to the linked quarter of 13 basis points and 10 basis points in the prior year's June quarter. The net interest margin expanded as the yield on interest-earning assets increased 4 basis points, primarily due to loan yield expansion, while the cost of interest-bearing liabilities decreased 1 basis point.

Although the Fed funds rate hasn't been reduced further this calendar year, we are seeing opportunities to lower our CD specials as local deposit competition eased during the fourth quarter. With this, in addition to our loan portfolio still repricing up to current market rates and originating loans at higher than the portfolio rate, we're optimistic we could see more margin expansion in fiscal 2026.

As of June, our average loan origination rate was about 7.3% compared to the average loans we have maturing over the next 12 months of 6.3%. If the FOMC does cut rates later this year, we believe there is further opportunity for the net interest margin expansion as our deposit pricing strategy leaves us well positioned to reduce funding costs if further rate cuts do occur.

Looking at noninterest income, we're up about 9.2% compared to the linked quarter. This increase was largely driven by an additional card network bonus, which is based on annual buying incentives. The total bonus received in the fourth quarter was $537,000. In fiscal 2026, the estimated fee income for these annual bonuses will be accrued through the year. This item was partially offset by $108,000 charge to reduce the fair value of our mortgage servicing rights, which stems from the decrease in market rates and associated expectations of increased prepayments.

As noted in the release, we have adopted ASU 2023-02 and now account for the renewable energy tax credit benefits through a direct reduction to income taxes. This has resulted in lower fee income for fiscal 2025 of $701,000 as it was moved to reduce tax provisions. Noninterest expense was up 2.3% compared to the linked quarter. This was primarily attributable to $425,000 consulting expense captured in legal and professional fees to negotiate a new contract with our debit card network.

In addition, we saw increased expenses in data processing due to third-party ancillary product expense. This is an area where we're trying to manage to stay commensurate with our earnings growth. The investment in these systems could be a net benefit in the longer term as we work to create more efficient processes and manage the growing complexities of the business and customer expectations.

The ACL at June 30, 2025, totaled $51.6 million, representing 1.26% of gross loans and 224% of nonperforming loans as compared to an ACL of $54.9 million or [1.37%] of gross loans and 250% of nonperforming loans in the linked quarter. $5.3 million of net charge-offs were realized in the quarter with $4.2 million of the increase from the linked quarter primarily due to the special purpose CRE relationship mentioned previously and $742,000 C&I credit related to a commercial contractor. Despite the increase in charge-offs for the quarter and overall year, our net charge-off ratio for fiscal 2025 was only 17 basis points and still compares well versus banks under $10 billion.

The decrease in the ACL was primarily attributable to net charge-offs, which reduced the required reserve for individually evaluated loans as well as a decline in certain qualitative adjustments relevant to assessing expected credit losses. This decrease was partially offset by higher model losses following our annual methodology update for pooled loans, reflecting management's updated view of a deteriorating economic outlook compared to the linked quarter's assessment.

Due to these drivers, the company recorded a provision for credit losses of $2.5 million compared to $932,000 in the March quarter. Given where we see the economic cycle and our asset quality trends, we would expect to see an uptick in the normal quarterly provision. Despite some additional credit charges during fiscal 2025, we delivered strong earnings growth for the year, increasing profitability to a 1.21% return on average assets and an 11.4% return on average equity.

Looking back over the past 5 years, even with the margin pressure experienced in 2024, we have compounded tangible book value by 10% annually while returning an average of 17% of earnings to shareholders through cash dividends. With this track record, we remain focused on driving continued growth in fiscal 2026 and sustaining long-term value creation for our shareholders. Greg, any closing thoughts?

Yes, Steph. We're proud of our accomplishments in fiscal '25, highlighted by the progress on our performance improvement initiative, a key project that is already beginning to show positive results, thanks to the dedication of our exceptional team. We have continued to reinvest in the company, adding new talent to support our legacy of growth with the goal of translating these investments into sustained earnings strength and improved profitability in the years ahead.

Since the last quarter, we've seen a modest uptick in M&A discussions, while market conditions have stabilized somewhat. We remain optimistic about the potential for attractive opportunities and with our solid capital base and proven financial performance, believe we are well positioned to act when the right transaction arises. Notably, there are approximately 50 banks headquartered in Missouri and 24 in Arkansas with assets between $500 million and $2 billion, along with a meaningful number of others in adjacent markets, providing a broad landscape for potential partnerships.

Thanks, Greg. At this time, Sammy, 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 comes from Matt Olney from Stephens.

I want to start on the loan growth. Really good results we just saw. I'm curious just as the loan growth developed throughout the quarter, did it strengthen throughout the quarter? Or was it steady? Just trying to get a better idea about the momentum you guys have into the upcoming October quarter. And then Greg mentioned, I think, potentially higher prepayments in the near term. Just want to dig into that statement. And is that something that you're already seeing early on in the quarter or something that borrowers have indicated that they could do? Just looking for any color.

Our loan growth was pretty steady over the entire quarter, and loans in the pipeline were steadily added over the quarter. In regard to prepayment expectations, they have not occurred yet, but we do have several larger credits that have indicated that they plan to pay off in the very near term, which would increase our prepayment activity. And they're primarily in our nonowner-occupied commercial real estate.

Okay. Perfect. No, I think you hit on that. I appreciate it. And I guess changing gears over towards the margin. It sounds like, Stefan, the margin has got some nice tailwinds from here. Any more color you can provide about kind of expectations more near term within the margin? And then if we do get those Fed cuts that you mentioned, kind of what the impact could look like for the bank?

Yes. I guess starting with the Fed cuts. We are a bit more neutral to rate movements right now due to the higher levels of excess cash compared to prior years. But as that cash is deployed through loan growth, we do become a little more liability sensitive again. And part of the sort of driving forces is on just the natural NIM expansion that we could see is just from the loan origination activity and renewals repricing at higher rates than our current portfolio.

Yes. Okay. And it sounds like within the deposit competition, it sounds like you felt good enough this quarter. I think you mentioned you recently took down some promotional offerings. So it sounds like the overall competitive levels on the deposit side remains reasonable.

It's been more reasonable over the last 6 to 9 months. We did see a little bit of a tick up in competition in July. So that might stall out a bit, but it's still not at the relatively high levels compared to Fed funds that we were seeing a year ago at this time.

Okay. And then on the credit front, I think you covered the charge-off this quarter, and it sounds like that's the same loan that we discussed on the last quarter. And I think I heard on the prepared remarks that the appraisal on one of the properties came in lower. Just want to dig in on that appraisal and just trying to appreciate just the collateral behind that and just kind of why experienced the deterioration that it did. And then I think you mentioned that was just one of the appraisals. Are there still other appraisals on the other remaining loans from the same borrower that we're still waiting on?

We have -- we wrote down the balance on one of them after the appraisal came in. And with it being a special purpose entity that was operating it, we had a much higher than normal advance rate or lease rate that we advanced on that was more above market conditions with that specialty provider going away from that market term market rents to replace that tenant are much lower than what our original balance was resulting in the large charge-off.

It would not surprise me if we would have an additional charge-off on the other remaining building, and we're still doing some negotiation with the guarantors on that on where we end up. But it would not surprise me to have an additional write-down.

And Greg, on the potential for those additional appraisals coming in, is there any specific provision or reserve already allocated towards that? Or would that be incremental from what you have now as far as the allowance?

We have 42% of the balance in specific reserve.

[Operator Instructions] Our next question comes from Kelly Motta from KBW.

This is Charlie on for Kelly. Just high level on the funding side. I know you mentioned a seasonally slow quarter for deposits. Do you still expect to fund near-term growth with CDs mainly or like anything you expect from clients on deposit flows?

We wouldn't expect growth to be as heavily weighted towards CDs this year, as what it's been over the last couple of years. Also, just given the strong funding position we're entering the year with, we'll probably be able to be a little less aggressive on the CD side. So that might drive a little bit slower growth on the CD side relative to the non-maturity side.

Okay. And then could you give some specifics on the CDs you have rolling off this quarter and the rates that are going to be replaced that?

Yes. So about on average over the next 12 months, the CD rates that we have are about [4.24%]. And on average, we're replacing at about 4%.

Anything materially different in the next 3 months?

I guess more towards the first half of our fiscal year, we have some higher rates rolling off and then towards the back end, those become more in line with the current market rates.

Okay. That's great. And then just on the M&A environment kind of picking up, are you guys seeing the pace of conversations increase at all? And how are you viewing kind of the buyback here in this environment and then with prices where they're at?

We are having -- there are more calls according to investment bankers. We haven't really seen a big uptick in actionable items, but I think that, that could be coming up here over the next quarter.

And then buyback.

And on the stock buyback, it's just going to depend upon where we are trading at relative to our tangible book value. At this time, we believe that a potential M&A transaction could have a shorter earn-back period than if we were repurchasing our shares.

We currently have no further questions. So I'd like to hand back to Matt Funke for closing remarks.

Thank you, Sammy, and thank you, everyone, for your interest and attendance today. We appreciate the chance to visit with you, and we'll talk again in 3 months. Have a good day.

This concludes today's call. Thank you, everyone, for joining. You may now disconnect your lines.