Good afternoon, and welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Matt Funke, Chief Financial Officer. Please go ahead. .

Thank you, Phil, and welcome, everyone. This is Matt Funke with Southern Missouri Bancorp. The purpose of our call today is to review the information and data we presented in our quarterly earnings release dated Monday, July 24, 2017, 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 such statements contained in the press release..

So thanks, again for joining us. I'll begin by reviewing the preliminary results highlighted in our quarterly earnings release. The June quarter is the fourth quarter of our 2017 fiscal year..

We earned $0.49 diluted in the June quarter, that is the same result from the June quarter a year ago and it's down $0.04 from the $0.53 diluted that we earned in the linked March quarter. The current period includes some nonrecurring items, which we'll touch on as we move through the areas of the income statement.

Some were positive and some were negative and the onetime expenses did outweigh the onetime benefits. The linked March quarter had some larger nonrecurring benefits, which we discussed on last quarter's call and we'll try to highlight those as we move through the income statement also..

On the balance sheet, the asset growth in the June quarter was primarily attributable to the mid-June acquisition of Capaha Bank. Total assets were up $212 million, and included loan growth of $172 million. Capaha made up $152 million of that loan growth, and they were also the primary reason for most other asset category increases.

Compared to June 30, 2016, gross loans were up $264 million and if you take out the $152 million from Capaha, we'd show an increase of $112 million or just under 10% for the year. The investment portfolio continues to grow more slowly outside of the increase attributable to Capaha for the quarter.

The portfolio was up about 4% over the last 12 months..

Deposits were up $183 million in the June quarter, with $167 million of that attributable to Capaha. Our public unit deposits, which has been a source of growth for us over this fiscal year, they were actually down this quarter on an organic basis although the Capaha acquisition contributed about $12.5 million in new public unit money.

Similarly, while we've grown brokered deposits during the fiscal year, we did not utilize them in the June quarter, although Capaha add about $18 million in that funding source remaining at June 30.

For the year to date, our deposits are -- or for the year, our deposits are up $335 million, with $167 million coming from Capaha and $58 million coming from our legacy use of traditional brokered funding.

We did see good growth in public unit deposits this year with some of our public unit customers moving from our swept repurchase agreement into deposit accounts which utilize our reciprocal brokered deposit arrangements..

Equity was up during the quarter with the issuance of stock in the Capaha acquisition and also the completion of our aftermarket offering of common stock, both in mid-June. Shares outstanding increased by more than 1.1 million but our average shares outstanding during the quarter increased far less because both issuances were late in the quarter..

Moving over to the income statement. We include a comment each quarter on our fair value discount accretion on loans and the smaller premium amortization on time deposits from our Peoples Bank acquisition. That acquisition is now 3 years old and the recurring accretion will really not be too consequential moving forward.

In the current quarter, however, that item jumps back up to $409,000, almost double where we were in the linked March quarter. June quarter in the prior fiscal year concluded at a similar level to this quarter, and the September quarter of our current fiscal year had an even higher level.

Each of these instances where it increased like that is the result of resolution of particular purchase credit impaired loan. While we expect the impact of discount accretion from Peoples to continue to move lower in the coming quarters, we may still seek some isolated increases as we continue to resolve a few individual impaired credits..

Our net interest margin in the fourth quarter was 3.82%, of which 12 basis points was the result of that fair value discount accretion. Another 8 basis points would be attributable to recognition of interest income on the payoff of loans, which we had carried previously in nonaccrual status. .

In the year-ago period, our margin was 3.73%, of which 13 basis points resulted from the Peoples Bank fair value accretion. So on what we would look at as a core basis then, our margin was up 3 basis points comparing the June 2017 quarter to the June 2016 quarter. Our core asset yield is up 6 basis points and our core cost of funds is up 2..

Compared to the linked quarter when our net interest margin was 3.64% and we had 6 basis points of benefit from the purchase accounting related to the Peoples acquisition, this would indicate that our core margin is up 5 basis points.

But we did note on our call last quarter that the March quarter is slightly negatively impacted in how we annualize our quarterly figures. So we actually haven't seen quite that much improvement on a sequential basis if you would calculate that on a daily calculation..

Noninterest income as a percentage of our average assets annualized was 75 basis points, that is unchanged from the same quarter a year ago, but we did identify in the June quarter last year that we had about $143,000 in nonrecurring benefits, primarily related to the sale of an interest in a low-income housing -- a low-income housing tax credit partnership.

This quarter was the best quarter of our fiscal year on a core basis. It's up from the figure we posted in the linked March quarter if you exclude $343,000 in onetime benefit in the March quarter, which primarily reflected a bank-owned life insurance benefit.

The rebound we saw on a core basis from the March quarter is somewhat typical for this time of year. .

Noninterest expense was up compared both to the same quarter a year ago and compared to the linked quarter. We had $536,000 in expense attributable to M&A activity, after a much smaller amount in the last couple of sequential quarters and none at the year-ago period.

As a percentage of average assets, noninterest expense increased to 2.82%, but if you exclude those M&A expenses, a write-off of fixed assets related to flooding at one of our locations, intangible amortization and a seasonal swing in our provision for off balance sheet credit exposure, we calculate that our operating interest expense as a percentage of average assets is up 13 basis points from the year-ago quarter and up 4 basis points from the linked quarter..

Items including legal, data processing, advertising and compensation were impacted by M&A. We also saw a shift to a more significant provision for off balance sheet credit exposure as compared to recovery on that item in the same quarter a year ago, and we also had some charges to write down the carrying value of foreclosed real estate..

Nonperforming loans were down a bit in dollar terms to $2.8 million. They declined further in percentage terms to 20 basis points on our total loans, down 5 basis points from where we were at March 30 at 0.25% and from $5.6 million or 0.49% at June 30, 2016.

We noted in our call last quarter that we've restored almost $2.5 million to accrual status in several purchase credit impaired loans which were performing according to terms, and that's the primary reason for the decline year-to-date. .

Nonperforming assets at June 30 were $6.3 million, declining at about the same amount as our NPLs and they extended our lowest levels since 2011 in percentage terms. As a definitional matter, we consider nonperforming assets to be our foreclosed and repossessed property, nonaccrual loans and loans 90 or more days past due..

Net charge-offs for the quarter were just 1 basis point annualized and for the full year, charge-offs were 5 basis points. Last year, for the full fiscal year, our average was 9 basis points..

The allowance as a percentage of our gross loans was down to 1.10% at June 30, 2017. The acquired Capaha Bank loans will be subject to fair value accounting instead of an allowance.

We provisioned $383,000 in the June quarter, that's up slightly from where we were in the linked quarter, and it's down more significantly from the year-ago period as charge-offs were much lower and we had a lower level of nonperformers..

Our effective tax rate for the quarter was 28.9%, down from 31% in the same period of the prior year, but up from the 27% in the linked quarter -- 27.0% in the linked quarter.

The bank's formation at the beginning of this fiscal year of a real estate investment trust has benefited our effective tax rate year-over-year while the current quarter includes some nondeductible expenses related to M&A while the linked quarter included some onetime benefit related to bank-owned life insurance which allowed the effective rate to be lower during that quarter..

That concludes my prepared remarks on the financials. I'll introduce our CEO, Greg Steffens, to provide his thoughts on our performance and to update you on some of our strategic initiatives. .

Thank you, Matt, and good afternoon, everyone. .

I'm going to start off with lending. And our net loan growth for the year, again, totaled $262 million or up 23%. Included in that total again was $152 million in loans from Capaha. Outside of the Capaha acquisition and based on our internally generated branch profitability reports, our average loan balances for the year were up $116 million or 10.2%.

So we slightly exceeded our internal goals for loan growth of 8% to 10%. Our strong loan growth was attributed to continuing to build on good relationships that we have with existing and new customers and the investment we made in some additional loan staff over the year. .

Our average loans grew $24 million in the June quarter from the March quarter, and the majority of this loan growth over the last quarter was led by commercial real estate and C&I type loans..

Including our Capaha acquisition, the composition of loan portfolio has changed slightly as our non-owner-occupied nonresidential real estate has grown by $91 million while ag real estate has gone up $38 million, commercial loans were up $32 million, non-owner-occupied one- to four-family is up $22 million and multifamily loans were up $21 million.

The remainder of the increase was spread over a variety of different loan types. Basically, much of the Capaha portfolio kind of followed what percentages of loan portfolio we had prior to the acquisition..

For our internal loan growth for the year, it was led considerably by our West region. Our West region, which includes the Springfield, Missouri market area was up nearly $70 million, or 19.5%; followed by our South region, which was up $28 million, or nearly 10%; while our legacy location in the East region was up $18 million, or nearly 4%.

The West and South regions will continue to be the key for us obtaining the loan growth targets that we have, and we're looking forward to where we're going to be at over the upcoming year..

For an update on our agricultural lending, our ag real estate balances have grown to $140 million while our operating lines are up to $87 million. That does include the balances from the Capaha acquisition.

Excluding the Capaha acquisition, our ag operating balances grew a little bit more than $3 million due -- or over the last quarter, which was lower than what we'd anticipated due to the payoff of one larger operating line that we were not able to renew and they were able to obtain financing elsewhere..

As far as the ongoing crop year, the crop, by and large, is looking pretty good for most of our farmers. A lot of the areas we would categorize the conditions as excellent. However, we do have a few areas that were impacted by flooding, including the flooding of our facility. We had several ag customers that were negatively impacted.

Overall, we feel like the ag portfolio was looking good, and we feel comfortable with where our farmers are in the ag production cycle this year.

We expect the ag balances to continue to draw down as we have nearly $19 million left to draw and we would anticipate approximately $10 million in additional draws over the next -- or over the current quarter..

When we look at our existing loan pipeline, it is strong, and the highest quarter end balance that we've had to date, and totals $80.7 million. The loan pipeline consists of a wide variety of loans, and we believe that it should be at a level to put us on pace to hit within our anticipated loan growth targets of the 8% to 10% on an annualized basis. .

Our loan production for the quarter was good as it totaled $99 million, which is down slightly from the $110 million we originated a year ago and down from $121 million last quarter. For the fiscal year 2017, we originated a total of $495 million in loans as compared to $426 million in the prior fiscal year. So our loan production was up 16%..

Secondary market lending activity continued to be strong for us, and our total fee income generated totaled not quite $1.1 million versus $850,000 in the prior year. We anticipate this activity to continue to grow as our originations this year totaled $48 million as compared to $36 million in the prior year.

And with the acquisition of Capaha, we would expect some activity there to continue to expand..

When we look at our deposit activity for the fourth quarter and for the year-to-date, as Matt indicated, we grew $335 million for the year with Capaha representing $160 million in growth. So we generated $168 million in growth organically or including $50 million of brokered CDs.

We are especially proud of our nonmaturity deposits growing at $108 million, of which only $27 million was in public unit funds, leaving nonmaturity deposit growth of $81 million or 13.2%..

Again, we have established internal growth targets of 8% to 10%, and we're happy that we were able to exceed those growth targets this year. And we're looking forward to -- hoping that continued deposit growth happens over this current fiscal year..

In addition to our nonmaturity deposit growth, we were able to generate $22 million of growth in our CD portfolio, which also brought us to where we generated more in deposit growth this year than we did in loan growth, so we were able to reduce our overnight borrowing slightly.

Our deposit growth was led in our South region, which includes most of Arkansas operations and some Missouri locations, while we did have really good strong growth in our West and East regions as well. .

As we turn to M&A, our Capaha transaction closed on June 16, and all is proceeding well. We did convert them to our system on that same date of June 16, so we were able to bring them online and change their signage and everything.

To date, this is the smoothest transaction that we have completed yet, and integration is moving well and is ahead of schedule and our cost savings are at least on target, if not slightly ahead..

In looking at the additional M&A opportunities, we continue to look at a number of deals and we're hopeful that something will come to fruition within the next 6 months. We do continue to anticipate a need for core deposits but our recent growth in deposits has alleviated some of those short-term needs.

But long term, we do anticipate that we still need to continue to look for deposit-heavy acquisitions..

Most of the opportunities that we are looking at are a little smaller in size, though we do continue to have opportunities across most of our footprint or areas adjacent thereto.

We do have some issues with sellers seeming to consider themselves worth a little bit more than what we evaluate them at, but usually, pricing expectations will come in line over time. When we look at capital, our ATM offering that we commenced was completed within 4 days and we were pleased to be able to generate the capital.

And we felt like it was at a good, reasonable price, and we welcome our new and expanded shareholders to our company..

Internally, we continue to target 8% to 9% tangible common equity of assets. At present, we are at 9.36% so we're above those targeted levels, and we're up from the 8.55% that we were at last quarter.

Outside of doing the ATM offering, we would have been a little bit under 8%, so we do feel like we have a little bit of a capital war chest if the right opportunity would allow itself to come to fruition..

Overall, we're pleased with our opportunities and where we're at, and that concludes my remarks. .

All right. Phil, if you would, please remind folks how they could queue for questions, and we'll be ready to take those. .

[Operator Instructions] The first question comes from Andrew Liesch with Sandler O'Neill. .

Just a question on the loan pipeline being up here near $81 million.

How much of that's from Capaha versus just the legacy franchise from before the deal?.

The majority of it is through our existing franchise before Capaha. Capaha has not contributed much at this point. .

Okay.

That's still heavily weighted towards the Western region and the Southern region, that pipeline?.

That is correct. .

And then just related to M&A, you mentioned you're looking at smaller deals but, certainly, with this capital you have, you can do something larger.

So I'm just thinking, is that something you'd be considering? And any, like, geography that you would be looking to expand to if not a rural transaction with lots of deposits?.

We would -- we're primarily looking within our footprint or any market that would be adjacent to our footprint, like the Capaha transaction was just right beside where we operate in. We would consider that type of opportunity. We're not looking to expand into a completely different area.

Our longer-term objective is a still to look to be from Kansas City to St. Louis, down as far South as maybe Memphis and as far to the West as Little Rock. So that's kind of our geographic area that we're looking at.

As you get outside of that, the pricing and the benefits to us would have to be greater to take the risk of going outside of our anticipated footprint. .

[Operator Instructions] This concludes our question-and-answer session. I'd like to turn the conference back over to Matt Funke for any closing remarks. .

Okay. Thanks again, and thank you to everyone for joining us. I appreciate your interest in the company, and we'll talk again in 3 months. .

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..