Good day, and welcome to the Southern Missouri Bancorp Inc. First Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matt Funke, please go ahead..

Thank you, Brandon. Good afternoon everyone. This is Matt Funke, CFO, with Southern Missouri Bancorp. The purpose of our call today is to review the information and data presented in our quarterly earnings releasedated Monday, October 22, 2018, and to take your questions.

We may make certain forward-looking statements during today's call, we refer you to our cautionary statement regarding forward-looking statements contained in the press release. So, thanks again for joining us today.

I'll start by reviewing the preliminary results highlighted in the quarterly earnings release and as a reminder, this September quarter is the first quarter of our 2019 fiscal year.

We earned $0.76 diluted in the September quarter, that figure is up $0.13 from the linked June quarter and it is up $0.20 from the $0.56 diluted that we earned in the September quarter a year ago.

We reported a larger amount of discount accretion from acquired loan portfolios in the current period as we work through some relationships we've identified as impaired from the Capaha and Peoples acquisitions.

We had a modest amount of M&A expenses in the current period, in the linked period, and in the year ago period, so really not much of a difference maker in that regard.

And finally, this quarter is also the first in which we realize the full impact of the lower corporate tax rate enacted in December 2017 and we saw a decrease in the effective rate compared to where it ran in the second half of the fiscal year ended June 30, 2018.

This was the second full quarter following our acquisition of Southern Missouri Bank of Marshfieldand the impact of discount appreciation on their loans and time deposit, improved net interest income by 92,000 in the current quarter that's up a little bit from the 79,000 in the linked quarter and of course, with no comparable item in the year ago period.

A similar item from the Capaha acquisition contributed 740,000 in the current quarter that’s up significantly from the 159,000 in the linked June quarter and up from 231,000 in the year ago period. The current quarter impact was higher primarily due to resolution of an impaired relationship with a larger credit mark.

Finally, the similar items from the Peoplesacquisition improved net interest income in the current quarter by 358,000. That’s compared to 120,000 in the linked June quarter and 234,000 in the September quarter a year ago. We had a couple of impaired acquired relationships which repaid during the current quarter from that acquisition also.

We expect this component of net interest income to be significantly lower in the future.The total between the three acquisitions accounted for an additional 1.2 million in net interest income which added about 27 basis points to our reported net interest margin.

The impact in the linked June quarter was 358,000 which we equated to about 8.5 basis points on margin and in the September quarter a year ago, we reported 465,000 and this component of net interest income which was about 12 basis points on margin.

Our total margin in the first quarter was 3.92%, of which, again, 27 basis points was fair value discount accretion. A year ago, our margin was 3.79% in September quarter, of which, 12 basis point was from Fair Value discount accretion.

So, on what we would view as a core basis then, our margin was -- our core margin was down about 2 basis point comparing the September 2018 quarter to the September 2017 quarter. In that time, our core asset yield movedup 25 basis point, our core cost of deposits moved up 27, and our total core cost of funds moved up by 29.

Compared to the link quarter when our net interest margin was 3.72% and we had about 8.5 basis points of benefit from discount accretion. That would show that our core margin is up by two basis points, but we have a 92-day quarter in September as compared to 91-day quarter in June and that impacts that measurement slightly when we annualize that.

And on a core basis, we would probably assess that we’ve moved down by about that same 2 basis points linked sequential quarter versus year over year -- exactly the same as year over year I should say.

Net interest income as a percentage of average assets annualized was 72 basis points that's down four basis points from the same quarter a year ago and down three basis points from the linked June quarter after excluding again on AFS securities we recognized in that quarter. We continue to see good improvements in bank card interchange income.

Net NSF charges are growing a little more slowly than our asset and it was a tougher quarter for loan late charges, loan servicing income, gains on secondary market loans and other loan fees.The September quarter a year ago was notably strong on some of those items.

Noninterest expense was up 6.5% compared to the same quarter a year ago, which would have been before the Marshfield acquisition, but we would still have had some cost savings yet to be realized from the Capaha acquisition at that time last year.

If you exclude M&A, intangible amortization, and provision for off-balance sheet credit exposure which is a small charge in the September quarter compared to a larger recovery in the June quarter this year, we're down about three tenths of a percent over the linked quarter.

As a percentage of average assets, non-interest expense is down seven basis points year over year to 2.41%, but if you exclude 175,000 in M&A expenses, our intangible amortization,and the seasonal swings in our provision for off-balance sheet credit exposure, we calculate an operating non-interest expense as a percentage of average assets to be down 6 basis points from the linked June quarter and down 7 basis points from the September quarter last year.

So, improvements in efficiency that we're happy to say there. Our tax rate for the September quarter came in towards the top end of our projected range at 19.7% as the large amount of discount accretion pushed that higher as pre-tax income moved higher in relation to our tax advantage investments.

Moving over to the balance sheet, we saw loan growth pick up as we generally expect to during the September quarter.

Greg will have additional comments on the composition of long growth in his remarks, but hitting the highlight, we saw total asset increaseby 57.5 million for the quarter and assets are up 180 million in the last 12 months which would include the Southern Missouri Bank of Marshfield acquisition which brought about 86 million in assets onto our balance sheet.

Gross loans were up 62 million for the September quarter and they are up 177 million over the last 12 months which also would have been impacted by the Marshfield acquisition with 68 million in loans at fair value although we had some paydown in that acquired loan book in the interim.

Deposits were up 11.2 million in the September quarter and they're up more than 119 million over the last twelve months of which Marshfield again accounted for about 68 million.

In the current quarter, we issued additional traditional broker deposits, increasing that funding sourced by about $39 million including both time and non-maturity brokered funding.

Public unit deposits were down this quarter, some of which is seasonal and some of which were time deposits just put out for bid and public unit deposits were down by about 22.5 million in total. We generally do expect seasonal outflows of public unit deposits in the June and September quarters.

FHLB advances were up almost 42 million in the September quarter mostly in overnight funding. Non-performing loans moved back lower this quarter by about 1.6 million to a total of just over 7.5 million. In percentage terms, NPLs moved down 12 basis points to 0.47% on gross loans compared to 0.59% at June 30, 2018.

They are up, however, from 0.18% at September 30,2017. Non-performing assets at September 30 were 12.5 million, down a little more than a half million dollars since June 30, 2018 and up from 6 million at September 30, 2017.

Again, as a percentage of total assets, NPAs are 64 basis points, down from 69 basis points at June 30 but up from 34 basis points September 30 a year ago.

The decrease in NPLs this quarter was attributable to principal repayment on one non-accrual relationship and migration to foreclosed property on another with NPAs moving down west because that specific foreclosed property was not liquidated by quarter end.

Net charge offs for the quarter were 3 basis points annualized as compared to 1 basis point in the linked June quarter and also 1 basis point in the September quarter year ago.

Despite our strong loan growth, provision for loan losses dropped this quarter to 682,000 as that paydown mentioned on the non-accrual relationship allowed us to reduce some of the allowance attributable to those loans. A year ago in the September quarter, we expensed a provision of 868,000.

The provision in the current quarter represented a charge of 17 basis points annualized as a percentage of average loans, down from 26 basis points in the linked June quarter and down from 24 basis points in the September quarter a year ago.

And finally, the allowance as a percentage of gross loans was down 1 basis pointto 1.14% at September 30, 2018 as compared to 1.15% at June 30. A year ago in September, which would been shortly after the Capaha acquisition, the ALLL was 1.12% on gross loans.

That concludes my prepared remarks on the financials and I'll turn this over to Greg Steffens, our CEO..

Thank you, Matt. I'm going to head a little bit about loans and deposits and then some things on M&A today. We got a loan growth for the September quarter, the first quarter of our fiscal year, totaled a record $61 million or 3.9%.

This level of growth did exceed our prior expectations as well as exceeding our loan growth of 52 million in the same quarter of the prior year. The September quarter is typically our strongest quarter for growth and will likely be so again this year.

Growth was spread over several loan types with the largest changes being 23 million in nonresidential non-owner-occupied real estate, 17 million in commercial business type loans, and 10 million in advances on agricultural lines of credit.

In addition, our net growth was aided by reduced prepayments in our commercial loan portfolios as we experienced fewer owners selling their properties as well as less refinancing within our portfolio from other lending institutions when compared to recent quarters.But this growth and changes in our loan portfolio, our CRE concentrations move from 245% of capital at 6/30/2018 to 257% at September 30, but this is still below our CRE levels of 272% that were in place at September 30, 2017.

Loan growth was centered primarily in our East region and totaled approximately $44 million. Our East region includes our recently acquired markets in the Cape Girardeau area and then as well as our Poplar Bluff market and our agricultural centers in Sikeston and Dexter.

We also had growth in our West Region totaling $11 million which includes the Springfield market area. We're pleased with the volume of our originations over the quarter which totaled a 177 million which is up from 137 million in the same period of the prior year and 127 in the sequential quarter.

Next, I would like to provide a little update on our agricultural portfolio and the experience this quarter. Our ag real estate balances dropped approximately 5 million over the quarter.

The decline is largely attributed to us being able to move an acquired impaired loan out of the bank which contributed to the aforementioned recovered credit marks that Matt went over. Also as stated previously, our ag operating linesincreased 10 million over the quarter.

Our agricultural customers have completed approximately 65% of their harvest, which is roughly three weeks behind where we were at this time last year. For harvested crops to-date, yields have exceeded our estimates from both our internal crop inspections and as well as from our original underwriting when the loans were underwritten this spring.

The cotton, rice, and soybean crops have generally done very well, while the corn crop has just been average.

On a negative note, current market prices are presently below levels where we completed our underwriting, but this should be mitigated for our farmers by better than expected production and the anticipated receipt of government subsidy payments from the market facilitations program which was basically the government program enacted in response to the tariffs placed on soybeans and other agricultural crops.

In addition, our farmers increased use of contacting the crops earlier this year should also be a mitigating factor to current price levels.

Based on our preliminary review of our farmers to-date, we believe that they will have a better than average year and we expect our agricultural book to perform well this year and we expect no material credit issues within the agricultural books.

Looking at our loan pipeline for loans to be funded within the next 90 days, it presently totals 115 million which is above the 85 million where we stood one year ago and up from 81 million last quarter. The pipeline remains diverse in nature and is quite similar to our existing portfolio mix.

Based on our pipeline and recent reductions in loan prepayments, we should experience reasonable growth this quarter. Our primary concerns about term market pricing in the marketplace for both rate and loan terms has lessened to a degree of most of our market areas.

Due to our faster than expected loan growth in the September quarter and a strong long pipeline, we anticipate our annual long growth to be at the upper end of our 6-8% forecasted range. Turning to deposits, our deposit growth for the quarter came in at $11 million.

As we predicted last quarter, deposit growth was more challenging during the September quarter which has traditionally been our weakest quarter of the year for deposit growth. Non-maturity deposits dropped $36 million this quarter as our public unit deposits declined$20 million and retail deposits dropped 16 million.

These declines were attributed to several factors including seasonality of deposit flows in our agricultural communities as well as our municipal units and public units.

Also, fierce deposit competition for deposit products of all types and increased migrationof deposits from checking accounts to money market accounts into CDs contributed to some of these declines. During the September quarter, retail CDs grew $10 million while our use of brokered CD deviated from our recent trends and increased $38 million.

We do anticipate non-desposit growth rates to improve this quarter due in part to the aforementioned seasonality and deposit flows and enhance deposit gathering initiatives and training. And our 6% to 8% growth target for non-material deposits may be tough to attain given current market conditions and competitive factors.

Turning to mergers and acquisitions, Our Southern Missouri Bank of Marshfield acquisition which was completed in February converted into our systems in March. Most of our anticipated cost savings have been recognized and we are pleased with our entry into the market and have been well received based upon deposit activities within that market.

We also announced the acquisition of First Commercial Bank on June 12, we have received approval from the Federal Reserve and are working through the merger process. We anticipate closing the transaction and completing the data conversion in the current quarter.

We continue to have opportunities for a few potential additional partnerships, we have passed on several of these opportunities recently,but we continue to look for the right set. We continue to target companies within our general market footprint and in the 250 million to 500 million asset range.

But we will continue to consider smaller or larger companies depending upon their strategic benefit for us both financially and geographically. Our ideal partner would provide additional liquidity as well. That concludes my remarks..

Well, thank you, Greg. At this time Brendan, we’d like to take any questions that our participants may have, so if you can remind folks how they may queue for questions, we’ll do that at this time..

[Operation Instructions] Our first question comes from Andrew Lieschwith Sandler O'Neill, please go ahead..

I’m just wondering if you can provide some thoughts on your outlook on core margin. It sounds like deposit competition is getting tougher and you may need to fund it with some brokered sources, maybe some higher cost there, but also, your loan growth and prospects there seem pretty good.

So I'm just kind of curious, if you roll those things to the balance sheet, where you think the core margin can go from here?.

Well, we want to be optimistic. Greg mentioned that the loan pricing outlook was maybe a little relief here in the most recent quarter. I know other companies are experiencing funding pressure just like us, so maybe we'll have a little more rational pricing on that side.

But you're right to think about cost of funds to and whether we can keep pace on the asset side. We're going to be hopefulto maintain but don’t have any real specific guidance for you..

And then just in the expense side, did you say that there were some merger charges this quarter or in your first fiscal quarter..

Yes, that’s correct..

Then presumably those loans -- and then what do you anticipate recording here in your second quarter?.

M&A charges?.

Yeah, yeah..

I don't have a number for you on that.We’ve been-- I remember in the numbers here, we've been between 150 and 225 a quarter in each of thesenumbers that we’re comparing between the year ago period, the linked period to the current period, it’s probably not going to be a huge number.

I can't think of anything outsized with the pending acquisition that should hang up on it..

[Operator Instructions] Our next question comes from Kelly Motta with KBW. Please go ahead..

So, with the provision this quarter of being a bit lower with the aforementioned pay downs of purchased credit impaired loans.

About how much of the impact did that have on the provision and also with kind of the workout of these impaired loans, is there more that could maybe come understanding that there is some volatility and lumpiness with this that could perhaps impact accretion and your provision levels or was this kind of it here..

One thing is I like it, I would say ifyou went back to our loan footnote at the last fiscal year-end, I think we had about 700,000 set aside on that specific relationship where we were able to release that.

This was a very big quarter for growth obviously and so that weight on the other side and won’t necessarily expect those -- can’t fund that many quarter over quarter. But in general, it’s somewhat offsetting I would say between the growth and relief on that one relationship..

So a provision at this kind of level or maybe last quarter blended average is kind of what we should expect sort of going forward knowing that growth is obviously very strong at between the 17 basis points to 26 basis points type of thing from the prior two quarters..

That's been fairly consistent over the last several years as we've had limited charge offs and fairly consistent loan growth over the years..

If we don’t see any change in our credit portfolio metrics and we see loan production back off a little bit, I would anticipate that the loss provision would be no more than what it was this quarter..

And then, with Gideon, I know -- I think you have the shareholder vote coming out very soon.

Do you still have -- you have the Fed approval; do you still have state approvals to get vis-a-vis how soon after that can you close the deal in the quarter and should we expect sort of an impact to next quarter’s earnings from that or is that more of a 3Q ‘19-- isthat more of a following quarters income statement impact?.

We're hoping to close sometime middle, at probably middle like quarter, it probably will be a two-step closure with ownership coming before the bank merger. So I don't thing it will be a huge item within the second quarter numbers,but it should be positive and then we pick up a full quarter benefit in the March quarter..

Typically, the state of Missouri facetheir approval for right prior to the actual acquisition, they have a very brief time period of when they issue their approval. So we anticipate no issues with that basically it’s more of a formality at this point..

If I could sneak in one more, you had talked about some deposit gathering initiatives in your prepared remarks. I was hoping you can comment a little bit further on that and whether you’ve been running CD promotions that we've been seeing at a lot of other banks..

We don't do a lot of external promotions, so to speak.

Our primary mode of advertising is digital, but we have done a lot more of giving our lending staff focused on the need for deposits and then we have several training things where we have started training - where we call it queue up training for ourselves but basically it's several procedures that we're putting in place to get people to be listening more to customers’needs and to be asking questions in a conversational basis and we're getting better at doing the ask for additional business and we do plan to see several of those things generate some additional deposit growth..

This concludes our question-and-answer session. I would like to turn the conference back over to Matt Funke for any closing remarks..

Okay thanks again Brandon and thanks everyone for your interest and we will look forward to speaking again in three months..

The conference is now concluded. Thank you for attending today's presentation, you may now disconnect..