Good day and welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will an opportunity to ask questions.

[Operator Instructions] Please note this event is being recorded.I would like to now turn the conference over to Matt Funke. Please go ahead..

Thank you, Ben, and 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 release dated Monday, July 22, 2019, 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.So, thank you to all for joining us today. I want to start by reviewing the preliminary results highlighted in the quarterly earnings release.

The quarter ended June 30, 2019 -- I'm sorry June 30, 2019 is the fourth quarter of our 2019 fiscal year.So we earned $0.81 diluted in the June quarter that is up $0.05 from the linked March quarter, and it's up $0.18 from the $0.63 diluted that we earned in the June 2018 quarter.

For the full fiscal year, these preliminary earnings show $3.15 per diluted share that is up $0.76 from the $2.39 in the prior fiscal year.Our net interest margin in the fourth quarter was 3.77% and that number includes about 12 basis points of contribution from fair value discount accretion on acquired loan portfolios and premium amortization on the same deposits or about $615,000 in dollar terms.

In the year ago period, our margin was 3.72, of which 8 basis points resulted from fair value discount accretion or $358,000.And the reason for the increase year-over-year is primarily the First Commercial or Gideon Bancshares acquisition.

So on what we see as a core base it's been, our margin was up by about 1 basis point compare into June 2019 quarter to the June 2018 quarter.

Our core asset yield was up 43 basis points, roughly equal for the increase in our core cost of deposit, but our total core cost of funds is just led the 42 basis points, as we saw some benefit this quarter from reduced wholesale funding.Compared to the linked March quarter when our net interest margin was 3.73% and we have 13 basis points with benefit from discounted accretion, this would indicate that our core margins was up 5 basis points.

However, if we take into account the number of days and the quarter, the impact on that measurement, because we figure our annualized net interest margin simply by taking our quarterly figure and multiplying by four, we think that methodology provides the list of few basis points in the 91-day June quarter, as compared to the 90-day March quarter.Adjusted for that day count, we would have put the improvement in the margin on a core basis as at closer to 1 basis point.

Non-interest income as a percent of average assets annualized was 58 basis points, which is 8 basis points lower than the same quarter a year ago and as account 4 basis points from the linked March quarter.

In the current quarter, we had no gain on the sales of AFS securities as compared to gain to 244,000 in the linked quarter and $43,000 in the same quarter one year ago.Other non-core items in the linked quarter totaled a little more than $200,000.

So compared to linked quarter, we pay our core non-interest in down as a percentage of average assets improved by about 4 basis points, but did remain about 7 basis points below the same quarter a year ago.

Most of that decrease is attributable to the swing from a positive adjustment to the fair values of our mortgage servicing rights at the prior year end to a negative adjustment this year.Non-interest expense was at 13.3% compared to the same quarter a year ago, and down 3.1% as compared to the linked quarter.

In the same quarter year ago, we had $149,000 in mergers and acquisitions expenses with none in the current period.

Core deposit intangible amortization is a bit higher currently at $441,000 this quarter, and we had a small recovery of provision for off-balance sheet credit exposure $46,000, as compared to a larger recovering the same quarter a year ago $162,000.In the linked quarter, we had some unusual expenses related to the establishment of the wealth management division and $243,000 in M&A charges.

As a percentage of average assets, non-interest expenses down 10 basis points from both the linked quarter and the same quarter of a year ago to 2.32%, but if you exclude M&A and other non-recurring expenses, and tangible amortization provision for off balance sheet credit exposure, we would calculate that are operating on interest expense as a percentage of average asset is down 1 basis point from the linked March quarter and down 9 basis points from the June quarter last year, as we continue to improve efficiency following the last several acquisitions.Our effective tax rates was little changed at 19.7% a year ago into June quarter following the December 2017 passage of tax bill, including a reduced federal income tax rate for 2018.

We were administratively subject to a 28.1% federal income tax rate due to our June 30 tax year end.

Beginning in the first quarter of this current fiscal year, we are able to recognize the full benefit of the lower 21% federal rate.Moving over to the balance sheet, loan growth increased slightly to $23 million in the June quarter from $22 million in the March quarter.

So figures over the last six months are very similar in dollar terms our result from January through June a year ago, that we saw a little more of a seasonal tilt in the growth towards the June quarter a year ago.

Available for sales securities increase just a bit since March 31st as we did not view market opportunities as favorably as we would have hoped.Total Assets increased about $38 million in the June quarter attributable to vote for loans, securities and cash equivalent growth.

For the full fiscal year, total assets were up to about 200 -- I'm sorry, about $328 million, attributable in large part to the Gideon acquisition, which did include $218 million total assets, although we liquidated a good amount of their securities as we noted on last quarter’s call.Gross loans are up almost $285 million for the fiscal year with $144 million of that attributable the balances acquired from Gideon.

So, the remaining $141 million in organic growth would represent just a little less than 9% growth for the year. Deposits were up a little less than $20 million in the June quarter, slowing from a more robust March quarter. Broker deposits were down $12.6 million this quarter.So on for basis, we were happier with that result.

And that was down from the core March growth pace is in line with what we typically expect or drop off and deposit growth to be from the March to June quarters. For the fiscal year, we are up $143 million outside of the Gideon acquisition and just under $40 million of that total is broker growth.

Excluding broker deposits to any acquisition, about 70% of our growth came from time deposits growing at a rate of just under 14%.Non-maturity deposit, excluding broker funding and the acquisition, grew just over a 3% rate.

A lot of that tilt towards time deposit is the result of -- the results of our deposit that is migrating from non-maturity funding and CDs, taking advantage of higher rates available during the fiscal year.

Combined between the two, we put core deposit growth at a little better than 6.5% for the fiscal year.Federal home loan bank advances were up about $6.5 million in the June quarter following a significant reduction during the March quarter.

Average balances declined from the March quarter, reflecting the significant March quarter reductions and helped us with some funding cost pressures.

From June 30, 2018, we reduced FHLB funding by almost $32 million or a little more than 40%.Non-performing loans dropped slightly this quarter ends down almost $1.7 million or about 10 basis points as a percentage of total loans, and they stand at 1.13%.

Not quite doubled our prior year and figure following the Gideon acquisition.Non-performing assets at quarter end were $24.8 million down almost as much as our NPL, and at the percentage of total assets, NPAs are 1.12%, down from 1.21% at March 31, and up from 69 basis points of June 30 one year ago.

The banks credit management team continued to make progress with acquired relationships to improve delinquencies and we expect this that will soon translate to some more significant improvement in non-performing loan and asset figures.Net charge offs for the quarter were 2 basis points annualized that unchanged from the December and March quarter and is equal to the June quarter a year ago.

With loan growth little change from the March quarter our provision increase slightly to $546,000 as compared to $491,000 in the links quarter. A year ago in the June quarter, we provisioned almost $1 million which was 26 basis points on average loans.

This quarterly provision was 12 basis points.If you look at those figures on a trailing 12 months basis, our provision to average loans in the last four quarters of the 12 basis points and are charged off to average loans are at 2 basis points. A year ago those figures within a provision of 20 basis points and net charge offs of 2 basis points.

The allowance as a percentage of our gross loans was up 2 basis points for 1.07% in 30, 2019 as compared to 1.05% as March 31.A year ago before the Gideon acquisition, the ALLL was 1.15% on gross loans.

Acquired loans are subject to fair value adjustment at the time of acquisition and we do not hold the violence against those loans unless we subsequently identify impairment.

And that explains most of the decrease in our ALLL in percentage terms compared to the year ago period.With that, I've concluded my prepared remarks and I'll introduce our CEO, Greg Steffens..

Thank you, Matt. For the quarter we're please with long growth for both the fiscal year and the quarter as exceeded our initial expectations. Exclusive of the Gideon acquisition, organic loan growth for the fiscal year totaled a $141 million or nearly 9%, with growth at $23 million in the June quarter.

We originally projected organic loan growth for the year to come in at 6% to 8%. The revised for essence 8% to 10% last quarter.Our organic growth continues to be led by increases in our commercial loan portfolios.

This growth along with the Gideon acquisition has changed the composition of our loan portfolio, with an increase of $81 million in non-residential, non-owner occupied real estate, $61 million commercial loans, $33 million in multi-family, $32 million in owner occupied non-residential real estate, $22 million in ag real estate and $11,000 in one to four family.With this growth and changes in our loan portfolio, our CRE concentration at the holding company level move from 233% percentage a June 30, ’18 to 260% at 3-31-19 and remained slightly below 260% as of June 30.

Our organic loan growth continues to be centered primarily in our east and west regions, which grew by $67 million and $76 million respectively from the year.

We're also pleased with the volume of origination was totaled $124 million during the quarter and $606 million for fiscal year, which is up from $550 million in the prior year.Now, I'd like to provide an agricultural upstate.

Agricultural real estate balances remains flat over the quarter, while agricultural production loans grew $11 million for the fiscal year.

Ag real estate balances and production balances grew by $22 million and $14 million respectively, primarily due to the Gideon acquisition.Our Agricultural customers 2019 crop years started slowly due to wet and cool weather conditions and has remained wet for most of the year, leaving our anticipated harvest states to be approximately one month later as a normal.

Given these delays, it's hard to assess where we are in anticipated yields and we're just beginning to make our farmers sections at the present time and to ascertain how much of the anticipated crop has been put by our customers.Generally, our farmers were able to plan approximately 90% of their acreage with remainder not plan to due to wet to this, but there was also some transition from their anticipated crop mix to include more soybeans due to the planning delays and market prices.

Our farmers' financial performance issue will be largely determined by upcoming weather, crop prices from the government payments will be made. Overall, we have less clarity than normal on our agricultural loan portfolio at this time.I would also like to add to Matt's comments regarding our non-performing loans.

Our non-performing loan balances have been elevated from historical levels since the Gideon acquisition.

We've been diligently working on resolving these credits and we're anticipating the resolution at several larger ones during the current quarter, which will move us closer to our historic non-performing asset ratios.We have also seen improved payment performance on our loan portfolio as loans 30 days or more past due dropped from $19.7 million to 1.07% at March 31, 2019 to just $11.6 million or 0.60% at June 30.

Our loan pipeline for loan speed funded in 90 days totaled $73 million, which is similar to both last quarter and a prior fiscal year end.

The pipeline is diverse in nature is similar to our existing portfolio based.Based on our pipeline, seasonality of our agricultural portfolio, the recent drop in treasury rates, some anticipate reductions and loans required in the Gideon acquisition and a reduction in loan demand, we anticipate our loan portfolio to grow slightly below historical averages.

Pricing pressure to the marketplace have increased with recent drop offs in loans demand and the drop in interest rates.Due to recent softening and loan demands, the interest rate outlook and again some of the acquire reductions and acquired loan balances, we're expecting slower loan growth for the fiscal year in the 5% to 7% range.

Deposit growth also slowed to approximately $20 million during the fourth quarter of our fiscal year bringing deposit growth for the year to $103 million excluding the Gideon acquisition and brokered funding.Non-deposit -- non-maturity deposits grew $32 million or approximately 3% with $25 million occurring during the June quarter.

Our internal goal for non-maturity growth was 6% to 8%, but we fell below this target primarily due to increased and continued migration of deposits from non-maturity accounts and succeeding.

This migration as well as our marketing efforts let to greater than anticipated CD growth, which exceeded historical growth rates.For the fiscal year CDs grew by $71 million or 13% with $7 million occurring in the June quarter.

We're especially pleased with the deposit growth during the second half of the fiscal year when deposits grew by $94 million. Core deposit growth continues to be challenging or likely continue to be so due to aggressive competition from both banks and investment companies.

We expect sinking deposit growth and both non-maturity and CDs for the fiscal 2020 years. We are projecting non-maturity and CD growth of 5% to 7%.We announce the acquisition of First Commercial Bank on June 12th of last year we completed the acquisition on November 21 and completed the data conversion December 7.

Today, the transitions went well and anticipated cost savings have been achieved. Overall, we're pleased with the acquisition and the loan and deposit retention. We have looked at a number of potential partners over the last quarter and submitted several bits of both rural and urban areas.The price has been quite competitive.

We'll continue to evaluate potential activity in our markets where nearby markets where we believe our business model will perform well and offered opportunities and profitably grow our franchise and we'll look for acquisitions that offer good core deposit bases to provide for long-term growth.We will continue to target companies in the $250 million to $500 million range that will consider smaller or larger companies depending upon their strategic benefit for us both financially and geographic.

We're committed to being patient and will not say steel. We announced the stock repurchase plan for 450,000 shares of our stock in November of 2018.During the last quarter, we repurchased 35,351 shares of our stock.

The Company continues to look at the market value of our stocks compare to evaluation metrics for other stocks in our industry and peers in our region.

We will continue to evaluate the potential use of capital to stock to repurchases versus other options to deploy capital and provide for long-term shareholder returns.Of note, we also did adopt 10b5-1 plan during the term quiet period and repurchased approximately 10,000 shares under the plan through June 30, 2019.That concludes my remarks..

Okay, Ben, at this time, we like to take any questions. So if you would remind our listeners how to two questions..

Okay, thank you. [Operator Instructions] Okay, our first question comes from Andrew Liesch of Sandler O'Neill. Please go ahead..

Can you just give a little outlook on how you think the margins going to perform from here with the expectation of the fed cutting rates next week?.

Andrew, we’re, we know that we’ll have loans that we can identify re-price. We don't know what that is what will happen on the funding side. We’ve already seen some reduction and competition for time deposit.

So, we still have time deposits that are rolling over about literally a year or more older and would originally then priced the fair amount lower.Also to achieve some of our deposit growth over the last six months, we've made some short, rather short-term commitments on rate, but that will take a little bit of time to roll through as well before we can make any adjustments on that pricing.

So realistically, we would expect it to provide some pressures on the margin over the medium term, but probably not that significant, you know, six months or so..

Okay, so it sounds like the deposit cost might, might peak here and you're going to be late this quarter or some points in October?.

Yes, that's probably little bit we get..

Okay, then just on the -- just on the provision here. It seems like you guys are trying to get a handle on credit and working out some of the loans acquired from Gideon, but if loan growth going to be a little bit slower -- shouldn’t and with working out some non-performers.

So the provisions also be, maybe lower than you've historically provided kind of something similar that you did here in the fourth quarter?.

So thinking through that we, if we see loan growth come in lower than what it otherwise would, yes, we would expect provision to be less everything else equal.

We do have dollars that have been acquired, and are still subject for value accounting, that has those dollars kind are replaced by organic production even renewals or something customers, we have to go ahead and make it allows for revision at that point on those dollars. So, we don't want to we don't want to give you a number to guide forward on it.

But assuming charge-offs remain low we would expect that, the provision would be relatively consistently low..

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

Hi, Greg and Matt. Thanks for the question. Hey, so you've referenced Greg in your prepared remarks about the drop in loan demand.

I was wondering if you could give us an overview maybe if there's any certain categories that may be driving it, and why you think that is?.

We're saying a lot --we're having a lot less inquiries, particularly in the commercial real estate space, where we're just not having the levels of interest that we had before. We have less loans that are in the CRE pipelines.

Our residential activity is actually been an increasing, but more where we will learn dollars in more of the commercial real estate commercial arena. And we're just not having the level of demand that we had in prior period..

Okay. And then with the outlook for loan growth slowing and I know you mentioned that you established a 10b5-1 plan this quarter.

Is it fair to assume that if that remains the case that you may be more active with the repurchases like you had started this last quarter?.

In the prior two quarters, when we had a stock repurchase plan, we hadn't repurchased any shares. We're started repurchasing shares this quarter. And, we're going to continue to evaluate the best uses of our capital.

And our capital ratios have been growing, and we're definitely going to be running our evaluations on where and what level of stock repurchases may be appropriate..

Okay, thanks. And then I was hoping I really appreciated the overview on ag that you gave in the prepared remarks. I was hoping, do you have where your ag portfolio is now at 630. And I had read about -- and I think you alluded to it in your prepared remarks maybe some increased flooding in Missouri area it would be interested to see.

How if that's directly been impacting your customers, and I think you referenced 90% had been planted, if the expectation is for the harvest to kind of lower. I know, you had said there's less priority this quarter, but any color would be really helpful..

We really have not had too much problem with flooding for most of our market area.

We did have some areas where that 90% figure I referenced, that 10% is largely some ground in the Mississippi river bottom that never was planted to begin with, and never got dry enough to plant it, so just wasn't planted.So really as far as flooding, we've had very little of any of that, there's areas where yields might have been hampered by water being over a very short period of time, that really flooding, yes, had been there severe in our area as a lot of other parts of the state of Missouri.Does that answer enough for what you're looking for?.

Yes. No, that's helpful. And do you the dollar amount of ag loans as 6/30? I think you had referenced how much it was up, but I don't have the quarter-over-quarter in front of me..

I think, Greg had referenced the -- probably the growth for the year..

Okay. Yes..

But the growth for the quarter would have been probably in the $10 million range..

Yes. It is $10 million or $11 million..

So where the loan balances -- ag loan balances stand?.

Including the real estate portion of it, probably 270-ish..

All right, that's helpful. Thank you. And....

Ag real estate was 182 and ag operating lines is $96 million..

Thank you so much.

Maybe last one you referenced that there is a $200,000 of non-core fees this quarter, what was that?.

The non-core purchase mortgage servicing..

Okay..

So for the prior quarter, is that what you're asking?.

Okay. Maybe I misunderstood. I thought you had said $200,000 this quarter, but perhaps it was higher quarter..

If I did, I misspoke. It was in the prior quarter..

Got you. Okay. Thanks..

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

Okay. Thank you, Ben, and thank you to everyone for participating. We appreciate your interest. And we'll speak again in a quarter. Have a good day..

Thank you, all..

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect..