Good day, and welcome to the Southern Missouri Bancorp Fourth 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. Sir, please go ahead.

Thank you very much, 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, which was dated Monday, July 23, 2018, and to take your questions. We may make certain forward-looking statements during today's call, and we'd refer you to our cautionary statement regarding forward-looking statements contained in the press release. So thanks for joining us today, everyone. I'll start off by reviewing the preliminary results highlighted in the quarterly earnings release. Again, the June quarter is the fourth quarter of our 2018 fiscal year. We earned $0.63 diluted in the June quarter. That is up $0.03 from the linked March quarter, and it's up $0.14 from the $0.49 diluted that we earned in the June quarter one year ago. The current quarter included a relatively smaller amount of M&A expenses. Partially offsetting those M&A expenses was a small gain on available-for-sale securities. In the linked March quarter, we saw larger amount of M&A expense, but it was offset by both larger available for sale securities gains and by gains on sale of fixed assets. And the March quarter also included a higher level of discount accretion. The June quarter a year ago included a larger amount of M&A expense also, and it also included a fixed asset - excuse me, a fixed asset impairment charge. And we also saw in that quarter additional discount accretion on the acquired loan books compared to the current period. For the full fiscal year, we preliminary reported earnings of $2.39 per diluted share, up from $2.07 a year ago. That's an increase of $0.32 or 15.5%. That improvement is attributable to a good year-over-year increase in earning assets, the result of…

All right. Well, thank you, Matt. I did make it back, and so hopefully I'll stay here. I'd like to talk a little bit about loans and deposits and then M&A. Net loan growth for the June quarter totaled $41 million. This growth was slightly below our internal expectations, but we're still pleased with the amount of growth we had for the quarter. For the fiscal year, we've grown our loan balances $168 million or 12%, which did include the Marshfield acquisition. Excluding the acquisition, the gross loan portfolio increased by approximately $109 million or 7.8%, which fell just slightly below our internal growth targets of 8% to 10%. Loan growth was negatively impacted over the year by higher-than-anticipated prepayments in both quarter and the fiscal year. Increased prepayments have been attributed to a combination of factors, which have included customers selling assets, customers seeking more aggressively priced longer-term fixed rate loans or customers obtaining financing elsewhere who did not meet our underwriting standards as part of the acquired loan balances that we've had. Of those acquired loan balances, they have declined by approximately $48 million in this fiscal year. We also have noted contributing to the prepayments was an increased number of sales of properties where we have demands as increases in capitalization rates in the marketplace have lagged increases of market interest rates, causing some of what we feel to be our more astute investors to sell some of their properties. Overall, we are pleased with the volume of our loan originations, which had totaled $550 million for this fiscal year, which is up 11% from originations to the prior year. Overall, our loan portfolio mix has not changed significantly year-over-year, but we have noted a decline in our CRE concentrations, which had dropped from 272% of capital…

We’ll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Andrew Liesch with Sandler O'Neill. Please go ahead.

Guys, a couple of questions for me. First is around the margin to your comments on the deposit growth being slower and then with the - to the increase in borrowing this quarter that maybe - or that funding costs are likely going to rise. Are you going to be able to offset that with stronger loan yields? Or should we start to see the core margin move lower here this quarter?

Greg, do you want to take that on loan pricing?

Loan pricing, I believe that we'll be able to do a little better on some of the loan pricing than what we've done to loan originations over the last quarter as we are seeing more movement to more fixed rate financing and things that are going to provide a higher overall yield to us than where we were pricing last quarter.

On the funding side, Andrew, I'd say we definitely saw a little bit of pickup in our betas, and I'm seeing that in our other releases that we're watching this quarter as well. We'll have to see what happens here if that was kind of a onetime bump up in what market competition was pricing deposits at or if we should expect to see that continue to be a little more aggressive going forward on the funding side.

Okay. And then just on the -- I know it's small, but the non-interest income about $3.5 million backing up the securities gains. Is that a good number to use going forward? Or is there anything that might be onetime in there? Or is this bolstered by some mortgage banking?

We do have a little bit of a benefit in the current quarter on just revaluation annually of the mortgage servicing rights, but it's not terribly significant. And we've -- we're really seeing the improvement primarily on the debit card income and the NSF charges.

Okay. That was my questions. Thanks.

Okay.

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

Hi, Greg and Matt. Can you hear me?

We can hear you.

Yes.

Excellent. So turning to expenses. Expense control looked really good this quarter. X the onetime charges, it looks like they declined about $350,000 quarter-over-quarter, which included that full quarter of SMB Marshfield. I was wondering, excluding the recovery of the provision of unfunded credits, if that's a good base to build off of from here. And kind of if you could refresh us on kind of what your targets are in terms of efficiency and/or expenses to average assets for 2019?

It's probably a little bit more favorable than what we'd expect to be able to continue on. It's our fiscal year-end, we're truing up accruals and things like that. And I would say things on -- we had things falling both ways. But on that, probably a little bit of a benefit to us. Overall, we look at our core efficiency. We'd like to get down as low as 55%. I don't know if that's achievable immediately. I've got it pegged at about 57% over this last fiscal year. And somewhere in that range, we'd be happy with 55% to 57%.

Great. And then I think on the last call, you said that headcount was running a little low on the senior side. And I know you put out a release that you hired a CLO. Are you at fully staffed levels at this point in your Q4 run rate?

We do have vacancies that we will anticipate to generally continue, some we'd like to fill a little faster than others. But no senior positions we're anticipated filling in the short-term that will have a significant impact all at once.

Okay, great. And then maybe turning to credit with the tick-up in NPLs. You had the higher provisions on that, but you really haven't had any net charge-offs really so far in this last year. So how should we be thinking about provisioning levels and credit? And with what you're seeing with the migration of credits to non-accrual, is there anything systemic there that we should be thinking about?

We really feel pretty good about our credit quality, which is one of the relationships that we have out there that contributed to the NPAs. It's something that has been out there for a long period of time from an acquired institution from a lot of years ago and it just finally reached its conclusion. But as far as the overall credit quality of the organization, we don't see really any downticks in it. We're just reaching the resolution of several credits that had been out there for a long period of time, but we're not seeing indications of any real credit stress in the remaining parts of our portfolio.

Kelly, within the loan footnote, we do have to identify specific reserves set aside on impaired relationships, and we did see one of those relationships that went to nonperforming status in this last year that we had set aside some dollars on through the allowance. But two of them were not anticipating any loss, even though they are nonperforming.

Okay. And then maybe finally, on capital. You touched on M&A there at the end, Greg. So post Gideon, can you remind me where you kind of fall out on TCE, and kind of the room you have within your target. Are you still targeting kind of an 8% to 9% TCE ratio?

We're expecting the acquisition to move us down by about 100 basis points on TCE with the 50% cash component and the intangible we would create with the acquisition, but that would still be towards the high end of that 8% to 9% range that you mentioned.

Great. I’ll step back. Thank you.

Thank you.

And showing no further questions, this concludes our question-and-answer session. I'd like to turn the conference back over to Matt Funke for any closing remarks.

Okay. Thank you, again. I appreciate everybody's interest in the call, and we'll talk to you again in three months.

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