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Edited Transcript of SMBC earnings conference call or presentation 23-Jul-19 8:30pm GMT

Q4 2019 Southern Missouri Bancorp Inc Earnings Call

POPLAR BLUFF Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Southern Missouri Bancorp Inc earnings conference call or presentation Tuesday, July 23, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Greg A. Steffens

Southern Missouri Bancorp, Inc. - President, CEO & Director

* Matthew T. Funke

Southern Missouri Bancorp, Inc. - Executive VP & CFO

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Conference Call Participants

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* Andrew Brian Liesch

Sandler O'Neill + Partners, L.P., Research Division - MD

* Kelly Ann Motta

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

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Presentation

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Operator [1]

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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 Matt Funke. Please go ahead.

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Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [2]

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Thank you, Ben, and good afternoon, everyone. This is Matt Funke, CFO of 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 is up $0.18 from the $0.63 diluted that we earned in the June 2018 quarter. For the full fiscal year, these preliminary earnings showed $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 assumed deposit 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 the Gideon Bancshares acquisition.

So on what we see as a core basis then, our margin was up by about 1 basis point comparing to June 2019 quarter to the June 2018 quarter. Our core asset yield was up 43 basis points, roughly equal to the increase in our core cost of deposits, but our total core cost of funds is up just slight at 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 had 13 basis points of benefit from discount accretion, this would indicate that our core margin was up 5 basis points. However, if we take into account the number of days in the quarter, the impact on that measurements, because we figure our annualized net interest margin simply by taking our quarterly figure and multiplying by 4, we think that methodology provides a lift of a 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 at closer to 1 basis point.

Now on interest income as a percent of average assets annualized was 68 basis points, which is 8 basis points lower than the same quarter a year ago, and it's down 4 basis points from the linked March quarter. In the current quarter, we had no gains on the sale of AFS securities as compared to gains of $244,000 in the linked quarter and $43,000 in the same quarter 1 year ago.

Other noncore items in the linked quarter totaled a little more than $200,000. So compared to the linked quarter, we'd say our core noninterest income 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 a swing from a positive adjustment to the fair value of our mortgage servicing rights at the prior year-end to a negative adjustment this year.

Noninterest expense was up 13.3% compared to the same quarter a year ago and down 3.1% as compared to the linked quarter. In the same quarter a year ago, we had $149,000 in mergers and acquisition 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 recovery in the same quarter a year ago of $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, noninterest expense is down 10 basis points from both the linked quarter and the same quarter a year ago at 2.32%. But if you exclude M&A and other nonrecurring expenses, intangible amortization, provision for off-balance-sheet credit exposure, we would calculate that our operating noninterest expense as a percentage of average assets 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 rate was little changed at 19.7%. A year ago in the June quarter following the December 2017 passage of the 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 were 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. The figures over the last 6 months are very similar in dollar terms to our results from January through June a year ago, though we saw a little more of a seasonal tilt in the growth towards the June quarter a year ago. Available-for-sale securities increased just a bit since March 31 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 loan securities and cash equivalent growth. For the full fiscal year, total assets were up about -- sorry, about $328 million attributable in large part to the Gideon acquisition, which did include $218 million in total assets, although we liquidated a good amount of their securities as we noted on last quarter's call. Gross loans were up almost $285 million for the fiscal year, with $144 million of that attributable to balances acquired from Gideon. So the remaining $141 million in organic growth could 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 a core basis, we were happy with that result. And though it's down from the core March growth pace, it's in line with what we typically expect our drop-off in deposit growth could 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 brokered growth. Excluding brokered deposits and the acquisition, about 70% of our growth came from time deposits, growing at a rate of just under 14%; nonmaturity deposits, excluding brokered funding; and the acquisition grew at just over a 3% rate. A lot of that tilt towards time deposits is the result of our depositors migrating from nonmaturity funding into CDs, taking advantage of higher rates available during the fiscal year. Combined between the 2, we booked core deposit growth at a little better than 6.5% from 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 reduction 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%. Nonperforming loans dropped slightly this quarter end, down almost $1.7 million or about 10 basis points as a percentage of total loans, and they stand at 1.13%, not quite double our prior year-end figure following the Gideon acquisition.

Nonperforming assets at quarter end were $24.8 million, down almost as much as our NPLs. And as a percentage of total assets, NPAs are 1.12%, down from 1.21% at March 31 and up from 69 basis points at June 30 1 year ago.

The bank's credit management team continued to make progress with acquired relationships to improve delinquencies, and we expect that, that will soon translate to some more significant improvement in nonperforming loan and asset figures.

Net charge-offs for the quarter were 2 basis points annualized. That's unchanged from the December and March quarters and is equal to the June quarter a year ago. With loan growth a little changed from the March quarter, our provision increased slightly to $546,000 as compared to $491,000 in the linked 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-month basis, our provision to average loans in the last 4 quarters is at 12 basis points, and our charge-off to average loans were at 2 basis points. A year ago, those figures would have been 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 to 1.07% at June 30, 2019, as compared to 1.05% at March 31. A year ago, before the Gideon acquisition, the ALLL was 1.15% on the gross loan. Acquired loans are subject to fair value adjustment at the time of acquisition, and we do not hold an allowance 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 concluded my prepared remarks, and I'll introduce our CEO, Greg Steffens.

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Greg A. Steffens, Southern Missouri Bancorp, Inc. - President, CEO & Director [3]

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Thank you, Matt. For the quarter, we're pleased with loan growth for both the fiscal year and the quarter as it exceeded our initial expectations. Exclusive of the Gideon acquisition, organic loan growth for the fiscal year totaled $141 million or nearly 9%, with growth of $23 million in the June quarter. We originally projected organic loan growth for the year to come in at 6% to 8%. We revised our estimates to 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 nonresidential, nonowner-occupied real estate; $61 million in commercial loans; $33 million in multifamily; $32 million in owner-occupied, nonresidential real estate; $22 million in ag real estate; and $11 million in 1-4 family.

With this growth and changes in our loan portfolio, our CRE concentration at the holding company level moved from 233% at 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, for the year.

We're also pleased with the volume of our originations, which totaled $124 million during the quarter and $606 million for the fiscal year, which is up from $550 million in the prior year.

Now I'd like to provide an agricultural update. Agricultural real estate balances remained 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 year started slowly due to wet and cool weather conditions and has remained wet for most of the year, leaving our anticipated harvest dates to be approximately 1 month later than normal. Given these delays, it's hard to assess where we are in anticipated yields, and we are just beginning to make our farm inspections at the present time and to ascertain how much of the anticipated crop has been booked by our customers.

Generally, our farmers were able to plant approximately 90% of their acreage with the remainder not planted due to weather conditions. But there was also some transition from their anticipated crop mix to include more soybeans due to planting delays and market prices. Our farmers' financial performance this year will be largely determined by upcoming weather, crop prices and when 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 nonperforming loans. Our nonperforming loan balances have been elevated from historical levels since the Gideon acquisition. We've been diligently working on resolving these credits, and we are anticipating the resolution of several larger ones during the current quarter, which will move us closer to our historic nonperforming asset ratios. We have also seen improved payment performance on our loan portfolio as well as 30 days or more past due dropped from $19.7 million or 1.07% at March 31, 2019, to just $11.6 million or 0.62% at June 30.

Our loan pipeline for loans to be funded in 90 days totaled $73 million, which is similar to both last quarter and the prior fiscal year-end. The pipeline is diverse in nature and similar to our existing portfolio mix.

Based on our pipeline and seasonality of our agricultural portfolio, the recent drop in treasury rates, some anticipated reductions in loans acquired in the Gideon acquisition and a reduction in loan demand, we anticipate our loan portfolio to grow slightly below historical averages. Pricing pressures in the marketplace have increased with the recent drop-off in loan demand and the drop in interest rates. Due to recent softening in loan demand, the interest rate outlook and, again, some of the acquired reductions in 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. Nondeposit -- nonmaturity deposits grew $32 million or approximately 3%, with $25 million occurring during the June quarter. Our internal goal for nonmaturity growth was 6% to 8%, but we fell below this target primarily due to increased in continued migration of deposits from nonmaturity accounts into CDs. This migration as well as our marketing efforts led 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 deposit growth during the second half of the fiscal year when deposits grew by $94 million. Core deposit growth continues to be challenging and will likely continue to be so due to aggressive competition from both banks and investment companies. We expect continued deposit growth in both nonmaturity and CDs for the fiscal 2020 year. We are projecting nonmaturity and CD growth of 5% to 7%.

We announced the acquisition of First Commercial Bank June 12 of last year. We completed the acquisition on November 21 and completed the data conversion December 7. To date, 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 bids in both rural and urban areas, though price has been quite competitive. We'll continue to evaluate potential activity in our markets or in nearby markets where we believe our business model will perform well and offer the opportunity to 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, but we'll consider smaller or larger companies depending upon the strategic benefit for us both financially and geographically. We're committed to being patient and will not chase deals.

We announced a stock repurchase plan for 450,000 shares of our stock in November of 2019. During the last quarter, we repurchased 35,351 shares of our stock. The company continues to look at the market value of our stock compared to valuation metrics for other stocks in our industry and peers in our region. We will continue to evaluate the potential use of capital through stock repurchases versus other options to deploy capital and provide for long-term shareholder returns. Of note, we also did adopted the 10b5-1 plan during the current quiet period and repurchased approximately 10,000 shares under the plan through June 30, 2019.

That concludes my remarks.

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Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [4]

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Okay. Ben, at this time, we'd like to take any questions, so if you would remind our listeners how to queue for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Andrew Liesch of Sandler O'Neill.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [2]

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Could you just give a little outlook on how you think the margin is going to perform from here with the expectation of the Fed cutting rates next week?

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Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [3]

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Andrew, we're -- we know that we'll have loans that we can identify and reprice. We don't know exactly what will happen on the funding side. We've already seen some reduction in competition for time deposits, but we still have time deposits that are rolling over literally a year or more older and was originally been priced a fair amount lower.

Also, to achieve some of our deposit growth over the last 6 months, we've made some rather short-term commitments on rates, but that will take a little bit of time to roll through as well before we can make any adjustments on that price.

And so realistically, we would expect it to provide some pressure on the margin over the medium term but probably not that significant beyond 6 months or so.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [4]

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Okay. So it sounds like the deposit cost might peak here in your -- mid, late this quarter or at some point in October?

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Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [5]

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Yes, that's probably a really good guess.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [6]

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Okay. Then 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 is going to be a little bit slower, should -- and with working out the nonperformers, should the provisions also be maybe lower than you've historically provided, kind of similar to what you did here in the fourth quarter?

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Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [7]

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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 to fair value accounting that as those dollars kind of are replaced by organic production, even renewal with those same customers, we have to go ahead and make an allowance provision at that point on those dollars. So 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.

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Operator [8]

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(Operator Instructions) Our next question comes from Kelly Motta with KBW.

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [9]

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So you 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.

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Greg A. Steffens, Southern Missouri Bancorp, Inc. - President, CEO & Director [10]

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We're seeing 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 has actually been increasing but more -- where we loan our dollars is in more of the commercial real estate, commercial arena, and we're just not having the level of demand that we've had in prior periods.

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [11]

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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?

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Greg A. Steffens, Southern Missouri Bancorp, Inc. - President, CEO & Director [12]

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Yes. On the prior 2 quarters, when we had a stock repurchase plan, we hadn't repurchased any shares. We 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.

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [13]

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Okay. 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 6/30? And I had read about, and I think you alluded to it in your prepared remarks, maybe some increased flooding in Missouri area. I would be interested to see how -- has that directly been impacting your customers. And I think you referenced 90% had been planted. If the expectation is for the harvest to come in lower, I know you had said there's less clarity this quarter, but any color would be really helpful.

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Greg A. Steffens, Southern Missouri Bancorp, Inc. - President, CEO & Director [14]

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We really have not had too much problem with flooding for most of our market areas. 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. It never got dry enough to plant, so it 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. But really flooding [nets] have been very superior in our area as well as other parts of the state of Missouri. Does that answer enough of what you're looking for?

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [15]

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

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Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [16]

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I think Greg had referenced the -- probably the growth for the year, but the quarter would have been probably in the $10 million range.

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Greg A. Steffens, Southern Missouri Bancorp, Inc. - President, CEO & Director [17]

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Yes. It's in the $11 million.

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [18]

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

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Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [19]

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Including the real estate portion of it, probably 2 70-ish.

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Greg A. Steffens, Southern Missouri Bancorp, Inc. - President, CEO & Director [20]

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Ag real estate was 1 82 and ag operating line is $96 million.

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [21]

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When you referenced that there was that $200,000 of noncore fees this quarter, what was that?

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Greg A. Steffens, Southern Missouri Bancorp, Inc. - President, CEO & Director [22]

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The noncore purchased mortgage services. So for the prior quarter, is that what you're asking?

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [23]

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

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Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [24]

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

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Operator [25]

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

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Matthew T. Funke, Southern Missouri Bancorp, Inc. - Executive VP & CFO [26]

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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.

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Greg A. Steffens, Southern Missouri Bancorp, Inc. - President, CEO & Director [27]

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Thank you all.

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Operator [28]

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