Matt Funke - Chief Financial Officer Greg Steffens - Chief Executive Officer.

Andrew Liesch - Sandler O'Neill.

Good afternoon and welcome to the Southern Missouri Bancorp Second Quarter Earnings Conference Call. All participants will be in listen-only mode (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions (Operator Instructions). Please note that this event is being recorded.

I would now like to turn the conference over to Matt Funke, Chief Financial Officer. Please go ahead, sir..

Thank you, Denise and good afternoon everyone. This is Matt Funke, CFO at Southern Missouri. The purpose of the call is to review the information and data we presented in our quarterly earnings release dated Monday January, 26, 2015 and to take your questions.

We might make certain forward-looking statements here in today’s call when we refer you to our cautionary statement regarding forward-looking statements contained in the press release.

To start off, I want to highlight some of our financial results from the earnings release for our December quarter, which is the second quarter of our 2015 fiscal year.

We earned $0.89 diluted in the quarter that figure is unchanged from the first quarter of fiscal 2015, our linked quarter and it’s up $0.16 from the $0.73 diluted that we earned in the prior year second quarter. For the fiscal year-to-date we’ve earned $1.78 diluted, up from $1.47 for the first six months of the prior fiscal year.

In the current quarter the amount of net interest income that resulted from fair value discount accretion on loans and some fair value premium amortization on time deposits acquired with the First Southern Bank acquisition in 2010 amounted to $67,000 compared to $168,000 in the same period of last year.

In the first six months of fiscal 2015, that acquisition provided 168,000 in fair value accretion compared to 372,000 in the first six months of last year.

Also for this quarter and fiscal year-to-date, we’ve recognized a benefit from the accretion of fair value discount accretion on loans and premium on time deposits from our Peoples Bank acquisition, which closed in August of this fiscal year. That amounted to 703,000 in the current quarter and 1.1 million in the six months year-to-date.

And obviously it was zero in the prior year’s period.

So we’re dwindling down on the impact of that accretion from the First Southern acquisition as the acquired loan balances approach zero and Peoples Bank stepped up this quarter as we had that institution for a full three months this quarter where we have them for a little less than two months in the first quarter of this fiscal year.

So going forward we would expect that Peoples’ discount accretion to begin to diminish also, but it will remain significant for the next several quarters. Margin in the second quarter was 4.03% of which 25 basis points was the result of the fair value discount accretion mentioned previously.

Year ago in the second quarter our margin was 3.83, of which 7 basis points resulted from that same fair value discount accretion. So on what we look at as a core basis then our margin for the quarter was up 2 basis points with our core asset yield down 10 basis points and our core cost of fund down 15.

For the six months year-to-date margin was 3.98, of which 22 basis points was attributable to that fair value discount accretion. And a year ago for the six months period margin was 3.7 with 10 basis points coming from the fair value discount accretion.

And so then on what we look at as a core basis for the six months period core margin was down 1 basis point. Moving on to non-interest income, outside of securities gains and losses, we remain towards the top end of the range.

We’ve seen over the last couple of fiscal years as a percent of asset we saw a good quarter with NFS charges, bank card interchange and gains on secondary market loan sale and of course in dollar terms the inclusion of Peoples Bank’s result for the full three months contribution to that.

Non-interest expense ticked up marginally for the quarter on core basis M&A charges at 359,000 were up compared to the linked quarter, but down compared to the year ago quarter when we had our bankers fair transaction closing.

During the quarter of course we completed the bank merger of Peoples Bank of the Ozarks which followed the August acquisition of the parent company. Included in that 359,000 of course was legal and data system conversion charges, also a smaller amount of severance cost.

For the positions that were eliminated most personnel did not leave until very late in the calendar quarter. So we did not really see much in the way of any personal efficiency until this next quarter. Moving on to non-performing assets, we consider those to be foreclosed, reposes property non-accrual loans and any loans 90 days or more past due.

Those numbers ticked up with the migration of the classified loans that we had identified as impaired during our fiscal 2011 acquisition of First Southern Bank. We noted in the press release that that relationship had carrying value of 2 million.

Peoples Bank, their acquisition in the first quarter of this fiscal year had added 1.7 million in non-performing loan and a $1 million in foreclose real estate. We liquidated a few smaller foreclosed property balances with these larger items contributing were now 8.8 million, compared to 4.4 million at the beginning of the fiscal year.

So non-performing assets were 68 basis points as a percentage of total asset increasing from 43 basis points at the beginning of the fiscal year and from 52 basis point at the end of the prior quarter.

Non-performing loans are now 46 basis points at the percentage of total loans that’s compared to 17 basis points at the beginning of the fiscal year and a 29 basis points at September 30, but we’ve had the increase at September 30 attributable to the acquisition and then the increase here at December 31st attributable to this one long relationship with the non-accrual status.

On a related point we talked in the prior quarter’s call about the impact of purchase accounting under which we acquire loans and fair value discount rather than with an allowance for loan losses and how those loans mature, has it replace to renewals or origination, part of our portfolio would migrate from being account for under that purchase accounting methodology to our traditional allowance for loan losses methodology.

As that’s begun, the allowance as a percentage of our gross loan increased to 1.07% at December 31st, down from 1.14% at June 30, but from 98 basis points at September 30, 2014. Our provision in current period were 862,000 compared to 295,000 in the same quarter of last year.

Just a few balance sheet highlights, we’ve grown assets by 275 million in the fiscal year-to-date of which 215 million is in the loan portfolio and of course the biggest part of that is the result of the Peoples acquisition deposit 277 million, again with Peoples being the primary driver of that, but also benefitting from some seasonal inflows with our public unit that generally hold more cash in the winter and spring, while our farmers on the loan side of drawn less on their operating line.

Investment portfolio is up for the year, but down since September 30, as we took the opportunity with the bond rally, move a few position, pay downs some overnight borrowing, cash position -- cash holding some of which are time deposits are little bit higher after the acquisition and overnight borrowings down seasonal inflows.

Overall to wrap up, we were reasonable pleased with quarter’s numbers. We feel like we’re off to a good start on integrating the Peoples franchise and we look forward to concentrating on efficiency in the coming quarters. With that I want to introduce our CEO, Greg Steffens to talk about some of our strategic initiatives for the company..

Hi. Thank you, Matt. Just wanted to point on related to non-performing asset levels, we’re anticipating that number to gradually decline over the next six months to the year, we’re not anticipating immediate improvement but it should decline as the year moves on as we work out some of the non-performing assets we acquired.

And then speaking of the growth that we had over the quarter, over the six months, again we’ve had 250 million in loan growth, 190 million of which came from Peoples Bank that we acquired and then we’ve had an additional 30 million of internally generated growth of which -- then we’ve had 5 million of loans from Peoples that has paid off.

Our internal loan growth has been spread pretty evenly between our Southeast Missouri market and our Springfield market, where our consolidate is basically flat to the last three and six months. Our internal loan growth has been spread fairly evenly between one to four family, multi-family, commercial real estate, land and C&I loans.

So it's been a diverse amount of different types of collateral that we’ve experienced our growth with. And then looking at our Ag balances over the last quarter, Ag balances are down $11 million and that’s part of the normal seasonality of our Ag portfolio.

However, if we look at our Ag balances right now they are 16 million higher than they were one-year ago and part of that increase in comparison for one-year over the next is due to some customers delaying the marketing of their crop as crop prices have come down and they forward contract it for later in the year.

And then we also had an increase in several new lending relationships that they are in our Ag portfolio, but they are more in the brining elevators and some of that type of business to where they actually increase their balances at this time of year.

As we’re looking at our Ag results for 2014s calendar year, we see that by and large almost all of our farmers will payout and we’re not expecting any credit issues arising from our Ag portfolio this year.

However, our underwriting for this upcoming year will be a lot more difficult as the agricultural prices have come down and the cost of inputs have not come down as quickly, so a lot of our farmers are going to be a little more squeeze on our underwriting this upcoming year.

We do anticipate that the -- there will be some relief provided by the drop in energy prices and a lot of our agricultural customers are very reliant on the cost of energy and so they will be realizing some benefits from that. And looking at our loan pipeline, our loan pipeline is very strong right now.

It is up $15 million from where we were at the last quarter and it’s as high as what it has been for this time of the year in the history that’s been with the bank. And the composition of it includes a lot more C&I than what we’ve traditionally seen. And speaking of loan pricing, loan pricing is pretty similar to where it was at the last quarter.

Competition remains quite competitive, but not really a lot of change from where we were last quarter. Our loan to deposit ratios have improved, but we do anticipate that that with the deposit inflows we had towards the end of the calendar year that our loan to deposit ratios will move back higher again.

And our secondary market penetration has improved and we’re continuing to generate better fee income, while the secondary market lending in sales as we’re 316,000 this year versus 225,000 last year. And speaking of M&A activity, our Peoples’ Bank transaction again closed in early August and we emerged into Southern Bank on December 5th.

And again we moved a 190 million in loans onto our balance sheet, which now total 185 million. And we moved 222 million in deposits, which now total 216 million with the drop mostly being more of a seasonal nature. Cost savings, we are now accomplishing what we have projected.

We’re going to realize a little bit more in savings faster than what we had anticipated. We had some integration issues with initial conversion in December, but those issues are really wound down and we’re very satisfied with how the acquisition has went thus far.

We’re going to spend a lot of our time this next quarter basically tweaking operations and trying to bring out more of the efficiencies that we’re anticipating from the transaction and we’re anticipating limited loan growth from the Peoples’ transaction going forward or for the next three months, six months as we’re integrating them into our operations and then we’re hopeful that we will generate some core deposit growth.

The acquisition pushed our internal systems, but I think that things have really improved now and we’re being well suited going forward. A brief update on our Citizens Acquisition which we closed in February ‘14 and merged in April, our integration is basically done and our cost savings have been achieved.

We did generate good deposit growth for this fiscal year-to-date at almost $2 million so far, while loan totaled to down about $1 million. Loan growth is likely to remain challenged there, but we’re hopeful we’ll be able to continue recent trends on deposits.

And speaking just about M&A activity in general, there continues to be a fair amount of activity in our market area where several banks are being marketed. Nothing’s been that attractive for us and we’ve not pursued any acquisitions at this point.

We are ever mindful of the opportunities that are going to be out there, but right now we’re really concentrating more on integration of what we require. It does seem that the marketplace is remaining competitive on the winning of institutions and that there will continue to be a fair number of acquisitions that occur.

Briefly on fixed assets, our construction of our new headquarters have started and we expect that to be completed in March ‘16. And our Springfield main office building is being built now and we’re anticipating it to open in September. And talking about deposits, our focus continues to be on non-maturity deposits.

We had very good growth this quarter and some of the cyclical republic union money’s coming in towards the end of the year with tax payments. Our legacy offices were up $39 million for the year-to-date and $20 million in this last quarter.

Our growth was used in deposits to pay down some of our overnight borrowings, as our overnight borrowings were reduced substantially. However, we do anticipate some outflows of some of these funds in this next quarter and we’re pleased with our numbers for the year-to-date.

Speaking briefly on capital, our tangible common equity ratio is now 7.85% up from 7.52% at the end of last quarter.

It’s below our internal target range of where we would like to operate and we also have our SBLF funds that reprise January 1, ‘16 from the current 1% to 9%, then we’ll have $20 million of capital that we’ll be anticipating paying off at that time.

And we continue to evaluate our capital structure and evaluate what we are going to do to replace those SBLF funds and one of the things that we are really giving active consideration to is an additional secondary offering or follow on offering of an amount yet to be determined.

That concludes the remarks I have, I would like to turn it over to Matt..

Thank you, Greg and Denise at this time we’d like to take any questions that participants may have..

Very good. Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]. And our first question will come from Andrew Liesch of Sandler O'Neill. Please go ahead..

Coursing on your comments on the provision from earlier, does this mean that you’re going to kind of rebuild it from the [stubble] as some of the purchase accounting declines? Or is that I misheard you?.

Well to some extent that’s required. We look at our allowance each quarter and determine how much needs to be and based on what is in the portfolio and subject to that allowance accounting, but as those dollars grow, everything else equal you’d expect to have to provision more while the purchase accounting loans are going away in June..

I guess how what I’m thinking of it, is this like a similar level for future quarters over 800,000?.

Well that’s hard to say without looking at exactly what charge-offs and loan growth does, but there will be some -- if every dollar that was in the Peoples’ portfolio such as purchase accounting, if we relied that as we would renew or originate new dollars to replace that then we would have to provision additional dollars in order to have an allowance set aside against those loans..

On the non-interest expense side, just backing up things that you talked about that maybe helping, getting to about an $8 million a quarter or so run-rate, is that in the ballpark?.

Well we’re not giving any forward guidance. We do hope to achieve some savings over what our core basis is right now, but I don’t want to give you guidance on it..

I guess the compensation production that’s going to come from the folks that last Peoples’ at the end of the year, I mean just what is the -- do you have like the dollar amount for any old salary that they will a quarterly salary that they will save?.

I don’t have that in front of me Andrew, I’m sorry..

And then my last question, it sounds like some of the agriculture borrowers are holding under the crop to sell maybe later on this quarter maybe even next quarter, does that mean we could see the pay downs that portfolio push out later in this quarter and next quarter?.

I think that the level of pay downs in the Ag portfolio will definitely be pushed out some. That being said, they got a new crop that they are putting in the ground, so pay downs will be pushed out, but the balance is new draws will be happening along the same path as where they were last year..

Got you. So maybe they sell their crop and then just use that cash right away. Okay that covers my questions, thanks so much guys..

And I’m showing no additional questions at this time. This will conclude our question-and-answer session. I would like to turn the conference back over to Matt Funke for any closing remarks..

Thank you Denise and thank everyone for their interest and we’ll talk to you again in three months..

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines..