Matt Funke - CFO Greg Steffens - CEO.

Andrew Liesch - Sandler O'Neill David Cohen - Analyst Derek Ferber - FJ Capital Management.

Welcome to the Southern Missouri Bancorp Third Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Matt Funke. Please go ahead, sir..

Thank you, Dan. Good afternoon everyone this is Matt Funke, CFO, Southern Missouri Bancorp, the purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, April 27, 2015 and to take your question.

We may 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.

First off I want to note some of the highlights of our financial results from the earnings release for our March quarter which is the third quarter of our 2015 fiscal year.

We’re in 44 since diluted in the quarter net figure is down one penny on a split adjusted basis from the second quarter fiscal 2015, the linked quarter and it's up $0.12 from the $0.32 diluted that we earned on a split adjusted basis in the prior year's third quarter.

For the fiscal year to-date we have earned a $1.33 diluted up from a $1.06 for the first nine months of the prior fiscal year both figure is adjusted.

The March quarter is historically is a tough one on the linked quarter comparison for us, will give you a shorter number of days, with seasonality in our loan book and deposit account charges in this time of the year.

In the current quarter the amount of net interest income is opened from fair value discount accretion on loans and fair value premium amortization on time deposits acquired with the First Southern Bank acquisition in 2010 with 69,000 versus a 109,000 in the same period last year and over the first nine months it has totaled 244,000 versus 481,000 last year.

Also for this quarter and fiscal year-to-date we have recognized the benefit from the accretion of fair value discount on loans and fair value premiums amortization on time deposits on our Peoples Bank acquisition which was in August of this fiscal year, that amounted to 558,000 in the current quarter and 1.7 million in the nine months year-to-date with no comparable benefit in the prior year.

Margin in the third quarter was 3.89, of which 21 basis points was the result of that combined fair value discount accretion mentioned previously. In the year ago period margin was 372 of which five basis points resulted from that same fair value discount accretion.

Little bit around in here but on what we view as a core basis the margin for the quarter was up six basis points year-over-year, core asset yield was down six basis points and core cost of fund is down nine basis points. For the nine months margin was 395 with still 21 basis points attributable to fair value discount accretion.

A year ago for the nine month period margin was 381, and eight basis points resulted from the fair value discount accretion and what we look at is the core margin we were down less than one basis points.

Excluding securities, gains and losses, non-interest income declined by two basis points compared to the second quarter in this fiscal year and was up five basis points compared to the same period a year ago, again as a percentage of average assets, we saw a decline from the December quarter and NSF charges and again that seems to be typical for all this time of the year.

Non-interest expense declined from the linked quarter on both the total and core basis, M&A charges were down to just 21,000 in the March compared to 359,000 in the December quarter and in the March quarter a year ago we had both M&A charges and a charge for early termination of our debit card processing contract and those totaled $732,000.

Non-performing assets which we considered to be foreclosed and repossessed property, non-accrual loans and loans 90 days or more past due, those were down slightly from December 31, and total non-performing assets were at 8.7 million compared to 4.4 million at the beginning of the fiscal year, we have talked over the last couple of calls about the impact on the Peoples acquisition and one classified asset that migrated over the last six months to non-performing.

We were 0.66% of total assets, that compared to 0.43% at the beginning of fiscal year and 0.68% at December 31, 2014. Non-performing loans are 0.41% of total loans compared to 0.17% at the beginning of the fiscal year and 0.46% at December 31.

We have mentioned on the last couple of calls the impact of purchase accounting under which we acquire loans at a fair value discount rather than holding an allowance for loan losses and we have mentioned as those loans mature and are replaced through renewal, renewal origination but dollars in our loan portfolio that migrate from being accounted under purchase accounting to allowance methodology.

The allowance as a percentage of our gross loans is 1.11% at March 31, down from 1.14% at June 30, but that’s from 0.98% at September which was the quarter end most immediately following the Peoples acquisition.

Provision for loan loss in the current period was 837,000 versus 253,000 in the same quarter of last year, accounted both for loan growth and those dollars migrating to allowance methodology.

For the fiscal year-to-date we have grown assets by 281 million, 90% of that growth has been to loan portfolio and three quarters of our loan growth is the result of the Peoples acquisition.

Deposits are up 271 million during the March quarter we did see some reversal, with the normal seasonality at the end of the calendar year and the deposit portfolio of primarily with our public unit depositors.

On the loan side some of our ag lending draws have been slower this year due to wet weather, but we anticipate that will come during the June quarter. We have continued to opportunistically move a few securities position with the various rallies in the market and we have reduced our investment portfolio modestly.

Overnight borrowings were lower during the quarter as a result of some of these seasonal factors. Though the wrap-up on the financials we are pleased with the quarter's numbers, again the March quarter is a challenging one and we still showed reasonably strong core profitability.

We feel pretty good about where we’re operationally on the Peoples acquisition, seven or eight months into it. We’re looking forward to wrapping fiscal year and making progress on some of our long term strategic goals and for some discussion about that I will introduce Greg Steffens, our CEO, who will talk about it..

The part of the side [ph] I want to talk about is lending and again I would like to emphasize in our lending that our credit quality remains good, now went over some of our non-performing asset numbers and some of the modest improvement from last quarter and then with our increase being primarily due to the Peoples acquisition.

But overall we’re expecting non-performing assets to gradually improve, and we do not see any deterioration in our legacy portfolio. When we look at loan growth for the year-to-date we’re showing loan growth of $248.5 million of which a 190 million was from the Peoples Bank acquisition.

However, a 190 million in loans acquired from Peoples those balances are now down to a 166 million representing a repayment of 24 million and part of that repayment is due to some loans that migrated to our portfolio but by and large it's just a lot of the loans maybe had a little different underwriting criteria or standards between us and Peoples resulting in some of those loans moving elsewhere.

If we look over the quarter, our loans grew $35 million with majority of that growth occurring in Southeast Missouri which grew 22 million, the Southwest Missouri market grew 7 and then Arkansas market grew by 7 million. So Southeast Missouri led our loan growth for the last quarter.

When I look at the composition of loan growth over the last quarter we had 20 million in growth in C&I that was in non-ag related C&I our C&I portfolio for ag was actually down $10 million and that just reflects the normal paydowns that we have with our ag portfolio.

On the ag portfolio it is 13 million higher than where it was a year ago at this point in time and much of that growth however is due to growth in our customer balances with new customers and some of it's attributed to having a poor agricultural year in 2014 and customers having a worse working capital position when their crop year started.

We completed the analysis of our ag customers for 2014 and overall our farmers had a tough year but they did pay off their loans and, view some of the working capital position but overall they are really in a pretty good position to start this crop year.

Again we have had wet weather so the actual ag balances that have drawn down on their lines for this year is below what we would normally expect at this time. At the present time a lot of farmers are just waiting for conditions to drive so they can get in their fields.

When we’re looking at other components for our growth for the in the last quarter, our construction balances were up $12 million, multi-family balances were up 8 million and our non-residential real estate balances were up another 6 million so that comprised a majority of our growth.

For our fiscal year-to-date we’re up $58 million on a core basis and if we actually excluded the 24 million of loans that paid off in the Peoples Bank acquisition we would be up 82 million. When we look at our loan pipeline, our loan pipeline is down considerably from where we were at 12.31, it's actually down about $30 million from those balances.

That being said our pipeline is very similar to where it was in March of '14 and we’re expecting that significant balance is drawn on our ag lines here in the June quarter. Loan pricing remains competitive; they are very similar to where it was last quarter. There is maybe a small uptick in pricing competition in the Springfield market.

Our loan to deposit ratio has moved to a 100% and we’re anticipating this number to remain high. On a fee income basis just note that our secondary market lending has improved as it is up to 408,000 this year versus 338,000 last year.

In relation to M&A activity, our Peoples Banka acquisition again closed in August and then we merged it into our system in December. As [indiscernible] mentioned was transpired with the loan portfolio of the deposit portfolio of non-maturity deposits since the acquisition there of $1.7 million. Our CD balances are down about 500,000.

Overall our cost savings have exceeded projections and we do have some cost savings that we’re expecting to continue to realize and primarily related to some contracts that are finishing up here in the next several quarters.

Our customer retention has been good and again we’re seeing some deposit growth and we’re seeing a real uptick in that from December to March quarter. And we’re expecting to have real positive results this quarter on our non-maturity deposit growth and our operations continue to smooth out.

When we look at M&A activity overall we were shown 7 or 8 yields in the last quarter.

We actually did not bet on any of the banks that we looked at, for a variety of reasons, pricing expectations of the seller, not quite being the right fit, risk reward and the related transactions all played in each of the potential acquisitions and we did not end up again bidding on any of them but that being said none of those institutions have announced a transactions of any type yet.

We do continue to focus on our internal operations but we’re keeping our eyes open that if the right strategic opportunity comes up that we would like to take advantage of those.

One of the things that we’re also working on with our operations is our acquired facilities are not operating as efficiently as our legacy facilities and that has contributed in some of the deterioration in our efficiency ratios and we’re looking at how we can bring some of those operations in-line with our legacy operations.

In regard to fixed assets the construction of our new company headquarters is underway and we expect it to still be completed in March of 16, and then we also have a new office under construction in Springfield that will be lease based and we’re hoping to move in November of '15.

In regard to deposit activity, non-maturity deposit growth continues to be our focus, we’re up $29 million or 8.5% annualized for the year-to-date including all of our funds of different sites, including public unit money's. If we look at just core retail non-public unit money's those balances are up 6.4% or $18.6 million.

So we’re satisfied with non-maturity deposit growth that we have had. We would like to see more but given the quarter that we have had we’re pretty pleased with the non-maturity deposit growth.

Our marketing efforts continue to be focused on these deposits and they are primarily through social media outlets and through our existing customer base in different events that we’re having in each of our communities.

I'm looking for the next several quarters, we’re expecting our CD balances to decline slightly or gradually and that’s primarily due to increased price competition in that arena and we’re seeing some and off of those funds as we’re not matching some of our competitors rates.

Moving on to capital, our tangible common equity ratio improved from 7.85% last quarter to 8% this quarter. And again that’s up from 7.52% in September so we continue to see good growth in our tangible common equity ratio and it is in the midpoint of the range where we would like to see our tangible common equity ratio stay at between 7.5% and 8.5%.

Other items affecting capital are small business lending fund repriced at January 1, 2016 and we have had a variety of discussions with the regulators and we have reviewed our capital ratios post Basel III and we feel good about being able to repay those SBLF funds prior to the maturity or to the repricing of those maturities.

We did file our shelf-registration of March 24, for $75 million. At this time we’re not expecting to utilize that shelf-registration unless we have a potential acquisition that comes to fruition and we would anticipate using part of the [indiscernible] acquisition capital at that point in time.

Primarily the shelf is out there for flexibility, and again for inclusive capital. And with that I would like to turn it over to Matt..

Thank you, Greg. Dan, at this time if you would remind callers if they would like to queue for questions and we will take what's available..

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

So just a couple of questions here, it looks like the loan growth came later in the quarter, is that correct?.

It came spread out over the quarter but there was a lot of drones at the tailend..

And then curious what are your agricultural and farmer customers telling you about their businesses with lower commodity prices, are they concerned?.

There is definitely some concern. We use that say it's crop prices for the underwriting of the ag credits that we do and at the present time based upon historical yields and the existing prices our farmers will be able to cover all their debts and obligations and service debt at this point.

The challenge comes in as what happens if prices decline by 10% to 15%, there is a lot of farmers that at that point they don’t have the cushion to be able to service all their intermediate debts. We’re not worried about them being able to pay operating line money but in servicing their intermediate term that whether there will be more concern.

And that ratio was tighter than where it historically has been and that’s one of the reasons we’re paying significant attention to where our farmers marketing plans are, what their insurance purchase requirements are and what they are buying and just closely monitoring what they are doing..

Shifting towards the margin, just curious what was the average yield of new loans added this quarter?.

It remained consistent, it would be 4 in a quarter to 4.5..

And then so just with just general trend in the margin then with some of the accretion going away, would you expect it to trend down over the next few quarters?.

The top line number, yes, we feel pretty comfortable that we’re managing that core margin but yes we will see a loss of - that accretion over time..

Okay, and then now one last one, looks like the provisions have been hanging around 850,000 level for a while even for and a lot of just to cover the loan growth, is that how we should be thinking about provisioning going forward?.

Well both the loan growth and again the migration of those dollars into the allowance methodology. Where we have those dollars in the acquired portfolio that are paying down as those balances were smaller, we see fewer dollars migrating, we would expect that would require less provisioning also..

[Operator Instructions]. Our next question comes from David Cohen. Please go ahead..

I do have a question, it looks like to me you’re paying about 19% of your profits out and dividends, do you’ve a percentage goal that you are shooting for or what percentage of profits do you want to pay out in dividends?.

We address dividend policy every year after our in the first quarter of our fiscal year and we anticipating addressing that again and know we usually like to stay between 20% and 25% of our income..

And our next question comes from Derek Ferber of FJ Capital Management. Please go ahead..

Just had a quick question with regard to M&A, you had mentioned earlier that you’ve taken a look at a handful of deals and didn’t not submit any bips, you’re kind of being a little ways in 2015 based on what you’ve seen so far would you say it's probably lower probability event of having deal announced this year at least or do you think M&A talks are still somewhat robust..

There is still a lot of conversation going on. It's just a matter of whether buyers and sellers are going to reach terms if they can agree to, you know there is some buyers out there - some sellers that just have expectations that the way that we look at deals they just don’t work.

And I think there is going to be plenty of activity and discussion, it's just a matter whether the buyer and sellers can get to the right price, but as far as activity wise there is going to be a lot of discussion..

And then just a quick follow-up question with regard to the question that Andrew had asked earlier on purchase accounting.

Can you all quantify the amount of purchase accounting accretion that you think that you all will lose over the next call it, 4 to 5 quarters?.

I don’t have the projections in front of me here. We really pale down to a pretty immaterial amount on everything other than People and Peoples was a very short portfolio that number is going to tail-off relatively quickly but is it going to be half of what it is today in four quarters, I don’t know what that number is.

Some of it is a little bit really dependent on our purchased and impaired loans, what happens specifically with our projections on those, with the non-impaired loans it's going to be a pretty smooth glide past to zero over the next couple of years..

Okay, and then one more question and I will hop off.

It sounded you all put up the shelf earlier and based on your comments earlier just kind of a clarification question, am I interpreting it correctly when suddenly you all said that in less than acquisition opportunities, source is you all will probably not be looking to raise additional capital this year..

That would be correct. We’re hoping to be able to utilize our existing capital resources and that to be able to not have to shelf at this point unless the acquisition opportunity arises..

[Operator Instructions]. At this time I'm showing no further questions. I would like to turn the conference back over to Matt Funke for any closing remarks..

All right, thank you, Dan and we appreciate everyone who called in and participated and we will talk to you again in three months. Thank you..