Matt Funke - CFO Greg Steffens - CEO.

Andrew Liesch - Sandler O'Neill Bruce Baughman - Franklin Chris Brown - Aristides Capital David Welch - River Oaks Capital.

Good afternoon, and welcome to the Southern Missouri Bancorp, Inc. Quarterly 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 this event is being recorded.

I would now like to turn the conference over to Mr. Matt Funke, Chief Financial Officer of Southern Missouri Bancorp. Please go ahead..

Thank you, Allison, and good afternoon everyone. This is Matt Funke, CFO with Southern Missouri. The purpose of this call is to review the information, and data presented in our quarterly earnings release dated Monday, October 26, 2015, 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. I want to start today by touching on some of the highlights from the quarter. The September quarter is the first quarter of our 2016 fiscal year.

We earned $0.48 diluted in the September quarter that up $0.01 from the fourth quarter of fiscal '15, our linked quarter, and up $0.04 from the $0.44 diluted that we earned on a split adjusted basis in the prior year's first quarter. In August of 2014, we closed on the Peoples Bank acquisition.

In our current quarter, the amount of our net interest income resulting from fair value discount accretion on loan, and a smaller fair value premium amortization on time deposits related to that acquisition, and now it's $412,000 in the first quarter of fiscal 2015, which again, because of the August acquisition date did not reflect a full quarter's benefit.

The similar benefits to our net interest income was 390,000. Those benefits are offset somewhat by additional loan loss provisioning required as our loan dollars that were subject to the purchasing accounting and fair value mark refinanced, renewed or pay down, and are replaced with new production.

All of which would mean that the new loans are then subject to allowance methodology. Also, we'd note, that over the last almost five years, we've been reporting quarterly on a similar impact resulting from the first Southern Bank acquisition, which closed in December of 2010.

Those benefits have declined to an amount that are immaterial, and we don't see a need to continue to provide that detail going forward. So our margin in the first quarter was 3.87%, of which 14 basis points was the result of the combined fair value discount accretion and the time deposit premium amortization that we just mentioned.

One year ago, the margin was 393, of which a similar 14 basis points was attributable to the Peoples Bank fair value discount accretion. On what we would call a core bases, then our margin for the quarter was down about six basis points year-over-year.

The core asset yield was down five basis points, and our core cost of funds was actually up one basis point.

Compared to the linked quarter, when our net interest margin was three and five, and we had 15 basis points of benefit from the Peoples acquisition purchase accounting, we would consider our core margin to have moved up three basis points, primarily because we shifted the earning asset mix towards loans.

Excluding securities, gains, and losses, which we did not have any in the comparable quarters as a percentage of average assets, non-interest income increased by three basis points compared to the same quarter of our prior fiscal year, and was down six basis points compared to the fourth quarter of the prior fiscal year, our linked quarter.

The linked quarter was one of our stronger recent performances, and this quarter is more in line with our performance for fiscal 2015 as a whole. Non-interest expense declined just a bit from the linked quarter, and did increase in dollar terms from the same quarter a year ago, but was lower as a percentage of assets.

We had no M&A expenses recognized in the current or the linked quarter, compared to 128,000 in the September quarter a year ago. Also in the same quarter a year ago, we incurred expenses related to the branch network from the Peoples Bank acquisition for just two out of the three months in the quarter.

And of course, this quarter we have the full three months worth of expenses resulting from that.

When we exclude our disclosed one-time expenses, our intangible amortization, seasonal swings and our provision for off balance sheet credit exposure, we calculate that our operating non-interest expense as a percentage of average assets is down five basis points from the last quarter, and down two basis points from the same quarter in the prior fiscal year, at 2.35%.

On asset quality, we consider non-performing assets to be our foreclosed and repossessed property, our non-accrual loans, and -- our loans 90 or more days past due. Those numbers were up slightly from June 30, 2015. In total, they stand at 8.6 million as of September 30, compared to 8.3 million at the beginning of the fiscal year.

Total non-performing assets were 65 basis points, as compared to our total assets, and that compares to 64 basis points at the beginning of the fiscal year, and 52 basis points at September 30, 2014, which was before we saw an acquired impaired relationship from our First Southern Acquisition migrate to non-accrual status.

Non-performing loans today or at September 30th, are 38 basis points on total loans, as compared to 36 basis points at the beginning of the fiscal year, and 29 basis points at September 30, 2014.

We mentioned earlier the impact of that purchase accounting on our margin and the offsetting impact on provisioning as those acquired loans mature, and are replaced with renewals or new originations, and how those dollars in our loan portfolio migrate from being accounted for under purchase accounting to the traditional allowance methodology.

The allowance as a percentage of our gross loans increased to 1.18% at September 30, 2015. That's up from 115 basis points, at June 30, 2015. Immediately after the Peoples acquisition, at September 30, 2014, the ratio was 98 basis points.

The Peoples loan portfolio was notably short, and so the purchase accounting discount is being accreted relatively fast. And the allowance, likewise, would need to grow more quickly as those dollars become subject to that methodology. Loan loss provisions in the current period were 618,000 versus the 827,000 in the same quarter of last year.

On the balance sheet, we grew assets for the quarter by just under $20 million. Loans made up a majority of that, at just under $16 million. Deposits are up 2.5 million. Looking at our quarter sequentially, loan growth the last two quarters has been below expectations.

And we've been somewhat disappointed with deposit totals, though things do look a bit better month to month as we evaluate our non-maturity deposit growth. As we look back to September 30, 2014, loans are up just over 5%, and deposits are up 3.5%.

Within the deposit totals, though we've been experiencing maturity in brokerage funding over the last four quarter ends from December 31 through September 30. Those dollars totaled $19 million overall and $3 million in the current quarter.

So if you adjust for that component of our deposit portfolio, both loans and deposits are growing at similar rates. Those rates right now are below our long term goals, but given the operational mergers we've completed between December of 2013 and December of 2014, we do recognize that we've been battling some headwinds on the organic growth front.

I'll let Greg speak a little more generally about quarter loan and deposit growth. Finally, just wrap this up by saying our biggest strategic item to speak of with this release actually didn't happen until October. That was the repurchase of our small business lending fund preferred stock.

That $20 million which we were fortunate to carry at a very low dividend over the life of the program did help us to accomplish growth, both organically and through acquisition over the last four years. We believe that we've served the purpose of that program in growing our small business lending while we participated.

We're pleased to be able to complete the repurchase without diluting our common shareholders, and to have both that issue and the warrant repurchase behind us now. With that, I'll introduce Greg Steffens, our CEO to talk about some of our more strategic issues.

Greg?.

Thank you, Matt. The first item I'd like to speak about today relates to our lending, and our loan growth over the last quarter. Again, as Matt indicated, our loan growth was 16 million over the quarter. Which we are slightly disappointed with those results.

Now, most of the actual growth during the quarter actually occurred during the month of September, instead of the earlier parts of the quarter. Our growth was limited basically due to a higher than anticipated level of payoffs, primarily in our Southwest Missouri market.

Our loan production was strong during the quarter as we originated 106 million in loans, compared to just 79 million that we originated in the year ago quarter. When I look at the components of our loan growth that we had during our quarter, both our family loans were up 5.2 million, commercial non-owner occupied real estate was up 5.5 million.

Our Ag operating balances were up 12.9 million. And these were slightly offset by a 4.5 million reduction in our C&I portfolio, and 2.1 million in our owner occupied commercial real estate.

When we look at where our growth actually occurred over the last quarter, we had 18 million in growth attributed to our Southeast Missouri markets, which was fueled mostly by growth in our agricultural portfolios, again which totaled almost $13 million.

In our actual Southwest Missouri locations the growth rate was a little over a negative $11 million, and that was primarily attributed to shrinkage in our existing office that we have in the Springfield area. And what we've been seeing there is we've just been seeing increased market rate competition in that particular market.

As well as we had several larger projects that people [indiscernible] actually sold the projects to other non-customers. And when you look at our Arkansas market, we grew nearly $10 million in our Arkansas market over the last quarter, with growth scattered over most of our Arkansas territories.

When we are looking at our agricultural portfolio, our balances at September 30th were not quite $71 million which compares to just a little shy of $69 million last year.

Historically speaking, our Ag balances have peaked out during the September quarter, however we're looking at this year the peaking out to be a little later than what we have seen some years due to the initial delays in the planting of the crops.

At the present time, our harvest is well underway; we've had a number of crops that are largely completed on their harvesting, while some of the cotton is still yet to be harvested, and some soybeans. At the present time, yields are really varied from one part of our region to another, as far as how the farmers are doing on the production.

And then prices are a little bit lower than where they were last quarter. And in our next quarterly earnings release we'll have more detailed information on how our farmers will have fared, and will have seen the completion of the cotton harvest.

When we're looking at some of the indicators of future growth, our loan pipeline is up to a 37.5 million, at September 30th, from $30 million at the end of June. So we are seeing a pretty strong pipeline. However we are uncertain on what is going to happen with pay offs over the last -- our upcoming quarter.

As I indicated earlier, pricing has become more competitive, which is contributing again to our payoffs, and is causing us to look closer at what our current pricing is, compared to where we have been at the in other periods.

As we're trying to evaluate growth versus margin, we were very pleased with our margin maintaining on a core basis over the last quarter. However, disappointed with the amount of payoff, and so we're really in the process of reevaluating where our loan pricing is going to be moving from here.

And just the last item in the lending front I'd like to address is our secondary market lending. And basically, our secondary market activity has been flat from the last quarter to this quarter. And we're seeing that if anything, we'll be under slight pressure to match our results of the prior year as we look into this quarter.

Moving on to other areas of our focus, which includes loan and deposit growth, now we have been modestly successful in loan growth and not as successful in deposit growth. However when we look at our deposit balances, our primary focus has been non-maturity deposits.

And we do feel a little bit better that our non-maturity deposits grew from $653 million to $661 million over the quarter, which is growth of 8.3 million or 1.3%. So we're growing at an annual pace of 5%, which is still under our targeted goal of 8% for non-maturity growth, bit it has improved.

And then when we look at the actual activity that we've had since, and we're looking at where things are going to go this quarter, we're pretty pleased with our initial results. And we think that this will be a better quarter for deposit growth.

Plus, we historically have some seasonality in the December quarter, with some deposit inflows from some of our public units. As well as from our agricultural areas, the deposits related to some of the landlords and people in those communities.

And again, our brokered CD balances have continued to go down, and our overall CD balances have continued to decline. Overall, over the last quarter, CD balances dropped from 402 million to not quite 396 million, of which 3 million of that shrinkage was in brokered deposits.

We will continue to focus on growing non-maturity deposits, and be paying close attention to our loan-to-deposit ratio, which continues to exceed 100% at this time. So, that is going to be an area of continued focus, as well as continuing to look at our expense control, so where we are on an efficiency basis.

When we're looking at our current efficiency, we're pleased with some of the improvement that we have made.

But we have to be ever mindful that we need to continue to monitor and look for ways to become more efficient, as we feel like that is one of the best avenues that we have to continue to support our long term return on equity and our -- and in competitive advantages we would have over our competitors.

When we look at our capital structure at the present time, our tangible common equity ratio is 8.22%, which is up from 8.07% at June 30th, which we do like seeing some of the improvement in that particular ratio. We are also pleased that we are able to retire our SBLF funding.

One of the things that it does contribute to though is, at our current level in capitalization with repayment of SBLF, if we have any success at a larger acquisition, it's going to cause us to look closely at, one, the structure of the deal, whether it would be in stock and cash or cash, that it could have some impact on us needing to raise capital.

And speaking about mergers and acquisitions, we're looking more earnestly at deals now than what we were over the last year, and we're in the position where the Peoples acquisition is largely behind us. And so we're looking a lot closer at deals.

On some of the pricing that we've seen around our overall market area, it seems that pricing is continuing to inch higher. And there's been several small deals announced in our footprint. And we do anticipate having the opportunity to look at several other potential acquisitions here over the next quarter or two.

Just finally on a closing note, our fixed assets, we do anticipate opening our -- our relocating to a new office in Springfield, on a national for our new Springfield area headquarters. And then for our Poplar Bluff area, we plan on moving into our new headquarters in the March quarter of this year. With that, I'd like to turn it over to Matt..

Okay. Thanks, Greg. And Allison, at this time, we'd like to take any questions our participants may have. And if you would remind them on how they might queue for questions, and we'll stand ready to take any questions..

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

Hi, guys..

Hello, Andrew..

Just a few questions from me here, you said loan originations were 106 million in the quarter.

Do you know what they were or have with you what they were in June quarter?.

I don't have that readily available. It would've been less than that..

All right. Okay.

And then just looking at the core margin here, just curious what yields that new production was coming on at versus the existing portfolio?.

Probably 25-30 basis points below the existing portfolio on average..

All right. Because it looked like it held up pretty well this quarter.

So, in general, would you expect that on the core yields just to be turning downwards because of that?.

I think some of the stuff that we were paid off on [indiscernible] Southwest Missouri may have been priced below in the portfolio as well..

Well, okay. Got you.

And then it looked like you added some municipal securities in the quarter, just curious what yields you are getting there, and if more of those purchases are going to continue?.

We report our margin before any cash benefits. Probably -- and it's a wide variety as far as maturity on those. I suppose we take what we can get here and there. But I'm going to say, between 2% to 3%. And probably on average around 2.5%..

Okay, great. Thanks so much..

Our next question comes from Bruce Baughman from Franklin. Please go ahead..

Nice quarter. I know you're a little discouraged about the loan growth. But it looks like a pretty nice quarter to me. My question had to do with any other balance sheet adjustments you're going to make, having paid off the SBLF preferred without even considering acquisitions.

Is there anything you're going to do to mitigate the effect on the net interest margin or any of the proportionality of the different balance sheet accounts?.

Are you asking specifically with regard to capital or just….

Well, yes, with capital or did you fund it through draw downs on the investments or just how do you do it?.

We've had basically a combination of a little bit of an increase in wholesale borrowings. Greg mentioned earlier, that so far, in October, we're off to a decent start with our deposit growth, and just the combination of those two..

Do expect a material change with the net interest margin as a result of paying off the preferred?.

No..

Okay. Thanks..

[Operator Instructions] Our next question comes from Chris Brown from Aristides Capital. Please go ahead..

Yes. Good afternoon, gentlemen.

I was just wondering if you could give a little bit of color on how the recent mergers are going, and on how much integration, if any, is left to do?.

We feel like we're doing pretty well as far as hitting our targeted cost savings. Operationally, the mergers are complete. We don't have anything significant outstanding with relation to that. It's just a matter of getting those acquired branch networks into our business model's efficiency template..

When we look at the deposit growth -- deposit and loan growth for each of the acquisitions, some of the results vary for each one.

By and large, our deposit growth has been led in -- for this year that we've had, has been led by the Southwest Missouri area, where we have continued to generate deposit growth each month of the new fiscal year since the acquisition.

In our acquisition of banks of Howell County, and West Plains, and Thayer, we have continued to generate pretty good loan growth and deposit growth in each of those markets. Whereas in the acquisition of Citizens of Bald Knob, that area we have not generated any loan growth whatsoever, and the deposits have been relatively stable.

So, each acquisition is a little different. The Peoples is the one that we pay the most attention to. And I guess I forget to mention on its loan growth, we would've had -- I think loan balances of the acquired locations during the last quarter were down approximately 600,000.

So with the new production generated versus the run-off of what we acquired, that's by far the best quarter we've had in maintaining those loan balances. And we'd look for that to probably trend more to the positive side during this quarter..

Do you feel like you guys are through the period of communicating changes to customers, and through any possible customer churn that you may have had? And then also, are you guys -- have you already consolidated computer systems?.

The computer consolidation was complete last December. And I say complete, 90% complete. There's a few systems here and there that still hang up. On the first question about communicating to customers, yes, that's been largely complete for some time..

Okay. Great. Thank you..

Thanks..

You're Welcome..

Having no further questions, this concludes our question-and-answer session. Actually, we do have a question that just came in. Our next question will come from David Welch from River Oaks Capital. Please go ahead..

Thank you. Gentleman, you mentioned that you're kind of ready to get back looking at acquisitions more seriously after the consolidation is close to complete. And I know you're going to be limited in how you can answer this.

But I look at your franchise, if you could make an acquisition in a more urban market that probably has better loan demand, and maybe is more competitive, versus a rural market, where you might have some funding advantages, and given your loan-to-deposits, the funding might be attractive.

So I guess I'd ask -- want you to share what you can on what your preference is boxing or profiling what an acquisition target might look like?.

David, when we look at that, really, it's -- I don't think we have the ideal portfolio. And we want to look, is it going to make a good financial return for us and shareholders. We definitely have interest in in-market rural area acquisitions.

But, the pricing on those is going to be a lot less, and you're going to tend to see a lot [technical difficulty] heavier amount of deposits and loans, and that could help us out with some of our loan-to-deposit ratio issues with the rural community.

Whereas a larger urban area, it can help us out with loan growth in that going forward, as you stated. But, I think that we just have to look at which opportunities come up, and what's going to generate the best opportunity for us on a return for our shareholders..

Okay. Thank you..

And I wouldn't preclude one over the other..

Okay..

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Funke for any closing remarks..

Okay. Well, thank you, Allison. Thank you everyone for participating. And we'll talk to you again in three months. Have a great day..

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