Matt Funke - CFO Greg Steffens - President and CEO.

Andrew Liesch - Sandler O'Neill.

Good afternoon, and welcome to the Southern Missouri Bancorp 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 Matt Funke, Chief Financial Officer. Please go ahead..

Thank you, Laura. Good afternoon, everyone. This is Matt Funke, CFO with Southern Missouri Bancorp. The purpose of this call is to review the information, and data presented in our quarterly earnings release dated Monday, January 25, 2016, and to take your questions.

We may make certain forward-looking statements during today's call, and we refer you to the cautionary statement regarding forward-looking statements contained in the press release. I will begin with highlights from the quarter. The December quarter is the second quarter of our 2016 fiscal year.

We earned $0.56 diluted in the December quarter, that's up $0.08 from the $0.48 we reported for the September 2015 quarter, and up $0.11 from the $0.45 diluted that we earned on a split adjusted basis in the prior year's second quarter.

The current quarter's results included some non-recurring non-interest income items and a higher level of fair value discount accretion resulting from resolution of a purchase credit impaired loan.

In December of ’14, we closed on the Peoples Bank acquisition and we continue to report net interest income resulting from the fair value discount accretion on loans, and a smaller amount of fair value premium amortization on time deposits related to that acquisition. In the current quarter, it amounted to $557,000.

In the year ago quarter, ended December, 2014, which was the first full quarter following the acquisition, we recognized accretion of $722,000. In the linked-quarter ended September 2015, discount accretion provided a benefit to net interest income of 412,000.

So the figure has been trending down sequentially, but it was up in the current period as we resolved a purchase credit impaired loan with the receipt of pay-off that exceeded the loan’s carrying value. We’d expect the impact of this discount accretion to likely be lower in the coming quarters.

Also remember that much of this benefit overtime has been somewhat offset by additional loan loss provisions we've been required to make, as our acquired loans which are initially subject to purchase accounting on fair value mark.

As those have been refinanced, renewed or paid down and replaced with the new production all of which would result in new loan balances subject to allowance methodology. Net interest margin in the second quarter was 3.88%, of which 18 basis points was the result of the fair value discount accretion we just mentioned.

In the year ago period our margin was 4.03%, of which 24 basis points resulted from the Peoples Bank fair value discount accretion. On what we would be with the core bases, then our margin was down nine basis points comparing the December 2015 quarter to the December 2014 quarter.

Core asset yield is down almost 8 basis points, and our core cost of funds is up 1 basis point.

Compared to the linked-quarter, when our net interest margin was 3.87 and we had 14 basis points of benefit from the purchase accounting related to the Peoples acquisition, we would consider our core margin to have deteriorated 3 basis points, due mostly to continued downward pressure on loan pricing, as well as some upward pressure on deposit pricing.

Excluding securities gains and losses, non-interest as a percentage of average assets on an annualized basis increased by 17 basis points to 0.84% as compared to the December quarter of the prior fiscal year, when we generated non-interest income at a 0.67% growth.

The current quarter was up 16 basis points compared to the September quarter of this fiscal year the linked-quarter. The current quarter included benefits from a bank owned life insurance policy payout and a gain due to the purchase of the Ozark Trust & Investment Corporation in which we own stock by Simmons First National.

Combined those two items accounted for almost 19 basis points of our non-interest income. We saw a little bit tougher quarter for deposit account service charges, which includes in the net debt charges and secondary market loan originations. Debit card interchange income was up.

Non-interest expense increased compared to the linked-quarter, but it was down compared to the same quarter a year ago. We had no M&A expenses recognized in the current or linked-quarter, compared to 359,000 in the December 2014 quarter.

When we exclude our disclosed onetime expenses, intangible amortization and seasonal swings in our provision for off balance sheet credit exposure, we calculate that our operating net interest expense as a percentage of average assets is down 4 basis points from the year ago quarter, and up 2 basis points from the September 2015 quarter at a 2.37% annualized rate.

Compared to a year ago, we're seeing lower compensation, less intangible amortization, lower legal and professional fees and lower deposit insurance premiums, but higher occupancy cost and charges related to disposal of foreclosed real estate.

Onto the balance sheet, we consider non-performing assets to be foreclosed and repossessed property non-accrual loans and loans 90 or more days past due. Those numbers are down from our June 30 fiscal year-end.

In total, non-performing assets are 7.6 million now compared to 8.3 million at the beginning of the fiscal year and non-performing assets are 0.57% of total assets compared to 0.64% at the beginning of the fiscal year, and as compared to 68 basis points at December 31, 2014.

Non-performing loans are now at 35 basis points on total loans compared to 36 basis points at the beginning of the fiscal year and 46 basis points at December 31 a year ago.

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

The allowance as a percentage of our gross loans was 1.21% at December 31, '15, up from 1.18% at September 30, '15 and 1.15% at June 30, 2015. Immediately after the Peoples acquisition, the ratio was as low as 98 basis points at September 30, 2014.

The Peoples loan portfolio was notably short, so the purchase accounting discount was accreted relatively quickly and of course the allowance was required to reflect loan balances which became subject to allowance methodology, those refis, renewals and new production that we talked about.

Loan loss provisions in the current period were 496,000 versus 862,000 in the same quarter of last year. Other discussion on the balance sheet for the quarter, we grew assets by just under $18 million, loans made up almost $11 million of that, and deposits were up 59.5 million, as we had some seasonal inflows from our public units.

Loan growth in the December quarter had to overcome pay-downs in the ag operating line portfolio, which was a little less than $10 million. If we look back to December 31, 2014 our loans were up 6.6% and our deposits were up 5.1%.

Additionally, deposits would be up roughly equivalent amount to our loan growth, if not for a maturity of just over 14.5 million in traditional brokered CDs over the last 12 months.

Loan and deposit growth over the last 12 months is a little below our longer term targets, with the largest merger we’ve completed to-date having been finalized in December of 2014.

We expected that we wouldn’t be able to hold on to 100% of those acquired balances and we’re really quite pleased with the retail deposit growth out of the Southwest Missouri market over the last six months.

Overall, we are relatively pleased with how our balance sheet developed over the 2015 calendar year, with the redemption of the 20 million in preferred stock we’d issued under the SBLF program and as we were able to reduce all the lines on brokerage funding.

We would prefer to see a little stronger loan growth to leverage our capital, but at the same time we recognize that that higher capital ratio right now gives us a little more flexibility in how we can approach merger and acquisition activity that we hope to explore over the coming year.

So with that, I'll introduce our CEO, Greg Steffens to talk about some of our strategic initiatives.

Greg?.

All right, thank you, Matt. The first item that I want to discuss is just our lending activity. Our loan growth this last quarter was slightly below our expectations, but we are still pleased with having positive loan growth of a little over $10 million.

That $10 million is better than what we did in the same quarter of the prior year when our loan portfolio actually declined by 5 million. The December quarter we typically have a fair amount of back pay-downs which happened again this quarter and that does impact our ability to have loan growth in the December quarter.

Our loan originations and renewals totaled $123 million this quarter, versus $110 million in the same quarter of last year. Again our growth was limited impart due to pay-downs in our ag portfolio.

When we look at the composition of our loan growth for the quarter, we had multifamily loans growing a little over $9 million, our commercial real estate balances grew around $6 million, while residential construction, C&I and non-owner occupied residential real estate grew a little bit over $4 million amongst those three categories.

Our Ag commercial and C&I portfolio was down approximately $10 million and Ag real estate was up 3 million.

When we look at what regions we are generating our growth from, our Southeast Missouri region has generated growth of a little over $19 million for the first six months of our fiscal year, while our Arkansas region is close to $14 million and Southwest Missouri is having shrinkage of a little less than $9 million.

We are pleased that our Southeast Missouri region was able to continue to grow this quarter, in spite of the agricultural pay-downs that we had in this area. If you look over the last quarter, our Southwest Missouri region did grow and made up some of the losses that it has had and our Arkansas region grew $4 million as well.

The Peoples Bank portfolio of loans that we acquired continues to shrink as those balances were down around $10 million over this last quarter. When we look at our agricultural balances they totaled around $59 million at the end of December, which compares to $58 million last year.

So our balance is approximately what it was a year ago and our pay-downs have been little bit faster than expected, which given the health of the agricultural sector we are pleased to see. In regard to our agricultural portfolio, the harvest has been completed and we've begun the renewal process for the upcoming year.

Generally speaking, our Ag balances have and credits have performed a little better than what we have expected. We have had several credits that we have seen where there is -- they had some poor performance over this last year, but even with their poor performance our underlying financial trends and strengths are good.

So overall, we are not expecting any material impact on credit quality to maintain this in our assessment of agricultural portfolio. When we look at our loan pipeline, it is down a little bit from where we were last quarter, but at present it's at $35.2 million, which is still very strong for this time of the year.

And when we’re looking at loan pricing, pricing pressures remain and I would characterize pricing as consistent with where we were last quarter.

We were hopeful that the increase in prime that we had this quarter that we would have seem some relief on loan pricing in the marketplace, but really we have been seeing that loan pricings remain basically flat. And when we look at our secondary market, our activity is up a little bit from the prior year.

However, our actual fee income was down primarily due to we have less role development type loans that we’re doing this year compared to last year. But we're all as Matt alluded to earlier, secondary market income was down a little bit, but overall we're down $30,000 from last year, so not a meaningful change.

Moving on to merger and acquisition activity, over this last quarter we've looked at several deals. We've had several that we've moved forward with, but none of them ended up being the right fit for us. We do see several opportunities on the near-term horizon that we're hoping to look at and that we're hoping that we'll be able to move forward with.

Pricing does remain competitive, we feel like a lot of the deal pricing in our market areas is similar to what it was last quarter and it is really our hope that we will have something that we can announce by the end of the calendar year.

Looking at our actual loan and deposit growth, we’ve discussed loan growth, but deposit growth this quarter was especially strong and the December quarter is usually our strongest quarter of the year for deposit growth and we feel like that occurred again this year.

Our focus has always been on our non-maturity deposits and we're pleased that they grew from 653 million at June 30th to 713 million at 12/31. So this approximate growth of $60 million was above our historical expectations.

Public unit funds represented about a third of this growth and a lot of that growth is seasonal and a lot of those funds will flow out here over this current quarter. When we look at the growth in our core non-maturity deposits, they totaled approximately $35 million, which will be annualized growth of 13%, which is in excess of our 8% goal.

If you look at where the deposit growth has come from our Southwest Missouri market has grown approximately $16 million, followed by Southeast Missouri growing a little over 14 million, our Arkansas market's up about 4.5 million.

So overall, our non-maturity deposit growth has really been good and it has really been allowed us to reduce our level of overnight borrowings and our sensitivity to some of those rate changes related to the recent uptick in prime. When we look at our capital levels, capital has continued to improve.

Our tangible common equity ratio is now 8.35% versus 8.22 last quarter and 8.07 at June 30th. Our targeted range for tangible common equity ranges from 7.5% to 8.5%, so we are moving towards the higher end of that range. We are hoping that via acquisition we will be able to manage some of that capital ratio.

We have built capital a little faster than expected impart due to slower than anticipated loan growth, but we are also pleased that with our capital we were able to read DMR -- SBLF investment and have done dilution ratio and some common stock from retiring those funds.

And then also when we look at our fixed assets, we moved into our Springfield office, the new office in December and we anticipate moving into our new headquarters in Poplar Bluff in February to early March. With that that concludes my prepared remarks, and I’d like to turn it over to Matt..

Okay, great. Laura if you would at this time, please indicate again how folks can queue for questions and we'll be prepared to take those..

A couple of questions from me, first Matt I think you went over expenses relative to the year ago quarter, but it looks like on a sequential basis they were up around 180,000.

I'm just curious what is causing that difference?.

The current quarter we had some charges in there for liquidation of foreclosed real estate, and a little bit of an uptick in our expense there..

Got you, okay. So you are a little bit outside this quarter because of the real estate, okay.

And then can you just talk a little bit on the margins, it sounds like that loan yield pressure is brewing, but just kind of curious on your thoughts there on a core basis?.

Can you repeat the first part of that?.

It is, your thoughts on the core margin going forward.

It sounds like there is still some loan yield pressures, but just some like, how do you look at the core margins for the coming quarters?.

We think it ought to be relatively steady.

This March quarter is always a little bit tougher for us seasonally, but other than that we think what Greg mentioned that we didn’t see the relief we hoped for in some of the pricing competition without a swap curve move since the Fed move, but we did pick up a little bit of benefit in our loan growth that we currently have booked with the prime in trade that won't be substantial, but it will give us maybe a little bit of relief there.

We would probably see continued upticks in the deposit portfolio it makes us wonder if that are two at a time for here, but I would think we would see less compression over the coming year than what we’ve seen in the last year, without giving the two harder numbers there..

No it's great. Thank you so much..

Andrew on the liquidation that one piece of real estate owned, we had a loss of approximately $200,000 on that, so that was a big part of that number..

[Operator Instructions] And we’re showing no further questions. I would like to turn the conference back over to Matt Funke for any closing remarks..

Okay. Thank you, Laura. And we thank everyone for their interest. Happy to close out the calendar year on a pretty good note and we'll talk to you again in three months..

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