SOUTHERN MISSOURI BANCORP, INC. quarterly report, Q3 FY2012

Southern Missouri Bancorp, Inc. — Form 10-Q Summary

Reporting period: The filing covers the quarter and nine months ended March 31, 2012, compared with the corresponding 2011 periods. The request metadata identifies “2011 Q3,” but the filing itself is for fiscal 2012 third quarter. Southern Missouri Bancorp operates primarily through Southern Bank, serving customers in Missouri and Arkansas.

Financial condition and key metrics

Metric	Three months ended March 31, 2012	Nine months ended March 31, 2012	Comparable period
Net income	$2.2 million	$7.7 million	$2.0 million and $8.9 million, respectively
Net income available to common shareholders	$2.1 million	$7.3 million	$1.8 million and $8.5 million, respectively
Diluted earnings per common share	$0.64	$2.67	$0.86 and $3.93, respectively
Net interest income	$7.3 million	$22.1 million	$7.4 million and $16.7 million, respectively
Net interest margin	3.97%	4.16%	4.46% and 3.78%, respectively
Provision for loan losses	$215,000	$1.1 million	$1.2 million and $2.1 million, respectively
Noninterest income	$955,000	$3.0 million	$850,000 and $9.5 million, respectively
Noninterest expense	$4.9 million	$12.5 million	$4.1 million and $10.6 million, respectively
Return on average assets	1.13%	1.39%	1.15% and 1.93%, respectively

Total assets were $751.2 million at March 31, 2012, up 9.2% from June 30, 2011.
Net loans were $546.2 million, down 1.9% from June 30, 2011. Available-for-sale securities rose to $73.6 million from $63.3 million.
Cash and cash equivalents increased to $86.9 million from $33.9 million, primarily reflecting capital and deposit inflows and lower loan balances.
Deposits increased 7.0% to $599.3 million, led by NOW, noninterest-bearing transaction and money-market accounts; certificates of deposit and savings balances declined.
Stockholders’ equity increased 66.2% to $92.6 million, primarily from the SBLF preferred-stock issuance, common-stock offering proceeds and retained earnings.
At March 31, 2012, liabilities included $24.5 million of FHLB advances, $26.5 million of repurchase agreements and $7.2 million of subordinated debt.

Cash flow and liquidity

Operating activities provided $5.7 million of cash during the first nine months, compared with $11.9 million in the prior-year period.
Investing activities used $13.3 million, including $39.9 million of available-for-sale securities purchases, $3.9 million of premises and equipment purchases and $7.5 million invested in bank-owned life insurance, partially offset by securities maturities and a $9.1 million decrease in loans.
Financing activities provided $60.6 million, including $20.0 million of SBLF preferred-stock proceeds, $19.9 million from the common-stock offering and $58.6 million of demand and savings deposit growth.
The Bank had approximately $91.5 million of outstanding loan commitments and approvals. FHLB collateral supported approximately $180.6 million of available credit, of which $24.5 million was drawn; farmland and agricultural loans supported $47.3 million of Federal Reserve discount-window availability.
Management stated that available liquidity was sufficient for anticipated needs.

Material changes versus comparable periods

Nine-month net income declined 13.1%, primarily because the prior-year period included a $7.0 million bargain purchase gain from the First Southern Bank acquisition. The quarter’s net income increased 10.0%.
Nine-month net interest income increased 32.6%, supported by acquisition-related loan discount accretion, balance-sheet growth and lower funding costs. Management cautioned that acquired-loan accretion will decline as those loans pay down.
The quarter’s net interest income declined 1.1% as lower asset yields and a larger cash position offset lower deposit and borrowing costs. The quarter’s reported net interest margin fell to 3.97% from 4.46%.
Noninterest income decreased 68.9% for the nine months because of the absence of the prior-year bargain purchase gain, while quarterly noninterest income increased 12.3% from higher card-network income and loan-sale gains.
Noninterest expense increased 19.6% in the quarter and 18.0% for the nine months. The quarter included a $476,000 prepayment penalty related to early repayment of $9.0 million of FHLB advances.
The allowance for loan losses increased to $7.3 million from $6.4 million. Nine-month net charge-offs were $257,000, and the provision declined 49.0% from the prior-year period.
Nonperforming assets rose to $3.8 million from $2.4 million at June 30, 2011. Nonaccrual loans increased to $2.0 million from $262,000, principally because two loans totaling approximately $1.3 million became nonaccrual during the quarter.
The company identified $3.3 million of performing troubled debt restructurings during the period, compared with none reported at June 30, 2011, largely due to the adoption of updated TDR guidance.

Capital, outlook, risks and unusual items

On July 21, 2011, the company issued $20.0 million of SBLF preferred stock to the U.S. Treasury and used approximately $9.6 million of proceeds to redeem its TARP preferred stock. The SBLF dividend rate was 1.0% for the quarter ended March 31, 2012; management stated the rate for the quarter ending June 30, 2012 was expected to be 2.3183% based on qualified small-business lending.
The company completed a November 2011 public offering of 1.15 million common shares at $19.00 per share, generating approximately $19.9 million of net proceeds.
The Bank was categorized as well capitalized. At March 31, 2012, Southern Bank reported total risk-based capital of 15.79%, Tier 1 risk-based capital of 14.54% and Tier 1 leverage capital of 9.86%.
Management expects modest asset growth through loan originations and securities purchases, funded by cash, deposits, FHLB borrowings and, if needed, brokered certificates of deposit. No formal earnings guidance was provided.
Key risks include interest-rate and yield-curve changes, declining yields on cash and new assets, credit deterioration, commercial and construction real-estate exposure, changing collateral values, deposit competition, liquidity access, regulatory actions and acquisition-integration risks.
The securities portfolio included four pooled trust-preferred securities with estimated fair value of $295,000 and unrealized losses of $1.3 million that had persisted for more than 12 months. Management did not classify the losses as other-than-temporary but warned that future OTTI charges remain possible.
Management believes the allowance for loan losses is adequate, but acknowledges that the estimate is judgmental and may require additional provisions if economic conditions, collateral values or borrower performance deteriorate.
No material pending legal proceedings were reported, and management stated that there were no material changes to the risk factors in the prior Form 10-K. Disclosure controls were evaluated as effective.

Important facts for investors to verify

Confirm the effect of acquisition-related loan discount accretion on recurring net interest margin and future earnings.
Track nonperforming assets, nonaccrual loans, TDRs, classified loans and allowance coverage as the loan portfolio changes.
Review the valuation, cash flows and potential OTTI exposure of pooled trust-preferred securities, including securities receiving payment-in-kind interest.
Assess deposit growth sustainability and the cost of rewards checking and other above-market deposit products.
Monitor the SBLF dividend rate, redemption terms and the potential increase to a 9% rate after four and one-half years.
Evaluate liquidity against approximately $91.5 million of loan commitments and the availability and collateral requirements of FHLB and Federal Reserve funding.
Reconcile reported earnings with non-GAAP measures that exclude acquisition accretion, deposit-premium amortization, bargain purchase gains and unusual FHLB prepayment penalties.