SMBC

Business Context and Reporting Period

Company: Southern Missouri Bancorp, Inc. (a Missouri corporation owning Southern Missouri Bank & Trust Co.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009 (Third Quarter of Fiscal Year 2009)
Business Overview: The Company operates a bank with a home office in Poplar Bluff, MO, and nine branch facilities. Earnings are primarily dependent on the operations of its subsidiary bank. The Company participates in the U.S. Treasury's Capital Purchase Program (CPP).

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 9.6% for the quarter and 8.3% for the nine-month period compared to the prior year. However, net income available to common shareholders decreased 3.7% for the quarter due to preferred stock dividends ($119,375) resulting from the Treasury CPP investment.
• Balance Sheet Growth: Total assets increased $37.8 million (9.0%) to $455.6 million. This was driven by a $18.6 million increase in available-for-sale securities and a $15.4 million increase in net loans.
• Capital Structure: Stockholders' equity increased $10.7 million (35.0%) primarily due to the $9.6 million investment in preferred equity by the U.S. Treasury under the CPP.
• Non-Interest Income: Decreased 35.3% for the nine-month period due to $678,973 in other-than-temporary impairment (OTTI) charges on investments (Freddie Mac preferred stock and a pooled trust preferred security).
• Expense Management: Non-interest expense increased 12.3% for the nine-month period, driven by higher compensation costs and increased FDIC deposit insurance assessments.
• Asset Quality: Nonperforming assets increased to $690,000 (0.15% of total assets) from $68,000 in the prior year-end, largely due to the classification of specific loans and investments.

Guidance, Outlook, and Risks

• Acquisition Activity: On April 16, 2009, the Company signed a definitive agreement to acquire Southern Bank of Commerce (SBOC), a troubled institution in Arkansas, for $600,000 cash. The transaction is expected to close in Q4 2009 or Q1 2010.
• Capital Purchase Program (CPP): The Company utilized the $9.6 million Treasury investment to leverage asset growth, purchasing $15.1 million in agency-backed CMOs and $5.6 million in municipal debt to support credit availability.
• Interest Rate Environment: The Company remains "liability-sensitive" as liabilities re-price faster than assets. Management anticipates the bottom of the interest rate cycle but expects difficulty maintaining net interest margins in a rising rate environment.
• Risks and Contingencies:
  • Investment Impairments: The Company holds three additional collateralized debt obligations (CDOs) with significant unrealized losses that have not yet been deemed other-than-temporarily impaired but are monitored closely.
  • Economic Conditions: Deteriorating credit and housing markets have led to increased provisions for loan losses. The Company expects continued pressure on asset quality.
  • Regulatory Capital: The Bank is classified as "well-capitalized" by the FDIC. However, participation in the CPP generally precludes stock repurchases in the near term.

Key Facts for Investor Verification

• Preferred Stock Dividends: Verify the impact of the 5% (rising to 9%) cumulative dividend on the Treasury preferred stock on future earnings available to common shareholders.
• Investment Portfolio Quality: Review the status of the remaining three CDOs with significant unrealized losses to assess potential future OTTI charges.
• Acquisition Integration: Monitor the closing and integration of the Southern Bank of Commerce acquisition and the associated $600,000 cash outlay.
• Loan Loss Provisions: Track the trend in the provision for loan losses, which increased 83.6% year-over-year for the nine-month period, as a leading indicator of asset quality stress.
• Deposit Insurance Costs: Verify future FDIC assessment rates, as the Company noted exhaustion of one-time credits and anticipated higher premiums.