Southern Missouri Bancorp - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

(Mark One)

For the quarterly period ended March 31, 2009

OR

For the transition period from __________ to __________

Commission file number 0-23406

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  o    Noo

Indicate by check mark whether the registrant is a shell corporation (as defined in Rule 12 b-2 of the Exchange Act)

Yes  o    Nox

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

INDEX

 

 

 

See Notes to Consolidated Financial Statements

Note 1:  Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Securities and Exchange Commission (SEC) Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all material adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.  The consolidated balance sheet of the Company as of June 30, 2008, has been derived from the audited consolidated balance sheet of the Company as of that date.  Operating results for the three- and nine-month period ended March 31, 2009, are not necessarily indicative of the results that may be expected for the entire fiscal year.  For additional information, refer to the Company’s June 30, 2008, Form 10-K, which was filed with the SEC and the Company’s annual report, which contains the audited consolidated financial statements for the fiscal years ended June 30, 2008 and 2007.

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Southern Missouri Bank & Trust Co. (SMBT or Bank).  All significant intercompany accounts and transactions have been eliminated in consolidation.

Note 2:  Fair Value Measurements

Effective July 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”).  SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  SFAS No. 157 has been applied prospectively as of the beginning of the year/period.

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value:

 

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-sale securities are recorded at fair value on a recurring basis. Available-for-sale securities is the only balance sheet category our Company is required, in accordance with accounting principles generally accepted in the United States of America (US GAAP), to carry at fair value on a recurring basis. Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, our Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

 

 

 

 

Note 3:  Securities

Available for sale securities are summarized as follows at estimated fair value:

 

The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2008.

Except as discussed below, management believes the declines in fair value for these securities to be temporary.

At March 31, 2009, “other securities” included investments in four pooled trust preferred securities with a fair value of $263,000, and unrealized losses of $1.2 million in a continuous unrealized loss position for twelve months or more.

 

 

 

Three of the pooled trust preferred securities, with an amortized cost of $1.4 million and an unrealized loss of $1.1 million, showed unrealized losses primarily due to the long-term nature of pooled trust preferred securities, a lack of demand or inactive market for these securities, and concern regarding the underlying financial institutions that have issued the pooled trust preferred securities.  Collateral and cash flow analysis of these securities show that at this time it is probable the Company will receive all contractual principal and interest with no material change in the interest payment schedule.  Because the Company does not intend to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the investments in the securities to be other-than-temporarily impaired at March 31, 2009.

A fourth pooled trust preferred security, with an amortized cost of $125,000, and an unrealized loss of $118,000, was deemed other-than-temporarily impaired in the Company’s second quarter of fiscal 2009.  Based on an estimated discounted cash flow valuation of the security, the Company recorded an impairment charge of $375,000 for the unrealized loss on the security.  The loss established a new, lower amortized cost basis for the security and reduced non-interest income for the Company’s second quarter and the nine months ended March 31, 2009.  Because the Company does not intend to sell the security and it is not more-likely-than-not that the Company will be required to sell this security before recovery of its new, lower amortized cost basis, which may be maturity, the Company does not consider the remainder of the investment in the security to be other-than-temporarily impaired at March 31, 2009.

The Company’s investments in Freddie Mac Preferred Stock with an amortized cost of $0 and unrealized gains of $8,000 was deemed other-than-temporarily impaired in the Company’s first quarter of fiscal 2009, based on quoted market prices which reflected market participants’ expectations regarding the likelihood of recovery of their investment.  Accordingly, the Company recorded an impairment charge for the full amortized cost of the security, $304,000.  The loss established the amortized cost basis for the security at $0, and reduced non-interest income for the Company’s first quarter and the nine months ended March 31, 2009.

Note 4:  Loans

Loans are summarized as follows:

Note 5:  Deposits

Deposits are summarized as follows:

Note 6:  Comprehensive Income

The Company’s comprehensive income for the three- and nine-month periods ended March 31, 2009, was as follows:

Note 6:  Earnings Per Share

Basic and diluted earnings per share are based upon the weighted-average shares outstanding.  The following table summarizes basic and diluted earnings per common share for the three- and nine-month periods ended March 31, 2009 and 2008.

The Company had 189,826 and 65,500 stock options and warrants outstanding at March 31, 2009 and 2008, respectively, with a grant price exceeding the market price.  These stock options and warrants were excluded from the above calculation as they were anti-dilutive.

Note 7:   Stock Option Plans

Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” requires that compensation costs related to share-based payment transactions be recognized in financial statements.  With limited exceptions, the amount of compensation cost is measured based on the grant-date fair value of the equity instruments issued.  Compensation cost is recognized over the vesting period during which an employee provides service in exchange for the award.

Note 8:  Employee Stock Ownership Plan

The Bank established a tax-qualified ESOP in April 1994. The plan covers substantially all employees who have attained the age of 21 and completed one year of service.  The Company’s intent is to continue the ESOP for fiscal 2009.  The Company has been accruing $53,000 per quarter for ESOP benefit expenses during this fiscal year and has contributed cash to the plan to allow the purchase of shares for allocation to participants.

Note 9:  Corporate Obligated Floating Rate Trust Preferred Securities

Southern Missouri Statutory Trust I issued $7.0 million of Floating Rate Capital Securities (the “Trust Preferred Securities”) in March, 2004, with a liquidation value of $1,000 per share.  The securities are due in 30 years, are now redeemable, and bear interest at a floating rate based on LIBOR.  The securities represent undivided beneficial interests in the trust, which was established by the Company for the purpose of issuing the securities.  The Trust Preferred Securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended (the “Act”) and have not been registered under the Act.  The securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

 

 

 

Southern Missouri Statutory Trust I used the proceeds from the sale of the Trust Preferred Securities to purchase Junior Subordinated Debentures of the Company.  The Company has used its net proceeds for working capital and investment in its subsidiary.

Note 10:Capital Purchase Program Implemented by the U.S. Treasury

In December 2008, the Company received $9.6 million from the U.S. Treasury through the sale of 9,550 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, as part of the Treasury’s Capital Purchase Program.  The Company also issued to the U.S. Treasury a warrant to purchase 114,326 shares of common stock at $12.53 per share.  The amount of preferred shares sold represented approximately 3% of the Company’s risk-weighted assets as of September 30, 2008.

The transaction was part of the Treasury’s program to infuse capital into the nation’s healthiest and strongest banks for the purpose of stabilizing the US financial system and promoting economic activity.  The Company elected to participate in the program given the uncertain economic outlook, the relatively attractive cost of capital compared to the current market, and the strategic opportunities the Company foresees regarding potential uses of the capital.  The additional capital increased the Company’s already well-capitalized position.  The Company used the proceeds of the issue for working capital and investment in its banking subsidiary.

The preferred shares pay a cumulative dividend of 5% per year for the first five years and 9% per year thereafter.  The preferred shares are callable after three years at 100% of the issue price, subject to the approval of the Company’s federal regulator.  Earlier redemptions of the preferred shares also require that the Company complete an offering of at least $2,387,500.

Note 11:  Authorized Share Repurchase Program

On October 22, 2008, the Board of Directors authorized and the Company announced the open-market or privately-negotiated stock repurchase of up to 110,000 shares of the Company’s outstanding stock.  The repurchase program was completed November 19, 2008.  As of March 31, 2009, the number of shares held as treasury stock was 869,250.  Outside of purchases necessary for funding of benefit plans, the Company expects no significant repurchase activity in the near term, due to its participation in the US Treasury Department’s Capital Purchase Program, which generally precludes repurchase activity.

Note 12:  New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting standards, and expands disclosures about fair value measurements. SFAS No. 157 was effective for the Company for the fiscal year which began July 1, 2008. In March 2008, the FASB issued Staff Position No. FAS 157-2 (“FSP No. 157-2”), which delays the effective date of SFAS No. 157 for non-financial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years and interim periods beginning after November 15, 2008. Adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial statements.

In September 2006, the Emerging Issues Task Force (EITF) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” was ratified. This EITF Issue addresses accounting for separate agreements which split life insurance policy benefits between an employer and employee. The Issue requires the employer to recognize a liability for future benefits payable to the employee under these agreements. The effects of applying this Issue must be recognized through either a change in accounting principle through an adjustment to equity or through the retrospective application to all prior periods. The Issue was effective for the fiscal year which began July 1, 2008, and did not have a material impact on the Company’s consolidated financial statements..

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at estimated fair value. Most of the provisions of SFAS No. 159 are elective; however, the amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities that own trading and available-for-sale securities. The fair value option created by SFAS No. 159 permits an entity to measure eligible items at fair value as of specified election dates. The fair value option (a) may generally be applied instrument by instrument, (b) is irrevocable unless a new election date occurs, and (c) must be applied to the entire instrument and not to only a portion of the instrument. SFAS No. 159 was effective for the Company for the fiscal year which began July 1, 2008, and did not have a material effect on the Company’s consolidated financial statements.

 

 

 

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 was effective for the Company for the interim period which began January 1, 2009, and did not have a significant effect on the Company’s consolidated financial statements.

In October 2008, the FASB issued the FASB Staff Position on FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP 157-3”).  FSP 157-3 clarifies the application of SFAS No. 157, “Fair Value Measurements,” in a market that is not active and provides an example to illustrate key considerations in determining fair value of financial assets when the market for that financial asset is not active.   FSP 157-3 applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with FAS 157.  FSP 157-3 was effective upon issuance and included prior periods for which financial statements had not been issued.  The application of FSP 157-3 did not have a material impact on the Company’s consolidated financial statements.

Note 13:  New Accounting Pronouncements Not Yet Effective

In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations—A Replacement of FASB Statement No. 141” (“SFAS No. 141(R)”) and Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures certain items in a business combination, as well as disclosures about the nature and financial effects of a business combination. SFAS No. 160 establishes accounting and reporting standards surrounding noncontrolling interest, or minority interests, which are the portions of equity in a subsidiary not attributable, directly or indirectly, to a parent. The pronouncements are effective for fiscal years beginning on or after December 15, 2008 and apply prospectively to business combinations, meaning they are effective for the Company beginning July 1, 2009. Presentation and disclosure requirements related to noncontrolling interests must be retrospectively applied. Management is currently evaluating the impact of SFAS No. 141(R) on its accounting for future acquisitions; management has evaluated the requirements of SFAS No. 160 and believes it will not have a material effect on the Company’s consolidated financial statements.

In April 2009, the FASB issued the FASB Staff Position on FAS 157-4, “Determining Fair Value When the Volume and Level of Activity For the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP 157-4).  FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have decreased significantly.  FSP 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly.  The provisions of FSP 157-4 will be effective for the Company’s year ended June 30, 2009.  Management is currently evaluating the impact of FSP 157-4, and believes implementation will not have a material effect on the Company’s consolidated financial statements.

In April 2009, the FASB issued the FASB Staff Position on FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (the FSP).  The FSPestablishes a methodology of determining and recording other-than-temporary impairments of debt securities and expands disclosures about fair value measurements.  The provisions of the FSP will be effective for the Company’s year ended June 30, 2009.   Management is currently evaluating the impact of the FSP.

In April 2009, the FASB issued the FASB Staff Position on FAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (the FSP).  The FSP requires disclosures about fair value of financial instruments in interim reporting periods of publicly-traded companies that were previously only required to be disclosed in annual financial statements.  The provisions of the FSP are effective for the Company for the interim period ended September 30, 2009, and, as the FSP amends only the disclosure requirements about fair value of financial instruments in interim periods, adoption is not expected to affect the Company’s consolidated financial statements.

Note 14:  Subsequent Events

On April 16, 2009, the Company announced the signing of a definitive agreement with Southern Bank of Commerce (SBOC), a troubled financial institution headquartered in Paragould, Arkansas, whereby SBOC will be acquired by the Company and merged into Southern Missouri Bank and Trust Co.  The definitive agreement calls for payment of $600,000 in cash, of which $200,000 will be held in escrow subject to resolution of certain matters, in exchange for all outstanding stock in SBOC.  Additional funds may be paid to SBOC shareholders upon the realization by the Company of funds, in excess of the $200,000 discussed above, related to certain tax matters or upon the sale of the bank charter held by SBOC.  As of March 31, 2009, SBOC had total assets of $30.5 million, net loans of $16.6 million, deposits of $28.3 million, and stockholder’s equity of $1.3 million.  SBOC had 3.8 million shares of common stock outstanding.  We expect the transaction to close in the fourth quarter of the Company’s 2009 fiscal year, or in the first quarter of the 2010 fiscal year, subject to approval by SBOC shareholders and federal and state banking regulators.

 

 

 

PART I:  Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Southern Missouri Bancorp, Inc. (Southern Missouri or Company) is a Missouri corporation and owns all of the outstanding stock of Southern Missouri Bank & Trust Co. (SMBT or the Bank).  The Company’s earnings are primarily dependent on the operations of the Bank.  As a result, the following discussion relates primarily to the operations of the Bank.  The Bank’s deposit accounts are generally insured up to a maximum of $100,000 (certain retirement accounts are insured up to $250,000) by the Deposit Insurance Fund (DIF), which is administered by the Federal Deposit Insurance Corporation (FDIC).  Currently, a temporary increase in the Standard Maximum Deposit Insurance Amount, to $250,000, is in effect through December 31, 2009.  The Bank currently conducts its business through its home office located in Poplar Bluff and nine full service branch facilities in Poplar Bluff (2), Van Buren, Dexter, Kennett, Doniphan, Sikeston, Matthews, and Qulin, Missouri.

The significant accounting policies followed by Southern Missouri Bancorp, Inc. and its wholly-owned subsidiary for interim financial reporting are consistent with the accounting policies followed for annual financial reporting.  All adjustments, which are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported, have been included in the accompanying consolidated condensed financial statements.

The consolidated balance sheet of the Company as of June 30, 2008, has been derived from the audited consolidated balance sheet of the Company as of that date.  Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report filed with the Securities and Exchange Commission.

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company.  The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and accompanying notes.  The following discussion reviews the Company’s consolidated financial condition at March 31, 2009, and the results of operations for the three- and nine-month periods ended March 31, 2009 and 2008, respectively.

This document, including information incorporated by reference, contains forward-looking statements about the Company and its subsidiaries which we believe are within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements may include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities, interest rates, cost savings and funding advantages expected or anticipated to be realized by management.  Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify these forward-looking statements.  Forward-looking statements by the Company and its management are based on beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions of management and are not guarantees of future performance.  The important factors we discuss below, as well as other factors discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and identified in our filings with the SEC and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this document:

The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.

Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters.  Management of the Company must use assumptions and estimates to apply these principles where actual measurement is not possible or practical.  For a complete discussion of the Company’s significant accounting policies, see “Notes to the Consolidated Financial Statements” in the Company’s 2008 Annual Report.  Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates.  Changes in such estimates may have a significant impact on the financial statements.  Management has reviewed the application of these policies with the Audit Committee of the Company’s Board of Directors.  For a discussion of applying critical accounting policies, see “Critical Accounting Policies” beginning on page 11 in the Company’s 2008 Annual Report.

Our results of operations depend primarily on our net interest margin, which is directly impacted by the interest rate environment.  The net interest margin represents interest income earned on interest-earning assets (primarily mortgage loans, commercial loans and the investment portfolio), less interest expense paid on interest-bearing liabilities (primarily certificates of deposit, savings, interest-bearing demand accounts and borrowed funds), as a percentage of average interest-earning assets.  Net interest margin is directly impacted by the spread between long-term interest rates and short-term interest rates, as our interest-earning assets, particularly those with initial terms to maturity or repricing greater than one year, generally price off longer term rates while our interest-bearing liabilities generally price off shorter term interest rates.

Our results of operations may also be affected significantly by general and local economic and competitive conditions, particularly those with respect to changes in market interest rates, government policies and actions of regulatory authorities.

In December 2008, the Company announced its participation in the U.S. Treasury Department’s Capital Purchase Program (CPP), which is one component of its Troubled Asset Relief Program (TARP).  The Treasury invested $9.6 million in perpetual preferred stock carrying a dividend of 5% for the first five years, increasing to 9% thereafter.  The Treasury Department created the CPP with the intention of building capital at healthy U.S. financial institutions in order to increase the flow of financing to U.S. businesses and consumers, and to support the U.S. economy.  As of March 31, 2009, the Company has increased loan balances by $15.4 million in the current fiscal year, and by $28.5 million over the last twelve months.  Additionally, the Company has contributed to the accomplishment of Treasury’s objective by leveraging the investment to support the purchase of $15.1 million in agency-backed collateralized mortgage obligations (CMOs) and $5.6 million in municipal debt, helping to improve the availability of credit in two distressed markets.  The majority of these securities purchases would not likely have been made by the Company, absent the Treasury investment.  Including both securities and direct loans, the Company has increased its investment in credit markets by $44.7 million over the last twelve months.

 

 

 

In addition, on April 16, 2009, the Company announced the signing of a definitive agreement with Southern Bank of Commerce, a troubled financial institution headquartered in Paragould, Arkansas, whereby Southern Bank of Commerce will be acquired by the Company and merged into Southern Missouri Bank and Trust Co.  As of March 31, 2009, Southern Bank of Commerce had total assets of $30.5 million and deposits of $29.1 million.  The Company anticipated, at the time it applied for the CPP funding, that some troubled institutions would likely become available given the current state of the economy and the banking system.  The Company also believed that it could assist Treasury in meeting its goals by helping to make credit available in communities in which such institutions are located.  From December 31, 2006, through December 31, 2008, gross loans at Southern Bank of Commerce fell by 32.9%.  The Company anticipates reversing that decline, which will assist in the accomplishment of Treasury’s stated goals for the CPP.

Net income for the third quarter of fiscal 2009 increased9.6% to $984,000, as compared to $898,000 earned during the same period of the prior year.  After accounting for preferred stock dividends of $119,000 in the third quarter of fiscal 2009, net earnings available to common shareholders decreased 3.7%, to $865,000.  The increase in net income compared to the year-ago period was primarily due to a 16.2% increase in net interest income, partially offset by a 17.8% increase in noninterest expense and a 17.1% increase in provisions for loan losses.  Diluted earnings per common share for the third quarter of fiscal 2009 were $0.42, as compared to $0.40 for the third quarter of fiscal 2008.  For the first nine months of fiscal 2009, net income increased 8.3% to $2.8 million, as compared to $2.6 million earned during the same period of the prior year.  After accounting for preferred stock dividends of $154,000, net earnings available to common shareholders increased 2.3%, to $2.6 million.  The increase in net income compared to the year-ago period was primarily due to a 23.7% increase in net interest income, partially offset by a 35.3% decrease in non-interest income – the result of charges to record the other-than-temporary impairment of Company investments – an 83.6% increase in loan loss provisions, and a12.3% increase in non-interest expense.  For both the third quarter and first nine months of fiscal 2009, our increase in net interest income was due primarily to an increase in average interest-earning assets, as well as an increase in net interest rate spread.

 

 

 

The Company determined the amount of OTTI charges to record on the Freddie Mac Preferred Stock based on quoted market prices, and on the Trapeza IV CDO based on the estimated present value of expected cash flows on the instruments, discounted using a current market rate on such securities.  The Trapeza IV CDO is receiving principal in kind (PIK), in lieu of cash interest payments, and is treated by the Company as a non-accrual asset.  For the Trapeza XIII CDOs and the Preferred Term Securities pooled trust preferred investments, the Company expects to receive principal and interest in full without a material change in the scheduled interest payments, based on a review of the terms of the obligation and the financial strength of the underlying firms.

We expect to continue to grow our assets modestly through the origination and occasional purchase of loans, and purchases of investment securities.  The primary funding for our asset growth is expected to come from retail deposits, short- and long-term FHLB borrowings, and, as needed, brokered certificates of deposit.  We intend to grow deposits by offering desirable deposit products for our existing customers and by attracting new depository relationships.  We will continue to explore branch expansion opportunities in market areas that we believe present attractive opportunities for our strategic business model.

The Company’s total assets increased by $37.8 million, or 9.0%, to $455.6 million at March 31, 2009, as compared to $417.8 million at June 30, 2008.  Available-for-sale investment balances increased by $18.6 million, or 46.7%, to $58.5 million, as compared to $39.9 million at June 30, 2008.  This growth was attributed to the Company’s leveraged use of the investment by the U.S. Treasury Department of $9.6 million under its Capital Purchase Program.  Loans, net of the allowance for loan losses, increased $15.4 million, or 4.5%, to $358.4 million at March 31, 2009, as compared to $343.1 million at June 30, 2008.  Commercial real estate loan balances grew by $8.0 million, while commercial loans were up $2.2 million, as the Company continues to focus on developing this business.  Residential real estate loans were up $2.7 million.

Asset growth during the first nine months of fiscal 2009 has been funded primarily with deposit growth, which totaled $14.4 million, or 4.9%, bringing deposit balances to $306.7 million at March 31, 2009, as compared to $292.3 million at June 30, 2008.  The increase in deposits was due primarily to a $23.3 million increase in interest-bearing checking accounts, a $2.9 million increase in non-interest checking accounts, and a $6.1 million increase in certificates of deposit, partially offset by a $15.3 million decrease in combined money market passbook savings and money market deposit accounts, and a $2.7 million decrease in statement savings accounts.  Included in those figures is a decrease in public unit funds of $13.4 million, and an increase in brokered CDs of $4.2 million, meaning that retail, non-brokered deposits were up $23.7 million since June 30, 2008. The Company attributes strong deposit growth to introduction of its new “rewards checking” product, which provides the depositor an above-market yield on their checking account when the customer meets certain conditions such as debit card use and receipt of electronic monthly statements.  Deposit outflows from money market passbook savings, money market deposit accounts, and statement savings accounts are attributed to scheduled withdrawals of public unit funds, and customer preference for products offering higher yields, including our own reward checking and certificate of deposit products.  The Company also used FHLB advances, which increased $8.5 million, or 13.2%, to $72.5 million at March 31, 2009, as compared to $64.1 million at June 30, 2008.  Securities sold under agreements to repurchase totaled $26.2 million at March 31, 2009, an increase of $4.4 million, or 20.3%, compared to $21.8 million at June 30, 2008.

Total stockholders’ equity increased $10.7 million, or 35.0%, to $41.1 million at March 31, 2009, as compared to $30.5 million at June 30, 2008.  The increase was primarily due to the $9.6 million investment in preferred equity by the U.S. Treasury Department under the terms of its Capital Purchase Program.  Additionally, capital increased due to retention of net income, an increase in the market value of the Company’s available-for-sale investment portfolio, and the exercise of stock options outstanding, partially offset by stock repurchases and cash dividends paid on both common and preferred shares.

The tables on the following pages present certain information regarding Southern Missouri Bancorp, Inc.’s financial condition and net interest income for the three- and nine-month periods ending March 31, 2009 and 2008.  The tables present the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities.  We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown.  Yields on tax-exempt obligations were not computed on a tax equivalent basis.

 

 

 

 

 

 

 

 

 

 

 

 

General.  Net income for the three- and nine-month periods ended March 31, 2009, was $984,000 and $2.8 million, respectively.  After preferred dividends of $119,000 paid in the three-month period ended March 31, 2009, net income available to common shareholders was $865,000, a decrease of $33,000, or 3.7%, as compared to $898,000 earned in the same period of the prior fiscal year.  After preferred dividends of $154,000, paid in the nine-month period ended March 31, 2009, net income available to common shareholders was $2.6 million, an increase of $60,000, or 2.3%, as compared to the $2.6 million earned in the same period of the prior fiscal year.  Basic and diluted net income available to common shareholders was $0.42 for the third quarter and $1.24 for the first nine months of fiscal 2009, compared to $0.41 basic and $0.40 diluted net income available to common shareholders for thethird quarter, and $1.18 basic and $1.17 diluted for the first nine months of fiscal 2008.  Our annualized return on average assets for the three- and nine-month periods ended March 31, 2009, was 0.87% and 0.86%, respectively, compared to0.90% and 0.89%, respectively, for the same periods of the prior fiscal year.  Our return on average common stockholders’ equity for the three- and nine-month periods ended March 31, 2009, was 11.0% and 11.4%, respectively, compared to 11.8% and 11.6%, respectively, for the same periods of the prior fiscal year.

Net Interest Income.  Net interest income for the three- and nine-month periods ended March 31, 2009, was $3.6 million and $10.5 million, respectively, increases of $500,000, or 16.2%, and $2.0 million, or 23.7%, respectively, as compared to the same periods of the prior fiscal year.  For both the three- and nine-month periods, the increases reflected our growth initiatives, which resulted in increases in the average balances of both interest-earning assets and interest-bearing liabilities, and an expansion of our net interest rate spread.  Our interest rate spread was 3.09% and 3.13%, respectively, for the three- and nine-month periods ended March 31, 2009, as compared to 2.95% and 2.76%, respectively, for the same periods of the prior fiscal year.  For the three- and nine-month periods ended March 31, 2009, our net interest margin, determined by dividing the annualized net interest income by total average interest-earning assets, was 3.36% and 3.39%, respectively, compared to 3.25% and 3.09%, respectively, for the same periods of the prior fiscal year. The increase in interest rate spread for the three-month period resulted from a 100 basis point decrease in the average cost of interest-bearing liabilities, partially offset by an 86 basis point decrease in the average yield on interest-earning assets.  For the nine-month period, the increase in interest rate spread resulted from a 120 basis point decrease in the average cost of interest-bearing liabilities, partially offset by an 83 basis point decrease in the average yield on interest-earning assets.  Expansion of our interest rate spread was attributed primarily to the faster re-pricing of liabilities (compared to assets) on the Company’s balance sheet in a falling rate environment, combined with the improved slope of the yield curve.

Interest Income.  Total interest income for the three- and nine-month periods ended March 31, 2009, was $6.3 million and $18.9 million, respectively, decreases of $96,000, or 1.5%, and $159,000, or 0.8%, respectively, from the amounts earned in the same periods of the prior fiscal year. The decreases were due to the 86 and 83 basis point decreases, respectively, in the yield on interest-earning assets, partially offset by increases of $48.2 million, or 12.7%, and $46.3 million, or 12.6%, respectively, in the average balance of interest-earning assets during the three- and nine-month periods ended March 31, 2009.  For the three-and nine-month periods ended March 31, 2009, the average interest rate on interest-earning assets was 5.90% and 6.12%, respectively, as compared to 6.76% and 6.95%, respectively, for the same periods of the prior year.

Interest Expense.  Total interest expense for the three- and nine-month periods ended March 31, 2009, was $2.7 million and $8.4 million, respectively, decreases of $593,000, or 18.0%, and $2.2 million, or 20.4%, respectively, as compared to the same periods of the prior fiscal year.  The decreases were due to the 100 and 120 basis point decreases, respectively, in the average cost of interest-bearing liabilities, partially offset by increases of $38.2 million, or 11.0%, and $39.0 million, or 11.6%, respectively, in the average balance of interest-bearing liabilities during the three- and nine-month periods ended March 31, 2009.  For the three- and nine-month periods ended March 31, 2009, the average interest rate on interest-bearing liabilities was 2.81% and 2.99%, respectively, as compared to 3.81% and 4.19%, respectively, for the same periods of the prior fiscal year.  The increase in the average balance of interest-bearing liabilities was primarily due to funding needed for asset growth.

Provision for Loan Losses.  The provision for loan losses for the three- and nine-month periods ended March 31, 2009, was $410,000 and $1.0 million, respectively, as compared to $350,000 and $550,000, respectively, for the same periods of the prior fiscal year.  The increase in provisions was primarily due to management’s belief that it is appropriate to maintain larger reserves in light of continuing deterioration of the credit and housing markets.  In addition, the Company’s growth, over the last several years, in its commercial and commercial real estate loan portfolios has required increased provisions for loan losses, as those loan types generally carry additional risk.  In general, however, the Company does not anticipate that it will realize the level of credit problems that have been experienced by financial institutions more heavily involved in either subprime or Alt-A residential lending, or construction and development lending.  Although we believe that we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary as the loan portfolio grows, as economic conditions remain poor, and as other conditions differ from the current operating environment.  Even though we use the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.  (See “Critical Accounting Policies”, “Allowance for Loan Loss Activity” and “Nonperforming Assets”).

Non-interest Income.  Non-interest income for the three- and nine-month periods ended March 31, 2009, was $582,000 and $1.2 million, respectively, decreases of $19,000, or 3.2%, and $633,000, or 35.3%, compared to the same periods of the prior fiscal year.  The decrease for the three-month period was primarily due to lower NSF volume, partially offset by higher income from debit card activity, secondary loan market originations, and fees shared on discount brokerage commissions.  For the nine-month period, decreases were primarily due to the charges incurred to recognize the other-than-temporary impairment (“OTTI”) of two investments held by the Company.  Outside those charges, noninterest income would have increased 2.6% in the nine-month period ended March 31, 2009, attributable to increased debit card activity fees and secondary market loan sale income.

Non-interest Expense.  Non-interest expense for the three- and nine-month periods ended March 31, 2009, was $2.3 million and $6.6 million, respectively, increases of $354,000, or 17.8%, and $723,000, or 12.3%, respectively, compared to the same periods of the prior fiscal year.  For both the three- and nine-month periods ended March 31, 2009, the increases in non-interest expense were primarily in the categories of compensation and benefits and deposit insurance assessments.  Compensation increases were attributed to the addition of key personnel andgeneral increases in compensation levels.  Deposit insurance assessment increases were attributed to the exhaustion of the Bank’s one-time credit provided under the new deposit insurance assessment program instituted by the FDIC in 2006, and base assessment rate increases by the FDICin an attempt to replenish the DIF.  Going forward, additional deposit insurance assessment increases are anticipated based on the likelihood of additional losses experienced by the DIF. As the Company continues to grow its balance sheet, non-interest expense will continue to increase due to compensation, expenses related to expansion, and inflation.  Our efficiency ratio, determined by dividing total non-interest expense by the sum of net interest income and non-interest income, was 56.3% and 56.5%, respectively, for the three- and nine-month periods ended March 31, 2009, as compared to 54.0% and 57.1%, respectively, for the same periods of the prior fiscal year.

Income Taxes.  Provisions for income taxes for the three- and nine-month periods ended March 31, 2009, were $423,000 and $1.3 million, respectively, decreases of $19,000, or 4.4%, and $22,000, or 1.7%, compared to the same periods of the prior fiscal year.  Our effective tax rate for the three- and nine-month periods ended March 31, 2009, was 30.1% and 30.9%, respectively, as compared to 33.0% for the same periods of the prior fiscal year.  For both the three-and nine-month periods, the decrease in the effective tax rate was attributable to the Company’s increased investment in tax-exempt securities and purchases of tax credits; the decreases in tax provisions were due to the lower effective tax rate, partially offset by higher pre-tax income.

The Company regularly reviews its allowance for loan losses and makes adjustments to its balance based on management’s analysis of the loan portfolio, the amount of non-performing and classified assets, as well as general economic conditions.  Although the Company maintains its allowance for loan losses at a level that it considers sufficient to provide for losses, there can be no assurance that future losses will not exceed internal estimates.  In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies, which can order the establishment of additional loss provisions.  The following table summarizes changes in the allowance for loan losses over the nine months ended March 31, 2009 and 2008:

The allowance for loan losses has been calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Company’s loans.  Management considers such factors as the repayment status of a loan, the estimated net fair value of the underlying collateral, the borrower’s intent and ability to repay the loan, local economic conditions, and the Company’s historical loss ratios.  We maintain the allowance for loan losses through the provisions for loan losses that we charge to income.  We charge losses on loans against the allowance for loan losses when we believe the collection of loan

principal is unlikely. The allowance for loan losses increased $716,000 to $4.3 million at March 31, 2009, from $3.6 million at June 30, 2008.  At March 31, 2009, the Bank had $9.8 million, or 2.15% of total assets, adversely classified ($9.8 million classified “substandard”; none classified “doubtful” or “loss”), as compared to adversely classified assets of $4.5 million, or 1.07% of total assets at June 30, 2008, and $4.2 million, or 1.03% of total assets, adversely classified at March 31, 2008.  The increase is primarily due to the classification of two loans totaling $3.5 million outstanding to a bank holding company, as well as the classification of the Company’s investments in pooled trust preferred securities (see “Executive Summary”).  Other classified assets were generally comprised of loans secured by commercial real estate, agricultural real estate, or inventory and equipment.  With the exception of the Trapeza IV CDO (see “Executive Summary” and “Nonperforming Assets”), all classified assets were performing in accordance with terms at March 31, 2009.  All assets were classified due to concerns as to the borrowers’ ability to continue to generate sufficient cash flows to service the debt.

While management believes that our asset quality remains strong, it recognizes that, due to the continued growth in the loan portfolio and potential changes in market conditions, our level of nonperforming assets and resulting charge offs may fluctuate. Higher levels of net charge offs requiring additional provisions for loan losses could result.  Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.

The ratio of nonperforming assets to total assets and non-performing loans to net loans receivable is another measure of asset quality.  Nonperforming assets of the Company include nonaccruing loans, accruing loans delinquent/past maturity 90 days or more, and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure.  The table on the following page summarizes changes in the Company’s level of nonperforming assets over selected time periods:

At March 31, 2009, non-performing assets totaled $690,000, up from $68,000 at June 30, 2008, and $82,000 at March 31, 2008.  A single relationship consisting of two delinquent loans and one parcel of foreclosed real estate accounts for the majority of the increase in those non-performing asset classes.  Most of the increase in other repossessed assets was due to collateral repossessed from one commercial borrower, to which most of the increase in charge-offs for the nine-month period ended March 31, 2009, can also be attributed (see Allowance for Loan Loss Activity).  Nonperforming investments consist of the Company’s investment in Trapeza CDO IV, Ltd., class C2 (see Executive Summary).

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loans purchases, deposit withdrawals and operating expenses. Our primary sources of funds include deposit growth, securities sold under agreements to repurchase, FHLB advances, brokered deposits, amortization and prepayment of loan principal and interest, investment maturities and sales, and funds provided by our operations. While the scheduled loan repayments and maturing investments are relatively predictable, deposit flows, FHLB advance redemptions, and loan and security prepayment rates are significantly influenced by factors outside of the Bank’s control, including interest rates, general and local economic conditions and competition in the marketplace.  The Bank relies on FHLB advances and brokered deposits as additional sources for funding cash or liquidity needs.

The Company uses its liquid resources principally to satisfy its ongoing cash requirements, which include funding loan commitments, funding maturing certificates of deposit and deposit withdrawals, maintaining liquidity, funding maturing or called FHLB advances, purchasing investments, and meeting operating expenses.  At March 31, 2009, the Company had outstanding commitments to fund approximately $56.8 million in mortgage and non-mortgage loans.  These commitments are expected to be funded through existing cash balances, cash flow from normal operations and, if needed, FHLB advances.  At March 31, 2009, the Bank had pledged its residential real estate loan portfolio and a significant portion of its commercial real estate portfolio with the FHLB for available credit of approximately $129.0 million, of which $72.5 million had been advanced (additionally, letters of credit totaling $1.5 million had been issued on the Bank’s behalf in order to secure public unit funding).

The Bank has the ability to pledge several of its other loan portfolios, including home equity and commercial business loans, which could provide additional collateral for additional borrowings; in total, FHLB borrowings are generally limited to 40% of Bank assets, or $180.7 million, which means $106.7 million in borrowings remain available.  Along with the ability to borrow from the FHLB, management believes its liquid resources will be sufficient to meet the Company’s liquidity needs.

The Bank is subject to minimum regulatory capital requirements pursuant to regulations adopted by the federal banking agencies.  The requirements address both risk-based capital and leverage capital.  As of March 31, 2009, and June 30, 2008, the Bank met all applicable adequacy requirements.

The FDIC has in place qualifications for banks to be classified as “well-capitalized.”  As of March 31, 2009, the most recent notification from the FDIC categorized the Bank as “well-capitalized.”  There were no conditions or events since the FDIC notification that has changed the Bank’s classification.

The Bank’s actual capital amounts and ratios are also presented in the following tables.

PART I: Item 3:  Quantitative and Qualitative Disclosures About Market Risk

The goal of the Company’s asset/liability management strategy is to manage the interest rate sensitivity of both interest-earning assets and interest-bearing liabilities in order to maximize net interest income without exposing the Bank to an excessive level of interest rate risk.  The Company employs various strategies intended to manage the potential effect that changing interest rates may have on future operating results.  The primary asset/liability management strategy has been to focus on matching the anticipated re-pricing intervals of interest-earning assets and interest-bearing liabilities. At times, however, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the Company may determine to increase its interest rate risk position somewhat in order to maintain its net interest margin.

In an effort to manage the interest rate risk resulting from fixed rate lending, the Bank has utilized longer term FHLB advances (with maturities up to ten years), subject to early redemptions and fixed terms.  Other elements of the Company’s current asset/liability strategy include (i) increasing originations of commercial business, commercial real estate, agricultural operating lines, and agricultural real estate loans, which typically provide higher yields and shorter repricing periods, but inherently increase credit risk; (ii) actively soliciting less rate-sensitive deposits, including aggressive use of the Company’s “rewards checking” product, and (iii) offering competitively-priced money market accounts and CDs with maturities of up to five years.  The degree to which each segment of the strategy is achieved will affect profitability and exposure to interest rate risk.

The Company continues to originate long-term, fixed-rate residential loans.  During the first nine months of fiscal year 2009, fixed rate residential loan production totaled $12.5 million, as compared to $16.1 million during the same period of the prior year.  At March 31, 2009, the fixed rate residential loan portfolio was $97.0 million with a weighted average maturity of 207 months, as compared to $98.0 million at March 31, 2008, with a weighted average maturity of 205 months.  The Company originated $9.0 million in adjustable-rate residential loans during the nine-month period ended March 31, 2009, as compared to $6.5 million during the same period of the prior year.  At March 31, 2009, fixed rate loans with remaining maturities in excess of 10 years totaled $89.9 million, or 25.1% of net loans receivable, as compared to $81.8 million, or 24.7% of net loans receivable at March 31, 2008.  The Company originated $40.7 million of fixed rate commercial and commercial real estate loans during the nine-month period ended March 31, 2009, as compared to $43.0 million during the same period of the prior year.  At March 31, 2009, the fixed rate commercial and commercial real estate loan portfolio was $111.7 million with a weighted average maturity of 39.1 months, compared to $112.3 million at March 31, 2008, with a weighted average maturity of 29 months.  The Company originated $52.4 million in adjustable rate commercial and commercial real estate loans during the nine-month period ended March 31, 2009, as compared to $35.9 million during the same period of the prior year.  At March 31, 2009, adjustable-rate home equity lines of credit totaled $10.8 million, as compared to $7.4 million at March 31, 2008.  Over the last several years, the Company had maintained a relatively short weighted average life of its investment portfolio; however, in anticipation of the current declining rate environment, management began to expand the portfolio’s duration during the prior fiscal year.  At March 31, 2009, the portfolio’s weighted-average life stands at 4.3 years, compared to 4.9 years at March 31, 2008 (despite management’s efforts to expand the duration of the portfolio, the estimated weighted-average life of the portfolio has dropped in recent months as prepayment activity on mortgage-backed securities accelerates).  Management continues to focus on customer retention, customer satisfaction, and offering new products to customers in order to increase the Company’s amount of less rate-sensitive deposit accounts.  The company remains “liability-sensitive,” in that our liabilities generally re-price more quickly than our assets.  As we have reached what we expect to be the bottom of the current interest rate cycle, it is anticipated that management will seek to reduce the amount of sensitivity, but management does not expect to achieve the ability to maintain its net interest margin in a rising rate environment.

PART I: Item 4:  Controls and Procedures

An evaluation of Southern Missouri Bancorp’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended, (the “Act”)) as of March 31, 2009, was carried out under the supervision and with the participation of our Chief Executive and Financial Officer, and several other members of our senior management.  The Chief Executive and Financial Officer concluded that, as of March 31, 2009, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to management (including the Chief Executive and Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the quarter ended March 31, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Company does not expect that its disclosures and procedures will prevent all error and all fraud.  A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met.  Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II: Other Information

Item 1:  Legal Proceedings

Item 1a:  Risk Factors

 

 

 

Item 2:  Unregistered Sales of Equity Securities and Use of Proceeds

Item 3:  Defaults upon Senior Securities

Not applicable

Item 4:  Submission of Matters to a Vote of Security Holders

None

Item 5 -Other Information

None

Item 6 –Exhibits

        31                                Rule 13a-14(a) Certification

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.