PART I:
Item 2
: Management's Discussion and Analysis of Financial Condition and Results of Operations
SOUTHERN MISSOURI BANCORP, INC.
General
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). The Bank currently conducts its business through its home office located in Poplar Bluff and eight full service branch facilities in Poplar Bluff (2),
Van Buren, Dexter, Kennett, Doniphan, Sikeston, 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, 2007, 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 September 30, 2007, and the results of operations for the three-month periods ended September 30, 2007 and 2006,
respectively.
Forward Looking Statements
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 strength of the United States economy in general and the strength of the local economies in which we
conduct operations;
-
the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies
of the Federal Reserve Board;
-
inflation, interest rate, market and monetary fluctuations;
-
the timely development of and acceptance of our new products and services and the perceived overall value of
these products and services by users, including the features, pricing and quality compared to competitors' products and services;
-
the willingness of users to substitute our products and services for products and services of our
competitors;
-
the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking,
securities and insurance);
-
the impact of technological changes;
-
acquisitions;
9
NEXT PAGE
-
changes in consumer spending and saving habits; and
-
our success at managing the risks involved in the foregoing.
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.
Critical Accounting Policies
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 2007 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 2007 Annual Report.
Executive Summary
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 net interest income is also impacted by the shape of the market yield curve. A steep yield curve - in which the difference in interest rates between
short term and long term periods is relatively large - could be beneficial to our net interest income, as the interest rate spread between our additional interest-earning assets and interest-bearing
liabilities would be larger. Conversely, a flat or flattening yield curve, in which the difference in rates between short term and long term periods is relatively small or shrinking, or an inverted
yield curve, in which short term rates exceed long term rates, could have an adverse impact on our net interest income, as our interest rate spread could decrease.
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.
During the first three months of fiscal 2008, we grew our balance sheet by $6.1 million, which was consistent with the Company's growth strategies. This
additional growth reflected a $7.2 million increase in total net loans, a $4.4 million decrease in deposits, and an $11.6 million increase in borrowed funds. The growth in loans was primarily
due to commercial and commercial real estate loan originations and advances, coupled with residential real estate loan originations. The increase in borrowed funds was in the form of short-term
borrowings from the Federal Home Loan Bank of Des Moines (FHLB), used in part to fund loan growth.
Our net income for the first quarter of 2008 increased 9.9% to $813,000, as compared to $740,000 earned during the same period of the prior year. The
increase in net income was primarily due to a 5.7% increase in net interest income, partially offset by a 5.7% increase in non-interest expense. Diluted earnings per share for the first quarter of
fiscal 2008 were $0.36, as compared to $0.33 for the first quarter of fiscal 2007. For the three-month period ended September 30, 2007, our growth in interest income was derived primarily from
the overall growth in our balance sheet and the increase in yields earned; the increase in interest expense reflected the growth in our interest-bearing liabilities and increases in rates
paid.
Short-term market interest rates declined during the first three months of fiscal 2008, following increases during the previous two fiscal years. After two
years of increases left the overnight lending rate at 5.25% in June 2006, the Federal Open Market Committee of the Federal Reserve Bank held the rate steady until September 2007, when it cut rates by
50 basis points, to 4.75%. From July 1 to September 30, 2007, rates on short term treasuries declined based on investor expectations regarding short-term monetary policy. At July 1, the six-month
treasury bill and two-year treasury note yielded almost 5%, three months later, the yield was off nearly 100 basis points; meanwhile the ten-year bond declined about 50 basis points. The result was a
steepened yield curve. In this rate environment, our net interest margin decreased four basis points when comparing the first quarter of fiscal 2008 with the corresponding period in fiscal 2007;
however, compared to the fourth quarter of fiscal 2007, our net interest margin improved from 2.92% to 2.94% in the first quarter of fiscal 2008. The $142,000 increase in net interest income for the
first quarter of 2008, when compared to the corresponding period in 2007, reflected growth of 7.2% in our average interest-earning assets, compared to the prior period.
10
NEXT PAGE
The Company's net income is also affected by the level of non-interest income and operating expenses. Non-interest income consists primarily of service
charges, ATM and loan fees, and other general operating income. Operating expenses consist primarily of salaries and employee benefits, occupancy-related expenses, postage, insurance, advertising,
professional fees, office expenses, and other general operating expenses. During the three-month period ended September 30, 2007, compared to the corresponding period ended September 30, 2006,
non-interest income increased 2.3%, primarily due to increased ATM transaction fee income and loan fee collections, partially offset by lower income from NSF charges. Non-interest expense increased during the three months ended
September 30, 2007, compared to the same period of the prior fiscal year, primarily in the categories of compensation and benefits, as well as occupancy expenses, with the increases partially offset by lower advertising costs.
We expect to continue to grow our assets modestly through the origination and occasional purchase of loans and investment securities. A portion of the
current period's loan growth is attributed to the seasonal nature of agricultural lending, and growth for the remainder of the fiscal year may not continue at the same pace. The primary funding for
our asset growth is expected to come from retail deposits, short- and long-term FHLB borrowings, and 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.
Comparison of Financial Condition at September 30, 2007, and June 30, 2007
The Company's total assets increased by $6.1 million, or 1.6%, to $386.0 million at September 30, 2007, as compared to $379.9 million at June 30, 2007.
Loans, net of the allowance for loan losses, increased $7.2 million, or 2.3%, to $319.3 million, as compared to $312.1 million at June 30, 2007. The Company continues to focus on origination of
commercial loans, resulting in growth of $3.3 million in commercial and commercial real estate loan balances. Cash and cash equivalent balances decreased $1.9 million, or 25.3%, to $5.5 million, as
compared to $7.3 million at June 30, 2007.
Asset growth during the first three months of fiscal 2008 has been funded primarily with short-term FHLB borrowings. At June 30, 2007, the Company had $7.0
million in short-term FHLB borrowings. At September 30, 2007, short-term FHLB borrowings increased to $19.6 million. During the first three months of fiscal 2008, one FHLB advance of $1.0 million was
called, and the Company replaced this funding with short-term borrowings. The remaining $11.6 million increase in short-term borrowings was due to asset growth and decreases in deposit balances. FHLB
advances totaled $65.6 at September 30, 2007, compared to $54.0 million at June 30, 2007. At September 30, 2006, FHLB advances totaled $65.9 million. Deposits decreased $4.4 million, or 1.6%, to
$265.7 million at September 30, 2007, as compared to $270.1 million at June 30, 2007. At September 30, 2006, deposits totaled $247.3 million. The decrease in total deposits was primarily due to a
$3.8 million decrease in checking account balances (of which $3.0 million was in accounts tied to repurchase agreements, with customers whose account balances tend to fluctuate), and a $3.4 million
combined decrease in money market passbook and money market deposit accounts, partially offset by a $2.6 million increase in certificates of deposit. Securities sold under agreements to repurchase decreased
$1.6 million, or 8.9%; the decrease was primarily attributed to normal balance fluctuations with customers holding the agreements.
Total stockholders' equity increased $500,000, or 1.7%, to $29.2 million at September 30, 2007, as compared to $28.7 million at June 30, 2007. The increase
was primarily due to retention of net income and an increase in the market value of the available-for-sale investment portfolio, partially offset by purchases of treasury stock and cash dividends
paid.
Average Balance Sheet for the Three Months Ended September 30, 2007 and 2006
The table on the following page presents certain information regarding Southern Missouri Bancorp, Inc.'s financial condition and net interest income for the
three-month periods ending September 30, 2007 and 2006. The table presents 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.
11
NEXT PAGE
|
September 30, 2007
|
|
September 30, 2006
|
|
|
Average
Balance
|
Interest and
Dividends
|
Yield/
Cost
|
|
Average
Balance
|
Interest and
Dividends
|
Yield/
Cost
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
Mortgage loans (1)
|
$ 226,041,123
|
$ 4,042,688
|
7.15
|
%
|
$ 201,692,028
|
$ 3,466,447
|
6.87
|
%
|
Other loans (1)
|
91,014,918
|
1,868,620
|
8.21
|
|
86,304,988
|
1,745,031
|
8.09
|
|
|
|
Total net loans
|
317,056,041
|
5,911,308
|
7.46
|
|
287,997,016
|
5,211,478
|
7.24
|
|
Mortgage-backed securities
|
11,022,386
|
125,066
|
4.54
|
|
14,575,426
|
150,222
|
4.12
|
Investment securities (2)
|
26,966,168
|
289,487
|
4.29
|
|
27,986,537
|
318,200
|
4.55
|
|
Other interest earning assets
|
2,844,650
|
6,768
|
0.95
|
|
3,180,003
|
6,385
|
0.80
|
|
|
|
Total interest earning assets (1)
|
357,889,245
|
6,332,629
|
7.08
|
|
333,738,982
|
5,686,285
|
6.82
|
|
Other noninterest earning assets (3)
|
21,715,090
|
-
|
|
|
21,202,814
|
-
|
|
|
|
|
|
|
|
|
|
Total assets
|
$ 379,604,335
|
$ 6,332,629
|
|
|
$ 354,941,796
|
$ 5,686,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
Savings accounts
|
$ 77,765,702
|
$ 757,396
|
3.90
|
|
$ 72,670,458
|
$ 682,453
|
3.76
|
|
NOW accounts
|
29,925,632
|
104,072
|
1.39
|
|
29,019,502
|
94,453
|
1.30
|
|
Money market accounts
|
5,880,962
|
27,700
|
1.88
|
|
8,245,702
|
41,356
|
2.01
|
|
Certificates of deposit
|
132,470,942
|
1,636,992
|
4.94
|
|
123,237,029
|
1,323,069
|
4.29
|
|
|
|
Total interest bearing deposits
|
246,043,238
|
2,526,130
|
4.11
|
|
233,172,691
|
2,141,331
|
3.67
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
Securities sold under agreements
to repurchase
|
15,689,972
|
192,551
|
4.91
|
|
10,400,749
|
123,772
|
4.76
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
61,031,033
|
831,999
|
5.45
|
|
57,219,565
|
782,027
|
5.47
|
|
Subordinated debt
|
7,217,000
|
150,515
|
8.34
|
|
7,217,000
|
150,219
|
8.33
|
|
|
|
Total interest bearing liabilities
|
329,981,243
|
3,701,195
|
4.49
|
|
308,010,005
|
3,197,349
|
4.15
|
|
Noninterest bearing demand deposits
|
18,579,412
|
-
|
|
|
18,553,327
|
-
|
|
|
Other noninterest bearing liabilities
|
2,040,539
|
-
|
|
|
1,391,629
|
-
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
350,601,194
|
3,701,195
|
|
|
327,954,961
|
3,197,349
|
|
|
Stockholders' equity
|
29,003,141
|
-
|
|
|
26,986,835
|
-
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders' equity
|
$ 379,604,335
|
$ 3,701,195
|
|
|
$ 354,941,796
|
$ 3,197,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$2,631,434
|
|
|
|
$2,488,936
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (4)
|
|
|
2.59
|
%
|
|
|
2.67
|
%
|
Net interest margin (5)
|
|
|
2.94
|
%
|
|
|
2.98
|
%
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets
to average interest-bearing liabilities
|
108.46%
|
|
|
|
108.35%
|
|
|
|
(1)
|
Calculated net of deferred loan fees, loan discounts and loans-in-process. Non-accrual loans are included in average loans.
|
(2)
|
Includes FHLB stock and related cash dividends.
|
(3)
|
Includes average balances for fixed assets and BOLI of $8.6 million and $7.0 million, respectively, for the three-month period ending September 30, 2007, as compared to $8.9 million and $6.8 million for the same period of the prior year.
|
(4)
|
Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities.
|
(5)
|
Net interest margin represents net interest income divided by average interest-earning assets.
|
12
NEXT PAGE
Results of Operations - Comparison of the three month periods ended September 30, 2007 and 2006
General
. Net income for the three month period ended September 30, 2007, was $813,000, as compared to net income of $740,000 earned during
the same period of the prior year. Basic and diluted earnings per share were $0.37 and $0.36 for the first quarter of fiscal 2008, compared to $0.33 basic and diluted earnings per share for the first quarter of fiscal 2007. Our
annualized return on average assets was .86% for the first three months of fiscal 2008 compared to .83% for the first three months of fiscal 2007. Our return on average stockholders' equity was 11.2%
for the first three months of fiscal 2008, compared to 11.0% for the first three months of fiscal 2007.
Net Interest Income.
Net interest income for the three months ended September 30, 2007 increased $142,000 as compared to the same period of
the prior year. This increase primarily reflected our growth initiatives that resulted in increases in the average balances of both interest-earning assets and interest-bearing liabilities, and was
partially offset by a decrease in our net interest rate spread. Our net interest rate spread was 2.59% for the three-month period ended September 30, 2007, as compared to 2.67% for the same period of
the prior year. For the first quarter of fiscal 2008, our net interest margin, determined by dividing the annualized net interest income by total average interest-earning assets, was 2.94%, compared
to 2.98% for the same period of the prior year. The decrease in net interest rate spread for the three-month period ended September 30, 2007, resulted from a 34 basis point increase in the
weighted-average cost of funds, partially offset by a 26 basis point increase in the weighted-average yield on interest-earning assets. Net interest rate spread compression during the last twelve
months was attributed to repricing of liabilities at relatively higher short-term rates, while asset repriced at a slower pace and based on relatively lower longer-term interest rates. This trend
appears to have slowed -- however, if not reversed -- on a linked-quarter comparison. The Company's first quarter fiscal 2008 net interest spread improved to 2.59%, from 2.58% in the fourth
quarter of fiscal 2007, while the net interest margin improved to 2.94%, from 2.92%.
Interest Income.
Total interest income for the three-month period ended September 30, 2007, was $6.3 million, an increase of $646,000, or
11.4%, compared to the same period of the prior year. The increase was due to a $24.2 million, or 7.2%, increase in the average balance of interest-earning assets, to $358 million, and a 26 basis
point increase in the yield earned on those assets. For the three-month period ended September 30, 2007, the average interest rate on interest-earning assets was 7.08%, as compared to 6.82% for the
same period of the prior year.
Interest Expense
. Total interest expense for the three-month period ended September 30, 2007, was $3.7 million, an increase of $504,000, or
15.8%, compared to the same period of the prior year. The increase was due to a $22.0 million, or 7.1%, increase in the average balance of interest-bearing liabilities, to $330 million, and the
increase in the weighted average cost of funds of 34 basis points. The increase in the average balance of interest-bearing liabilities was primarily due to funding needed to provide for asset
growth.
Provision for Loan Losses
. The provision for loan losses for the three-month period ended September 30, 2007, was $110,000, as compared to
$125,000 for the same period of the prior year. 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. Although we believe that we have established and maintained the allowance for loan losses at adequate levels, additions will be
necessary as the loan portfolio grows, as economic conditions change, 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 increased $13,000, or 2.3%, to $590,000 for the three-month period ended September 30, 2007, as
compared to $577,000 for the same period of the prior year. The increase was primarily due to increased collections of loan fees, charges for NSF activity, and income from ATM and check card
transactions.
Non-interest Expense.
Non-interest expense increased $102,000, or 5.7%, to $1.9 million for the three-month period ended September 30, 2007,
as compared to $1.8 million for the same period of the prior year. The increase in non-interest expense was primarily due to increased salaries and benefits, as well as increased occupancy expenses.
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 58.9% for the first quarter of fiscal 2008, as compared to 58.6% for the same period of the prior
year.
Income Taxes.
Provisions for income taxes for the three-month period ended September 30, 2007, decreased $5,000, or 1.2%, to $399,000, as
compared to $404,000 for the same period of the prior year. Our effective tax rate for the first three months of fiscal 2008 was 32.9%, as compared to 35.3% for the same period of the prior year. The
decrease in the effective tax rate and our provisions for income taxes was primarily due to the Company's investment in tax-exempt securities and purchases of tax credits, partially offset by
increased pre-tax income.
13
NEXT PAGE
Allowance for Loan Loss Activity
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 three months ended September 30, 2007 and
2006:
|
2007
|
2006
|
Balance, beginning of period
|
$ 2,537,659
|
$ 2,058,144
|
|
|
Loans charged off:
|
|
|
Residential real estate
|
(11,150)
|
(30,222)
|
Commercial business
|
-
|
-
|
Consumer
|
(17,779)
|
(20,524)
|
|
|
Gross charged off loans
|
(28,929)
|
(50,746)
|
|
|
Recoveries of loans previously charged off:
|
|
|
Residential real estate
|
-
|
3,000
|
Commercial business
|
68
|
19,578
|
Consumer
|
624
|
2,915
|
|
|
Gross recoveries of charged off loans
|
692
|
25,493
|
|
|
Net charge offs
|
(28,237)
|
(25,253)
|
Provision charged to expense
|
110,000
|
125,000
|
|
|
Balance, end of period
|
$ 2,619,422
|
$ 2,157,891
|
|
|
|
|
|
Ratio of net charge offs during the period
to average loans outstanding during the period
|
0.01%
|
0.01%
|
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 $82,000 to $2.6 million at September 30, 2007, from $2.5
million at June 30, 2007. At September 30, 2007, the Bank had $4.4 million, or 1.13% of total assets adversely classified (substandard, doubtful, or loss) as compared to adversely classified assets
of $1.0 million, or .28% of assets at September 30, 2006. At September 30, 2007, the Company had classified assets as substandard, doubtful, and loss, in the amount of $4.4 million, $4,000, and $0,
respectively.
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.
Nonperforming Assets
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
following table summarizes changes in the Company's level of nonperforming assets over selected time periods:
|
9/30/2007
|
6/30/2007
|
9/30/2006
|
Loans past maturity/delinquent 90 days or more and non-accrual loans
|
|
|
|
Residential real estate
|
$ -
|
$ -
|
$ 149,000
|
Commercial real estate
|
40,000
|
20,000
|
-
|
Consumer
|
4,000
|
4,000
|
18,000
|
|
|
Total loans past maturity/delinquent 90 days or more and non-accrual loans
|
44,000
|
24,000
|
167,000
|
Foreclosed real estate or other real estate owned
|
86,000
|
111,000
|
339,000
|
Other repossessed assets
|
17,000
|
12,000
|
10,000
|
|
|
Total nonperforming assets
|
$ 147,000
|
$ 147,000
|
$ 516,000
|
|
|
Percentage nonperforming assets to total assets
|
0.04%
|
0.04%
|
0.14%
|
Percentage nonperforming loans to net loans
|
0.01%
|
0.01%
|
0.06%
|
14
NEXT PAGE
Liquidity Resources
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 September 30, 2007, the Company had outstanding commitments to fund approximately $43.9 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 September 30, 2007, the Bank had pledged its residential real estate loan portfolio with FHLB with available credit of approximately $99.1 million, of which $65.6 million had been advanced. In addition, the Bank has the ability to pledge several of its other loan portfolios, including commercial real estate, home equity, and commercial business loans, which could provide additional collateral for an additional $86.3 million in borrowings at September 30, 2007. In total, FHLB borrowings are generally limited to 35% of bank assets, or $134.2 million, which means $68.6 million in borrowings remains 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.
Regulatory Capital
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 September 30, 2007, and June 30, 2007, the Bank met all applicable adequacy requirements.
The FDIC has in place qualifications for banks to be classified as "well-capitalized." As of September 30, 2007, 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.
|
Actual
|
For Capital Adequacy
Purposes
|
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
As of September 30, 2007
|
|
|
|
|
|
|
Total Capital
(to Risk-Weighted Assets)
|
$33,138,000
|
11.77%
|
$22,524,000
|
8.00%
|
$28,155,000
|
10.00%
|
|
|
|
|
|
|
|
Tier I Capital
(to Risk-Weighted Assets)
|
30,519,000
|
10.84%
|
11,262,000
|
4.00%
|
16,893,000
|
6.00%
|
|
|
|
|
|
|
|
Tier I Capital
(to Average Assets)
|
30,519,000
|
8.14%
|
14,997,000
|
4.00%
|
18,746,000
|
5.00%
|
|
Actual
|
For Capital Adequacy
Purposes
|
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
As of June 30, 2007
|
|
|
|
|
|
|
Total Risk-Based Capital
(to Risk-Weighted Assets)
|
$ 32,420,000
|
11.81%
|
$ 21,954,000
|
8.00%
|
$ 27,443,000
|
10.00%
|
|
|
|
|
|
|
|
Tier I Capital
(to Risk-Weighted Assets)
|
29,882 ,000
|
10.89%
|
10,977,000
|
4.00%
|
16,466,000
|
6.00%
|
|
|
|
|
|
|
|
Tier I Capital
(to Average Assets)
|
29,882,000
|
8.10%
|
14,756,000
|
4.00%
|
18,445,000
|
5.00%
|
15
NEXT PAGE
PART I:
Item 3
: Quantitative and Qualitative Disclosures About Market Risk
SOUTHERN MISSOURI BANCORP, INC.
Asset and Liability Management and 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 repricing 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 (maturities up to ten
years), subject to early redemption 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) limiting the
price volatility of the investment portfolio by maintaining a weighted average maturity of less than five years, (iii) actively soliciting less rate-sensitive deposits, and (iv) 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.
During the first three months of fiscal year 2008, fixed rate residential loan production totaled $6.4 million, as compared to $3.5 million during the same
period of the prior year. At September 30, 2007, the fixed rate residential loan portfolio was $95.1 million with a weighted average maturity of 206 months, as compared to $87.1 million at September
30, 2006, with a weighted average maturity of 196 months. The Company originated $2.4 million in adjustable-rate residential loans during the three-month period ended September 30, 2007, as compared
to $2.2 million during the same period of the prior year. At September 30, 2007, fixed rate loans with remaining maturities in excess of 10 years totaled $80.4 million, or 25.2% of net loans
receivable, as compared to $71.4 million, or 24.5% of net loans receivable at September 30, 2006. The Company originated $14.1 million of fixed rate commercial and commercial real estate loans during
the three-month period ended September 30, 2007, as compared to $15.0 million during the same period of the prior year. At September 30, 2007, the fixed rate commercial and commercial real estate
loan portfolio was $100.7 million with a weighted average maturity of 28 months, compared to $60.8 million at September 30, 2006, with a weighted average maturity of 41 months. The Company originated
$8.1 million in adjustable rate commercial and commercial real estate loans during the three-month period ended September 30, 2007, as compared to $15.7 million during the same period of the prior
year. At September 30, 2007, adjustable-rate home equity lines of credit totaled $6.5 million, as compared to $6.3 million at September 30, 2006. Over the last several years, the Company has
maintained a weighted average life of its investment portfolio of less than four years. 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. As the company believed the Federal Reserve's Open Market Committee was approaching the peak of the
interest rate cycle in 2006, management began to avoid extending maturities of deposits and borrowings. As rates have been lowered recently, management will re-evaluate this strategy, exploring the
possibility of locking in some long-term borrowing costs.
16
NEXT PAGE
Interest Rate Sensitivity Analysis
The following table sets forth as of September 30, 2007, management's estimates of the projected changes in net portfolio value ("NPV") in the event of 100,
200, and 300 basis point ("bp") instantaneous and permanent increases, and 100, 200, and 300 basis point instantaneous and permanent decreases in market interest rates. Dollar amounts are expressed
in thousands.
BP Change
|
|
Estimated Net Portfolio Value
|
|
NPV as % of PV of Assets
|
|
in Rates
|
|
$ Amount
|
|
$ Change
|
|
% Change
|
|
NPV Ratio
|
|
Change
|
|
+300
|
|
$
|
20,461
|
|
$
|
(13,648
|
)
|
|
-40
|
%
|
|
5.62
|
%
|
|
-3.23
|
%
|
+200
|
|
|
25,564
|
|
|
(8,545
|
)
|
|
-25
|
%
|
|
6.85
|
%
|
|
-2.00
|
%
|
+100
|
|
|
30,217
|
|
|
(3,892
|
)
|
|
-11
|
%
|
|
7.96
|
%
|
|
-0.89
|
%
|
NC
|
|
|
|
|
|
-
|
|
|
-
|
|
|
8.98
|
%
|
|
-
|
|
-100
|
|
|
35,671
|
|
|
1,562
|
|
|
5
|
%
|
|
9.16
|
%
|
|
0.31
|
%
|
-200
|
|
|
36,639
|
|
|
2,530
|
|
|
7
|
%
|
|
9.33
|
%
|
|
0.48
|
%
|
-300
|
|
|
38,486
|
|
|
4,337
|
|
|
13
|
%
|
|
9.69
|
%
|
|
0.84
|
%
|
Computations of prospective effects of hypothetical interest rate changes are based on an internally generated model using
actual maturity and repricing schedules for the Bank's loans and deposits, and are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit
run-offs, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest
rates.
Management cannot predict future interest rates or their effect on the Bank's NPV in the future. Certain shortcomings are
inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in
differing degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have an initial fixed rate period typically from one to five years and over the
remaining life of the asset changes in the interest rate are restricted. In addition, the proportion of adjustable-rate loans in the Bank's portfolio could decrease in future periods due to
refinancing activity if market interest rates remain steady in the future. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from
those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.
The Bank's Board of Directors (the "Board") is responsible for reviewing the Bank's asset and liability policies. The Board's
Asset/Liability Committee meets monthly to review interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Bank's management is responsible for administering the
policies and determinations of the Board with respect to the Bank's asset and liability goals and strategies.
17
NEXT PAGE