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SOUTHERN MISSOURI BANCORP, INC. - Quarter Report: 2009 March (Form 10-Q)

smb-10q103109.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

FORM 10-Q


(Mark One)

  x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

OR

 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 0-23406

Southern Missouri Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Missouri
  
43-1665523
(State or jurisdiction of incorporation)
  
(IRS employer id. no.)

531 Vine Street       Poplar Bluff, MO            63901
(Address of principal executive offices)           (Zip code)

(573) 778-1800
Registrant's telephone number, including area code

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    No o

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    No o

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

Yes  o    No x

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):

Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  o
 Smaller reporting company  x


Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

Class
  
Outstanding at May 15, 2009
Common Stock, Par Value $.01
  
2,087,976 Shares
 

 
 
 
 


SOUTHERN MISSOURI BANCORP, INC.
FORM 10-Q

INDEX


PART I.
Financial Information
PAGE NO.
     
Item 1.
Consolidated Financial Statements
  
     
 
 -      Consolidated Balance Sheets
3
     
 
 -      Consolidated Statements of Income and
4
 
            Comprehensive Income
     
 
 -      Consolidated Statements of Cash Flows
5
     
 
 -      Notes to Consolidated Financial Statements
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
   Operations
12
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
22
     
Item 4.
Controls and Procedures
24
     
PART II.
OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
25
     
Item 1a.
Risk Factors
25
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
26
     
Item 3.
Defaults upon Senior Securities
26
     
Item 4.
Submission of Matters to a Vote of Security Holders
26
     
Item 5.
Other Information
26
     
Item 6.
Exhibits
26
     
 
-     Signature Page
27
     
 
-     Certifications
28
     
     

 
 
 
 

PART I: Item 1:  Consolidated Financial Statements

SOUTHERN MISSOURI BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2009, AND JUNE 30, 2008

   
March 31, 2009
    
June 30, 2008
  
   
(unaudited)
        
ASSETS
            
Cash and cash equivalents
   $ 9,008,524     $ 6,042,408  
Interest-bearing time deposits
     -       1,980,000  
Available for sale securities
     58,542,439       39,915,280  
Stock in FHLB of Des Moines
     4,592,300       3,323,700  
Loans receivable, net of allowance for loan losses of
     $4,282,711 and $3,567,203 at March 31, 2009,
     and June 30, 2008, respectively
                
               
    358,436,695       343,069,775  
Accrued interest receivable
     3,103,173       3,011,777  
Premises and equipment, net
     8,158,216       8,204,631  
Bank owned life insurance – cash surrender value
     7,496,264       7,289,819  
Intangible assets, net
     1,646,459       1,837,903  
Prepaid expenses and other assets
     4,595,789       3,145,090  
     Total assets
   $ 455,579,859     $ 417,820,383  
                 
LIABILITIES and STOCKHOLDERS’ EQUITY
                
Deposits
   $ 306,698,547     $ 292,257,045  
Securities sold under agreements to repurchase
     26,234,268       21,803,513  
Advances from FHLB of Des Moines
     72,500,000       64,050,000  
Accounts payable and other liabilities
     787,206       821,407  
Accrued interest payable
     1,017,108       1,199,769  
Subordinated debt
     7,217,000       7,217,000  
     Total liabilities
     414,454,129       387,348,734  
                 
Commitments and contingencies
     -       -  
                 
Preferred stock, $.01 par value, $1,000 liquidation value;
     500,000 shares authorized; 9,550 shares issued and outstanding
     9,380,960       -  
                 
Common stock, $.01 par value; 4,000,000 shares authorized;
     2,957,226 shares issued
     29,572       29,572  
Warrants to acquire common stock
     169,040       -  
Additional paid-in capital
     16,334,011       16,675,839  
Retained earnings
     29,296,154       27,364,219  
Treasury stock of 869,250 shares at March 31, 2009, and
     766,393 shares at June 30, 2008, at cost
     (13,994,800 )     (13,002,803 )
Accumulated other comprehensive loss - AFS securities
     (120,702 )     (626,673 )
Accumulated other comprehensive income - FAS 158
     31,495       31,495  
     Total stockholders’ equity
     41,125,730       30,471,649  
                 
     Total liabilities and stockholders’ equity
   $ 455,579,859     $ 417,820,383  



 
See Notes to Consolidated Financial Statements

 
3
 
 
 
SOUTHERN MISSOURI BANCORP, INC
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE- AND NINE-MONTH PERIODS ENDED MARCH 31, 2009 AND 2008 (Unaudited)

 
Three months ended
Nine months ended
 
March 31,
March 31,
 
2009
2008
2009
2008
INTEREST INCOME:
        
      Loans
 $                 5,613,302
 $                 5,756,757
 $               17,136,933
 $               17,587,607
      Investment securities
                       163,294
                       298,506
                       499,774
                       877,073
      Mortgage-backed securities
                       510,534
                       294,284
                    1,264,734
                       575,510
      Other interest-earning assets
                           2,769
                         36,137
                         34,849
                         55,365
                   Total interest income
                    6,289,899
                    6,385,684
                  18,936,290
                  19,095,555
         
INTEREST EXPENSE:
        
      Deposits
                    1,736,540
                    2,273,501
                    5,378,811
                    7,276,137
      Securities sold under agreements to repurchase
                         44,959
                       183,894
                       186,974
                       583,880
      Advances from FHLB of Des Moines
                       851,239
                       717,801
                    2,598,181
                    2,318,263
      Subordinated debt
                         81,708
                       134,625
                       285,186
                       438,767
                   Total interest expense
                    2,714,446
                    3,309,821
                    8,449,152
                  10,617,047
         
NET INTEREST INCOME
                    3,575,453
                    3,075,863
                  10,487,138
                    8,478,508
         
PROVISION FOR LOAN LOSSES
                       410,000
                       350,000
                    1,010,000
                       550,000
         
NET INTEREST INCOME AFTER
        
    PROVISION FOR LOAN LOSSES
                    3,165,453
                    2,725,863
                    9,477,138
                    7,928,508
         
NONINTEREST INCOME:
        
      Customer service charges
                       266,096
                       315,527
                       922,441
                       937,597
      Loan late charges
                         40,108
                         40,572
                       115,230
                       106,467
      Increase in cash surrender value of bank
            owned life insurance
                         67,036
                         68,632
                       206,445
                       206,364
      Net realized gains on sale of AFS securities
                                 -
                                 -
                                 -
                           6,084
      AFS securities losses due to other-than-
            temporary-impairment
                                 -
                                 -
                     (678,973)
                                 -
      Other
                       208,818
                       176,531
                       592,900
                       534,346
                   Total noninterest income
                       582,058
                       601,262
                    1,158,043
                    1,790,858
         
NONINTEREST EXPENSE:
        
      Compensation and benefits
                    1,269,556
                    1,117,020
                    3,642,457
                    3,265,860
      Occupancy and equipment, net
                       400,689
                       389,834
                    1,147,165
                    1,140,860
      DIF deposit insurance premium
                       132,217
                           7,644
                       222,979
                         22,660
      Professional fees
                         70,020
                         55,962
                       181,988
                       185,372
      Advertising
                         50,397
                         38,278
                       153,851
                       137,660
      Postage and office supplies
                         77,163
                         67,686
                       221,216
                       204,874
      Amortization of intangible assets
                         63,814
                         63,814
                       191,443
                       191,442
      Other
                       276,720
                       246,335
                       823,185
                       712,114
                   Total noninterest expense
                    2,340,576
                    1,986,573
                    6,584,284
                    5,860,842
         
INCOME BEFORE INCOME TAXES
                    1,406,935
                    1,340,552
                    4,050,897
                    3,858,524
         
INCOME TAXES
                       423,000
                       442,441
                    1,252,500
                    1,274,362
         
NET INCOME
                       983,935
                       898,111
                    2,798,397
                    2,584,162
      Effective dividend on preferred shares
119,375
-
153,861
-
      Net income available to common shareholders
 $                    864,560
$                    898,111
$                 2,644,536
$                 2,584,162
         
OTHER COMPREHENSIVE INCOME, NET OF TAX:
        
      Net income
$                    983,935
$                    898,111
$                 2,798,397
$                 2,584,162
      Unrealized gains on AFS securities,
            net of income taxes
                       246,312
                       123,355
                       505,971
                       552,185
      Adjustment for gains included in net income
                                 -
- 
                                 -
                         (6,084)
                  Total other comprehensive income
                       246,312
                       123,355
                       505,971
                       546,101
         
COMPREHENSIVE INCOME
 $                 1,230,247
 $                 1,021,466
 $                 3,304,368
 $                 3,130,263
         
Basic earnings per common share
 $                          0.42
 $                          0.41
 $                          1.24
 $                          1.18
Diluted earnings per common share
 $                          0.42
 $                          0.40
 $                          1.24
 $                          1.17
Dividends per common share
 $                          0.12
 $                          0.10
 $                          0.36
 $                          0.30
 
See Notes to Consolidated Financial Statements
 
4
 
 

SOUTHERN MISSOURI BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE- AND NINE-MONTH PERIODS ENDED MARCH 31, 2009 AND 2008 (Unaudited)

   
Nine months ended
  
   
March 31,
  
   
2009
    
2008
  
Cash Flows From Operating Activities:
            
Net income
   $ 2,798,397     $ 2,584,162  
    Items not requiring (providing) cash:
                
      Depreciation
     463,741       507,345  
      MRP and SOP expense
     51,801       54,142  
      AFS losses due to other-than-temporary impairment
     678,973       -  
      Net realized gains on sale of AFS securities
     -       (6,084 )
      Gain on sale of foreclosed assets
     (18,974 )     (20,203 )
      Amortization of intangible assets
     191,443       191,443  
      Increase in cash surrender value of bank owned life insurance
     (206,445 )     (206,364 )
      Provision for loan losses
     1,010,000       550,000  
      Net amortization (accretion) of premiums and discounts on securities
     74,422       (63,649 )
      Deferred income taxes
     (293,000 )     (503,999 )
    Changes in:
                
      Accrued interest receivable
     (91,396 )     (336,952 )
      Prepaid expenses and other assets
     110,727       76,876  
      Accounts payable and other liabilities
     (34,201 )     490,954  
      Accrued interest payable
     (182,661 )     (267,565 )
Net cash provided by operating activities
     4,552,827       3,050,106  
                 
Cash flows from investing activities:
                
      Net increase in loans
     (16,893,436 )     (19,888,934 )
      Proceeds from sales of available for sale securities
     -       233,500  
      Proceeds from maturities of available for sale securities
     5,203,501       19,929,465  
      Net purchases of Federal Home Loan Bank stock
     (1,268,600 )     (26,400 )
      Purchases of available-for-sale securities
     (23,780,825 )     (27,881,179 )
      Purchases of premises and equipment
     (417,326 )     (124,184 )
      Investments in state & federal tax credits
     (1,263,944 )     -  
      Proceeds from sale of foreclosed assets
     233,750       464,787  
            Net cash used in investing activities
     (38,186,880 )     (27,292,945 )
                 
Cash flows from financing activities:
                
      Preferred stock issued
     9,511,128       -  
      Net increase (decrease) in demand deposits and savings accounts
     8,331,828       (2,989,661 )
      Net increase in certificates of deposits
     6,109,674       15,237,615  
      Net increase in securities sold under agreements to repurchase
     4,430,755       4,891,773  
      Proceeds from Federal Home Loan Bank advances
     187,825,000       322,625,000  
      Repayments of Federal Home Loan Bank advances
     (179,375,000 )     (317,125,000 )
      Dividends paid on common and preferred stock
     (866,461 )     (660,653 )
      Exercise of stock options
     161,000       -  
      Purchases of treasury stock
     (1,507,755 )     (165,361 )
            Net cash provided by financing activities
     34,620,169       21,813,713  
                 
Increase (decrease) in cash and cash equivalents
     986,116       (2,429,126 )
Cash and cash equivalents at beginning of period
     8,022,408       7,330,966  
                 
Cash and cash equivalents at end of period
   $ 9,008,524     $ 4,901,840  
                 
Supplemental disclosures of
                
  Cash flow information:
                
                 
Noncash investing and financing activities:
                
Conversion of loans to foreclosed real estate
   $ 268,000     $ 344,788  
Conversion of loans to other equipment
     248,516       85,828  
                 
Cash paid during the period for:
                
Interest (net of interest credited)
   $ 2,132,670     $ 3,953,773  
Income taxes
     1,526,405       1,430,393  

 

See Notes to Consolidated Financial Statements

 
5
 
 

SOUTHERN MISSOURI BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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:
 
Level 1
Quoted prices in active markets for identical assets or liabilities
 
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

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
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.


 
Fair Value Measurements at March 31, 2009, Using:
 
Fair Value at
March 31, 2009
Quoted Prices in
Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
         
Available-for-sale securities
$              58,542,439
$                              -
$              58,542,439
$                              -
 
 
6
 
 
Note 3:  Securities

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

 
March 31, 2009
   
Gross
Gross
Estimated
 
Amortized
Unrealized
Unrealized
Fair
 
Cost
Gains
Losses
Value
         
Investment Securities:
        
  U.S. government and federal agency obligation
$          3,994,340
$               84,184
$                        -
$          4,078,524
  Obligations of state and political subdivisions
          12,139,138
                 91,609
            (195,045)
          12,035,702
  Other securities
            1,511,521
-
         (1,248,059)
               263,462
  FHLMC preferred stock
                          -
                 8,400
                          -
                 8,400
  Mortgage-backed securities
          41,088,788
            1,076,678
               (9,115)
          42,156,351
     Total investments and mortgage-backed securities
$        58,733,787
$          1,260,871
$       (1,452,219)
$        58,542,439
 
 
June 30, 2008
   
Gross
Gross
Estimated
 
Amortized
Unrealized
Unrealized
Fair
 
Cost
Gains
Losses
Value
         
Investment Securities:
        
  U.S. government and federal agency obligation
$          3,992,999
$               52,103
$            (25,660)
$          4,019,442
  Obligations of state and political subdivisions
            6,299,763
                   7,195
            (276,075)
            6,030,883
  Other securities
            1,889,424
                          -
            (325,979)
            1,563,445
  FHLMC preferred stock
               304,125
                          -
                (8,925)
               295,200
  Mortgage-backed securities
          28,423,717
                 63,754
            (481,161)
          28,006,310
     Total investments and mortgage-backed securities
$        40,910,028
$             123,052
$       (1,117,800)
$        39,915,280

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 March 31, 2009.
 
 
Less than 12 months
More than 12 months
Totals
 
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Investment Securities:
            
U.S. government and
   federal agency obligations
$                      -
$                    -
$                     -
$                    -
$                     -
$                      -
Obligations of state and
    political subdivisions
4,549,110
(138,776)
1,489,708
(56,269)
6,038,818
(195,045)
Other securities
-
-
263,462
(1,248,059)
263,462
(1,248,059)
Mortgage-backed securities
62,991
(165)
443,770
(8,950)
506,761
(9,115)
    Total investments and
        mortgage-backed securities
$        4,612,101
$      (138,941)
$       2,196,940
$   (1,313,278)
$       6,809,041
$     (1,452,219)

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.

 
Less than 12 months
More than 12 months
Totals
 
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Investment Securities:
            
U.S. government and
   federal agency obligations
$        1,971,482
$        (25,660)
$                      -
$                   -
$        1,971,482
$         (25,660)
Obligations of state and
   political subdivisions
5,117,601
(276,075)
-
-
5,117,601
(276,075)
Other securities
1,858,645
(334,904)
-
-
1,858,645
(334,904)
Mortgage-backed securities
        21,382,034
        (449,610)
          1,407,530
          (31,551)
        22,789,564
         (481,161)
    Total investments and
        mortgage-backed securities
$      30,329,762
$   (1,086,249)
$        1,407,530
$        (31,551)
$      31,737,292
$    (1,117,800)

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.
 
 
7

 
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:

 
March 31,
June 30,
 
2009
2008
Real Estate Loans:
    
  Conventional
 $             152,051,650
 $             149,340,248
  Construction
                  14,954,371
                  13,945,027
  Commercial
                  93,853,922
                  85,859,482
Consumer loans
                  22,733,042
                  21,524,166
Commercial loans
                  83,731,710
                  81,574,995
 
                367,324,695
                352,243,918
Loans in process
                   (4,695,026)
                  (5,667,898)
Deferred loan fees, net
                         89,737
                         60,958
Allowance for loan losses
                   (4,282,711)
                  (3,567,203)
     Total loans
 $             358,436,695
 $             343,069,775

Note 5:  Deposits

Deposits are summarized as follows:

 
 March 31,
 June 30,
 
2009
2008
     
Non-interest bearing accounts
 $               22,138,296
 $               19,220,977
NOW accounts
                  60,479,731
                  37,150,005
Money market deposit accounts
                    6,025,291
                  12,104,527
Savings accounts
                  61,587,214
                  73,423,195
Certificates
                156,468,015
                150,358,341
     Total deposits
 $             306,698,547
 $             292,257,045


 
8
 
 

Note 6:  Comprehensive Income

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

 
Three months ended
Nine months ended
 
March 31,
March 31,
 
2009
2008
2009
2008
         
Net income
 $            983,935
 $            898,111
 $       2,798,397
 $       2,584,162
     Other comprehensive income:
        
          Unrealized gains (losses) on securities available-for-sale
391,073
195,802
124,257
876,484
          Less, realized (losses) gains included in income
-
-
(678,973)
6,084
          Tax benefit (expense)
(144,761)
(72,447)
(297,259)
(324,299)
     Total other comprehensive income (loss)
246,312
123,355
505,971
546,101
Comprehensive income
 $         1,230,247
 $         1,021,466
 $       3,304,368
 $       3,130,263

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.

 
Three months ended
Nine months ended
 
March 31,
March 31,
 
2009
2008
2009
2008
         
Net income
 $                 983,935
 $                 898,111
 $              2,798,397
 $             2,584,162
Dividend payable on preferred stock
                     119,375
-
153,861
-
Net income available to common shareholders
 $                 864,560
 $                 898,111
 $              2,644,536
 $             2,584,162
         
Average Common shares – outstanding basic
                  2,082,627
                  2,212,961
                  2,136,583
                2,194,069
Stock options under treasury stock method
                           440
                      10,716
                            806
                       9,703
Average Common share – outstanding diluted
                  2,083,067
                  2,223,677
                  2,137,389
                2,203,772
         
Basic net income available to common shareholders
 $                       0.42
 $                       0.41
 $                       1.24
 $                      1.18
Diluted net income available to common shareholders
 $                       0.42
 $                       0.40
 $                       1.24
 $                      1.17

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.
 
 
9

 
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.
 
 
10

 
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 FSP establishes 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.
 
 
11

 
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).  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.

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 strength of the real estate market in 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;
 
 
12
 
 
 
·  
acquisitions;
·  
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 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.

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 nine months of fiscal 2009, we grew our balance sheet by $37.8 million; this growth was partially due to the leveraged use of $9.6 million in preferred capital invested by the U.S. Treasury Department under the terms of their Capital Purchase Program. Growth reflected an $18.6 million increase in available-for-sale investments, a $15.4 million increase in total net loans, a $14.4 million increase in deposits, an $8.5 million increase in advances from the Federal Home Loan Bank (FHLB), and a $4.4 million increase in securities sold under agreements to repurchase.  The growth in available-for-sale investments was primarily in the form of collateralized mortgage obligations (CMOs) and municipal bonds.  The growth in loans was primarily due to commercial real estate, residential real estate, and commercial loan growth.  Deposit growth was primarily in interest-bearing checking and certificates of deposit, partially offset by decreases in money market passbook savings and money market deposit accounts.

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.
 
 
13

 
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 increased 9.6% 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 a 12.3% 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.

Short-term market rates fell substantially during the first nine months of fiscal 2009, following an already substantial decline over the prior fiscal year.  In December 2008, the Federal Reserve cut the targeted Federal Funds rate to a range of 0.00% to 0.25%, and in March 2009, detailed its plan to purchase long-term mortgage-backed securities, agency debt, and long-term Treasuries.  From July 1, 2008, to March 31, 2009, the six-month treasury bill rate declined 174 basis points (to yield 0.43%); the two-year treasury note declined 182 basis points (to yield 0.81%); and the ten-year treasury bond declined 128 basis points (to yield 2.71%).  Notable volatility in the first six months of the Company’s fiscal year gave way to more stability in the financial markets in the most recent quarter.  The curve remained generally quite steep by recent historical comparisons, which is generally to the Company’s benefit.  In this rate environment, our net interest margin increased 30 basis points when comparing the first nine months of fiscal 2009 to the same period of the prior year.

The Company’s net income is also affected by the level of its 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 nine-month period ended March 31, 2009, non-interest income decreased 35.3% compared to the same period of the prior fiscal year, primarily due to charges incurred to recognize the other-than-temporary impairment of Company investments.  Excluding those charges, non-interest income would have increased 2.6%, attributable to increased debit card activity and secondary market loan sale income.  Non-interest expense increased for the nine-month period ended March 31, 2009, by 12.3%, compared to the same period of the prior fiscal year, primarily in the categories of compensation and benefits and deposit insurance assessments.

Our charges incurred to recognize the other-than-temporary impairment (OTTI) of available-for-sale investments related to investments in Freddie Mac preferred stock ($304,000 loss realized in the first quarter of fiscal 2009) and a pooled trust preferred collateralized debt obligation, Trapeza CDO IV, Ltd., class C2 ($375,000 loss realized in the second quarter of fiscal 2009).  The Company currently holds three additional collateralized debt obligations (CDOs) which have not been deemed other-than-temporarily impaired, based on the Company’s best judgment using information currently available.  All of these investments are described in the table below:

   
 Unrealized
 Estimated
S&P
Moody’s
Security
 Amortized Cost
 Gains / (Losses)
 Fair Value
Rating
Rating
Freddie Mac Preferred Stock Series Z
 $                                  -
 $                        8,400
 $                          8,400
C
Ca
Trapeza CDO IV, Ltd., class C2
                          125,000
                      (118,025)
                             6,975
NR
Ca
Trapeza CDO XIII, Ltd., class A2A
                          476,847
                      (372,497)
                         104,350
BB-
Baa2
Trapeza CDO XIII, Ltd., class B
                          477,596
                      (409,346)
                           68,250
NR
B3
Preferred Term Securities XXIV, Ltd., class B1
                          432,078
                      (348,191)
                           83,887
NR
B2
   Totals
 $                    1,511,521
 $                (1,239,659)
 $                      271,862
    
 
 
14

 
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.

Comparison of Financial Condition at March 31, 2009, and June 30, 2008

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.

Average Balance Sheet for the Three- and Nine-Month Periods Ended March 31, 2009 and 2008

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.

 
15
 
 


 
Three-month period ended
March 31, 2009
Three-month period ended
March 31, 2008
 
Average
Balance
Interest and Dividends
 Yield/
Cost (%)
Average
Balance
Interest and Dividends
 Yield/
Cost (%)
 
 Interest earning assets:
            
   Mortgage loans (1)
 $    258,159,170
 $        4,222,271
6.54
 $    227,601,634
 $        4,201,486
7.38
   Other loans (1)
         98,675,653
           1,391,031
5.64
         97,041,925
           1,555,271
6.41
      Total net loans
       356,834,823
           5,613,302
6.29
       324,643,559
           5,756,757
7.09
   Mortgage-backed securities
         42,085,918
              510,534
4.85
         23,509,298
              294,284
5.01
   Investment securities (2)
         22,263,967
              163,294
2.93
         21,849,724
              298,506
5.46
   Other interest earning assets
           5,014,033
                  2,769
0.22
           8,002,491
                36,137
1.81
        Total interest earning assets (1)
       426,198,741
           6,289,899
5.90
       378,005,072
           6,385,684
6.76
 Other noninterest earning assets (3)
         25,427,883
                  -
  
         21,910,487
                  -
  
             Total assets
 $    451,626,624
 $        6,289,899
  
 $    399,915,559
 $        6,385,684
  
             
 Interest bearing liabilities:
            
   Savings accounts
 $      62,385,720
 $           228,037
1.46
 $      76,063,709
 $           551,764
2.90
   NOW accounts
         54,368,002
              302,079
2.22
         33,218,035
              107,591
1.30
   Money market deposit accounts
           6,111,761
                19,398
1.27
           5,882,984
                26,654
1.81
   Certificates of deposit
       151,788,816
           1,187,026
3.13
       144,823,148
           1,587,492
4.38
       Total interest bearing deposits
       274,654,299
           1,736,540
2.53
       259,987,876
           2,273,501
3.50
 Borrowings:
            
   Securities sold under agreements
   to repurchase
         26,861,704
                44,959
0.67
         24,877,685
              183,894
2.96
  FHLB advances
         77,071,667
              851,239
4.42
         55,507,418
              717,801
5.17
 Subordinated debt
           7,217,000
                81,708
4.53
           7,217,000
              134,625
7.46
       Total interest bearing liabilities
       385,804,670
           2,714,446
2.81
       347,589,979
           3,309,821
3.81
 Noninterest bearing demand deposits
         23,909,363
 -
  
         19,687,209
 -
  
 Other noninterest bearing liabilities
           1,057,053
 -
  
           2,230,731
 -
  
       Total liabilities
       410,771,086
           2,714,446
  
       369,507,919
           3,309,821
  
 Stockholders’ equity
         40,855,538
                 -
  
         30,407,640
                 -
  
           Total liabilities and
           stockholders' equity
 $    451,626,624
 $        2,714,446
  
 $    399,915,559
 $        3,309,821
  
             
 Net interest income
  
 $        3,575,453
    
 $        3,075,863
  
             
 Interest rate spread (4)
    
3.09
    
2.95
 Net interest margin (5)
    
3.36
    
3.25
             
Ratio of average interest-earning assets
to average interest-bearing liabilities
110.47%
    
108.75%
    
 
(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 $8.2 million and $7.5 million, respectively, for the three-month period ending March 31, 2009, as compared to $8.3 million and $7.2 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
 
 
16
 
 
 

 
 
Nine-month period ended
March 31, 2009
Nine-month period ended
March 31, 2008
 
Average
Balance
Interest and Dividends
 Yield/
Cost (%)
Average
Balance
Interest and Dividends
 Yield/
Cost (%)
 
 Interest earning assets:
            
   Mortgage loans (1)
 $    251,544,704
 $      12,576,002
6.67
 $    228,684,296
 $      12,394,476
7.23
   Other loans (1)
       102,057,792
           4,560,931
5.96
         91,470,307
           5,193,130
7.57
      Total net loans
       353,602,496
         17,136,933
6.46
       320,154,603
         17,587,606
7.32
   Mortgage-backed securities
         34,235,733
           1,264,734
4.93
         16,150,551
              575,510
4.75
   Investment securities (2)
         19,171,282
              499,774
3.48
         24,862,322
              877,075
4.70
   Other interest earning assets
           5,391,983
                34,849
0.86
           4,954,588
                55,364
1.49
        Total interest earning assets (1)
       412,401,494
         18,936,290
6.12
       366,122,064
         19,095,555
6.95
 Other noninterest earning assets (3)
         23,603,122
                  -
  
         22,735,868
                  -
  
             Total assets
 $    436,004,616
 $      18,936,290
  
 $    388,857,932
 $      19,095,555
  
             
 Interest bearing liabilities:
            
   Savings accounts
 $      65,864,200
 $           949,297
1.92
 $      76,769,613
 $        2,000,155
3.47
   NOW accounts
         44,440,022
              624,123
1.87
         31,432,785
              318,762
1.35
   Money market deposit accounts
           7,176,780
                80,377
1.49
           5,827,998
                81,591
1.87
   Certificates of deposit
       148,975,130
           3,725,013
3.33
       138,444,378
           4,875,628
4.70
       Total interest bearing deposits
       266,456,132
           5,378,810
2.69
       252,474,774
           7,276,136
3.84
 Borrowings:
            
   Securities sold under agreements
   to repurchase
         24,107,020
              186,974
1.03
         19,991,918
              583,880
3.89
  FHLB advances
         78,933,671
           2,598,182
4.39
         57,936,191
           2,318,263
5.34
 Subordinated debt
           7,217,000
              285,186
5.27
           7,217,000
              438,768
8.11
       Total interest bearing liabilities
       376,713,823
           8,449,152
2.99
       337,619,883
         10,617,047
4.19
 Noninterest bearing demand deposits
         23,139,595
 -
  
         19,287,767
 -
  
 Other noninterest bearing liabilities
           1,195,206
 -
  
           2,333,157
 -
  
       Total liabilities
       401,048,624
           8,449,152
  
       359,240,807
         10,617,047
  
 Stockholders’ equity
         34,955,992
                 -
  
         29,617,125
                 -
  
           Total liabilities and
           stockholders' equity
 $    436,004,616
 $        8,449,152
  
       388,857,932
 $      10,617,047
  
             
 Net interest income
  
 $      10,487,138
    
 $         8,478,508
  
             
 Interest rate spread (4)
    
3.13
    
2.76
 Net interest margin (5)
    
3.39
    
3.09
             
Ratio of average interest-earning assets
to average interest-bearing liabilities
109.47%
    
108.44%
    
 
(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 $8.2 million and $7.4 million, respectively, for the nine-month period ending March 31, 2009, as compared to $8.5 million and $7.1 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
 
 
17
 

 
Results of Operations – Comparison of the three- and nine-month periods ended March 31, 2009 and 2008

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 the third 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 to 0.90% 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”).

 
18
 
 

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 and general 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 FDIC in 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.

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 nine months ended March 31, 2009 and 2008:

 
2009
2008
Balance, beginning of period
 $                 3,567,203
 $                 2,537,659
Loans charged off:
    
       Residential real estate
                        (19,382)
                       (18,919)
       Commercial business
                      (242,008)
                                 -
       Commercial real estate
                        (10,495)
-
       Consumer
                        (39,536)
                       (40,883)
       Gross charged off loans
                      (311,421)
                       (59,802)
Recoveries of loans previously charged off:
    
       Residential real estate
                           2,898
                              792
       Commercial business
                              150
                       162,851
       Commercial real estate
                           6,500
-
       Consumer
                           7,381
                           3,417
       Gross recoveries of charged off loans
                         16,929
                       167,060
Net (charge offs) recoveries
                      (294,492)
                       107,258
Provision charged to expense
                    1,010,000
                       550,000
Balance, end of period
 $                 4,282,711
 $                 3,194,917
     
Ratio of net charge offs (recoveries) during the period
0.08%
(0.03)%
   to average loans outstanding during the period

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
 
 
19
 
 
 
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.

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 table on the following page summarizes changes in the Company’s level of nonperforming assets over selected time periods:

 
3/31/2009
6/30/2008
3/31/2008
Loans past maturity/delinquent 90 days or more and non-accrual loans
      
        Residential real estate
 $                    185,000
 $                                -
 $                                -
        Commercial real estate
                                   -
                                   -
                                   -
        Consumer
                         17,000
                           6,000
                         25,000
Total loans past maturity/delinquent 90 days or more and non-accrual loans
                       202,000
                           6,000
                         25,000
Nonperforming investments
125,000
-
-
Foreclosed real estate or other real estate owned
                       148,000
                         38,000
                         38,000
Other repossessed assets
                       215,000
                         24,000
                         19,000
        Total nonperforming assets
 $                    690,000
 $                      68,000
 $                      82,000
Percentage nonperforming assets to total assets
0.15%
0.02%
0.02%
Percentage nonperforming loans to net loans
0.06%
0.00%
0.01%

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).

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 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).
 
 
20
 
 
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.

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 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.
 
 
Actual
For Capital Adequacy
Purposes
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of March 31, 2009
            
Total Capital
    (to Risk-Weighted Assets)
$  42,839,000
12.74%
$  26,892,000
8.00%
$  33,615,000
10.00%
             
Tier I Capital
    (to Risk-Weighted Assets)
38,632,000
11.49%
13,446,000
4.00%
20,169,000
6.00%
             
Tier I Capital
    (to Average Assets)
38,632,000
8.67%
17,834,000
4.00%
22,293,000
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, 2008
            
Total Risk-Based Capital
    (to Risk-Weighted Assets)
$  36,302,000
11.79%
$  24,631,000
8.00%
$  30,789,000
10.00%
             
Tier I Capital
    (to Risk-Weighted Assets)
32,735,000
10.63%
12,315,000
4.00%
18,473,000
6.00%
             
Tier I Capital
    (to Average Assets)
32,735,000
8.08%
16,214,000
4.00%
20,267,000
5.00%

 
21
 
 


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 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.

 
22
 
 

Interest Rate Sensitivity Analysis

The following table sets forth as of March 31, 2009, 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
  
$
35,448
  
$
(7,474
)
  
-17
%
  
7.96
%
  
-1.30
%
+200
    
38,886
    
(4,036
)
  
-9
%
  
8.18
%
  
-1.08
%
+100
    
42,046
    
(876
)
  
-2
%
  
8.65
%
  
-0.61
%
NC
    
42,922
    
-
    
-
    
9.26
%
  
-
  
-100
    
40,327
    
(2,595
    
-6
%
  
9.18
%
  
-0.08
%
-200
    
38,412
    
(4,510
)
  
-11
%
  
8.61
%
  
-0.65
%
-300
    
37,655
    
(5,267
    
-12
%
  
7.95
%
  
-1.31
%

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.


 
23
 
 

PART I: Item 4:  Controls and Procedures
SOUTHERN MISSOURI BANCORP, INC.


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.

 
24
 
 

PART II: Other Information
SOUTHERN MISSOURI BANCORP, INC.

Item 1:  Legal Proceedings

In the opinion of management, the Company and Bank are not a party to any pending claims or lawsuits that are expected to have a material effect on the Company’s or the Bank's financial condition or operations. Periodically, there have been various claims and lawsuits involving the Company and Bank mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Company or Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Company and Bank's business. Aside from such pending claims and lawsuits, which are incident to the conduct of the Company and Bank's ordinary business, neither the Company nor Bank is party to any material pending legal proceedings that would have a material effect on the financial condition or operations of the Company or Bank.

Item 1a:  Risk Factors

The following risk factors represent changes or additions to, and should be read in conjunction with, the risk factors set forth in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended June 30, 2008:

Difficult global market conditions and economic trends have adversely affected our industry and, to a lesser extent, our business.

Dramatic declines in the US housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and construction loans, and resulted in significant write-downs of assets by many financial institutions. General downward economic trends, reduced availability of commercial credit and increasing unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other. This market turmoil and tightening of credit has led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility, and widespread reduction in general business activity. Financial institutions have experienced decreased access to deposits or borrowings.

The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets may adversely affect our business, financial condition, results of operations, and stock price.

Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our credit exposure is made more complex by these difficult market and economic conditions. We also expect to face increased regulation and government oversight as a result of these downward trends. This increased government action may increase our costs and limit our ability to pursue certain business opportunities. We expect to pay higher Federal Deposit Insurance Corporation (FDIC) premiums than we have over recent periods, because financial institution failures resulting from the depressed market conditions have depleted and may continue to deplete the deposit insurance fund and reduce its ratio of reserves to insured deposits.

We do not believe these difficult conditions are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market and economic conditions on us, our customers, and the other financial institutions in our market. As a result, we may experience increases in foreclosures, delinquencies, and customer bankruptcies, as well as more restricted access to funds.

Recent legislative and regulator initiatives to address these difficult market and economic conditions may not stabilize the US banking system.

The recently-enacted Emergency Economic Stabilization Act of 2008 ("EESA") authorizes the United States Department of Treasury ("Treasury") to purchase from financial institutions and their holding companies up to $750 billion in mortgage loans, mortgage-related securities, and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in a Troubled Asset Relief Program ("TARP"). The purpose of the TARP is to restore confidence and stability to the US banking system and to encourage financial institutions to increase their lending to customers and to each other. The Treasury has allocated $250 billion under the TARP for a Capital Purchase Program ("CPP"). Under the CPP, the Treasury will purchase debt or equity securities from participating institutions. The TARP is also expected to include direct purchases or guarantees of troubled assets of financial institutions.
 
 
25

 
The EESA also increased FDIC deposit insurance on most accounts from $100,000 to $250,000. This increase is in place until the end of 2009 and is not covered by deposit insurance premiums paid by the banking industry. In addition, the FDIC has implemented two temporary programs to provide deposit insurance for the full amount of most non-interest bearing transaction accounts through the end of 2009 and to guarantee certain unsecured debt of financial institutions and their holding companies through June 2012.  Financial institutions were required to decide by December 5, 2008, whether to participate in the two programs (Southern Missouri elected to participate in both programs). The purpose of these legislative and regulatory actions is to stabilize the volatility in the US banking system.

The EESA, the TARP, and the FDIC's recent regulatory initiative may not stabilize the US banking system or financial markets. If the volatility in the market and the economy continue or worsen, our business, financial condition, results of operations, access to funds, and the price of our stock could all be materially and adversely impacted.

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

 
 
Period
 
Total Number of
Shares (or Units)
Purchased
 
Average Price Paid
per Share (or Unit)
 
Total Number of Shares (or Units)
Purchased as Part of Publicly
Announced Plans or Programs
Maximum Number (or
Approximate Dollar Value) of
Shares (or Units) that May Yet be
Purchased Under the Plans or
Program
1/1/2009 thru
1/31/2009
-
-
-
-
2/1/2009 thru 2/28/2009
-
-
-
-
3/1/2009 thru 3/31/2009
-
-
-
-
Total
-
-
-
-

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

 
(a)  Exhibits
   
(3)
(a)
Certificate of Incorporation of the Registrant+
   
(3)
(b)
Bylaws of the Registrant+
   
(4)
  
Form of Stock Certificate of Southern Missouri Bancorp++
   
(10)
  
Material Contracts
     
(a)
Registrant’s Stock Option Plan+++
     
(b)
Southern Missouri Savings Bank, FSB Management Recognition and Development Plans+++
     
(c)
Employment Agreements
       
(i)
Greg A. Steffens*
     
(d)
Director’s Retirement Agreements
       
(ii)
Samuel H. Smith**
       
(iii)
Sammy A. Schalk***
       
(iii)
Ronnie D. Black***
       
a.
L. Douglas Bagby***
       
b.
Rebecca McLane Brooks****
       
c.
Charles R. Love****
       
d.
Charles R. Moffitt****
       
e.
Dennis Robison*****
     
(e)
Tax Sharing Agreement***
 
 
 
26
 
 


        31                                Rule 13a-14(a) Certification
        32                                Section 1350 Certification

+
Filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the year ended June 30, 1999
++
Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-2320) as filed with the SEC on January 3, 1994.
+++
Filed as an exhibit to the registrant’s 1994 Annual Meeting Proxy Statement dated October 21, 1994.
*
Filed as an exhibit to the registrant’s Annual Report on Form 10-KSB for the year ended June 30, 1999.
**
Filed as an exhibit to the registrant’s Annual Report on Form 10-KSB for the year ended June 30, 1995.
***
Filed as an exhibit to the registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2000.
****
Filed as an exhibit to the registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004.
*****
Filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2008.

SIGNATURES

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.

   
SOUTHERN MISSOURI BANCORP, INC.
   
Registrant
     
Date:  May 15, 2009
  
/s/ Samuel H. Smith
   
Samuel H. Smith
   
Chairman of the Board of Directors
     
Date:  May 15, 2009
  
/s/ Greg A. Steffens
   
Greg A. Steffens
   
President (Principal Executive, Financial and
   
Accounting Officer)