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SMBC > SEC Filings for SMBC > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for SOUTHERN MISSOURI BANCORP INC

Form 10-Q for SOUTHERN MISSOURI BANCORP INC


14-Nov-2012

Quarterly Report

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 Bank (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 $250,000 by the Deposit Insurance Fund (DIF), which is administered by the Federal Deposit Insurance Corporation (FDIC). As of September 30, 2012, the Bank conducts its business through its home office located in Poplar Bluff, and 17 full service branch facilities in Poplar Bluff (3), Van Buren, Dexter, Kennett, Doniphan, Qulin, Sikeston, Matthews, and Springfield, Missouri, and Paragould, Jonesboro, Brookland, Leachville, Batesville, and Searcy, Arkansas.

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, 2012, 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 condensed consolidated financial condition at September 30, 2012, and results of operations for the three- month periods ended September 30, 2012 and 2011.

Forward Looking Statements

This document contains statements about the Company and its subsidiaries which we believe are "forward-looking statements" 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 this filing and in our other 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;

fluctuations in interest rates and in real estate values;

monetary and fiscal policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and the U.S. Government and other governmental initiatives affecting the financial services industry;

the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

our ability to access cost-effective funding;

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;

expected cost savings, synergies and other benefits from our merger and acquisition activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected;
fluctuations in real estate values and both residential and commercial real estate market conditions;

demand for loans and deposits in our market area;

legislative or regulatory changes that adversely affect our business;

results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses or to write-down assets;

the impact of technological changes; 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.

Non-GAAP Disclosures

The following financial measures contain information determined by methods other than in accordance with accounting principles generally accepted in the United States (commonly referred to as GAAP):

net income available to common shareholders excluding the accretion of fair value discount on acquired loans and amortization of fair value premium on assumed time deposits;

return on average assets excluding the accretion of fair value discount on acquired loans and amortization of fair value premium on assumed time deposits;

return on average common equity excluding the accretion of fair value discount on acquired loans and amortization of fair value premium on assumed time deposits;

net interest margin excluding the accretion of fair value discount on acquired loans and amortization of fair value premium on assumed time deposits;

These measurers indicate what net income available to common shareholders, return on average assets, return on average common equity, and net interest margin would have been without the impact of the accretion of fair value discount on acquired loans and amortization of fair value premium on assumed time deposits resulting from the December 2010 acquisition of most of the assets and assumption of substantially all of the liabilities of the former First Southern Bank, Batesville, Arkansas (the Acquisition). Management believes that showing these measures excluding these items provides useful information by which to evaluate the Company's operating performance on an ongoing basis from period to period.

These non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. Because not all companies use identical calculations, these non-GAAP financial measures might not be comparable to other similarly-titled measures as determined and disclosed by other companies. Reconciliations to GAAP of these non-GAAP financial measures presented are set forth below.

The following table presents reconciliation to GAAP of net income available to common stockholders excluding accretion of fair value discount on acquired loans and amortization of fair value premium on assumed time deposits:

                                          For the three months ended
       (dollars in thousands)        September 30, 2012 September 30, 2011

Net income available to common
stockholders                          $           2,395  $           2,620
   Less: impact of excluding
   accretion of fair value
   discount
   on acquired loans, amortization
   of fair value premium on
   acquired time deposits, and
   bargain purchase gain, net of
   transaction expenses, related
   to the Acquisition, net of tax                  331                736
Net income available to common
shareholders - excluding excluding
accretion
of fair value discount on acquired
loans, amortization of fair value
premium on
acquired time deposits, and
bargain purchase gain, net of
transaction expenses,
related to the Acquisition, net of
tax                                   $           2,064  $           1,884

The following table presents reconciliation to GAAP of return on average assets excluding accretion of fair value discount on acquired loans and amortization of fair value premium on assumed time deposits:

                                                                For the three months ended
                                                      September 30, 2012           September 30, 2011

Return on average assets                                             1.41 %                       1.62 %
Less: impact of excluding accretion of fair value
discount
on acquired loans, amortization of fair value
premium on
acquired time deposits, and bargain purchase gain,
net of
transaction expenses, related to the Acquisition,
net of tax                                                           0.18 %                       0.42 %
Return on average assets - excluding excluding
accretion of fair value discount
on acquired loans, amortization of fair value
premium on acquired time deposits,
and bargain purchase gain, net of transaction
expenses, related to the Acquisition,
net of tax                                                           1.23 %                       1.20 %

The following table presents reconciliation to GAAP of return on average common equity excluding accretion of fair value discount on acquired loans, amortization of fair value premium on assumed time deposits, and bargain purchase gain:

                                                              For the three months ended
                                                     September 30, 2012        September 30, 2011

Return on average common equity                                    12.64 %                   22.03 %
Less: impact of excluding accretion of fair value
discount
on acquired loans, amortization of fair value
premium on
acquired time deposits, and bargain purchase gain,
net of
transaction expenses, related to the Acquisition,
net of tax                                                          1.74 %                    6.18 %
Return on average common equity - excluding
excluding accretion of fair value
discount on acquired loans, amortization of fair
value premium on acquired time
deposits, and bargain purchase gain, net of
transaction expenses, related to the
Acquisition, net of tax                                            10.89 %                   15.84 %

The following table presents reconciliation to GAAP of net interest margin excluding accretion of fair value discount on acquired loans and amortization of fair value premium on assumed time deposits:

                                                                For the three months ended
                                                      September 30, 2012           September 30, 2011

Net interest margin                                                  4.30 %                       4.42 %
Less: impact of excluding accretion of fair value
discount
on acquired loans and amortization of fair value
premium
on acquired time deposits related to the
Acquisition                                                          0.31 %                       0.70 %
Net interest margin - excluding accretion of fair
value discount on acquired
loans and amortization of fair value premium on
acquired time deposits
related to the Acquisition                                           4.00 %                       3.72 %

Critical Accounting Policies

Accounting principles generally accepted in the United States of America 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 2012 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 58 in the Company's 2012 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 deposit accounts, repurchase agreements, 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. This difference in longer term and shorter term interest rates is often referred to as the steepness of the 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 interest-earning assets and interest-bearing liabilities would be larger. Conversely, a flat or flattening yield curve, in which the difference in rates between short term and long term periods is relatively small or shrinking, or an inverted yield curve, in which short term rates exceed long term rates, could have an adverse impact on our net interest income, as our interest rate spread could decrease.

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

During the first three months of fiscal 2013, we grew our balance sheet by $4.4 million. Asset growth reflected a $25.2 million increase in net loans receivable, partially offset by a $24.4 million decrease in cash and cash equivalents. Deposits decreased $12.9 million, and securities sold under agreements to repurchase decreased $2.7 million. Advances from the Federal Home Loan Bank (FHLB) increased $18.0 million. The increase in loan balances was primarily the result of growth in commercial real estate, conventional real estate, and commercial operating loans, partially offset by a decline in construction loans. The decrease in deposits was primarily the result of declines in certificates of deposit, interest-bearing transaction accounts, savings accounts, and noninterest-bearing transaction accounts, partially offset by an increase in money market deposit accounts.

Net income for the first three months of fiscal 2013 decreased 9.1% to $2.6 million, as compared to $2.9 million earned during the same period of the prior year. After accounting for dividends on preferred stock of $195,000, net earnings available to common shareholders were $2.4 million in the three-month period ended September 30, 2012, a decrease of 8.6% as compared to the same period of the prior fiscal year. The decrease in net income compared to the year-ago period was attributable to higher noninterest expense, higher provisions for loan losses, lower net interest income, and lower noninterest income, partially offset by a lower provision for income taxes. Diluted net income available to common shareholders was $0.71 per share for the first three months of fiscal 2013, as compared to $1.21 per share for the same period of the prior year. The decrease was primarily due to the additional average shares outstanding as a result of the common offering completed in November 2011, as well as the lower net income available to common shareholders. For the first three months of fiscal 2013, noninterest expense increased $355,000, or 9.4%; provision for loan losses increased $94,000, or 18.2%; net interest income decreased $58,000, or 0.8%; noninterest income decreased $57,000, or 5.1%; and provision for income taxes decreased $303,000, or 21.0%, as compared to the same period of the prior fiscal year. For more information see "Results of Operations."

Interest rates during the first three months of fiscal 2013 remained near historical lows. Across the yield curve, rates declined in medium-term securities and increased in longer-term securities from June 30, 2012 through September 30, 2012. Our average yield on earning assets increased, primarily due to a lower percentage of earning assets held as cash and cash equivalents (see "Results of Operations: Comparison of the three-month periods ended September 30, 2012 and 2011 - Net Interest Income"). Relative to recent historical norms, the curve remained relatively steep, and a steep curve is generally beneficial to the Company. 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, it detailed its plan to purchase long-term mortgage-backed securities, agency debt, and long-term Treasuries. A second securities purchase program focused on US Treasuries. More recently, the Federal Reserve has continued its quantitative easing program, focused now on lowering real estate borrowing costs through purchases of mortgage-backed securities, and extending the average life of its securities portfolio. It has also indicated that it anticipates continuing its extraordinarily low short-term rate policy through at least mid-2015. In this rate environment, our net interest margin declined when comparing the first three months of fiscal 2013 to the same period of the prior year; however, the decline was attributable to fair value accounting for the Acquisition, whereby the Company acquired loans at a discount. Net interest income resulting from the accretion of that discount (and a smaller premium on acquired time deposits) declined in the first quarter of fiscal 2013 to $529,000, as compared to $1.2 million in the first quarter of fiscal 2012. The decrease of $648,000 equates to 38 basis points impact on the net interest margin. Our core net interest margin, excluding this income, improved to 4.00% in the current quarter, as compared to 3.72% in the year-ago period, primarily as a result of a decline in lower-yielding cash and cash equivalent balances, along with an increase in relatively higher-yielding loan balances. The Company expects that as the acquired loan portfolio continues to pay down, the positive impact on net interest income will continue to be reduced.

The Company's net income is also affected by the level of its noninterest income and noninterest expenses. Non-interest income generally consists primarily of deposit account service charges, bank card network income, loan-related fees, increases in the cash value of bank-owned life insurance, gains on sales of loans, and other general operating income. Noninterest expenses consist primarily of compensation and employee benefits, occupancy-related expenses, deposit insurance assessments, professional fees, advertising, postage and office expenses, insurance, bank card network expenses, the amortization of intangible assets, and other general operating expenses. During the three-month period ended September 30, 2012, noninterest income decreased $57,000, or 5.1%, as compared to the same period of the prior year, due primarily to the inclusion in the year-ago period's results of a one-time increase due to the settlement of a legal claim obtained through the Acquisition; also contributing to the decline was a decrease in gains on secondary market loan sales, partially offset by an increase in deposit account service charges, earnings on Bank-owned life insurance, and bank card transaction fees. Noninterest expense increased $355,000, or 9.4%, during the first three months of fiscal 2013, compared to the same period of the prior year, due primarily to higher expenses for compensation and benefits, occupancy expenses, business development expenses, and a decline in gains on sales of foreclosed real estate, partially offset by declines in electronic banking, advertising, and postage and office supplies expenses.

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

Comparison of Financial Condition at September 30 and June 30, 2012

The Company's total assets increased by $4.4 million, or 0.6%, to $743.6 million at September 30, 2012, as compared to $739.2 million at June 30, 2012. Balance sheet growth consisted of an increase in net loans receivable, other assets (investment in a limited partnership to generate tax credits), and fixed assets, partially offset by a decline in cash and cash equivalents and available-for-sale securities. Balance sheet growth was funded by an increase in FHLB advances and stockholder equity, partially offset by a decline in deposits and securities sold under agreements to repurchase.

Loans, net of the allowance for loan losses, increased $25.2 million, or 4.3%, to $608.7 million at September 30, 2012, as compared to $583.5 million at June 30, 2012. Growth consisted of increases in commercial real estate, conventional real estate, and commercial operating loan balances, partially offset by a decline in construction loan balances.

Available-for-sale investment balances decreased by $3.2 million, or 4.2%, to $72.0 million at September 30, 2012, as compared to $75.1 million at June 30, 2012, as declines in the obligations of US government agencies and mortgage-backed securities were partially offset by an increase in obligations of state and political subdivision. Cash and cash equivalents decreased $24.4 million, or 73.1%, to $11.2 million at September 30, 2012, as compared to $33.4 million at June 30, 2012.

Deposit balances declined $12.9 million, or 2.2%, to $571.9 million at September 30, 2012, as compared to $584.8 million at June 30, 2012. The decrease in deposits was primarily the result of declines in certificates of deposit, interest-bearing transaction accounts, savings accounts, and noninterest-bearing transaction accounts, partially offset by an increase in money market deposit accounts.

Total stockholders' equity increased $2.3 million, or 2.4%, to $97.0 million at September 30, 2012, as compared to $94.7 million at June 30, 2012. The increase was due primarily to the retention of net income, as well as an increase accumulated other comprehensive income, partially offset by cash dividends paid on common and preferred stock.

Average Balance Sheet, Interest, and Average Yields and Rates for the Three-Month Periods Ended
September 30, 2012 and 2011

The tables below present certain information regarding our financial condition and net interest income for the three-month periods ended September 30, 2012 and 2011. 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.

                                            Three-month period ended                           Three-month period ended
                                               September 30, 2012                                 September 30, 2011
                                    Average        Interest and        Yield/          Average        Interest and        Yield/
                                    Balance          Dividends        Cost (%)         Balance          Dividends        Cost (%)
 Interest earning assets:
  Mortgage loans (1)             $ 439,859,319     $   6,502,347           5.91     $ 406,546,705     $   6,931,593           6.82
  Other loans (1)                  163,135,408         2,351,587           5.77       159,419,777         2,623,531           6.58
    Total net loans                602,994,727         8,853,934           5.87       565,966,482         9,555,124           6.75
  Mortgage-backed securities        18,442,670           125,763           2.73        22,518,812           276,567           4.91
  Investment securities (2)         56,605,134           362,703           2.56        44,259,519           353,177           3.19
  Other interest earning
assets                              11,908,352            19,249           0.65        44,280,701            29,034           0.26
     Total interest earning
assets (1)                         689,950,883         9,361,649           5.43       677,025,514        10,213,902           6.03
 Other noninterest earning
assets (3)                          44,957,394                 -                       27,855,344                 -
       Total assets              $ 734,908,277     $   9,361,649                    $ 704,880,858     $  10,213,902

 Interest bearing liabilities:
  Savings accounts                  85,320,620           118,717           0.56        95,452,979           249,553           1.05
  NOW accounts                     189,644,077           582,187           1.23       155,972,696           839,857           2.15
  Money market deposit
accounts                            18,418,271            25,609           0.56        15,505,109            46,334           1.20
  Certificates of deposit          227,377,837           853,187           1.50       265,118,574         1,147,240           1.73
    Total interest bearing
deposits                           520,760,805         1,579,700           1.21       532,049,358         2,282,984           1.72
 Borrowings:
  Securities sold under
agreements
   to repurchase                    24,567,244            48,303           0.79        25,789,630            59,701           0.93
  FHLB advances                     34,128,913           254,712           2.99        33,500,000           339,391           4.05
  Subordinated debt                  7,217,000            59,126           3.28         7,217,000            54,048           3.00
    Total interest bearing
liabilities                        586,673,962         1,941,841           1.32       598,555,988         2,736,124           1.83
. . .
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