Southern Missouri Bancorp - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2008

OR

For the transition period from   to

Commission file number   0-23406

(Exact name of registrant as specified in its charter)

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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.

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

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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 13, 2008

Common Stock, Par Value $.01                                                                               2,234,633 Shares

SOUTHERN MISSOURI BANCORP, INC.

FORM 10-Q

INDEX

 

 

See Notes to Consolidated Financial Statements

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 generally accepted accounting principles 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, 2007, has been derived from the audited consolidated balance sheet of the Company as of that date.  Operating results for the nine-month period ended March 31, 2008, 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, 2007, 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, 2007 and 2006.

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:  Securities

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

The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2008.

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, 2007.

Note 3:  Loans

Loans are summarized as follows:

Note 4:  Deposits

Deposits are summarized as follows:

Note 5:  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, 2008 and 2007.

Note 6:   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 7:  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 2008.  The Company has been accruing $50,000 per quarter for ESOP benefit expenses during this fiscal year and intends to contribute cash to the plan to allow the purchase of shares for allocation to participants at some point during fiscal 2008.

Note 8:  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, redeemable after five years and bear interest at a floating rate based on LIBOR.  The securities represent undivided beneficial interests in the trust, which was established by the Company for the purpose of issuing the securities.  The Trust Preferred Securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended (the “Act”) and have not been registered under the Act.  The securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

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

Note 9:  Authorized Share Repurchase Program

In June, 2007, the Board of Directors authorized and announced the open-market or privately-negotiated stock repurchase of up to 110,000 shares of the Company’s outstanding stock.  As of March 31, 2008, a total of 49,343 shares have been repurchased.  The number of shares, as of March 31, 2008, held as treasury stock was 722,593.

Note 10:  Newly Adopted Accounting Pronouncements

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” on July 1, 2007.  Implementation of the new Standard did not have a material impact on the Company’s financial statements.  The Company files income tax returns in the U.S. federal jurisdiction and the state of Missouri.  As of May 13, 2008, the open tax years under FIN 48 are 2006, 2005, and 2004.  These tax years correspond to our fiscal years ended 2007, 2006, and 2005.

 

 

 

 

 

 

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

SOUTHERN MISSOURI BANCORP, INC.

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

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

The consolidated balance sheet of the Company as of June 30, 2007, has been derived from the audited consolidated balance sheet of the Company as of that date.  Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report filed with the Securities and Exchange Commission.

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company.  The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and accompanying notes.  The following discussion reviews the Company’s consolidated financial condition at March 31, 2008, and the results of operations for the three- and nine-month periods ended March 31, 2008 and 2007, respectively.

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

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

Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters.  Management of the Company must use assumptions and estimates to apply these principles where actual measurement is not possible or practical.  For a complete discussion of the Company’s significant accounting policies, see “Notes to the Consolidated Financial Statements” in the Company’s 2007 Annual Report.  Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates.  Changes in such estimates may have a significant impact on the financial statements.  Management has reviewed the application of these policies with the Audit Committee of the Company’s Board of Directors.  For a discussion of applying critical accounting policies, see “Critical Accounting Policies” beginning on page 11 in the Company’s 2007 Annual Report.

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

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

Our net income for the third quarter of fiscal 2008 increased 37.8% to $898,000, as compared to $652,000 earned during the same period of the prior year.  The increase in net income compared to the year-ago period was primarily due to a 25.3% increase in net interest income and a 16.5% increase in non-interest income, partially offset by a 250.0% increase in loan loss provisions and a 5.2% increase in non-interest expense.  Diluted earnings per share for the third quarter of fiscal 2008 were $0.40, as compared to $0.29 for the third quarter of fiscal 2007.  For the first nine months of fiscal 2008, net income increased 22.2% to $2.58 million, as compared to $2.12 million earned during the same period of the prior year.  The increase in net income compared to the year-ago period was primarily due to a 15.2% increase in net interest income and a 9.1% increase in non-interest income, partially offset by a 6.8% increase in non-interest expense and a 71.9% increase in loan loss provisions.  For the third quarter of fiscal 2008, our increase in net interest income was due primarily to an increase in average interest rate spread, as well as an increase in average interest-earning assets.  For the fiscal year-to-date, the increase in net interest income was due primarily to an increase in average interest-earning assets, as well as an increase in average interest rate spread.

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

The Company’s total assets increased by $25.2 million, or 6.6%, to $405.2 million at March 31, 2008, as compared to $379.9 million at June 30, 2007.  Loans, net of the allowance for loan losses, increased $18.9 million, or 6.1%, to $331.0 million, as compared to $312.1 million at June 30, 2007.  Residential real estate loans grew by $8.9 million, while commercial real estate loans grew by $8.3 million.  The Company continues to focus on origination of commercial and commercial real estate loans.  Investment balances increased by $8.7 million, or 24.8%, to $43.5 million, as compared to $34.9 million at June 30, 2007.  Additional collateral requirements due to increased public funds deposits and securities sold under agreements to repurchase prompted the increase, which was also timed to take advantage of historically wide spreads available on some investment purchases.  Cash and cash equivalent balances decreased $2.4 million, or 33.1%, to $4.9 million, as compared to $7.3 million at June 30, 2007.

Asset growth during the first nine months of fiscal 2008 has been funded primarily with deposit growth; deposits increased $12.2 million, or 4.5%, to $282.3 million at March 31, 2008, compared to $270.1 million at June 30, 2007.  The increase in deposits was due to a $15.2 million increase in certificates of deposit, and a $1.4 million increase in checking accounts, partially offset by a $4.7 million decrease in money market savings and money market deposit accounts.  FHLB advances totaled $59.5 million at March 31, 2008, compared to $54.0 million at June 30, 2007, an increase of $5.5 million, or 10.2%.  Securities sold under agreements to repurchase totaled $22.7 million at March 31, 2008, an increase of $4.9 million, or 27.6%, compared to $17.8 million at June 30, 2007.

Total stockholders’ equity increased $2.4 million, or 8.2%, to $31.1 million at March 31, 2008, as compared to $28.7 million at June 30, 2007.  The increase was primarily due to retention of net income, an increase in the market value of the available-for-sale investment portfolio, and the exercise of stock options outstanding, partially offset by purchases of treasury stock and cash dividends paid.

The tables below 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, 2008 and 2007.  The tables present the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities.  We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown.  Yields on tax-exempt obligations were not computed on a tax equivalent basis.

       

 

 

 

 

     

General.  Net income for the three- and nine-month periods ended March 31, 2008, was $898,000 and $2.58 million, respectively, increases of $246,000, or 37.8%, and $469,000, or 22.2%, as compared to net income of $652,000 and $2.12 million, respectively, earned during the same periods of the prior year.  Basic and diluted earnings per share were $0.41 and $0.40, respectively, for the third quarter of fiscal 2008, compared to $0.29 basic and diluted earnings per share for the third quarter of fiscal 2007.  For the first nine months of fiscal 2008, basic and diluted earnings per share were $1.18 and $1.17, respectively, compared to $0.95 and $0.93, respectively, for the same period of the prior year.  Our annualized return on average assets for the three- and nine-month periods ended March 31, 2008, was .90% and ..89%, respectively, compared to .71% and .78%, respectively, for the same periods of the prior year.  Our return on average stockholders’ equity for the three- and nine-month periods ended March 31, 2008, was 11.8% and 11.6%, respectively, compared to 9.2% and 10.2%, respectively, for the same periods of the prior year.

Net Interest Income.  Net interest income for the three- and nine-month periods ended March 31, 2008, increased $621,000, or 25.3%, and $1.12 million, or 15.2%, respectively, as compared to the same periods of the prior year.  These increases reflected an expansion of our net interest rate spread, and our growth initiatives, which resulted in increases in the average balances of both interest-earning assets and interest-bearing liabilities.  Our interest rate spread was 2.95% for the three-month period ended March 31, 2008, as compared to 2.51% for the same period of the prior year; for the nine-month period ended March 31, 2008, our interest rate spread was 2.76%, as compared to 2.57% for the same period of the prior year.  For the three- and nine-month periods ended March 31, 2008, our net interest margin, determined by dividing the annualized net interest income by total average interest-earning assets, was 3.25% and 3.09%, respectively, compared to 2.83% and 2.89%, respectively, for the same periods of the prior year. The increase in interest rate spread for the three-month period ended March 31, 2008, resulted from a51 basis point decrease in the average cost of interest-bearing liabilities, partially offset by an eight basis point decrease in the average yield on interest-earning assets.  The increase in interest rate spread for the nine-month period ended March 31, 2008, resulted from an eleven basis point increase in the average yield on interest-earning assets, combined with an eight basis point decrease in the average cost of interest-bearing liabilities.  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, combined with the improved slope of the yield curve.

Interest Income.  Total interest income for the three- and nine-month periods ended March 31, 2008, was $6.4 million and $19.1 million, respectively, increases of $466,000, or 7.9%, and $1.7 million, or 9.7%, respectively, compared to the same periods of the prior year. The increases were due to increases of $31.5 million, or 9.1%, and $26.7 million, or 7.9%, respectively, in the average balance of interest-earning assets during the third quarter and first nine months of fiscal 2008, combined with an eleven basis point increase in the average yield on those assets for the first nine months of fiscal 2008, and partially offset by an eight basis point decrease in the average yield on those assets for the third quarter of fiscal 2008.  For the three- and nine-month periods ended March 31, 2008, the average interest rate on interest-earning assets was 6.76% and 6.95%, respectively, as compared to 6.83% and 6.84%, respectively, for the same periods of the prior year.

Interest Expense.  Total interest expense for the three-month period ended March 31, 2008, was $3.3 million, a decrease of $155,000, or 4.5%, compared to the same period of the prior fiscal year.  The decrease was due to a 51 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a $27.1 million increase in the average balance of interest-bearing liabilities.  For the nine-month period ended March 31, 2008, total interest expense was $10.6 million, an increase of $566,000, or 5.6%, compared to the same period of the prior fiscal year.  The increase was due to an increase of $24.1 million, or 7.7%, in the average balance of interest-bearing liabilities, compared to the same period of the prior year, partially offset by an eight basis point decline in the average cost of funds, compared to the same period of the prior year.  For the three- and nine-month periods ended March 31, 2008, the average interest rate on interest-bearing liabilities was 3.81% and 4.19%, respectively, as compared to 4.32% and 4.27%, respectively, for the same periods of the prior year.  The increases in the average balances of interest-bearing liabilities was primarily due to funding needed for asset growth.

 

 

 

 

Non-interest Income.  Non-interest income for the three- and nine-month periods ended March 31, 2008, increased $85,000, or 16.5%, and $149,000, or 9.1%, to $601,000 and $1.79 million, respectively, as compared to $516,000 and $1.64 million, respectively, for the same periods of the prior year.  The increases were primarily due to increased non-sufficient funds charges, debit card and ATM transaction fee income, and payment of loan late charges, and was partially offset by decreased secondary market residential real estate loan fee income.  NSF charges were up based on activity by depositors; debit card and ATM transaction fee income was up due to a greater preference for that type of transaction by our customer base, as well as due to the Company’s encouragement of that activity within our account products; late charges were up primarily due to a payoff on a single large commercial loan; and secondary market residential loan fee income was down due to a weakened real estate market and difficulties in obtaining approval for many prospective borrowers.

Non-interest Expense.  Non-interest expense for the three- and nine-month periods ended March 31, 2008, increased $97,000, or 5.2%, and $372,000, or 6.8%, to $1.99 million and $5.86 million, respectively, as compared to $1.89 million and $5.49 million, respectively, for the same periods of the prior year.  The increases in non-interest expense were primarily due to increased compensation and benefits expenses, data processing charges, expenses for accounting services, and additional charges for debit card activity, as well as charges to amortize the Company’s investments in tax credits, and were partially offset by lower advertising expenses, legal expenses, losses on the disposition of foreclosed real estate, and other miscellaneous expenses.  Compensation was up due to salary increases and additional personnel; data processing expenses were up due primarily to software costs.  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 54.0% and 57.1%, respectively, for the three- and nine-month periods ended March 31, 2008, as compared to 63.6% and 61.0%, respectively, for the same periods of the prior year.

Income Taxes.  Provisions for income taxes for the three- and nine-month periods ended March 31, 2008, increased $112,000, or 34.0%, and $199,000, or 18.5%, to $442,000 and $1.27 million, respectively, as compared to $330,000 and $1.08 million, respectively, for the same periods of the prior year.  Our effective tax rate for the nine-month period ended March 31, 2008, was 33.0%, as compared to 33.7% for the same period of the prior year.  The decrease in the effective tax rate was attributable to the Company’s investment in tax-exempt securities and purchases of tax credits; the increase in tax provisions was due to increased pre-tax income, partially offset by the lower effective tax rate.

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, 2008 and 2007:

The allowance for loan losses has been calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Company’s loans.  Management considers such factors as the repayment status of a loan, the estimated net fair value of the underlying collateral, the borrower’s intent and ability to repay the loan, local economic conditions, and the Company’s historical loss ratios.  We maintain the allowance for loan losses through the provisions for loan losses that we charge to income.  We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely. The allowance for loan losses increased $657,000 to $3.2 million at March 31, 2008, from $2.5 million at

June 30, 2007.  At March 31, 2008, the Bank had $4.2 million, or 1.03% of total assets adversely classified ($4.2 million classified “substandard”; none classified “doubtful” or “loss”), as compared to adversely classified assets of $1.1 million, or 0.30% of total assets at June 30, 2007, and $1.2 million, or 0.31% of total assets, adversely classified at March 31, 2007.  The increase in classified assets was due primarily to a single loan with an outstanding balance of $3.1 million, secured by commercial real estate and performing according to terms at March 31, 2008.  The loan was classified due to concerns regarding the borrower’s ability to generate sufficient cash flows to service the debt.

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

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

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, 2008, the Company had outstanding commitments to fund approximately $55.6 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, 2008, the Bank had pledged its residential real estate loan portfolio with the FHLB for available credit of approximately $103.2 million, of which $59.5 million had been advanced.   In addition, the Bank has the ability to pledge several of its other loan portfolios, including commercial real estate, home equity, and commercial business loans, which could provide additional collateral for an additional $91.1 million in borrowings at March 31, 2008.  In total, FHLB borrowings are generally limited to 40% of Bank assets (as of January 2008), or $161.1 million, which means $101.6 million in borrowings remain available.  Along with the ability to borrow from the FHLB, management believes its liquid resources will be sufficient to meet the Company’s liquidity needs.

The Bank is subject to minimum regulatory capital requirements pursuant to regulations adopted by the federal banking agencies.  The requirements address both risk-based capital and leverage capital.  As of March 31, 2008, and June 30, 2007, the Bank met all applicable adequacy requirements.

The FDIC has in place qualifications for banks to be classified as “well-capitalized.”  As of March 31, 2008, the most recent notification from the FDIC categorized the Bank as “well-capitalized.”  There were no conditions or events since the FDIC notification that has changed the Bank’s classification.

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

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

SOUTHERN MISSOURI BANCORP, INC.

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) limiting the price volatility of the investment portfolio by maintaining a weighted average maturity of less than five years, (iii) actively soliciting less rate-sensitive deposits, and (iv) offering competitively-priced money market accounts and CDs with maturities of up to five years.  The degree to which each segment of the strategy is achieved will affect profitability and exposure to interest rate risk.

During the first nine months of fiscal year 2008, fixed rate residential loan production totaled $16.1 million, as compared to $12.2 million during the same period of the prior year.  At March 31, 2008, the fixed rate residential loan portfolio was $98.0 million with a weighted average maturity of 205 months, as compared to $89.2 million at March 31, 2007, with a weighted average maturity of 196 months.  The Company originated $6.5 million in adjustable-rate residential loans during the nine-month period ended March 31, 2008, as compared to $5.0 million during the same period of the prior year.  At March 31, 2008, fixed rate loans with remaining maturities in excess of 10 years totaled $81.8 million, or 24.7% of net loans receivable, as compared to $73.0 million, or 24.2% of net loans receivable at March 31, 2007.  The Company originated $43.0 million of fixed rate commercial and commercial real estate loans during the nine-month period ended March 31, 2008, as compared to $53.2 million during the same period of the prior year.  At March 31, 2008, the fixed rate commercial and commercial real estate loan portfolio was $112.3 million with a weighted average maturity of 29 months, compared to $83.7 million at March 31, 2007, with a weighted average maturity of 33 months.  The Company originated $35.9 million in adjustable rate commercial and commercial real estate loans during the nine-month period ended March 31, 2008, as compared to $34.6 million during the same period of the prior year.  At March 31, 2008, adjustable-rate home equity lines of credit totaled $7.4 million, as compared to $6.3 million at March 31, 2007.  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 this fiscal year.  At March 31, 2008, the portfolio’s weighted-average life stands at 4.9 years, compared to 2.9 years at March 31, 2007.  Management continues to focus on customer retention, customer satisfaction, and offering new products to customers in order to increase the Company’s amount of less rate-sensitive deposit accounts.  As the Company believed the Federal Reserve’s Open Market Committee was approaching the peak of the interest rate cycle in 2006, management began to avoid extending maturities of deposits and borrowings.  As rates have been lowered recently, management has re-evaluated this strategy, locking in some long-term borrowing costs, and expects to continue to do so during the remainder of the fiscal year.  The company remains “liability-sensitive,” in that our liabilities generally re-price more quickly than our assets.  As we reach what we expect to be the bottom of the current interest rate cycle, it is expected that management will seek to reduce the amount of sensitivity, using both traditional means (e.g., longer-term borrowings or certificates of deposit) and derivative products (e.g., interest rate swaps).

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, 2008, 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, 2008, 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, 2008, 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.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and annually report on their systems of internal control over financial reporting.  We are in the process of completing documentation of internal control over financial reporting to provide the basis for our report that will, for the first time, be a required part of our Annual Report on Form 10-K for the fiscal year ending June 30, 2008.  In addition, our independent accountants must report on management’s evaluation of its internal control over financial reporting beginning June 30, 2010, according to the latest proposal from the SEC.  Due to the ongoing evaluation and testing of our internal controls, there can be no assurance that, if any control deficiencies are identified, they will be remediated before the end of the 2008 fiscal year, or that there may not be significant deficiencies or material weaknesses that would be required to be reported.  In addition, we expect the evaluation process and any required remediation, if applicable, to increase our accounting, legal, and other costs, and to divert management resources from core business operations.

PART II: Other Information

SOUTHERN MISSOURI BANCORP, INC.

Item 1:  Legal Proceedings

Item 1a:  Risk Factors

There have been no material changes to 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, 2007.

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

Item 3:  Defaults upon Senior Securities

Not applicable

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

None

Item 5 -Other Information

None

Item 6 –Exhibits

 

++       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 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 Annual Report on Form 10-QSB for the quarter ended December 31, 2000.

***** Filed as an exhibit to the registrant’s Annual Report on Form 10-QSB for the quarter ended December 31, 2004.

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.

Date:                May 13, 2008                                                              /s/ James W. Tatum                                

James W. Tatum

Chairman of the Board of Directors

Date:                May 13, 2008                                                              /s/ Greg A. Steffens                                                               

Greg A. Steffens

President (Principal Executive, Financial and Accounting Officer)