PART
I:
Item
2
: Management’s Discussion and Analysis of Financial Condition
and Results of Operations
SOUTHERN
MISSOURI BANCORP, INC.
General
Southern
Missouri Bancorp, Inc. (Southern Missouri or Company) is a Missouri corporation
and owns all of the outstanding stock of Southern Missouri Bank & Trust Co.
(SMBT or the Bank). The Company’s earnings are primarily dependent on
the operations of the Bank. As a result, the following discussion
relates primarily to the operations of the Bank. The Bank’s deposit
accounts are generally insured up to a maximum of $100,000 (certain retirement
accounts are insured up to $250,000) by the Deposit Insurance Fund (DIF), which
is administered by the Federal Deposit Insurance Corporation
(FDIC). The Bank currently conducts its business through its home
office located in Poplar Bluff and eight full service branch facilities in
Poplar Bluff (2), Van Buren, Dexter, Kennett, Doniphan, Sikeston, and Qulin,
Missouri.
The
significant accounting policies followed by Southern Missouri Bancorp, Inc.
and
its wholly-owned subsidiary for interim financial reporting are consistent
with
the accounting policies followed for annual financial reporting. All
adjustments, which are of a normal recurring nature and are in the opinion
of
management necessary for a fair statement of the results for the periods
reported, have been included in the accompanying consolidated condensed
financial statements.
The
consolidated balance sheet of the Company as of June 30, 2007, has been derived
from the audited consolidated balance sheet of the Company as of that
date. Certain information and note disclosures normally included in
the Company’s annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company’s Form 10-K annual report filed with the
Securities and Exchange Commission.
Management’s
discussion and analysis of financial condition and results of operations is
intended to assist in understanding the financial condition and results of
operations of the Company. The information contained in this section
should be read in conjunction with the unaudited consolidated financial
statements and accompanying notes. The following discussion reviews
the Company’s consolidated financial condition at December 31, 2007, and the
results of operations for the three- and six-month periods ended December 31,
2007 and 2006, respectively.
Forward
Looking
Statements
This
document, including information incorporated by reference, contains
forward-looking statements about the Company and its subsidiaries which we
believe are within the meaning of the Private Securities Litigation Reform
Act
of 1995. These forward-looking statements may include, without
limitation, statements with respect to anticipated future operating and
financial performance, growth opportunities, interest rates, cost savings and
funding advantages expected or anticipated to be realized by
management. Words such as “may,” “could,” “should,” “would,”
“believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar
expressions are intended to identify these forward-looking
statements. Forward-looking statements by the Company and its
management are based on beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions of management and are not guarantees
of
future performance. The important factors we discuss below, as well
as other factors discussed under the caption “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and identified in our
filings with the SEC and those presented elsewhere by our management from time
to time, could cause actual results to differ materially from those indicated
by
the forward-looking statements made in this document:
·
|
the
strength of the United States economy in general and the strength
of the
local economies in which we conduct
operations;
|
·
|
the
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;
|
·
|
changes
in consumer spending and saving habits;
and
|
·
|
our
success at managing the risks involved in the
foregoing.
|
The
Company disclaims any obligation to update or revise any forward-looking
statements based on the occurrence of future events, the receipt of new
information, or otherwise.
Critical
Accounting
Policies
Generally
accepted accounting principles are complex and require management to apply
significant judgments to various accounting, reporting and disclosure
matters. Management of the Company must use assumptions and estimates
to apply these principles where actual measurement is not possible or
practical. For a complete discussion of the Company’s significant
accounting policies, see “Notes to the Consolidated Financial Statements” in the
Company’s 2007 Annual Report. Certain policies are considered
critical because they are highly dependent upon subjective or complex judgments,
assumptions and estimates. Changes in such estimates may have a
significant impact on the financial statements. Management has
reviewed the application of these policies with the Audit Committee of the
Company’s Board of Directors. For a discussion of applying critical
accounting policies, see “Critical Accounting Policies” beginning on page 11 in
the Company’s 2007 Annual Report.
Executive
Summary
Our
results of operations depend primarily on our net interest margin, which is
directly impacted by the interest rate environment. The net interest
margin represents interest income earned on interest-earning assets (primarily
mortgage loans, commercial loans and the investment portfolio), less interest
expense paid on interest-bearing liabilities (primarily certificates of deposit,
savings, interest-bearing demand accounts and borrowed funds), as a percentage
of average interest-earning assets. Net interest margin is directly
impacted by the spread between long-term interest rates and short-term interest
rates, as our interest-earning assets, particularly those with initial terms
to
maturity or repricing greater than one year, generally price off longer term
rates while our interest-bearing liabilities generally price off shorter term
interest rates.
Our
net interest income is also impacted
by the shape of the market yield curve. A steep yield curve – in
which the difference in interest rates between short term and long term periods
is relatively large – could be beneficial to our net interest income, as the
interest rate spread between our additional interest-earning assets and
interest-bearing liabilities would be larger. Conversely, a flat or
flattening yield curve, in which the difference in rates between short term
and
long term periods is relatively small or shrinking, or an inverted yield curve,
in which short term rates exceed long term rates, could have an adverse impact
on our net interest income, as our interest rate spread could
decrease.
Our
results of operations may also be affected significantly by general and local
economic and competitive conditions, particularly those with respect to changes
in market interest rates, government policies and actions of regulatory
authorities.
During
the first six months of fiscal
2008, we grew our balance sheet by $12.7 million, which was consistent with
the
Company’s growth strategies. This additional growth reflected a
$7.6 million increase in total net loans
, a $3.3
million
increase in investments, a
$
4.1
million
in
crease
in deposits, and a $7.5 million
increase in borrowed funds. The growth in loans was primarily due to
residential and commercial real estate loan originations. The
increase in borrowed funds was primarily in the form of
securities sold under
agreements to
repurchase
,
and
was
used
primarily
to
fund loan and investment
growth.
Our
net income for the second quarter of
fiscal 2008 increased 20.6% to $873,000, as compared to $724,000 earned during
the same period of the prior year. T
he increase in net income
compared to the year-ago period was primarily due to a 14.8% increase in net
interest income and a 9.8% increase in non-interest income, partially offset
by
a 9.7% increase in non-interest expense. Diluted earnings per share
for the second
quarter of fiscal
2008 were $0.39, as compared to $0.32 for the second quarter of fiscal
2007. For the first six months of fiscal 2008, net income increased
15.2% to $1.69 million, as compared to $1.46 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 10.2% increase in net interest income
and
a 5.7% increase in non-interest income, partially offset by a 7.6% increase
in
non-interest expense. For
both the three- and six-month
periods
ended December 31, 2007, our growth in net interest income was derived primarily
from growth in our average balances of interest-earning assets, and secondarily
from an increased net interest margin.
Short-term
market interest rates
declined during the first six months of fiscal 2008, following increases during
the previous two fiscal years. After two years of increases left the overnight
lending rate at 5.25% in June 2006, the Federal Open Market Committee of the
Federal Reserve Bank (FOMC) held the rate steady until September 2007, when
it
cut rates by 50 basis points, to 4.75%, and then followed with 25 basis point
cuts at its October and December meetings. From July 1 to December
31, 2007, rates on short term treasuries declined based on investor expectations
regarding short-term monet
ary policy. At July 1, 2007,
the six-month treasury bill, two-year treasury note, and ten-year treasury
bond
each yielded about 5%; six months later, the yield was off approximately 150
basis points on the six-month bill, and 200 basis points on the two-year note,
while the ten-
year
bond yield had declined about 100
basis points. The result was a
generally
steepened
yield curve.
In this rate environment,
our net interest margin increased 20 basis points when comparing the second
quarter of fiscal 2008 with the corresponding period in fiscal 2007; comparing
the first six months of fiscal 2008 to the corresponding period in fiscal 2007,
our margin increased eight basis points
. Subsequent to the quarter
end, the FOMC cut rates by 125 basis points in two separate actions during
the
month of January. The Company expects rate cuts to date to have a
positive impact on our results of operations, but additional rate cuts may
bring
the short end of the yield curve to a point at which we cannot maintain our
historical pricing margins on deposit products, which may have a negative impact
on operating results.
The
Company’s net income is also
affected by the level of non-interest income and operating
expenses. Non-interest income consists primarily of service charges,
ATM and loan fees, and other general operating income. Operating
expenses consist primarily of salaries and employee benefits, occupancy-related
expenses, postage, insurance, advertising, professional fees, office expenses,
and other general operating expenses. During the three- and six-month
periods ended December 31, 2007, non-interest income increased 9.8% and 5.7%,
respectively, compared to the same periods of the prior fiscal year, primarily
due to increased debit card and ATM transaction fee income, loan fee
collections, and income from NSF charges. Non-interest expense
increased during the three- and six-month periods ended December 31, 2007,
by
9.7% and 7.6%, respectively, compared to the same periods of the prior fiscal
year, primarily in the categories of compensation and benefits, occupancy
expenses, accounting services, and ATM network expenses, as well as charges
to
amortize the Company’s investments in tax credits, partially offset by lower
advertising and supplies expenses.
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 December 31, 2007, and June 30, 2007
The
Company’s total assets increased by $12.7 million, or 3.3%, to $392.6 million at
December 31, 2007, as compared to $379.9 million at June 30,
2007. Loans, net of the allowance for loan losses, increased $7.6
million, or 2.4%, to $319.7 million, as compared to $312.1 million at June
30,
2007. Residential real estate loans grew by $7.0
million. The Company continues to focus on origination of commercial
loans. Commercial real estate loan balances grew by $4.6 million,
while commercial operating lines were down $3.5 million, due mostly to seasonal
agricultural loan paydowns. Investment balances increased by $3.2
million, or 9.3%, to $38.1 million, as compared to $34.9 million at June 30,
2007. Cash and cash equivalent balances increased $1.8 million, or
24.4%, to $9.1 million, as compared to $7.3 million at June 30,
2007.
Asset
growth during the first six months of fiscal 2008 has been funded primarily
with
securities sold under agreements to repurchase. At December 31, 2007,
repurchase agreements totaled $22.8 million, an increase of $5.0 million, or
28.4%, compared to $17.8 million at June 30, 2007. The increase was
attributed primarily to a single significant relationship, and growth was not
expected to continue for the remainder of the fiscal year. FHLB
advances totaled $56.5 million at December 31, 2007, compared to $54.0 million
at June 30, 2007, an increase of $2.5 million, or 4.6%. Deposits
increased $4.1 million, or 1.5%, to $274.1 million at December 31, 2007, as
compared to $270.1 million at June 30, 2007. The increase in deposits
was primarily due to a $9.4 million increase in certificate of deposit balances,
partially offset by a combined $4.9 million decrease in money market savings
and
money market deposit accounts.
Total
stockholders’ equity increased $1.0 million, or 3.5%, to $29.7 million at
December 31, 2007, as compared to $28.7 million at June 30, 2007. The
increase was primarily due to retention of net income and an increase in the
market value of the available-for-sale investment portfolio, partially offset
by
purchases of treasury stock and cash dividends paid.
Average
Balance Sheet for
the Three and Six Months Ended December 31, 2007 and 2006
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 six-month periods ending December 31, 2007 and 2006. 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
months ended
December
31, 2007
|
|
|
Three
months ended
December
31, 2006
|
|
|
|
Average
Balance
|
|
|
Interest
and Dividends
|
|
|
Yield/
Cost
(%)
|
|
|
Average
Balance
|
|
|
Interest
and Dividends
|
|
|
Yield/
Cost
(%)
|
|
|
Interest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans (1)
|
|
$
|
232,410,132
|
|
|
$
|
4,150,302
|
|
|
|
7.14
|
|
|
$
|
205,827,925
|
|
|
$
|
3,575,735
|
|
|
|
6.95
|
|
Other
loans (1)
|
|
|
86,354,079
|
|
|
|
1,769,239
|
|
|
|
8.20
|
|
|
|
87,000,795
|
|
|
|
1,767,033
|
|
|
|
8.12
|
|
Total
net loans
|
|
|
318,764,211
|
|
|
|
5,919,541
|
|
|
|
7.43
|
|
|
|
292,828,720
|
|
|
|
5,342,768
|
|
|
|
7.30
|
|
Mortgage-backed
securities
|
|
|
13,919,968
|
|
|
|
156,160
|
|
|
|
4.49
|
|
|
|
12,933,578
|
|
|
|
141,820
|
|
|
|
4.39
|
|
Investment
securities (2)
|
|
|
25,771,074
|
|
|
|
289,080
|
|
|
|
4.49
|
|
|
|
28,527,927
|
|
|
|
308,464
|
|
|
|
4.33
|
|
Other
interest earning assets
|
|
|
4,016,624
|
|
|
|
12,460
|
|
|
|
1.24
|
|
|
|
3,595,502
|
|
|
|
9,166
|
|
|
|
1.02
|
|
Total
interest earning assets (1)
|
|
|
362,471,877
|
|
|
|
6,377,241
|
|
|
|
7.04
|
|
|
|
337,885,727
|
|
|
|
5,802,218
|
|
|
|
6.87
|
|
Other
noninterest earning assets (3)
|
|
|
24,582,025
|
|
|
|
-
|
|
|
|
|
|
|
|
22,102,058
|
|
|
|
-
|
|
|
|
|
|
Total
assets
|
|
$
|
387,053,902
|
|
|
$
|
6,377,241
|
|
|
|
|
|
|
$
|
359,987,785
|
|
|
$
|
5,802,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$
|
76,479,426
|
|
|
$
|
690,995
|
|
|
|
3.61
|
|
|
$
|
69,325,040
|
|
|
$
|
648,563
|
|
|
|
3.74
|
|
NOW
accounts
|
|
|
31,154,693
|
|
|
|
107,129
|
|
|
|
1.38
|
|
|
|
29,966,964
|
|
|
|
94,418
|
|
|
|
1.26
|
|
Money
market deposit accounts
|
|
|
5,720,047
|
|
|
|
27,237
|
|
|
|
1.90
|
|
|
|
7,179,340
|
|
|
|
35,534
|
|
|
|
1.98
|
|
Certificates
of deposit
|
|
|
138,039,043
|
|
|
|
1,651,144
|
|
|
|
4.78
|
|
|
|
125,086,392
|
|
|
|
1,481,166
|
|
|
|
4.74
|
|
Total
interest bearing deposits
|
|
|
251,393,209
|
|
|
|
2,476,505
|
|
|
|
3.94
|
|
|
|
231,557,736
|
|
|
|
2,259,681
|
|
|
|
3.90
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold under agreements
to
repurchase
|
|
|
19,408,098
|
|
|
|
207,435
|
|
|
|
4.28
|
|
|
|
10,016,108
|
|
|
|
123,283
|
|
|
|
4.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
|
57,270,121
|
|
|
|
768,463
|
|
|
|
5.37
|
|
|
|
63,375,272
|
|
|
|
855,501
|
|
|
|
5.40
|
|
Subordinated
debt
|
|
|
7,217,000
|
|
|
|
153,627
|
|
|
|
8.51
|
|
|
|
7,217,000
|
|
|
|
150,045
|
|
|
|
8.32
|
|
Total
interest bearing liabilities
|
|
|
335,288,428
|
|
|
|
3,606,030
|
|
|
|
4.30
|
|
|
|
312,166,116
|
|
|
|
3,388,510
|
|
|
|
4.34
|
|
Noninterest
bearing demand deposits
|
|
|
19,996,122
|
|
|
|
-
|
|
|
|
|
|
|
|
17,893,678
|
|
|
|
-
|
|
|
|
|
|
Other
noninterest bearing liabilities
|
|
|
2,328,759
|
|
|
|
-
|
|
|
|
|
|
|
|
2,228,475
|
|
|
|
-
|
|
|
|
|
|
Total
liabilities
|
|
|
357,613,309
|
|
|
|
3,606,030
|
|
|
|
|
|
|
|
332,288,269
|
|
|
|
3,388,510
|
|
|
|
|
|
Stockholders’
equity
|
|
|
29,440,593
|
|
|
|
-
|
|
|
|
|
|
|
|
27,699,516
|
|
|
|
-
|
|
|
|
|
|
Total
liabilities and
stockholders'
equity
|
|
$
|
387,053,902
|
|
|
$
|
3,606,030
|
|
|
|
|
|
|
$
|
359,987,785
|
|
|
$
|
3,388,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
2,771,211
|
|
|
|
|
|
|
|
|
|
|
|
2,413,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate spread (4)
|
|
|
|
|
|
|
|
|
|
|
2.74
|
|
|
|
|
|
|
|
|
|
|
|
2.53
|
|
Net
interest margin (5)
|
|
|
|
|
|
|
|
|
|
|
3.06
|
|
|
|
|
|
|
|
|
|
|
|
2.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of average interest-earning assets
to
average interest-bearing liabilities
|
|
|
108.11
|
%
|
|
|
|
|
|
|
|
|
|
|
108.24
|
%
|
|
|
|
|
|
|
|
|
(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 $8.5 million and $7.1
million, respectively, for the three-month period ending December
31,
2007, as compared to $8.7 million and $6.8 million for the same period
of
the prior year.
|
(4)
|
Interest
rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
|
(5)
|
Net
interest margin represents net interest income divided by average
interest-earning assets.
|
|
|
Six
months ended
December
31, 2007
|
|
|
Six
months ended
December
31, 2006
|
|
|
|
Average
Balance
|
|
|
Interest
and Dividends
|
|
|
Yield/
Cost
(%)
|
|
|
Average
Balance
|
|
|
Interest
and Dividends
|
|
|
Yield/
Cost
(%)
|
|
Interest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans (1)
|
|
$
|
229,225,628
|
|
|
$
|
8,192,990
|
|
|
|
7.15
|
|
|
$
|
203,759,977
|
|
|
$
|
7,042,182
|
|
|
|
6.91
|
|
Other
loans (1)
|
|
|
88,684,499
|
|
|
|
3,637,860
|
|
|
|
8.20
|
|
|
|
86,652,892
|
|
|
|
3,512,064
|
|
|
|
8.11
|
|
Total
net loans
|
|
|
317,910,127
|
|
|
|
11,830,850
|
|
|
|
7.44
|
|
|
|
290,412,869
|
|
|
|
10,554,246
|
|
|
|
7.27
|
|
Mortgage-backed
securities
|
|
|
12,471,177
|
|
|
|
281,226
|
|
|
|
4.51
|
|
|
|
13,754,502
|
|
|
|
292,042
|
|
|
|
4.25
|
|
Investment
securities (2)
|
|
|
26,368,621
|
|
|
|
578,567
|
|
|
|
4.39
|
|
|
|
28,257,232
|
|
|
|
626,664
|
|
|
|
4.44
|
|
Other
interest earning assets
|
|
|
3,430,637
|
|
|
|
19,228
|
|
|
|
1.12
|
|
|
|
3,387,753
|
|
|
|
15,552
|
|
|
|
0.92
|
|
Total
interest earning assets (1)
|
|
|
360,180,562
|
|
|
|
12,709,871
|
|
|
|
7.06
|
|
|
|
335,812,356
|
|
|
|
11,488,503
|
|
|
|
6.84
|
|
Other
noninterest earning assets (3)
|
|
|
23,148,557
|
|
|
|
-
|
|
|
|
|
|
|
|
21,652,436
|
|
|
|
-
|
|
|
|
|
|
Total
assets
|
|
$
|
383,329,119
|
|
|
$
|
12,709,871
|
|
|
|
|
|
|
$
|
357,464,792
|
|
|
$
|
11,488,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
accounts
|
|
$
|
77,122,565
|
|
|
$
|
1,448,391
|
|
|
|
3.76
|
|
|
$
|
70,997,750
|
|
|
$
|
1,331,016
|
|
|
|
3.75
|
|
NOW
accounts
|
|
|
30,540,163
|
|
|
|
211,171
|
|
|
|
1.38
|
|
|
|
29,493,233
|
|
|
|
188,871
|
|
|
|
1.28
|
|
Money
market accounts
|
|
|
5,800,505
|
|
|
|
54,937
|
|
|
|
1.89
|
|
|
|
7,712,521
|
|
|
|
76,890
|
|
|
|
1.99
|
|
Certificates
of deposit
|
|
|
135,254,993
|
|
|
|
3,288,137
|
|
|
|
4.86
|
|
|
|
124,161,711
|
|
|
|
2,804,236
|
|
|
|
4.52
|
|
Total
interest bearing deposits
|
|
|
248,718,226
|
|
|
|
5,002,636
|
|
|
|
4.02
|
|
|
|
232,165,215
|
|
|
|
4,401,013
|
|
|
|
3.79
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold under agreements
to
repurchase
|
|
|
17,549,035
|
|
|
|
399,986
|
|
|
|
4.56
|
|
|
|
10,208,429
|
|
|
|
247,054
|
|
|
|
4.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
|
59,150,577
|
|
|
|
1,600,462
|
|
|
|
5.41
|
|
|
|
60,297,419
|
|
|
|
1,637,528
|
|
|
|
5.43
|
|
Subordinated
debt
|
|
|
7,217,000
|
|
|
|
304,142
|
|
|
|
8.43
|
|
|
|
7,217,000
|
|
|
|
300,264
|
|
|
|
8.32
|
|
Total
interest bearing liabilities
|
|
|
332,634,838
|
|
|
|
7,307,226
|
|
|
|
4.39
|
|
|
|
310,088,063
|
|
|
|
6,585,859
|
|
|
|
4.25
|
|
Noninterest
bearing demand deposits
|
|
|
19,287,767
|
|
|
|
-
|
|
|
|
|
|
|
|
18,223,453
|
|
|
|
-
|
|
|
|
|
|
Other
noninterest bearing liabilities
|
|
|
2,184,647
|
|
|
|
-
|
|
|
|
|
|
|
|
1,810,100
|
|
|
|
-
|
|
|
|
|
|
Total
liabilities
|
|
|
354,107,252
|
|
|
|
7,307,226
|
|
|
|
|
|
|
|
330,121,616
|
|
|
|
6,585,859
|
|
|
|
|
|
Stockholders’
equity
|
|
|
29,221,867
|
|
|
|
-
|
|
|
|
|
|
|
|
27,343,176
|
|
|
|
-
|
|
|
|
|
|
Total
liabilities and
stockholders'
equity
|
|
|
383,329,119
|
|
|
$
|
7,307,226
|
|
|
|
|
|
|
|
357,464,792
|
|
|
$
|
6,585,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
|
5,402,645
|
|
|
|
|
|
|
|
|
|
|
|
4,902,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate spread (4)
|
|
|
|
|
|
|
|
|
|
|
2.67
|
|
|
|
|
|
|
|
|
|
|
|
2.59
|
|
Net
interest margin (5)
|
|
|
|
|
|
|
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
2.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of average interest-earning assets
to
average interest-bearing liabilities
|
|
|
108.28
|
%
|
|
|
|
|
|
|
|
|
|
|
108.30
|
%
|
|
|
|
|
|
|
|
|
(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 $8.5 million and $7.1
million, respectively, for the six-month period ending December 31,
2007,
as compared to $8.8 million and $6.8 million for the same period
of the
prior year.
|
(4)
|
Interest
rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
|
(5)
|
Net
interest margin represents net interest income divided by average
interest-earning assets.
|
Results
of Operations –
Comparison of the three- and six-month periods ended December 31, 2007 and
2006
General
. Net
income
for the three- and six-month periods ended December 31, 2007, was $873,000
and
$1.69 million, respectively, increases of $149,000, or 20.6%, and $223,000,
or
15.2%, as compared to net income of $723,000 and $1.46 million, respectively,
earned during the same periods of the prior year. Basic and diluted
earnings per share were $0.40 and $0.39, respectively, for the second
quarter of fiscal 2008, compared
to
$0.32 basic and diluted earnings per share for the second quarter of fiscal
2007. For the first six months of fiscal 2008, basic and diluted
earnings per share were $0.77 and $0.7
6
,
respectively, compared to $0.66 and
$0.65, respectively, for the same period of the prior year. Our
annualized return on average assets for the three- and six-month periods ended
December 31, 2007, was .90% and .88%, respectively, compared to .80% and .82%,
respectively, for the same periods of the prior year. Our return on
average stockholders’ equity for the three- and six-month periods ended December
31, 2007, was 11.9% and 11.5%, respectively, compared to 10.5% and 10.7%,
respectively, for the same periods of the prior year.
Net
Interest
Income.
Net interest income for the three- and six-month
periods ended December 31, 2007, increased $358,000, or 14.8%, and $500,000,
or
10.2%, respectively, as compared to the same periods of the prior
year. These increases reflected our growth initiatives that 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 2.74% for the three-month period
ended December 31, 2007, as compared to 2.53% for the same period of the prior
year; for the six-month period ended December 31, 2007, our interest rate spread
was 2.66%, as compared to 2.59% for the same period of the prior
year. For the three- and six-month periods ended December 31, 2007,
our net interest margin, determined by dividing the annualized net interest
income by total average interest-earning assets, was 3.06% and 3.00%,
respectively, compared to 2.86% and 2.92%, respectively, for the same periods
of
the prior year.
The increase in
interest rate spread for the three-month period ended December 31, 2007,
resulted from a 17 basis point increase in the weighted-average yield on
interest-earning assets, combined with a four basis point decrease in the
weighted-average cost of funds. The increase in interest rate spread
for the six-month period ended December 31, 2007, resulted from a 22 basis
point
increase in the weighted-average yield on interest-earning assets, partially
offset by a 14 basis point increase in the weighted-average cost of
funds. Expansion of our interest rate spread was attributed primarily
to the faster repricing of liabilities on the Company’s balance sheet, combined
with the improved slope of the yield curve.
Interest
Income.
Total interest income for the three- and six-month
periods ended December 31, 2007, was $6.4 million and $12.7 million,
respectively, increases of $575,000, or 9.9%, and $1.2 million, or 10.6%,
respectively, compared to the same periods of the prior year. The increases
were
due to increases of $24.6 million, or 7.3%, and $24.4 million, or 7.3%,
respectively, in the average balance of interest-earning assets during the
second quarter and first six months of fiscal 2008, combined with increases
of
17 and 22 basis points, respectively, in the weighted-average yield on those
assets. For the three- and six-month periods ended December 31, 2007,
the average interest rate on interest-earning assets was 7.04% and 7.06%,
respectively, as compared to 6.87% and 6.84%, respectively, for the same periods
of the prior year.
Interest
Expense
. Total interest expense for the three- and six-month
periods ended December 31, 2007, was $3.6 million and $7.3 million,
respectively, increases of $218,000, or 6.4%, and $721,000, or 11.0%,
respectively, compared to the same periods of the prior year. The
increases were due to three- and six-month period increases of $23.1 million,
or
7.4%, and $22.5 million, or 7.3%, respectively, in the average balance of
interest-bearing liabilities, partially offset by a four basis point decline
in
the weighted-average cost of funds during the three-month period, and combined
with a 14 basis point increase in the weighted-average cost of funds during
the
six-month period. For the three- and six-month periods ended December
31, 2007, the average interest rate on interest-bearing liabilities was 4.30%
and 4.39%, respectively, as compared to 4.34% and 4.25%, 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.
Provision
for Loan
Losses
. The provision for loan losses for the three- and
six-month periods ended December 31, 2007, was $90,000 and $200,000,
respectively, as compared to $95,000 and $220,000, respectively, for the same
periods of the prior year. The Company’s growth, over the last several years, in
its commercial and commercial real estate loan portfolios has required increased
provisions for loan losses, as those loan types generally carry additional
risk. Although we believe that we have established and maintained the
allowance for loan losses at adequate levels, additions may be necessary as
the
loan portfolio grows, as economic conditions change, and as other conditions
differ from the current operating environment. Even though we use the
best information available, the level of the allowance for loan losses remains
an estimate that is subject to significant judgment and short-term
change. (See “Critical Accounting Policies”, “Allowance for Loan Loss
Activity” and “Nonperforming Assets”).
Non-interest
Income
. Non-interest income for the three- and six-month
periods ended December 31, 2007, increased $54,000, or 9.8%, and $64,000, or
5.7%, to $602,000 and $1.2 million, respectively, as compared to $548,000 and
$1.1 million, respectively, for the same periods of the prior
year.
The increases
were primarily due to increased
debit card
transaction
revenues
and
increased
NSF fee
collections
. Debit card transaction revenue increased based on
additional transaction volume, due in part to increasing customer preference
for
electronic payments, and due in part to the Company’s focus on encouraging such
activity with our account products. NSF fee collections were up based
on an increased volume of NSF activity among our customer base.
Non-interest
Expense.
Non-interest expense for the three- and six-month
periods ended December 31, 2007, increased $175,000, or 9.7%, and $274,000,
or
7.6%, to $2.0 million and $3.9 million, respectively, as compared to $1.8
million and $3.6 million, respectively, for the same periods of the prior
year. The increases in non-interest expense were primarily due to
increased compensation, occupancy, and charges to amortize the Company’s
investments in tax credits. Compensation was up due to salary
increases and additional personnel; occupancy expenses were up due to increased
repairs and maintenance and data processing expenses
.
As the Company
continues to grow its balance sheet, non-interest expense will continue to
increase due to compensation, expenses related to expansion, and
inflation. Our efficiency ratio, determined by dividing total
non-interest expense by the sum of net interest income and non-interest income,
was 58.6% and 58.8%, respectively, for the three- and six-month periods ended
December 31, 2007, as compared to 60.9% and 59.7%, respectively, for the same
periods of the prior year.
Income
Taxes.
Provisions for income taxes for the three- and
six-month periods ended December 31, 2007, increased $92,000, or 26.9%, and
$87,000, or 11.6%, to $432,000 and $832,000, respectively, as compared to
$341,000 and $745,000, respectively, for the same periods of the prior
year. Our effective tax rate for the six-month period ended December
31, 2007, 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.
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 six months ended December 31, 2007
and
2006:
|
|
2007
|
|
|
2006
|
|
Balance,
beginning of period
|
|
$
|
2,537,659
|
|
|
$
|
2,058,144
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
(11,150
|
)
|
|
|
(80,675
|
)
|
Consumer
|
|
|
(39,571
|
)
|
|
|
(39,743
|
)
|
Gross
charged off loans
|
|
|
(50,721
|
)
|
|
|
(120,418
|
)
|
Recoveries
of loans previously charged off:
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
-
|
|
|
|
3,604
|
|
Commercial
business
|
|
|
162,813
|
|
|
|
21,001
|
|
Consumer
|
|
|
1,873
|
|
|
|
7,645
|
|
Gross
recoveries of charged off loans
|
|
|
164,686
|
|
|
|
32,250
|
|
Net
recoveries (charge offs)
|
|
|
113,965
|
|
|
|
(88,168
|
)
|
Provision
charged to expense
|
|
|
200,000
|
|
|
|
220,000
|
|
Balance,
end of period
|
|
$
|
2,851,624
|
|
|
$
|
2,189,976
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net charge offs/recoveries during the period
|
|
|
-0.04
|
%
|
|
|
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 principal is unlikely. The
allowance for loan losses increased $314,000 to $2.9 million at December 31,
2007, from $2.5 million at June 30, 2007. At December 31, 2007, the
Bank had $4.1 million, or 1.04% of total assets adversely classified ($4.1
million classified “substandard”; $7,000 classified “doubtful”; none classified
as “loss”), as compared to adversely classified assets of $1.1 million, or 0.30%
of total assets at June 30, 2007, and adversely classified assets of $823,000,
or .23% of assets at December 31, 2006. The increase was due
primarily to a single loan for $3.1 million secured by commercial real estate,
and performing according to terms at December 31, 2007. 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.
Nonperforming
Assets
The
ratio
of nonperforming assets to total assets and non-performing loans to net loans
receivable is another measure of asset quality. Nonperforming assets
of the Company include nonaccruing loans, accruing loans delinquent/past
maturity 90 days or more, and assets which have been acquired as a result of
foreclosure or deed-in-lieu of foreclosure. The following table
summarizes changes in the Company’s level of nonperforming assets over selected
time periods:
|
|
12/31/2007
|
|
|
6/30/2007
|
|
|
12/31/2006
|
|
Loans
past maturity/delinquent 90 days or more and non-accrual
loans
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$
|
30,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial
real estate
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
-
|
|
Consumer
|
|
|
8,000
|
|
|
|
4,000
|
|
|
|
7,000
|
|
Total
loans past maturity/delinquent 90 days or more and non-accrual
loans
|
|
|
58,000
|
|
|
|
24,000
|
|
|
|
7,000
|
|
Foreclosed
real estate or other real estate owned
|
|
|
86,000
|
|
|
|
111,000
|
|
|
|
440,000
|
|
Other
repossessed assets
|
|
|
31,000
|
|
|
|
12,000
|
|
|
|
-
|
|
Total
nonperforming assets
|
|
$
|
175,000
|
|
|
$
|
147,000
|
|
|
$
|
447,000
|
|
Percentage
nonperforming assets to total assets
|
|
|
0.04
|
%
|
|
|
0.04
|
%
|
|
|
0.12
|
%
|
Percentage
nonperforming loans to net loans
|
|
|
0.02
|
%
|
|
|
0.01
|
%
|
|
|
0.00
|
%
|
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 December 31, 2007, the Company had outstanding
commitments to fund approximately $48.5 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 December 31, 2007, the Bank had pledged its residential
real estate loan portfolio with FHLB with available credit of approximately
$101.8 million, of which $56.5 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
$86.2 million in borrowings at December 31, 2007. In total, FHLB
borrowings are generally limited to 35% of Bank assets, or $136.6 million,
which
means $80.1 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 December 31,
2007, and June 30, 2007, the Bank met all applicable adequacy
requirements.
The
FDIC
has in place qualifications for banks to be classified as
“well-capitalized.” As of December 31, 2007, the most recent
notification from the FDIC categorized the Bank as
“well-capitalized.” There were no conditions or events since the FDIC
notification that has changed the Bank’s classification.
The
Bank’s actual capital amounts and ratios are also presented in the following
tables.
|
|
Actual
|
|
|
For
Capital Adequacy Purposes
|
|
|
To
Be Well Capitalized Under Prompt Corrective Action
Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital
(to
Risk-Weighted Assets)
|
|
$
|
34,098,000
|
|
|
|
12.07
|
%
|
|
$
|
22,598,000
|
|
|
|
8.00
|
%
|
|
$
|
28,248,000
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital
(to
Risk-Weighted Assets)
|
|
|
31,246,000
|
|
|
|
11.06
|
%
|
|
|
11,299,000
|
|
|
|
4.00
|
%
|
|
|
16,949,000
|
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital
(to
Average Assets)
|
|
|
31,246,000
|
|
|
|
8.17
|
%
|
|
|
15,299,000
|
|
|
|
4.00
|
%
|
|
|
19,124,000
|
|
|
|
5.00
|
%
|
|
|
Actual
|
|
|
For
Capital Adequacy Purposes
|
|
|
To
Be Well Capitalized Under Prompt Corrective Action
Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As
of June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Risk-Based Capital
(to
Risk-Weighted Assets)
|
|
$
|
32,420,000
|
|
|
|
11.81
|
%
|
|
$
|
21,954,000
|
|
|
|
8.00
|
%
|
|
$
|
27,443,000
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital
(to
Risk-Weighted Assets)
|
|
|
29,882
,000
|
|
|
|
10.89
|
%
|
|
|
10,977,000
|
|
|
|
4.00
|
%
|
|
|
16,466,000
|
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital
(to
Average Assets)
|
|
|
29,882,000
|
|
|
|
8.10
|
%
|
|
|
14,756,000
|
|
|
|
4.00
|
%
|
|
|
18,445,000
|
|
|
|
5.00
|
%
|