17
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23406
Southern Missouri Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Missouri 43-1665523
(State or jurisdiction of incorporation) (IRS employer id. no.)
531 Vine Street Poplar Bluff, MO 63901
(Address of principal executive offices) (Zip code)
(573) 785-1421
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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 14, 1999
Common Stock, Par Value $.01 1,367,900 Shares
SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
INDEX
PART I.Financial Information (Unaudited) PAGE NO.
Item 1. Consolidated Financial Statements (Unaudited)
- Consolidated Statements of Financial Condition 3
- Consolidated Statements of Income and
Comprehensive Income 4
- Consolidated Statements of Cash Flows 5-6
- Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
PART II. OTHER INFORMATION 15
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security-Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
- Signature Page 16
PART I Item 1. Financial Information
SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1999 AND JUNE 30, 1998
(UNAUDITED)
ASSETS
March 31, June 30,
1999 1998
Cash and due from banks $ 1,727,859 $ 2,462,679
Interest bearing deposits in other
financial institutions 5,032,968 1,863,795
Cash and cash equivalents 6,760,827 4,326,474
Available-for-sale investment securities 16,516,908 9,352,412
Held-to-maturity investment securities 3,766,292 4,645,407
Mortgage-backed securities, available-for-sale 17,614,697 14,154,096
Loans receivable, net 116,714,024 119,083,215
Foreclosed assets held for sale 477,537 171,721
Premises and equipment 1,965,522 1,883,064
Accrued interest receivable:
Loans 538,141 607,955
Investments 321,330 299,823
Federal Home Loan Bank stock 1,091,000 1,053,500
Prepaid expenses and other assets 454,103 369,391
Total Assets $166,220,381 $155,947,058
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $122,731,931 $109,410,436
Federal Home Loan Bank advances 19,800,000 21,068,905
Accrued interest payable 708,461 581,590
Advances from borrowers for taxes and insurance 250,904 315,123
Accrued expenses and other liabilities 628,865 459,119
Total Liabilities 144,120,161 131,835,173
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 500,000 shares
authorized; none issued and outstanding
- -
Common stock, $.01 par value; 4,000,000 shares
authorized; 1,803,201 shares issued 18,032 18,032
Additional paid-in capital 17,721,018 17,628,758
Accumulated other comprehensive income (38,798) (27,804)
Retained earnings, substantially restricted 13,276,961 12,771,731
Unearned ESOP shares (432,714) (510,114)
Unearned MRP shares (67,870) (155,710)
Treasury stock, at cost; 451,622 and 310,813
shares at March 31, 1999 and June 30, 1998,
respectively (8,376,409) (5,613,008)
Total stockholders' equity 22,100,220 24,111,885
Total Liabilities and Stockholders' Equity $166,220,381 $155,947,058
See Notes to Consolidated Financial Statements
SOUTHERN MISSOURI BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
Three-months ended Nine-months ended
March 31, March 31,
1999 1998 1999 1998
INTEREST INCOME:
Loans receivable $2,194,964 $2,322,505 $6,930,751 $6,798,500
Investment securities 270,218 206,048 673,577 739,906
Mortgage-backed and
related securities 261,944 257,405 717,986 964,650
Other interest-earning assets 55,700 56,512 124,748 111,678
Total interest income 2,782,826 2,842,470 8,447,062 8,614,734
INTEREST EXPENSE:
Deposits 1,292,436 1,224,762 3,923,509 3,897,952
Federal Home Loan Bank advances 239,955 290,032 741,547 812,529
Total interest expense 1,532,391 1,514,794 4,665,056 4,710,481
NET INTEREST INCOME 1,250,435 1,327,676 3,782,006 3,904,253
PROVISION FOR LOAN LOSSES 10,000 262,500 35,000 398,959
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,240,435 1,065,176 3,747,006 3,505,294
NONINTEREST INCOME:
Service charges 51,533 46,670 185,599 140,083
Gains(losses) on investment and
mortgage-backed securities,
available-for-sale 0 10,615 (625) 79,643
Insurance commissions 90,553 68,852 256,175 225,182
Income(expense) on foreclosed assets(2,654) 609 (22,627) (8,248)
Late charges and other fees 31,721 22,414 68,124 49,484
Other income 78,792 11,987 116,526 30,135
Total noninterest income 249,945 161,147 603,172 516,279
NONINTEREST EXPENSE:
Compensation and benefits 629,092 642,731 1,771,711 1,816,076
Occupancy and equipment, net 134,890 117,042 364,327 303,034
SAIF deposit insurance premiums 19,785 27,329 68,359 84,396
Professional fees 41,178 69,579 98,614 171,898
Advertising 33,909 23,321 90,684 87,642
Postage and office supplies 40,192 38,691 109,416 94,494
Other operating expense 99,344 68,139 288,576 201,969
Total noninterest expense 998,390 986,832 2,791,687 2,759,509
INCOME BEFORE INCOME TAXES 491,990 239,491 1,558,491 1,262,064
PROVISION FOR INCOME TAXES 162,496 76,480 533,614 449,027
NET INCOME 329,494 163,011 1,024,877 813,037
OTHER COMPREHENSIVE INCOME, NET:
Unrealized gains (losses) AFS
securities (29,308) (35,321) (10,600) (65,951)
Adjustment (gains) losses included
in net income 0 (6,687) 394 (50,175)
Other comprehensive income (29,308) (28,634) (10,994) (15,776)
COMPREHENSIVE INCOME $ 300,186 $ 134,377 $1,013,883 $ 797,261
Dividends per common share $ 0.125 $ 0.125 $ 0.375 $ 0.375
See Notes to Consolidated Financial Statements
PART I: FINANCIAL INFORMATION
SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIRY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine-months ended
March 31,
1999 1998
Cash Flows From Operating Activities:
Net income $ 1,024,877 $ 813,037
Items not requiring (providing) cash:
Depreciation and amortization 185,202 166,041
MRP expense and ESOP expense 248,572 385,776
Loss (gain) on sale of available-for-sale securities 625 (9,206)
(Gain) on sale of MBS, available-for-sale - (70,437)
Provision for loan losses 35,000 398,959
(Gain) loss on foreclosed real estate, net (20,580) 8,248
Net amortization of deferred income, premiums,
and discounts 83,134 42,163
Changes in:
Accrued interest receivable 48,307 184,663
Prepaid expenses and other assets (1,860) 71,234
Accounts payable and other liabilities 342,438 8,755
Accrued expense and other liabilities (39,911) (146,733)
Net cash provided by operating activities 1,905,804 1,852,500
Cash flows from investing activities:
Net decrease (increase) in loans 1,946,073 (10,630,868)
Proceeds from sales of available-for-sale
investment securities 999,375 2,491,094
Proceeds from sales of available-for-sale
mortgage-backed securities - 7,543,774
Proceeds from maturing available-for-sale
investment securities 4,212,120 5,435,000
Proceeds from maturing available-for-sale
mortgage-backed securities 4,276,567 3,999,516
Proceeds from maturing held-to-maturity
mortgage-backed securities 275,000 130,724
Proceeds from sales of certificates of deposits - 93,825
Purchase of Federal Home Loan Bank stock (37,500) -
Purchase of available-for-sale
mortgage-backed securities (8,048,143) (1,107,089)
Purchase of available-for-sale
investment securities (11,581,011) (1,997,810)
Purchase of premises and equipment (267,660) (371,103)
Proceeds from sale of foreclosed real estate 39,477 12,343
Net cash provided by (used in)
investing activities (8,185,702) 5,599,406
Cash flows from financing activities:
Net increase (decrease) in certificates of deposit 7,446,654 (11,154,914)
Net increase (decrease) in demand, NOW and
Saving accounts 5,874,841 377,166
Net increase in advances from borrowers for taxes
and insurance (64,219) (79,517)
Proceeds from Federal Home Loan Bank advances 5,500,000 99,550,000
Repayments of Federal Home Loan Bank advances (6,768,905) (91,511,949)
Cash dividends paid (510,719) (580,200)
Exercise of stock options 40,000 107,274
Purchase of treasury stock (2,803,401) (707,734)
Net cash provided by (used in)
financing activities 8,714,251 (3,999,874)
Increase in cash and cash equivalents 2,434,353 3,452,032
Cash and cash equivalents at beginning of period 4,326,474 3,425,175
Cash and cash equivalents at end of period $6,760,827 $6,877,207
See Notes to Consolidated Financial Statements
PART I: FINANCIAL INFORMATION
SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIRY
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(UNAUDITED)
Nine-months ended
March 31,
1999 1998
Supplemental disclosures of
Cash flow information:
Noncash investing and financing activities:
Conversion of loans to foreclosed real estate
and other assets $ 721,305 $ 36,626
Conversion of foreclosed real estate to loans $ 169,783 $ 6,950
Cash paid during the period for:
Interest (net of interest credited) $1,158,376 $1,136,343
Income taxes $ 300,000 $ 487,928
See Notes to Consolidated Financial Statements
SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY
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-QSB 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. Operating results for the three and
nine month periods ended March 31, 1999 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, 1998 Form 10-KSB, which was
filed with the SEC and the Company's annual report, which contains the
audited financial statements for the fiscal years ended June 30, 1998 and 1997.
Note 2: Holding Company Formation, and Stock Issuance, Charter
Conversions and State of Incorporation
Southern Missouri Bancorp, Inc. (the "Company"), a Missouri corporation,
was originally incorporated in the State of Delaware on December 30, 1993 for
the purpose of becoming a holding company for Southern Missouri Savings Bank,
upon its conversion from a state chartered mutual savings bank to a state
chartered stock savings bank.
The Company's subscription and community stock offering was completed on
April 13, 1994 with the issuance of 1,803,201 shares of common stock at a
price of $10 per share. The stock offering provided net proceeds of
approximately $15.2 million after conversion costs and unearned compensation
related to shares issued to the Employee Stock Ownership Plan ("ESOP") and
Management Recognition Plan ("MRP").
On June 20, 1995, Southern Missouri Savings Bank converted from a state
chartered stock savings bank to a federally chartered stock savings bank and
changed its name to Southern Missouri Savings Bank, FSB.
On February 17, 1998, Southern Missouri Savings Bank, FSB converted from a
federally chartered stock savings bank to a Missouri chartered stock savings
bank and changed its name to Southern Missouri Bank and Trust Co. (the "Bank"
or "SMBT").
On October 19, 1998, the Company's stockholders approved a proposal to change
the Company's state of incorporation from Delaware to Missouri. This
reincorporation was completed on April 1, 1999.
Note 3: Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, SMBT, which in turn owns all of
S.M.S. Financial Services, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Note 4: Employee Stock Ownership Plan
In conjunction with the stock offering, the Company established an ESOP
with 142,832 unallocated shares available for distribution. The unallocated
shares have been debited to unearned ESOP shares, a contra-equity account.
The Company recognizes compensation expense based on shares expected to be
released equal to the average market price of the shares in addition to
including the shares as outstanding for purposes of determining earnings per
share. At March 31, 1999, the ESOP had allocated 85,096 shares and had 9,000
shares committed for June 30, 1999 allocation to employees of the Bank.
Note 5: Management Change of the Holding Company
On May 7, 1999, Chairman Thadis R. Seifert was elected by the Board of
Directors to serve as the President of the Company. Mr. Seifert assumed this
position as a result of former President and CEO Donald R. Crandell's
retirement as President and CEO of the Company, Mr. Crandell will continue as
a director of the Company.
Note 6: Benefit Plans
In conjunction with the stock offering, the Company established both a MRP
and a Stock Option and Incentive Plan ("SOIP"). The MRP authorized 71,416
shares to be issued to directors, officers and employees of SMBT of which
68,918 have been awarded and 63,058 have vested or remain outstanding. The
SOIP authorized 178,540 stock options for shares to be issued to directors,
officers and employees of SMBT, pursuant to which 151,049 options have been
awarded and 114,275 remain outstanding. Stock awarded under the MRP vests
over five years, with compensation expense being amortized over each
participant's vesting period. As of March 31, 1999, the Company had 12,252
unvested MRP shares, of which 11,352 vested on April 13, 1999.
Note 7: Earnings Per Share
The Financial Accounting Standards Board recently adopted Statement of
Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share," and
SFAS No. 129, "Disclosure of Information about Capital Structure." The
statements replaced the presentation of primary earnings per share with a
presentation of basic earnings per share. These statements also
required dual presentation of basic and diluted earnings per share by
entities with complex capital structures and required a reconciliation of the
numerators and denominators between the two calculations. These statements
became effective for financial statements issued for periods ending after
December 15, 1997, including those for interim periods.
Basic and diluted earnings per share are based upon the weighted-average
shares outstanding. ESOP shares that have been committed to be released are
considered outstanding. The following table summarizes basic and diluted
earnings per common share for the three and nine months ended March 31, 1999
and 1998, under SFAS No. 128:
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
Net earnings $ 329,494 $ 163,011 $1,024,877 $ 813,037
Weighted-average shares -
Basic earnings per share 1,301,108 1,520,116 1,339,081 1,535,508
Stock options under treasury
stock method 35,332 55,663 37,683 50,958
Weighted-average shares -
Diluted earnings per share 1,336,440 1,575,779 1,376,764 1,586,466
Basic earnings per common share $ 0.25 $ 0.11 $ 0.76 $ 0.53
Diluted earnings per common share $ 0.24 $ 0.10 $ 0.74 $ 0.51
PART I
Item 2
Southern Missouri Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The Company's performance is reliant on the operations of the Bank, since
the Company has no significant assets other than the common stock of the Bank
and $1.1 million in investments and other assets. The Bank's results of
operations are primarily dependent on the difference (or "interest rate
spread") between the average yield earned on its interest-earning assets and
the average rate paid on interest-bearing liabilities. Interest-earning
assets consist primarily of loans receivable, investment securities,
mortgage-backed and related securities ("MBS") and other investments while
interest bearing liabilities consist primarily of retail deposits and Federal
Home Loan Bank ("FHLB") advances. The interest rate spread is affected by
economic, regulatory, and competitive factors, which influence interest
rates, loan demand, prepayment rates and deposit flows. The Bank remains
subject to interest-rate risk to the degree that its interest-earning assets
mature or reprice at different times, or on a varying basis, from its
interest-bearing liabilities.
The Bank's results of operations are also affected by provisions for loan
losses, non-interest income and non-interest expenses, such as employee
salary and benefits, occupancy expenses and other operational expenditures.
The following discussion reviews the Company's consolidated financial condition
at March 31, 1999 and the results of operations for the three and nine-month
periods ended March 31, 1999 and 1998, respectively.
Forward Looking Statements
Except for the historical information contained herein, the matters
discussed in this Form 10-QSB may be deemed to be forward-looking statements
that involve risks and uncertainties, including changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and price competition for loans and deposits. Actual strategies
and results in future periods may differ materially from those currently
expected. These forward-looking statements represent the Company's judgement
as of the date of this Form 10-QSB. The Company disclaims however, any
intent or obligation to update these forward-looking statements.
Financial Condition
The Company's total assets increased $10.3 million, or 6.6%,
to $166.2 million at March 31, 1999 as compared to $155.9 million
at June 30, 1998. The increase was due to respective increases
in investment and MBS and cash balances of $9.7 million and $2.4
million, which was partially offset by a $2.4 million decline in
loans receivable.
Loans receivable declined $2.4 million, or 2.0%, from $119.1 million at
June 30, 1998 to $116.7 million at March 31, 1999. The decline was primarily
due to increased loan prepayments, despite loan originations increasing $4.7
million to $36.1 million over the nine-month period ended March 31, 1999 as
compared to the $31.4 million originated over the same period of the prior
year. The loan portfolio's decline included reductions in commercial real
estate loans and installment loans of $3.0 million and $1.1 million,
respectively, partially offset by a $1.7 million increase in one- to
four-family residential loans. During the first nine months of fiscal 1999,
the Company has been unable to achieve its stated goal of increasing loans
receivable as a result of the increased loan prepayments. In response, the
Company has introduced a wider array of more competitively priced loan
products including fixed rate loans with various final maturities for
residential financing, which is anticipated to help the Company move closer
to attaining its stated goal.
Deposits increased $13.3 million, or 12.2%, from $109.4 million at
June 30, 1998 to $122.7 million at March 31, 1999. The increase was
primarily due to growth in money market demand accounts ("MMDA's"), checking
accounts and certificates of deposit ("CD's") of $4.5 million, $1.3 million
and $7.4 million, respectively. The growth in these accounts was due in part to
the success of a competitively priced tiered MMDA, a fee-based checking
account package and competitive pricing of CD's.
At March 31, 1999, stockholders' equity was $22.1 million as compared to
$24.1 million at June 30, 1998. The $2.0 million decline in stockholders'
equity was primarily due to the repurchase of $2.8 million of the Company's
common stock and $511,000 in cash dividends on common stock. This decline was
partially offset by the Company's $1.0 million net income and $249,000 in
benefit plan shares committed-to-be released.
Results of Operations - Comparison of the three and nine month periods ended
March 31, 1999 and 1998.
Net Income. The Company's net income for the three and nine month periods
ended March 31, 1999 was $329,000 and $1.0 million, respectively, as compared
to the $163,000 and $813,000 earned during the same periods of the prior
year. Increased earnings over the three and nine month periods ended
March 31, 1999 were primarily due to reduced provisions for loan losses and
increased noninterest income, partially offset by reduced net interest income.
Net Interest Income. Net interest income declined by $77,000, or 5.8%, to
$1.3 million for the three months ended March 31, 1999 as compared to the
$1.3 million earned during the same period of the prior year. The decline
was primarily due to a decline in the average ratio of interest-earning
assets to interest-bearing liabilities, from 120.1% to 113.5%. Net interest
income declined by $122,000, or 3.1%, to $3.8 million for the nine months
ended March 31, 1999 as compared to the $3.9 million earned during the same
period of the prior year. The decline was primarily due to a decline in the
average ratio of interest-earning assets to interest-bearing liabilities, to
114.6% from 118.0%, which was partially offset by a 10 basis point increase
in the average net interest spread from 2.61% to 2.71%. The declines in the
ratio of interest-earning assets to interest-bearing liabilities were
primarily due to the Company's repurchase of some of its common stock.
Interest Income. Interest income for the three and nine-month periods
ended March 31, 1999 declined $60,000 and $168,000, respectively, as compared
to the same periods of the prior year. The decline over the three month
period was primarily due to a 37 basis point decline in the average yield
earned on interest-earning assets, which was partially offset by a $4.6
million or 3.0% increase in average interest-earning assets. Over the nine-
month period, the decline was primarily due to a $1.4 million decline in
average interest-earning assets and an 8 basis point decline in the average
yield earned on these assets.
Interest Expense. Interest expense for the three-month period ended
March 31, 1999 increased $18,000, or 1.2%, to $1.5 million when compared to
the same period of the prior year. The increase was due to an $11.5 million
increase in the average balance of interest-bearing liabilities nearly being
offset by a 34 basis point reduction in the average rate paid on these
liabilities, from 4.71% to 4.37%. The decline in rate was due to reduced
interest costs for savings accounts, checking accounts, CD's and FHLB
advances, which was partly offset by increased costs for MMDAs.
Interest expense for the nine-month period ended March 31, 1999 declined
$45,000, or 1.0%, to $4.7 million when compared to the same period of the
prior year. The decline was due to an 18 basis point decline in the average
rate paid on interest-bearing liabilities, from 4.81% to 4.63%, partially
offset by a $3.8 million increase in the average balance of these liabilities.
The decline in rate was attributed to lower interest costs on savings
accounts, checking accounts and FHLB advances, which was partly offset by
increased costs for MMDAs.
Provision for Loan Losses. The provision for loan losses for the three
and nine-month periods ended March 31, 1999 declined $253,000 and $364,000,
respectively, as compared to the same periods of the prior year. The
decline was primarily due to a reduction in adversely classified assets.
During the prior year, adversely classified assets increased significantly,
which contributed to increased provisions in the prior year (see "Allowance
for Loan Loss Activity" and "Nonperforming Assets").
Noninterest Income. Noninterest income for the three months ended
March 31, 1999 increased $89,000, or 55.1%, to $250,000 as compared to the
$161,000 earned during the same period of the prior year. The increase was
primarily due to an $81,000 increase resulting from the Bank increasing its
fees for services as well as a $22,000 increase in insurance commissions,
which was partially offset by a $11,000 decline in net realized gains on AFS
security sales and a $3,000 increase in expenses on foreclosed assets.
Noninterest income for the nine months ended March 31, 1999 increased
$87,000, or 16.8%, to $603,000 as compared to the $516,000 earned during the
same period of the prior year. The increase was primarily due to a $151,000
increase resulting from the Bank increasing its fees for services as well as
a $31,000 increase in insurance commissions, which was partially offset by a
$80,000 reduction in gains realized on AFS security sales and a $14,000
increase in expenses on foreclosed assets.
Noninterest Expense. Non-interest expense for the three and nine month
periods ended March 31, 1999 increased $12,000 and $32,000, respectively, as
compared to the same periods of the prior year. The respective increases
were partly due to increased occupancy expenses related to computer system
upgrades, as well as increased general operating expenses related primarily
to costs associated with the fee-based checking account package. These
increases were partially offset by declines in professional fees, deposit
insurance premiums and compensation and benefits expense. Provision for
Income Taxes. The provision for income taxes for the three and nine-month
periods ended March 31, 1999 was $162,000 and $534,000, respectively, as
compared to the $76,000 and $449,000 for the same periods of the prior year.
The increases were attributed to higher levels of taxable income.
Regulatory Matters and Supervisory Agreement
On February 17, 1998, the Office of Thrift Supervision ("OTS") approved
the conversion of the Bank from a federally chartered stock savings bank to a
Missouri chartered stock savings bank. In connection with the charter
conversion, the Bank changed its name to Southern Missouri Bank and Trust
Co., the primary regulator of the Bank changed from the OTS to the Missouri
Division of Finance and operating restrictions previously in place on the
Bank pursuant to an OTS Supervisory Agreement were lifted. However, the Bank
remained subject to increased SAIF deposit insurance premium assessments
until December 31, 1998, due to the Bank's former regulatory status. During
the three-month and nine month periods ended March 31, 1999, the Bank
recognized additional expense of $0 and $18,000, respectively, due to these
higher deposit premiums.
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, which it considers to be 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 establish-
ment of additional loss provisions. The following table summarizes changes
in the allowance for loan losses for the nine months ended March 31, 1999 and
1998:
1999 1998
Balance, beginning of period $1,295,222 $706,487
Loans charged off:
Real estate (37,664) (1,892)
Unsecured consumer (68,426) (12,590)
Secured consumer (80,739) (77,283)
Mobile homes (11,120) (202,419)
Recoveries of loans previously charged off:
Real estate 1,790 -
Unsecured consumer 4,195 -
Secured consumer 8,919 -
Mobile homes 54,309 86,566
Net charge offs (128,736) (207,618)
Provision charged to expense 35,000 398,959
Balance, end of period $1,201,486 $897,828
Ratio of net charge offs during the period
to average loans outstanding during the period .08% .18%
The increase in charge offs was partially the result of underwriting
guidelines for secured and unsecured consumer loans, which were utilized
during a period beginning in July 1997, which emphasized consumer loan
portfolio growth. In an effort to reduce loan delinquencies and charge-offs,
the Company adopted more restrictive consumer loan underwriting guidelines in
December 1998 and aggressively reviewed the existing portfolio under these
guidelines. Management believes that these new guidelines will result in
reduced future charge-offs, while allowing modest portfolio growth. However,
management anticipates that charge-offs will remain at levels higher than
historical averages over the next several quarters due to the previous
underwriting guidelines. These factors were considered in the Company's
analysis of the adequacy of its provision for loan losses. In addition, the
Company anticipates future loan recoveries since it has 21 loans totaling
$155,000, secured by automobile loans or mobile home loans which have been
charged off, but the actual value of the collateral had not yet been
realized through repossession. The Company does not expect to realize the
full charged off balance of these loans.
Nonperforming Assets
The allowance for loan losses has been calculated based upon an evaluation
of pertinent factors underlying the various types and quality of the Bank'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 Bank's
historical loss ratios. The allowance for loan losses declined $94,000 to
$1.2 million at March 31, 1999 from $1.3 million at June 30, 1998. At
March 31, 1999, the Bank had $4.3 million, or 2.6% of assets adversely
classified (substandard, doubtful, or loss) as compared to adversely
classified assets of $5.6 million, or 3.6% of assets at June 30, 1998. The
improvement in these ratios was due to the improved financial condition of
several of the Bank's loan customers, which resulted in their removal from
the balance of adversely classified assets as well as increased efforts to
collect nonperforming loans.
The ratio of nonperforming assets to total assets and 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:
Loans past maturity/delinquent 90 days or more 3/31/99 6/30/98 03/31/98
Residential real estate $ 326,000 $ 842,000 $ 501,000
Commercial real estate 415,000 348,000 346,000
Consumer 145,000 65,000 5,000
Mobile homes 167,000 80,000 45,000
Total loans past maturity/delinquent 90+ days 1,053,000 1,335,000 897,000
Assets acquired in settlement of loans 478,000 172,000 101,000
Total nonperforming assets $1,531,000 $1,507,000 $ 998,000
Percentage nonperforming assets to total assets 0.92% 0.97% 0.63%
Percentage nonperforming loans to net loans 0.90% 1.12% 0.76%
Asset and Liability Management and Market Risk
The goal of the Bank's asset/liability management strategy is to manage
the interest rate sensitivity of both interest-earning assets and interest-
bearing liabilities so as to maximize net interest income without exposing
it or the Bank to an excessive level of interest-rate risk. The Bank has
employed various strategies intended to manage the potential effect that
changing interest rates have on future operating results. Historically,
the primary asset/liability management strategy had been to focus on matching
the repricing intervals of interest-earning assets and interest-bearing
liabilities. This strategy has resulted in a manageable exposure to
interest-rate risk with modest asset and loan growth rates.
The primary elements of the Bank's current asset/liability strategy
includes (i) increasing loans receivable through the origination of both
fixed and adjustable-rate residential loans, (ii) growth in loans secured by
commercial real estate, which typically provide higher yields, increased
credit risk and shorter repricing periods, (iii) expanding the consumer loan
portfolio, (iv) active solicitation of less rate-sensitive deposits, (v)
offering competitively priced short-term certificates of deposit, and (vi)
the use of FHLB advances to help manage sensitivity to fluctuating interest
rates. The degree to which each segment of the strategy is achieved will
affect profitability and exposure to interest-rate risk.
The Bank has not and does not anticipate the use of derivative financial
instruments or other financial instruments for managing its exposure to
interest-rate risk or use in a trading account. Further, the Bank is not
subject to any foreign currency exchange rate risk, commodity price risk,
equity price risk or risk to any hedge funds.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, the receipt of
principal and interest payments on loans and mortgage-backed securities,
maturities or early redemption of investment securities and FHLB advances.
While the scheduled repayments on loans and securities as well as the
maturity of short-term investments are somewhat predictable sources of
funding, deposit flows and loan prepayment rates are influenced by many
factors, which make their cash flows difficult to anticipate.
The Company uses its liquidity resources principally to satisfy
its ongoing cash requirements which include funding loan commitments, funding
maturing certificates of deposit as well as deposit withdrawals, maintaining
liquidity, purchasing investments, and meeting operating expenses. At
March 31, 1999, the Company had outstanding commitments to fund $5.0 million in
mortgage loans and $1.5 million in 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, 1999, the Bank had
available credit at the FHLB of approximately $60.3 million, of which $19.8
million had been advanced. Management believes that these and other
liquidity resources will be sufficient to meets the Company's liquidity needs.
Year 2000 Compliance
General. The Year 2000 ("Y2K") issue confronting the Bank and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing
computer programs and systems originally were programmed with six digit dates
that provided only two digits to identify the calendar year in the date field.
With the impending new millennium, these programs and computers will
recognize "00" as the year 1900 rather than the year 2000.
Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibili-
ties of senior management and directors. The Federal Financial Institutions
Examination Council ("FFIEC") has issued several interagency statements on
Y2K Project Management Awareness. These statements require financial
institutions to, among other things, examine the Y2K implications of reliance
on vendors and with respect to data exchange, the potential impact of the
Y2K issue on customers, suppliers and borrowers. These statements also
require each federally regulated financial institution to survey its exposure,
measure risk and prepare a plan to address the Y2K issue. In addition, the
federal banking regulators have issued safety and soundness guidelines to be
followed by insured depository institutions, such as the Bank, to assure
resolution of any Y2K problems. The federal banking agencies have asserted
that Y2K testing and certification is a key safety and soundness issue in
conjunction with regulatory examinations and, thus, that an institution's
failure to address appropriately the Y2K issue could result in supervisory
action, including the reduction of the institution's supervisory ratings, the
denial of applications for approval of mergers or acquisitions or the
imposition of civil money penalties.
Risk. Like most financial institutions service providers, the Bank and
its operations may be significantly affected by the Y2K issue due to its
dependence on technology and date-sensitive data. Computer software and
hardware and other equipment, both within and outside the Bank's direct
control and third parties with whom the Bank electronically or operationally
interfaces (including without limitation its customers and third party
vendors) are likely to be affected. If computer systems are not modified in
order to be able to identify the year 2000, many computer applications could
fail or create erroneous results. As a result, many calculations which rely
on date field information, such as interest, payment or due dates and other
operating functions, could generate results which are significantly
misstated, and the Bank could experience an inability to process
transactions, prepare statements or engage in similar normal business
activities. Likewise, under certain circumstances, a failure to adequately
address the Y2K issue could adversely affect the viability of the Bank's
suppliers and creditors and the creditworthiness of its borrowers. Thus, if
not adequately addressed, the Y2K issue could result in a significant adverse
impact on the Bank's operations and, in turn, its financial condition and
results of operations.
State of Readiness. During October 1997, the Bank formulated its plan to
address the Y2K issue. Since that time, the Bank has taken the following steps:
- Established senior management advisory and review
responsibilities;
- Completed a Bank-wide inventory of applications and system
software;
- Built an internal tracking database for application and vendor
software;
- Developed, tested and validated compliance plans;
- Initiated vendor compliance verification;
- Begun awareness and education activities for employees,
customers, borrowers and suppliers;
- Started testing contingency plans.
The following paragraphs summarize the phases of the Bank's Y2K plan:
Awareness Phase. The Bank formally established a Y2K plan headed by a
senior manager, and a project team was assembled for management of the Y2K
project. The project team created a plan of action that includes milestones,
budget estimates, strategies, and methodologies to track and report the
status of the project. Members of the project team also attended conferences
and information sharing sessions to gain more insight into the Y2K issue and
potential strategies for addressing it. This phase is substantially complete.
Assessment Phase. The Bank's strategies were further developed with .
respect to how the objectives of the Y2K plan would be achieved, and a Y2K
business risk assessment was made to quantify the extent of the Bank's Y2K
exposure. A corporate inventory (which is periodically updated as new
technology is acquired and as systems progress through subsequent phases) was
developed to identify and monitor Y2K readiness for information systems
(hardware, software, utilities, and vendors) as well as environmental systems
(security systems, facilities, etc.). Systems were prioritized based on
business impact and available alternatives. Mission critical systems
supplied by vendors were researched to determine Y2K readiness. If Y2K-ready
versions were not available, the Bank began identifying functional
replacements, which were either upgradable or currently Y2K-ready, and a
formal plan was developed to repair, upgrade, or replace all mission critical
systems. This phase is substantially complete.
Beginning in August, 1998, all borrowing relationships greater than $250,000
were sent a questionnaire developed by the Bank's credit administration staff
to evaluate Y2K exposure. The Bank also performed a more detailed risk
assessment of major borrowers and depositors exposure to Y2K and their
potential impact on the Bank. The Bank's loan portfolio is primarily real
estate-based and is diversified with regard to individual borrowers and types
of businesses, and the Bank's primary market area is not significantly
dependent on one employer or industry. Therefore, the Bank does not expect
any significant or prolonged Y2K-related difficulties that will affect net
earnings or cash flow. As part of the current credit approval process, all
new and renewed loans are evaluated for Y2K risk as well as new major
depositors.
Renovation Phase. The Bank's corporate inventory revealed that Y2K
upgrades were available for all vendor supplied mission critical systems,
and all these Y2K-ready versions have been delivered, placed into production
and have been successfully evaluated through the validation process. This
phase is substantially complete.
Validation Phase. The validation phase is designed to test the ability of
hardware and software to accurately process date sensitive data. The Bank
has completed its validation testing of each mission critical system. During
the validation testing process, no significant Y2K problems were identified
relating to any modified or upgraded mission critical system. New equipment
purchases or data updates that are made to mission critical systems will
continue to be validated.
Implementation Phase. The Bank's plan calls for putting Y2K-ready code
into production before having actually completed Y2K validation testing.
Y2K-ready modified or upgraded versions have been installed and placed into
production with respect to all mission critical systems. This phase is
substantially complete.
Bank Resources Invested. The Bank's Y2K project team has substantially
completed its assigned task of ensuring that all systems across the Bank are
identified, analyzed for Y2K compliance, corrected, if necessary, tested, and
changes put into service. The Y2K project team members represent all
functional areas of the Bank, including branches, data processing, loan
administration, accounting, item processing, operations, compliance, internal
audit, the Board of Directors and marketing. The Bank's Board of Directors
oversees the Y2K plan and provides guidance and resources to, and receives
monthly updates from, the Y2K project team.
The Bank has expensed costs associated with the required system changes as
those costs are incurred, and such costs are being funded through operating
cash flows. The total cost of the Y2K conversion project for the Bank is
estimated to be $100,000, approximately $75,000 of which has been incurred
and expensed by the Bank through March 31, 1999. The Bank does not expect
significant increases in future data processing costs related to Y2K compliance.
Customer Awareness. The Bank has established a customer awareness
program, by which, the Bank's customers will be informed about the Bank's Y2K
preparedness as well as the Y2K issue in general. The program's focus
includes direct and indirect customer contact and its goal is to make the
Bank's Y2K efforts known to its customer base and allay significant
apprehension of the customer base to the Y2K issue.
Contingency Plans. During the assessment phase, the Bank began to develop
back-up or contingency plans for each of its mission critical systems.
Virtually all of the Bank's mission critical systems are dependent upon third
party vendors or service providers, therefore, contingency plans include
selecting a new vendor or service provider and converting to their system. No
mission critical vendor systems failed during the validation phase. For some
systems, contingency plans consist of using spreadsheet or data base software
or reverting to manual systems until systems problems can be corrected.
Although the Bank has been informed that each of its primary vendors have
certified that all mission critical systems either are or will timely be
Y2K-ready, no warranties have been received from such vendors.
Regulatory Capital
The Bank is subject to minimum regulatory capital requirements equal to a
leverage ratio (or core capital) of 4.0% of average total assets, a tier I
capital to risk-weighted assets of 4.0% and a risk-based capital ratio of
8.0% of risk-weighted assets. At March 31, 1999, the Bank exceeded all
regulatory capital requirements with leverage capital of $20.4 million
(12.5% of average total assets), tier I capital of $20.4 million (22.7% of
risk-based assets) and risk-based capital of $21.5 million (24.0% of
risk-weighted assets). Under current regulatory guidelines, the Bank is
considered to be "well-capitalized".
PART II - OTHER INFORMATION
Southern Missouri Bancorp, Inc. and Subsidiary
Item 1 - Legal Proceedings
The Company and the Bank are not involved in any pending legal proceedings
other than legal proceedings incident to the business of the Company and
the Bank, which involve aggregate amounts management believes to be
immaterial to the financial condition and results of operations of the
Company and the Bank.
Item 2 - Changes in Securities and Use of Proceeds
None
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 and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K: A Form 8-K was filed on March 12, 1999
announcing the retirement of Donald R. Crandell as President and
CEO of the registrants subsidiary, Southern Missouri Bank and
Trust Co.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN MISSOURI BANCORP, INC.
Registrant
Date: May 14, 1999
Thadis R. Seifert
President
Date: May 14, 1999
Greg A. Steffens
Chief Financial Officer
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