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 December 31, 1998
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)
Delaware 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 February 12, 1999
Common Stock, Par Value $.01 1,343,281 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
DECEMBER 31, 1998 AND JUNE 30, 1998
(UNAUDITED)
ASSETS
December 31, June 30,
1998 1998
Cash and due from banks $ 2,790,659 $ 2,462,679
Interest bearing deposits in other
financial institutions 4,561,496 1,863,795
Cash and cash equivalents 7,352,155 4,326,474
Available-for-sale investment securities 7,822,168 9,352,412
Held-to-maturity investment securities 4,366,870 4,645,407
Mortgage-backed securities, available-for-sale 19,343,935 14,154,096
Loans receivable, net 114,570,917 119,083,215
Foreclosed assets held for sale 555,996 171,721
Premises and equipment 1,933,486 1,883,064
Accrued interest receivable:
Loans 676,326 607,955
Investments 276,467 299,823
Federal Home Loan Bank stock 1,091,000 1,053,500
Prepaid expenses and other assets 391,586 369,391
Total Assets $158,380,906 $155,947,058
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $115,385,630 $109,410,436
Federal Home Loan Bank advances 19,800,000 21,068,905
Accrued interest payable 667,689 581,590
Advances from borrowers for taxes and insurance 140,596 315,123
Accrued expenses and other liabilities 513,043 459,119
Total Liabilities 136,506,958 131,835,173
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 17,700,186 17,628,758
Accumulated other comprehensive income (9,490) (27,804)
Retained earnings, substantially restricted 13,107,717 12,771,731
Unearned ESOP shares (458,514) (510,114)
Unearned MRP shares (107,710) (155,710)
Treasury stock, at cost; 451,622 and 310,813
shares at December 31, 1998 and June 30, 1998,
respectively (8,376,273) (5,613,008)
Total stockholders' equity 21,873,948 24,111,885
Total Liabilities and Stockholders' Equity $158,380,906 $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 SIX MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
Three-months ended Six-months ended
December 31, December 31,
1998 1997 1998 1997
INTEREST INCOME:
Loans receivable $2,362,830 $2,279,525 $4,735,787 $4,475,995
Investment securities 181,304 275,285 384,866 530,583
Mortgage-backed and
related securities 246,927 312,122 456,042 707,245
Other interest-earning assets 45,943 29,911 87,541 58,755
Total interest income 2,837,004 2,896,843 5,664,236 5,772,578
INTEREST EXPENSE:
Deposits 1,345,284 1,298,976 2,631,073 2,673,189
Federal Home Loan Bank
advances 245,287 289,773 501,592 522,497
Total interest expense 1,590,571 1,588,749 3,132,665 3,195,686
NET INTEREST INCOME 1,246,433 1,308,094 2,531,571 2,576,892
PROVISION FOR LOAN LOSSES 15,000 113,959 25,000 136,459
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,231,433 1,194,135 2,506,571 2,440,433
NONINTEREST INCOME:
Service charges 74,511 44,536 134,066 93,413
Gains (losses) on investment
and mortgage- backed securities,
available-for-sale 0 37,266 (625) 68,878
Insurance commissions 86,524 84,736 165,621 156,330
Income (expense) on foreclosed
assets (15,601) (414) (19,973) (8,857)
Late charges and other fees 18,251 14,217 36,404 22,630
Other income 31,783 2,471 37,734 15,324
Total noninterest income 195,468 182,812 353,227 347,718
NONINTEREST EXPENSE:
Compensation and benefits 575,154 577,646 1,142,619 1,167,553
Occupancy and equipment, net 120,408 91,186 229,437 170,928
SAIF deposit insurance premiums 24,071 28,004 48,575 57,067
Professional fees 24,742 93,231 57,435 130,323
Advertising 30,029 32,434 56,775 64,220
Postage and office supplies 29,708 26,762 65,704 52,853
Other operating expense 108,404 56,911 192,752 122,320
Total noninterest expense 912,516 906,174 1,793,297 1,765,264
INCOME BEFORE INCOME TAXES 514,385 470,773 1,066,501 1,022,887
PROVISION FOR INCOME TAXES 176,495 177,584 371,117 372,547
NET INCOME 337,890 293,189 695,384 650,340
OTHER COMPREHENSIVE INCOME, NET:
Unrealized gains AFS securities (31,106) (25,246) 17,920 56,496
Adjustment (gains) losses
included in net income 0 (23,723) 394 (43,638)
Other comprehensive income (31,106) (48,969) 18,314 12,858
COMPREHENSIVE INCOME $ 306,784 $ 244,220 $ 713,698 $ 663,198
Basic earnings per common
share $ 0.25 $ 0.19 $ 0.51 $ 0.42
Diluted earnings per common
share $ 0.25 $ 0.18 $ 0.50 $ 0.41
Dividends per common share $ 0.125 $ 0.125 $ 0.25 $ 0.25
See Notes to Consolidated Financial Statements
PART I: FINANCIAL INFORMATION
SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIRY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six-months ended
December 31,
1998 1997
Cash Flows From Operating Activities:
Net income $ 695,384 $ 650,340
Items not requiring (providing) cash:
Depreciation and amortization 119,000 104,224
MRP expense and ESOP expense 162,101 245,719
Loss (gain) on sale of available-for-sale
securities 625 (68,878)
Provision for loan losses 25,000 136,459
(Gain) loss on foreclosed real estate, net (1,090) 4,338
Net amortization of deferred income, premiums,
and discounts 54,248 64,343
Changes in:
Accrued interest receivable (45,015) 76,432
Prepaid expenses and other assets 7,950 58,324
Accounts payable and other liabilities 193,987 (22,839)
Accrued expense and other liabilities (48,054) (159,631)
Net cash provided by operating activities 1,164,136 1,088,831
Cash flows from investing activities:
Net decrease (increase) in loans 4,070,949 (9,122,741)
Proceeds from sales of available-for-sale
investment securities 999,375 999,219
Proceeds from sales of available-for-sale
mortgage-backed securities - 6,337,653
Proceeds from maturing available-for-sale
investment securities 1,130,000 1,830,000
Proceeds from maturing available-for-sale
mortgage-backed securities 2,841,321 2,662,033
Proceeds from maturing held-to-maturity
mortgage-backed securities 275,000 51,607
Purchase of Federal Home Loan Bank stock (37,500) -
Purchase of available-for-sale securities (8,667,519) -
Purchase of premises and equipment (169,422) (210,942)
Proceeds from sale of foreclosed real estate 1,950 4,343
Net cash provided by investing activities 444,154 2,551,172
Cash flows from financing activities:
Net increase (decrease) in certificates
of deposit 2,709,826 (7,338,240)
Net increase (decrease) in demand, NOW
and Saving accounts 3,265,368 (384,276)
Net increase in advances from borrowers
for taxes and insurance (174,527) (204,661)
Proceeds from Federal Home Loan Bank advances 5,500,000 18,500,000
Repayments of Federal Home Loan Bank advances (6,768,905) (11,008,045)
Cash dividends paid (350,419) (388,117)
Exercise of stock options 40,000 -
Purchase of treasury stock (2,803,952) (369,830)
Net cash (used in) provided by
financing activities 1,417,391 (1,193,169)
Increase in cash and cash equivalents 3,025,681 2,446,834
Cash and cash equivalents at beginning of period 4,326,474 3,425,175
Cash and cash equivalents at end of period $7,352,155 $5,872,009
See Notes to Consolidated Financial Statements
PART I: FINANCIAL INFORMATION
SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIRY
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(UNAUDITED)
Six-months ended
December 31,
1998 1997
Supplemental disclosures of
Cash flow information:
Noncash investing and financing activities:
Conversion of loans to foreclosed real estate
and other assets $ 544,376 $ 6,094
Conversion of foreclosed real estate to loans $ 94,500 $ 6,950
Cash paid during the period for:
Interest (net of interest credited) $ 999,471 $ 792,199
Income taxes $ 165,000 $ 241,000
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
six month periods ended December 31, 1998 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 Proposed State of Incorporation
Southern Missouri Bancorp, Inc. (the "Company"), a Delaware corporation,
was incorporated 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 should become effective during the quarter ending
March 31, 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 December 31, 1998, the ESOP had allocated 85,096 shares and had
6,000 shares committed for allocation to employees of the Bank.
Note 5: 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 63,218 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 114,325 remain outstanding. Stock awarded under the MRP
vests over five years, with compensation expense being amortized over each
participant's vesting period. As of December 31, 1998, the Company had 12,411
unvested MRP shares, of which 11,514 are scheduled for distribution during
the current fiscal year.
Note 6: 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 six months ended
December 31, 1998 and 1997, under SFAS No. 128:
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
Net earnings $ 337,890 $ 293,189 $ 695,384 $ 650,340
Weighted-average shares -
Basic earnings per share 1,326,412 1,540,481 1,358,148 1,543,205
Stock options under treasury
stock method 34,144 49,800 38,859 48,606
Weighted-average shares -
Diluted earnings per share 1,360,556 1,590,281 1,397,007 1,591,811
Basic earnings per common
share $ 0.25 $ 0.19 $ 0.51 $ 0.42
Diluted earnings per common
share $ 0.25 $ 0.18 $ 0.50 $ 0.41
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 $1.2 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 December 31, 1998 and the results of operations for the three and six
month periods ended December 31, 1998 and 1997, 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 $2.4 million, or 1.6%, to $158.4
million at December 31, 1998 as compared to $155.9 million at June 30, 1998.
The increase was attributed to respective increases in investment and MBS and
cash balances of $3.4 million and $3.0 million, which was partially offset by a
$4.5 million decline in loans receivable.
Loans receivable declined $4.5 million, or 3.8%, from $119.1 million at
June 30, 1998 to $114.6 million at December 31, 1998. The decline was due to
a combination of increased prepayments and a $1.9 million decline in loan
originations to $20.0 million over the six-month period ended
December 31, 1998 as compared to the $21.9 million originated over the same
period of the prior year. The loan portfolio's decline consisted of
reductions in loans secured by one- to four-family residences, commercial
real estate and installment loans of $2.0 million, $1.8 million and $838,000,
respectively. During the first six months of fiscal 1999, the Company has
not been able to achieve its stated goal of increasing loans receivable, due
primarily to higher than anticipated prepayments. In response, the Company
has introduced a more competitively priced 15, 20 and 30-year fixed rate
mortgage for residential financing, which is anticipated to help the Company
achieve its stated goal.
Deposits increased $6.0 million, or 5.5%, from $109.4 million at
June 30, 1998 to $115.4 million at December 31, 1998. The increase was
attributed to growth in checking accounts and certificates of deposit("CD's")
of $3.4 million and $2.7 million, respectively. The growth in these accounts
was due in part to the success of a recently introduced fee-based checking
account, a competitively-priced, tiered money market demand account ("MMDA")
and the inflow of $1.8 million in public unit CD's.
At December 31, 1998, stockholders' equity was $21.9 million as
compared to $24.1 million at June 30, 1998. The $2.2 million decline in
stockholders' equity was primarily due to the repurchase of $2.8 million of
Company common stock and $353,000 in cash dividends on common stock. This
decline was partially offset by the Company's $695,000 net income, $100,000
in benefit plan shares committed to be released and $18,000 in mark-to-market
adjustments on the Company's available-for-sale ("AFS") securities.
Results of Operations - Comparison of the three and six month periods ended
December 31, 1998 and 1997.
Net Income. The Company's net income for the three and six month
periods ended December 31, 1998 was $338,000 and $695,000, respectively, as
compared to the $293,000 and $650,000 earned during the same periods of the
prior year. Increased earnings over the three and six month periods ended
December 31, 1998 were primarily due to reduced provisions for loan losses,
which were partially offset by declines in net interest income and increased
noninterest expense.
Net Interest Income. Net interest income declined by $62,000, or 4.7%,
to $1.2 million for the three months ended December 31, 1998 as compared to
the $1.3 million earned during the same period of the prior year. The
decline was primarily due to a 2.4% decline in the average ratio of interest-
earning assets to interest-bearing liabilities, from 116.9% to 114.1%. Net
interest income declined by $45,000, or 1.8%, to $2.5 million for the six
months ended December 31, 1998 as compared to the $2.6 million earned during
the same period of the prior year. The decline was primarily due to a 2.9%
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 17 basis
point increase in the average net interest spread. The declines in the ratio
of interest-earning assets to interest-bearing liabilities were primarily due
to the purchase of Company common stock.
Interest Income. Interest income for the three and six month periods
ended December 31, 1998 declined $60,000 and $108,000, respectively, as
compared to the same periods of the prior year. The decline over the three
month period was primarily due to a $2.8 million or 1.8% decline in interest-
earning assets and a 2 basis point decline in the average yield earned on
these assets. Over the six month period, the decline was primarily due to a
$4.5 million or 3.0% decline in interest-earning assets, which was partially
offset by a 7 basis point increase in the average yield earned on these
assets, to 7.52% from 7.45%. In addition, the composition of interest-
earning assets over the six month period ended December 31, 1998 changed when
compared to the same period of the prior year as the average balance of loans
receivable increased $4.0 million while average investment securities and MBS
declined $9.5 million, or 24.0%.
Interest Expense. Interest expense for the three and six month periods
ended December 31, 1998 declined $2,000 and $63,000, respectively, as
compared to the same periods of the prior year. The limited change over the
three month period was primarily due to a $780,000 increase in the average
balance of interest-bearing liabilities being offset by a 2 basis point
decline in the average cost of these liabilities. Over the six month period,
the decline was primarily due to a 9 basis point reduction in the average
rate paid on interest-bearing liabilities, from 4.86% to 4.77%. The decline
was primarily the result of a 90 basis point decline in the average cost of FHLB
advances, which was partly offset by an increase in the average cost of CDs
and MMDAs.
Provision for Loan Losses. The provision for loan losses for the three
and six month periods ended December 31, 1998 declined $99,000 and $111,000,
respectively, as compared to the same periods of the prior year. The decline
was partly due to a change in the methodology of determining the adequacy of
the allowance for loss, which resulted in increased provisions during the
prior year, as well as a reduction in adversely classified assets (see "Loan
Loss Activity" and "Nonperforming Assets").
Noninterest Income. Noninterest income for the three months ended
December 31, 1998 increased $13,000, or 6.9%, to $195,000 as compared to the
$183,000 earned during the same period of the prior year. The increase was
primarily due to a $30,000 increase in banking service charges and other
income, which was partially offset by a $37,000 decline in net realized gains
on AFS security sales and a $15,000 increase in expenses on foreclosed assets.
Noninterest income for the six months ended December 31, 1998 increased
$6,000, or 1.6%, to $353,000 as compared to the $348,000 earned during the
same period of the prior year. The increase was primarily due to a $41,000
increase in banking service charges and a $36,000 increase in late charges
and other income, which was partially offset by a $70,000 reduction in gains
realized on AFS security sales and a $11,000 increase in expenses on
foreclosed assets.
Noninterest Expense. Non-interest expense for the three and six month
periods ended December 31, 1998 increased $6,000 and $28,000, respectively,
as compared to the same periods of the prior year. The respective increases
of 0.7% and 1.6% were attributed to increased occupancy expenses related to
the Company's computer system upgrade, while as well as increased general
operating expenses related primarily to costs associated with the Company's
fee-based checking club promotion. Both of these increases were partially
offset by declines in deposit insurance premiums.
Provision for Income Taxes. The provision for income taxes for the
three and six month periods ended December 31, 1998 was $176,000 and
$371,000, respectively, as compared to the $177,000 and $373,000 for the
same periods of the prior year.
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 the operating restrictions placed 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 six month periods ended December 31, 1998, the Bank
recognized additional expense of $9,000 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
establishment of additional loss provisions. The following table summarizes
changes in the allowance for loan losses over the six months ended
December 31, 1998 and 1997:
1998 1997
Balance, beginning of period $1,295,222 $706,487
Loans charged off:
Real estate (37,664) -
Unsecured consumer (52,275) (4,501)
Secured consumer (36,310) (1,377)
Mobile homes (4,038) (91,459)
Recoveries of loans previously charged off:
Real estate 657 -
Unsecured consumer 3,070 -
Mobile homes 33,076 26,035
Net charge offs (93,484) (71,302)
Provision charged to expense 25,000 136,459
Balance, end of period $1,226,738 $771,644
Ratio of net charge offs during the
period to average loans outstanding
during the period .08% .06%
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. 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 26 loans totaling
$201,000, 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
$68,000 to $1.23 million at December 31, 1998 from $1.30 million on
June 30, 1998. At December 31, 1998, the Bank had $5.1 million, or 3.20% of
assets adversely classified (substandard, doubtful, or loss) as compared to
adversely classified assets of $5.6 million, or 3.61% 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.
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:
Loans past maturity/delinquent
90 days or more 12/31/98 6/30/98 12/31/97
Residential real estate $ 677,000 $ 842,000 $ 707,000
Commercial real estate 2,306,000 348,000 306,000
Consumer 189,000 65,000 76,000
Mobile homes 182,000 80,000 166,000
Total loans past maturity/delinquent
90+ days 3,354,000 1,335,000 1,255,000
Assets acquired in settlement of loans 556,000 172,000 66,000
Total nonperforming assets $3,910,000 $1,507,000 $1,321,000
Percentage nonperforming assets to
total assets 2.47% .97% .83%
Percentage nonperforming loans to
net loans 3.41% 1.12% 1.13%
The increase in the percentage of nonperforming assets to total assets
and the percentage of nonperforming loans to net loans receivable was
primarily due to the deterioration in the repayment status on two commercial
real estate relationships. Both of these relationships, which aggregated
$2.7 million and $517,000, respectively, had balances of $1.8 million and
$315,000, which were more than 90 days delinquent. The delinquency in each
instance was attributed to the borrower's underlying collateral experiencing
cash flow difficulties. Management expects these borrowers cash flow
difficulties to improve; however, if improvement does not occur, the Company's
future operations could be impacted.
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,
investments 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
December 31, 1998, the Company had outstanding commitments to fund $4.0
million in mortgage loans and $127,000 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
December 31, 1998, the Bank had available credit at the FHLB of approximately
$57.9 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
responsibilities 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 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 October, 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 contacted its most significant
borrowers informing them of the Y2K issue. Because 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, 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.
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 or are scheduled to be
placed into production and have entered the validation process.
Validation Phase. The validation phase is designed to test the ability
of hardware and software to accurately process date sensitive data. The Bank
currently is in the process of validation testing of each mission critical
system, with the degree of completion of such testing ranging from 25% to 100%.
The Bank's validation phase is expected to be completed by March 31, 1999,
for all mission critical systems. During the validation testing process to
date, no significant Y2K problems have been identified relating to any
modified or upgraded mission critical systems.
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.
Bank Resources Invested. The Bank's Y2K project team has been assigned
the task of ensuring that all systems across the Bank are identified,
analyzed for Y2K compliance, corrected, if necessary, tested, and changes put
into service by March 31, 1999. 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 $35,000 of which has been incurred
and expensed by the Bank through December 31, 1998. The Bank does not expect
significant increases in future data processing costs related to Y2K compliance.
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. In the event a current vendor's system fails during the validation
phase and it is determined that the vendor is unable or unwilling to correct
the failure, the Bank will convert to a new system from a pre-selected list
of prospective vendors. In each such case, realistic trigger dates have been
established to allow for orderly and successful conversions. 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
anticipates 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 December 31, 1998, the Bank exceeded all
regulatory capital requirements with leverage capital of $20.1 million (13.0% of
average total assets), tier I capital of $20.1 million (22.9% of risk-based
assets) and risk-based capital of $21.3 million (24.1% 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 manage-
ment 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
(3) (a) Certificate of Incorporation of the Registrant*
(3) (b) Bylaws of the Registrant*
10 (a) Registrant's Stock Option Plan**
10 (b) Southern Missouri Savings Bank, FSB Management
Recognition and Development Plans**
10 (c) Employment Agreement with Donald R. Crandell***
10 (d) Director's Retirement Agreements***
(i) Robert A. Seifert
(ii) Thadis R. Seifert
(iii) Leonard W. Ehlers
(iv) James W. Tatum
(v) Samuel H. Smith
10 (e) Tax Sharing Agreement***
(27) Financial Data Schedule
* Filed as an exhibit to the registrant's Registration Statement on Form S-1
(33-73746).
** 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, 1995.
(b) Reports on Form 8-K: No reports on Form 8-K have been filed
during the quarter for which this report is filed.
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: February 12, 1999
Donald R. Crandell
President and Chief Executive Officer
Date: February 12, 1999
Greg A. Steffens
Chief Financial Officer and
Senior Vice President
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