|
|
 | | | |
- close
- close
- close
- close
| |||||||||
Southern Missouri Bancorp 10-K 2008 Documents found in this filing:
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________________________
FORM
10-K
Commission
File Number: 0-23406
SOUTHERN MISSOURI BANCORP, INC.
(Exact
name of small business issuer as specified in its charter)
Registrant's
telephone number, including area code: (573)
778-1800
Securities
registered pursuant to Section 12(b) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
YES __ NO X
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
YES __
NO X
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
by check mark
whether disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in
definitive proxy or other information statements incorporated by reference in
Part III of this Form 10-K or any amendments to this Form 10-K.
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definition
of "large accelerated filer," "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES __ NO X
The
aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the bid and asked price of
such stock as of the last business day of the registrant's most recently
completed second fiscal quarter, was $23.4 million. (The exclusion
from such amount of the market value of the shares owned by any person shall not
be deemed an admission by the registrant that such person is an affiliate of the
registrant.)
As of
September 12, 2008, there were issued and outstanding 2,210,833 shares of the
Registrant's common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Part II
of Form 10-K – Annual Report to Stockholders for the fiscal year ended June 30,
2008.
Part III
of Form 10-K – Portions of the Proxy Statement for the 2008 Annual Meeting of
Stockholders. PART
I
Item
1. Description of
Business
General
Southern
Missouri Bancorp, Inc. ("Company"), which changed its state of incorporation to
Missouri on April 1, 1999, was originally incorporated in Delaware on
December 30, 1993 for the purpose of becoming the holding company for Southern
Missouri Savings Bank upon completion of Southern Missouri Savings Bank's
conversion from a state chartered mutual savings and loan association to a state
chartered stock savings bank. As part of the conversion in April
1994, the Company sold 1,803,201 shares of its common stock to the
public. The Company's Common Stock is quoted on the National
Association of Securities Dealers Automated Quotations ("NASDAQ") National
Market System under the symbol "SMBC".
Southern
Missouri Savings Bank was originally chartered as a mutual Missouri savings and
loan association in 1887. On June 20, 1995, it converted to a
federally chartered stock savings bank and took the name Southern Missouri
Savings Bank, FSB. On February 17, 1998, Southern Missouri Savings
Bank converted from a federally chartered stock savings bank to a Missouri
chartered stock savings bank and changed its name to Southern Missouri Bank
& Trust Co. On June 4, 2004, Southern Missouri Bank & Trust
Co. ("Bank") converted from a Missouri chartered stock savings bank to a
Missouri state chartered trust company with banking powers ("Charter
Conversion").
The
primary regulator of the Bank is the Missouri Division of
Finance. The Bank's deposits continue to be insured up to applicable
limits by the Deposit Insurance Fund ("DIF") of the Federal Deposit Insurance
Corporation ("FDIC"). With the Bank's conversion to a trust company
with banking powers, the Company became a bank holding company regulated by the
Federal Reserve Board ("FRB").
The
principal business of the Bank consists primarily of attracting retail deposits
from the general public and using such deposits along with wholesale funding
from the Federal Home Loan Bank of Des Moines ("FHLB"), and to a lesser extent,
brokered deposits, to invest in one- to four-family residential mortgage loans,
mortgage loans secured by commercial real estate, commercial non-mortgage
business loans and consumer loans. These funds are also used to
purchase mortgage-backed and related securities ("MBS"), U.S. Government Agency
obligations and other permissible investments.
At June
30, 2008, the Company had total assets of $417.8 million, total deposits of
$292.3 million and stockholders' equity of $30.5 million. The Company
has not engaged in any significant activity other than holding the stock of the
Bank. Accordingly, the information set forth in this report,
including financial statements and related data, relates primarily to the
Bank. The Company's revenues are derived principally from interest
earned on loans, investment securities, MBS, CMO's and, to a lesser extent,
banking service charges, loan late charges, increases in the cash surrender
value of bank owned life insurance and other fee income.
2
Forward
Looking Statements
This
document, including information incorporated by reference, contains
forward-looking statements about the Company and its subsidiaries which we
believe are within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements include, without
limitation, statements with respect to anticipated future operating and
financial performance, growth opportunities, interest rates, cost savings and
funding advantages expected or anticipated to be realized by
management. Words such as "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan" and similar
expressions are intended to identify these forward-looking
statements. Forward-looking statements by the Company and its
management are based on beliefs, plans, objectives, goals, expectations,
anticipations, estimates and the intentions of management and are not guarantees
of future performance. The Company disclaims any obligation to update
or revise any forward-looking statements based on the occurrence of future
events, the receipt of new information, or otherwise. The important factors we
discuss below, as well as other factors discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and identified in our filings with the SEC and those presented
elsewhere by our management from time to time, could cause actual results to
differ materially from those indicated by the forward-looking statements made in
this document:
The
Company disclaims any obligation to update or revise any forward-looking
statements based on the occurrence of future events, the receipt of new
information, or otherwise.
Market
Area
The Bank
provides its customers with a full array of community banking services and
conducts its business from its headquarters in Poplar Bluff and seven additional
full service offices located in Poplar Bluff, Van Buren, Dexter, Kennett,
Doniphan, Sikeston, and Qulin, Missouri. The Bank's primary market
area includes all or portions of Butler, Carter, Dunklin, Ripley, Stoddard,
Scott, Mississippi, New Madrid, Wayne, and Pemiscot Counties in Missouri, and
Mississippi and Clay Counties in Arkansas. The Bank's market area has
a population of approximately 200,000. The largest employers in the
Bank's primary market area are the Poplar Bluff Regional Medial Center,
employing approximately 1,500 persons, and Briggs & Stratton, a small engine
manufacturing facility employing approximately 1,300 persons. Other
major employers include Noranda Aluminum, Visiting Nurse Association, Good
Humor-Breyers, Gates Rubber, John Pershing VA Hospital, Nordyne, the Poplar
Bluff School District, the Missouri Delta Medical Center, Wal-Mart Stores,
Mid-Continent Nail, Tyson Foods, and ArvinMeritor. The Bank's market
area is primarily rural in nature and relies heavily on the manufacturing
industries and agriculture, with products including livestock, rice, timber,
soybeans, wheat, melons, corn and cotton.
3
Competition
The Bank
faces strong competition in attracting deposits (its primary source of lendable
funds) and originating loans. The Bank is one of 27 financial
institution groups located in its primary market area. Competitors
for deposits include commercial banks, credit unions, money market funds, and
other investment alternatives, such as mutual funds, full service and discount
broker-dealers, equity markets, brokerage accounts and government
securities. The Bank's competition for loans comes principally from
other financial institutions, mortgage banking companies, mortgage brokers and
life insurance companies. The Bank expects competition to continue to
increase in the future as a result of legislative, regulatory and technological
changes within the financial services industry. Technological
advances, for example, have lowered barriers to market entry, allowed banks to
expand their geographic reach by providing services over the Internet and made
it possible for non-depository institutions to offer products and services that
traditionally have been provided by banks. The Gramm-Leach-Bliley
Act, which permits affiliation among banks, securities firms and insurance
companies, also has changed the competitive environment in which the Bank
conducts business.
Internet
Website
Bancorp
maintains a website at www.smbtonline.com. The information contained on that
website is not included as part of, or incorporated by reference into, this
Annual Report on Form 10-K. Bancorp currently makes available on or through its
website Bancorp's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K or amendments to these reports. These materials are
also available free of charge on the Securities and Exchange Commission's
website at www.sec.gov.
Selected
Consolidated Financial Information
This
information is incorporated by reference from pages 9 and 10 of the 2008 Annual
Report to Stockholders attached hereto as Exhibit 13 ("Annual
Report").
Yields
Earned and Rates Paid
This
information contained under the section captioned "Yields Earned and Rates Paid"
is incorporated herein by reference from page 18 of the Annual
Report.
Rate/Volume
Analysis
This
information is incorporated by reference from page 18 of the Annual
Report.
Average
Balance, Interest and Average Yields and Rates
This
information contained under the section captioned "Average Balance, Interest and
Average Yields and Rates" is incorporated herein by reference from pages 16 and
17 of the Annual Report. 4
Lending
Activities
Supervision
of the loan portfolio is the responsibility of William D. Hribovsek, Chief
Lending Officer. Loan officers have varying amounts of lending
authority depending upon experience and types of loans. Loans beyond
their authority are presented to the Loan Officers Committee, comprised of
President Greg Steffens and Chief Lending Officer William D. Hribovsek, along
with various appointed loan officers. Loans to one borrower (or group
of related borrowers), in aggregate, in excess of $750,000 require the approval
of a majority of the Discount Committee, which consists of all Bank directors,
prior to the closing of the loan. All loans are subject to
ratification by the full Board of Directors.
The
aggregate amount of loans that the Bank is permitted to make under applicable
federal regulations to any one borrower, including related entities, or the
aggregate amount that the Bank could have invested in any one real estate
project, is based on the Bank's capital levels. See "Regulation -
Loans to One Borrower." At June 30, 2008, the maximum amount which
the Bank could lend to any one borrower and the borrower's related entities was
approximately $9.6 million. At June 30, 2008, the Bank's five largest
extensions of credit to one entity ranged from $6.3 million to $8.6 million, net
of participation interests sold. The majority of these credits were
commercial, commercial real estate, or multi-family real estate loans and all of
them were performing according to their terms.
5
Loan Portfolio
Analysis.> The following table sets forth the composition of
the Bank's loan portfolio by type of loan and type of security as of the dates
indicated.
6
The
following table shows the fixed and
adjustable rate composition of the Bank's loan portfolio at the dates
indicated.
The Bank
currently offers both fixed-rate and adjustable-rate mortgage ("ARM")
loans. During the year ended June 30, 2008, the Bank originated $9.9
million of ARM loans and $22.0 million of fixed-rate loans that were secured by
one- to four-family residences. Substantially all of the one- to
four-family residential mortgage originations in the Bank's portfolio are
located within the Bank's primary market area.
The Bank
generally originates one- to four-family residential mortgage loans in amounts
up to 90% of the lower of the purchase price or appraised value of residential
property. For loans originated in excess of 80%, the Bank charges an
additional 37.5 basis points, but does not require private mortgage
insurance. The majority of new residential mortgage loans originated
by the Bank conform to secondary market standards. The interest rates
charged on these loans are competitively priced based on local market
conditions, the availability of funding, and anticipated profit
margins. Fixed and ARM loans originated by the Bank are amortized
over periods as long as 30 years, but typically are repaid over shorter
periods.
Fixed-rate
loans secured by one- to four-family residences have contractual maturities up
to 30 years, and are generally fully amortizing with payments due
monthly. These loans normally remain outstanding for a substantially
shorter period of time because of refinancing and other
prepayments. A significant change in the interest rate environment
can alter the average life of a residential loan portfolio. The one-
to four-family fixed-rate loans do not contain prepayment
penalties. Most are written using secondary market
guidelines. At June 30, 2008, one- to four-family loans with a fixed
rate totaled $98.6 million, and had a weighted-average maturity of 207
months.
7
The Bank
currently originates ARM loans, which adjust annually, after an initial period
of one, three or five years. Typically, originated ARM loans secured
by owner occupied properties reprice at a margin of 2.75% to 3.00% over the
weekly average yield on United States Treasury securities adjusted to a constant
maturity of one year ("CMT"). Generally, ARM loans secured by
non-owner occupied residential properties reprice at a margin of 3.75% over the
CMT index. Current residential ARM loan originations are subject to
annual and lifetime interest rate caps and floors. As a consequence
of using interest rate caps, discounted initial rates and a "CMT" loan index,
the interest earned on the Bank's ARMs will react differently to changing
interest rates than the Bank's cost of funds. At June 30, 2008,
loans tied to the CMT index totaled $35.1 million.
Until
1999, most of the owner occupied residential loans originated by the Bank
repriced annually at a margin of 2.50% or 2.75% over the 11th district cost of
funds index or the Bank's internal cost of funds, while non-owner occupied
residential loans typically repriced at a margin of 3.00% to 3.75% over these
same indices. The maximum annual interest rate adjustment on these
ARMs was typically limited to a 1.00% to 2.00% adjustment, while the maximum
lifetime adjustment was generally limited to 5.00% to
6.00%. Generally, each of these indices are considered a "lagging"
index because they adjust more slowly to changes in market interest rates than
most other indices. At June 30, 2008, loans tied to these
indices totaled $3.3 million.
In
underwriting one- to four-family residential real estate loans, the Bank
evaluates the borrower's ability to meet debt service requirements at current as
well as fully indexed rates for ARM loans, as well as the value of the property
securing the loan. During fiscal 2008, most properties securing real
estate loans made by the Bank had appraisals performed on them by independent
fee appraisers approved and qualified by the Board of Directors. The
Bank generally requires borrowers to obtain title insurance and fire, property
and flood insurance (if indicated) in an amount not less than the amount of the
loan. Real estate loans originated by the Bank generally contain a
"due on sale" clause allowing the Bank to declare the unpaid principal balance
due and payable upon the sale of the security property.
Commercial
real estate loans originated by the Bank generally are based on amortization
schedules of up to 20 years with monthly principal and interest
payments. Generally, the interest rate received on these loans is
fixed for a maturity for up to five years, with a balloon payment due at
maturity. Alternatively, for some loans, the interest rate adjusts at
least annually after an initial period up to five years, based upon the Wall
Street prime rate or the one year CMT. The Bank’s fixed-rate
commercial real estate portfolio has a weighted average maturity of 34.7
months. Variable rate commercial real estate originations typically
adjust daily, monthly, quarterly or annually based on the Wall Street prime
rate. Generally, improved commercial real estate loan amounts do not
exceed 80% of the lower of the appraised value or the purchase price of the
secured property. Before credit is extended, the Bank analyzes the
financial condition of the borrower, the borrower's credit history, and the
reliability and predictability of the cash flow generated by the property and
the value of the property itself. Generally, personal guarantees are
obtained from the borrower in addition to obtaining the secured property as
collateral for such loans. The Bank also generally requires
appraisals on properties securing commercial real estate to be performed by a
Board-approved independent certified fee appraiser.
Generally,
loans secured by commercial real estate involve a greater degree of credit risk
than one- to four-family residential mortgage loans. These loans
typically involve large balances to single borrowers or groups of related
borrowers. Because payments on loans secured by commercial real
estate are often dependent on the successful operation or management of the
secured property, repayment of such loans may be subject to adverse conditions
in the real estate market or the economy. See "Asset
Quality."
8
Construction
loans originated by the Bank are generally secured by permanent mortgage loans
for the construction of owner occupied residential real estate or to finance
speculative construction secured by residential real estate, land development or
owner-operated commercial real estate. At June 30, 2008, the Bank had
$13.9 million in construction loans, $5.6 million of which were secured by one-
to four-family residential real estate (of which $2.1 million was for
speculative construction), $1.6 million of which were secured by commercial real
estate and $5.7 million of which were secured by multi-family real
estate. An additional $1.0 million is secured by an assignment of a
lease agreement between the borrower/builder and a local government
entity. The Bank’s increase in construction loans is primarily due to
one multi-family development with an outstanding balance of $1.6 million and
undisbursed commitments of $3.4 million. During construction, these
loans typically require monthly interest-only payments and have maturities
ranging from 6 to 12 months. Once construction is completed, permanent
construction loans are converted to monthly payments using amortization
schedules of up to 30 years on residential and up to 20 years on commercial real
estate.
Speculative
construction and land development lending generally affords the Bank an
opportunity to receive higher interest rates and fees with shorter terms to
maturity than those obtainable from residential
lending. Nevertheless, construction and land development lending is
generally considered to involve a higher level of credit risk than one- to
four-family residential lending due to (i) the concentration of principal among
relatively few borrowers and development projects, (ii) the increased difficulty
at the time the loan is made of accurately estimating building or development
costs and the selling price of the finished product, (iii) the increased
difficulty and costs of monitoring and disbursing funds for the
loan, (iv) the higher degree of sensitivity to increases in market
rates of interest and changes in local economic conditions, and (v) the
increased difficulty of working out problem loans. Due in part to
these risk factors, the Bank may be required from time to time to modify or
extend the terms of some of these types of loans. In an effort to
reduce these risks, the application process includes a submission to the Bank of
accurate plans, specifications and costs of the project to be
constructed. These items are also used as a basis to determine the
appraised value of the subject property. Loan amounts are limited to
85% of the lesser of current appraised value and/or the cost of
construction.
Home
equity loans represented 38.2% of the Bank's consumer loan portfolio at June 30,
2008, and totaled $8.2 million, or 2.4% of net loans receivable.
Home
equity lines of credit (HELOCs) are secured with a deed of trust and are issued
up to 100% of the appraised or assessed value of the property securing the line
of credit, less the outstanding balance on the first mortgage. Interest rates on
the HELOCs are adjustable and are tied to the current prime interest rate. This
rate is obtained from the Wall Street Journal and adjusts on a daily
basis. Interest rates are based upon the loan-to-value ratio of the
property with better rates given to borrowers with more equity. HELOCs, which
are secured by residential properties, are secured by stronger collateral than
automobile loans and because of the adjustable rate structure, contain less
interest rate risk to the Bank. Lending up to 100% of the value of the property
presents greater credit risk to the Bank. Consequently, the Bank limits this
product to customers with a favorable credit history. At June 30,
2008, lines of credit up to 80% of the property value represented 77.6% of
outstanding balances, and 79.0% of balances and commitments; lines of credit for
more than 80%, but not exceeding 90%, of the property value represented 20.2% of
outstanding balances and 19.5% of balances and commitments; and lines of credit
in excess of 90% of the property value represented 2.2% of outstanding balances
and 1.5% of balances and commitments.
Automobile
loans represented 41.2% of the Bank's consumer loan portfolio at June 30,
2008, and totaled $8.9 million, or 2.6% of net loans receivable. Of
that total, $716,000 represented loans originated by auto
dealers. These loans generally pay a negotiated fee back to the
dealer. Typically, automobile loans are 9
made for
terms of up to 60 months for new and used vehicles. Loans secured by
automobiles have fixed rates and are generally made in amounts up to 100% of the
purchase price of the vehicle.
Consumer
loan terms vary according to the type and value of collateral, length of
contract and creditworthiness of the borrower. The underwriting
standards employed for consumer loans include employment stability, an
application, a determination of the applicant's payment history on other debts,
and an assessment of ability to meet existing and proposed
obligations. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer
loans may entail greater credit risk than do residential mortgage loans, because
they are generally unsecured or are secured by rapidly depreciable or mobile
assets, such as automobiles or mobile homes. In the event of
repossession or default, there may be no secondary source of repayment or the
underlying value of the collateral could be insufficient to repay the
loan. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. The
Bank's delinquency levels for these types of loans are reflective
of these risks. See "Asset
Classification."
The Bank
currently offers both fixed and adjustable rate commercial business
loans. At year end, the Bank had $59.8 million in fixed rate and
$21.8 million of adjustable rate commercial business loans. The
adjustable rate business loans typically reprice daily, monthly, quarterly, or
annually, in accordance with the Wall Street prime rate of
interest. The Bank expects to continue to maintain or increase the
current percentage of commercial business loans in its total loan
portfolio.
Commercial
business loan terms vary according to the type and value of collateral, length
of contract and creditworthiness of the borrower. Generally,
commercial loans secured by fixed assets are amortized over periods up to five
years, while commercial operating lines of credit are generally for a one year
period. The Bank's commercial business loans are evaluated based on
the loan application, a determination of the applicant's payment history on
other debts, business stability and an assessment of ability to meet existing
obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
Unlike
residential mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of
funds for the repayment of commercial business loans may be substantially
dependent on the success of the business itself. Further, the
collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the
business. 10
Contractual
Obligations and Commitments, Including Off-Balance Sheet
Arrangements>. The following table discloses our fixed and
determinable contractual obligations and commercial commitments by payment date
as of June 30, 2008. Commitments to extend credit totaled $51.5
million at June 30, 2008.
Loan
Maturity and Repricing
The
following table sets forth certain information at June 30, 2008 regarding the
dollar amount of loans maturing or repricing in the Bank's portfolio based on
their contractual terms to maturity or repricing, but does not include scheduled
payments or potential prepayments. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Mortgage loans that have
adjustable rates are shown as maturing at their next repricing
date. Listed loan balances are shown before deductions for
undisbursed loan proceeds, unearned discounts, unearned income and allowance for
loan losses.
As of
June 30, 2008, loans with a maturity date after June 30, 2009 with fixed
interest rates totaled $182.5 million, and loans with a maturity date after June
30, 2009 with adjustable rates totaled $84.2 million.
Loan
Originations, Sales and Purchases
Generally,
all loans are originated by the Bank's staff, who are salaried loan
officers. Loan applications are taken and processed at each of the
Bank's full-service locations. The Bank began offering secondary
market loans, which are also originated by the Bank’s staff, to customers during
fiscal year 2002.
While the
Bank originates both adjustable-rate and fixed-rate loans, the ability to
originate loans is dependent upon the relative customer demand for loans in its
market. In fiscal 2008, the Bank originated 11
$123.6
million of loans, compared to $130.9 million and $120.0 million in fiscal 2007
and 2006, respectively. Of these loans, mortgage loan originations
were $82.2 million, $77.8 million and $74.0 million in fiscal 2008, 2007 and
2006, respectively.
From time
to time, the Bank has purchased loan participations consistent with its loan
underwriting standards. In fiscal 2008, the Bank purchased $17.7
million of new loans. At June 30, 2008, loan participations totaled
$28.9 million, or 8.4% of net loans receivable. At June 30,
2008, all of these participations were performing in accordance to their
respective terms. The Bank will evaluate purchasing additional loan
participations, based in part on local loan demand, liquidity, portfolio and
leverage rate.
The
following table shows total loans originated, purchased, sold and repaid during
the periods indicated.
Loan
Commitments
The Bank
issues commitments for one- to four-family residential mortgage loans, operating
or working capital lines of credit. Such commitments may be oral or
in writing with specified terms, conditions and at a specified rate of interest
and standby letters-of-credit. The Bank had outstanding net loan
commitments of approximately $51.5 million at June 30, 2008. See Note
13 of Notes to Consolidated Financial Statements contained in the Annual Report
to Stockholders.
12
Loan
Fees
In addition to
interest earned on loans, the Bank receives income from fees in connection with
loan originations, loan modifications, late payments and for miscellaneous
services related to its loans. Income from these activities varies
from period to period depending upon the volume and type of loans made and
competitive conditions.
Asset
Quality
Delinquent
Loans.> Generally, when a borrower fails to make a required
payment on mortgage or installment loans, the Bank begins the collection process
by mailing a computer generated notice to the customer. If the
delinquency is not cured promptly, the customer is contacted again by notice or
telephone. After an account secured by real estate becomes over 60
days past due, the Bank will send a 30-day demand notice to the customer which,
if not cured or unless satisfactory arrangements have been made, will lead to
foreclosure. For consumer loans, the Missouri Right-To-Cure Statute
is followed, which requires issuance of specifically worded notices at specific
time intervals prior to repossession or further collection efforts.
The
following table sets forth the Bank's loan delinquencies by type and by amount
at June 30, 2008.
Non-Performing
Assets.> The table below sets forth the amounts and categories
of non-performing assets in the Bank's loan portfolio. Loans are
placed on non-accrual status when the collection of principal and/or interest
become doubtful, and as a result, previously accrued interest income on the loan
is removed from current income. The Bank has no reserves for
uncollected interest and does not accrue interest on non-accrual
loans. A loan may be transferred back to accrual status once a
satisfactory repayment history has been restored. Foreclosed assets
held for sale include assets acquired in settlement of loans and are shown net
of reserves.
At June
30, 2008, the Bank had one loan on which interest was not being accrued, in
accordance with SFAS No. 114 as amended by SFAS No. 118. The Bank
would have recorded a nominal amount of interest income during the years ended
June 30, 2008 and 2007, and 2006, on non-accrual loans, if these loans had been
performing in accordance with their terms during such
periods. Interest income recognized on non-accrual loans for the
years ended June 30, 2008, 2007, and 2006, was considered
nominal. 13
The
following table sets forth information with respect to the Bank's non-performing
assets as of the dates indicated. At the dates indicated, the Bank
had no restructured loans within the meaning of SFAS 15.
14
allowances
is subject to review by the FDIC and the Missouri Division of Finance, which can
order the establishment of additional loss allowances.
On the
basis of management's review of the assets of the Company, at June 30, 2008,
classified assets totaled $4.5 million, or 1.07% of total assets as compared
$1.1 million, or 0.30% of total assets at June 30, 2007. The
full amount classified as of June 30, 2008, was considered
substandard. At June 30, 2008, one loan relationship with outstanding
classified balances of $3.5 million, secured by commercial and agricultural real
estate, was classified due to concerns regarding the borrower’s ability to
generate sufficient cash flows to service the debt. The relationship
was performing in accordance with its terms at June 30, 2008. Three
additional, commercial lending relationships, which in the aggregate totaled
$1.0 million, were classified due to the same reason, and were also performing
in accordance with terms at June 30, 2008.
Allowance for
Loan Losses.> The Bank's allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risk inherent in the loan portfolio and changes in the nature and volume
of loan activity, including those loans which are being specifically
monitored. Such evaluation, which includes a review of loans for
which full collectibility may not be reasonably assured, considers among other
matters, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
recognition in providing for an adequate provision for loan
losses. These provisions for loan losses are charged against earnings
in the year they are established. The Bank had an allowance for loan
losses at June 30, 2008, of $3.6 million, which represented 5,305% of
nonperforming assets as compared to an allowance of $2.5 million, which
represented 1,712% of nonperforming assets at June 30, 2007. See
"Item 3. Legal Proceedings" for a discussion of the fiscal 2005 impact on the
Bank of allegedly fraudulent actions by a significant borrower.
Although
management believes that it uses the best information available to determine the
allowance, unforeseen market conditions could result in adjustments and net
earnings could be significantly affected if circumstances differ substantially
from assumptions used in making the final determination. Future
additions to the allowance will likely be the result of periodic loan, property
and collateral reviews and thus cannot be predicted with certainty in
advance.
15
The
following table sets forth an analysis of the Bank's allowance for loan losses
for the periods indicated. Where specific loan loss reserves have
been established, any difference between the loss reserve and the amount of loss
realized has been charged or credited to current income.
16
The following
table sets forth the breakdown of the allowance for loan losses by loan category
for the periods indicated.
17
Investment
Activities
The
Company's investment portfolio is managed in accordance with the Bank's
investment policy which was adopted by the Board of Directors of the Bank and is
implemented by members of the asset/liability management committee which
consists of the President, the CFO, the COO and three outside
directors.
Investment
purchases and/or sales must be authorized by the appropriate party, depending on
the aggregate size of the investment transaction, prior to any investment
transaction. The Board of Directors reviews all investment
transactions. All investment purchases are identified as
available-for-sale ("AFS") at the time of purchase. The Company has
not classified any investment securities as hold-to-maturity over the last five
years. Securities classified as "AFS" must be reported at fair value
with unrealized gains and losses recorded as a separate component of
stockholders' equity. At June 30, 2008, AFS securities totaled $39.9
million (excluding FHLB stock). For information regarding the
amortized cost and market values of the Company's investments, see Note 2 of
Notes to Consolidated Financial Statements contained in the Annual
Report.
Presently,
the Company has no high risk derivative instruments and no outstanding hedging
activities. Management has reviewed potential uses for derivative instruments
and hedging activities, but has no immediate plans to employ these
tools.
Mortgage-Backed
Securities.> At June 30, 2008, MBS totaled $28.0 million, or
6.7%, of total assets as compared to $10.7 million, or 2.8%, of total assets at
June 30, 2007. During fiscal 2008, the Bank had maturities and
prepayments of $4.7 million and had purchases of $22.1 million in
MBS. At June 30, 2008, the MBS portfolio included $276,000 in
adjustable-rate MBS, $23.8 million in fixed-rate MBS and $4.0 million in fixed
rate collateralized mortgage obligations (CMOs), which passed the Federal
Financial Institutions Examination Council's sensitivity test. Based
on recent prepayment rates, the weighted average life of the MBS and CMOs at
June 30, 2008 was 52 months. Prepayment rates may cause the
anticipated average life of MBS portfolio to extend or shorten based upon actual
prepayment rates. 18
Investment
Securities Analysis
The
following table sets forth the Company's investment securities AFS portfolio at
carrying value and FHLB stock at the dates indicated.
The
following table sets forth the maturities and weighted average yields of AFS
debt securities in the Company's investment securities portfolio at June 30,
2008.
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||