Residential Mortgage Lending.
The Bank actively originates loans for the acquisition or refinance of one- to four-family residences. These loans are originated as a result of customer and real estate agent referrals, existing and walk-in customers and from responses to the Bank's marketing campaigns. At June 30, 2018, residential loans secured by one- to four-family residences totaled $343.4 million, or 23.7% of net loans receivable.
The Bank currently offers both fixed-rate and adjustable-rate mortgage ("ARM") loans. During the year ended June 30, 2018, the Bank originated $35.0 million of ARM loans and $30.6 million of fixed-rate loans that were secured by one- to four-family residences, for retention in the Bank's portfolio. An additional $29.8 million in fixed-rate one- to four-family residential loans were originated for sale on the secondary market. Substantially all of the one- to four-family residential mortgage originations in the Bank's portfolio are located within the Bank's 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% loan-to-value, the Bank charges an additional 50-75 basis points, but does not require private mortgage insurance. At June 30, 2018, the remaining balance of loans originated with a loan-to-value ratio in excess of 80% was $76.0 million. For fiscal years ended June 30, 2018, 2017, 2016, 2015 and 2014, originations of one- to four-family loans in excess of 80% loan-to-value have totaled $26.3 million, $25.0 million, $16.5 million, $24.3 million and $13.6 million, respectively, totaling $105.7 million. The remaining balance of those loans at June 30, 2018, was $60.9 million. Originating loans with higher loan-to-value ratios presents additional credit risk to the Bank. Consequently, the Bank limits this product to borrowers with a favorable credit history and a demonstrable ability to service the debt. The majority of new residential mortgage loans originated by the Bank conform to secondary market underwriting standards, however, documentation of loan files may not be adequate to allow for immediate sale. The interest rates charged on these loans are competitively priced based on local market conditions, the availability of funding, and anticipated profit margins. Fixed rate 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. At June 30, 2018, one- to four-family loans with a fixed rate totaled $161.2 million, and had a weighted-average maturity of 100 months.
The Bank currently originates one- to four-family adjustable rate mortgage ("ARM") loans, which adjust annually, after an initial period of one, three, five, or seven 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, initial rates which may be at a premium or discount, 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, 2018, one- to four-family loans tied to the CMT index totaled $136.8 million. One- to four-family loans tied to other indices totaled $46.3 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. Most properties securing real estate loans made by the Bank during fiscal 2018 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.
The Bank also originates loans secured by multi-family residential properties that are often located outside the Company's primary market area, but made to borrowers who operate within the primary market area. At June 30, 2018, the Bank had $107.5 million, or 7.4% of net loans receivable, in multi-family residential real estate. The majority of the multi-family residential loans that are originated by the Bank are amortized over periods generally up to 25 years, with balloon maturities up to ten years. Both fixed and adjustable interest rates are offered and it is
typical for the Bank to include an interest rate "floor" and "ceiling" in these loan agreements. Variable rate loans typically adjust daily, monthly, quarterly or annually based on the Wall Street prime interest rate. Generally, multi-family residential loans do not exceed 85% of the lower of the appraised value or purchase price of the secured property. The Bank generally requires a Board-approved independent certified fee appraiser to be engaged in determining the collateral value. As a general rule, the Bank requires the unlimited guaranty of all individuals (or entities) owning (directly or indirectly) 20% or more of the stock of the borrowing entity.
The primary risk associated with multi-family loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in borrowers having to provide rental rate concessions to achieve adequate occupancy rates. In an effort to reduce these risks, the Bank evaluates the guarantor's ability to inject personal funds as a tertiary source of repayment.
Commercial Real Estate Lending.
The Bank actively originates loans secured by commercial real estate including land (improved and unimproved), shopping centers, retail establishments, nursing homes and other healthcare related facilities, and other businesses generally located in the Bank's market area. At June 30, 2018, the Bank had $704.6 million in commercial real estate loans, which represented 45.1% of net loans receivable. Of this amount, $160.3 million were loans secured by agricultural properties. The increase over the last several fiscal years in agricultural lending is the result of an intentional focus by the Bank on that segment of our market, including the hiring of personnel with knowledge of agricultural lending and experience in that type of business development. The Bank expects to continue to grow its agricultural lending portfolio, but expects that the rate of growth experienced over the last several fiscal years is unlikely to be maintained. The Bank expects to continue to maintain or increase the percentage of commercial real estate loans, inclusive of agricultural properties, in its total portfolio.
Commercial real estate loans originated by the Bank are generally based on amortization schedules of up to 25 years with monthly principal and interest payments. Generally, these loans have fixed interest rates and maturities ranging up to seven 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. The Bank typically includes an interest rate "floor" in the loan agreement. The Bank's fixed-rate commercial real estate portfolio has a weighted average maturity of 44 months. Variable rate commercial real estate originations typically adjust daily, monthly, quarterly or annually based on the Wall Street prime rate. Generally, loans for improved commercial properties do not exceed 80% of the lower of the appraised value or the purchase price of the secured property. Agricultural real estate terms offered differ slightly, with amortization schedules of up to 25 years with an 80% loan-to-value ratio, or 30 years with a 75% loan-to-value ratio. Agricultural real estate loans generally require annual, instead of monthly, payments. 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."
Construction Lending.
The Bank originates real estate loans secured by property or land that is under construction or development. At June 30, 2018, the Bank had $112.7 million, or 7.2% of net loans receivable in construction loans outstanding.
Construction loans originated by the Bank are generally secured by 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 or non-owner occupied commercial real estate. At June 30, 2018, $70.9 million of the Bank's construction loans were secured by one- to four-family residential real estate (of which $6.3 million was for speculative construction), $29.7 million of which were secured by multi-family residential real estate, and $12.1 million of which were secured by commercial real estate. During construction, these loans typically require monthly
interest-only payments and have maturities ranging from 6 to 12 months. Once construction is completed, construction loans may be converted to permanent financing, generally with monthly payments using amortization schedules of up to 30 years on residential and up to 25 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 generally limited to 80% of the lesser of current appraised value and/or the cost of construction.
Consumer Lending.
The Bank offers a variety of secured consumer loans, including: home equity, direct and indirect automobile, second mortgage, mobile home and deposit-secured loans. The Bank originates substantially all of its consumer loans in its primary market area. Usually, consumer loans are originated with fixed rates for terms of up to five years, with the exception of home equity lines of credit, which are variable, tied to the prime rate of interest, and are for a period of ten years. At June 30, 2018, the Bank's consumer loan portfolio totaled $78.6 million, or 5.0% of net loans receivable.
Home equity loans represented 49.9% of the Bank's consumer loan portfolio at June 30, 2018, and totaled $39.2 million, or 2.5% of net loans receivable.
Home equity lines of credit (HELOCs) are secured with a deed of trust and are generally issued for up to 90% 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, generally with an interest rate floor in the loan agreement. 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 generally secured by stronger collateral than other consumer loans and, because of the adjustable rate structure, present less interest rate risk to the Bank.
Automobile loans represented 11.5% of the Bank's consumer loan portfolio at June 30, 2018, and totaled $9.1 million, or 0.58% of net loans receivable. Of that total, an immaterial amount was originated by auto dealers. Typically, automobile loans are 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. 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."
Commercial Business Lending.
The Bank's commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance accounts receivable, inventory, equipment and operating lines of credit. At June 30, 2018, the Bank had $281.3 million in commercial business loans outstanding, or 18.0%
of net loans receivable. Of this amount, $81.5 million were loans related to agriculture, including amortizing equipment loans and annual production lines. The Bank expects to continue to maintain the current percentage of commercial business loans in its total loan portfolio.
The Bank currently offers both fixed and adjustable rate commercial business loans. At year end, the Bank had $151.8 million in fixed rate and $129.5 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 typically includes an interest rate "floor" in the loan agreement.
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 or agricultural production lines 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.
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, 2018. Commitments to extend credit totaled $266.8 million at June 30, 2018.
|
|
Less Than
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
More Than
5 Years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank advances
|
|
$
|
74,300
|
|
|
$
|
2,110
|
|
|
$
|
242
|
|
|
$
|
---
|
|
|
$
|
76,652
|
|
Certificates of deposit
|
|
|
311,440
|
|
|
|
176,794
|
|
|
|
45,217
|
|
|
|
---
|
|
|
|
533,451
|
|
Total
|
|
$
|
385,740
|
|
|
$
|
178,904
|
|
|
$
|
45,459
|
|
|
$
|
---
|
|
|
$
|
610,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
More Than
5 Years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans in process
|
|
$
|
46,533
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
46,533
|
|
Other commitments
|
|
|
183,426
|
|
|
|
6,624
|
|
|
|
5,367
|
|
|
|
24,852
|
|
|
|
220,269
|
|
|
|
$
|
229,959
|
|
|
$
|
6,624
|
|
|
$
|
5,367
|
|
|
$
|
24,852
|
|
|
$
|
266,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Maturity and Repricing
The following table sets forth certain information at June 30, 2018, 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.
|
|
|
|
|
After
One Year
Through
5 Years
|
|
|
After
5 Years
Through
10 Years
|
|
|
After
10 Years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
174,465
|
|
|
$
|
213,637
|
|
|
$
|
33,683
|
|
|
$
|
29,134
|
|
|
$
|
450,919
|
|
Commercial real estate
|
|
|
205,553
|
|
|
|
377,277
|
|
|
|
117,739
|
|
|
|
4,078
|
|
|
|
704,647
|
|
Construction
|
|
|
97,893
|
|
|
|
7,258
|
|
|
|
7,053
|
|
|
|
514
|
|
|
|
112,718
|
|
Consumer
|
|
|
54,566
|
|
|
|
23,079
|
|
|
|
788
|
|
|
|
138
|
|
|
|
78,571
|
|
Commercial business
|
|
|
182,441
|
|
|
|
82,229
|
|
|
|
10,574
|
|
|
|
6,028
|
|
|
|
281,272
|
|
Total loans
|
|
$
|
714,918
|
|
|
$
|
703,480
|
|
|
$
|
169,837
|
|
|
$
|
39,892
|
|
|
$
|
1,628,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018, loans with a maturity date after June 30, 2019, with fixed interest rates totaled $752.5 million, and loans with a maturity date after June 30, 2019, with adjustable rates totaled $160.7 million.
Loan Originations, Sales and Purchases
Generally, all loans are originated by the Bank's staff, who are salaried loan officers. All loan officers are eligible for bonuses based on production, market performance, and credit quality. Certain lenders, in particular, those originating higher volume of residential loans for sale on the secondary market, may earn a relatively higher percentage of their total compensation through bonuses. Loan applications are generally taken and processed at each of the Bank's full-service locations, and the Bank in recent years began processing online applications for single-family residential loans. The Bank also offers secondary market loans to its customers.
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 2018, the Bank originated $550.5 million of loans, compared to $494.9 million and $425.9 million, respectively, in fiscal 2017 and 2016. Of these loans, mortgage loan originations were $397.9 million, $399.2 million and $334.2 million in fiscal 2018, 2017 and 2016, respectively. Increases in originations over recent periods is attributed primarily to an expanded market area and customer base following recent acquisitions.
From time to time, the Bank has purchased loan participations consistent with its loan underwriting standards. In fiscal 2018, the Bank purchased $4.6 million of new loan participations. At June 30, 2018, loan participations totaled $15.7 million, or 1.01% of net loans receivable. At June 30, 2018, all of these participations were performing in accordance with their respective terms. The Bank evaluates additional loan participations on an ongoing basis, based in part on local loan demand, liquidity, portfolio and capital levels.
The following table shows total loans originated, purchased, sold and repaid during the periods indicated.
|
|
Year Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at beginning of period
|
|
$
|
1,464,002
|
|
|
$
|
1,170,981
|
|
|
$
|
1,090,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans originated:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
96,061
|
|
|
|
94,733
|
|
|
|
78,356
|
|
Multi-family residential and
|
|
|
|
|
|
|
|
|
|
|
|
|
commercial real estate
|
|
|
185,914
|
|
|
|
235,427
|
|
|
|
179,253
|
|
Construction loans
|
|
|
115,919
|
|
|
|
69,087
|
|
|
|
76,579
|
|
Commercial business
|
|
|
134,318
|
|
|
|
78,342
|
|
|
|
76,257
|
|
Consumer and others
|
|
|
18,316
|
|
|
|
17,326
|
|
|
|
15,416
|
|
Total loans originated
|
|
|
550,528
|
|
|
|
494,915
|
|
|
|
425,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans purchased
(1)
|
|
|
72,846
|
|
|
|
158,808
|
|
|
|
5,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans sold
|
|
|
(64,073
|
)
|
|
|
(56,131
|
)
|
|
|
(22,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments
|
|
|
(386,912
|
)
|
|
|
(295,615
|
)
|
|
|
(319,510
|
)
|
Participation principal repayments
|
|
|
(6,098
|
)
|
|
|
(7,758
|
)
|
|
|
(7,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosures
|
|
|
(2,166
|
)
|
|
|
(1,198
|
)
|
|
|
(656
|
)
|
Net loan activity
|
|
|
164,125
|
|
|
|
293,021
|
|
|
|
80,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at end of period
|
|
$
|
1,628,127
|
|
|
$
|
1,464,002
|
|
|
$
|
1,170,981
|
|
______________
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amount reported in fiscal 2018 includes the Company's acquisition of loans from the Marshfield acquisition recorded at a $68.3 million fair value. Amount reported in fiscal 2017 includes the Company's acquisition of loans from the Capaha acquisition recorded at a $152.2 million fair value.
|
Loan Commitments
The Bank issues commitments for one- to four-family residential mortgage loans, operating or working capital lines of credit, and standby letters-of-credit. Such commitments may be oral or in writing with specified terms, conditions and at a specified rate of interest. The Bank had outstanding net loan commitments of approximately $266.8 million at June 30, 2018. See Note 14 of Notes to the Consolidated Financial Statements contained in Item 8.
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 typically send a 30-day demand notice to the customer which, if not cured or unless satisfactory arrangements have been made, will lead to foreclosure.
Foreclosure may not begin until the loan reaches 120 days delinquency in the case of consumer residential loans. 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, 2018.
|
|
Loans Delinquent For:
|
|
|
|
|
|
|
60-89 Days
|
|
|
90 Days and Over
|
|
|
Total Loans
Delinquent 60 Days
or More
|
|
|
|
Numbers
|
|
|
Amounts
|
|
|
Numbers
|
|
|
Amounts
|
|
|
Numbers
|
|
|
Amounts
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
3
|
|
|
$
|
84
|
|
|
|
26
|
|
|
$
|
4,089
|
|
|
|
29
|
|
|
$
|
4,173
|
|
Commercial real estate
|
|
|
2
|
|
|
|
290
|
|
|
|
8
|
|
|
|
1,484
|
|
|
|
10
|
|
|
|
1,774
|
|
Construction
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Consumer
|
|
|
6
|
|
|
|
33
|
|
|
|
20
|
|
|
|
146
|
|
|
|
26
|
|
|
|
179
|
|
Commercial Business
|
|
|
5
|
|
|
|
90
|
|
|
|
8
|
|
|
|
707
|
|
|
|
13
|
|
|
|
797
|
|
Totals
|
|
|
16
|
|
|
$
|
497
|
|
|
|
62
|
|
|
$
|
6,426
|
|
|
|
78
|
|
|
$
|
6,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 becomes 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.
The increase in nonperforming assets in fiscal 2018 was attributed primarily to the increase in nonaccrual loans, which, in turn, was primarily attributable to three relationships: a $1.7 million relationship secured by commercial collateral, commercial real estate, and agricultural real estate which deteriorated during fiscal 2018; a $1.0 million multi-family relationship which has been considered a classified asset for approximately four years; and a $2.7 million relationship secured by residential rental properties which has been considered a classified asset for approximately one year.
For information regarding accrual of interest on impaired loans, see Note 1 of Notes to the Consolidated Financial Statements contained in Item 8.
The Company generally treats loans acquired with impaired credit quality as an accruing asset, despite reporting such loans as impaired, because these loans are recorded at acquisition at fair value, which includes an accretable discount which is recorded as interest income over the expected life of the obligation.
The following table sets forth information with respect to the Bank's non-performing assets as of the dates indicated.
|
|
At June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(Dollars in thousands)
|
|
Nonaccruing loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
5,913
|
|
|
$
|
1,263
|
|
|
$
|
2,676
|
|
|
$
|
2,202
|
|
|
$
|
444
|
|
Construction
|
|
|
25
|
|
|
|
35
|
|
|
|
388
|
|
|
|
133
|
|
|
|
---
|
|
Commercial real estate
|
|
|
1,962
|
|
|
|
960
|
|
|
|
1,797
|
|
|
|
1,271
|
|
|
|
673
|
|
Consumer
|
|
|
209
|
|
|
|
158
|
|
|
|
160
|
|
|
|
88
|
|
|
|
58
|
|
Commercial business
|
|
|
1,063
|
|
|
|
409
|
|
|
|
603
|
|
|
|
63
|
|
|
|
91
|
|
Total
|
|
|
9,172
|
|
|
|
2,825
|
|
|
|
5,624
|
|
|
|
3,757
|
|
|
|
1,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans 90 days past due
accruing interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
---
|
|
|
|
59
|
|
|
|
---
|
|
|
|
---
|
|
|
|
106
|
|
Construction
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Commercial real estate
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
18
|
|
Consumer
|
|
|
---
|
|
|
|
13
|
|
|
|
7
|
|
|
|
34
|
|
|
|
6
|
|
Commercial business
|
|
|
---
|
|
|
|
329
|
|
|
|
31
|
|
|
|
11
|
|
|
|
---
|
|
Total
|
|
|
---
|
|
|
|
401
|
|
|
|
38
|
|
|
|
45
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
9,172
|
|
|
|
3,226
|
|
|
|
5,662
|
|
|
|
3,802
|
|
|
|
1,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming investments
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Foreclosed assets held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned
|
|
|
3,874
|
|
|
|
3,014
|
|
|
|
3,305
|
|
|
|
4,440
|
|
|
|
2,912
|
|
Other nonperforming assets
|
|
|
50
|
|
|
|
86
|
|
|
|
61
|
|
|
|
64
|
|
|
|
65
|
|
Total nonperforming assets
|
|
$
|
13,096
|
|
|
$
|
6,326
|
|
|
$
|
9,028
|
|
|
$
|
8,306
|
|
|
$
|
4,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
to net loans
|
|
|
0.59
|
%
|
|
|
0.23
|
%
|
|
|
0.50
|
%
|
|
|
0.36
|
%
|
|
|
0.17
|
%
|
Total nonperforming loans
to total assets
|
|
|
0.49
|
%
|
|
|
0.19
|
%
|
|
|
0.40
|
%
|
|
|
0.29
|
%
|
|
|
0.14
|
%
|
Total nonperforming assets
to total assets
|
|
|
0.69
|
%
|
|
|
0.37
|
%
|
|
|
0.64
|
%
|
|
|
0.64
|
%
|
|
|
0.43
|
%
|
At June 30, 2018, troubled debt restructurings (TDRs) totaled $13.0 million, of which $1.3 million was considered nonperforming and was included in the nonaccrual loan total above. The remaining $11.7 million in TDRs have complied with the modified terms for a reasonable period of time and are therefore considered by the Company to be accrual status loans. At June 30, 2017, TDRs totaled $11.2 million, of which $338,000 was considered nonperforming and was included in the nonaccrual loan total above. In general, these loans were subject to classification as TDRs at June 30, 2018, on the basis of guidance under ASU 2011-02, which indicates that the Company may not consider the borrower's effective borrowing rate on the old debt immediately before the restructuring in determining whether a concession has been granted.
Real Estate Owned.
Real estate properties acquired through foreclosure or by deed in lieu of foreclosure are recorded at the lower of cost or fair value, less estimated disposition costs. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged-off to the allowance for loan losses at the time of transfer. Management periodically updates real estate valuations and if the value declines, a specific provision for losses on such property is established by a charge to operations. At June 30, 2018, the Company's balance of real estate owned totaled $3.9 million and included $786,000 in residential properties and $3.1 million in non-residential properties.
Asset Classification.
Applicable regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, regulatory examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. When an insured institution classifies problem assets as loss, it charges off the balance of the assets. Assets which do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses, may be designated as special mention. The Bank's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the FRB 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, 2018, classified assets totaled $18.2 million, or 0.96% of total assets as compared to $17.5 million, or 1.02% of total assets at June 30, 2017. Of the amount classified as of June 30, 2018, $16.3 million was considered substandard, and $1.8 million was considered doubtful. Included in classified assets at June 30, 2018, were various loans totaling $14.3 million (see Note 3 of Notes to the Consolidated Financial Statements contained in Item 8 for more information on classified loans) and foreclosed real estate and repossessed assets totaling $3.9 million. Classified loans are so designated due to concerns regarding the borrower's ability to generate sufficient cash flows to service the debt. Classified loans totaling $6.8 million had been placed on nonaccrual status at June 30, 2018, of which $5.3 million were more than 30 days delinquent. Of the remaining $7.5 million of classified loans, $70,000 were more than 30 days delinquent.
Other Loans of Concern.
In addition to the classified assets above, there was also an aggregate of $10.2 million in loans, with respect to which management has concerns as to the ability of the borrowers to continue to comply with present loan repayment terms, which may ultimately result in the classification of such assets. These loans continued to perform according to terms as of June 30, 2018, but were identified as having elevated risk due to concerns regarding the borrower's ability to continue to generate sufficient cash flows to service the debt.
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 collectability 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 provisioning 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, 2018, of $18.2 million, which represented 139% of nonperforming assets as compared to an allowance of $15.5 million, which represented 246% of nonperforming assets at June 30, 2017.
At June 30, 2018, the Bank also had an allowance for credit losses on off-balance sheet credit exposures of $1.2 million, as compared to $1.1 million at June 30, 2017. This amount is maintained as a separate liability account to cover estimated potential credit losses associated with off-balance sheet credit instruments such as off-balance sheet loan commitments, standby letters of credit, and guarantees.
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.
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.
|
|
Year Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at beginning of period
|
|
$
|
15,538
|
|
|
$
|
13,791
|
|
|
$
|
12,298
|
|
|
$
|
9,259
|
|
|
$
|
8,386
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
2
|
|
|
|
10
|
|
|
|
5
|
|
|
|
11
|
|
|
|
16
|
|
Construction real estate
|
|
|
---
|
|
|
|
1
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Commercial real estate
|
|
|
2
|
|
|
|
20
|
|
|
|
46
|
|
|
|
47
|
|
|
|
1
|
|
Commercial business
|
|
|
8
|
|
|
|
31
|
|
|
|
15
|
|
|
|
33
|
|
|
|
17
|
|
Consumer
|
|
|
23
|
|
|
|
8
|
|
|
|
8
|
|
|
|
4
|
|
|
|
95
|
|
Total recoveries
|
|
|
35
|
|
|
|
70
|
|
|
|
74
|
|
|
|
95
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
190
|
|
|
|
211
|
|
|
|
167
|
|
|
|
54
|
|
|
|
169
|
|
Construction real estate
|
|
|
9
|
|
|
|
31
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Commercial real estate
|
|
|
56
|
|
|
|
19
|
|
|
|
97
|
|
|
|
9
|
|
|
|
96
|
|
Commercial business
|
|
|
22
|
|
|
|
337
|
|
|
|
725
|
|
|
|
128
|
|
|
|
59
|
|
Consumer
|
|
|
129
|
|
|
|
65
|
|
|
|
86
|
|
|
|
50
|
|
|
|
578
|
|
Total charge offs
|
|
|
406
|
|
|
|
663
|
|
|
|
1,075
|
|
|
|
241
|
|
|
|
902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs
|
|
|
(371
|
)
|
|
|
(593
|
)
|
|
|
(1,001
|
)
|
|
|
(146
|
)
|
|
|
(773
|
)
|
Provision for loan losses
|
|
|
3,047
|
|
|
|
2,340
|
|
|
|
2,494
|
|
|
|
3,185
|
|
|
|
1,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
18,214
|
|
|
$
|
15,538
|
|
|
$
|
13,791
|
|
|
$
|
12,298
|
|
|
$
|
9,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance to total loans
outstanding at the end of the period
|
|
|
1.15
|
%
|
|
|
1.10
|
%
|
|
|
1.20
|
%
|
|
|
1.15
|
%
|
|
|
1.14
|
%
|
Ratio of net charge offs to average
loans outstanding during the period
|
|
|
0.02
|
%
|
|
|
0.05
|
%
|
|
|
0.09
|
%
|
|
|
0.01
|
%
|
|
|
0.10
|
%
|
The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated.
|
|
At June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Amount
|
|
|
Percent of
Loans in
Each
Category
to Total
Loans
|
|
|
Amount
|
|
|
Percent of
Loans in
Each
Category
to Total
Loans
|
|
|
Amount
|
|
|
Percent of
Loans in
Each
Category
to Total
Loans
|
|
|
Amount
|
|
|
Percent of
Loans in
Each
Category
to Total
Loans
|
|
|
Amount
|
|
|
Percent of
Loans in
Each
Category
to Total
Loans
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
3,226
|
|
|
|
27.70
|
%
|
|
$
|
3,230
|
|
|
|
30.22
|
%
|
|
$
|
3,247
|
|
|
|
33.56
|
%
|
|
$
|
2,819
|
|
|
|
34.63
|
%
|
|
$
|
2,462
|
|
|
|
36.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
1,097
|
|
|
|
6.92
|
|
|
|
964
|
|
|
|
7.30
|
|
|
|
1,091
|
|
|
|
6.61
|
|
|
|
899
|
|
|
|
6.35
|
|
|
|
355
|
|
|
|
4.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
8,793
|
|
|
|
43.28
|
|
|
|
7,068
|
|
|
|
41.25
|
|
|
|
5,711
|
|
|
|
38.60
|
|
|
|
4,956
|
|
|
|
37.13
|
|
|
|
4,143
|
|
|
|
37.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
902
|
|
|
|
4.82
|
|
|
|
757
|
|
|
|
4.35
|
|
|
|
738
|
|
|
|
3.98
|
|
|
|
758
|
|
|
|
4.29
|
|
|
|
519
|
|
|
|
4.25
|
|
Commercial business
|
|
|
4,196
|
|
|
|
17.28
|
|
|
|
3,519
|
|
|
|
16.88
|
|
|
|
3,004
|
|
|
|
17.25
|
|
|
|
2,866
|
|
|
|
17.60
|
|
|
|
1,780
|
|
|
|
17.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for
loan losses
|
|
$
|
18,214
|
|
|
|
100.00
|
%
|
|
$
|
15,538
|
|
|
|
100.00
|
%
|
|
$
|
13,791
|
|
|
|
100.00
|
%
|
|
$
|
12,298
|
|
|
|
100.00
|
%
|
|
$
|
9,259
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Activities
General.
Under Missouri law, the Bank is permitted to invest in various types of liquid assets, including U.S. Government and State of Missouri obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, banker's acceptances, repurchase agreements, federal funds, commercial paper, investment grade corporate debt securities and obligations of States and their political sub-divisions. Generally, the investment policy of the Company is to invest funds among various categories of investments and repricing characteristics based upon the Bank's need for liquidity, to provide collateral for borrowings and public unit deposits, to help reach financial performance targets and to help maintain asset/liability management objectives.
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/Chief Executive Officer, the Chief Financial Officer, the Chief Operations Officer and four 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 held-to-maturity over the last five years. Securities classified as "AFS" must be reported at fair value with unrealized gains and losses, net of tax, recorded as a separate component of stockholders' equity. At June 30, 2018, AFS securities totaled $146.3 million (excluding FHLB and Federal Reserve Bank membership stock). For information regarding the amortized cost and market values of the Company's investments, see Note 2 of Notes to the Consolidated Financial Statements contained in Item 8.
As of June 30, 2018, the Company had no 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.
Debt and Other Securities.
At June 30, 2018, the Company's debt and other securities portfolio totaled $56.2 million, or 2.98% of total assets as compared to $66.1 million, or 3.87% of total assets at June 30, 2017. During fiscal 2018, the Bank had $10.2 million in maturities and $7.3 million in securities purchases. Of the securities that matured, $7.1 million was called for early redemption. At June 30, 2018, the investment securities portfolio included $9.4 million in U.S. government and government agency bonds, of which $6.4 million is subject to early redemption at the option of the issuer, and $41.6 million in municipal bonds, of which $35.2 million is subject to early redemption at the option of the issuer. The remaining portfolio consists of $5.2 million in other securities (including pooled trust preferred securities with an estimated fair value of $795,000). Based on projected maturities, the weighted average life of the debt and other securities portfolio at June 30, 2018, was 44 months. Membership stock held in the FHLB of Des Moines, totaling $5.7 million, FHLB of Chicago totaling $215,000, and the Federal Reserve Bank of St. Louis, totaling $3.6 million, along with equity stock of $825,000 in four correspondent (banker's) banks, was not included in the above totals.
At June 30, 2018, the Company owned two pooled trust preferred securities with an estimated fair value of $795,000 and a book value of $971,000. The June 30, 2018, cash flow analysis for these two securities indicated it is probable the Company will receive all contracted principal and related interest projected. The cash flow analysis used in making this determination was based on anticipated default, recovery, and prepayment rates, and the resulting cash flows were discounted based on the yield anticipated at the time the securities were purchased. See Note 2 of Notes to the Consolidated Financial Statements contained in Item 8.
Mortgage-Backed Securities.
At June 30, 2018, mortgage-backed securities ("MBS") totaled $90.2 million, or 4.8%, of total assets, as compared to $78.3 million, or 4.6%, of total assets at June 30, 2017. During fiscal 2018, the Bank had maturities and prepayments of $14.7 million and $36.7 million in purchases of MBS. At June 30, 2018, the MBS portfolio included $41.2 million in fixed-rate MBS, and $49.0 million in fixed rate collateralized mortgage obligations ("CMOs"), all of which passed the Federal Financial Institutions Examination Council's sensitivity test. Based on projected prepayment rates, the weighted average life of the MBS and CMOs at June 30, 2018, was 57 months. Prepayment rates may cause the anticipated average life of MBS portfolio to extend or shorten based upon actual prepayment rates.
Investment Securities Analysis
The following table sets forth the Company's debt and other securities portfolio, at carrying value, and membership stock, at cost, at the dates indicated.
|
|
At June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Fair
Value
|
|
|
Percent of
Portfolio
|
|
|
Fair
Value
|
|
|
Percent of
Portfolio
|
|
|
Fair
Value
|
|
|
Percent of
Portfolio
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government
agencies
|
|
$
|
9,385
|
|
|
|
14.13
|
%
|
|
$
|
10,438
|
|
|
|
14.34
|
%
|
|
$
|
6,517
|
|
|
|
9.75
|
%
|
State and political subdivisions
|
|
|
41,612
|
|
|
|
62.65
|
|
|
|
49,978
|
|
|
|
68.66
|
|
|
|
46,185
|
|
|
|
69.12
|
|
Other securities
|
|
|
5,152
|
|
|
|
7.76
|
|
|
|
5,725
|
|
|
|
7.86
|
|
|
|
5,291
|
|
|
|
7.92
|
|
FHLB/FNBB/MIB membership stock
|
|
|
6,701
|
|
|
|
10.09
|
|
|
|
4,295
|
|
|
|
5.90
|
|
|
|
6,484
|
|
|
|
9.70
|
|
Federal Reserve Bank membership stock
|
|
|
3,566
|
|
|
|
5.37
|
|
|
|
2,357
|
|
|
|
3.24
|
|
|
|
2,343
|
|
|
|
3.51
|
|
Total
|
|
$
|
66,416
|
|
|
|
100.00
|
%
|
|
$
|
72,793
|
|
|
|
100.00
|
%
|
|
$
|
66,820
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the maturities and weighted average yields of AFS debt securities in the Company's investment securities portfolio and membership stock at June 30, 2018.
|
|
Available for Sale Securities
June 30, 2018
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Tax-Equiv.
Wtd.-Avg. Yield
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency securities:
|
|
|
|
|
|
|
|
|
|
Due within 1 year
|
|
$
|
2,247
|
|
|
$
|
2,243
|
|
|
|
1.45
|
%
|
Due after 1 year but within 5 years
|
|
|
7,266
|
|
|
|
7,142
|
|
|
|
1.61
|
|
Due after 5 years but within 10 years
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Due over 10 years
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Total
|
|
|
9,513
|
|
|
|
9,385
|
|
|
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within 1 year
|
|
|
1,293
|
|
|
|
1,293
|
|
|
|
2.04
|
%
|
Due after 1 year but within 5 years
|
|
|
8,953
|
|
|
|
8,939
|
|
|
|
2.84
|
|
Due after 5 years but within 10 years
|
|
|
15,429
|
|
|
|
15,286
|
|
|
|
3.56
|
|
Due over 10 years
|
|
|
16,187
|
|
|
|
16,094
|
|
|
|
3.30
|
|
Total
|
|
|
41,862
|
|
|
|
41,612
|
|
|
|
3.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within 1 year
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
%
|
Due after 1 year but within 5 years
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Due after 5 years but within 10 years
|
|
|
3,992
|
|
|
|
4,043
|
|
|
|
5.44
|
|
Due over 10 years
|
|
|
1,292
|
|
|
|
1,109
|
|
|
|
3.03
|
|
Total
|
|
|
5,284
|
|
|
|
5,152
|
|
|
|
4.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No stated maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB/FNBB/MIB membership stock
|
|
|
6,701
|
|
|
|
6,701
|
|
|
|
3.24
|
%
|
Federal Reserve Bank membership stock
|
|
|
3,566
|
|
|
|
3,566
|
|
|
|
6.56
|
|
Total
|
|
|
10,267
|
|
|
|
10,267
|
|
|
|
4.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt and other securities
|
|
$
|
66,926
|
|
|
$
|
66,416
|
|
|
|
3.32
|
%
|
The following table sets forth certain information at June 30, 2018 regarding the dollar amount of MBS and CMOs at amortized cost due, based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. MBS and CMOs that have adjustable rates are shown at amortized cost as maturing at their next repricing date.
|
|
At June 30, 2018
|
|
|
|
(Dollars in thousands)
|
|
Amounts due:
|
|
|
|
Within 1 year
|
|
$
|
---
|
|
After 1 year through 3 years
|
|
|
56
|
|
After 3 years through 5 years
|
|
|
---
|
|
After 5 years
|
|
|
92,652
|
|
Total
|
|
$
|
92,708
|
|
|
|
|
|
|
The following table sets forth the dollar amount of all MBS and CMOs at amortized cost due, based on their contractual terms to maturity, one year after June 30, 2018, which have fixed, floating, or adjustable interest rates.
|
At June 30, 2018
|
|
|
(Dollars in thousands)
|
|
Interest rate terms on amounts due after 1 year:
|
|
|
Fixed
|
|
$
|
92,708
|
|
Adjustable
|
|
|
---
|
|
Total
|
|
$
|
92,708
|
|
|
|
|
|
|
The following table sets forth certain information with respect to each MBS and CMO security at the dates indicated.
|
|
At June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC certificates
|
|
$
|
16,598
|
|
|
$
|
16,113
|
|
|
$
|
21,380
|
|
|
$
|
21,489
|
|
|
$
|
23,298
|
|
|
$
|
23,799
|
|
GNMA certificates
|
|
|
38
|
|
|
|
38
|
|
|
|
1,437
|
|
|
|
1,449
|
|
|
|
1,814
|
|
|
|
1,856
|
|
FNMA certificates
|
|
|
25,800
|
|
|
|
25,062
|
|
|
|
28,457
|
|
|
|
28,628
|
|
|
|
28,292
|
|
|
|
28,931
|
|
Collateralized mortgage obligations issued
by government agencies
|
|
|
50,272
|
|
|
|
48,963
|
|
|
|
26,814
|
|
|
|
26,709
|
|
|
|
16,489
|
|
|
|
16,645
|
|
Total
|
|
$
|
92,708
|
|
|
$
|
90,176
|
|
|
$
|
78,088
|
|
|
$
|
78,275
|
|
|
$
|
69,893
|
|
|
$
|
71,231
|
|
Deposit Activities and Other Sources of Funds
General.
The Company's primary sources of funds are deposits, borrowings, payments of principal and interest on loans, MBS and CMOs, interest and principal received on investment securities and other short-term investments, and funds provided from operating results. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general market interest rates and overall economic conditions.
Borrowings, including FHLB advances, have been used at times to provide additional liquidity. Borrowings are used on an overnight or short-term basis to compensate for periodic fluctuations in cash flows, and are used on a longer term basis to fund loan growth and to help manage the Company's sensitivity to fluctuating interest rates.
Deposits.
The Bank's depositors are generally residents and entities located in the State of Missouri, Arkansas, or Illinois. Deposits are attracted from within the Bank's market area through the offering of a broad selection of deposit instruments, including demand deposit accounts, negotiable order of withdrawal ("NOW") accounts, money market deposit accounts, saving accounts, certificates of deposit and retirement savings plans. Deposit account terms vary according to the minimum balance required, the time periods the funds may remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, the Bank considers current market interest rates, profitability to the Bank, managing interest rate sensitivity and its customer preferences and concerns. The Bank's Asset/Liability Committee regularly reviews its deposit mix and pricing.
The Bank will periodically promote a particular deposit product as part of the Bank's overall marketing plan. Deposit products have been promoted through various mediums, which include digital and social media, radio and newspaper advertisements, as well as "grassroots" marketing techniques, such as sponsorship of – or activity at – community events. The emphasis of these campaigns is to increase consumer awareness and market share of the Bank.
The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, and competition. Based on its experience, the Bank believes that its deposits are relatively stable sources of funds. However, the ability of the Bank to attract and maintain money market deposit accounts, passbook savings accounts, and certificates of deposit, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. The following table depicts the composition of the Bank's deposits as of June 30, 2018:
As of June 30, 2018
|
|
Weighted
Average
Interest
Rate
|
|
Term
|
|
Category
|
|
Minimum
Amount
|
|
|
Balance
|
|
|
Percentage
of Total
Deposits
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00%
|
|
None
|
|
Non-interest Bearing
|
|
$
|
100
|
|
|
$
|
203,517
|
|
|
|
12.89
|
%
|
0.82
|
|
None
|
|
NOW Accounts
|
|
|
100
|
|
|
|
569,005
|
|
|
|
36.02
|
|
0.51
|
|
None
|
|
Savings Accounts
|
|
|
100
|
|
|
|
157,540
|
|
|
|
9.97
|
|
0.70
|
|
None
|
|
Money Market Deposit Accounts
|
|
|
1,000
|
|
|
|
116,389
|
|
|
|
7.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
1.24
|
|
6 months or less
|
|
Fixed Rate/Term
|
|
|
1,000
|
|
|
|
43,039
|
|
|
|
2.72
|
|
0.80
|
|
6 months or less
|
|
IRA Fixed Rate/Term
|
|
|
1,000
|
|
|
|
1,827
|
|
|
|
0.12
|
|
1.22
|
|
7-12 months
|
|
Fixed Rate/Term
|
|
|
1,000
|
|
|
|
71,720
|
|
|
|
4.54
|
|
0.95
|
|
7-12 months
|
|
IRA Fixed Rate/Term
|
|
|
1,000
|
|
|
|
12,489
|
|
|
|
0.79
|
|
1.53
|
|
13-24 months
|
|
Fixed Rate/Term
|
|
|
1,000
|
|
|
|
228,023
|
|
|
|
14.43
|
|
1.36
|
|
13-24 months
|
|
IRA Fixed Rate/Term
|
|
|
1,000
|
|
|
|
22,649
|
|
|
|
1.42
|
|
1.37
|
|
25-36 months
|
|
Fixed Rate/Term
|
|
|
1,000
|
|
|
|
34,279
|
|
|
|
2.17
|
|
1.31
|
|
25-36 months
|
|
IRA Fixed Rate/Term
|
|
|
1,000
|
|
|
|
5,026
|
|
|
|
0.32
|
|
1.82
|
|
48 months and more
|
|
Fixed Rate/Term
|
|
|
1,000
|
|
|
|
93,684
|
|
|
|
5.93
|
|
1.81
|
|
48 months and more
|
|
IRA Fixed Rate/Term
|
|
|
1,000
|
|
|
|
20,715
|
|
|
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,579,902
|
|
|
|
100.00
|
%
|
The following table indicates the amount of the Bank's jumbo certificates of deposit by time remaining until maturity as of June 30, 2018. Jumbo certificates of deposit require minimum deposits of $100,000 and rates paid on such accounts are generally negotiable.
Maturity Period
|
|
Amount
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Three months or less
|
|
$
|
55,923
|
|
Over three through six months
|
|
|
49,035
|
|
Over six through twelve months
|
|
|
80,557
|
|
Over 12 months
|
|
|
144,784
|
|
Total
|
|
$
|
330,299
|
|
|
|
|
|
|
Time Deposits by Rates
The following table sets forth the time deposits in the Bank classified by rates at the dates indicated.
|
|
At June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
0.00 - 0.99%
|
|
$
|
77,958
|
|
|
$
|
200,868
|
|
|
$
|
205,387
|
|
1.00 - 1.99%
|
|
|
356,172
|
|
|
|
296,964
|
|
|
|
162,180
|
|
2.00 - 2.99%
|
|
|
98,842
|
|
|
|
36,228
|
|
|
|
28,135
|
|
3.00 - 3.99%
|
|
|
479
|
|
|
|
---
|
|
|
|
20
|
|
4.00 - 4.99%
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
5.00 - 5.99%
|
|
|
---
|
|
|
|
3,000
|
|
|
|
3,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
533,451
|
|
|
$
|
537,060
|
|
|
$
|
398,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the amount and maturities of all time deposits at June 30, 2018.
|
|
Amount Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Total
|
|
|
|
Than One
|
|
|
|
1-2
|
|
|
|
2-3
|
|
|
|
3-4
|
|
|
After
|
|
|
|
|
|
Certificate
|
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
4 Years
|
|
|
Total
|
|
|
Accounts
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00 – 0.99%
|
|
$
|
75,171
|
|
|
$
|
2,109
|
|
|
$
|
378
|
|
|
$
|
300
|
|
|
$
|
---
|
|
|
$
|
77,958
|
|
|
|
14.61
|
%
|
1.00 – 1.99%
|
|
|
220,497
|
|
|
|
86,395
|
|
|
|
26,303
|
|
|
|
14,967
|
|
|
|
8,010
|
|
|
|
356,172
|
|
|
|
66.77
|
|
2.00 - 2.99%
|
|
|
15,772
|
|
|
|
53,893
|
|
|
|
7,716
|
|
|
|
13,263
|
|
|
|
8,198
|
|
|
|
98,842
|
|
|
|
18.53
|
|
3.00 - 3.99%
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
479
|
|
|
|
479
|
|
|
|
0.09
|
|
4.00 - 4.99%
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
5.00 - 5.99%
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
311,440
|
|
|
$
|
142,397
|
|
|
$
|
34,397
|
|
|
$
|
28,530
|
|
|
$
|
16,687
|
|
|
$
|
533,451
|
|
|
|
100.00
|
%
|
Deposit Flow
The following table sets forth the balance of deposits in the various types of accounts offered by the Bank at the dates indicated.
|
|
At June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
Percent of
Total
|
|
|
Increase
(Decrease)
|
|
|
Amount
|
|
|
Percent of
Total
|
|
|
Increase
(Decrease)
|
|
|
Amount
|
|
|
Percent of
Total
|
|
|
Increase
(Decrease)
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
203,517
|
|
|
|
12.88
|
%
|
|
$
|
17,314
|
|
|
$
|
186,203
|
|
|
|
12.79
|
%
|
|
$
|
54,207
|
|
|
$
|
131,996
|
|
|
|
11.78
|
%
|
|
$
|
14,525
|
|
NOW checking
|
|
|
569,005
|
|
|
|
36.02
|
|
|
|
89,517
|
|
|
|
479,488
|
|
|
|
32.94
|
|
|
|
83,383
|
|
|
|
396,105
|
|
|
|
35.34
|
|
|
|
60,008
|
|
Savings accounts
|
|
|
157,540
|
|
|
|
9.97
|
|
|
|
10,293
|
|
|
|
147,247
|
|
|
|
10.12
|
|
|
|
31,533
|
|
|
|
115,714
|
|
|
|
10.33
|
|
|
|
(16,170
|
)
|
Money market deposit
|
|
|
116,389
|
|
|
|
7.37
|
|
|
|
10,790
|
|
|
|
105,599
|
|
|
|
7.25
|
|
|
|
27,444
|
|
|
|
78,155
|
|
|
|
6.97
|
|
|
|
10,403
|
|
Fixed-rate certificates
which mature
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
311,440
|
|
|
|
19.71
|
|
|
|
(15,198
|
)
|
|
|
326,638
|
|
|
|
22.44
|
|
|
|
80,734
|
|
|
|
245,904
|
|
|
|
21.94
|
|
|
|
618
|
|
Within three years
|
|
|
176,794
|
|
|
|
11.19
|
|
|
|
13,984
|
|
|
|
162,810
|
|
|
|
11.19
|
|
|
|
59,011
|
|
|
|
103,799
|
|
|
|
9.26
|
|
|
|
(11,184
|
)
|
After three years
|
|
|
45,217
|
|
|
|
2.86
|
|
|
|
(2,395
|
)
|
|
|
47,612
|
|
|
|
3.27
|
|
|
|
(1,408
|
)
|
|
|
49,020
|
|
|
|
4.38
|
|
|
|
7,251
|
|
Variable-rate certificates
which mature:
Within one year
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Within three years
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Total
|
|
$
|
1,579,902
|
|
|
|
100.00
|
%
|
|
$
|
124,305
|
|
|
$
|
1,455,597
|
|
|
|
100.00
|
%
|
|
$
|
334,904
|
|
|
$
|
1,120,693
|
|
|
|
100.00
|
%
|
|
$
|
65,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
___________________________
(1)
At June 30, 2018, 2017 and 2016, certificates in excess of $100,000 totaled
$330.3
million,
$342.5
million and
$234.5
million, respectively.
The following table sets forth the deposit activities of the Bank for the periods indicated.
|
|
At June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
1,455,597
|
|
|
$
|
1,120,693
|
|
|
$
|
1,055,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase before interest credited
|
|
|
111,480
|
|
|
|
326,432
|
|
|
|
58,044
|
|
Interest credited
|
|
|
12,825
|
|
|
|
8,472
|
|
|
|
7,407
|
|
Net increase in deposits
|
|
|
124,305
|
|
|
|
334,904
|
|
|
|
65,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,579,902
|
|
|
$
|
1,455,597
|
|
|
$
|
1,120,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the unlikely event the Bank is liquidated, depositors will be entitled to payment of their deposit accounts prior to any payment being made to the Company as the sole stockholder of the Bank.
Borrowings.
As a member of the FHLB of Des Moines, the Bank has the ability to apply for FHLB advances. These advances are available under various credit programs, each of which has its own maturity, interest rate and repricing characteristics. Additionally, FHLB advances have prepayment penalties as well as limitations on size or term. In order to utilize FHLB advances, the Bank must be a member of the FHLB system, have sufficient collateral to secure the requested advance and own stock in the FHLB equal to 4.45% of the amount borrowed. See "REGULATION – The Bank – Federal Home Loan Bank System."
Although deposits are the Bank's primary and preferred source of funds, the Bank has actively used FHLB advances. The Bank's general policy has been to utilize borrowings to meet short-term liquidity needs, or to provide a longer-term source of funding loan growth when other cheaper funding sources are unavailable or to aide in asset/liability management. As of June 30, 2018, the Bank had $76.7 million in FHLB advances, of which $7.0 million had an original term of ten years, subject to early redemption by the FHLB after an initial period of one to five years, $2.7 million in fixed-rate long term advances, $400,000 of fixed rate amortizing advances, and $66.6 million in overnight borrowings. In order for the Bank to borrow from the FHLB, it has pledged $706.2 million of its residential and commercial real estate loans to the FHLB (although the actual collateral required for advances taken and letters of credit issued amounts to $167.3 million) and has purchased $5.7 million in FHLB stock. At June 30, 2018, the Bank had additional borrowing capacity on its pledged residential and commercial real estate loans from the FHLB of $267.0 million, as compared to $251.8 million at June 30, 2017.
Additionally, the Bank is approved to borrow from the Federal Reserve Bank's discount window on a primary credit basis. Primary credit is available to approved institutions on a generally short-term basis at the "discount rate" set by the FOMC. The Bank has pledged agricultural real estate and other loans to farmers as collateral for any amounts borrowed through the discount window. As of June 30, 2018, the Bank was approved to borrow up to $163.2 million through the discount window, but no balance was outstanding.
Also classified as borrowings are the Bank's securities sold under agreements to repurchase ("repurchase agreements"). These agreements are typically entered into with local public units or corporations. Generally, the Bank pays interest on these agreements at a rate similar to those available on repurchase agreements with wholesale funding sources. The Bank views repurchase agreements with local entities as a stable funding source. At June 30, 2018, the Bank had outstanding $3.3 million in repurchase agreements, as compared to $10.2 million at June 30, 2017.
Southern Missouri Statutory Trust I, a Delaware business trust subsidiary of the Company, issued $7.0 million in Floating Rate Capital Securities (the "Trust Preferred Securities") with a liquidation value of $1,000 per share in March, 2004. The securities are due in 30 years, were redeemable after five years and bear interest at a floating rate based on LIBOR. At June 30, 2018, the current rate was 5.08%. The securities represent undivided beneficial interests in the trust, which was established by Southern Missouri Bancorp for the purpose of issuing the securities. The Trust Preferred Securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended (the "Act") and have not been registered under the Act. The securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
Southern Missouri Statutory Trust I used the proceeds of the sale of the Trust Preferred Securities to purchase Junior Subordinated Debentures of Southern Missouri Bancorp. Southern Missouri Bancorp is using the net proceeds for working capital and investment in its subsidiaries. Trust Preferred Securities currently qualify as Tier I Capital for regulatory purposes. See "Regulation" for further discussion on the treatment of the trust-preferred securities.
In its October 2013 acquisition of Ozarks Legacy, the Company assumed $3.1 million in floating rate junior subordinated debt securities. The securities had been issued in June 2005 by Ozarks Legacy in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, and mature in 2035. At June 30, 2018, the carrying value was $2.6 million, and bore interest at a current coupon rate of 4.79% and an effective rate of 6.67%.
In the Peoples Acquisition, the Company assumed $6.5 million in floating rate junior subordinated debt securities. The debt securities had been issued in 2005 by PBC in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. At June 30, 2018, the carrying value was $5.1 million and bore interest at a current coupon rate of 4.14% and an effective rate of 6.66%.
The following table sets forth certain information regarding short-term borrowings by the Bank at the end of and during the periods indicated:
|
|
Year Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Year end balances
|
|
|
|
|
|
|
|
|
|
Short-term FHLB advances
|
|
$
|
66,550
|
|
|
$
|
20,000
|
|
|
$
|
69,750
|
|
Securities sold under agreements to repurchase
|
|
|
3,267
|
|
|
|
10,212
|
|
|
|
27,085
|
|
|
|
$
|
69,817
|
|
|
$
|
30,212
|
|
|
$
|
96,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average rate at year end
|
|
|
1.98
|
%
|
|
|
1.02
|
%
|
|
|
0.45
|
%
|
The following table sets forth certain information as to the Bank's borrowings for the periods indicated:
|
|
Year Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
FHLB advances
|
|
|
|
|
|
|
|
|
|
Daily average balance
|
|
$
|
56,593
|
|
|
$
|
96,065
|
|
|
$
|
65,273
|
|
Weighted average interest rate
|
|
|
1.84
|
%
|
|
|
1.18
|
%
|
|
|
1.95
|
%
|
Maximum outstanding at any month end
|
|
$
|
88,538
|
|
|
$
|
140,361
|
|
|
$
|
100,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily average balance
|
|
$
|
5,373
|
|
|
$
|
22,198
|
|
|
$
|
27,387
|
|
Weighted average interest rate
|
|
|
0.70
|
%
|
|
|
0.43
|
%
|
|
|
0.44
|
%
|
Maximum outstanding at any month end
|
|
$
|
9,902
|
|
|
$
|
28,825
|
|
|
$
|
31,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily average balance
|
|
$
|
14,897
|
|
|
$
|
14,800
|
|
|
$
|
14,705
|
|
Weighted average interest rate
|
|
|
5.15
|
%
|
|
|
4.37
|
%
|
|
|
3.86
|
%
|
Maximum outstanding at month end
|
|
$
|
14,945
|
|
|
$
|
14,848
|
|
|
$
|
14,753
|
|
Subsidiary Activities
The Bank has three subsidiaries, SMS Financial Services, Inc., which had no assets or liabilities at June 30, 2018, and is currently inactive, and SB Corning, LLC and SB Real Estate Investments, LLC both active subsidiaries. SB Corning, LLC represents a $1.4 million investment in a limited partnership formed for the purpose of generating low income housing tax credits. SB Real Estate Investments, LLC is a wholly owned subsidiary of the Bank formed to hold Southern Bank Real Estate Investments, LLC. Southern Bank Real Estate Investments, LLC is a REIT which is majority-owned by the investment subsidiary, but has other preferred shareholders in order to meet the requirements to be a REIT. At June 30, 2018, SB Real Estate Investments, LLC held assets of $608.3 million, while Southern Bank Real Estate Investments, LLC held assets of $607.6 million.
REGULATION
The following is a brief description of certain laws and regulations applicable to the Company and the Bank. Descriptions of laws and regulations here and elsewhere in this prospectus do not purport to be complete and are qualified in their entirety by reference to the actual laws and regulations. Legislation is introduced from time to time in the United States Congress or the Missouri state legislature that may affect the operations of the Company and the Bank. In addition, the regulations governing us may be amended from time to time. Any such legislation or regulatory changes in the future could adversely affect our operations and financial condition.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") imposed various restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. The following discussion summarizes significant aspects of the Dodd-Frank Act that may affect the Bank and the Company.
The following selected aspects of the Dodd-Frank Act are related to the operations of the Bank:
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The Consumer Financial Protection Bureau ("CFPB"), an independent consumer compliance regulatory agency within the FRB, has been established. The CFPB is empowered to exercise broad regulatory, supervisory and enforcement authority over financial institutions with total assets of over $10 billion with respect to Federal consumer financial protection laws. Financial institutions with assets of less than $10 billion, like the Bank, will continue to be subject to supervision and enforcement by their primary federal banking regulator with respect to federal consumer financial protection laws. The
CFPB also has authority to promulgate new consumer financial protection regulations and amend existing consumer financial protection regulations;
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The Federal Deposit Insurance Act was amended to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries;
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The prohibition on payment of interest on demand deposits was repealed;
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Deposit insurance was permanently increased to $250,000; and
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The deposit insurance assessment base for FDIC insurance is the depository institution's average consolidated total assets less the average tangible equity during the assessment period;
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The following aspects of the Dodd-Frank Act are related to the operations of the Company:
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Tier 1 capital treatment for "hybrid" capital items like trust preferred securities is eliminated, subject to various grandfathering and transition rules. As required by the Act, the federal banking agencies have promulgated new rules on regulatory capital for both depository institutions and their holding companies;
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Public companies are required to provide their shareholders with a non-binding vote: (i) at least once every three years on the compensation paid to executive officers, and (ii) at least once every six years on whether shareholders should have a "say on pay" vote every one, two or three years;
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A separate, non-binding shareholder vote is required regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments;
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Securities exchanges are required to prohibit brokers from using their own discretion to vote shares not beneficially owned by them for certain "significant" matters, which include votes on the election of directors, executive compensation matters, and any other matter determined to be significant;
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Stock exchanges are prohibited from listing the securities of any issuer that does not have a policy providing for (i) disclosure of its policy on incentive compensation payable on the basis of financial information reportable under the securities laws, and (ii) the recovery from current or former executive officers, following an accounting restatement triggered by material noncompliance with securities law reporting requirements, of any incentive compensation paid erroneously during the three-year period preceding the date on which the restatement was required that exceeds the amount that would have been paid on the basis of the restated financial information;
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Smaller reporting companies are exempt from complying with the internal control auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.
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2018 Regulatory Reform
In May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the "Act"), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory relief for community banks such as the Bank.
The Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single "Community Bank Leverage Ratio" of between 8 and 10 percent. Any qualifying depository institution or its holding company that exceeds the "community bank leverage ratio" will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered to be "well capitalized" under the prompt corrective action rules. The Act also expands the category of holding companies that may rely on the "Small Bank Holding Company and Savings and Loan Holding Company Policy Statement" (the "HC Policy Statement") by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
It is difficult at this time to predict when or how any new standards under the Act will ultimately be applied to us or what specific impact the Act and the yet-to-be-written implementing rules and regulations will have on community banks.
The Bank
General.
As a state-chartered, federally insured trust company with banking powers, the Bank is subject to extensive regulation. Lending activities and other investments must comply with various statutory and regulatory requirements, including prescribed minimum capital standards. The Bank is regularly examined by the FRB and the Missouri Division of Finance and files periodic reports concerning the Bank's activities and financial condition with its regulators. The Bank's relationship with depositors and borrowers also is regulated to a great extent by both federal law and the laws of Missouri, especially in such matters as the ownership of deposit accounts and the form and content of mortgage documents.
Federal and state banking laws and regulations govern all areas of the operation of the Bank, including reserves, loans, mortgages, capital, issuance of securities, payment of dividends, and establishment of branches. Federal and state bank regulatory agencies also have the general authority to limit the dividends paid by insured banks and bank holding companies if such payments should be deemed to constitute an unsafe and unsound practice, and in other circumstances. The FRB as the primary federal regulator of the Company and the Bank has authority to impose penalties, initiate civil and administrative actions and take other steps intended to prevent banks from engaging in unsafe or unsound practices.
State Regulation and Supervision.
As a state-chartered trust company with banking powers, the Bank is subject to applicable provisions of Missouri law and the regulations of the Missouri Division of Finance. Missouri law and regulations govern the Bank's ability to take deposits and pay interest thereon, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customers, and to establish branch offices.
Federal Reserve System.
The FRB requires all depository institutions to maintain reserves at specified levels against their transaction accounts (checking, NOW and Super NOW checking accounts). At June 30, 2018, the Bank was in compliance with these reserve requirements.
The Bank is authorized to borrow from the Federal Reserve Bank "discount window." FRB regulations require associations to exhaust other reasonable alternative sources of funds, including FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System.
The Bank is a member of the FHLB of Des Moines, which is one of 11 regional FHLBs that provide home financing credit. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Agency. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. See Business - Deposit Activities and Other Sources of Funds - Borrowings.
As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines. At June 30, 2018, the Bank had $5.7 million in FHLB stock, which was in compliance with this requirement. The Bank received $147,000 and $151,000 in dividends from the FHLB of Des Moines for the years ended June 30, 2018 and 2017, respectively.
The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank's FHLB stock may result in a corresponding reduction in the Bank's capital.
Federal Deposit Insurance Corporation
.
The Bank's deposits are insured up to applicable limits by the Deposit Insurance Fund ("DIF") of the FDIC. The general insurance limit is $250,000. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF. The FDIC also has the authority to initiate enforcement actions against a member bank of the FRB after giving the FRB an opportunity to take such action.
The Dodd-Frank Act establishes 1.35% as the minimum reserve ratio (the ratio of the net worth of the DIF to aggregate insured deposits). The FDIC has adopted a plan under which it will meet this ratio by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The FDIC is required to offset the effect of the increase in the reserve ratio on institutions with assets less than $10 billion of the increase in the statutory minimum reserve ratio to 1.35% from the former statutory minimum of 1.15%. In addition to the statutory minimum ratio, the FDIC must designate a reserve ratio, known as the designated reserve ratio or DRR, which may exceed the statutory minimum. The FDIC has established 2.0% as the DRR.
Implementing the Dodd-Frank Act requirement that the FDIC's deposit insurance assessments be based on assets instead of deposits, the FDIC has issued rules specifying that specify that the assessment base for a bank is equal to its total average consolidated assets less average tangible equity. Effective for the quarter beginning July 1, 2017, the assessment rates for an institution with assets of less than $10 billion will range from 3 to 30 basis points, based on the institution's weighted average CAMELS component ratings and certain financial ratios. These rates are subject to downward adjustment (not below 1.5 basis points) based on the ratio of unsecured debt the institution has issued to its assessment base, and to upward adjustment based on its holdings of unsecured debt issued by other insured institutions. Assessment rates are expected to decrease in the future as the reserve ratio increases in specified increments. To implement the offset requirement, FDIC regulations require that institutions with assets of $10 billion or more pay a surcharge during a temporary period, and smaller institutions will receive certain credits when the reserve ratio reaches 1.38%. No institution may pay a dividend if it is in default on its federal deposit insurance assessment.
A significant increase in insurance assessment rates would likely have an adverse effect on the operating expenses and results of operations of the Bank. There can be no prediction as to what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of the Bank is not aware of any practice, condition or violation that might lead to termination of the Bank's deposit insurance.
In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and during the fourth quarter ended June 30, 2018, was 0.32 basis points (annualized) of assessable deposits.
Prompt Corrective Action.
Under the Federal Deposit Insurance Act ("FDIA"), each federal banking agency is required to implement a system of prompt corrective action for depository institutions that it regulates. The federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action. In connection with the capital rules discussed under "Capital Rules" below, an institution is deemed to be "well capitalized" if it has (i) a total risk-based capital ratio of 10.0% or more, (ii) a common equity Tier 1 risk-based capital ratio of 6.5% or more, (iii) a Tier 1 risk-based capital ratio of 8.0% or more, and (iv) a leverage ratio of 5.0% or more, and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure. An institution is deemed to be "adequately capitalized" if it has (i) a total risk-based capital ratio of 8.0% or more, (ii) a common equity Tier 1 risk-based capital ratio of 4.5% or more, (iii) a Tier 1 risk-based capital ratio of 6.0% or more, and (iv) a leverage ratio of 4.0% or more and does not meet the definition of "well capitalized;" "undercapitalized" if it has (i) a total risk-based capital ratio that is less than 8.0%, (ii) a common equity Tier 1 risk-based capital ratio that is less than 4.5%, (iii) a Tier 1 risk-based capital ratio that is less than 6.0%, or (iv) a leverage ratio that is less than 4.0%; "significantly undercapitalized" if it has (i) a total risk-based capital ratio that is less than 6.0%, (ii) a common equity Tier 1 risk-based capital ratio that is less than 3.0%, (iii) a Tier 1 risk-based capital ratio that is less than 4.0%, or (iv) a leverage ratio that is less than 3.0%; and "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.
A federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category if it determines, after notice and opportunity for hearing, that the institution is in an unsafe or unsound condition or has received in its most recent examination, and has not corrected, a less than satisfactory rating for asset quality, management, earnings, liquidity or sensitivity to market risk. (The agency may not, however, reclassify a significantly undercapitalized institution as critically undercapitalized.) An institution that is not well capitalized is subject to certain restrictions on its deposit rates.
An undercapitalized, significantly undercapitalized, or critically undercapitalized institution is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. The plan must specify (i) the steps the institution will take to become adequately capitalized, (ii) the capital levels to be attained each year, (iii) how the institution will comply with any regulatory sanctions then in effect against the institution and (iv) the types and levels of activities in which the institution will engage. The banking agency may not accept a capital restoration plan unless the agency determines, among other things, that the plan is based on realistic assumptions, and is likely to succeed in restoring the institution's capital and would not appreciably increase the risks to which the institution is exposed. An institution that is not well capitalized is subject to restrictions on brokered deposits.
The FDIA provides that the appropriate federal regulatory agency must require an insured depository institution that is significantly undercapitalized or is undercapitalized and either fails to submit an acceptable capital restoration plan within the time period allowed or fails in any material respect to implement a capital restoration plan accepted by the appropriate federal banking agency, or the parent bank holding company of such an institution, to take one or more of the following actions: (i) sell enough voting shares, to become adequately capitalized; (ii) merge with (or be sold to) another institution (or holding company), but only if grounds exist for appointing a conservator or receiver; (iii) restrict certain transactions with banking affiliates as if the "sister bank" exemption of Section 23A of the Federal Reserve Act ("FRA") did not exist; (iv) otherwise restrict transactions with bank or non-bank affiliates; (v) restrict interest rates that the institution pays on deposits to "prevailing rates" in the institution's region; (vi) restrict asset growth or reduce total assets; (vii) alter, reduce or terminate activities; (viii) hold a new election of directors; (ix) require dismissal of any director or senior executive officer who held office for more than 180 days immediately before the institution became undercapitalized; (x) employ qualified senior executive officers; (xi) cease acceptance of deposits from correspondent depository institutions; (xii) divest the institution or certain non-depository holding company subsidiaries which pose a danger to the institution, or divest certain subsidiaries of the institution; (xiii) obtain prior FRB approval for payment of dividends by the parent bank holding company; and (xiv) any other action which the agency determines would better carry out the purposes of the prompt corrective action provision and request the institution to take.
A critically undercapitalized institution is subject to further restrictions and to appointment of a receiver or conservator 90 days after becoming critically undercapitalized unless the FDIC and, in the case of a state member Bank, the FRB concur that other action better serves the purposes of the prompt corrective action provisions.
At June 30, 2018, the Bank was categorized as "well capitalized" under the prompt corrective action regulations of the FRB.
Standards for Safety and Soundness.
The federal banking regulatory agencies have prescribed, by regulation, standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits ("Guidelines"). The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the FRB determines that the Bank fails to meet any standard prescribed by the Guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard.
Guidance on Subprime Mortgage Lending.
The federal banking agencies have issued guidance on subprime mortgage lending to address issues related to certain mortgage products marketed to subprime borrowers, particularly adjustable rate mortgage products that can involve "payment shock" and other risky characteristics. Although the guidance focuses on subprime borrowers, the banking agencies note that institutions should look to the principles contained in the guidance when offering such adjustable rate mortgages to non-subprime borrowers. The guidance prohibits predatory lending programs; provides that institutions should underwrite a mortgage loan on the borrower's ability to repay the debt by its final maturity at the fully-indexed rate, assuming a fully amortizing repayment schedule; encourages reasonable workout arrangements with borrowers who are in default; mandates clear and balanced advertisements and other communications; encourages arrangements for the escrowing of real estate taxes and insurance; and states that institutions should develop strong control and monitoring systems.
The federal banking agencies have announced their intention to carefully review the risk management and consumer compliance processes, policies and procedures of their supervised financial institutions and their intention to take action against institutions that engage in predatory lending practices, violate consumer protection laws or fair lending laws, engage in unfair or deceptive acts or practices, or otherwise engage in unsafe or unsound lending practices.
Guidance on Commercial Real Estate Concentrations
.
The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk: total loans for construction, land development, and other land represent 100% or more of the bank's total capital; or total commercial real estate loans (as defined in the guidance) greater than 300% of the Bank's total capital and an increase in the bank's commercial real estate portfolio of 50% or more during the prior 36 months.
Capital Rules
.
The regulatory capital ratios of the federal banking agencies implement the "Basel III" regulatory capital reforms and changes required by the Dodd-Frank Act. "Basel III" refers to various documents released by the Basel Committee on Banking Supervision. The capital regulations became effective January 1, 2015 (with some provisions transitioned into full effectiveness over two to four years). The new requirements created a new ratio for common equity Tier 1 ("CET1") capital, increased the leverage and Tier 1 capital ratios, changed the risk-weights of certain assets for purposes of the risk-based capital ratios, created an additional capital conservation buffer over the minimum capital ratios, and changed what qualifies as regulatory capital.
Under the new requirements, the minimum capital ratios are: a ratio of CET1 capital to total risk-weighted assets of 4.5%, a ratio of Tier 1 capital to risk-weighted assets of 6.0%, a ratio of total capital to risk-weighted assets of 8.0%, and a leverage ratio of 4.0%. The new requirements apply to the Bank and the Company.
Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock are deducted from capital, subject to a two-year transition period. CET1 capital consists of Tier 1 capital less all capital components that are not considered common equity. Tier 1 capital generally includes accumulated other comprehensive income, which includes all unrealized gains and losses on available for sale debt and equity securities, subject to a two-year transition period. Because of its asset size, Southern Bank had the one-time option and elected in the first quarter of calendar year 2015 to permanently opt-out of the inclusion of accumulated other comprehensive income in its capital calculations, to reduce the impact of market volatility on its regulatory capital levels. For a bank holding company with less than $15 billion in consolidated assets as of December 31, 2009, TARP and cumulative perpetual preferred stock included in Tier 1 capital prior to May 19, 2010 is grandfathered and included as Tier 1 capital under the new capital regulations.
The new requirements also include changes in the risk-weights of certain assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%); a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk-weights (0% to 600%) for equity exposures.
In addition to the minimum CET1, Tier 1, and total capital ratios, Southern Bank and the Company must maintain a capital conservation buffer consisting of additional CET1 capital equal to 2.5% of risk-weighted assets above each of the required minimum risk-based capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying certain discretionary bonuses. The capital conservation buffer requirement is phased in beginning in January 2016 at 0.625% of risk-weighted assets and increases each year by that amount until fully implemented in January 2019. If the Company or the Bank fails to meet the buffer requirement, it will be subject to restrictions on the payment of dividends or discretionary bonuses and repurchases of stock.
As of June 30, 2018, Southern Bank and the Company met all these new requirements, including the full 2.5% capital conservation buffer, as if phased-in requirements had been fully in effect on that date.
Activities and Investments of Insured State-Chartered Banks.
Subject to certain regulatory exceptions, the FDIA and FDIC regulations provide that an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as "principal" in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the Deposit Insurance Fund and that the bank is in compliance with applicable regulatory capital requirements.
Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors', trustees' and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met.
Affiliate Transactions.
The Company and the Bank are separate and distinct legal entities. Various legal limitations restrict the Bank from lending to or otherwise engaging in transactions with the Company (or any other affiliate), generally limiting such transactions with an affiliate to 10% of the Bank's capital and surplus and limiting all such transactions with all affiliates to 20% of the Bank's capital and surplus. Such transactions, including extensions of credit, sales of securities or assets and provision of services, also must be on terms and conditions consistent with safe and sound banking practices, including credit standards, that are substantially the same or at least as favorable to the Bank as those prevailing at the time for transactions with unaffiliated companies.
Federally insured banks are subject, with certain exceptions, to certain additional restrictions (including collateralization) on extensions of credit to their parent holding companies or other affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or securities as collateral from any borrower. In addition, such banks are prohibited from engaging in certain tying arrangements in connection with any extension of credit or the providing of any property or service.
Community Reinvestment Act.
Banks are also subject to the provisions of the Community Reinvestment Act of 1977 ("CRA"), which requires the appropriate federal bank regulatory agency, in connection with its regular examination of a bank, to assess the bank's record in meeting the credit needs of the community serviced by the bank, including low and moderate income neighborhoods. The regulatory agency's assessment of the bank's record is made available to the public. Further, such assessment is required of any bank which has applied, among other things, to establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a financial institution. The Bank received a "satisfactory" rating during its most recent CRA examination.
Dividends.
Dividends from the Bank constitute the major source of funds for dividends that may be paid by the Company. The amount of dividends payable by the Bank to the Company depends upon the Bank's earnings and capital position, and is limited by federal and state laws, regulations and policies.
The amount of dividends actually paid by the Bank during any one period will be strongly affected by the Bank's management policy of maintaining a strong capital position. Dividends can be restricted if the capital conservation buffer is not maintained as described under "Capital Rules" above. Federal law further provides that no insured depository institution may make any capital distribution (which would include a cash dividend) if, after making the distribution, the institution would be "undercapitalized," as defined in the prompt corrective action regulations. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments should be deemed to constitute an unsafe and unsound practice.
The Company
Federal Securities Law.
The stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As such, the Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act.
The Company's stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period.
Bank Holding Company Regulation.
Bank holding companies are subject to comprehensive regulation by the FRB under the Bank Holding Company Act ("BHCA"). As a bank holding company, the Company is required to file reports with the FRB and such additional information as the FRB may require, and the Company and its non-banking affiliates are subject to examination by the FRB. Under FRB policy, a bank holding company must serve as a source of financial strength for its subsidiary banks. Under this policy the FRB may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized subsidiary bank. Under the Dodd-Frank Act, this policy is codified and rules to implement it are to be established. Under the BHCA, a bank holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.
The Company is subject to the activity limitations imposed on bank holding companies that are not financial holding companies. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain activities which are permitted, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the FRB includes, among other things, operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers' checks and United States Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.
TAXATION
Federal Taxation
General.
The Company and the Bank report their income on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company.
On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 35 percent to 21 percent, as well as other changes. As a result of enactment of the legislation, the Company incurred additional one-time income tax expense of $998,050 during the second quarter of fiscal 2018, primarily related to the remeasurement of certain deferred tax assets and liabilities.
Bad Debt Reserve.
Historically, savings institutions, such as the Bank used to be, which met certain definitional tests primarily related to their assets and the nature of their business ("qualifying thrift"), were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income. The Bank's deductions with respect to their loans, which are generally loans secured by certain interests in real property, historically has been computed using an amount based on the Bank's actual loss experience, in accordance with IRC Section 585(B)(2). Due to the Bank's loss experience, the Bank generally recognized a bad debt deduction equal to their net charge-offs.
The Bank's average assets for the current year exceeded $500 million, thus classifying it as a large bank for purposes of IRC Section 585. Under IRC Section 585(c)(3), a bank that becomes a large bank must change its method of accounting from the reserve method to a specific charge-off method under IRC Section 166. The Bank's deductions with respect to their loans are computed under the specific charge-off method. The specific charge-off method will be used in the current year and all subsequent tax years.
Dividends-Received Deduction.
The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted.
Missouri Taxation
General.
Missouri-based banks, such as the Bank, are subject to a Missouri bank franchise and income tax.
Bank Franchise Tax.
The Missouri bank franchise tax is imposed on (i) the bank's taxable income at the rate of 7%, less credits for certain Missouri taxes, including income taxes. However, the credits exclude taxes paid for real estate, unemployment taxes, bank tax, and taxes on tangible personal property owned by the Bank and held for lease or rentals to others - income-based calculation; and (ii) the bank's net assets at a rate of .007%. Net assets are defined as total assets less deposits and the investment in greater than 50% owned subsidiaries - asset-based calculation.
Income Tax.
The Bank and its holding company and related subsidiaries are subject to an income tax that is imposed on the consolidated taxable income apportioned to Missouri at the rate of 6.25%. The return is filed on a consolidated basis by all members of the consolidated group including the Bank.
Arkansas Taxation
General.
Due to its loan activity and the acquisitions of Arkansas banks in recent periods, the Bank is subject to an Arkansas income tax. The tax is imposed on the Bank's apportioned taxable income at a rate of 6%.
Illinois Taxation
General.
Due to its loan activity and the acquisitions of Illinois banks in recent periods, the Bank is subject to an Illinois income tax. The tax is imposed on the Bank's apportioned taxable income at a rate of 9.5%.
Audits
There have been no IRS audits of the Company's Federal income tax returns or audits of the Bank's state income tax returns during the past five years.
For additional information regarding taxation, see Note 11 of Notes to the Consolidated Financial Statements contained in Item 8.
PERSONNEL
As of June 30, 2018, the Company had 374 full-time employees and 41 part-time employees. The Company believes that employees play a vital role in the success of a service company and that the Company's relationship with its employees is good. The employees are not represented by a collective bargaining unit.
EXECUTIVE OFFICERS
Greg A. Steffens
, the Company's President and Chief Executive Officer, joined our Company in 1998 as Chief Financial Officer, and was appointed President and CEO in 1999. He has over 28 years of experience in the banking industry, including service from 1993 to 1998 as chief financial officer of Sho-Me Financial Corp (Mount Vernon, Missouri), prior to the sale of that company to Union Planters Corporation. Mr. Steffens also served from 1989 to 1993 as an examiner with the Office of Thrift Supervision. Mr. Steffens holds a Bachelor of Science Degree in Business Administration-Accounting and Finance from the University of Central Missouri, Warrensburg, Missouri.
Matthew T. Funke
, the Company's Chief Financial Officer, joined our Company in 2003. He has more than 19 years of banking and finance experience. Mr. Funke was initially hired to establish an internal audit function for the Company, and served as internal auditor and compliance officer until 2006, when he was named Chief Financial Officer. Previously, Mr. Funke was employed with Central Bancompany, Inc. (Jefferson City, Missouri), where he advanced to the role of internal audit manager, and as a fiscal analyst with the Missouri General Assembly. Mr. Funke holds a Bachelor of Science Degree in Accounting from Missouri State University, Springfield, Missouri, and is a graduate of the Southwest Graduate School of Banking at SMU, Dallas, Texas.
Kimberly A. Capps
, the Company's Chief Operations Officer, joined our Company in 1994. She has over 25 years banking experience. Ms. Capps is responsible for the Company's retail deposit operations, product development and marketing, and data processing and network administration functions. Ms. Capps was initially hired by our bank subsidiary as controller, and was named Chief Financial Officer in 2001. In 2006, Ms. Capps was named Chief Operations Officer. Prior to joining the Company, Ms. Capps was employed for more than three years with the accounting firm of Kraft, Miles & Tatum, where she specialized in financial institution audits and taxation. She holds a Bachelor of Science Degree in Business Administration-Accounting from Southeast Missouri State University, Cape Girardeau, Missouri.
Lora L. Daves
, the Company's Chief Risk Officer, has worked for us since 2006. Ms. Daves is responsible for the oversight of the Company's internal audit, loan review, and compliance functions. Ms. Daves also oversees the Company's quarterly stress testing of its commercial real estate portfolio and the credit analysis of proposed new credits. Ms. Daves served as our Chief Credit Officer from 2006 through 2016. Ms. Daves has over 29 years of banking and finance experience, including 11 years beginning with Mercantile Bank of Poplar Bluff, which merged with and into US Bank, a subsidiary of U.S. Bancorp (Minneapolis, Minnesota) during her tenure there. Ms. Daves' responsibilities with US Bank included credit analysis, underwriting, credit presentation, credit approval, monitoring credit quality, and analysis of the allowance for loan losses. She advanced to hold responsibility for regional credit administration, loan review, compliance, and problem credit management. Ms. Daves' experience also includes four years as Chief Financial Officer of a southeast Missouri healthcare provider which operated a critical access hospital, eight rural health clinics, two retail pharmacies, an ambulatory surgery center, and provided outpatient radiology and physical therapy services; and four years with a national real estate development and management firm, working in their St. Louis-based Midwest regional office as a general accounting manager. Ms. Daves holds a Bachelor of Science Degree in Business Administration-Accounting from Southeast Missouri State University, Cape Girardeau, Missouri.
Justin G. Cox
is our Regional President for the Bank's west region, in which role he is responsible for loan production activity in the region, and also provides joint oversight of the deposit-taking operation in the region. Mr. Cox joined our Company in 2010 as a lending officer, as an integral part of the team which established our presence in Springfield, Missouri, through the opening of a loan production office in that market. Mr. Cox has more than 15 years banking experience. He previously worked for Metropolitan National Bank (Springfield, Missouri), and advanced to the role of Vice President of Lending for that institution. Mr. Cox holds a Bachelor of Science Degree in Business Administration-Marketing & Management from Southwest Baptist University, Bolivar, Missouri.
Mark E. Hecker
, the Company's Chief Credit Officer, has worked for us since January 23, 2017. Mr. Hecker is responsible for administration of the Company's credit portfolio, including the approval process for proposed new credits and monitoring of the portfolio's credit quality. Mr. Hecker has over 28 years of banking experience, having most recently served twelve years with BankLiberty (Liberty, Missouri) as its Chief Lending Officer. Prior to that, Mr. Hecker served as a commercial banker for Midland Bank (Lee's Summit, Missouri) and its successor organization, Commercial Federal Bank (Omaha, Nebraska) for eight years. Mr. Hecker was employed as an examiner with the FDIC for more than six years and is a Commissioned Bank Examiner. Mr. Hecker holds a Bachelor of Science Degree in Business Administration-Accounting from the University of Central Missouri, Warrensburg, Missouri.
Rick A. Windes
, the Company's Chief Lending Officer, joined our Company May 7, 2018. Mr. Windes is responsible for the Company's loan production. Mr. Windes has 25 years' experience in commercial lending and lending management. Most recently, he served as a regional president in Springfield, Missouri, for Bear State Bank (Little Rock, Arkansas), prior to its merger with Arvest Bank. Previously, he was the senior lender for Metropolitan National Bank (Springfield, Missouri) prior to its acquisition by Bear State Bank. Mr. Windes holds a Bachelor of Science Degree in Business Administration from Truman State University, Kirksville, Missouri, and is a graduate of the Graduate School of Banking at Colorado, Boulder, Colorado.
INTERNET WEBSITE
We maintain a website with the address of
www.bankwithsouthern.com
. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. This Annual Report on Form 10-K and our other reports, proxy statements and other information, including earnings press releases, filed with the SEC are available at
http://investors.bankwithsouthern.com
. For more information regarding access to these filings on our website, please contact our Corporate Secretary, Southern Missouri Bancorp, Inc., 2991 Oak Grove Road, Poplar Bluff, Missouri, 63901; telephone number (573) 778-1800.
Item 1A.
Risk Factors
Risks Relating to Our Business and Operating Environment
An investment in our securities is subject to inherent risks. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. The value or market price of our securities could decline due to any of these identified or other risks, and you could lose all or part of your investment.
We may fail to realize all of the anticipated benefits of our acquisition activities.
The success of our acquisition activities depend on, among other things, our ability to realize anticipated cost savings and to combine the businesses of the companies in a manner that does not materially disrupt the existing customer relationships of the companies or result in decreased revenues from customers. If we are unable to achieve these objectives, the anticipated benefits of the acquisitions may not be realized fully, if at all, or may take longer to realize than expected.
Our allowance for loan losses may be insufficient to absorb losses in our loan portfolio.
Lending money is a substantial part of our business. Every loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to ensure repayment. This risk is affected by, among other things:
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cash flow of the borrower and/or the project being financed;
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in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
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the credit history of a particular borrower;
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changes in economic and industry conditions; and
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the duration of the loan.
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We maintain an allowance for loan losses which we believe is appropriate to provide for potential losses in our loan portfolio. The amount of this allowance is determined by our management through a periodic review and consideration of several factors, including, but not limited to:
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the quality, size and diversity of the loan portfolio;
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evaluation of non-performing loans;
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historical default and loss experience;
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historical recovery experience;
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risk characteristics of the various classifications of loans; and
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the amount and quality of collateral, including guarantees, securing the loans.
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If loan losses exceed the allowance for loan losses, our business, financial condition and profitability may suffer.
If our nonperforming assets increase, our earnings will be adversely affected.
At June 30,
2018
and June 30, 2017, our nonperforming assets were $13.1 million and $6.3 million, respectively, or 0.69% and 0.37% of total assets, respectively. Our nonperforming assets adversely affect our net income in various ways:
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We do not accrue interest income on nonaccrual loans, nonperforming investment securities, or other real estate owned.
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We must provide for probable loan losses through a current period charge to the provision for loan losses.
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Non-interest expense increases when we must write down the value of properties in our other real estate owned portfolio to reflect changing market values or recognize other-than-temporary impairment on nonperforming investment securities.
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There are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees related to our other real estate owned.
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The resolution of nonperforming assets requires the active involvement of management, which can divert management's attention from more profitable activities.
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If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.
Changes in economic conditions, particularly an economic slowdown in southern Missouri or northern Arkansas, could hurt our business.
Our business is directly affected by market conditions, trends in industry and finance, legislative and regulatory changes, and changes in governmental monetary and fiscal policies and inflation, all of which are beyond our control. The housing and real estate sectors have recovered since the 2008 economic slowdown and are currently expanding. However, future deterioration in economic conditions, particularly within our primary market area in southern Missouri and northern Arkansas, could result in the following consequences, among others, any of which could hurt our business materially:
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loan delinquencies may increase;
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problem assets and foreclosures may increase;
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demand for our products and services may decline;
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loan collateral may decline in value, in turn reducing a customer's borrowing power and reducing the value of collateral securing our loans; and
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the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
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Downturns in the real estate markets in our primary market area could hurt our business.
Our business activities and credit exposure are primarily concentrated in southern Missouri and northern Arkansas. While we did not and do not have a sub-prime lending program, our residential real estate, construction and land loan portfolios, our commercial and multi-family loan portfolios and certain of our other loans could be affected by the downturn in the residential real estate market. We anticipate that significant declines in the real estate markets in our primary market area would hurt our business and would mean that collateral for our loans would hold less value. As a result, our ability to recover on defaulted loans by selling the underlying real estate would be diminished, and we would be more likely to suffer losses on defaulted loans. The events and conditions described in this risk factor could therefore have a material adverse effect on our business, results of operations and financial condition.
Our construction lending exposes us to significant risk.
Our construction loan portfolio, which totaled $112.7 million, or 7.21% of loans, net, at June 30,
2018
, includes residential and non-residential construction and development loans. This type of lending is generally considered to have more complex credit risks than traditional single-family residential lending because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and sale, leasing, or operation of the related real estate project. Consequently, these loans are often more sensitive to adverse conditions in the real estate market or the general economy than other real estate loans. These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a market decline. Additionally, we may experience significant construction loan losses because independent appraisers or project engineers inaccurately estimate the cost and value of construction loan projects.
Deterioration in our construction portfolio could result in increases in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.
Our loan portfolio possesses increased risk due to our percentage of commercial real estate and commercial business loans.
At June 30, 2018, 60.6
%
of our loans, net, consisted of commercial real estate and commercial business loans to small and mid-sized businesses, generally located in our primary market area, which are the types of businesses that have a heightened vulnerability to local economic conditions. Over the last ten years, we have increased this type of lending from 47.5% of our portfolio at June 30, 2008, in order to improve the yield on our assets. At June 30, 2018, our loan portfolio included
$704.6
million of commercial real estate loans and
$281.3
million of commercial business loans compared to
$603.9
million and
$247.2
million, respectively, at June 30, 2017. The credit risk related to these types of loans is considered to be greater than the risk related to one- to four-family residential loans because the repayment of commercial real estate loans and commercial business loans typically is dependent on the successful operation and income stream of the borrower's business or the real estate securing the loans as collateral, which can be significantly affected by economic conditions. Additionally, commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. Commercial loans not collateralized by real estate are often secured by collateral that may depreciate over time, be difficult to appraise and fluctuate in value (such as accounts receivable, inventory and equipment). If loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could require us to increase our provision for loan losses and adversely affect our operating results and financial condition.
Several of our commercial borrowers have more than one commercial real estate or business loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to any one- to four-family residential mortgage loan. Finally, if we foreclose on a commercial real estate loan, our holding period for the collateral, if any, typically is longer than for one- to four-family residential property because there are fewer potential purchasers of the collateral. Since we plan to continue to increase our originations of these loans, it may be necessary to increase the level of our allowance for loan losses due to the increased risk characteristics associated with these types of loans. Any increase to our provision for loan losses would adversely affect our operating results and financial condition. Any delinquent payments or the failure to repay these loans would hurt our operating results and financial condition.
Included in the commercial real estate loans described above are agricultural real estate loans totaling
$160.3
million, or 10.3
%
of our loan portfolio, net, at June 30, 2018. Agricultural real estate lending involves a greater degree of risk and typically involves larger loans to single borrowers than lending on single-family residences. Payments on agricultural real estate loans are dependent on the profitable operation or management of the farm property securing the loan. The success of the farm may be affected by many factors outside the control of the farm borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields (such as hail, drought and floods), loss of livestock due to disease or other factors, declines in market prices for agricultural products (both domestically and internationally) and the impact of government regulations (including changes in price supports, subsidies and environmental regulations). In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower's ability to repay the loan may be impaired. The primary agricultural activity in our market areas is
livestock, dairy, poultry, rice, timber, soybeans,
wheat, melons, corn, and cotton
. Accordingly, adverse circumstances affecting these activities could have an adverse effect on our agricultural real estate loan portfolio. Our agricultural real estate lending has grown significantly since June 30, 2008,
when these loans totaled
$14.9
million, or 4.2
%
of our loan portfolio.
Included in the commercial business loans described above are agricultural production and equipment loans. At June 30, 2018, these loans totaled $81.5 million, or 5.2%, of our loan portfolio, net. As with agricultural real estate loans, the repayment of operating loans is dependent on the successful operation or management of the farm property. The same risk applies to agricultural operating loans which are unsecured or secured by rapidly depreciating assets such as farm equipment or assets such as livestock or crops. Any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation to the collateral. Our agricultural operating loans have also grown significantly since June 30, 2008,
when such loans totaled $22.7 million, or 6.4% of our loan portfolio.
Continued growth of our commercial real estate and commercial business loan portfolios may increase the risk of credit defaults in the future.
Due to our increasing emphasis on commercial real estate and commercial business lending, a substantial amount of the loans in our commercial real estate and commercial business portfolios and our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as "seasoning." A portfolio of older loans will usually behave more predictably than a newer portfolio. Commercial real estate and commercial business loans naturally create portfolio "churn" as loans are originated and repaid. As a result, our portfolio consists of a mix of seasoned and unseasoned loans. We believe that our underwriting practices are sound and based on industry standards and best practices. However, a significant portion of our loan portfolio is relatively new, therefore, the current level of delinquencies and defaults may not be representative of the level that will prevail as the portfolio becomes more seasoned, which may be higher than current levels. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition.
As we approach thresholds defined in interagency guidance on commercial real estate concentrations, we may incur additional expense or slow the growth of certain categories of commercial real estate lending.
The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending (see "REGULATION"). For the purposes of this guidance, "commercial real estate" includes, among other types, multi-family residential loans and non-owner occupied nonresidential loans, two categories which have been a source of loan growth for the Company. A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk: total loans for construction land development and other land representing 100% or more of the bank's total capital; or total commercial real estate loans (as defined in the guidance) that exceed 300% of the bank's total capital and the bank's commercial real estate portfolio has increased by 50% or more during the prior 36 months.
During fiscal 2017, the Bank exceeded the 300% threshold for non-owner occupied commercial real estate loans as a percentage of total regulatory capital for the first time at September 30, 2016, and remained above the threshold for most of fiscal 2017, before declining to 271% at June 30, 2017. The Bank's highest level during fiscal 2017 was 303% at December 31, 2016. The lower level at June 30, 2017, was the result of additional capital invested in the Bank by the Company following the June at-the-market common stock offering completed by the Company, and from additional capital resulting from the acquisition and merger of Tammcorp, Inc., and its bank subsidiary, Capaha Bank, with and into Southern Missouri Bancorp, Inc., while Capaha Bank held a lower percentage of its loans in non-owner occupied commercial real estate loans. During fiscal 2018, the Bank remained below the 300% threshold throughout the fiscal year, and reported total commercial real estate loans (as defined in the guidance) of 241% of the Bank's total capital at June 30, 2018.
During fiscal 2017, the Company's non-owner occupied commercial real estate loans peaked at 293% of total regulatory capital at December 31, 2016, before declining to 256% at June 30, 2017, with this decline also attributable to additional capital provided by the at-the-market common offering completed by the Company in June, as well as the Tammcorp, Inc., acquisition. During fiscal 2018, the Company also remained below the 300% threshold throughout the fiscal year, and reported total commercial real estate loans (as defined in the guidance) of 233% of the Company's total capital at June 30, 2018.
The Bank and Company may again see its non-owner occupied commercial real estate lending grow as a percentage of total regulatory capital, or it may slow the growth of this type of lending activity. Should we continue to grow this category of our loan portfolio, we may incur additional expense to meet the heightened supervisory expectations related to this lending activity. If we slow the growth of commercial real estate loans generally, or particular concentrations of borrowers or categories of properties within that definition, we may be negatively impacted in terms of our asset growth, net interest margin and earnings, leverage, or other targets.
Changes in interest rates may negatively affect our earnings and the value of our assets.
Our earnings and cash flows depend substantially upon our net interest income. Net interest income is the difference between interest income earned on interest-earnings assets, such as loans and investment securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are sensitive to many factors that are beyond our control, including general economic conditions, competition and policies of various governmental and regulatory agencies and, in particular, the policies of the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investment securities and the amount of interest we pay on deposits and borrowings, but these changes could also affect: (i) our ability to originate loans and obtain deposits; (ii) the fair value of our financial assets and liabilities, including our securities portfolio; and (iii) the average duration of our interest-earning assets. This also includes the risk that interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rate indices underlying various interest-earning assets and interest-bearing liabilities may not change in the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk), including a prolonged flat or inverted yield curve environment. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or an adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry generally.
We have pursued a strategy of supplementing internal growth by acquiring other financial companies or their assets and liabilities that we believe will help fulfill our strategic objectives and enhance our earnings. There are risks associated with this strategy, including the following:
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We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be adversely affected;
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Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices we considered acceptable and expect that we will experience this condition in the future;
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The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into us to make the transaction economically successful. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, or at all, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful.
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To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill. We are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition;
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To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing shareholders; and
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We have completed three acquisitions within the past five years and opened additional banking offices in the past few years that enhanced our rate of growth. We do not necessarily expect to be able to maintain our past rate of growth, and may not be able to grow at all in the future.
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Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. While we anticipate that our capital resources will satisfy our capital requirements for the foreseeable future, we may at some point need to raise additional capital to support our operations or continued growth, both internally and through acquisitions. Any capital we obtain may result in the dilution of the interests of existing holders of our common stock, or otherwise adversely affect your investment.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances of our ability to raise additional capital if needed, or if the terms will be acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our financial condition and liquidity could be materially and adversely affected.
Legislative or regulatory changes or actions, or significant litigation, could adversely impact us or the businesses in which we are engaged.
The financial services industry is extensively regulated. We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds, and not to benefit our shareholders. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution's allowance for loan losses. Additionally, actions by regulatory agencies or significant litigation against us could require us to devote significant time and resources to defending our business and may lead to penalties that materially affect us and our shareholders.
Impairment of investment securities, other intangible assets, or deferred tax assets could require charges to earnings, which could negatively impact our results of operations.
In assessing the impairment of investment securities, we consider the length of time and extent to which the fair value of the securities has been less than the cost of the securities, the financial condition and near-term prospects of the issuers, whether the market decline was affected by macroeconomic conditions and whether we have the intent to sell the debt security or will be required to sell the debt security before its anticipated recovery. In fiscal 2009, we incurred charges to recognize the other-than-temporary impairment (OTTI) of available-for-sale investments related to investments in Freddie Mac preferred stock ($304,000 impairment realized in the first quarter of fiscal 2009) and a pooled trust preferred collateralized debt obligation, Trapeza CDO IV, Ltd., class C2 ($375,000 impairment realized in the second quarter of fiscal 2009). We currently hold two additional collateralized debt obligations (CDOs) which have not been deemed other-than-temporarily impaired, based on our best judgment using information currently available.
Under current accounting standards, goodwill and certain other intangible assets with indeterminate lives are no longer amortized but, instead, are assessed for impairment periodically or when impairment indicators are present. As of June 30, 2018, we determined that none of our goodwill or other intangible assets was impaired.
Deferred tax assets are only recognized to the extent it is more likely than not they will be realized. Should our management determine it is not more likely than not that the deferred tax assets will be realized, a valuation allowance with a charge to earnings would be reflected in the period. At June 30, 2018, our net deferred tax asset was
$4.4
million, none of which was disallowed for regulatory capital purposes. Based on the levels of taxable income in prior years and our expectation of profitability in the current year and future years, management has determined that no valuation allowance was required at June 30, 2018. If we are required in the future to take a valuation allowance with respect to our deferred tax asset, our financial condition, results of operations and regulatory capital levels would be negatively affected.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral we hold cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the loan. We cannot assure you that any such losses would not materially and adversely affect our business, financial condition or results of operations.
Non-compliance with USA Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury's Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. Several banking institutions have received large fines for non-compliance with these laws and regulations. Although we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.
We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations, some of which is expected to increase our costs of operations.
We are currently subject to extensive examination, supervision and comprehensive regulation by the FDIC and the DFI and by the Federal Reserve. The FDIC, DFI and the Federal Reserve govern the activities in which we may engage, primarily for the protection of depositors and the Deposit Insurance Fund. These regulatory authorities have extensive discretion, including the ability to restrict an institution's operations, require the institution to reclassify assets, determine the adequacy of the institution's allowance for loan losses and determine the level of deposit insurance premiums assessed. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material adverse impact on our operations. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or growth prospects. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things.
The Dodd-Frank Act has significantly changed the bank regulatory structure and will affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting and implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
Certain provisions of the Dodd-Frank Act are expected to have a near term impact on us. For example, a provision of the Dodd-Frank Act eliminates the federal prohibition on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Financial institutions, such as our subsidiary banks, with $10 billion or less in assets continue to be examined for compliance with the consumer laws by their primary bank regulators.
It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense. Any additional changes in our regulation and oversight, whether in the form of new laws, rules or regulations, could make compliance more difficult or expensive or otherwise materially adversely affect our business, financial condition or prospects.
Significant legal actions could subject us to substantial liabilities.
We are from time to time subject to claims related to our operations. These claims and legal actions, including supervisory actions by our regulators, could involve large monetary claims and significant defense costs. As a result, we may be exposed to substantial liabilities, which could adversely affect our results of operations and financial condition.
Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
We face substantial competition in all phases of our operations from a variety of competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. To date, we have grown our business successfully by focusing on our business lines in geographic markets and emphasizing the high level of service and responsiveness desired by our customers. We compete for loans, deposits and other financial services with other commercial banks, thrifts, credit unions, brokerage houses, mutual funds, insurance companies and specialized finance companies. Many of our competitors offer products and services that we do not offer, and many have substantially greater resources and lending limits, name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, and smaller newer competitors may also be more aggressive in terms of pricing loan and deposit products than we are in order to obtain a share of the market. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies, federally insured state-chartered banks, national banks and federal savings banks. As a result, these nonbank competitors have certain advantages over us in accessing funding and in providing various services.
We are subject to security and operational risks relating to our use of technology that could damage our reputation and business.
Security breaches in our internet banking activities could expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures, which could damage our reputation and business.
We are subject to security and operational risks relating to our use of technology that could damage our reputation and business.
Security breaches in our internet banking activities could expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures, which could damage our reputation and business.
We face significant operational risks because the financial services business involves a high volume of transactions and increased reliance on technology, including risk of loss related to cyber-security breaches.
We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions and to collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others and concerning our own business, operations, plans and strategies. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of operational deficiencies or as a result of non-compliance with applicable regulatory standards or customer attrition due to potential negative publicity. In addition, we outsource some of our data processing to certain third-party providers. If these third-party providers encounter difficulties, including as a result of cyber-attacks or information security breaches, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected.
In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, or a breach of our security systems, including if confidential or proprietary information were to be mishandled, misused or lost, we could suffer financial loss, face regulatory action, civil litigation and/or suffer damage to our reputation.
Our information technology systems may be subject to failure, interruption or security breaches.
Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities investments, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions and security breaches, including privacy breaches and cyber attacks, but such events may still occur or may not be adequately addressed if they do occur.
There have been increasing efforts by third parties to breach data security at financial institutions. There have been several recent instances involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data. Although we take protective measures, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber attacks that could have an impact on information security. Because the techniques used to cause security breaches change frequently, we may be unable to proactively address these techniques or to implement adequate preventative measures.
In addition, we outsource some of our data processing requirements to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with those service providers, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business, subject us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.
Risks Relating to Our Common Stock
The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell our common stock when you want or at prices you find attractive.
We cannot predict how our common stock will trade in the future. The market value of our common stock will likely continue to fluctuate in response to a number of factors including the following, most of which are beyond our control, as well as the other factors described in this "Risk Factors" section:
·
|
actual or anticipated quarterly fluctuations in our operating and financial results;
|
·
|
developments related to investigations, proceedings or litigation;
|
·
|
changes in financial estimates and recommendations by financial analysts;
|
·
|
dispositions, acquisitions and financings;
|
·
|
actions of our current shareholders, including sales of common stock by existing shareholders and our directors and executive officers;
|
·
|
fluctuations in the stock prices and operating results of our competitors;
|
·
|
regulatory developments; and
|
·
|
other developments in the financial services industry.
|
The market value of our common stock may also be affected by conditions affecting the financial markets in general, including price and trading fluctuations. These conditions may result in (i) volatility in the level of, and fluctuations in, the market prices of stocks generally and, in turn, our common stock and (ii) sales of substantial amounts of our common stock in the market, in each case that could be unrelated or disproportionate to changes in our operating performance. These broad market fluctuations may adversely affect the market value of our common stock.
There may be future sales of additional common stock or other dilution of our shareholders' equity, which may adversely affect the market price of our common stock.
We are not restricted from issuing additional common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or similar securities in the market or the perception that such sales could occur.
We may issue debt and equity securities that are senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock.
In the future, we may increase our capital resources by entering into debt or debt-like financing or issuing debt or equity securities, which could include issuances of senior notes, subordinated notes, preferred stock or common stock. In the event of the liquidation of Southern Missouri Bancorp, Inc., its lenders and holders of its debt or preferred securities would receive a distribution of the available assets of Southern Missouri Bancorp, Inc., before distributions to the holders of our common stock. Our decision to incur debt and issue other securities in future offerings will depend on market conditions and other factors beyond our control. We cannot predict or estimate the amount, timing or nature of our future offerings and debt financings. Future offerings could reduce the value of our common stock and dilute the interests of our shareholders.
Regulatory and contractual restrictions may limit or prevent us from paying dividends on and repurchasing our common stock.
Southern Missouri Bancorp, Inc., is an entity separate and distinct from its subsidiary bank, and derives substantially all of its revenue in the form of dividends from the subsidiary. Accordingly, the Company is and will be dependent upon dividends from its subsidiary bank to pay the principal of and interest on its indebtedness, to satisfy its other cash needs and to pay dividends on its common and preferred stock. The Bank's ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event the subsidiary bank is unable to pay dividends to the Company, the Company may not be able to pay dividends on its common or preferred stock. Also, the Company's right to participate in a distribution of assets upon the subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors. In addition,
holders of our common stock are entitled to receive dividends only when, as and if declared by our board of directors. Although we have historically paid cash dividends on our common stock, we are not required to do so and our board of directors could reduce, suspend or eliminate our common stock cash dividend in the future.
If we defer interest payments on our outstanding junior subordinated debt securities or if certain defaults relating to those debt securities occur, we will be prohibited from declaring or paying dividends or distributions on, and from making liquidation payments with respect to, our common stock.
As of June 30, 2018, we had outstanding $16.8 million aggregate principal amount of junior subordinated debt securities issued in connection with the sale of trust preferred securities by subsidiaries of ours that are statutory business trusts. As of that date, those debt securities were carried at a fair value of $14.9 million.
We guarantee the trust preferred securities described above. The indentures under which the junior subordinated debt securities were issued, together with the guarantee, prohibits us, subject to limited exceptions, from declaring or paying any dividends or distributions on, or redeeming, repurchasing, acquiring or making any liquidation payments with respect to, any of our capital stock at any time when (i) there shall have occurred and be continuing an event of default under the indenture; or (ii) we are in default with respect to payment of any obligations under the guarantee; or (iii) we have elected to defer payment of interest on the junior subordinated debt securities. In that regard, we are entitled, at our option but subject to certain conditions, to defer payments of interest on the junior subordinated debt securities from time to time for up to five years.
Events of default under the indentures generally consist of our failure to pay interest on the junior subordinated debt securities under certain circumstances, our failure to pay any principal of or premium on such junior subordinated debt securities when due, our failure to comply with certain covenants under the indenture, and certain events of bankruptcy, insolvency or liquidation relating to us.
As a result of these provisions, if we were to elect to defer payments of interest on the junior subordinated debt securities, or if any of the other events described in clause (i) or (ii) of the first paragraph of this risk factor were to occur, we would be prohibited from declaring or paying any dividends on our common stock, from redeeming, repurchasing or otherwise acquiring any of our common stock, and from making any payments to holders of our common stock in the event of our liquidation, which would likely have a material adverse effect on the market value of our common stock. Moreover, without notice to or consent from the holders of our common stock, we may issue additional series of junior subordinated debt securities in the future with terms similar to those of our existing junior subordinated debt securities or enter into other financing agreements that limit our ability to purchase or to pay dividends or distributions on our capital stock, including our common stock.
Anti-takeover provisions could negatively impact our shareholders.
Provisions of our articles of incorporation and bylaws, Missouri law and various other factors may make it more difficult for companies or persons to acquire control of us without the consent of our board of directors. These provisions include limitations on voting rights of beneficial owners of more than 10% of our common stock, the election of directors to staggered terms of three years and not permitting cumulative voting in the election of directors. Our bylaws also contain provisions regarding the timing and content of shareholder proposals and nominations for service on the Board of Directors.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Description of Properties
At June 30, 2018, the Bank operated from its headquarters, 37 full-service branch offices, and three limited-service branch offices. The Bank owns the office building and related land in which its headquarters are located, and 36 of its other branch offices. The remaining four branches are either leased or partially owned.
For additional information regarding our properties, see "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 5 – Premises and Equipment".
Management believes that our current facilities are adequate to meet our present and immediately foreseeable needs. However, we will continue to monitor customer growth and expand our branching network, if necessary, to serve our customers' needs.
Item 3.
Legal Proceedings
In the opinion of management, the Bank is not a party to any pending claims or lawsuits that are expected to have a material effect on the Bank's financial condition or operations. Periodically, there have been various claims and lawsuits involving the Bank mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank's business. Aside from such pending claims and lawsuits, which are incident to the conduct of the Bank's ordinary business, the Bank is not a party to any material pending legal proceedings that would have a material effect on the financial condition or operations of the Bank.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
|
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
|
|
Equity Securities
|
The common stock of Southern Missouri Bancorp, Inc., is traded under the symbol "SMBC" on the Nasdaq Global Market. The table below shows the high and low closing prices for our common stock for the periods indicated. This information was provided by Nasdaq. At June 30, 2018, there were 8,996,584 shares of common stock outstanding and approximately 267 common stockholders of record.
|
|
Stock Price
|
|
|
|
|
2018 Quarters:
|
|
High
|
|
|
Low
|
|
|
Dividends
per Share
|
|
Fourth Quarter (ended 6/30/2018)
|
|
$
|
39.90
|
|
|
$
|
34.33
|
|
|
$
|
0.11
|
|
Third Quarter (ended 3/31/2018)
|
|
|
38.64
|
|
|
|
33.82
|
|
|
|
0.11
|
|
Second Quarter (ended 12/31/2017)
|
|
|
40.41
|
|
|
|
35.89
|
|
|
|
0.11
|
|
First Quarter (ended 9/30/2017)
|
|
|
36.49
|
|
|
|
31.02
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Quarters:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter (ended 6/30/2017)
|
|
$
|
35.49
|
|
|
$
|
30.97
|
|
|
$
|
0.10
|
|
Third Quarter (ended 3/31/2017)
|
|
|
36.73
|
|
|
|
31.54
|
|
|
|
0.10
|
|
Second Quarter (ended 12/31/2016)
|
|
|
36.59
|
|
|
|
24.30
|
|
|
|
0.10
|
|
First Quarter (ended 9/30/2016)
|
|
|
25.20
|
|
|
|
23.84
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarters:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter (ended 6/30/2016)
|
|
$
|
24.86
|
|
|
$
|
22.79
|
|
|
$
|
0.09
|
|
Third Quarter (ended 3/31/2016)
|
|
|
24.02
|
|
|
|
22.95
|
|
|
|
0.09
|
|
Second Quarter (ended 12/31/2015)
|
|
|
24.40
|
|
|
|
21.26
|
|
|
|
0.09
|
|
First Quarter (ended 9/30/2015)
|
|
|
21.50
|
|
|
|
18.75
|
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our cash dividend payout policy is continually reviewed by management and the Board of Directors. The Company intends to continue its policy of paying quarterly dividends; however, future dividend payments will depend upon a number of factors, including capital requirements, regulatory limitations (See "Item 1. Description of Business – Regulation"), the Company's financial condition, results of operations and the Bank's ability to pay dividends to the Company. The Company relies significantly upon such dividends originating from the Bank to accumulate earnings for payment of cash dividends to stockholders. See "Item 1A. Risk Factors – Risks Relating to our Common Stock – Regulatory and Contractual Restrictions may limit or prevent us from paying dividends on and repurchasing our common stock."
Information regarding our equity compensation plans is included in Part II, Item 11 of this Form 10-K.
On January 2, 2015, the Company declared a two-for-one common stock split in the form of 100% common stock dividend payable on January 30, 2015, to shareholders of record on January 16, 2015. The table above, and all references to stock prices and per share information throughout this annual report on Form 10-K, reflect this split for all periods.
The following table summarizes the Company's stock repurchase activity for each month during the three months ended June 30, 2018.
|
|
Total #
of Shares
Purchased
|
|
|
Average
Price
Paid Per
Share
|
|
|
Total # of Shares
Purchased as Part of a Publicly
Announced
Program
|
|
|
Maximum Number of Shares That
May Yet Be Purchased
|
|
06/01/18 - 06/30/18 period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
05/01/18 - 05/31/18 period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
04/01/18 - 04/30/18 period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The following graph and related discussion are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be "soliciting materials" or to be "filed" with the SEC (other than as provided in Item 201) nor shall this information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained therein, except to the extent that the Company specifically incorporates it by reference into a filing.
The following graph shows a comparison of stockholder return on the common stock of Southern Missouri Bancorp, Inc., to the cumulative total returns for the indices shown below. The graph was compiled by S&P Global Market Intelligence, a division of S&P Global, Inc. The graph assumes an initial investment of $100 and reinvestment of dividends. The graph is historical only and may not be indicative of possible future performance.
Item 6.
Selected Financial Data
(Dollars in thousands)
|
|
At June 30,
|
|
Financial Condition Data
:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Total assets
|
|
$
|
1,886,115
|
|
|
$
|
1,707,712
|
|
|
$
|
1,403,910
|
|
|
$
|
1,300,064
|
|
|
$
|
1,021,422
|
|
Loans receivable, net
|
|
|
1,563,380
|
|
|
|
1,397,730
|
|
|
|
1,135,453
|
|
|
|
1,053,146
|
|
|
|
801,056
|
|
Mortgage-backed securities
|
|
|
90,176
|
|
|
|
78,275
|
|
|
|
71,231
|
|
|
|
70,054
|
|
|
|
58,151
|
|
Cash, interest-bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and investment securities
|
|
|
84,428
|
|
|
|
97,674
|
|
|
|
81,270
|
|
|
|
78,258
|
|
|
|
88,658
|
|
Deposits
|
|
|
1,579,902
|
|
|
|
1,455,597
|
|
|
|
1,120,693
|
|
|
|
1,055,242
|
|
|
|
785,801
|
|
Borrowings
|
|
|
82,919
|
|
|
|
56,849
|
|
|
|
137,301
|
|
|
|
92,126
|
|
|
|
111,033
|
|
Subordinated debt
|
|
|
14,945
|
|
|
|
14,848
|
|
|
|
14,753
|
|
|
|
14,658
|
|
|
|
9,727
|
|
Stockholder's equity
|
|
|
200,694
|
|
|
|
173,083
|
|
|
|
125,966
|
|
|
|
132,643
|
|
|
|
111,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
For the Year Ended June 30,
|
|
Operating Data
:
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
Interest income
|
|
$
|
77,174
|
|
|
$
|
61,488
|
|
|
$
|
56,317
|
|
|
$
|
55,301
|
|
|
$
|
40,471
|
|
Interest expense
|
|
|
14,791
|
|
|
|
10,366
|
|
|
|
9,365
|
|
|
|
8,766
|
|
|
|
7,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
62,383
|
|
|
|
51,122
|
|
|
|
46,952
|
|
|
|
46,535
|
|
|
|
32,986
|
|
Provision for loan losses
|
|
|
3,047
|
|
|
|
2,340
|
|
|
|
2,494
|
|
|
|
3,185
|
|
|
|
1,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision for loan losses
|
|
|
59,336
|
|
|
|
48,782
|
|
|
|
44,458
|
|
|
|
43,350
|
|
|
|
31,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income
|
|
|
13,871
|
|
|
|
11,084
|
|
|
|
9,758
|
|
|
|
8,659
|
|
|
|
6,132
|
|
Noninterest expense
|
|
|
44,475
|
|
|
|
38,252
|
|
|
|
32,686
|
|
|
|
32,285
|
|
|
|
23,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
28,732
|
|
|
|
21,614
|
|
|
|
21,530
|
|
|
|
19,724
|
|
|
|
13,826
|
|
Income taxes
|
|
|
7,803
|
|
|
|
6,062
|
|
|
|
6,682
|
|
|
|
6,056
|
|
|
|
3,745
|
|
Net Income
|
|
|
20,929
|
|
|
|
15,552
|
|
|
|
14,848
|
|
|
|
13,668
|
|
|
|
10,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: effective dividend on preferred stock
|
|
|
---
|
|
|
|
---
|
|
|
|
85
|
|
|
|
200
|
|
|
|
200
|
|
Net income available to common stockholders
|
|
$
|
20,929
|
|
|
$
|
15,552
|
|
|
$
|
14,763
|
|
|
$
|
13,468
|
|
|
$
|
9,881
|
|
Basic earnings per share available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stockholders
(2)
|
|
$
|
2.40
|
|
|
$
|
2.08
|
|
|
$
|
1.99
|
|
|
$
|
1.84
|
|
|
$
|
1.49
|
|
Diluted earnings per share available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stockholders
(2)
|
|
$
|
2.39
|
|
|
$
|
2.07
|
|
|
$
|
1.98
|
|
|
$
|
1.79
|
|
|
$
|
1.45
|
|
Dividends per share
(2)
|
|
$
|
0.44
|
|
|
$
|
0.40
|
|
|
$
|
0.36
|
|
|
$
|
0.34
|
|
|
$
|
0.32
|
|
|
|
At June 30,
|
|
Other Data
:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Number of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans
|
|
|
7,241
|
|
|
|
6,800
|
|
|
|
5,554
|
|
|
|
5,428
|
|
|
|
4,459
|
|
Deposit Accounts
|
|
|
79,762
|
|
|
|
72,186
|
|
|
|
60,839
|
|
|
|
58,927
|
|
|
|
43,159
|
|
Full service offices
|
|
|
38
|
|
|
|
39
|
|
|
|
33
|
|
|
|
32
|
|
|
|
22
|
|
Limited service offices
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
Loan production offices
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the year ended June 30,
|
|
Key Operating Ratios
:
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
Return on assets (net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
divided by average assets)
|
|
|
1.17
|
%
|
|
|
1.05
|
%
|
|
|
1.11
|
%
|
|
|
1.07
|
%
|
|
|
1.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average common equity (net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
divided by average common equity)
|
|
|
11.30
|
|
|
|
11.70
|
|
|
|
12.34
|
|
|
|
12.48
|
|
|
|
11.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average equity to average assets
|
|
|
10.31
|
|
|
|
8.96
|
|
|
|
9.40
|
|
|
|
10.04
|
|
|
|
11.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (spread between
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted average rate on all interest-earning
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets and all interest-bearing liabilities)
|
|
|
3.62
|
|
|
|
3.64
|
|
|
|
3.69
|
|
|
|
3.81
|
|
|
|
3.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (net interest income as a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
percentage of average interest-earning assets
|
|
|
3.78
|
|
|
|
3.74
|
|
|
|
3.80
|
|
|
|
3.92
|
|
|
|
3.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense to average assets
|
|
|
2.48
|
|
|
|
2.58
|
|
|
|
2.45
|
|
|
|
2.53
|
|
|
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average interest-bearing liabilities
|
|
|
117.15
|
|
|
|
113.13
|
|
|
|
114.38
|
|
|
|
115.39
|
|
|
|
114.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to gross loans
(1)
|
|
|
1.15
|
|
|
|
1.10
|
|
|
|
1.20
|
|
|
|
1.15
|
|
|
|
1.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nonperforming loans
(1)
|
|
|
198.58
|
|
|
|
481.65
|
|
|
|
243.66
|
|
|
|
323.35
|
|
|
|
663.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) to average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding loans during the period
|
|
|
0.02
|
|
|
|
0.05
|
|
|
|
0.09
|
|
|
|
0.01
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of nonperforming assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to total assets
(1)
|
|
|
0.69
|
|
|
|
0.37
|
|
|
|
0.64
|
|
|
|
0.64
|
|
|
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholder dividend payout ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(common dividends as a percentage of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings available to common shareholders
|
|
|
18.29
|
|
|
|
19.14
|
|
|
|
18.12
|
|
|
|
18.69
|
|
|
|
21.44
|
|
(2)
|
All share and per share amounts have been adjusted for the two-for-one common stock split in the form of a 100% common stock dividend paid January 30, 2015.
|
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Southern Missouri Bancorp, Inc., is a Missouri corporation originally organized for the principal purpose of becoming the holding company of Southern Bank. The principal business of Southern Bank consists of attracting deposits from the communities it serves and investing those funds in loans secured by one- to four-family residences and commercial real estate, as well as commercial business and consumer loans. These funds have also been used to purchase investment securities, mortgage-backed securities (MBS), U.S. government and federal agency obligations and other permissible securities.
Southern Bank's results of operations are primarily dependent on the levels of its net interest margin and noninterest income, and its ability to control operating expenses. Net interest margin is dependent primarily on the difference or spread between the average yield earned on interest-earning assets (including loans, mortgage-related securities, and investments) and the average rate paid on interest-bearing liabilities (including deposits, securities sold under agreements to repurchase, and borrowings), as well as the relative amounts of these assets and liabilities. Southern Bank is 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.
Southern Bank's noninterest income consists primarily of fees charged on transaction and loan accounts, interchange income from customer debit and ATM card use, gains on sales of loans to the secondary market, and increased cash surrender value of bank owned life insurance ("BOLI"). Southern Bank's operating expenses include: employee compensation and benefits, occupancy expenses, legal and professional fees, federal deposit insurance premiums, amortization of intangible assets, and other general and administrative expenses.
Southern Bank's operations are significantly influenced by general economic conditions including monetary and fiscal policies of the U.S. government and the Federal Reserve Board. Additionally, Southern Bank is subject to policies and regulations issued by financial institution regulatory agencies including the Federal Reserve, the Missouri Division of Finance, and the Federal Deposit Insurance Corporation. Each of these factors may influence interest rates, loan demand, prepayment rates and deposit flows. Interest rates available on competing investments as well as general market interest rates influence the Bank's cost of funds. Lending activities are affected by the demand for real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered. Lending activities are funded through the attraction of deposit accounts consisting of checking accounts, passbook and statement savings accounts, money market deposit accounts, certificate of deposit accounts with terms of 60 months or less, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank of Des Moines, and, to a lesser extent, brokered deposits. The Bank intends to continue to focus on its lending programs for one- to four-family residential real estate, commercial real estate, commercial business and consumer financing on loans secured by properties or collateral located primarily in Missouri and Arkansas.
All share amounts and per share amounts discussed below have been adjusted for the two-for-one common stock split in the form of a 100% common stock dividend paid January 30, 2015.
CRITICAL ACCOUNTING POLICIES
The Company has established various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in Item 8 under the Notes to the Consolidated Financial Statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.
The allowance for losses on loans represents management's best estimate of probable losses in the existing loan portfolio. The allowance for losses on loans is increased by the provision for losses on loans charged to expense and reduced by loans charged off, net of recoveries.
The provision for losses on loans is determined based on management's assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experience, the level of classified and nonperforming loans and the results of regulatory examinations.
Integral to the methodology for determining the adequacy of the allowance for loan losses is portfolio segmentation and impairment measurement. Under the Company's methodology, loans are first segmented into 1) those comprising large groups of smaller-balance homogeneous loans, including single-family mortgages and installment loans, which are collectively evaluated for impairment and 2) all other loans which are individually evaluated. Those loans in the second category are further segmented utilizing a defined grading system which involves categorizing loans by severity of risk based on conditions that may affect the ability of the borrowers to repay their debt, such as current financial information, collateral valuations, historical payment experience, credit documentation, public information, and current trends. The loans subject to credit classification represent the portion of the portfolio subject to the greatest credit risk and where adjustments to the allowance for losses on loans as a result of provisions and charge-offs are most likely to have a significant impact on operations.
A periodic review of selected credits (based on loan size and type) is conducted to identify loans with heightened risk or probable losses and to assign risk grades. The primary responsibility for this review rests with the loan administration personnel. This review is supplemented with periodic examinations of both selected credits and the credit review process by applicable regulatory agencies. The information from these reviews assists management in the timely identification of problems and potential problems and provides a basis for deciding whether the credit represents a probable loss or risk that should be recognized.
Loans are considered impaired if, based on current information and events, it is probable that Southern Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the fair value of the collateral for collateral-dependent loans. If the loan is not collateral-dependent, the measurement of impairment is based on the present value of expected future cash flows discounted at the historical effective interest rate or the observable market price of the loan. In measuring the fair value of the collateral, management uses the assumptions (i.e., discount rates) and methodologies (i.e., comparison to the recent selling price of similar assets) consistent with those that would be utilized by unrelated third parties. Impairment identified through this evaluation process is a component of the allowance for loan losses. If a loan is not considered impaired, it is grouped together with loans having similar characteristics (i.e., the same risk grade), and an allowance for loan losses is based upon a quantitative factor (historical average charge-offs for similar loans over the past one to five years), and qualitative factors such as qualitative factors such as changes in lending policies; national, regional, and local economic conditions; changes in mix and volume of portfolio; experience, ability, and depth of lending management and staff; entry to new markets; levels and trends of delinquent, nonaccrual, special mention, and classified loans; concentrations of credit; changes in collateral values; agricultural economic conditions; and regulatory risk. For portfolio loans that are evaluated for impairment as part of homogenous pools, an allowance is maintained based upon similar quantitative and qualitative factors. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the conditions of the various markets in which collateral may be sold may all affect the required level of the allowance for losses on loans and the associated provision for losses on loans.
FINANCIAL CONDITION
General.
The Company experienced balance sheet growth in fiscal 2018, with total assets of $1.9 billion at June 30, 2018, reflecting an increase of $178.4 million, or 10.4%, as compared to June 30, 2017. Asset growth was comprised mainly of loan growth, and was due in part to the February 2018 acquisition of Southern Missouri Bancshares, Inc., parent of Southern Missouri Bank of Marshfield (the "SMB-Marshfield Acquisition").
Cash and equivalents.
Cash and cash equivalents were $26.3 million at June 30, 2018, down $4.5 million, or 14.5%, as compared to June 30, 2017. Interest-bearing time deposits were $2.0 million at June 30, 2018, up $1.2 million, or 161.4%, over the same time period.
Investments.
Available-for-sale (AFS) securities were $146.3 million at June 30, 2018, an increase of $1.9 million, or 1.3%, as compared to June 30, 2017. The relatively small increase was the result of the acquisition of a small portfolio through the SMB-Marshfield Acquisition, partially offset by sales and maturities slightly in excess of purchases. By category, mortgage-backed U.S. government-sponsored entity (GSE) residential securities increased, and obligations of state and political subdivisions decreased.
Loans.
Loans, net of the allowance for loan losses, were $1.6 billion at June 30, 2018, up $165.6 million, or 11.9%, as compared to June 30, 2017. The increase was attributable in part to the SMB-Marshfield Acquisition, which added loans totaling $68.3 million at fair value at the acquisition date. Inclusive of these acquired loans, our portfolio saw growth in commercial real estate loans, commercial loans, consumer loans, drawn balances in construction loans, and residential real estate loans. Commercial real estate loan growth was mostly attributable to increases in loans secured by nonresidential properties and agricultural real estate. The increase in commercial loan balances was attributable to growth in commercial & industrial lending, partially offset by paydowns in agricultural operating loans. The increase in consumer loans was attributable to loans secured by deposits and was anticipated to be temporary in nature. Residential real estate growth was attributable to growth in loans secured by 1-to-4 family properties, partially offset by a decline in loans secured by multi-family properties.
Allowance for Loan Losses.
The allowance for loan losses was $18.2 million at June 30, 2018, an increase of $2.7 million, or 17.2%, as compared to June 30, 2017. The allowance represented 1.15% of gross loans receivable at June 30, 2018, as compared to 1.10% of gross loans receivable at June 30, 2017. The increase in the allowance as a percentage of gross loans receivable was the result of provisioning at a higher rate than net charge offs and loan growth, which was attributable to an increase in the allowance required under ASC 310-10-35 for impaired loans. See also, Provision for Loan Losses, under Comparison of Operating Results for the Years Ended June 30, 2018 and 2017.
In its quarterly evaluation of the adequacy of its allowance for loan losses, the Company employs historical data, including past due percentages, charge offs, and recoveries for the previous one to five years for each loan category. Average net charge offs are calculated as net charge offs for the period by portfolio type as a percentage of the average balance of the respective portfolio type over the same period. The Company believes that it is prudent to emphasize more recent historical factors in the allowance evaluation.
The following table sets forth the Company's historical net charge offs as of June 30, 2018:
|
|
Net charge offs -
|
|
|
Net charge offs -
|
|
Portfolio segment
|
|
1-year historical
|
|
|
5-year historical
|
|
Real estate loans:
|
|
|
|
|
|
|
Residential
|
|
|
0.04
|
%
|
|
|
0.04
|
%
|
Construction
|
|
|
0.01
|
|
|
|
0.02
|
|
Commercial
|
|
|
0.01
|
|
|
|
0.00
|
|
Consumer loans
|
|
|
0.23
|
|
|
|
0.22
|
|
Commercial loans
|
|
|
0.01
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
Additionally, in its quarterly evaluation of the adequacy of the allowance for loan losses, the Company evaluates changes in the financial condition of individual borrowers; changes in local, regional, and national economic conditions; the Company's historical loss experience; and changes in market conditions for property pledged to the Company as collateral. The Company has identified specific qualitative factors that address these issues and subjectively assigns a percentage to each factor. Qualitative factors are reviewed quarterly and may be adjusted as necessary to reflect improving or declining trends. At June 30, 2018, these qualitative factors included:
·
|
Changes in lending policies
|
·
|
National, regional, and local economic conditions
|
·
|
Changes in mix and volume of portfolio
|
·
|
Experience, ability, and depth of lending management and staff
|
·
|
Levels and trends of delinquent, nonaccrual, special mention and classified loans
|
·
|
Concentrations of credit
|
·
|
Changes in collateral values
|
·
|
Agricultural economic conditions
|
The qualitative factors are applied to the allowance for loan losses based upon the following percentages by loan type:
|
|
Qualitative factor
|
|
|
Qualitative factor
|
|
|
|
applied at
|
|
|
applied at
|
|
Portfolio segment
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
Real estate loans:
|
|
|
|
|
|
|
Residential
|
|
|
0.63
|
%
|
|
|
0.73
|
%
|
Construction
|
|
|
1.69
|
|
|
|
1.73
|
|
Commercial
|
|
|
1.27
|
|
|
|
1.33
|
|
Consumer loans
|
|
|
1.41
|
|
|
|
1.36
|
|
Commercial loans
|
|
|
1.32
|
|
|
|
1.37
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2018, the amount of our allowance for loan losses attributable to these qualitative factors increased to approximately $15.5 million, as compared to $13.8 million at June 30, 2017, primarily due to the increase in loan balances. The relatively small change in qualitative factors applied was attributable to management's assessment that risks represented by the qualitative factors were little changed, on balance.
Premises and Equipment.
Premises and equipment increased to $54.8 million, up $0.6 million, or 1.2%, as compared to June 30, 2017. The increase was due to facilities added through the SMB-Marshfield Acquisition and other acquisitions of premises and equipment, partially offset by depreciation and sales of premises and equipment.
BOLI.
The Bank has purchased "key person" life insurance policies (BOLI) on employees at various times since fiscal 2003, and has acquired additional BOLI in connection with certain bank acquisitions. In fiscal 2018, the Bank acquired additional BOLI with a cash surrender value of $2.3 million in connection with the SMB-Marshfield Acquisition. At June 30, 2018, the cash surrender value of all such policies had increased to $37.5 million, up $3.2 million, or 9.4%, as compared to June 30, 2017.
Intangible Assets.
Intangible assets generated as a result of branch acquisitions in fiscal 2000 and the December 2010 assumption of deposits of the former First Southern Bank were fully amortized as of June 30, 2016. The July 2009 acquisition of the Southern Bank of Commerce resulted in goodwill of $126,000. The October 2013 acquisition of Ozarks Legacy Community Financial, Inc., resulted in goodwill of $1.5 million and a $1.4 million core deposit intangible, which is being amortized over a five-year period using the straight-line method. The February 2014 acquisition of Citizens State Bankshares, Inc., resulted in a $624,000 core deposit intangible, which is being amortized over a five-year period using the straight-line method. The August 2014 acquisition of Peoples Service Company, Inc., and its subsidiary, Peoples Bank of the Ozarks (the "Peoples Acquisition") resulted in goodwill of $3.0 million and a $3.0 million core deposit intangible, which is being amortized over a six-year period using the straight-line method. The June 2017 acquisition of Tammcorp, Inc., and its subsidiary, Capaha Bank (the "Capaha Acquisition") resulted in goodwill of $4.1 million and a $3.4 million core deposit intangible, which is being amortized over a seven-year period using the straight-line method. The SMB-Marshfield Acquisition resulted in goodwill of $4.4 million and a $1.3 million core deposit intangible, which is being amortized over a seven-year period using the straight-line method. Goodwill from these acquisitions will not be amortized, but will be tested for impairment at least annually.
Deposits.
Deposits were $1.6 billion at June 30, 2018, an increase of $124.3 million, or 8.5%, as compared to June 30, 2017. The increase was attributable in part to the SMB-Marshfield Acquisition, which included deposits of $68.2 million at fair value. Inclusive of these assumed deposits, our deposit balances saw growth in interest-bearing transaction accounts, noninterest-bearing transaction accounts, money market deposit accounts, and passbook and statement savings, while certificate of deposit balances declined. Specifically, the Company's public unit deposits increased $81.1 million (with $7.7 million of this growth attributable to the SMB-Marshfield Acquisition), brokered certificates of deposit decreased $62.4 million, and brokered nonmaturity deposits decreased $8.0 million. Our discussion of brokered deposits excludes those brokered deposits originated through reciprocal arrangements, as our reciprocal brokered deposits are primarily originated by our public unit depositors and utilized as an alternative to pledging securities against those deposits. The average loan-to-deposit ratio for the fourth quarter of fiscal 2018 was 98.5%, as compared to 97.7% for the same period of the prior fiscal year.
Borrowings.
FHLB advances were $76.7 million at June 30, 2018, an increase of $33.0 million, or 75.7%, as compared to June 30, 2017, as the Company assumed $4.8 million (at fair value) in term advances in the SMB-Marshfield Acquisition, and utilized overnight funding to provide for loan growth in excess of deposit growth and to allow brokered deposits to mature without renewal. Securities sold under agreements to repurchase totaled $3.3
million at June 30, 2018, a decrease of $6.9 million, or 68.0%, as compared to June 30, 2017, as we continued to encourage larger depositors to migrate from this product to a reciprocal brokered deposit agreement. At both dates, the full balance of repurchase agreements was due to local small business and government counterparties. In June 2017, the Company entered into a revolving, reducing line of credit with a five-year term, providing available credit of $15.0 million. The line of credit bears interest at a floating rate based on LIBOR, and available credit will be reduced by $3.0 million on each anniversary date of the line of credit. At June 30, 2018, the Company had a drawn balance of $3.0 million, and remaining availability of $9.0 million on the line of credit.
Subordinated Debt.
In March 2004, $7.0 million of Floating Rate Capital Securities of Southern Missouri Statutory Trust I, with a liquidation value of $1,000 per share were issued. The securities bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2034. In connection with its October 2013 acquisition of Ozarks Legacy, the Company assumed $3.1 million in floating rate junior subordinated debt securities. The debt securities had been issued in June 2005 by Ozarks Legacy in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. The carrying value of these debt securities was approximately $2.6 million at June 30, 2018 and 2017. In connection with the Peoples Acquisition, the Company assumed $6.5 million in floating rate junior subordinated debt securities. The debt securities had been issued in 2005 by Peoples, in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. The carrying value of these debt securities was approximately $5.1 million at June 30, 2018 and 2017.
Stockholders' Equity.
The Company's stockholders' equity was $200.7 million at June 30, 2018, an increase of $27.6 million, or 16.0%, as compared to June 30, 2017. The increase was attributable to the retention of net income and the issuance of common shares in the SMB-Marshfield Acquisition, partially offset by payment of dividends on common stock and a decrease in accumulated other comprehensive income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2018 AND 2017
Net Income.
The Company's net income available to common stockholders for the fiscal year ended June 30, 2018, was $20.9 million, an increase of $5.4 million, or 34.6%, as compared to the prior fiscal year.
Net Interest Income
. Net interest income for fiscal 2018 was $62.4 million, an increase of $11.3 million, or 22.0%, when compared to the prior fiscal year. The increase, as compared to the prior fiscal year, was attributable to a 20.9% increase in the average balance of interest-earning assets, combined with an increase in the net interest margin, from 3.74% to 3.78%. Average earning asset balance growth was due in part to the late-fiscal 2017 Capaha Acquisition and the mid-2018 SMB Marshfield Acquisition. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Peoples Acquisition was $1.0 million in fiscal 2018, as compared to $1.5 million in fiscal 2017. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Capaha Acquisition and the SMB-Marshfield Acquisition was $1.1 million and $127,000, respectively, in fiscal 2018, with no comparable contributions in fiscal 2017. In total, these components of net interest income contributed an additional 14 basis points to the net interest margin in fiscal 2018, as compared to a contribution of 11 basis points in fiscal 2017. The Company expects the impact of fair value discount accretion related to the Peoples Acquisition and the Capaha Acquisition to decline substantially in fiscal 2018, though discount accretion recognized over the course of a full fiscal year related to the SMB-Marshfield Acquisition will offset that decrease to a smaller degree.
Interest Income.
Interest income for fiscal 2018 was $77.2 million, an increase of $15.7 million, or 25.5%, when compared to the prior fiscal year. The increase was due to an increase of $285.8 million, or 20.9%, in the average balance of interest-earning assets, combined with a 17 basis point increase in the average yield earned on interest-earning assets, from 4.50% in fiscal 2017, to 4.67% in fiscal 2018.
Interest income on loans receivable for fiscal 2018 was $73.1 million, an increase of $15.1 million, or 26.1%, when compared to the prior fiscal year. The increase was due to a $268.1 million increase in the average balance of loans receivable, combined with a 16 basis point increase in the average yield earned on loans receivable. The increase in the average yield was attributed primarily to origination and repricing of loans and borrower refinancing as market interest rates have increased over the last two years, as well as an increase in the accretion of fair value discount on loans attributable to the Peoples, Capaha, and SMB-Marshfield acquisitions, which increased to $2.2 million in fiscal 2018, as compared to $1.3 million in fiscal 2017.
Interest income on the investment portfolio and other interest-earning assets was $4.1 million for fiscal 2018, an increase of $552,000, or 15.8%, when compared to the prior fiscal year. The increase was due to a seven basis point increase in the average yield earned on these assets, combined with a $17.7 million increase in the average balance of these assets.
Interest Expense.
Interest expense was $14.8 million for fiscal 2018, an increase of $4.4 million, or 42.7%, when compared to the prior fiscal year. The increase was due to the $202.6 million increase in the average balance of interest-bearing liabilities, combined with a 19 basis point increase in the average rate paid on interest-bearing liabilities, from 0.86% in fiscal 2017 to 1.05% in fiscal 2018.
Interest expense on deposits was $12.8 million for fiscal 2018, an increase of $4.4 million, or 51.4%, when compared to the prior fiscal year. The increase was due primarily to the $256.2 million increase in the average balance of interest-bearing deposits, combined with a 17 basis point increase in the average rate paid on those deposits.
Interest expense on FHLB advances was $1.0 million for fiscal 2017, a decrease of $97,000, or 8.5%, when compared to the prior fiscal year. The decrease was due to a $39.5 million decrease in the average balance of FHLB advances, partially offset by a 66 basis point increase in the average rate paid on those advances. The increase in the average rate paid was attributable primarily to the continuing increases in the overnight borrowing rate.
Provision for Loan Losses.
A provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level considered adequate by management to provide for probable loan losses based on prior loss experience, type and amount of loans in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. Management also considers other factors relating to the collectability of the loan portfolio.
The provision for loan losses was $3.0 million for fiscal 2018, an increase of $707,000, or 30.2%, as compared to the prior fiscal year. The increase in provision was attributed primarily to stronger organic loan growth. The provision also increased, in part, due to the increase in nonperforming loans discussed previously. In fiscal 2018, net charge offs were $371,000, as compared to $593,000 for the prior fiscal year. At June 30, 2018, classified loans totaled $14.2 million, or 0.90% of gross loans, as compared to $13.3 million, or 0.94% of gross loans, at June 30, 2017. Classified loans were comprised primarily of commercial real estate, residential real estate, and commercial operating loans. All loans so designated were classified due to concerns as to the borrowers' ability to continue to generate sufficient cash flows to service the debt.
The above provision was made based on management's analysis of the various factors which affect the loan portfolio and management's desire to maintain the allowance at a level considered adequate. Management performed a detailed analysis of the loan portfolio, including types of loans, the charge-off history, and an analysis of the allowance for loan losses. Management also considered the continued origination of loans secured by commercial and agricultural real estate, and commercial and agricultural operating loans, which bear an inherently higher level of credit risk. While management believes the allowance for loan losses at June 30, 2018, is adequate to cover all losses inherent in the portfolio, there can be no assurance that, in the future, increases in the allowance will not be necessary, or that actual losses will not exceed the allowance.
Noninterest Income.
Noninterest income was $13.9 million for fiscal 2018, an increase of $2.8 million, or 25.1%, when compared to the prior fiscal year. The increase was attributable in part to the late-fiscal 2017 Capaha Acquisition and the mid-2018 SMB-Marshfield Acquisition, and consisted of higher bank card interchange income, deposit account service charges, loan servicing fees, gains on the sale of available-for-sale securities, and loan origination and other loan fees, partially offset by reduced earnings on bank-owned life insurance (BOLI).
Noninterest Expense.
Noninterest expense was $44.5 million for fiscal 2018, an increase of $6.2 million, or 16.3%, when compared to the prior fiscal year. The increase in noninterest expense was attributable primarily to increased compensation expense, occupancy expense, amortization of core deposit intangibles, and bank card network expense, partially offset by inclusion in the prior period's results of charges to recognize the impairment of fixed assets and expenses attributable to the prepayment of FHLB advances. Fiscal 2018 results included $925,000 in merger-related charges, as compared to $710,000 in comparable expenses for the prior fiscal year.
Provision for Income Taxes.
The Company recorded an income tax provision of $7.8 million for fiscal 2018, an increase of $1.7 million, or 28.7%, as compared to the prior fiscal year, as the Company saw increased earnings before tax, but the effective tax rate for fiscal 2018 was lower, at 27.2%, as compared to 28.0% for fiscal 2017. The decrease in the effective tax rate was attributable primarily to the December 2017 enactment of a
reduction in the federal corporate income tax (FCIT) rate, partially offset by the required revaluation of the Company's deferred tax asset (DTA), which increased our provision for income taxes by approximately $1.1 million, and our effective tax rate by approximately 3.9 percentage points. Due to the Company's fiscal and tax year end of June 30, it did not achieve the full benefit of the reduced FCIT rate in fiscal 2018, but utilized a statutory tax rate that approximates the mid-point of the old FCIT rate of 35% and the new FCIT rate of 21%. In fiscal 2019, the Company expects to benefit from a further reduction in our effective tax rate, to a range of 18 to 20 percent.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2017 AND 2016
Net Income.
The Company's net income available to common stockholders for the fiscal year ended June 30, 2017, was $15.6 million, an increase of $789,000, or 5.3%, as compared to the prior fiscal year. Before a dividend on preferred shares of $85,000, net income was $14.8 million for the 2016 fiscal year, and increased by $704,000, or 4.7%, to $15.5 million for fiscal 2017.
Net Interest Income
. Net interest income for fiscal 2017 was $51.1 million, an increase of $4.2 million, or 8.9%, when compared to the prior fiscal year. The increase, as compared to the prior fiscal year, was attributable to a 10.5% increase in the average balance of interest-earning assets, partially offset by a decrease in the net interest margin, from 3.80% to 3.74%. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Peoples Acquisition was $1.5 million in fiscal 2017, as compared to $1.7 million in fiscal 2016. This component of net interest income contributed an additional 11 basis point to the net interest margin in fiscal 2017, as compared to a contribution of 14 basis points in fiscal 2016. While the Company expects the impact of fair value discount accretion related to the Peoples Acquisition to decline substantially in fiscal 2018, discount accretion recognized related to the Capaha Acquisition will offset that decrease to some degree.
Interest Income.
Interest income for fiscal 2017 was $61.5 million, an increase of $5.2 million, or 9.2%, when compared to the prior fiscal year. The increase was due to an increase of $129.7 million, or 10.5%, in the average balance of interest-earning assets, partially offset by a six basis point decrease in the average yield earned on interest-earning assets, from 4.56% in fiscal 2016, to 4.50% in fiscal 2017.
Interest income on loans receivable for fiscal 2017 was $58.0 million, an increase of $5.1 million, or 9.7%, when compared to the prior fiscal year. The increase was due to a $132.0 million increase in the average balance of loans receivable, partially offset by a 10 basis point decline in the average yield earned on loans receivable. The decline in the average yield was attributed primarily to origination and repricing of loans and borrower refinancing in the continued low rate environment, as well as a reduction in the accretion of fair value discount on loans attributable to the Peoples Acquisition, which declined to $1.3 million in fiscal 2017, as compared to $1.5 million in fiscal 2016.
Interest income on the investment portfolio and other interest-earning assets was $3.5 million for fiscal 2017, an increase of $33,000, or 1.0%, when compared to the prior fiscal year. The increase was due to a seven basis point increase in the average yield earned on these assets, partially offset by a $2.3 million decrease in the average balance of these assets.
Interest Expense.
Interest expense was $10.4 million for fiscal 2017, an increase of $1.0 million, or 10.7%, when compared to the prior fiscal year. The increase was due to the $126.6 million increase in the average balance of interest-bearing liabilities, partially offset by a one basis point decrease in the average rate paid on interest-bearing liabilities, from 0.87% in fiscal 2016 to 0.86% in fiscal 2015.
Interest expense on deposits was $8.5 million for fiscal 2017, an increase of $1.1 million, or 14.4%, when compared to the prior fiscal year. The increase was due primarily to the $100.5 million increase in the average balance of interest-bearing deposits, combined with a three basis point increase in the average rate paid on those deposits.
Interest expense on FHLB advances was $1.1 million for fiscal 2017, a decrease of $127,000, or 37.2%, when compared to the prior fiscal year. The decrease was due to a $30.8 million decrease in the average balance of FHLB advances, combined with a 76 basis point decrease in the average rate paid on those advances. The decrease in the average rate paid was attributable primarily to the repayment early in the fiscal year of relatively high-cost term advances, combined with an increase in the percentage of total advances outstanding during the year in overnight or other short-term structures with a relatively lower cost.
Provision for Loan Losses.
A provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level considered adequate by management to provide for probable loan losses based on prior loss experience, type and amount of loans in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. Management also considers other factors relating to the collectability of the loan portfolio.
The provision for loan losses was $2.3 million for fiscal 2017, a decrease of $154,000, or 6.2%, as compared to the prior fiscal year. The decrease in provision was attributed to management's analysis of the loan portfolio. In fiscal 2017, net charge offs were $593,000, as compared to $1.0 million for the prior fiscal year. At June 30, 2017, classified loans totaled $13.3 million, or 0.94% of gross loans, as compared to $11.0 million, or 0.96% of gross loans, at June 30, 2016. Classified loans were comprised primarily commercial and agricultural real estate loans, commercial and agricultural operating loans, and residential real estate loans. All loans so designated were classified due to concerns as to the borrowers' ability to continue to generate sufficient cash flows to service the debt.
The above provision was made based on management's analysis of the various factors which affect the loan portfolio and management's desire to maintain the allowance at a level considered adequate. Management performed a detailed analysis of the loan portfolio, including types of loans, the charge-off history, and an analysis of the allowance for loan losses. Management also considered the continued origination of loans secured by commercial and agricultural real estate, and commercial and agricultural operating loans, which bear an inherently higher level of credit risk. While management believes the allowance for loan losses at June 30, 2017, is adequate to cover all losses inherent in the portfolio, there can be no assurance that, in the future, increases in the allowance will not be necessary, or that actual losses will not exceed the allowance.
Noninterest Income.
Noninterest income was $11.1 million for fiscal 2017, an increase of $1.3 million, or 13.6%, when compared to the prior fiscal year. The increase was attributed primarily to loan origination fees, bank card interchange income, deposit account service charges, loan servicing fees, increases in the cash value of bank-owned life insurance (BOLI), and net gains realized on the sale of residential loans originated for sale into the secondary market.
Noninterest Expense.
Noninterest expense was $38.3 million for fiscal 2017, an increase of $5.6 million, or 17.0%, when compared to the prior fiscal year. The increase in noninterest expense was attributable primarily to increased compensation, occupancy, legal and professional fees, charges to recognize the impairment of fixed assets, expenses attributable to the prepayment of FHLB advances, provisioning for off-balance sheet credit exposures, losses on foreclosed real estate, bank card network expenses, and expenses related to providing debit cards, internet banking, and other deposit services. Fiscal 2017 results included $710,000 in merger-related charges, with no comparable expenses in the prior fiscal year.
Provision for Income Taxes.
The Company recorded an income tax provision of $6.1 million for fiscal 2017, a decrease of $620,000 as compared to the prior fiscal year. The effective tax rate for fiscal 2017 was 28.0%, as compared to 31.0% for fiscal 2016. The decrease in the effective tax rate was attributable primarily to formation by the Company of a Real Estate Investment Trust ("REIT") to hold certain qualified assets in order to minimize state tax liability, as well as an increase in tax-advantaged investments, and was partially offset by the inclusion in the current fiscal year's results of some non-deductible expenses related to merger and acquisition activity.
LIQUIDITY AND CAPITAL RESOURCES
Southern Missouri's primary potential sources of funds include deposit growth, securities sold under agreements to repurchase, FHLB advances, amortization and prepayment of loan principal, investment maturities and sales, and ongoing operating results. While scheduled repayments on loans and securities as well as the maturity of short-term investments are a relatively predictable source of funding, deposit flows, FHLB advance redemptions and loan and security prepayment rates are significantly influenced by factors outside of the Bank's control, including general economic conditions and market competition. The Bank has relied on FHLB advances as a source for funding cash or liquidity needs.
Southern Missouri uses its liquid assets as well as other funding sources to meet ongoing commitments, to fund loan demand, to repay maturing certificates of deposit and FHLB advances, to make investments, to fund other deposit withdrawals and to meet operating expenses. At June 30, 2018, the Bank had outstanding commitments to extend credit of $266.8 million (including $181.9 million in unused lines of credit). Total commitments to originate
fixed-rate loans with terms in excess of one year were $42.0 million at rates ranging from 2.96% to 7.75%, with a weighted-average rate of 5.17%. Management anticipates that current funding sources will be adequate to meet foreseeable liquidity needs.
For the year ended June 30, 2018, Southern Missouri increased deposits and FHLB advances by $124.3 million and $33.0 million, respectively, and reduced securities sold under agreements to repurchase by $6.9 million. During the prior year, Southern Missouri increased deposits by $334.9 million, and reduced securities sold under agreements to repurchase by and FHLB advances by $16.9 million and $66.6 million, respectively. At June 30, 2018, the Bank had pledged $706.2 million of its single-family residential and commercial real estate loan portfolios to the FHLB for available credit of approximately $349.8 million, of which $76.7 million was advanced, and $6 million utilized for the issuance of letters of credit to secure public unit deposits. The Bank had also pledged $219.5 million of its agricultural real estate and agricultural operating and equipment loans to the Federal Reserve's discount window for available credit of approximately $163.2 million, as of June 30, 2018, none of which was advanced. In addition, the Bank has the ability to pledge several of its other loan portfolios, including, for example, its multi-family residential real estate, home equity, or commercial business loans. In total, FHLB borrowings are limited to 35% of Bank assets, or approximately $643.0 million as most recently reported by the FHLB on June 30, 2018, which means that an amount up to $560.1 million may still be eligible to be borrowed from the FHLB, subject to available collateral. Along with the ability to borrow from the FHLB and Federal Reserve, management believes its liquid resources will be sufficient to meet the Company's liquidity needs.
Liquidity management is an ongoing responsibility of the Bank's management. The Bank adjusts its investment in liquid assets based upon a variety of factors including (i) expected loan demand and deposit flows, (ii) anticipated investment and FHLB advance maturities, (iii) the impact on profitability, and (iv) asset/liability management objectives.
At June 30, 2018, the Bank had $311.4 million in CDs maturing within one year and $1.0 billion in other deposits and securities sold under agreements to repurchase without a specified maturity, as compared to the prior year of $326.6 million in CDs maturing within one year and $928.7 million in other deposits and securities sold under agreements to repurchase without a specified maturity. Management believes that most maturing interest-bearing liabilities will be retained or replaced by new interest-bearing liabilities. Also at June 30, 2018, the Bank had overnight advances totaling $66.6 million from the FHLB, $7.8 million in term FHLB advances maturing within one year, and $2.4 million in FHLB advances with a maturity date in excess of one year, but eligible for early redemption by the lender within one year.
REGULATORY CAPITAL
Federally insured financial institutions are required to maintain minimum levels of regulatory capital. Federal Reserve regulations establish capital requirements, including a tier 1 leverage (or core capital) requirement and risk-based capital requirements. The Federal Reserve is also authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.
At June 30, 2018, the Bank exceeded regulatory capital requirements with tier 1 leverage, total risk-based capital, and tangible common equity capital of $195.4 million, $214.8 million and $195.4 million, respectively. The Bank's tier 1 capital represented 10.60% of total adjusted assets and 12.00% of total risk-weighted assets, while total risk-based capital was 13.18% of total risk-weighted assets, and tangible common equity capital was 12.00% of total risk-weighted assets. To be considered adequately capitalized, the Bank must maintain tier 1 leverage capital levels of at least 4.0% of adjusted total assets and 6.0% of risk-weighted assets, total risk-based capital of 8.0% of risk-weighted assets, and tangible common equity capital of 4.5%. To be considered well capitalized, the Bank must maintain tier 1 leverage capital levels of at least 5.0% of adjusted total assets and 8.0% of risk-weighted assets, total risk-based capital of 10.0% of risk-weighted assets, and tangible common equity capital of 6.5%.
At June 30, 2018, the Company exceeded regulatory capital requirements with tier 1 leverage, total risk-based capital, and tangible common equity capital of $202.8 million, $222.1 million and $188.4 million, respectively. The Company's tier 1 capital represented 10.97% of total adjusted assets and 12.35% of total risk-weighted assets, while total risk-based capital was 13.53% of total risk-weighted assets, and tangible common equity capital was 11.48% of total risk-weighted assets. To be considered adequately capitalized, the Company must maintain tier 1 leverage capital levels of at least 4.0% of adjusted total assets and 6.0% of risk-weighted assets, total risk-based capital of 8.0% of risk-weighted assets, and tangible common equity capital of 4.5%.
See Note 14 of the Notes to the Consolidated Financial Statements contained in Item 8.
IMPACT OF INFLATION
The consolidated financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates generally have a more significant impact on a financial institution's performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. In the current interest rate environment, liquidity and maturity structure of the Company's assets and liabilities are critical to the maintenance of acceptable performance levels.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The table on the following page sets forth certain information relating to the Company's average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and the average cost of liabilities for the periods indicated. These yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the years indicated. Nonaccrual loans are included with other noninterest-earning assets.
The table also presents information with respect to the difference between the weighted-average yield earned on interest-earning assets and the weighted-average rate paid on interest-bearing liabilities, or interest rate spread, which financial institutions have traditionally used as an indicator of profitability. Another indicator of an institution's net interest income is its net yield (or net interest margin) on interest-earning assets, which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.
|
|
Years Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
(Dollars in thousands)
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/
Cost
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/
Cost
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/
Cost
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
(1)
|
|
$
|
1,183,961
|
|
|
$
|
57,294
|
|
|
|
4.84
|
%
|
|
$
|
975,670
|
|
|
$
|
45,998
|
|
|
|
4.71
|
%
|
|
$
|
865,029
|
|
|
$
|
41,643
|
|
|
|
4.81
|
%
|
Other loans
(1)
|
|
|
306,169
|
|
|
|
15,828
|
|
|
|
5.17
|
|
|
|
246,335
|
|
|
|
11,990
|
|
|
|
4.87
|
|
|
|
224,930
|
|
|
|
11,207
|
|
|
|
4.98
|
|
Total net loans
|
|
|
1,490,130
|
|
|
|
73,122
|
|
|
|
4.91
|
|
|
|
1,222,005
|
|
|
|
57,988
|
|
|
|
4.75
|
|
|
|
1,089,959
|
|
|
|
52,850
|
|
|
|
4.85
|
|
Mortgage-backed securities
|
|
|
81,326
|
|
|
|
1,817
|
|
|
|
2.23
|
|
|
|
72,205
|
|
|
|
1,496
|
|
|
|
2.07
|
|
|
|
66,736
|
|
|
|
1,467
|
|
|
|
2.20
|
|
Investment securities
(2)
|
|
|
76,077
|
|
|
|
2,166
|
|
|
|
2.85
|
|
|
|
67,472
|
|
|
|
1,975
|
|
|
|
2.93
|
|
|
|
67,885
|
|
|
|
1,965
|
|
|
|
2.90
|
|
Other interest-earning assets
|
|
|
3,378
|
|
|
|
69
|
|
|
|
2.02
|
|
|
|
3,427
|
|
|
|
29
|
|
|
|
0.83
|
|
|
|
10,799
|
|
|
|
35
|
|
|
|
0.32
|
|
TOTAL INTEREST-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNING ASSETS
(1)
|
|
|
1,650,911
|
|
|
|
77,174
|
|
|
|
4.67
|
|
|
|
1,365,109
|
|
|
|
61,488
|
|
|
|
4.50
|
|
|
|
1,235,379
|
|
|
|
56,317
|
|
|
|
4.56
|
|
Other noninterest-earning assets
(3)
|
|
|
144,838
|
|
|
|
---
|
|
|
|
---
|
|
|
|
118,809
|
|
|
|
---
|
|
|
|
---
|
|
|
|
99,463
|
|
|
|
---
|
|
|
|
---
|
|
TOTAL ASSETS
|
|
$
|
1,795,749
|
|
|
|
77,174
|
|
|
|
---
|
|
|
$
|
1,483,918
|
|
|
|
61,488
|
|
|
|
---
|
|
|
$
|
1,334,842
|
|
|
|
56,317
|
|
|
|
---
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
149,252
|
|
|
|
756
|
|
|
|
0.51
|
|
|
$
|
121,734
|
|
|
|
413
|
|
|
|
0.34
|
|
|
$
|
121,741
|
|
|
|
386
|
|
|
|
0.32
|
|
NOW accounts
|
|
|
536,510
|
|
|
|
4,421
|
|
|
|
0.82
|
|
|
|
428,201
|
|
|
|
3,094
|
|
|
|
0.72
|
|
|
|
375,355
|
|
|
|
2,746
|
|
|
|
0.73
|
|
Money market accounts
|
|
|
114,393
|
|
|
|
804
|
|
|
|
0.70
|
|
|
|
85,285
|
|
|
|
313
|
|
|
|
0.37
|
|
|
|
75,947
|
|
|
|
219
|
|
|
|
0.29
|
|
Certificates of deposit
|
|
|
529,238
|
|
|
|
6,844
|
|
|
|
1.29
|
|
|
|
438,011
|
|
|
|
4,652
|
|
|
|
1.06
|
|
|
|
399,685
|
|
|
|
4,056
|
|
|
|
1.01
|
|
TOTAL INTEREST-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEARING DEPOSITS
|
|
|
1,329,393
|
|
|
|
12,825
|
|
|
|
0.96
|
|
|
|
1,073,231
|
|
|
|
8,472
|
|
|
|
0.79
|
|
|
|
972,728
|
|
|
|
7,407
|
|
|
|
0.76
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements to repurchase
|
|
|
5,373
|
|
|
|
37
|
|
|
|
0.70
|
|
|
|
22,198
|
|
|
|
95
|
|
|
|
0.43
|
|
|
|
27,387
|
|
|
|
119
|
|
|
|
0.44
|
|
FHLB advances
|
|
|
56,593
|
|
|
|
1,041
|
|
|
|
1.84
|
|
|
|
96,065
|
|
|
|
1,138
|
|
|
|
1.18
|
|
|
|
65,273
|
|
|
|
1,271
|
|
|
|
1.95
|
|
Note payable
|
|
|
3,000
|
|
|
|
121
|
|
|
|
4.02
|
|
|
|
363
|
|
|
|
13
|
|
|
|
3.67
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Junior subordinated debt
|
|
|
14,897
|
|
|
|
767
|
|
|
|
5.15
|
|
|
|
14,800
|
|
|
|
648
|
|
|
|
4.37
|
|
|
|
14,705
|
|
|
|
568
|
|
|
|
3.86
|
|
TOTAL INTEREST-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEARING LIABILITIES
|
|
|
1,409,256
|
|
|
|
14,791
|
|
|
|
1.05
|
|
|
|
1,206,657
|
|
|
|
10,366
|
|
|
|
0.86
|
|
|
|
1,080,093
|
|
|
|
9,365
|
|
|
|
0.87
|
|
Noninterest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
demand deposits
|
|
|
193,178
|
|
|
|
---
|
|
|
|
---
|
|
|
|
138,881
|
|
|
|
---
|
|
|
|
---
|
|
|
|
125,503
|
|
|
|
---
|
|
|
|
---
|
|
Other liabilities
|
|
|
8,152
|
|
|
|
---
|
|
|
|
---
|
|
|
|
5,408
|
|
|
|
---
|
|
|
|
---
|
|
|
|
3,764
|
|
|
|
---
|
|
|
|
---
|
|
TOTAL LIABILITIES
|
|
|
1,610,586
|
|
|
|
14,491
|
|
|
|
---
|
|
|
|
1,350,946
|
|
|
|
10,366
|
|
|
|
---
|
|
|
|
1,209,360
|
|
|
|
9,365
|
|
|
|
---
|
|
Stockholders' equity
|
|
|
185,163
|
|
|
|
---
|
|
|
|
---
|
|
|
|
132,972
|
|
|
|
---
|
|
|
|
---
|
|
|
|
125,482
|
|
|
|
---
|
|
|
|
---
|
|
TOTAL LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
$
|
1,795,749
|
|
|
|
14,791
|
|
|
|
---
|
|
|
$
|
1,483,918
|
|
|
|
10,366
|
|
|
|
---
|
|
|
$
|
1,334,842
|
|
|
|
9,365
|
|
|
|
---
|
|
Net interest income
|
|
|
|
|
|
$
|
62,383
|
|
|
|
|
|
|
|
|
|
|
$
|
51,122
|
|
|
|
|
|
|
|
|
|
|
$
|
46,952
|
|
|
|
|
|
Interest rate spread
(4)
|
|
|
|
|
|
|
|
|
|
|
3.62
|
%
|
|
|
|
|
|
|
|
|
|
|
3.64
|
%
|
|
|
|
|
|
|
|
|
|
|
3.69
|
%
|
Net interest margin
(5)
|
|
|
|
|
|
|
|
|
|
|
3.78
|
%
|
|
|
|
|
|
|
|
|
|
|
3.74
|
%
|
|
|
|
|
|
|
|
|
|
|
3.80
|
%
|
Ratio of average interest-earning
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets to average interest-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing liabilities
|
|
|
117.15
|
%
|
|
|
|
|
|
|
|
|
|
|
113.13
|
%
|
|
|
|
|
|
|
|
|
|
|
114.38
|
%
|
|
|
|
|
|
|
|
|
_____________________
(1)
|
Calculated net of deferred loan fees, loan discounts and loans-in-process. Nonaccrual loans are not included in average loans.
|
(2)
|
Includes FHLB membership stock, Federal Reserve membership stock, and related cash dividends.
|
(3)
|
Includes equity securities and related cash dividends.
|
(4)
|
Represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities.
|
(5)
|
Represents net interest income divided by average interest-earning assets.
|
YIELDS EARNED AND RATES PAID
The following table sets forth for the periods and at the date indicated, the weighted average yields earned on the Company's assets, the weighted average interest rates paid on the Company's liabilities, together with the net yield on interest-earning assets.
|
|
At
June 30,
|
|
|
For
The Year Ended June 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Weighted-average yield on loan portfolio
|
|
|
4.95
|
%
|
|
|
4.91
|
%
|
|
|
4.75
|
%
|
|
|
4.85
|
%
|
Weighted-average yield on mortgage-backed securities
|
|
|
2.45
|
|
|
|
2.23
|
|
|
|
2.07
|
|
|
|
2.20
|
|
Weighted-average yield on investment securities
(1)
|
|
|
2.88
|
|
|
|
2.85
|
|
|
|
2.93
|
|
|
|
2.83
|
|
Weighted-average yield on other interest-earning assets
|
|
|
2.32
|
|
|
|
2.02
|
|
|
|
0.83
|
|
|
|
0.32
|
|
Weighted-average yield on all interest-earning assets
|
|
|
4.74
|
|
|
|
4.67
|
|
|
|
4.50
|
|
|
|
4.56
|
|
Weighted-average rate paid on interest-bearing deposits
|
|
|
1.12
|
|
|
|
0.96
|
|
|
|
0.79
|
|
|
|
0.76
|
|
Weighted-average rate paid on securities sold under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements to repurchase
|
|
|
0.91
|
|
|
|
0.70
|
|
|
|
0.43
|
|
|
|
0.44
|
|
Weighted-average rate paid on FHLB advances
|
|
|
2.18
|
|
|
|
1.84
|
|
|
|
1.18
|
|
|
|
1.95
|
|
Weighted-average rate paid on note payable
|
|
|
4.44
|
|
|
|
4.02
|
|
|
|
3.67
|
|
|
|
---
|
|
Weighted-average rate paid on subordinated debt
|
|
|
5.90
|
|
|
|
5.15
|
|
|
|
4.37
|
|
|
|
3.86
|
|
Weighted-average rate paid on all interest-bearing
liabilities
|
|
|
1.23
|
|
|
|
1.05
|
|
|
|
0.86
|
|
|
|
0.87
|
|
Interest rate spread (spread between weighted average
rate on all interest-earning assets and all interest-
bearing liabilities)
|
|
|
3.51
|
|
|
|
3.62
|
|
|
|
3.64
|
|
|
|
3.69
|
|
Net interest margin (net interest income as a percentage
of average interest-earning assets)
|
|
|
3.70
|
|
|
|
3.78
|
|
|
|
3.74
|
|
|
|
3.80
|
|
________________
(1)
Includes Federal Home Loan Bank, Federal Reserve Bank stock.
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net interest income of the Company. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) changes in rate/volume (change in rate multiplied by change in volume).
|
|
Years Ended June 30,
2018 Compared to 2017
Increase (Decrease) Due to
|
|
|
Years Ended June 30,
2017 Compared to 2016
Increase (Decrease) Due to
|
|
(Dollars in thousands)
|
|
Rate
|
|
|
Volume
|
|
|
Rate/
Volume
|
|
|
Net
|
|
|
Rate
|
|
|
Volume
|
|
|
Rate/
Volume
|
|
|
Net
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
(1)
|
|
$
|
1,999
|
|
|
$
|
12,725
|
|
|
$
|
410
|
|
|
$
|
15,134
|
|
|
$
|
(1,120
|
)
|
|
$
|
6,392
|
|
|
$
|
(134
|
)
|
|
$
|
5,138
|
|
Mortgage-backed securities
|
|
|
119
|
|
|
|
189
|
|
|
|
13
|
|
|
|
321
|
|
|
|
(84
|
)
|
|
|
120
|
|
|
|
(7
|
)
|
|
|
29
|
|
Investment securities
(2)
|
|
|
(70
|
)
|
|
|
254
|
|
|
|
7
|
|
|
|
191
|
|
|
|
25
|
|
|
|
(12
|
)
|
|
|
(3
|
)
|
|
|
10
|
|
Other interest-earning deposits
|
|
|
41
|
|
|
|
---
|
|
|
|
(1
|
)
|
|
|
40
|
|
|
|
55
|
|
|
|
(24
|
)
|
|
|
(37
|
)
|
|
|
(6
|
)
|
Total net change in income on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-earning assets
|
|
|
2,089
|
|
|
|
13,168
|
|
|
|
429
|
|
|
|
15,686
|
|
|
|
(1,124
|
)
|
|
|
6,476
|
|
|
|
(181
|
)
|
|
|
5,171
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,977
|
|
|
|
1,943
|
|
|
|
433
|
|
|
|
4,353
|
|
|
|
239
|
|
|
|
803
|
|
|
|
23
|
|
|
|
1,065
|
|
Securities sold under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements to repurchase
|
|
|
59
|
|
|
|
(72
|
)
|
|
|
(45
|
)
|
|
|
(58
|
)
|
|
|
(2
|
)
|
|
|
(23
|
)
|
|
|
1
|
|
|
|
(24
|
)
|
FHLB advances
|
|
|
633
|
|
|
|
(466
|
)
|
|
|
(264
|
)
|
|
|
(97
|
)
|
|
|
(497
|
)
|
|
|
599
|
|
|
|
(235
|
)
|
|
|
(133
|
)
|
Note payable
|
|
|
1
|
|
|
|
97
|
|
|
|
10
|
|
|
|
108
|
|
|
|
---
|
|
|
|
---
|
|
|
|
13
|
|
|
|
13
|
|
Subordinated debt
|
|
|
115
|
|
|
|
4
|
|
|
|
---
|
|
|
|
119
|
|
|
|
76
|
|
|
|
4
|
|
|
|
---
|
|
|
|
80
|
|
Total net change in expense on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing liabilities
|
|
|
2,785
|
|
|
|
1,506
|
|
|
|
134
|
|
|
|
4,425
|
|
|
|
(184
|
)
|
|
|
1,383
|
|
|
|
(198
|
)
|
|
|
1,001
|
|
Net change in net interest income
|
|
$
|
(696
|
)
|
|
$
|
11,662
|
|
|
$
|
295
|
|
|
$
|
11,261
|
|
|
$
|
(940
|
)
|
|
$
|
5,093
|
|
|
$
|
17
|
|
|
$
|
4,170
|
|
________________
(1)
Does not include interest on loans placed on nonaccrual status.
(2)
Does not include dividends earned on equity securities.
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
The goal of the Company's asset/liability management strategy is to manage the interest rate sensitivity of both interest-earning assets and interest-bearing liabilities in order to maximize net interest income without exposing the Company to an excessive level of interest rate risk. The Company employs various strategies intended to manage the potential effect that changing interest rates may have on future operating results. The primary asset/liability management strategy has been to focus on matching the anticipated repricing intervals of interest-earning assets and interest-bearing liabilities. At times, however, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the Company may increase its interest rate risk position in order to maintain its net interest margin.
In an effort to manage the interest rate risk resulting from fixed rate lending, the Company has at times utilized longer term (up to 10 year maturities), fixed-rate FHLB advances, which may be subject to early redemption, to offset interest rate risk. Other elements of the Company's current asset/liability strategy include: (i) increasing originations of commercial real estate, commercial business loans, agricultural real estate, and agricultural operating lines, which typically provide higher yields and shorter repricing periods, but inherently increase credit risk, (ii) limiting the price volatility of the investment portfolio by maintaining a relatively short weighted average maturity, (iii) actively soliciting less rate-sensitive nonmaturity deposits, and (iv) offering competitively priced money market accounts and CDs with maturities of up to five years. The degree to which each segment of the strategy is achieved will affect profitability and exposure to interest rate risk.
The Company continues to generate long-term, fixed-rate residential loans. During the fiscal year ended June 30, 2018, fixed rate residential loan originations totaled $60.4 million (of which $29.8 million was originated for sale into the secondary market), compared to $60.2 million during the prior year (of which $33.1 million was originated for sale into the secondary market). At June 30, 2018, the fixed-rate residential loan portfolio totaled $161.2 million, with a weighted average maturity of 100 months, compared to $147.5 million with a weighted average maturity of 106 months at June 30, 2017. The Company originated $35.7 million in adjustable rate residential loans during the fiscal year ended June 30, 2018, compared to $34.5 million during the prior fiscal year. At June 30, 2018, fixed rate loans with remaining maturities in excess of 10 years totaled $38.6 million, or 2.5%, of loans receivable, compared to $36.7 million, or 2.6%, of loans receivable, at June 30, 2017. The Company originated $246.1 million in fixed rate commercial and commercial real estate loans during the year ended June 30, 2018, compared to $221.8 million during the prior fiscal year. The Company also originated $74.1 million in adjustable rate commercial and commercial real estate loans during the fiscal year ended June 30, 2018, compared to $92.0 million during the prior fiscal year. At June 30, 2018, adjustable-rate home equity lines of credit totaled $39.3 million, compared to $35.2 million as of June 30, 2017. At June 30, 2018, the Company's weighted average life of its investment portfolio was 4.3 years, compared to 3.7 years at June 30, 2018. At June 30, 2018, CDs with original terms of two years or more totaled $220.4 million, compared to $248.8 million at June 30, 2017.
INTEREST RATE SENSITIVITY ANALYSIS
The following table sets forth as of June 30, 2018 and 2017, management's estimates of the projected changes in net portfolio value in the event of 100, 200, and 300 basis point, instantaneous and permanent increases or decreases in market interest rates.
Computations in the table below are based on prospective effects of hypothetical changes in interest rates and are based on an internally generated model using the actual maturity and repricing schedules for Southern Bank's loans and deposits, adjusted by management's assumptions for prepayment rates and deposit runoff. Further, the computations do not consider any reactions that the Bank may undertake in response to changes in interest rates. These projected changes should not be relied upon as indicative of actual results in any of the aforementioned interest rate changes.
Management cannot accurately predict future interest rates or their effect on the Company's NPV and net interest income in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV and net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Additionally, most of Southern Bank's loans have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the foregoing table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase.
June 30, 2018
|
|
Change in Rates
|
Net Portfolio
|
|
NPV as Percentage of
PV of Assets
|
|
Value
|
|
Change
|
|
% Change
|
|
NPV Ratio
|
|
Change
|
|
(Dollars in thousands)
|
|
(%)
|
|
(basis points)
|
|
+300 bp
|
|
$
|
171,151
|
|
|
$
|
(31,594
|
)
|
|
|
(16
|
)
|
|
|
9.57
|
|
|
|
-122
|
|
+200 bp
|
|
|
182,263
|
|
|
|
(20,482
|
)
|
|
|
(10
|
)
|
|
|
10.03
|
|
|
|
-77
|
|
+100 bp
|
|
|
193,119
|
|
|
|
(9,626
|
)
|
|
|
(5
|
)
|
|
|
10.45
|
|
|
|
-35
|
|
0 bp
|
|
|
202,745
|
|
|
|
---
|
|
|
|
---
|
|
|
|
10.80
|
|
|
|
---
|
|
-100 bp
|
|
|
212,684
|
|
|
|
9,939
|
|
|
|
5
|
|
|
|
11.16
|
|
|
|
36
|
|
-200 bp
|
|
|
241,161
|
|
|
|
38,415
|
|
|
|
19
|
|
|
|
12.43
|
|
|
|
163
|
|
-300 bp
|
|
|
268,610
|
|
|
|
65,865
|
|
|
|
32
|
|
|
|
13.64
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Change in Rates
|
Net Portfolio
|
|
NPV as Percentage of
PV of Assets
|
|
Value
|
|
Change
|
|
% Change
|
|
NPV Ratio
|
|
Change
|
|
(Dollars in thousands)
|
|
(%)
|
|
(basis points)
|
|
+300 bp
|
|
$
|
146,140
|
|
|
$
|
(26,692
|
)
|
|
|
(15
|
)
|
|
|
8.99
|
|
|
|
-113
|
|
+200 bp
|
|
|
154,473
|
|
|
|
(18,359
|
)
|
|
|
(11
|
)
|
|
|
9.35
|
|
|
|
-77
|
|
+100 bp
|
|
|
162,804
|
|
|
|
(10,027
|
)
|
|
|
(6
|
)
|
|
|
9.70
|
|
|
|
-42
|
|
0 bp
|
|
|
172,832
|
|
|
|
---
|
|
|
|
---
|
|
|
|
10.12
|
|
|
|
---
|
|
-100 bp
|
|
|
189,720
|
|
|
|
16,888
|
|
|
|
10
|
|
|
|
10.91
|
|
|
|
79
|
|
-200 bp
|
|
|
209,964
|
|
|
|
37,133
|
|
|
|
21
|
|
|
|
11.91
|
|
|
|
179
|
|
-300 bp
|
|
|
215,014
|
|
|
|
42,182
|
|
|
|
24
|
|
|
|
12.16
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has worked to limit its exposure to rising rates in the current historically low rate environment by (a) increasing the share of funding on its balance sheet obtained from non-maturity transaction accounts, (b) limiting FHLB borrowings and (c) limiting the duration of its available-for-sale investment portfolio.
Item 8.
Financial Statements and Supplementary Information
Report of Independent Registered Public Accounting Firm
Stockholders, Board of Directors
and Audit Committee
Southern Missouri Bancorp, Inc.
Poplar Bluff, Missouri
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Southern Missouri Bancorp, Inc. ("Company") as of June 30, 2018 and 2017 and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three year period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of June 30, 2018 based on criteria established in
Internal Control-Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated September 13, 2018, expressed and unqualified opinion.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/sig/
BKD,
LLP
We have served as the Company's auditor since 2002.
Decatur, Illinois
September 13, 2018