-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EBP0Uib5kdRNbCwS8iZj25nZUJtO/C9+IeY+hdmowAi4HIpHPhIp807XMVqNXdu/ 0kgQUJW83ur4NmpWvQO+WA== 0000939057-96-000070.txt : 19960930 0000939057-96-000070.hdr.sgml : 19960930 ACCESSION NUMBER: 0000939057-96-000070 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960927 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN MISSOURI BANCORP INC CENTRAL INDEX KEY: 0000916907 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 431665523 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-23406 FILM NUMBER: 96635928 BUSINESS ADDRESS: STREET 1: 531 VINE ST CITY: POPLAR BLUFF STATE: MO ZIP: 63901 BUSINESS PHONE: 3147851421 10KSB40 1 SOUTHERN MISSOURI BANCORP INC. FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________ FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-23406 SOUTHERN MISSOURI BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 43-1665523 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 531 Vine Street, Poplar Bluff, Missouri 63901 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (573) 785-1421 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB. YES x NO The registrant's revenues for the fiscal year ended June 30, 1996 were $11,649,811. As of September 18, 1996, there were issued and outstanding 1,803,201 shares of the registrant's Common Stock, which are listed on the Nasdaq National Market System under the symbol "SMBC." Based on the average of the bid and asked prices for the Common Stock on September 18, 1996, the aggregate value of the Common Stock outstanding held by nonaffiliates of the registrant was $25,695,614 (1,803,201 shares at $14.25 per share). For purposes of this calculation, officers and directors of the registrant are considered nonaffiliates. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Annual Report to Stockholders for the Fiscal Year Ended June 30, 1996 ("Annual Report") (Parts I and II). 2. Portions of Registrant's Definitive Proxy Statement for the 1996 Annual Meeting of Stockholders (Part III). Transitional Small Business Disclosure Format (check one) Yes No X PAGE PART I Item 1. Description of Business General Southern Missouri Bancorp, Inc. ("Southern Missouri Bancorp" or the "Company"), a Delaware corporation, was incorporated on December 30, 1993 for the purpose of becoming the holding company for Southern Missouri Savings Bank ("Southern Missouri" or the "Savings Bank") upon the Savings Bank's conversion from a state chartered mutual to a state chartered stock savings and loan association ("Conversion"). The Conversion was completed on April 13, 1994 through the sale and issuance of 1,785,375 shares of common stock by the Company. At June 30, 1996, the Company had total assets of $159.8 million, total deposits of $120.1 million and stockholders' equity of $26.2 million. Southern Missouri Bancorp has not engaged in any significant activity other than holding the stock of Southern Missouri. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Savings Bank and its subsidiaries. Southern Missouri was chartered as a Missouri savings and loan association in 1887. On June 20, 1995, the Savings Bank converted to a federally chartered stock savings bank and took its current name, Southern Missouri Savings Bank, FSB. The Savings Bank conducts its business from its home office in Poplar Bluff and seven full service branch facilities in Poplar Bluff, Van Buren, Dexter, Malden, Kennett, Doniphan and Ellington, Missouri. The deposits of the Savings Bank are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The Savings Bank provides its customers with a full array of community banking services. The Savings Bank is primarily engaged in the business of attracting deposits from the general public and using such deposits, together with other funding sources, to invest in one- to four-family residential mortgage loans and, to a lesser extent, consumer and commercial real estate loans, including loans secured by farm properties, for its loan portfolio. The Savings Bank also invests in mortgage-backed and related securities, obligations of state and political subdivisions and U.S. Government and agency securities, and other assets. Market Area The Savings Bank is headquartered in Poplar Bluff, Missouri, which is the economic hub of the Savings Bank's primary market area. The Savings Bank's primary market area has a population of approximately 127,000. The largest employer in the primary market area is Briggs & Stratton which has a small engine manufacturing facility and employs approximately 750 persons. Other employers in the market area are Gates Rubber Co., Rowe Furniture Co., Lucy Lee Hospital, John Pershing VA Hospital, Doctors Regional Hospital, Poplar Bluff School District, Arvin, Noranda and Paramount Cap Manufacturing Company. The economy of the primary market area is primarily rural in nature and also encompasses Shannon, Wayne, New Madrid and Pemiscott counties. Farming is significant to the local economy with the primary emphasis on livestock, rice, timber, soybeans, wheat, watermelons, corn and cotton. Supervisory Agreement On December 21, 1994, the Savings Bank voluntarily entered into a Supervisory Agreement with the OTS as a result of its latest OTS examination. The Supervisory Agreement generally concerns the Savings Bank's investment portfolio and more specifically focuses on the reporting, monitoring and assessment of interest rate risk in connection with the Savings Bank's portfolio of collateralized mortgage obligations ("CMOs"). As part of the Supervisory Agreement, the Savings Bank hired a Chief Financial Officer. See Part III, Item 9. of this Form 10-KSB for information concerning the Savings Bank's Chief Financial Officer. In addition, the Savings Bank revised its Investment Policy to conform more closely to the OTS's policy on securities activities and implemented additional procedures to review the investment activities and monitor interest rate risk management. 1 PAGE Proposed Federal Legislation Effective January 1, 1996, the FDIC substantially reduced deposit insurance premiums for well-capitalized, well-managed financial institutions that are members of the Bank Insurance Fund ("BIF"). Under the new assessment schedule, approximately 92% of BIF members pay the statutory minimum annual assessment of $2,000. With respect to financial institutions that are members of the SAIF, the FDIC has retained the existing rate schedule of 23 to 31 basis points. The Savings Bank is a member of the SAIF rather than the BIF. SAIF premiums may not be reduced for several years because the SAIF has lower reserves than the BIF. Because deposit insurance premiums are often a significant component of noninterest expense for insured depository institutions, the reduction in BIF premiums may place the Savings Bank at a competitive disadvantage since BIF-insured institutions (such as most commercial banks) may be able to offer more attractive loan rates, deposit rates, or both. Proposed federal legislation would recapitalize the SAIF and resolve the current premium disparity by requiring savings institutions like the Savings Bank to pay a one-time assessment to increase SAIF's reserves to $1.25 per $100 of deposits that is expected to be approximately 80 basis points on the amount of deposits held by a SAIF-member institution. The payment of a one-time fee would have the effect of immediately reducing the capital and pre-tax earnings of SAIF-member institutions by the amount of the fee. Based on the Savings Bank's assessable deposits of $120.1 million at June 30, 1996, a one-time assessment of 80 basis points would equal approximately $961,000 on a pre-tax basis, or $634,000 after tax. Management cannot predict whether any legislation imposing such a fee will be enacted, or, if enacted, the amount or timing of any one-time fee or whether ongoing SAIF premiums will be reduced to a level equal to that of BIF premiums. See "REGULATION." Selected Consolidated Financial Information This information is incorporated by reference from pages 5 and 6 of the 1996 Annual Report to Stockholders ("Annual Report") attached hereto as Exhibit 13. Yields Earned and Rates Paid The information contained under the section captioned "Yields Earned and Rates Paid" in the Annual Report is incorporated herein by reference. Rate/Volume Analysis The following table sets forth the effects of changing rates and volumes on net interest income of the Savings Bank. 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). 1996 Compared to 1995 1995 Compared to 1994 Increase (Decrease) Increase (Decrease) Due to Due to Rate/ Rate/ Rate Volume Volume Net Rate Volume Volume Net (Dollars in thousands) Interest-earning assets: Loans receivable(1) $451 $708 $55 $1,214 (283) $ 518 $ (26) $ 209 Mortgage-backed and related securities (68) 372 (15) 289 122 104 9 235 Investment securities 89 (252) (11) (174) (213) 163 (17) (67) Other interest-earning deposits 33 6 1 40 60 (10) (6) 44 2 PAGE 1996 Compared to 1995 1995 Compared to 1994 Increase (Decrease) Increase (Decrease) Due to Due to Rate/ Rate/ Rate Volume Volume Net Rate Volume Volume Net (Dollars in thousands) Total net change in income on interest- earning assets 505 834 30 1,369 (314) 775 (40) 421 Interest-bearing liabilities: Deposits 513 184 19 716 635 (160) (22) 453 FHLB advances and other borrowings (1) 414 (8) 405 (2) 12 (1) 9 Total net change in expense on interest- bearing liabilities 512 598 11 1,121 633 (148) (23) 462 Net change in net interest income $ (7) $236 $19 $ 248 $(947) $ 923 $ (17) $(41) (1) Does not include interest on loans 90 days or more past due. Asset and Liability Management The Savings Bank employs various strategies intended to minimize the adverse effect of interest rate risk on future operations by providing for a better match between the interest rate sensitivity of its assets and liabilities. In particular, the Savings Bank's strategies are intended to stabilize net interest income for the long-term by protecting its interest rate spread against increases in interest rates. Such strategies include the origination for portfolio of adjustable-rate mortgage loans ("ARMs") secured by one to four family residential real estate and the origination of consumer and other loans with greater interest rate sensitivities than long-term, fixed-rate residential mortgage loans. Asset/liability management in the form of structuring cash instruments provides greater flexibility to adjust exposure to interest rates. During periods of high interest rates, management believes it is prudent to offer competitive rates on short-term deposits and less competitive rates for long-term liabilities. This posture allows the Savings Bank to benefit quickly from declines in interest rates. Likewise, offering more competitive rates on long-term deposits during the low interest rate periods allows the Savings Bank to extend the repricing and/or maturity of its liabilities thus reducing its exposure to rising interest rates. The OTS provides a net market value methodology to measure the interest rate risk exposure of thrift institutions. This exposure is a measure of the potential decline in the net portfolio value ("NPV") of the institution based upon the effect of an assumed 200 basis point increase or decrease in interest rates. NPV is the present value of the expected net cash flows from the institution's assets, liabilities and off-balance sheet contracts. Under OTS regulations, an institution's "normal" level of interest rate risk in the event of this assumed change in interest rates is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. Beginning July 1, 1994, thrift institutions with greater than "normal" interest rate exposure must take a deduction from their total capital available to meet their risk-based capital requirement. The amount of that deduction is one-half of the difference between (a) the institution's actual calculated exposure to the 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of the present value of its assets. Utilizing this measurement concept, at June 30, 1996, the change in the Savings Bank's NPV as a percent of the present value of its assets was negative 2.68% in the event of a 200 basis point increase in interest rates. 3 PAGE On this basis, the Savings Bank believes that its interest rate risk is substantially less than the amount treated as "normal" under the OTS regulations. The table below measures interest rate risk by estimating the change in market value of the Savings Bank's assets, liabilities, and off-balance sheet contracts in response to an instantaneous change in the general level of interest rates. The procedure for measuring interest rate risk was developed by the OTS to replace the "gap" analysis (the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a specific time period). The model first estimates the level of the Savings Bank's NPV (market value of assets, less market value of liabilities, plus or minus the market value of any off-balance sheet items) under the current rate environment. In general, market values are estimated by discounting the estimated cash flows of each instrument by appropriate discount rates. The model then recalculates the Savings Bank's NPV under different interest rate scenarios. The change in NPV under the different interest rate scenarios provides a measure of the Savings Bank's exposure to interest rate risk. The data presented below is based on information provided by the Savings Bank as calculated by the OTS as of June 30, 1996. NPV as % of Net Portfolio PV of Assets Change in Rates $ Amount $ Change % Change NPV Ratio Change (Dollars in thousands) +400 bp $11,799 $(10,786) (48)% 8.11% (619) bp +300 bp 14,863 (7,721) (34) 9.98 (432) bp +200 bp 17,683 (4,901) (22) 11.62 (268) bp +100 bp 20,265 (2,320) (10) 13.06 (124) bp 0 bp 22,585 14.30 - -100 bp 23,873 1,289 6 14.95 65 bp - -200 bp 24,864 2,279 10 15.42 112 bp - -300 bp 25,735 3,150 14 15.82 152 bp - -400 bp 26,815 4,230 19 16.32 202 bp Lending Activities General. The principal lending activity of the Savings Bank is the origination of conventional mortgage loans for the purpose of purchasing or refinancing one- to four-family owner occupied homes within its primary market area. In an attempt to diversify its lending portfolio, however, the Savings Bank also engages in community banking activities and originates real estate loans, consumer loans, mobile home dealer paper, home improvement loans, commercial real estate loans, commercial business loans, agricultural loans, student loans, and loans secured by deposit accounts. At June 30, 1996, the Savings Bank's net loans receivable totaled approximately $95.5 million representing approximately 59.8% of total assets. Since 1983, the Savings Bank has originated primarily adjustable rate mortgage ("ARM") loan products. At June 30, 1996, ARM loans accounted for $74.0 million or 72.5% of the net loan portfolio. The Savings Bank focuses on serving the needs of its local community and strongly believes in a lending philosophy that stresses individual customer service and flexibility in meeting the needs of its customers. 4 PAGE Loan Portfolio Analysis. The following table sets forth the composition of the Savings Bank's loan portfolio by type of loan and type of security as of the dates indicated. At June 30, 1996 1995 1994 Amount Percent Amount Percent Amount Percent (Dollars in thousands) Type of Loan: Mortgage Loans: Conventional $68,330 71.52% $60,521 73.02% $58,995 78.73% Commercial 16,584 17.36 14,775 17.82 11,392 15.20 Construction 4,283 4.48 4,587 5.53 2,013 2.69 Total mortgage loans $89,197 $79,883 $72,400 Other Loans: Loan secured by deposit accounts $ 753 .79 $ 726 .88 $ 819 1.09 Home equity and second mortgage loans 689 .72 493 .59 701 .94 Automobile loans 3,196 3.35 1,252 1.51 823 1.09 Other 5,157 5.40 2,616 3.16 2,199 2.94 Total other loans 9,795 5,087 4,542 Total loans $98,992 103.62 $84,970 102.51 $76,942 102.68 Less: Undisbursed loans in process $2,610 (2.73) $1,260 (1.52) $1,228 (1.64) Unearned discounts on loans originated and purchased -- -- 4 -- 28 (.03) Deferred gain on sale of other real estate 131 (.14) 172 (.21) 209 (.28) Unamortized loan origination fees, net or direct costs 89 (.09) 75 (.09) 68 (.09) Allowance for loan losses 627 (.66) 572 (.69) 477 (.64) Total loans receivable, net $95,535 100.00% $82,887 100.00% $74,932 100.00% Type of Security: Residential real estate One- to four- family $69,368 72.61% $62,626 75.56% $59,334 79.18% Other dwellings 2,663 2.79 3,616 4.36 2,393 3.19 Commercial real estate 15,612 16.34 12,666 15.28 9,641 12.87 Land 1,554 1.63 975 1.17 1,032 1.38 Savings accounts 753 .79 726 .88 819 1.09 Consumer and other 9,042 9.46 4,361 5.26 3,723 4.97 Total loans $98,992 103.62 84,970 102.51 76,942 102.68 (table continued on following page) 5 PAGE At June 30, 1996 1995 1994 Amount Percent Amount Percent Amount Percent (Dollars in thousands) Less: Due to borrowers on construction loans $2,610 (2.73) 1,260 (1.52) 1,228 (1.64) Unamortized loan fees . 89 (.09) 75 (.09) 68 (.09) Unearned discount on loans purchased -- 4 -- 28 (.03) Deferred gain on sale of other real estate 131 (.14) 172 (.21) 209 (.28) Allowance for possible loan losses 627 (.66) 572 (.69) 477 (.64) Total loans receivable, net $95,535 100.00% $82,887 100.00% $74,932 100.00% One- to Four-Family Residential Loans. The primary lending activity of the Savings Bank has been the origination of mortgage loans to enable borrowers to purchase existing homes, to construct new one- to four-family homes or refinance existing debt on their homes. At June 30, 1996, approximately $69.4 million, or 72.7% of the Savings Bank's net loan portfolio consisted of loans secured by one- to four-family residential real estate. The Savings Bank presently originates ARM loans secured by one- to four-family properties with loan terms of 15 to 20 years in its primary market area. Since 1983, the Savings Bank has originated primarily ARM loan products. Initially, ARMs were indexed to the semi annual national average cost of funds for FSLIC insured institutions. In 1986, the Savings Bank discontinued the use of the District Cost of Funds Index and changed to the Savings Bank's cost of funds index. On June 21, 1995, the Savings Bank began to use the 11th District cost of funds for ARMs indexing. The Savings Bank's long-term, fixed-rate loans are originated with terms of up to 15 to 20 years, and are amortized on a monthly basis with principal and interest due each month. At June 30, 1996, the Savings Bank had $11.4 million of long-term, fixed-rate mortgage loans in its portfolio or 11.5% of its total loan portfolio. The loan fees charged, interest rates and other provisions of the Savings Bank's ARMs are determined by the Savings Bank on the basis of its own pricing criteria and competitive market conditions. At June 30, 1996, the Savings Bank charged an origination fee on its ARMs ranging from 0% to 1% of the principal amount of the loan. Interest rates and payments on the Savings Bank's ARMs generally are adjusted annually to a rate typically equal to 250 to 300 basis points above the ARM index used by the Savings Bank. The Savings Bank offers ARMs with initial rates below those which would prevail under the foregoing computations, determined by the Savings Bank based on market factors and competitive rates for loans having similar features offered by other lenders for such initial periods. At June 30, 1996, the initial interest rate being offered on the Savings Bank's ARMs ranged from 7.25% to 8.25% per annum. The periodic interest rate cap (the maximum amount by which the interest rate may be increased or decreased in a given period) on the Savings Bank's ARMs is generally 100 to 200 basis points and the maximum lifetime interest rate cap is 12% and there is generally a minimum interest rate of 5%. The Savings Bank underwrites ARMs based on the borrower's ability to repay the loan using the first year adjusted rate to qualify the borrower. While single-family residential real estate loans are normally originated with 15-year terms, such loans typically remain outstanding for substantially shorter periods. This is because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. In addition, substantially all of the fixed interest rate loans in the Savings Bank's loan portfolio contain due-on-sale clauses providing that the Savings Bank may declare the unpaid amount due and payable upon the sale of the property securing the loan. The Savings Bank enforces these due-on-sale 6 PAGE clauses to the extent permitted by law. Thus, average loan maturity, which the Savings Bank estimates is between 7 to 10 years, is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans. On loans originated since 1980, a total of 2,437 real estate mortgage loans have prepaid as of June 30, 1996 with an average estimated life of approximately 8.4 years. On all loans originated by the Savings Bank, a total of 1,222 real estate mortgage loans have prepaid during the past three fiscal years and these loans had an average estimated life of seven to 10 years. The Savings Bank's lending policies generally limit the maximum loan-to-value ratio on adjustable rate residential mortgage loans to 80% of the lesser of the appraised value or purchase price of the underlying residential property. Loan requests for 80 - 90% can be approved by the loan committee, discount committee, or the Board of Directors. The Savings Bank requires title insurance or an abstract extension and attorney's opinion, and fire, flood (if applicable) and casualty coverage on all mortgage loans originated or purchased. All of the Savings Bank's real estate loans contain "due-on-sale" clauses. At June 30, 1996, the maximum loan-to-value ratio on loans to borrowers was 90%. At June 30, 1996, the Savings Bank had $4.3 million in interim construction loans in its portfolio with maximum loan to value ratios of 90%. Most of these loans are residential construction loans for one- to four- or multi-family dwelling units. All of these loans automatically convert into permanent residential real estate loans. The Savings Bank also has a construction loan on a local motel project and also is committed to a construction loan on a church. Multi-Family Residential Loans. At June 30, 1996, approximately $2.7 million, or 2.73% of the Savings Bank's net loan portfolio consisted of loans secured by multi-family residential real estate. Multi-family real estate loans are generally originated at 80% of the appraised value of the property or selling price, whichever is less, and carry adjustable rate mortgages with the principal amortized over 10 to 15 years. Loans secured by multi-family real estate are generally larger and involve a greater degree of risk than one- to four- family residential loans. In addition, multi-family real estate loans carry risks similar to those associated with commercial real estate lending. See "-- Consumer and Commercial Business Loans." Commercial Real Estate and Land Loans. The Savings Bank had land and commercial real estate loans outstanding of $17.2 million or 18.0% of the loan portfolio at June 30, 1996. Commercial real estate loans amounted to approximately $15.6 million or 16.3% of the loan portfolio at that date, as compared to $12.7 million or 16.5% of the loan portfolio at June 30, 1995. The commercial real estate loans originated by the Savings Bank traditionally have been secured by motels, medical centers, churches, industrial buildings and fast food restaurants. The Savings Bank expanded its commercial real estate portfolio in fiscal 1996 and fiscal 1995 by targeting a more diverse group of commercial borrowers, such as farmers, rental property owners, manufacturing concerns and small business entities. Land loans on property located primarily in the Savings Bank's primary market area amounted to $1.6 million or 1.7% of the total loan portfolio at that date. The Savings Bank's land loans generally are secured by undeveloped lots, farm land, crops, equipment and livestock and involve the risks associated with general agricultural conditions. Currently, the Savings Bank originates commercial real estate loans to select borrowers known to the Savings Bank and secured by properties in its primary market area. The origination of commercial loans in excess of $500,000 was restricted from August 1989 to January 1993 in connection with a Supervisory Agreement entered into by the Savings Bank with the Federal Home Loan Bank Board ("FHLBB"), the predecessor to the OTS. At June 30, 1996, commercial real estate loans outstanding ranged in principal balance from approximately $1,000 to $1.52 million, with an average balance of approximately $141,000. At June 30, 1996, the Savings Bank's largest commercial real estate loan was a $1.52 million loan secured by a motel located in Poplar Bluff, Missouri, which was performing according to its terms. Subject to market conditions, the Savings Bank intends to originate commercial real estate loans in excess of $500,000 and, since the Supervisory Agreement was lifted in January 1993, the Savings Bank has originated four loans in excess of $500,000 (that amount to $4.25 million in the aggregate at 7 PAGE June 30, 1996). At June 30, 1996, the Savings Bank also had two other commercial loans that were each in excess of $500,000 that had been originated prior to the Supervisory Agreement and at June 30, 1996 totaled approximately $2.73 million. Of primary concern in commercial real estate lending is the borrower's creditworthiness and the feasibility and cash flow potential of the project. To diversify the risks inherent in such lending, the Savings Bank's income property collateral is not concentrated in any one industry or area. Loans secured by income properties are generally larger and involve greater risks than residential mortgage loans because payments on loans secured by income properties are often dependent on successful operation or management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to supply and demand in the market in the type of property securing the loan and therefore, may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, the borrowers ability to repay the loan may be impaired. Moreover, to the extent that the properties constitute new ventures, projections regarding their operating results are inherently speculative, and cash flow and other financial problems may take some time to develop. If these borrowers develop problems, because of the relatively large size of such loans, such problems may require increased reserves and may result in significant reductions in net income. The Savings Bank's general loan-to-value maximum at origination for commercial and industrial property loans is 70%. Consumer and Other Loans. The Savings Bank's consumer loans consist of car loans, mobile home loans, deposit account loans, student loans and various other consumer loans. At June 30, 1996, the Savings Bank's consumer loans totaled approximately $9.8 million, or 10.3% of the Savings Bank's loans receivable. Subject to market conditions, management expects to continue to market and originate consumer loans as part of its strategy to provide a wide range of personal financial services to its depository customer base and as a means to enhance the interest rate sensitivity of the Savings Bank's interest-earning assets and its interest rate spread. The Savings Bank has purchased mobile home loans that are originated by a local dealer. Such loans are made by the Savings Bank to the dealer's customers. At June 30, 1996, such loans amounted to $1.33 million. Reserves for losses maintained by the dealers at June 30, 1996 totaled $131,000. These loans are originated by the mobile home dealer and underwritten by the Savings Bank. Payments are made to the Savings Bank by the borrower. The Savings Bank obtains and reviews regularly updated financial statements of the dealer and monitors the individual loans. The Savings Bank's procedures for underwriting consumer loans include an assessment of the applicant's payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the borrower's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, to the proposed loan amount. Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciating assets such as automobiles, mobile homes, boats and recreational vehicles. In such cases, any repossessed collateral for a defaulted consumer 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. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loans such as the Savings Bank, and a borrower may be able to assert against such assignee claims and defenses that it has against the seller of the underlying collateral. The Savings Bank historically has had a low level of delinquencies on its consumer loans. See "-- Nonperforming Assets and Delinquencies." At June 30, 1996, $45,000 of the Savings Bank's consumer loan portfolio was 90 days or more past due. 8 PAGE Loan Maturity and Repricing The following table sets forth certain information at June 30, 1996 regarding the dollar amount of loans maturing in the Savings Bank's portfolio based on their contractual terms to maturity, 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 which have adjustable rates are shown as maturing at their next repricing date. Loan balances are before deductions for undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses. Within After One Year After 3 Years One Year Through 3 Years Through 5 Years (In thousands) Real estate mortgage $56,072 $2,345 $1,681 Commercial real estate 13,654 1,085 422 Construction (net of undisbursed proceeds) 4,283 -- -- Consumer 1,881 1,785 1,733 Commercial 2,508 329 308 Total loans $78,398 $5,544 $4,144 After 5 Years Through 10 Years Beyond 10 Years Total (In thousands) Real estate mortgage $6,048 $2,184 $68,330 Commercial real estate 167 1,256 16,584 Construction (net of undisbursed proceeds) -- -- 4,283 Consumer 905 2 6,306 Commercial 193 151 3,489 Total loans $7,313 $3,593 $98,992 The following table sets forth the dollar amount of all loans due one year after June 30, 1996, which have fixed interest rates and have floating or adjustable interest rates and which do not reprice within one year. Fixed Floating or Rates Adjustable Rates(1) (In thousands) Real estate mortgage $11,247 $ -- Commercial real estate 3,359 -- Construction 4,283 -- Consumer 6,306 -- Commercial 1,206 -- Total $26,401 $ -- (1) All ARM's outstanding at June 30, 1996 adjust within one year. 9 PAGE The following table sets forth scheduled contractual amortization of loans at June 30, 1996 and June 30, 1995, and the dollar amount of such securities and loans at the date which are scheduled to mature after one year which have fixed or adjustable interest rates. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdraft loans are reported as due in one year or less. At June 30, 1996 Commercial Mortgage Consumer Business Total Loans Loans Loans Loans (In thousands) Amounts due: Within one year $74,009 $1,881 $2,508 $78,398 After one year through three years 3,430 1,785 329 5,544 After three years through five years 2,103 1,733 308 4,144 After five years 9,655 907 344 10,906 Total $89,197 $6,306 $3,489 $98,992 Interest rate terms on amounts due after one year: Fixed $18,889 $6,306 $1,206 $26,401 Adjustable 70,308 -- 2,283 72,591 At June 30, 1996 Commercial Mortgage Consumer Business Total Loans Loans Loans Loans (In thousands) Amounts due: Within one year $ 9,215 $1,981 $ 474 $11,670 After one year through three years 14,164 1,156 336 15,656 After three years through five years 12,644 417 197 13,258 After five years 43,860 147 379 44,386 Total $79,883 $3,701 $1,386 $84,970 Interest rate terms on amounts due after one year: Fixed $19,002 $3,701 $780 $23,483 Adjustable 59,571 -- 606 60,177 10 PAGE Loan Solicitation and Processing. A majority of the loans originated by the Savings Bank are made to existing customers. Upon receipt of a loan application, a credit report is ordered to verify specific information relating to the loan applicant's employment, income and credit standing. A loan applicant's income is verified through the applicant's employer or from the applicant's tax returns. In the case of a resident real estate loan, an appraisal of the real estate intended to secure the proposed loan is required. Since June 30, 1994 the Savings Bank has used outside appraisers for the majority of its real estate loans. Certain individual officers have loan approval authority up to $50,000. The Savings Bank's President, Donald R. Crandell, or Senior Vice President, Kent Nichols, may approve a loan of between $50,000 and $100,000 and all loans over that amount are submitted to the Board of Directors or a Discount Committee consisting of members of the Board of Directors. Upon approval, a commitment letter is issued to the customer with a commitment period generally not exceeding 30 days. All loans are subsequently reviewed by the full Board of Directors. Loan Commitments. The Savings Bank issues commitments for fixed- and adjustable-rate single-family residential mortgage loans conditioned upon the occurrence of certain events. Such commitments are made in writing on specified terms and conditions and are honored generally for up to 30 days from approval, depending on the type of transaction. The Savings Bank had outstanding mortgage loan commitments of approximately $4.0 million at June 30, 1996 including $2.9 million of commitments for construction loans and $545,000 for a church. See Note 13 of Notes to Consolidated Financial Statements contained in the Annual Report. Loan Originations, Purchases and Sales. The Savings Bank has originated loans for its portfolio and not with a view toward sale in the secondary market and many of the loans would not be eligible for sale in the secondary market. The Savings Bank has infrequently purchased loans primarily because the Savings Bank's primary market area has provided the Savings Bank with a sufficient demand for lendable funds and because of the uncertain credit risks associated with such purchases. 11 PAGE The following table shows total loans originated, purchased, sold and repaid during the periods indicated. Year Ended June 30, 1996 1995 1994 (In thousands) Total mortgage loans at beginning of period $79,883 $72,400 $69,661 Loans originated: One- to four-family residential 16,032 13,489 14,577 Multi-family residential and commercial real estate 5,781 2,671 4,750 Construction loans 3,242 4,113 1,575 Other loans -- -- -- Total loans originated 25,055 20,273 20,902 Loans purchased: Other -- -- -- Total loans purchased -- -- -- Loans sold: Total loans sold -- -- -- Total loans sold -- -- -- Mortgage loan principal repayments (15,620) (12,770) (17,942) Foreclosures (121) (20) (221) Net loan activity 9,314 7,483 2,739 Total mortgage loans at end of period $89,197 $79,883 $72,400 Loan Origination and Other Fees. The Savings Bank, in many instances, receives loan origination fees and discount "points." Loan fees and points are a percentage of the principal amount of the mortgage loan that are charged to the borrower for funding the loan. The Savings Bank usually charges origination fees of 0% to 1% on one- to four-family residential real estate loans, long-term commercial real estate loans and residential construction loans. Current accounting standards require fees received for originating loans to be deferred and amortized into interest income over the contractual life of the loan. Deferred fees associated with loans that are sold are recognized as income at the time of sale. The Savings Bank had $89,000 of net deferred loan fees at June 30, 1996. Non-Performing Assets and Delinquencies. When a mortgage loan borrower fails to make a required payment by the end of the grace period in which the payment is due, the Savings Bank generally institutes collection procedures. The first notice is generally mailed to the borrower within 15 days of the end of the grace period, and if necessary, a second notice follows at the end of the next two week period. In most cases, delinquencies are cured promptly; however, if the Savings Bank is unable to make contact with the borrower to obtain full payment, or, if it is not possible to work out a repayment schedule, a notice to commence foreclosure may be mailed to the borrower. The Savings Bank makes every reasonable effort, however, to work with delinquent borrowers. Understanding that borrowers sometimes cannot make payments because of illness, lost jobs, etc., the Savings Bank will attempt to work with delinquent borrowers who are communicating and cooperating with the Savings Bank. The Savings Bank institutes the same collection procedures for non-mortgage loans. 12 PAGE The Board of Directors is informed monthly as to the status of all mortgage and non-mortgage loans that are delinquent 60 days or more, as well as the status on all loans currently in foreclosure or owned by the Savings Bank through foreclosure. The table below sets forth the amounts and categories of non-performing assets in the Savings Bank's loan portfolio at the dates indicated. All loans are placed on non-accrual status after 90 days or prior to that period, when the Savings Bank determines there is little if any likelihood they will be repaid. The loans are fully reserved at that time, through appropriate loss reserves are kept on the books as long as some principal is being repaid. The Savings Bank has no reserves for uncollected interest and does not accrue interest on the non-accrual loans. The Savings Bank would have recorded interest income of $25,000, $32,000 and $24,000 on non-accrual loans during the years ended June 30, 1996, 1995 and 1994, respectively, if such loans had been performing during such periods. The Savings Bank did not recognize interest income on loans after being placed on a non-accrual basis during the years ended June 30, 1996, 1995 and 1994. The following table sets forth information with respect to the Savings Bank's non-performing assets as of the dates indicated. At the dates indicated, the Savings Bank had no restructured loans within the meaning of SFAS 15. At June 30, 1996 1995 1994 1993 1992 (Dollars in thousands) Loans accounted for on a nonaccrual basis: Real estate - Residential $480 $ 700 $ 641 $ 907 $1,111 Commercial -- 14 47 413 501 Consumer 45 14 8 9 25 Commercial 21 9 -- -- -- Total $546 $ 737 $ 696 $1,329 $1,637 Total of nonaccrual and 90 days past due loans $546 $ 737 $ 696 $1,329 $1,637 Real estate owned 60 $ 727 $ 778 $1,128 $1,731 Other non-performing assets -- -- -- -- -- Total nonperforming assets $606 $ 1,464 $ 1,474 $2,457 $3,368 Total loans delinquent 90 days or more to net loans .57% .89% .93% 1.85% 2.25% Total loans delinquent 90 days or more to total assets .34 .50 .49 .99 1.22 Total nonperforming assets to total assets .38 .99 1.04 1.82 2.52 Asset Classification. The OTS has adopted various changes in its regulations regarding problem assets of savings institutions. These regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: 13 PAGE 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. Assets classified as substandard or doubtful require the institution to establish general allowances for these asset losses. If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge off such amount. A portion of general loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated "special mention" and monitored by the Savings Bank. At June 30, 1996 and 1995 the aggregate amounts of the Savings Bank's classified assets as determined by the Savings Bank, and of the Savings Bank's general and specific loss allowances and charge-offs for the period then ended, were as follows: At June 30, 1996 1995 (In thousands) Loss $ -- $ -- Doubtful -- 5 Substandard assets 560 1,529 Special mention -- -- Total classified assets $ 560 $1,534 General loss allowances $ 627 $ 572 Specific loss allowances 335 419 Total allowances $ 962 $ 991 Charge-offs $ (5) $ (33) The following is a discussion of the Savings Bank's substandard loans of special concern: At June 30, 1996 the Savings Bank had an aggregate of $431,000 of loans to a borrower that were secured by commercial property. As of that date, none of these loans were 30 to 60 days delinquent. The commercial real estate property is currently profitable, and the borrower's personal cash flow problem has improved over the past 12 months subsequent to June 30, 1996. Real Estate Owned. Real estate acquired by the Savings Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired, the unpaid principal balance of the related loan plus foreclosure costs are compared to the property's appraised value. The property is then directly written down to the lower of cost or fair value less estimated selling costs with any adjustments made through the establishment of a specific reserve. At June 30, 1996, the Savings Bank's real estate owned was $60,000 and included 16 properties in loan amounts ranging from $1,000 to $15,000. Allowance for Loan Losses The Savings Bank's management evaluates the need to establish reserves for losses on loans based on estimated losses on specific loans when a finding is made that a decline in value has occurred. Such evaluation includes a 14 PAGE review of all loans for which full collectibility may not be reasonably assured and considers, among other matters, the estimated market value of the underlying collateral of problem loans, prior loss experience, economic conditions and overall portfolio quality. These provisions for losses are charged against earnings in the year they are established. The Savings Bank had allowance for loan losses at June 30, 1996, 1995 and 1994 of approximately $627,000, $572,000 and $477,000, respectively. Management believes that loan loss reserves were adequate at June 30, 1996. However, if the underlying facts and circumstances of the loan portfolio change in the future, the adequacy of the allowance for loan losses will be addressed and, if need be, adjusted accordingly. There has been a greater level of scrutiny by regulatory authorities of the loan portfolios of financial institutions nationwide, undertaken as part of the examination of the institution by the FDIC, OTS, or other federal regulators. Results of recent examinations indicate that these regulators may be applying more conservative criteria in evaluating real estate values, requiring significantly increased provisions for potential loan losses. While the Savings Bank believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that regulators, in reviewing the Savings Bank's loan portfolio, will not request the Savings Bank to significantly increase its allowance for loan losses. Any material increase in reserves may adversely affect the Savings Bank's financial condition and earnings. The following table sets forth an analysis of the Savings 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, 1996 1995 1994 1993 1992 (Dollars in thousands) Allowance at beginning of period $572 $477 $261 $274 $287 Provision for loan losses 60 95 230 26 7 Recoveries -- -- -- -- -- Charge offs: Residential real estate -- -- 14 24 19 Consumer 5 -- -- 15 1 Total charge offs 5 -- 14 39 20 Net charge offs 5 -- 14 39 20 Balance at end of period $627 $572 $477 $261 $274 Ratio of allowance to total loans outstanding at the end of the period .63% .67% .62% .36% .38% Ratio of net charge offs to average loans outstanding during the period .01% -- .02% .05% .03% 15 PAGE The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated. At June 30, 1996 1995 1994 Percent Percent Percent of Loans of Loans of Loans in Each in Each in Each Category Category Category to Total to Total to Total Amount Gross Loans Amount Gross Loans Amount Gross Loans (Dollars in thousands) Residential mortgage $562 72.77% $562 77.96% $ 467 80.23% Consumer 65 9.89 10 5.99 10 5.90 Unallocated -- -- -- -- -- -- Total allowance for loan losses $627 $572 $ 477 At June 30, 1993 1992 Percent Percent of Loans of Loans in Each in Each Category Category to Total to Total Amount Gross Loans Amount Gross Loans (Dollars in thousands) Residential mortgage $251 82.49% $249 83.20% Consumer 10 4.64 25 3.83 Unallocated -- -- -- -- Total allowance for loan losses $261 $274 16 PAGE Investment Activities The Savings Bank has authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various Federal agencies and of state and municipal governments, deposits at the FHLB-Des Moines, certificates of deposit of federally insured institutions, certain bankers' acceptances and federal funds. Subject to various restrictions, such savings institutions may also invest a portion of their assets in commercial paper, corporate debt securities and mutual funds, the assets of which conform to the investments that federally chartered savings institutions are otherwise authorized to make directly. Savings institutions are also required to maintain minimum levels of liquid assets which vary from time to time. See "REGULATION OF SOUTHERN MISSOURI -- Federal Home Loan Bank System." The Savings Bank may decide to increase its liquidity above the required levels depending upon the availability of funds and comparative yields on investments in relation to return on loans. The Savings Bank is required under federal regulations to maintain a minimum amount of liquid assets and is also permitted to make certain other security investments. See "REGULATION OF SOUTHERN MISSOURI" herein and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources" in the Annual Report. The balance of the Savings Bank's investments in short-term securities in excess of regulatory requirements reflects management's response to the significantly increasing percentage of deposits with short maturities. At June 30, 1996, the Savings Bank's regulatory liquidity was 10.0% which is in excess of the required 5%. It is the intention of management to hold securities with short maturities in the Savings Bank's investment portfolio in order to enable the Savings Bank to match more closely the interest-rate sensitivities of its assets and liabilities. Investment decisions are made by the Investment Officer and Chief Executive Officer, who acts within policies established by the Board of Directors, and are reported monthly to the Board. Those investments include corporate securities, federally insured certificates of deposit, FHLB term time obligations, bankers acceptances, treasury obligations and U.S. Government agencies. Securities are purchased for investment purposes and are determined to be either held until maturity or available for sale at the time of purchase. The goals of the Savings Bank's investment policy are to obtain the highest yield consistent with maintaining flexibility through diversification of investments. In addition, as a result of the concern with interest rate risk exposure, there recently has been a focus on intermediate-term investments. At June 30, 1996, the Savings Bank's securities investment portfolio totaled $21.3 million and consisted primarily of federal agency obligations securities, corporate bonds, and municipal bonds. For further information concerning the Savings Bank's investment securities portfolio, see Note 2 of the Notes to the Consolidated Financial Statements contained in the Annual Report. The Savings Bank invests in various corporate bonds, rated BAA or better, generally in amounts up to $1.0 million. At June 30, 1996, its investments included bonds in GMAC, Associates Corp., Sears Roebuck & Co., Ford Motor Company, Salaman, Inc., Bell Atlantic, CIT Group Holdings, and Phillip Morris. At June 30, 1996, such bonds ranged in maturity from 1996 to 1998 at interest rates of 5.5% to 8.3%. As part of its investment activities, the Savings Bank also purchases state and local municipal obligations. It has purchased non-rated municipal obligations of local and surrounding areas within the State of Missouri and rated obligations of municipalities located outside of its market area. At June 30, 1996, the Savings Bank had $8.9 million outstanding in obligations of states and political subdivisions. On June 30, 1994, the Company adopted Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which allows debt securities to be classified as "held to maturity" and reported at amortized cost only if the reporting entity has the positive intent and ability to hold these securities to maturity. Securities classified as "available for sale" must be reported at fair value with unrealized gains and losses recorded as a separate component of stockholders' equity. At June 30, 1996, investments and mortgage-backed and related securities totaling $50.6 million (book value) were classified as available for sale. See Notes 1 and 2 of Notes to Consolidated Financial Statements contained in the Annual Report. 17 Investment Securities Analysis The following table sets forth the Savings Bank's investment securities portfolio at carrying value (including securities classified held to maturity and securities classified as available for sale) at the dates indicated. At June 30, 1996 1995 Carrying Percent of Carrying Percent of Value(1) Portfolio Value(1) Portfolio (Dollars in thousands) U.S. government treasury and obligations of U.S. government agencies $8,023 37.64% $13,737 40.82% Obligations of states and political subdivisions 8,856 41.55 13,562 40.30 Corporate securities 2,915 13.68 4,860 14.45 Capital Stock - Federal Home Loan Bank of Des Moines 1,520 7.13 1,490 4.43 Total $21,314 100.00% $33,649 100.00% At June 30, 1994 Carrying Percent of Value(1) Portfolio (Dollars in thousands) U.S. government treasury and obligations of U.S. government agencies $13,712 40.85% Obligations of states and political subdivisions 13,348 39.76 Corporate securities 5,018 14.95 Capital Stock - Federal Home Loan Bank of Des Moines 1,490 4.44 Total $33,568 100.00% (1) The market value of the Savings Bank's investment securities portfolio amounted to $21.3 million, $33.9 million and $33.5 million at June 30, 1996, 1995 and 1994, respectively. The following table sets forth the maturities and weighted average yields of the debt securities in the Savings Bank's investment securities portfolio (including securities classified held to maturity and securities classified as available for sale) at June 30, 1996. Less Than One to Five to One Year Five Years Ten Years Amount Yield Amount Yield Amount Yield (Dollars in thousands) U.S. government treasury and obligations of U.S. government agencies $ 557 7.68% $1,885 5.70% $4,663 7.11% Obligations of states and political subdivisions 36 3.85 1,756 5.55 4,205 5.87 Corporate Securities 1,368 8.07 1,547 6.20 -- -- Total $1,961 7.88 $5,188 5.80 $8,868 6.52 Over Ten Years Total Amount Yield Amount Yield (Dollars in thousands) U.S. government treasury and obligations of U.S. government agencies $ 918 6.88% $ 8,023 6.80% Obligations of states and political subdivisions 2,859 6.98 8,856 6.16 Corporate Securities -- -- 2,915 7.07 Total $3,777 6.96 $19,794 6.55 18 PAGE Mortgage-Backed and Related Securities. To supplement lending activities in periods of deposit growth and/or declining loan demand, the Savings Bank has invested in residential mortgage-backed and related securities. Although such securities are either held to maturity or available for sale, they can serve as collateral for borrowings and, through repayments, as a source of liquidity. For information regarding the carrying and market values of the Savings Bank's mortgage-backed securities portfolio, see Note 2 of the Notes to Consolidated Financial Statements contained in the Annual Report. The Savings Bank invests in securities guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA") and the Government National Mortgage Association ("GNMA") and also invests in CMOs. As of June 30, 1996, the Savings Bank had $35.0 million of mortgage-backed and related securities purchased as investments to supplement the Savings Bank's mortgage lending activities. The Savings Bank has invested in CMOs which are securities issued by special purpose entities generally collateralized by pools of mortgage-backed securities. The cash flows from such pools are segmented and paid in accordance with predetermined priority to various classes of securities issued by the entity. As a result of supervisory criticism, the Savings Bank has discontinued its investment in CMOs and is closely monitoring its portfolio. See "-- Supervisory Agreement." In connection with the OTS examination and subsequent to June 30, 1994, the Savings Bank sold one CMO at a loss of $74,300 due to a reclassification under OTS policies as a high risk. The Savings Bank's CMOs are collateralized by federal agency securities with weighted average lives of 9.1 years. As of June 30, 1996, the Savings Bank had CMOs with both a carrying value and an estimated market value of $3.5 million. The Savings Bank does not invest in interest only, principal only, or similar types of CMOs. The Savings Bank has incorporated into its investment policy the regulatory requirements set forth in the OTS TB 52, which deals with the selection of securities dealers, securities policies, unsuitable investment practices and mortgage derivative products. The following table sets forth certain information at June 30, 1996 regarding the dollar amount of mortgage-backed and related securities maturing in the Savings Bank's portfolio (including securities classified held to maturity and securities classified available for sale) based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Mortgage loans which have adjustable rates are shown as maturing at their next repricing date. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses. At June 30, 1996 (In thousands) Amounts due: Within 1 year $ 764 After 1 year through 3 years 2,663 After 3 year through 5 years 4,331 After 5 years 27,801 Total $35,559 The following table sets forth the dollar amount of all mortgage-backed and related securities due one year after June 30, 1996, which have fixed interest rates and have floating or adjustable rates. At June 30, 1996 (In thousands) Interest rate terms on amounts due after 1 year: Fixed $13,091 Adjustable 21,704 Total $34,795 19 PAGE The following table sets forth certain information with respect to each security (other than U.S. Government and agency securities and mutual funds which invest exclusively in such securities) which had an aggregate book value in excess of 10% of the Savings Bank's retained earnings at the dates indicated. At June 30, 1996 1995 1994 Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value (In thousands) FHLMC Certificates $ 8,614 $ 8,616 $ 8,695 $ 8,858 $ 6,672 $ 6,569 GNMA Certificates 10,644 10,644 2,377 2,463 2,654 2,674 FNMA Certificates 12,323 12,325 6,068 6,077 6,652 6,613 Collateralized mortgage obligations 3,456 3,456 7,433 7,433 8,166 8,166 Total $35,037 $35,041 $24,573 $24,831 $24,144 $24,022 Deposit Activities and Other Sources of Funds General. Deposits and loan repayments are the major source of the Savings Bank's funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer term basis for general business purposes. Deposit Accounts. Deposits are attracted from within the Savings Bank's primary market area through the offering of a broad selection of deposit instruments, including negotiable order of withdrawal ("NOW") accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, the Savings Bank considers the rates offered by its competition, profitability to the Savings Bank, matching deposit and loan products and its customer preferences and concerns. The Savings Bank generally reviews its deposit mix and pricing weekly, and adjusts it as necessitated by liquidity needs, the gap position and competition. Management believes deposits have remained relatively stable to increasing slightly, net of interest credited, despite withdrawals as depositors sought increased yields on alternative investments in the marketplace. 20 PAGE The following table sets forth information concerning the Savings Bank's time deposits and other interest-bearing deposits at June 30, 1996. Percentage Interest Minimum of Total Rate Term Category Amount Balance Deposits (In thousands) 2.55% None Now Accounts $100 $ 8,037 6.69% 2.75 None Savings Accounts 50 6,981 5.81 2.67 None Money Market Deposit Accounts 1,000 7,395 6.16 Certificate of Deposit 4.13 91-day Fixed-term/Fixed-rate 500 1,837 1.53 5.64 5 month Fixed-term/Fixed-rate 500 3,935 3.28 5.17 6 month Fixed-term/Fixed-rate 500 23,432 19.50 4.93 6 month IRA Fixed-term/Fixed-rate 500 27 .02 5.26 9 month Fixed-term/Fixed-rate 500 26,984 22.46 6.17 9 month IRA Fixed-term/Fixed-rate 500 7,223 6.01 5.18 11 month Fixed-term/Fixed-rate 500 3,702 3.08 4.64 12 month Fixed-term/Fixed-rate 500 6,587 5.48 4.75 12 month IRA Fixed-term/Fixed-rate 500 378 .32 5.20 15 month Fixed-term/Fixed-rate 500 1,887 1.58 4.41 24 month Fixed-term/Fixed-rate 500 5,068 4.22 5.00 24 month IRA Fixed-term/Fixed-rate 500 265 .22 4.48 36 month Fixed-term/Fixed-rate 500 3,588 2.98 5.25 36 month IRA Fixed-term/Fixed-rate 500 5,947 4.95 5.02 48 month Fixed-term/Fixed-rate 500 711 .59 5.81 60 month Fixed-term/Fixed-rate 500 6,074 5.06 7.79 72 month Fixed-term/Fixed-rate 500 17 .01 8.08 96 month Fixed-term/Fixed-rate 500 63 .05 $120,138 100.00% The following table indicates the amount of the Savings Bank's jumbo certificates of deposit by time remaining until maturity as of June 30, 1996. Jumbo certificates of deposit require minimum deposits of $100,000 and rates paid on such accounts are negotiable. Certificates Maturity Period of Deposits (In thousands) Three months or less $ 8,458 Over three through six months 6,053 Over six through twelve months 2,714 Over 12 months 1,073 Total $18,298 21 PAGE Time Deposits by Rates The following table sets forth the time deposits in the Savings Bank classified by rates at the dates indicated. At June 30, 1996 1995 1994 (In thousands) 2.00 - 2.99% $ -- $ 276 $ 1,141 3.00 - 3.99% -- 2,584 41,867 4.00 - 4.99% 24,741 33,389 18,323 5.00 - 5.99% 66,530 15,438 9,807 6.00 - 6.99% 5,139 41,241 8,827 7.00 - 7.99% 1,236 1,545 4,557 8.00 - 8.99% 63 267 601 9.00 - 9.99% 17 15 14 Total $97,726 $ 94,755 $85,137 The following table sets forth the amount and maturities of time deposits at June 30, 1996. Less Than 1-2 2-3 3-4 After One Year Years Years Years 4 Years (In thousands) 2.00 - 2.99% $ -- $ -- $ -- $ -- $ -- 3.00 - 3.99% -- -- -- -- -- 4.00 - 4.99% 19,579 4,343 819 -- -- 5.00 - 5.99% 56,612 6,140 3,067 294 417 6.00 - 6.99% 5,139 -- -- -- -- 7.00 - 7.99% 1,218 8 5 5 -- 8.00 - 8.99% -- -- -- -- 63 9.00 - 9.99% 17 -- -- -- -- Total $82,565 $10,491 $3,891 $299 $480 Amount Due Percent of Total Certificate Total Accounts (In thousands) 2.00 - 2.99% $ -- --% 3.00 - 3.99% -- -- 4.00 - 4.99% 24,741 25.32 5.00 - 5.99% 66,530 68.08 6.00 - 6.99% 5,139 5.26 7.00 - 7.99% 1,236 1.26 8.00 - 8.99% 63 .06 9.00 - 9.99% 17 .02 Total $97,726 100.00% 22 PAGE Deposit Flow The following table sets forth the balances of savings deposits in the various types of savings accounts offered by the Savings Bank at the dates indicated. At June 30, 1996 1995 Percent Percent of Increase of Increase Amount Total (Decrease) Amount Total (Decrease) (Dollars in thousands) Noninterest bearing $ 771 .64% $ (235) $ 1,006 .85% $ 58 NOW checking 7,266 6.05 1,031 6,235 5.28 252 Regular savings accounts 6,981 5.81 (26) 7,007 5.93 (2,225) Money market deposit 7,395 6.16 (1,754) 9,149 7.74 (3,678) Fixed-rate certificates which mature (1): Within one year 82,565 68.72 5,750 76,815 65.01 13,006 Within three years 14,382 11.97 (1,397) 15,779 13.36 (1,728) After three years 778 .65 (1,383) 2,161 1.83 (1,660) Less: Premium on deposits acquired -- -- -- -- -- -- Total $120,138 100.00% $1,986 $118,152 100.00% $4,025 At June 30, 1994 Percent of Amount Total (Dollars in thousands) Noninterest bearing $ 948 .83% NOW checking 5,983 5.24 Regular savings accounts 9,232 8.09 Money market deposit 12,827 11.24 Fixed-rate certificates which mature (1): Within one year 63,809 55.91 Within three years 17,507 15.34 After three years 3,821 3.35 Less: Premium on deposits acquired -- -- Total $114,127 100.00% ________ (1) At June 30, 1996, 1995, and 1994 jumbo certificates (in thousands) amounted to $18,298, $11,319 and $5,678, respectively, and IRAs (in thousands) equalled $13,841, $13,710 and $14,273 at those dates, respectively. 23 PAGE The following table sets forth the savings activities of the Savings Bank for the periods indicated. Year Ended June 30, 1996 1995 1994 (In thousands) Beginning Balance $118,152 $114,127 $124,117 Net increase (decrease) before interest credited (2,059) 577 (13,078) Interest credited 4,045 3,448 3,088 Net increase (decrease) in savings deposits 1,986 4,025 (9,990) Ending balance $120,138 $118,152 $114,127 In the unlikely event the Savings Bank is liquidated, depositors will be entitled to payment of their deposit accounts prior to any payment being made to the stockholders of the Savings Bank. Substantially all of the Savings Bank's depositors are residents of the State of Missouri. Borrowings. Savings deposits are the primary source of funds for the Savings Bank's lending and investment activities and for its general business purposes. The Savings Bank may rely upon advances from the FHLB-Des Moines to supplement its supply of lendable funds and to meet deposit withdrawal requirements. At June 30, 1996, the Savings Bank had $11.3 million borrowed for short-term purposes, due October through December, 1996. The FHLB-Des Moines has served as the Savings Bank's primary borrowing source. Advances from the FHLB-Des Moines are typically secured by the Savings Bank's first mortgage loans. At June 30, 1996, the Savings Bank also had $300,000 of borrowings from the FHLB-Des Moines at a weighted average interest rate of 5.9% which mature in 2008. Such advances were obtained in connection with a matched borrowing program which enables the Savings Bank to originate 15-year fixed rate loans without any significant increase in interest rate risk. Under the program, advances may not be prepaid within the first year, but may be prepaid at any time after one year without penalty. The FHLB-Des Moines functions as a central reserve bank providing credit for savings and loan associations and certain other member financial institutions. As a member, the Savings Bank is required to own capital stock in the FHLB-Des Moines and is authorized to apply for advances on the security of such stock and certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution's retained earnings or on the FHLB's assessment of the institution's creditworthiness. The FHLB-Des Moines determines specific lines of credit for each member institution. 24 PAGE The following table sets forth certain information regarding borrowings by the Savings Bank at the end of and during the periods indicated: At June 30, 1996 1995 Weighted average rate paid on: Other long term borrowings -- 6.47% Year Ended June 30, 1996 1995 (Dollars in thousands) Maximum amount of borrowings outstanding at any month end: FHLB advances $11,559 $4,320 Approximate average short-term borrowings outstanding with respect to: FHLB advances 7,645 285 Other long term borrowings -- -- Approximate weighted average rate paid on:(1) FHLB advances 5.78% 5.90% _______________ (1) Computed using the weighted rates of each individual transaction. Subsidiary Activities The Savings Bank may invest up to 3% of their assets in service corporations, provided that at least one-half of any amount in excess of 1% is used primarily for community, inner-city and community development projects. The Savings Bank's investment in its service corporation at June 30, 1996 did not exceed the limits applicable to federal savings and loan associations. The Savings Bank has one subsidiary, SMS Financial Services, Inc., which is a full-service insurance agency selling various types of insurance to individuals and businesses. It also leases computer equipment to the Savings Bank. The activities of the subsidiary are not significant to the financial condition or results of operations of the Savings Bank. Competition The Savings Bank has been, and continues to be, a community-oriented savings institution offering a variety of financial resources to meet the needs of Carter, Reynolds, Butler, Stoddard, Ripley and Dunklin counties, Missouri. The Savings Bank's deposit gathering and lending activities are concentrated in these market areas. The Savings Bank's offices are located in Poplar Bluff, Van Buren, Dexter, Malden, Kennett, Doniphan and Ellington, Missouri. The Savings Bank is one of 20 banks and thrifts located in the primary market area. The Savings Bank faces strong competition in the attraction of savings deposits and in the origination of loans. Its most direct competition for savings deposits and loans has historically come from other thrift institutions and from commercial banks located in its primary market area, some with a state-wide or regional presence and some of which have greater 25 PAGE resources than the Savings Bank. Additionally, the Savings Bank faces significant competition from the FHA and Farm Credit System and other financial entities in lending. The Savings Bank also competes with securities firms, credit unions, money market funds and mutual funds in raising deposits. Management considers the Savings Bank's reputation for financial strength and customer service as its major competitive advantage in attracting and retaining customers in its market area. The Savings Bank also believes it benefits from its community orientation as well as its relatively stable core deposit base. REGULATION General The Savings Bank is subject to extensive regulation, examination and supervision by the OTS as its chartering agency, and the FDIC, as the insurer of its deposits. The activities of federal savings institutions are governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and the FDIC to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which federal savings associations may engage. Lending activities and other investments must comply with various statutory and regulatory capital requirements. In addition, the Savings Bank's relationship with its depositors and borrowers is also regulated to a great extent, especially in such matters as the ownership of deposit accounts and the form and content of the Savings Bank's mortgage documents. The Savings Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to review the Savings Bank's compliance with various regulatory requirements. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on the Company, the Savings Bank and their operations. The Company, as a savings and loan holding company, is also required to file certain reports with, and otherwise comply with the rules and regulations of, the OTS. Federal Regulation of Savings Associations Office of Thrift Supervision. The OTS is an office in the Department of the Treasury subject to the general oversight of the Secretary of the Treasury. The OTS generally possesses the supervisory and regulatory duties and responsibilities formerly vested in the FHLBB. Among other functions, the OTS issues and enforces regulations affecting federally insured savings associations and regularly examines these institutions. Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated duties of the FHFB are to supervise the FHLBs, to ensure that the FHLBs carry out their housing finance mission, to ensure that the FHLBs remain adequately capitalized and able to raise funds in the capital markets, and to ensure that the FHLBs operate in a safe and sound manner. The Savings Bank, as a member of the FHLB-Des Moines, is required to acquire and hold shares of capital stock in the FHLB-Des Moines in an amount equal to the greater of (i) 1.0% of the aggregate outstanding principal amount of residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB-Des Moines. The Savings Bank is in compliance with this requirement with an investment in FHLB-Des Moines stock of $1.5 million at June 30, 1996. 26 PAGE Among other benefits, the FHLB provides a central credit facility primarily for member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB-Des Moines. Federal Deposit Insurance Corporation. The FDIC is an independent federal agency established originally to insure the deposits, up to prescribed statutory limits, of federally insured banks and to preserve the safety and soundness of the banking industry. In 1989 the FDIC also became the insurer, up to the prescribed limits, of the deposit accounts held at federally insured savings associations and established two separate insurance funds: the BIF and the SAIF. As insurer of deposits, the FDIC has examination, supervisory and enforcement authority over all savings associations. The Savings Bank's accounts are insured by the SAIF. The FDIC insures deposits at the Savings Bank to the maximum extent permitted by law. The Savings Bank currently pays deposit insurance premiums to the FDIC based on a risk-based assessment system established by the FDIC for all SAIF-member institutions. Under applicable regulations, institutions are assigned to one of three capital groups that are based solely on the level of an institution's capital -- "well capitalized," "adequately capitalized," and "undercapitalized" -- which are defined in the same manner as the regulations establishing the prompt corrective action system, as discussed below. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with rates currently ranging from .23% for well capitalized, financially sound institutions with only a few minor weaknesses to .31% for undercapitalized institutions that pose a substantial risk of loss to the SAIF unless effective corrective action is taken. Until the second half of 1995, the same matrix applied to BIF-member institutions. The FDIC is authorized to raise assessment rates in certain circumstances. The Savings Bank's assessments expensed for the year ended June 30, 1996, totalled $275,000. Effective January 1, 1996, the FDIC substantially reduced deposit insurance premiums for well-capitalized, well-managed financial institutions that are members of the BIF. Under the new assessment schedule, rates were reduced to a range of 0 to 27 basis points, with approximately 92% of BIF members paying the statutory minimum annual assessment rate of $2,000. With respect to SAIF member institutions, the FDIC has retained the existing rate schedule of 23 to 31 basis points. See "-- Proposed Federal Legislation." The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in termination of the deposit insurance of the Savings Bank. Liquidity Requirements. Under OTS regulations, each savings institution is required to maintain an average daily balance of liquid assets (cash, certain time deposits and savings accounts, bankers' acceptances, and specified U.S. Government, state or federal agency obligations and certain other investments) equal to a monthly average of not less than a specified percentage (currently 5.0%) of its net withdrawable accounts plus short-term borrowings. OTS regulations also require each savings institution to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1.0%) of the total of its net withdrawable savings accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet liquidity requirements. Prompt Corrective Action. Under the FDIA, each federal banking agency is required to implement a system of prompt corrective action for institutions that it regulates. The federal banking agencies have promulgated 27 PAGE substantially similar regulations to implement this system of prompt corrective action. Under the regulations, an institution shall be deemed to be (i) "well capitalized" if it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has 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; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a leverage ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized;" (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a leverage ratio that is less than 3.0%; and (v) "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, after notice and an opportunity for a hearing, 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 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 or liquidity. (The OTS may not, however, reclassify a significantly undercapitalized institution as critically undercapitalized.) An institution generally must file a written capital restoration plan that meets specified requirements, as well as a performance guaranty by each company that controls the institution, with the appropriate federal banking agency within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. Immediately upon becoming undercapitalized, an institution shall become subject to various mandatory and discretionary restrictions on its operations. At June 30, 1996, the Savings Bank was categorized as "well capitalized" under the prompt corrective action regulations of the OTS. Standards for Safety and Soundness. The FDIA requires the federal banking regulatory agencies to prescribe, 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; and (vi) compensation, fees and benefits. The federal banking agencies adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to implement safety and soundness standards required by the FDIA. 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. The agencies also proposed asset quality and earnings standards which, if adopted in final, would be added to the Guidelines. If the OTS determines that the Savings Bank fails to meet any standard prescribed by the Guidelines, the agency may require the Savings Bank to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDIA. OTS regulations establish deadlines for the submission and review of such safety and soundness compliance plans. Qualified Thrift Lender Test. All savings associations are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. A savings institution that fails to become or remain a QTL shall either become a national bank or be subject to the following restrictions on its operations: (i) the association may not make any new investment or engage in activities that would not be permissible for national banks; (ii) the association may not establish any new branch office where a national bank located in the savings institution's home state would not be able to establish a branch office; (iii) the association shall be ineligible to obtain new advances from any FHLB; and (iv) the payment of dividends by the association shall be subject to the rules regarding the statutory and regulatory dividend restrictions applicable to national banks. Also, beginning three years after the date on which the savings institution ceases to be a QTL, the savings institution would be prohibited from retaining any investment or engaging in any activity not permissible for a national bank and would be required to repay any outstanding advances to any FHLB. In addition, 28 PAGE within one year of the date on which a savings association controlled by a company ceases to be a QTL, the company must register as a bank holding company and become subject to the rules applicable to such companies. A savings institution may requalify as a QTL if it thereafter complies with the QTL test. Currently, the QTL test requires that 65% of an institution's "portfolio assets" (as defined) consist of certain housing and consumer-related assets on a monthly average basis in nine out of every 12 months. Assets that qualify without limit for inclusion as part of the 65% requirement are loans made to purchase, refinance, construct, improve or repair domestic residential housing and manufactured housing; home equity loans; mortgage-backed securities (where the mortgages are secured by domestic residential housing or manufactured housing); FHLB stock; and direct or indirect obligations of the FDIC. In addition, the following assets, among others, may be included in meeting the test subject to an overall limit of 20% of the savings institution's portfolio assets: 50% of residential mortgage loans originated and sold within 90 days of origination; 100% of consumer and educational loans (limited to 10% of total portfolio assets); and stock issued by the FHLMC or FNMA. Portfolio assets consist of total assets minus the sum of (i) goodwill and other intangible assets, (ii) property used by the savings institution to conduct its business, and (iii) liquid assets up to 20% of the institution's total assets. At June 30, 1996, the qualified thrift investments of the Savings Bank were approximately 74.5% of its portfolio assets. Capital Requirements. Under OTS regulations a savings association must satisfy three minimum capital requirements: core capital, tangible capital and risk-based capital. Savings associations must meet all of the standards in order to comply with the capital requirements. The Company is not subject to any minimum capital requirements. OTS capital regulations establish a 3% core capital or leverage ratio (defined as the ratio of core capital to adjusted total assets). Core capital is defined to include common stockholders' equity, noncumulative perpetual preferred stock and any related surplus, and minority interests in equity accounts of consolidated subsidiaries, less (i) any intangible assets, except for certain qualifying intangible assets; (ii) certain mortgage servicing rights; and (iii) equity and debt investments in subsidiaries that are not "includable subsidiaries," which is defined as subsidiaries engaged solely in activities not impermissible for a national bank, engaged in activities impermissible for a national bank but only as an agent for its customers, or engaged solely in mortgage-banking activities. In calculating adjusted total assets, adjustments are made to total assets to give effect to the exclusion of certain assets from capital and to account appropriately for the investments in and assets of both includable and nonincludable subsidiaries. Institutions that fail to meet the core capital requirement would be required to file with the OTS a capital plan that details the steps they will take to reach compliance. In addition, the OTS's prompt corrective action regulation provides that a savings institution that has a leverage ratio of less than 4% (3% for institutions receiving the highest CAMEL examination rating) will be deemed to be "undercapitalized" and may be subject to certain restrictions. See "-- Federal Regulation of Savings Associations -- Prompt Corrective Action." As required by federal law, the OTS has proposed a rule revising its minimum core capital requirement to be no less stringent than that imposed on national banks. The OTS has proposed that only those savings associations rated a composite one (the highest rating) under the CAMEL rating system for savings associations will be permitted to operate at or near the regulatory minimum leverage ratio of 3%. All other savings associations will be required to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each individual savings association through the supervisory process on a case-by-case basis to determine the applicable requirement. No assurance can be given as to the final form of any such regulation, the date of its effectiveness or the requirement applicable to the Savings Bank. Savings associations also must maintain "tangible capital" not less than 1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is defined, generally, as core capital minus any "intangible assets" other than purchased mortgage servicing rights. Each savings institution must maintain total risk-based capital equal to at least 8% of risk-weighted assets. Total risk-based capital consists of the sum of core and supplementary capital, provided that supplementary capital cannot exceed core capital, as previously defined. Supplementary capital includes (i) permanent capital instruments such as cumulative perpetual 29 PAGE preferred stock, perpetual subordinated debt and mandatory convertible subordinated debt, (ii) maturing capital instruments such as subordinated debt, intermediate-term preferred stock and mandatory convertible subordinated debt, subject to an amortization schedule, and (iii) general valuation loan and lease loss allowances up to 1.25% of risk-weighted assets. The risk-based capital regulation assigns each balance sheet asset held by a savings institution to one of four risk categories based on the amount of credit risk associated with that particular class of assets. Assets not included for purposes of calculating capital are not included in calculating risk-weighted assets. The categories range from 0% for cash and securities that are backed by the full faith and credit of the U.S. Government to 100% for repossessed assets or assets more than 90 days past due. Qualifying residential mortgage loans (including multi-family mortgage loans) are assigned a 50% risk weight. Consumer, commercial, home equity and residential construction loans are assigned a 100% risk weight, as are nonqualifying residential mortgage loans and that portion of land loans and nonresidential construction loans that do not exceed an 80% loan-to-value ratio. The book value of assets in each category is multiplied by the weighing factor (from 0% to 100%) assigned to that category. These products are then totalled to arrive at total risk-weighted assets. Off-balance sheet items are included in risk-weighted assets by converting them to an approximate balance sheet "credit equivalent amount" based on a conversion schedule. These credit equivalent amounts are then assigned to risk categories in the same manner as balance sheet assets and included risk-weighted assets. The OTS has incorporated an interest rate risk component into its regulatory capital rule. Under the rule, savings associations with "above normal" interest rate risk exposure would be subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200 basis point increase or decrease in market interest rates divided by the estimated economic value of the association's assets, as calculated in accordance with guidelines set forth by the OTS. A savings association whose measured interest rate risk exposure exceeds 2% must deduct an interest rate risk component in calculating its total capital under the risk-based capital rule. The interest rate risk component is an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the association's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk-based capital requirement. Under the rule, there is a two quarter lag between the reporting date of an institution's financial data and the effective date for the new capital requirement based on that data. A savings association with assets of less than $300 million and risk-based capital ratios in excess of 12% is not subject to the interest rate risk component, unless the OTS determines otherwise. The rule also provides that the Director of the OTS may waive or defer an association's interest rate risk component on a case-by-case basis. Under certain circumstances, a savings association may request an adjustment to its interest rate risk component if it believes that the OTS-calculated interest rate risk component overstates its interest rate risk exposure. In addition, certain "well-capitalized" institutions may obtain authorization to use their own interest rate risk model to calculate their interest rate risk component in lieu of the OTS-calculated amount. The OTS has postponed the date that the component will first be deducted from an institution's total capital until savings associations become familiar with the process for requesting an adjustment to its interest rate risk component. 30 PAGE The following table presents the Savings Bank's capital levels as of June 30, 1996. At June 30, 1996 Percent of Amount Assets (Dollars in thousands) Tangible capital $19,620 12.67% Minimum required tangible capital 2,324 1.50 Excess $17,296 11.17% Core capital $19,620 12.67% Minimum required core capital 4,648 3.00% Excess $14,972 9.67% Risk-based capital $20,248 26.47% Minimum risk-based capital requirement(1) 6,119 8.00 Excess $14,129 18.47% Limitations On Capital Distributions. OTS regulations impose uniform limitations on the ability of all savings associations to engage in various distributions of capital such as dividends, stock repurchases and cash-out mergers. In addition, OTS regulations require the Savings Bank to give the OTS 30 days' advance notice of any proposed declaration of dividends, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends. The regulation utilizes a three-tiered approach which permits various levels of distributions based primarily upon a savings association's capital level. A Tier 1 savings association has capital in excess of its fully phased-in capital requirement (both before and after the proposed capital distribution). Tier 1 savings association may make (without application but upon prior notice to, and no objection made by, the OTS) capital distributions during a calendar year up to 100% of its net income to date during the calendar year plus one-half its surplus capital ratio (i.e., the amount of capital in excess of its fully phased-in requirement) at the beginning of the calendar year or the amount authorized for a Tier 2 association. Capital distributions in excess of such amount require advance notice to the OTS. A Tier 2 savings association has capital equal to or in excess of its minimum capital requirement but below its fully phased-in capital requirement (both before and after the proposed capital distribution). Such an association may make (without application) capital distributions up to an amount equal to 75% of its net income during the previous four quarters depending on how close the association is to meeting its fully phased-in capital requirement. Capital distributions exceeding this amount require prior OTS approval. Tier 3 associations are savings associations with capital below the minimum capital requirement (either before or after the proposed capital distribution). Tier 3 associations may not make any capital distributions without prior approval from the OTS. The Savings Bank is currently meeting the criteria to be designated a Tier 1 association and, consequently, could at its option (after prior notice to, and no objection made by, the OTS) distribute up to 100% of its net income during the calendar year plus 50% of its surplus capital ratio at the beginning of the calendar year less any distributions previously paid during the year. Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the national bank limit on loans to one borrower. Generally, this limit is 15% of the Savings Bank's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include 31 PAGE certain financial instruments and bullion. The OTS by regulation has amended the loans to one borrower rule to permit savings associations meeting certain requirements, including capital requirements, to extend loans to one borrower in additional amounts under circumstances limited essentially to loans to develop or complete residential housing units. At June 30, 1996, the Savings Bank's limit on loans to one borrower was $2.94 million. At June 30, 1996, the Savings Bank's largest aggregate amount of loans to one borrower was $1.86 million. Activities of Associations and Their Subsidiaries. When a savings association establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings association must notify the FDIC and the OTS 30 days in advance and provide the information each agency may, by regulation, require. Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders. The OTS may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIA. Based upon that determination, the FDIC or the OTS has the authority to order the savings association to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the SAIF. If so, it may require that no SAIF member engage in that activity directly. Transactions with Affiliates. Savings associations must comply with Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B") relative to transactions with affiliates in the same manner and to the same extent as if the savings association were a Federal Reserve member bank. A savings and loan holding company, its subsidiaries and any other company under common control are considered affiliates of the subsidiary savings association under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which the insured association or its subsidiaries may engage in certain covered transactions with an affiliate to an amount equal to 10% of such institution's capital and surplus and place an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, the purchase of assets, the issuance of a guarantee and similar types of transactions. Three additional rules apply to savings associations: (i) a savings association may not make any loan or other extension of credit to an affiliate unless that affiliate is engaged only in activities permissible for bank holding companies; (ii) a savings association may not purchase or invest in securities issued by an affiliate (other than securities of a subsidiary); and (iii) the OTS may, for reasons of safety and soundness, impose more stringent restrictions on savings associations but may not exempt transactions from or otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted only by the Federal Reserve Board, as is currently the case with respect to all FDIC-insured banks. The Savings Bank has not been significantly affected by the rules regarding transactions with affiliates. The Savings Bank's authority to extend credit to executive officers, directors and 10% shareholders, as well as entities controlled by such persons, is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation O thereunder. Among other things, these regulations require that such loans be made on terms and conditions substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. Regulation O also places individual and aggregate limits on the amount of loans the Savings Bank may make to such persons based, in part, on the Savings Bank's capital position, and requires certain board approval procedures to be followed. The OTS regulations, with certain minor variances, apply Regulation O to savings institutions. Savings and Loan Company Regulations Company Acquisitions. The HOLA and OTS regulations issued thereunder generally prohibit a savings and loan holding company, without prior OTS 32 PAGE approval, from acquiring more than 5% of the voting stock of any other savings association or savings and loan holding company or controlling the assets thereof. They also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings association not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the OTS. Company Activities. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions. If the Company acquires control of another savings association as a separate subsidiary other than in a supervisory acquisition, it would become a multiple savings and loan holding company. There generally are more restrictions on the activities of a multiple savings and loan holding company than on those of a unitary savings and loan holding company. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not an insured association shall commence or continue for more than two years after becoming a multiple savings and loan association holding company or subsidiary thereof, any business activity other than: (i) furnishing or performing management services for a subsidiary insured institution, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary insured institution, (iv) holding or managing properties used or occupied by a subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies or (vii) those activities authorized by the Federal Reserve Board as permissible for bank holding companies, unless the OTS by regulation, prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above also must be approved by the OTS prior to being engaged in by a multiple holding company. Qualified Thrift Lender Test. The HOLA requires any savings and loan holding company that controls a savings association that fails the QTL test, as explained under "-- Federal Regulation of Savings Associations -- Qualified Thrift Lender Test," must, within one year after the date on which the association ceases to be a QTL, register as and be deemed a bank holding company subject to all applicable laws and regulations. TAXATION Federal Taxation General. The Company and the Savings Bank report their income on a fiscal year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Savings 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 Savings Bank or the Company. Tax Bad Debt Reserves. For taxable years beginning prior to January 1, 1996, savings institutions such as the Savings Bank which met certain definitional tests primarily relating to their assets and the nature of their business ("qualifying thrifts") were permitted to establish a reserve for bad debts and to make annual additions thereto, which additions may, within specified formula limits, have been deducted in arriving at their taxable income. The Savings Bank's deduction with respect to "qualifying loans," which are generally loans secured by certain interests in real property, may have been computed using an amount based on the Savings Bank's actual loss experience, or a percentage equal to 8% of the Savings Bank's taxable income, computed with certain modifications and reduced by the amount of any permitted additions to the nonqualifying reserve. The Savings Bank's deduction with respect to nonqualifying loans was computed under the experience method, which essentially allows a deduction based on the Savings Bank's actual loss experience over a period of several years. Each year the Savings Bank selected the most favorable way to calculate the deduction attributable to an addition to the tax bad debt reserve. The Savings Bank used the percentage method bad debt deduction for the taxable years ended December 31, 1995, 1994 and 1993. 33 PAGE Recently enacted legislation repealed the reserve method of accounting for bad debt reserves for tax years beginning after December 31, 1995. As result, savings associations will no longer be able to calculate their deduction for bad debts using the percentage-of-taxable-income method. Instead, savings associations will be required to compute their deduction based on specific charge-offs during the taxable year or, if the savings association or its controlled group had assets of less than $500 million, based on actual loss experience over a period of years. This legislation also requires savings associations to recapture into income over a six-year period their post-1987 additions to their bad debt tax reserves, thereby generating additional tax liability. The recapture may be suspended for up to two years if, during those years, the institution satisfies a residential loan requirement. At June 30, 1996, the Savings Bank did not have any post-1987 reserves. Additionally, the Savings Bank has sufficient qualifiying loans in order for it not to have to recapture any of the 1987 reserve. Under prior law, if the Savings Bank failed to satisfy the qualifying thrift definitional tests in any taxable year, it would be unable to make additions to its bad debt reserve. Instead, the Savings Bank would be required to deduct bad debts as they occur and would additionally be required to recapture its bad debt reserve deductions ratably over a multi-year period. At June 30, 1996, the Savings Bank's total bad debt reserve for tax purposes was approximately $1.5 million. Among other things, the qualifying thrift definitional tests required the Savings Bank to hold at least 60% of its assets as "qualifying assets." Qualifying assets generally include cash, obligations of the United States or any agency or instrumentality thereof, certain obligations of a state or political subdivision thereof, loans secured by interests in improved residential real property or by savings accounts, student loans and property used by the Savings Bank in the conduct of its banking business. Under current law, a savings association will not be required to recapture its pre-1988 bad debt reserves if it ceases to meet the qualifying thrift definitional tests. Distributions. To the extent that the Savings Bank makes "nondividend distributions" to the Company that are considered as made: (i) from the reserve for losses on qualifying real property loans, to the extent the reserve for such losses exceeds the amount that would have been allowed under the experience method; or (ii) from the supplemental reserve for losses on loans ("Excess Distributions"), then an amount based on the amount distributed will be included in the Savings Bank's taxable income. Nondividend distributions include distributions in excess of the Savings Bank's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Savings Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Savings Bank's bad debt reserve. Thus, any dividends to the Company that would reduce amounts appropriated to the Savings Bank's bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Savings Bank. The amount of additional taxable income attributable to an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if, the Savings Bank makes a "nondividend distribution," then approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 35% corporate income tax rate (exclusive of state and local taxes). See "REGULATION" for limits on the payment of dividends by the Savings Bank. The Savings Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve. Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. In addition, only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which the Savings Bank's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). For taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess of AMTI (with certain modification) over $2.0 million is imposed on corporations, including the Savings Bank, whether or not an Alternative Minimum Tax ("AMT") is paid. Dividends-Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Savings Bank as a member 34 PAGE 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 Savings Bank will not file a consolidated tax return, except that if the Company or the Savings Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted. Other Federal Tax Matters. Other recent changes in the federal tax system could also affect the business of the Savings Bank. These changes include limitations on the deduction of personal interest paid or accrued by individual taxpayers, limitations on the deductibility of losses attributable to investment in certain passive activities and limitations on the deductibility of contributions to individual retirement accounts. The Savings Bank does not believe these changes will have a material effect on its operations. Missouri Taxation Missouri-based thrift institutions, such as the Savings Bank, are subject to a special financial institutions tax, based on net income without regard to net operating loss carryforwards, at the rate of 7% of net income. This tax is in lieu of certain other state taxes on thrift institutions, on their property, capital or income, except taxes on tangible personal property owned by the Savings Bank and held for lease or rental to others and on real estate, contributions paid pursuant to the Unemployment Compensation Law of Missouri, social security taxes, sales taxes and use taxes. In addition, Southern Missouri is entitled to credit against this tax all taxes paid to the State of Missouri or any political subdivision except taxes on tangible personal property owned by the Savings Bank and held for lease or rental to others and on real estate, contributions paid pursuant to the Unemployment Compensation Law of Missouri, social security taxes, sales and use taxes, and taxes imposed by the Missouri Financial Institutions Tax Law. Missouri thrift institutions are not subject to the regular state corporate income tax. There have not been any IRS audits of the Savings Bank's Federal income tax returns or audits of the Savings Bank's state income tax returns during the past five years. For additional information regarding taxation, see Note 10 of Notes to Consolidated Financial Statements contained in the Annual Report. 35 PAGE Personnel As of June 30, 1996, the Company had 44 full-time employees and 10 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. Item 2. Description of Properties The following table sets forth certain information regarding the Savings Bank's offices as of June 30, 1996. Building Net Book Value Land Building Year as of June Owned/ Owned/ Location Opened 30, 1996 Leased Leased (Dollars in thousands) Main Office 531 Vine Street Poplar Bluff, Missouri 1966 $301 Owned Owned Branch Offices Highway 60 Van Buren, Missouri 1982 125 Owned Owned 1330 Highway 67 Poplar Bluff, Missouri 1976 -- Leased(1) Owned Business 60 West Dexter, Missouri 1979 196 Owned Owned 100 South Madison Malden, Missouri 1974 -- Leased(2) Leased 308 First Street Kennett, Missouri 1982 84 Owned Owned 116 Washington Doniphan, Missouri 1976 -- Leased(3) Leased Highway 106 & 2nd Street Ellington, Missouri 1987 -- Leased(4) Leased (1) Lease expires on September 3, 1999 and has one 5-year option remaining. (2) Lease is month-to-month. (3) Lease expires on October 15, 1996. (4) Lease is month-to-month. 36 PAGE Item 3. Legal Proceedings In the opinion of management, the Savings Bank is not a party to any pending claims or lawsuits that are expected to have a material effect on the Savings Bank's financial condition or operations. Periodically, there have been various claims and lawsuits involving the Savings Bank mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Savings Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Savings Bank's business. Aside from such pending claims and lawsuits which are incident to the conduct of the Savings Bank's ordinary business, the Savings 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 Savings Bank. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the quarter ended June 30, 1996. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information contained in the section captioned "Common Stock" in the Annual Report is incorporated herein by reference. Item 6. Management's Discussion and Analysis or Plan of Operation The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference. Item 7. Financial Statements Independent Auditors Report* (a) Consolidated Statements of Financial Condition as of June 30, 1996 and 1995 (b) Consolidated Statements of Income for the Years Ended June 30, 1996, 1995 and 1994 (c) Consolidated Statements of Stockholders' Equity For the Years Ended June 30, 1996, 1995 and 1994 (d) Consolidated Statements of Cash Flows For the Years Ended June 30, 1996, 1995 and 1994 (e) Notes to Consolidated Financial Statements * Contained in the Annual Report filed as an exhibit hereto and incorporated herein by reference. All schedules have been omitted as the required information is either inapplicable or contained in the Consolidated Financial Statements or related Notes contained in the Annual Report. Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure No disagreement with the Company's independent accountants on accounting and financial disclosure has occurred during the two most recent fiscal years. 37 PAGE PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The information contained under the section captioned "Proposal I -- Election of Directors" in the Proxy Statement is incorporated herein by reference. The following table sets forth certain information with respect to the executive officers of the Company and the Savings Bank. Age at June 30, Name 1996 Position Company Savings Bank Robert A. Seifert 75 Chairman of the Board Director Donald R. Crandell 62 President and Chief President and Chief Executive Officer Executive Officer Leonard W. Ehlers 77 Director Chairman of the Board Samuel H. Smith 58 Secretary/Treasurer Director In addition to the above, the Savings Bank's executive officers group includes: Age at June 30, Name 1996 Position James W. Tatum 70 Vice Chairman Wilma F. Case 57 Senior Vice President and Chief Operations Officer Kent Nichols 58 Senior Vice President and Chairman Loan Department Wilma J. Pratte 61 Secretary Robert Stanley Jones 44 Vice President and Chief Financial Officer The principal occupation of each executive officer of the Company is set forth below. All of the officers listed above have held positions with or been employed by the Company for five years unless otherwise stated. All executive officers reside in Poplar Bluff, Missouri. There are no family relationships among or between the executive officers, unless otherwise stated. Robert A. Seifert served as President of the Savings Bank from 1960 until 1995. He has been a director of the Savings Bank since 1960. Mr. Seifert was the Butler County Recorder of Deeds in Poplar Bluff until his retirement in 1990. He is active in a variety of organizations, including the American Red Cross, the United Gospel Rescue Mission, the Poplar Bluff Museum Board and also serves as Treasurer of the Butler County Historical Society and as an Advisory Member of the Southeast Missouri Mental Health Commission. Mr. Seifert is the brother of Thadis R. Seifert. 38 PAGE Donald R. Crandell joined the Savings Bank in 1985 and served as Executive Vice President and Chief Executive Officer from 1986 to 1995. In November 1994 he became President of the Savings Bank and also continues to serve as Chief Executive Officer. From 1973 to 1985, Mr. Crandell served as Executive Vice President of First National Bank of Salem, Missouri. Mr. Crandell is past President and a Board Member of the Poplar Bluff Chamber of Commerce and the Kiwanis Club. Leonard W. Ehlers served as the Official Court Reporter of the 36th Judicial Circuit and was the owner of Ehlers Reporting Service for over 39 years until his retirement in 1984. Mr. Ehlers is a Board Member of the Willhaven Residential Complex, Inc. and the United Gospel Rescue Mission. Samuel H. Smith is President, Chief Executive Office and a majority stockholder of S H Smith and Company, Inc., an engineering consulting firm in Poplar Bluff, Missouri. He is a member of the Board of Trustees of the Poplar Bluff Public Library; a member of the Board of Directors of the Poplar Bluff Museum; a Board member of the Poplar Bluff Downtown Development Committee; a Haitism Volunteer of the Engineering Ministries, Ltd; and a Board Member of the Poplar Bluff Historical Commission. James W. Tatum was a member and a Partner of Kraft, Miles & Tatum, CPA's, an accounting firm, for over 40 years until his retirement in 1989. He is a past member of the Kiwanis Club and the Poplar Bluff Chamber of Commerce, the American Institute of CPA's and the Missouri Society of CPA's. Wilma F. Case has been affiliated with the Savings Bank for 27 years and has served as Senior Vice President since 1992 and was appointed Chief Operations Officer in 1995. Ms. Case is active in a variety of organizations and currently serves as President of the American Cancer Society, as Director of the Kiwanis Club and is a member of the Business and Professional Women's Association and the Poplar Bluff Chamber of Commerce. Kent Nichols has been affiliated with the Savings Bank for 13 years and has served as Senior Vice President since 1994 and was appointed Chairman of the Loan Department in 1995. Mr. Nichols is active in the Kiwanis Club. Wilma J. Pratte has been affiliated with the Savings Bank for 33 years and has served as Secretary since 1994. Mrs. Pratte served as Assistant Treasurer of the Savings Bank for 24 years. Robert Stanley Jones was hired in 1995 as the investment officer of the Savings Bank. In 1996 he was appointed as the Chief Financial Officer of the Savings Bank. He is a member of the Lion's Club. Item 10. Executive Compensation The information contained under the section captioned "Proposal I -- Election of Directors" in the Proxy Statement is incorporated herein by reference. Item 11. Security Ownership of Certain Beneficial Owners and Management (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement. 39 PAGE (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the sections captioned "Voting Securities and Security Ownership of Certain Beneficial Owners and Management" and "Proposal I - Election of Directors" of the Proxy Statement. (c) Changes in Control The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company. Item 12. Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference to the section captioned "Proposal I -- Election of Directors -- Certain Transactions." Item 13. Exhibits, List and Reports on Form 8-K (a) Exhibits (3)(a) Certificate of Incorporation of the Registrant* (3)(b) Bylaws of the Registrant* 10(a) Registrant's 1994 Stock Option Plan** 10(b) Southern Missouri Savings Bank, FSB Management Recognition and Development Plans** 10(c) Employment Agreement with Donald R. Crandell*** 10(d) Director's Retirement Agreements*** (i) Robert A. Seifert (ii) Thadis R. Seifert (iv) Leonard W. Ehlers (v) James W. Tatum (vi) Samuel H. Smith 10(e) Tax Sharing Agreement*** 13 1996 Annual Report to Stockholders 21 Subsidiaries of the Registrant 23 Consent of Auditors (b) Report on Form 8-K No Forms 8-K were filed during the quarter ended June 30, 1996. Filed as an exhibit to the registrant's Registration Statement on Form S-1 (33-73746). ** Filed as an exhibit to the registrant's 1994 annual meeting proxy statement dated October 21, 1994. *** Filed as an exhibit to the registrant's Annual Report on Form 10-KSB for the year ended June 30, 1995. 40 PAGE SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTHERN MISSOURI BANCORP, INC. Date: September 27, 1996 By: /s/ Donald R. Crandell _________________________________ Donald R. Crandell President and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Donald R. Crandell September 27, 1996 ___________________________________________ Donald R. Crandell President and Chief Executive Officer (Principal Executive and Financial Officer) By: /s/ Robert A. Seifert September 27, 1996 ___________________________________________ Robert A. Seifert President and Director (Principal Accounting Officer) By: /s/ Leonard W. Ehlers September 27, 1996 ___________________________________________ Leonard W. Ehlers Director By: /s/ Thadis R. Seifert September 27, 1996 ___________________________________________ Thadis R. Seifert Director By: /s/ Samuel H. Smith September 27, 1996 ___________________________________________ Samuel H. Smith Director By: /s/ James W. Tatum September 27, 1996 ___________________________________________ James W. Tatum Director PAGE Exhibit 13 1996 Annual Report to Stockholders SOUTHERN MISSOURI BANCORP, INC. 1996 Annual Report to Stockholders TABLE OF CONTENTS Page Letter to Stockholders 1-2 Business of the Company and the Savings Bank 3 Common Stock 4 Selected Consolidated Financial Condition, Operating and Other Data 5-6 Management's Discussion and Analysis of Financial Condition and Results of Operations 7-16 Independent Auditors' Report 17 Consolidated Financial Statements: Consolidated Statements of Financial Condition as of June 30, 1996 and 1995 18 Consolidated Statements of Income for the years ended June 30, 1996, 1995 and 1994 19 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1996, 1995 and 1994 20 Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994 21-22 Notes to Consolidated Financial Statements 23-48 Directors and Officers 49 Corporate Information 50 September 1, 1996 A MESSAGE TO OUR STOCKHOLDERS: On April 13, 1994, Southern Missouri Savings Bank successfully completed its conversion from a mutual to a stock institution. As a result of the conversion, Southern Missouri Bancorp, Inc. was formed as the Savings Bank's holding company. Effective June 20, 1995, the Savings Bank converted from a state-chartered stock savings and loan association to a Federally-chartered stock savings bank. Since the initial offering price of $10.00 per share, the common stock has reached a high of $17.50 and closed on June 30, 1996 at $14.125 per share. The common stock is listed on the Nasdaq National Market under the symbol "SMBC". Net income for the year ended June 30, 1996 was $1.47 million compared with $1.25 million for 1995, an increase of 17.6%. The earnings per share for 1996 were $0.90. The return on assets for the year ended June 30, 1996 was 0.93% with a return on equity of 5.48%. The total assets as of June 30, 1996 were $159.8 million as compared to $148.3 million as of June 30, 1995 an increase of 7.8%. Loan volume continues to be strong with a 15.3% increase of outstanding loans in 1996. The ratio of nonperforming assets to total assets has decreased from 0.99% to 0.38% for the respective fiscal years of 1995 and 1996. The year 1996 was the fifth year of a trend of decreasing ratios for nonperforming assets. The net charge-offs for 1996 was 0.01% of total loans. The foreclosed real estate account has been reduced from $727,510 to $60,133 during these periods. 1 PAGE The Board has approved a $300,000 expenditure for upgrading of the Savings Bank's electronic data processing equipment and programs. This should be completed by the end of fiscal year 1997. A commitment was made in fiscal year 1997 to purchase automatic teller machines to be located in each Southern Missouri Savings Bank community. Remodeling programs for the Kennett and Poplar Bluff branch offices were completed in fiscal year 1996. The main office is undergoing an extensive remodeling program that should be completed in the second quarter of fiscal year 1997. Two major forces continue to guide the Savings Bank's daily activities. The first is a strong commitment to quality service and the second is to promote and support the communities which we serve. With the commitment of the Board, officers, and staff, we look forward to continued growth and financial strength. All of us at the Savings Bank appreciate your loyalty and continued support and look forward to the future with great enthusiasm and excitement. Very truly yours, /s/Donald R. Crandell Donald R. Crandell President and Chief Executive Officer 2 PAGE BUSINESS OF THE COMPANY AND THE SAVINGS BANK On April 13, 1994, Southern Missouri Savings Bank completed its conversion from mutual to stock form and became a wholly-owned subsidiary of a newly formed Delaware holding company, Southern Missouri Bancorp, Inc. The Company issued 1,785,375 shares of common stock at $10 per share in conjunction with the offering and an additional 17,826 shares of common stock were granted to the Savings Bank's Management Recognition Plan (MRP). Net proceeds from the sale of common stock in the offering were $15,160,161 after deduction of conversion costs of $729,369, and unearned compensation related to shares issued to the Employee Stock Ownership Plan (ESOP) and MRP. The Company retained 50% of the net conversion proceeds, less the funds used to originate a loan to the Savings Bank's ESOP for the purchase of shares of common stock, and used the balance of the net proceeds to purchase all of the stock of the Savings Bank in the conversion. The Company has no significant assets other than common stock of the Savings Bank, the loan to the ESOP, and the net proceeds retained by the Company following the conversion. The Company's principal business is the business of the Savings Bank. The Savings Bank operates as a Federally-chartered stock savings bank, originally chartered by the State of Missouri in 1887. The Savings Bank converted from a state-chartered stock savings and loan association to a Federally-chartered stock savings bank effective June 20, 1995. The Savings Bank's deposit accounts are insured up to a maximum of $100,000 by the Savings Association Insurance Fund (SAIF), which is administered by the Federal Deposit Insurance Corporation (FDIC). The Savings Bank's primary business is the origination of mortgage loans secured by one-to four-family residences. The Savings Bank conducts its business through its home office located in Poplar Bluff and seven full service branch facilities in Poplar Bluff, Van Buren, Dexter, Malden, Kennett, Doniphan, and Ellington, Missouri. Lending activities are funded through attraction of deposit accounts, consisting of certificate accounts with terms of 60 months or less, passbook accounts and money-market deposit accounts and advances from the Federal Home Loan Bank of Des Moines. To a lesser extent, the Savings Bank also originates mortgage loans on commercial real estate, construction loans on single-family residences and commercial properties, consumer loans, and loans secured by deposit accounts. 3 PAGE COMMON STOCK The common stock of the Company is traded in the over-the-counter market and quoted on the Nasdaq National Market System under the symbol "SMBC". The following table sets forth per share market price and dividend information for the Company's common stock. As of September 1, 1996, there were approximately 464 stockholders of record. This does not reflect the number of persons or entities who hold stock in nominee or "street name." Fiscal 1996 High Low Dividend Paid First Quarter $17.25 $14.75 $ .125 Second Quarter 17.50 15.00 .125 Third Quarter 15.50 13.50 .125 Fourth Quarter 14.75 13.50 .125 Fiscal 1995 High Low Dividend Paid First Quarter $12.625 $10.875 $ .075 Second Quarter 12.00 8.500 .075 Third Quarter 13.50 9.875 .125 Fourth Quarter 15.50 12.750 .125 Any future dividend declarations and payments are subject to the discretion of the Board of Directors of the Company. The ability of the Company to pay dividends depends primarily on the ability of the Savings Bank to pay dividends to the Company. For a discussion of the restrictions on the Savings Bank's ability to pay dividends, see Note 15 of Notes to Consolidated Financial Statements included elsewhere in this report. 4 PAGE SELECTED CONSOLIDATED FINANCIAL CONDITION, OPERATING AND OTHER DATA At June 30, (In thousands) FINANCIAL CONDITION DATA: 1996 1995 1994 1993 1992 Total assets $159,848 $148,323 $141,824 $134,818 $133,850 Loans receivable, net 95,535 82,887 74,932 71,742 72,600 Mortgage-backed and related securities 35,037 24,574 24,144 25,926 26,938 Cash, interest-bearing deposits and investment securities 24,459 35,421 37,540 33,463 29,907 Deposits 120,138 118,152 114,127 124,117 125,147 Borrowings 11,550 1,314 412 185 145 Stockholders' equity 26,227 27,047 25,793 9,207 7,073 Year Ending June 30, (In thousands) OPERATING DATA: 1996 1995 1994 1993 1992 Interest income $ 11,010 $ 9,640$ 9,219$ 10,322 $ 11,251 Interest expense 6,308 5,187 4,725 5,458 7,361 Net interest income 4,702 4,453 4,494 4,864 3,890 Provision for loan losses 60 95 230 26 8 Net interest income after provision for loan losses 4,642 4,358 4,264 4,838 3,882 Noninterest income 639 455 571 554 674 Noninterest expense 3,161 3,112 2,731 2,328 2,260 Income before income taxes and cumulative effect of change in accounting principle 2,120 1,701 2,104 3,064 2,296 Income tax expense 653 454 626 930 511 Income before cumulative effect of change in accounting principle 1,467 1,247 1,478 2,134 1,785 Cumulative effect of change in accounting principle, income taxes - - 279 - - Net income $ 1,467 $ 1,247$ 1,757$ 2,134 $ 1,785 5 At June 30, OTHER DATA: 1996 1995 1994 1993 1992 Number of: Real estate loans 3,053 3,082 3,278 3,381 3,538 Deposit accounts 12,626 12,837 12,917 14,141 15,248 Full service offices 8 8 8 8 8 KEY OPERATING RATIOS: At or For the Year Ended June 30, 1996 1995 1994 1993 1992 Return on assets (net income divided by average assets) 0.93% 0.86% 1.30% 1.59% 1.36% Return on average equity (net income divided by average equity) 5.48 4.68 13.34 26.48 29.25 Average equity to average assets 17.05 18.30 9.73 6.00 4.65 Interest rate spread (spread between weighted average rate on all interest-earning assets and all interest-bearing liabilities) 2.29 2.39 3.13 3.61 2.95 Net interest margin (net interest income as a percentage of average interest-earning assets) 3.09 3.16 3.44 3.77 3.10 Noninterest expense to average assets 2.01 2.14 2.02 1.73 1.72 Average interest-earning assets to interest-bearing liabilities 119.42 121.09 108.59 103.91 102.52 Allowance for loan losses to total loans at end of period .63 .67 .62 .36 .38 Allowance for loan losses to nonperforming loans 114.94 77.66 68.53 19.64 16.74 Net charge offs to average out- standing loans during the period .01 .00 .02 .05 .03 Ratio of nonperforming assets to total assets .38 .99 1.04 1.82 2.52 6 PAGE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The business of the Savings Bank consists primarily of attracting deposits from the general public and using such deposits to originate mortgage loans secured by one-to four-family residences and, to a lesser extent, commercial real estate loans and loans secured by deposit accounts. The Savings Bank's revenues are derived principally from interest earned on loans and, to a lesser extent, from interest earned on investments. The operations of the Savings Bank are influenced significantly by general economic conditions and by policies of financial institution regulatory agencies, including the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC). The Savings Bank's cost of funds is influenced by interest rates on competing investments and general market interest rates. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered. The Savings Bank's net interest income is dependent primarily upon the difference or spread between the average yield earned on loans and investments and the average rate paid on deposits, as well as the relative amounts of such assets and liabilities. The Savings Bank, as other thrift institutions, is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different times, or on a different basis, than its interest-earning assets. ASSET/LIABILITY MANAGEMENT Key components of a successful asset/liability management strategy are the monitoring and managing of interest rate sensitivity of both the interest-earning asset and interest-bearing liability portfolios. In accordance with a recent interpretation of Statement of Financial Standards No. 115 the Company transferred $23,041,000 of investment and mortgage backed and related securities in December 1995 from the held to maturity classification to the available for sale classification. The transfer under this one-time opportunity was made in order to increase investment management flexibility. The Savings Bank has employed various strategies intended to minimize the adverse effect of interest rate risk on future operations by providing a better match between the interest rate sensitivity of its assets and liabilities. In particular, the Savings Bank's strategies are intended to stabilize net interest income for the long-term by protecting its interest rate spread against increases in interest rates. Such strategies include the origination for its portfolio of one-year, adjustable-rate mortgage loans (AMLs) secured by one-to four-family residential real estate and the origination of other types of adjustable-rate and short-term loans with greater interest rate sensitivities than long-term, fixed-rate residential mortgage loans. 7 PAGE Asset/liability management in the form of structuring cash instruments provides greater flexibility to adjust exposure to interest rates. During periods of high interest rates, management believes it is prudent to offer competitive rates on short-term deposits and less competitive rates for long-term liabilities. This posture allows the Savings Bank to benefit quickly from declines in interest rates. Likewise, offering more competitive rates on long-term deposits during the low interest rate periods allows the Savings Bank to extend the repricing and/or maturity of its liabilities thus reducing its exposure to rising interest rates. LIQUIDITY AND CAPITAL RESOURCES The Savings Bank's principal sources of funds are cash receipts from deposits, loan repayments by borrowers, advances from the Federal Home Loan Bank (FHLB) of Des Moines and net earnings. The Savings Bank has an agreement with the FHLB of Des Moines to provide cash advances, should the need for additional funds be required. For regulatory purposes, liquidity is measured as a ratio of cash and certain investments to withdrawable deposits and short-term borrowings. The present minimum level of liquidity required by regulation is 5%. The Savings Bank's liquidity ratio at June 30, 1996, was approximately 10%. The Savings Bank has $82.6 million in certificates due within one year and $22.4 million in other deposits without specific maturity at June 30, 1996. Management estimates that most of the deposits will be retained or replaced by new deposits. Total assets increased from $148.3 million at June 30, 1995 to $159.8 million at June 30, 1996 as a result of strong loan demand. Cash flows from sales, maturities and prepayments of securities available for sale, deposits, and advances from the FHLB of Des Moines were used to originate loans and purchase securities available for sale. The Savings Bank intends to borrow from the FHLB when the cost of such funds is less than the cost of retail deposits. Stock in the FHLB of Des Moines increased due to receiving a stock dividend in 1996. Accrued interest receivable decreased due to the timing of interest receipts on securities, partially offset by an increase in interest receivable on loans. Foreclosed real estate, net, decreased due to sale of certain properties. Premises and equipment increased principally due to upgrading the electronic data processing equipment and the addition of an automatic teller machine at the Poplar Bluff branch. Income taxes payable increased due to state taxes. In prior years the Savings Bank did not owe state taxes due to the availability of state tax credits. Accrued interest payable increased due to the timing of interest payments on a promotional nine-month certificate as well as a higher outstanding balance of certificates of deposits at June 30, 1996 versus 1995. Interest on the nine month certificate of deposit is paid at maturity, unlike most of the Savings Bank's certificates of deposit, on which interest is paid periodically. 8 PAGE Commitments to originate mortgage loans are legally binding agreements to lend to the Savings's Bank's customers. Commitments at June 30, 1996 to originate mortgage loans and fund loans in process and letters of credit were approximately $6.8 million. Loan commitments normally expire in 180 days or less. RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEAR ENDED JUNE 30, 1996 AND 1995 Net Income. Net income for the year ended June 30, 1996 was $1.5 million or $.90 per share compared with $1.2 million or $.77 per share for 1995. The increase was due to a higher net interest income, higher noninterest income, offset by slightly higher noninterest expense and higher income taxes. Net Interest Income. Net interest income increased by $248,000 from $4.45 million for 1995 to $4.70 million in 1996. The Savings Bank increased its interest bearing assets and interest bearing liabilities by approximately $11 million in 1996. Although the interest rate spread decrease from 2.39% for 1995 to 2.29% for 1996, the Savings Bank earned an interest rate spread on the $11 million. Interest Income. Interest income for 1996 was $11.0 million compared with $9.6 million for 1995. The weighted-average yield on interest-earning assets increased from 6.85% for 1995 to 7.24% for 1996. The increase in the weighted-average rate was accompanied by an increase in average interest-earning assets from $140.8 million for 1995 to $152.2 million for 1996. Interest on loans receivable increased from $5.8 million in 1995 to $7.0 million in 1996 as a result of higher average loans outstanding for 1996 and a higher average interest rate. Interest on mortgage-backed securities increased due to a higher average balance, offset by a lower weighted-average rate. Interest on investment securities decreased due to lower average balance, offset by an increase in the average rate. Interest on other interest-earning assets increased as a result of higher interest rates on overnight funds, and a slightly higher average balance. Interest Expense. Interest expense increased due to higher average balances and interest rates. Average balances for deposits and FHLB advances increased by $4.1 million and $7.0 million, respectively, in 1996 over the 1995 averages. The weighted-average rate on interest-bearing liabilities increased from 4.46% for 1995 to 4.95% for 1996. Provision for Loan Losses. Provision for loan losses are charged to earnings to bring the total allowance for loan losses to a level considered adequate by management to provide for loan losses based on prior loss experience, known and inherent risks 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 collectibility of the Savings Bank's loan portfolio. 9 PAGE For the year ended June 30, 1996, the Savings Bank established a provision for loan losses of $60,000 compared with $95,000 for the year ended June 30, 1995. The book value of non-accrual loans at June 30, 1996 was $546,000 compared to $737,000 at June 30, 1995. These provisions are made based on management's analysis of the various factors which affect the loan portfolio and management's desire to hold the allowance at a level considered adequate. Management performed a detailed analysis of the Savings Bank's loan portfolio, including types of loans and reviews of the Savings Bank's charge-off history and an analysis of the Savings Bank's allowance for loan losses. Management also considered that the Savings Bank has continued to originate a significant amount of multi-family, construction, commercial real estate, and commercial business loans (such as loans secured by business equipment, farm equipment, and inventory). Such loans bear an inherently higher level of credit risk than one-to four-family residential real estate loans. Subject to market conditions, management of the Savings Bank expects that these trends in its lending activities will continue. While management believes the allowance for losses at June 30, 1996 is adequate to cover all losses inherent in the Savings Bank's portfolio, there can be no assurance that in the future the Savings Bank's regulators will not require further increases in the allowance or actual losses will not exceed the allowance. Noninterest Income. Noninterest income increased from $455,000 for 1995 to $639,000 for 1996. The Savings Bank realized net gains on sales of securities and mortgage backed securities (MBSs) of $131,000 in 1996, compared to $11,000 in 1995. Gains on sales of securities and MBSs are not a stable source of income and no assurance can be given that the Savings Bank will generate such gains in the future. Commissions on insurance increased from $291,000 for 1995 to $309,000 for 1996. Banking service charges increased from $121,000 for 1995 to $140,000 for 1996. Net loss from foreclosed real estate was $30,000 for 1995 and $18,000 for 1996. Substantially all foreclosed real estate has been sold by the Savings Bank. Noninterest Expense. Noninterest expense increased from $3.1 million for 1995 to $3.2 million for 1996. Compensation and benefits increased from $1.9 million for 1995 to $2.1 million for 1996. Compensation and benefits increased due to salary increases and the hiring of additional employees during the year. Stock benefit plans established in connection with the conversion were in effect for the full year ended June 30, 1995 and 1996. In addition, under generally accepted accounting principles, expense of the Employee Stock Ownership Plan (ESOP) is affected by changes in the market price of the Company's stock, which increased expense $66,000 in 1996 over 1995. ESOP expense will fluctuate in the future based on changes in the market price of the Company's stock. Occupancy and equipment expense decreased from $314,000 for 1995 to $302,000 for 1996 as result of lower repairs. Provision for losses on foreclosed real estate was a net credit of $59,000 for 1995 compared to a net credit of 84,000 for 1996 as a result of recognition of gain on sales of foreclosed real 10 PAGE estate. Professional fees, which includes supervisory examination fees, decreased from $182,000 for 1995 to $150,000 for 1996. Other expenses decreased due principally to a decrease in dues and subscriptions, annual report printing, and other miscellaneous expenses. Income Taxes. Income taxes increased due to higher earnings before income taxes as well as a higher effective tax rate. The effective tax rate increased in 1996 as a result of higher state taxes, and relatively smaller effect of tax exempt income of state and municipal obligations. State taxes in years prior to 1996 were lower due to the availability of state tax credits and other non-recurring items. See Note 10 of Notes to Consolidated Financial Statements. COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEAR ENDED JUNE 30, 1995 AND 1994 Net Income. Net income for the year ended June 30, 1995 was $1.2 million compared with $1.8 million for 1994. The decrease was due to a lower interest rate spread (difference between weighted- average rate on all interest-bearing assets and all interest- bearing liabilities), lower noninterest income, higher noninterest expense, and the effect of the change in accounting for income taxes in 1994. Net Interest Income. Net interest income decreased by $40,000 from $4.49 million for 1994 to $4.45 million in 1995. The interest rate spread decreased from 3.13% for 1994 to 2.39% for 1995. The decrease in interest rate spread was offset, in part, by an increase in average interest-earning assets. The increase in weighted-average rate on interest-bearing liabilities was offset, in part, by a decrease in average liabilities. Interest Income. Interest income for 1995 was $9.6 million compared with $9.2 million for 1994. The weighted-average yield on interest-earning assets decreased from 7.06% for 1994 to 6.85% for 1995. The decrease in weighted-average rate was offset, in part, by an increase in average interest-earning assets from $130.5 million for 1994 to $140.8 million for 1995. Interest on loans receivable increased from $5.6 million in 1994 to $5.8 million in 1995 as a result of higher average loans outstanding for 1995, offset by a decline in average interest rate. Interest on mortgage-backed securities increased due to higher interest rates and average balance. Interest on investment securities decreased slightly due to a lower weighted-average rate, offset by a higher balance. Interest on other interest-earning assets increased as a result of substantially higher interest rates on overnight funds. Interest Expense. Interest expense increased due to higher interest rates. The weighted-average rate on interest-bearing liabilities increased from 3.93% for 1994 to 4.46% for 1995. The increase in weighted-average rate on interest-bearing liabilities was offset, in part, by a decrease in average liabilities. 11 PAGE Provision for Loan Losses. Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level considered adequate by management to provide for loan losses based on prior loss experience, known and inherent risks 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 collectibility of the Savings Bank's loan portfolio. For the year ended June 30, 1995, the Savings Bank established a provision for loan losses of $95,000 compared with $230,000 for the year ended June 30, 1994. The book value of non-accrual loans at June 30, 1995 was $737,000 compared to $696,000 at June 30, 1994. Noninterest Income. Noninterest income decreased from $571,000 for 1994 to $455,000 for 1995. The Savings Bank realized net gains on sales of securities and mortgage backed securities (MBSs) of $11,000 in 1995, compared to $48,000 in 1994. Gains on sales of securities and MBSs are not a stable source of income and no assurance can be given that the Savings Bank will generate such gains in the future. Commissions on insurance increased from $271,000 for 1994 to $291,000 for 1995. Banking service charges decreased from $137,000 for 1994 to $121,000 for 1995. Net income of foreclosed real estate decreased from income of $28,000 for 1994 to a loss of $30,000 for 1995. The Savings Bank sold several apartment complexes during 1994. The intangible tax refund was $19,000 for 1994, which was the last installment for the Savings Bank. Noninterest Expense. Noninterest expense increased from $2.7 million for 1994 to $3.1 million for 1995. Compensation and benefits increased from $1.6 million for 1994 to $1.9 million for 1995 due to several factors. Stock benefit plans established in connection with the conversion were in effect for the full year ended June 30, 1995 compared with approximately one quarter of the prior year. In addition, under generally accepted accounting principles, expense of the Employee Stock Ownership Plan is affected by changes in the market price of the Company's stock, which increased substantially during the year. ESOP expense will fluctuate in the future based on changes in the market price of the Company's stock. Compensation and benefits were also affected by salary increases and the employment of additional employees during the year. Occupancy and equipment expense increased from $286,000 for 1994 to $314,000 for 1995 as a result of higher property taxes, repairs and computer expenses. Provision for losses on foreclosed real estate was $16,000 for 1994 and a net credit of $59,000 for 1995 as a result of recognition of gains on sales of foreclosed real estate. Professional fees, which include supervisory examination fees, increased from $103,000 for 1994 to $182,000 for 1995 as a result of operating as a public company, assistance in operations of stock benefit plans, and legal assistance 12 PAGE in certain supervisory matters. Other expenses increased due principally to costs associated with operating as a public company, including the Delaware franchise fee, Nasdaq fees, annual report printing, and registrar fees. Income Taxes. Income taxes decreased due to lower earnings before income taxes and cumulative effect of change in accounting principle, as well as a lower effective tax rate. The effective tax rate was lower in 1995 due to the full year effect of tax exempt income of state and municipal obligations purchased late in the year ended June 30, 1994, offset by state taxes. The Savings Bank has not had a state tax liability in recent years because of refund claims of state taxes previously paid. See Note 10 of Notes to Consolidated Financial Statements. EFFECT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of 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 Savings Bank 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, 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 the maturity structure of the Savings Bank's assets and liabilities are critical to the maintenance of acceptable performance levels. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS See Note 1 of Notes to Consolidated Financial Statements for a discussion of the impact of recent accounting pronouncements. SUPERVISORY AGREEMENT On December 21, 1994, the Savings Bank voluntarily entered into a Supervisory Agreement with the Office of Thrift Supervision (OTS) as a result of its latest OTS examination. The Supervisory Agreement generally concerns the Savings Bank's investment portfolio and more specifically focuses on the reporting, monitoring and assessment of interest rate risk in connection with the Savings Bank's portfolio of collateralized mortgage obligations (CMOs). As part of the Supervisory Agreement, the Savings Bank hired a Chief Financial Officer. In addition, the Savings Bank revised its Investment Policy to conform more closely to the OTS's policy on securities activities and implemented additional procedures to review the Savings Bank's investment activities and monitor its interest rate risk management. 13 AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES The following table 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. Such yields and costs are derived by dividing income or expense by the average month-end balance of assets or liabilities, respectively, for the periods indicated. During the periods indicated, nonaccrual loans are included in the net loan category. The table also presents information for the periods indicated 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 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. 14 PAGE Year Ended June 30, 1996 1995 1994 Interest Interest Interest Average and Yield/ Average and Yield/ Average and Yield/ Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost (Dollars in thousands) Interest-earning assets: Mortgage loans $ 80,275 $ 6,244 7.78% $ 74,564 $ 5,412 7.26% $ 69,040 $ 5,312 7.69% Other loans 8,806 775 8.80 4,824 393 8.15 3,616 283 7.82 Total net loans 89,081 7,019 7.88 79,388 5,805 7.31 72,656 5,595 7.70 Mortgage-backed and related securities 30,690 1,976 6.44 25,157 1,688 6.71 23,477 1,454 6.19 Investment securities 27,935 1,821 6.52 31,964 1,995 6.24 29,618 2,061 6.96 Other interest-earning assets 4,461 194 4.35 4,291 153 3.57 4,740 109 2.30 Total interest- earning assets 152,167 11,010 7.24 140,800 9,641 6.85 130,491 9,219 7.06 Noninterest-earning assets: Office properties and equipment, net 1,307 -- 1,340 -- 1,194 -- Real estate, net 676 -- 736 -- 930 -- Other noninterest- earning assets 2,964 -- 2,566 -- 2,816 -- Total assets $157,114 $ 11,010 $145,442 $ 9,641 $135,431 $ 9,219 Interest-bearing liabilities: Passbook accounts $ 6,783 $ 180 2.65 $ 7,670 $ 212 2.77 $ 9,654 $ 264 2.73 NOW accounts 6,478 159 2.45 6,257 154 2.46 6,106 152 2.49 Money market accounts 8,786 264 3.00 10,737 327 3.05 13,533 400 2.96 Certificates of deposit 97,728 5,263 5.39 90,986 4,457 4.90 90,430 3,881 4.29 Total deposits 119,775 5,866 4.90 115,650 5,150 4.45 119,723 4,697 3.92 Other interest-bearing liabilities 7,645 442 5.78 627 37 5.90 444 28 6.31 Total interest- bearing liabilities 127,420 6,308 4.95 116,277 5,187 4.46 120,167 4,725 3.93 Noninterest-bearing liabilities: Noninterest-bearing deposits 735 -- 609 -- 549 -- Other liabilities 2,169 -- 1,935 -- 1,536 -- Total liabilities 130,324 -- 118,821 5,187 122,252 4,725 Stockholders' equity 26,790 -- 26,621 -- 13,179 -- Total liabilities and stockholders' equity $157,114 $ 6,308 $145,442 $ 5,187 $135,431 $ 4,725 Net interest income -- $ 4,702 -- -- $ 4,454 -- -- $ 4,494 -- Interest rate spread -- -- 2.29% -- -- 2.39% -- 3.13% Net interest margin -- -- 3.09% -- -- 3.16% -- 3.44% Ratio of average interest-earning assets to average interest-bearing liabilities 119.42% -- -- 121.09% -- -- 108.59% -- -- 15
PAGE YIELDS EARNED AND RATES PAID: The following table sets forth for the periods and at the dates 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, Year Ended June 30, 1996 1996 1995 1994 Weighted-average yield on loan portfolio 7.85% 7.88% 7.31% 7.70% Weighted-average yield on mortgage-backed and related securities 6.23 6.44 6.71 6.19 Weighted-average yield on investment portfolio 6.56 6.52 6.24 6.96 Weighted-average yield on other interest-earning assets 4.82 4.35 3.57 2.30 Weighted-average yield on all interest-earning assets 7.28 7.24 6.85 7.06 Weighted-average rate paid on deposits 4.72 4.90 4.45 3.92 Weighted-average rate paid on FHLB advances and other borrowings 5.68 5.78 5.90 6.31 Weighted-average rate paid on all interest-bearing liabilities 4.80 4.95 4.46 3.93 Interest rate spread (spread between weighted average rate on all interest-earning assets and all interest-bearing liabilities) 2.48 2.29 2.39 3.13 Net interest margin (net interest income as a percentage of average interest- earning assets) -- 3.09 3.16 3.44 16 PAGE [Logo for Kraft, Miles & Tatum] INDEPENDENT AUDITORS' REPORT Board of Directors Southern Missouri Bancorp, Inc. Poplar Bluff, Missouri We have audited the accompanying consolidated statements of financial condition of Southern Missouri Bancorp, Inc. and Subsidiary (Company) as of June 30, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southern Missouri Bancorp, Inc. and Subsidiary as of June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles. As discussed in Notes 1, 2, 9 and 10 to the consolidated financial statements, the Company changed its method of accounting for its employee stock ownership plan in 1995 and investment and mortgage-backed and related securities and income taxes in 1994. /s/Kraft, Miles & Tatum Poplar Bluff, Missouri KRAFT, MILES & TATUM August 16, 1996 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION JUNE 30, 1996 AND 1995 ASSETS 1996 1995 Cash and cash equivalents $ 4,477,872 2,985,898 Certificates of deposit 186,512 276,741 Investment and mortgage-backed and related securities: (Note 2) Available for sale - at estimated market value (amortized cost $50,615,727 and $17,938,084 at June 30, 1996 and 1995, respectively) 49,980,348 17,762,860 Held to maturity - at amortized cost (estimated market value $4,888,427 and $39,442,358 at June 30, 1996 and 1995, respectively) 4,851,454 38,969,530 Total investment and mortgage- backed and related securities 54,831,802 56,732,390 Stock in Federal Home Loan Bank of Des Moines 1,519,700 1,489,700 Loans receivable, net (Note 3) 95,534,657 82,886,563 Accrued interest receivable (Note 4) 1,141,099 1,194,993 Foreclosed real estate, net (Note 5) 60,133 727,518 Premises and equipment (Note 6) 1,411,247 1,294,741 Prepaid expenses and other assets 684,701 734,438 Total assets $ 159,847,723 148,322,982 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits (Note 7) $ 120,138,066 118,152,385 Advances from borrowers for taxes and insurance 353,895 472,846 Advances from FHLB of Des Moines (Note 8) 11,550,478 1,314,474 Income taxes payable (Note 10) 136,210 8,243 Accounts payable and other liabilities 459,971 529,773 Accrued interest payable 981,809 798,285 Total liabilities 133,620,429 121,276,006 Commitments and contingencies (Note 12) Preferred stock, $.01 par value; 500,000 shares authorized; none issued and outstanding -- -- Common stock, $.01 par value; 3,000,000 shares authorized; 1,803,201 shares issued and outstanding 18,032 18,032 Additional paid-in capital 17,449,978 17,325,586 Retained earnings-substantially restricted 12,192,583 11,491,096 Treasury stock of 102,188 shares in 1996, at cost (1,691,030) -- Common stock acquired by ESOP (918,207) (1,122,251) Common stock acquired by MRP (397,972) (540,805) Unrealized loss on investment and mortgage- backed securities available for sale (419,785) (115,647) Minimum pension liability (Note 9) (6,305) (9,035) Total stockholders' equity 26,227,294 27,046,976 Total liabilities and stockholders' equity $ 159,847,723 148,322,982 See accompanying notes to consolidated financial statements. 18 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 1996, 1995 AND 1994 1996 1995 1994 Interest income: Loans receivable $ 7,018,869 5,805,021 5,594,541 Investment securities 1,820,703 1,994,815 2,060,986 Mortgage-backed and related securities 1,976,216 1,687,766 1,454,257 Other interest-earning assets 194,646 153,336 109,007 Total interest income 11,010,434 9,640,938 9,218,791 Interest expense: Deposits (Note 7) 5,866,482 5,149,849 4,697,294 Other borrowings - 1,380 8,277 Advances from FHLB 442,247 36,053 19,301 Total interest expense 6,308,729 5,187,282 4,724,872 Net interest income 4,701,705 4,453,656 4,493,919 Provision for loan losses (Note 3) 60,000 95,000 229,706 Net interest income after provision for loan losses 4,641,705 4,358,656 4,264,213 Noninterest income: Gain on sale of investment securities, available for sale 75,632 85,172 -- Loss on sale of mortgage-backed securities, available for sale (8,722) (74,295) -- Gain on sale of mortgage-backed securities, held to maturity 63,748 -- -- Gain on sale of investment securities -- -- 22,875 Gain on sale of mortgage backed securities -- -- 24,956 Insurance commissions 308,634 290,834 270,727 Banking service charges 140,237 121,110 136,609 Net income on foreclosed real estate (17,945) (29,889) 27,760 Intangible tax refund -- -- 19,109 Loan late charges 52,611 34,755 39,985 Other 25,182 27,623 29,622 Total noninterest income 639,377 455,310 571,643 Noninterest expense: General and administrative: Compensation and benefits 2,075,615 1,920,641 1,623,661 Occupancy and equipment 302,126 314,309 285,607 SAIF deposit insurance premium 275,488 275,441 281,260 Provisions for losses on fore- closed real estate (Note 5) (84,252) (58,574) 15,546 Professional fees 149,940 181,945 103,349 Advertising 84,612 94,665 92,675 Postage and office supplies 117,917 112,206 102,711 Other 239,703 271,572 226,440 Total noninterest expense 3,161,149 3,112,205 2,731,249 Income before income taxes and cumulative effect of change in accounting principle 2,119,933 1,701,761 2,104,607 Income taxes (Note 10) Current 590,513 470,858 662,121 Deferred 62,898 (16,554) (36,000) 653,411 454,304 626,121 Income before cumulative effect of change in accounting principle 1,466,522 1,247,457 1,478,486 Cumulative effect of change in accounting principle: Income taxes (Note 10) - - 279,000 Net income $ 1,466,522 1,247,457 1,757,486 Net income per common share $ .90 .77 * * Not meaningful since the common stock was issued on April 13, 1994. See accompanying notes to consolidated financial statements. 19 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1996, 1995 AND 1994 Unrealized Common Common Loss on Additional Stock Stock Securities Minimum Total Common Paid-in Retained Acquired Acquired Treasury Available Pension Stockholders' Stock Capital Earnings by ESOP by MRP Stock For Sale Liability Equity Balance at June 30, 1993 $ - - 9,207,433 - - - - - 9,207,433 Issuance of common stock 18,032 17,284,609 - - - - - - 17,302,641 Unrealized loss on securities available for sale, net - - - - - - (227,484) - (227,484) Common stock acquired by ESOP - - - (1,428,320) - - - - (1,428,320) Common stock acquired by MRP - - - - (714,160) - - - (714,160) MRP expense - - - - 30,523 - - - 30,523 Dividends declared ($.075 per share) - - (135,240) - - - - - (135,240) Net income - - 1,757,486 - - - - - 1,757,486 Balance at June 30, 1994 18,032 17,284,609 10,829,679 (1,428,320) (683,637) - (227,484) - 25,792,879 Change in unrealized loss on securities available for sale, net - - - - - - 111,837 - 111,837 Minimum pension liability - - - - - - - (9,035) (9,035) Amortization of ESOP awards - 37,977 - 306,069 - - - - 344,046 MRP expense - - - - 142,832 - - - 142,832 Tax benefit of MRP - 3,000 - - - - - - 3,000 Dividends declared ($.325 per share) - - (586,040) - - - - - (586,040) Net income - - 1,247,457 - - - - - 1,247,457 Balance at June 30, 1995 18,032 17,325,586 11,491,096 (1,122,251) (540,805) - (115,647) (9,035) 27,046,976 Change in unrealized loss on securities available for sale, net - - - - - - (304,138) - (304,138) Minimum pension liability - - - - - - - 2,730 2,730 Amortization of ESOP awards - 104,392 - 204,044 - - - - 308,436 MRP expense - - - - 142,833 - - - 142,833 Tax benefit of MRP - 20,000 - - - - - - 20,000 Dividends declared ($.50 per share) - - (765,035) - - - - - (765,035) Purchase of treasury stock - - - - - (1,799,150) - - (1,799,150) Exercise of stock options - - - - - 108,120 - - 108,120 Net income - - 1,466,522 - - - - - 1,466,522 Balance at June 30, 1996 $ 18,032 17,449,978 12,192,583 (918,207) (397,972) (1,691,030) (419,785) (6,305) 26,227,294 See accompanying notes to consolidated financial statements. 20
PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1996, 1995 AND 1994 1996 1995 1994 Cash flows from operating activities: Net income $ 1,466,522 1,247,457 1,757,486 Items not requiring (providing) cash: Depreciation and amortization 156,376 205,507 208,733 MRP expense and ESOP expense 451,270 486,878 30,523 Gain on sale of investment securities, available for sale (75,632) (85,172) - Loss on sale of mortgage-backed securities, available for sale 8,722 74,295 - Gain on sale of mortgage-backed securities, held to maturity (63,748) - - Gain on sale of investment securities - - (22,875) Gain on sale of mortgage- backed securities- - (24,956) Provision for loan losses 60,000 95,000 229,706 FHLB stock dividend (30,000) - - (Gain) loss on foreclosed real estate, net (84,252) (58,574) 15,546 Net amortization of deferred income, premiums, and discounts 140,058 53,457 (102,832) Changes in: Accrued interest receivable 53,894 (129,527) (93,298) Prepaid expenses and other assets 19,251 (37,504) (356,256) Accounts payable and other liabilities (69,802) (220,295) 337,622 Income taxes payable 127,967 (73,854) (69,625) Accrued interest payable 183,524 559,573 (55,201) Net cash provided by operating activities 2,344,150 2,117,241 1,854,573 Cash flows from investing activities: Net increase in loans (11,827,066) (7,923,565) (2,971,000) Proceeds from sales of investment securities - - 522,875 Proceeds from sales of investment securities, available for sale 5,841,202 2,792,770 - Proceeds from maturing investment securities, available for sale 10,535,000 3,525,419 - Proceeds from maturing investment securities, held to maturity 3,600,000 4,530,672 2,742,492 Purchase of investment securities, available for sale (7,457,104) (2,996,506) - Purchase of investment securities, held to maturity (500,000) (8,194,729) (9,468,772) Proceeds from sales of mortgage- backed securities - - 779,250 Proceeds from sales of mortgage- backed securities, held to maturity 1,161,028 - - Proceeds from sales of mortgage- backed securities, available for sale 8,087,727 369,256 - Proceeds from maturing mortgage- backed securities, available for sale 6,223,361 712,350 - Proceeds from maturing mortgage- backed securities, held to maturity 1,131,708 2,452,546 9,407,895 Purchase of mortgage-backed securities, available for sale (27,239,834) - - Purchase of mortgage-backed securities, held to maturity - (3,660,481) (8,837,448) Purchase of certificates of deposit of other financial institutions - (500,000) - Proceeds from maturing certificates of deposit 90,000 590,000 - Purchase of premises and equipment (239,666) (232,241) (138,520) Proceeds from sale of foreclosed real estate 94,799 14,775 69,555 Net cash used in investing activities (10,498,845) ( 8,519,734) (7,893,673) See accompanying notes to consolidated financial statements. 21 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued YEARS ENDED JUNE 30, 1996, 1995 AND 1994 1996 1995 1994 Cash flows from financing activities: Net (decrease) increase in demand deposits and savings accounts $ (985,489) (5,591,614) 150,077 Net increase (decrease) in certificates of deposit 2,971,170 9,617,176 (10,140,042) Net decrease in advances from borrowers for taxes and insurance (118,951) (48,830) (29,491) Repayment of other borrowings - (84,250) (100,250) Proceeds from advances from FHLB of Des Moines 15,250,000 5,000,000 336,436 Repayment of advances from FHLB of Des Moines (5,013,996) (4,012,924) (9,038) Proceeds from sale of common stock - - 15,160,161 Dividends on common stock (765,035) (586,040) (135,240) Exercise of stock options 108,120 - - Payments to acquire treasury stock (1,799,150) - - Net cash provided by financing activities 9,646,669 4,293,518 5,232,613 Increase (decrease) in cash and cash equivalents 1,491,974 (2,108,975) (806,487) Cash and cash equivalents at beginning of period 2,985,898 5,094,873 5,901,360 Cash and cash equivalents at end of period $ 4,477,872 2,985,898 5,094,873 Supplemental disclosures of cash flow information: Noncash investing and financing activities Conversion of loans to foreclosed real estate $ 124,279 46,105 237,743 Conversion of foreclosed real estate to loans $ 680,839 81,725 448,550 Cash paid during the period for Interest (net of interest credited) $ 1,939,186 1,739,282 1,685,595 Income taxes $ 422,306 563,369 661,000 See accompanying notes to consolidated financial statements. 22 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 NOTE 1: Organization and Summary of Significant Accounting Policies Organization On April 13, 1994, Southern Missouri Savings Bank (the Savings Bank) completed its conversion from mutual to stock form and became the wholly-owned subsidiary of a newly formed Delaware holding company, Southern Missouri Bancorp, Inc. (Company). The Company has no significant assets other than common stock of the Savings Bank, the loan to the ESOP, and net proceeds retained by the Company following conversion. The Company's principal business is the business of the Savings Bank. The Savings Bank converted from a state-chartered savings and loan association to a Federally-chartered savings bank effective June 20, 1995. Basis of Financial Statement Presentation The financial statements of the Company have been prepared in conformity with generally accepted accounting principles and general practices within the savings and loan industry. In the normal course of business, the Company encounters two significant types of risk; economic and regulatory. Economic risk is comprised of interest rate risk, credit risk, and market risk. The Company is subject to interest rate risk to the degree that its interest- bearing liabilities reprice on a different basis than its interest-earning assets. Credit risk is the risk of default on the Company's loan portfolio that results from the borrowers' inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the value of the Company's investment in real estate. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. The determination of the provision for loan losses and the valuation of real estate are based on estimates that are particularly susceptible to changes in the economic environment and market conditions. These balances may be adjusted in the future based on such changes, or based on requirements of regulatory examiners of the Company's subsidiaries. Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, the Savings Bank, and the Savings Bank's wholly-owned subsidiary, S.M.S. Financial Services, Inc. All significant intercompany accounts and transactions have been eliminated. 23 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 NOTE 1: Organization and Summary of Significant Accounting Policies (Continued) Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and due from depository institutions and interest-bearing deposits in other depository institutions with original maturities of three months or less. Interest bearing deposits in other depository institutions were $2,541,950, and $1,204,966 at June 30, 1996 and 1995, respectively. Investment and Mortgage-Backed and Related Securities The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective June 30, 1994. Under the Statement, debt securities that the Company has the positive intent and ability to hold to maturity are classified as "held to maturity" securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as "trading" securities and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held to maturity or trading securities are classified as "available for sale" securities and reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity (net of deferred tax effects). Transfers of securities between classifications will be accounted for at fair value. No securities have been classified as trading securities. In accordance with a recent interpretation of SFAS 115 the Company transferred $23,041,000 of investment and mortgage backed and related securities in December 1995 from the held to maturity classification to the available for sale classification. The transfer under this one-time opportunity was made in order to increase investment management flexibility. Prior to adoption of SFAS No. 115, securities were classified as held for investment. Premiums and discounts on debt securities are amortized or accreted as adjustments to income over the estimated life of the security using the level yield method. Gain or loss on the sale of securities is based on the specific identification method. The fair value of securities is based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The Company does not invest in collateralized mortgage obligations that are considered high risk. 24 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 NOTE 1: Organization and Summary of Significant Accounting Policies (Continued) Loans Receivable, Net Loans receivable, net are stated at unpaid principal balances, less the allowance for loan losses, net deferred loan origination fees, deferred gain on real estate and unearned discounts. Discounts on mortgage loans are amortized to income using the interest method over the remaining period to contractual maturity adjusted for prepayments. Discounts on consumer loans are recognized over the lives of the loans using the interest method. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, known and inherent risks 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. Uncollectible interest on loans that are contractually past due 90 days or more is charged-off. Income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. Effective July 1, 1995, the Company adopted the provisions of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." Specific valuation allowances are established for impaired loans for the difference between the loan amount and the fair value of collateral less estimated selling costs. The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement on a timely basis. The types of loans for which impairment is measured under SFAS No. 114 and 118 include nonaccrual income property loans (excluding those loans included in the homogenous portfolio which are collectively reviewed for impairment), large, nonaccrual single family loans and troubled debt restructurings. Such loans are placed on nonaccrual status at the point they become contractually delinquent more than 90 days. Impairment losses are recognized through an increase in the allowance for loan losses. There were no impaired loans under SFAS No. 114 and 118 at June 30, 1996. 25 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 NOTE 1: Organization and Summary of Significant Accounting Policies (Continued) Loan Origination Fees Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans. Foreclosed Real Estate Real estate acquired by foreclosure or by deed in lieu of foreclosure is initially recorded at the lower of cost or fair value less estimated selling costs. Costs for development and improvement of the property are capitalized. Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated fair value, less estimated selling costs. Loans to facilitate the sale of real estate acquired in foreclosure are discounted if made at less than market rates. Discounts are amortized over the fixed interest period of each loan using the interest method. Income Taxes Effective July 1, 1993 the Company changed its method of accounting for income taxes to conform with SFAS No. 109. See Note 10. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and include expenditures for major betterments and renewals. Maintenance, repairs, and minor renewals are expensed as incurred. When property is retired or sold, the retired asset and related accumulated depreciation are removed from the accounts and the resulting gain or loss taken into income. Depreciation is computed by use of straight-line and accelerated methods over the estimated useful lives of the assets. Estimated lives are generally twenty to fifty years for premises, and five to seven years for equipment. Earnings Per Share Earnings per share are based upon the weighted-average shares outstanding. ESOP shares that have been committed to be released are considered outstanding. The presentation of net earnings per common share for 1994 is not meaningful since the common stock was issued on April 13, 1994. 26 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 NOTE 1: Organization and Summary of Significant Accounting Policies (Continued) Business Combinations The Savings Bank acquired two savings and loan associations in business combinations accounted for by the purchase method of accounting. Assets and liabilities acquired were recorded at their estimated fair values at the date of acquisition. Discounts resulting from fair value adjustments are amortized by the interest method over the remaining lives of the related assets, adjusted for expected prepayments. The following paragraphs summarize the impact of new accounting pronouncements: In May 1995, FASB issued SFAS no. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 122 eliminates distinctions between servicing rights that were purchased and those that were retained upon the sale of loans. The statement requires mortgage services to recognize as separate assets rights to service loans, no matter how the rights were acquired. Institutions who sell loans and retain the servicing rights will be required to allocate the total cost of the loans to servicing rights and loans based on their relative fair values if that value can be estimated. SFAS No. 122 is effective for fiscal years beginning after December 15, 1995. Further, SFAS No. 122 requires that all capitalized mortgage servicing rights be periodically evaluated for impairment based upon the current fair value of these rights. Management believes that the implementation of this statement will have a minimal effect on the Company since the Company does not presently service loans for others. In October, 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires that compensation cost for stock-based employee compensation plans be measured at the grant date based on the fair value of the award and recognized over the service period, which is usually the vesting period. Stock-based employee compensation plans include stock purchase plans, stock options, restricted stock and stock appreciation rights. Employee stock ownership plans are not covered by this Statement. SFAS No. 123 is effective for transactions entered into in fiscal years that begin after December 15, 1995, with earlier application permitted. SFAS No. 123 is not expected to materially affect the Company's financial position or results of operations. 27 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 NOTE 2: Investment and Mortgage-Backed and Related Securities The Company adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities" at June 30, 1994 (See Note 1). Available for Sale - The amortized cost, gross unrealized gains, gross unrealized losses and estimated market value of securities available for sale consisted of the following: June 30, 1996 Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value Investment securities: U.S. government and fed- eral agency obligations $ 7,650,697 18,858 246,437 7,423,118 Corporate securities 2,896,630 27,067 8,075 2,915,622 Obligations of states and political subdivisions 4,705,308 111,171 16,630 4,799,849 Total investment securities 15,252,635 157,096 271,142 15,138,589 Mortgage-backed and related securities: GNMA certificates 10,740,300 39,386 135,231 10,644,455 FNMA certificates 12,427,572 23,964 175,542 12,275,994 FHLMC certificates 8,547,444 39,982 122,476 8,464,950 Collateralized mortgage obligations 3,647,776 - 191,416 3,456,360 Total mortgage-backed and related securities 35,363,092 103,332 624,665 34,841,759 Total $50,615,727 260,428 895,807 49,980,348 June 30, 1995 Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value Investment securities: U.S. government and fed- eral agency obligations $ 3,324,213 77,727 - 3,401,940 Corporate securities 3,077,085 38,085 - 3,115,170 Obligations of states and political subdivisions 736,795 1,949 462 738,282 Total investment securities 7,138,093 117,761 462 7,255,392 Mortgage-backed and related securities: FNMA certificates 3,095,169 29,744 50,591 3,074,322 Collateralized mortgage obligations 7,704,822 11,992 283,668 7,433,146 Total mortgage-backed and related securities 10,799,991 41,736 334,259 10,507,468 Total $17,938,084 159,497 334,721 17,762,860 28 SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 AND 1994 Held to Maturity - The amortized costs, gross unrealized gains, gross unrealized losses and estimated market value of securities held to maturity consisted of the following: June 30, 1996 Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value Investment securities: U.S. government and fed- eral agency obligations $ 600,000 - 34,020 565,980 Obligations of states and political subdivisions 4,055,830 71,412 4,455 4,122,787 Total investment securities 4,655,830 71,412 38,475 4,688,767 Mortgage-backed securities: FHLMC certificates 148,689 2,727 70 151,346 FNMA certificates 46,935 1,379 - 48,314 Total mortgage-backed securities 195,624 4,106 70 199,660 Total $ 4,851,454 75,518 38,545 4,888,427 June 30, 1996 Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value Investment securities: U.S. government and fed- eral agency obligations $10,334,689 172,951 56,345 10,451,295 Corporate securities 1,745,108 9,535 22,234 1,732,409 Obligations of states and political subdivisions 12,823,678 146,591 35,488 12,934,781 Total investment securities 24,903,475 329,077 114,067 25,118,485 Mortgage-backed securities: FHLMC certificates 8,694,829 223,489 60,184 8,858,134 GNMA certificates 2,377,292 86,285 755 2,462,822 FNMA certificates 2,993,934 24,942 15,959 3,002,917 Total mortgage-backed securities 14,066,055 334,716 76,898 14,323,873 Total $38,969,530 663,793 190,965 39,442,358 29 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 AND 1994 The amortized cost and estimated market value of investment an mortgage-backed and related securities by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. June 30, 1996 Available for Sale Held to Maturity Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value Due in one year or less $ 1,938,225 1,960,554 - - Due after one year thru 5 years 3,926,385 3,914,943 1,273,506 1,244,347 Due after 5 years thru 10 years 6,420,814 6,300,184 2,567,833 2,614,944 Due after 10 years 2,967,211 2,962,908 814,491 829,476 Total investment securities 15,252,635 15,138,589 4,655,830 4,688,767 Mortgage-backed and related securities 35,363,092 34,841,759 195,624 199,660 Total $50,615,727 49,980,348 4,851,454 4,888,427 Proceeds from sales of investment and mortgage-backed and related securities and gross realized gains and losses are summarized below. June 30, 1996 1995 1994 Proceeds from sales: Investment securities $ 5,841,202 2,792,770 522,875 Mortgage-backed and related securities 9,248,755 369,256 779,250 Gross realized gains: Investment securities 86,947 85,172 22,875 Mortgage-backed and related securities 148,477 - 24,956 Gross realized losses: Investment securities (11,315) - - Mortgage-backed and related securities (93,451) (74,295) - Included in the gross realized gains on mortgage-backed and related securities are sales of small balance pools of mortgage-backed securities held to maturity that had an amortized cost of $1,161,028 which are permitted to be sold prior to maturity. The amortized cost of investment and mortgage-backed securities pledged as collateral to secure public deposits amounted to $17,900,762 and $8,001,341 at June 30, 1996 and 1995, respectively. Adjustable rate mortgage loans included in mortgage-backed and related securities at June 30, 1996 and 1995 amounted to $21,733,920 and $10,507,468, respectively. All adjustable rate mortgage-backed and related securities at June 30, 1996 and 1995 are recorded as available for sale. 30 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 AND 1994 NOTE 3: Loans Receivable, net Loans receivable, net are summarized as follows: June 30, 1996 1995 Real estate loans: Conventional $ 68,330,068 60,520,660 Construction 4,283,294 4,587,058 Commercial 16,583,759 14,775,402 Loans secured by deposit accounts 752,514 726,435 Consumer and other loans 9,042,171 4,360,813 98,991,806 84,970,368 Loans in process (2,609,546) (1,259,661) Unearned discounts on purchased real estate loans - (4,339) Deferred loan fees, net (89,341) (75,060) Deferred gain on sale of real estate (130,698) (172,404) Allowance for loan losses (627,564) (572,341) $ 95,534,657 82,886,563 Adjustable-rate loans included in the loan portfolio amounted to $74,040,220, and $64,829,077 at June 30, 1996 and 1995, respectively. One-to four-family residential real estate loans amounted to $69,368,000 and $62,626,000 at June 30, 1996 and 1995, respectively. Real estate construction loans are secured principally by single and multi-family dwelling units. Commercial real estate loans are secured principally by motels, medical centers, churches and fast food restaurants. Following is a summary of activity in the allowance for loan losses: June 30, 1996 1995 1994 Balance, beginning of period $ 572,341 477,341 261,341 Loans charged-off (5,167) - (13,706) Recoveries of loans previously charged off 390 - - Net charge-offs (4,777) - (13,706) Provision charged to expense 60,000 95,000 229,706 Balance, end of period $ 627,564 572,341 477,341 The Company ceased recognition of interest income on loans with a book value of $546,000, $737,000 and $696,000 for June 30, 1996, 1995 and 1994, respectively. The average balance of nonaccrual loans for the year ended June 30, 1996 was approximately $699,000. Allowance for losses on nonaccrual loans amounted to approximately $27,000 at June 30, 1996. Interest income of approximately $22,000, $27,000 and $34,000 was recognized on these loans for the years ended June 30, 1996, 1995 and 1994, respectively. Gross interest income would have been approximately $47,000, $59,000 and $58,000 for the years ended June 30, 1996, 1995 and 1994, respectively, if the interest payments had been received in accordance with the original terms. 31 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 Following is a summary of loans to directors, executive officers and loans to corporations in which executive officers and directors have substantial benefit interest: Balance, June 30, 1994 $ 436,388 Additions 133,500 Repayments (103,966) Balance, June 30, 1995 465,922 Additions 244,577 Repayments (254,765) Balance, June 30, 1996 $ 455,734 These loans were made on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated persons. NOTE 4: Accrued Interest Receivable Accrued interest receivable is summarized as follows: June 30, 1996 1995 Investment securities $ 421,536 640,542 Mortgage-backed and related securities 239,801 178,591 Loans receivable 479,762 375,860 $ 1,141,099 1,194,993 NOTE 5: Foreclosed Real Estate Foreclosed real estate consists of the following: June 30, 1996 1995 Foreclosed real estate $ 395,430 1,146,627 Allowance for losses (335,297) (419,109) $ 60,133 727,518 Activity in the allowance for losses for foreclosed real estate is as follows: June 30, 1996 1995 1994 Balance, beginning of period $ 419,109 444,798 584,852 Charge-offs and recoveries, net 440 32,885 (155,600) Provisions for losses on foreclosed real estate (84,252) (58,574) 15,546 Balance, end of period $ 335,297 419,109 444,798 32 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 NOTE 6: Premises and Equipment Following is a summary of premises and equipment: June 30, 1996 1995 Land $ 342,042 342,042 Buildings and improvements 1,992,331 1,934,003 Furniture, fixtures, and equipment 1,203,077 1,035,739 Automobiles 58,246 44,246 3,595,696 3,356,030 Less accumulated depreciation (2,184,449) (2,061,289) $ 1,411,247 1,294,741 Depreciation expense for the years ended June 30, 1996, 1995 and 1994 was $123,160, $127,806 and $131,025, respectively. NOTE 7: Deposits Deposits are summarized as follows: June 30, 1996 1995 Non-interest bearing NOW accounts $ 770,735 1,006,013 NOW accounts 2.55% 7,266,140 6,234,761 Money market deposit accounts, 2.67% and 2.80%, respectively 7,394,864 9,149,624 Savings accounts 2.75% 6,980,637 7,007,467 Total transactions accounts 22,412,376 23,397,865 Certificates: 2.00 - 2.99% -0- 275,890 3.00 - 3.99% -0- 2,583,873 4.00 - 4.99% 24,741,332 33,389,500 5.00 - 5.99% 66,529,484 15,437,939 6.00 - 6.99% 5,138,828 41,240,629 7.00 - 7.99% 1,236,070 1,544,949 8.00 - 8.99% 63,289 266,569 9.00 - 9.99% 16,687 15,171 Total certificates, 5.21% and 5.48%, respectively 97,725,690 94,754,520 Total deposits $ 120,138,066 118,152,385 Weighted-average rates - deposits 4.72% 4.95% The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was $18,297,762 and $11,318,791 at June 30, 1996 and 1995, respectively. Certificate maturities at June 30, 1996 are summarized as follows: July 1, 1996 to June 30, 1997 $ 82,565,195 July 1, 1997 to June 30, 1998 10,491,550 July 1, 1998 to June 30, 1999 3,890,662 July 1, 1999 to June 30, 2000 293,475 July 1, 2000 to June 30, 2001 421,520 Thereafter 63,288 $ 97,725,690 33 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 Interest expense on deposits is summarized as follows: Year Ended June 30, 1996 1995 1994 NOW accounts $ 159,335 154,393 151,948 Money market deposit accounts 259,926 326,907 398,740 Savings accounts 178,847 210,717 265,222 Certificates of deposit 5,268,374 4,457,832 3,881,384 $ 5,866,482 5,149,849 4,697,294 NOTE 8: Advances from FHLB of Des Moines Advances from Federal Home Loan Bank of Des Moines are summarized as follows: June 30, 1996 1995 FHLB advances, due at various dates through 2008, with interest rates from 5.52% to 5.97% and a weighted average rate of 5.68% at June 30, 1996, and from 5.80% to 6.65% and a weighted average rate of 6.47% at June 30, 1995. $ 11,550,478 1,314,474 Advances from FHLB of Des Moines are secured by FHLB stock and single-family mortgage loans of $17,326,000. Principal maturities of advances from FHLB of Des Moines over the next five years are as follows: July 1, 1996 to June 30, 1997 $ 11,265,158 July 1, 1997 to June 30, 1998 18,560 July 1, 1998 to June 30, 1999 19,685 July 1, 1999 to June 30, 2000 20,879 July 1, 2000 to June 30, 2001 22,145 NOTE 9: Employee Benefits The Savings Bank had a defined benefit pension plan covering substantially all of its employees. The Board of Directors of the Savings Bank terminated the defined benefit plan effective April 30, 1996. In relation to the termination, the Savings Bank will distribute the participants' vested benefits by purchasing nonparticipating annuity contracts or provide lump sum cash distributions. The excess of plan assets over the distribution of vested benefits will be applied to purchase additional retirement benefits for participants. Defined benefits were not provided under any successor plan. 34 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 As a result of this termination the Savings Bank recognized a loss of $28,487 for 1996, determined as follows: Before Effect of After Termination Termination Termination Assets and obligations: Accumulated benefit obligation $ (616,901) 616,901 0 Effects of projected future compensation levels (204,108) 204,108 0 Projected benefit obligation (821,009) 821,009 0 Plan assets at fair value 807,104 (807,104) 0 Items not yet recognized in earnings: Unrecognized net assets at transition (140,897) 140,897 0 Unrecognized net loss subsequent to transition 255,305 (255,305) 0 Unrecognized prior service cost (gains from plan amendment) (72,016) 72,016 0 Pension asset (liability) included in other assets and accounts payable and accrued expenses, respectively $ 28,487 (28,487) 0 Net pension cost for 1996, 1995 and 1994 included the following components: 1996 1995 1994 Service cost - benefit earned during the period $ 67,340 27,982 53,910 Interest cost on projected benefit obligation 62,184 57,250 59,355 Net (income) loss on plan assets (56,497) (58,916) (57,880) Net amortization and deferral (11,635) (10,637) (8,925) Net periodic pension cost $ 61,392 15,679 46,460 Assumptions used to develop the net periodic pension cost were: 1996 1995 1994 Discount rate 6.65% 6.65% 6.65% Expected long-term rate of return on assets 7.00 7.00 7.00 Rate of increase in compensation levels 4.00 4.00 4.00 On July 1, 1995 the Savings Bank adopted a 401(k) profit sharing plan that covers substantially all eligible employees. Contributions to the plan are at the discretion of the Board of Directors of the Savings Bank. During 1996 there were no contributions made to the plan. 35 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 In connection with the conversion from mutual to stock form, the Savings Bank established a tax-qualified employee stock ownership plan (ESOP). The plan covers substantially all employees who have attained the age of 21 and completed one year of service. The ESOP purchased 142,832 shares of the Company's common stock at $10 per share with funds loaned by the Company. The Savings Bank makes contributions to the ESOP equal to the ESOP's debt service less dividends on unallocated ESOP shares used to repay the ESOP Loan. Dividends on allocated ESOP shares are paid to participants of the ESOP. The ESOP shares are pledged as collateral on the ESOP loan. Shares are released from collateral and allocated to participants based on pro-rata compensation as the loan is repaid over seven years. Benefits are vested over five years. Forfeitures are allocated on the same basis as other contributions. Benefits are payable upon a participant's retirement, death, disability or separation of service. The purchase of the shares of the ESOP has been recorded in the consolidated financial statements through a credit to common stock and additional paid-in capital with a corresponding charge to a contra equity account for the unreleased shares. Effective July 1, 1994, the Savings Bank adopted SOP 93-6. As shares are committed to be released from collateral, the Savings Bank reports compensation expense equal to the average fair value of the ESOP shares committed to be released. Prior to July 1, 1994, compensation expense was equal to the cost of ESOP shares committed to be released in accordance with Emerging Issues Task Force No. 89-8. The ESOP expense for 1996, 1995 and 1994 was $308,436, $242,023, and $102,023, respectively. The number of ESOP shares at June 30, 1996 were as follows: Allocated shares 51,011 Unreleased shares 91,821 Total ESOP shares 142,832 The fair value of unreleased ESOP shares at June 30, 1996 was $1,296,972. 36 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 In connection with the conversion, the Board of Directors of the Savings Bank adopted a management recognition plan (MRP) for the benefit of non-employee directors and two MRPs for officers and key employees (who may also be directors), the objective of which is to enable the Savings Bank to retain personnel of experience and ability in key positions of responsibility. In connection with the conversion to stock form, the Savings Bank contributed 46,165 shares to the MRP. Subsequent to the reorganization an additional 17,826 shares were purchased from the Company by the MRP. The Savings Bank has granted 17,854 shares of common stock to non-employee directors and 53,562 shares to officers and key employees. The shares granted are in the form of restricted stock payable at the rate of 20% of such shares per year following completion of the conversion. Compensation expense in the amount of the fair market value of the common stock at the date of grant will be recognized pro rata over the five years during which the shares are payable. The Board of Directors can terminate the MRPs at any time, and if it does so, any shares not allocated will revert to the Company. The MRP expense for 1996, 1995 and 1994 was $142,833, $142,832 and $30,523, respectively. The Board of Directors adopted a stock option plan in connection with the conversion. The purpose of the plan is to provide additional incentive to certain directors, officers and key employees of the Savings Bank. The Savings Bank has granted non-incentive options for 53,560 shares to non-employee directors and incentive options for 72,489 shares to certain officers and key personnel and the remaining 52,491 shares are unallocated. The stock options were granted at $10 per share which was equal to the market value at the date of grant. All options expire in April 2004. Changes in options outstanding were as follows: Number of Shares Balance at June 30, 1993 - Granted 126,049 Exercised - Balance at June 30, 1994 126,049 Granted - Exercised - Balance at June 30, 1995 126,049 Granted - Exercised 10,812 Balance at June 30, 1996 115,237 37 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 The Savings Bank adopted a directors' retirement plan. The directors' retirement plan provides that each non-employee director (participant) shall receive upon termination of service on the Board on or after age 60, other than termination for cause, a benefit in equal annual installments over a five year period. The benefit will be based upon the product of the participant's vesting percentage and the total Board fees paid to the participant during the calendar year preceding termination of service on the Board. The vesting percentage shall be determined based upon the participant's years of service on the Board, whether before or after the reorganization date, according to the following schedule: Full Years of Service Non-Employee Director's on the Board Vested Percentage Less than 5 0% 5 to 9 50% 10 to 14 75% 15 or more 100% In the event that the participant dies before collecting any or all of the benefits, the Savings Bank shall pay the participant's beneficiary. No benefits shall be payable to anyone other than the beneficiary, and shall terminate on the death of the beneficiary. The following table sets forth the directors' retirement plan's funded status and amounts recognized in the financial statements at June 30, 1996 and 1995: 1996 1995 Actuarial present value of benefit obligations: Vested accumulated benefits $ 156,830 144,166 Nonvested accumulated benefits 13,689 12,911 Total accumulated benefits 170,519 157,077 Unrecognized prior service cost being recognized over four years 60,131 90,619 Unrecognized net obligation being recognized over four years 6,305 9,035 Adjustment to recognize minimum liability (66,436) (99,654) Overaccrual 1,340 835 Accrued pension cost $ 171,859 157,912 Net pension cost includes the following components: Service costs - benefits earned during the year $ 2,783 3,928 Interest cost on benefit obligation 10,659 10,019 Amortization of prior service cost and net obligation 33,218 33,218 Overaccrual 1,340 835 Net pension cost $ 48,000 48,000 A discount rate of 7% was used in determining net pension cost. The disclosures required under SFAS No. 87 for the directors' retirement plan were not available at June 30, 1994. The directors' retirement plan expense for 1994 was $10,258. 38 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 NOTE 10: Income Taxes The Company and its subsidiary file consolidated Federal income tax returns. If certain conditions are met in determining taxable income, the Company is allowed a special bad-debt deduction based on a percentage of taxable income (presently 8 percent) or on specified experience formulas. Effective July 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Evaluation allowances are established when necessary to reduce deferred tax assets to the amount that will more likely than not be realized. Income tax expense is the tax payable or refundable for the period plus or minus the net change in the deferred tax assets and liabilities. The cumulative effect of the change in accounting principle on years prior to July 1, 1993, of $279,000 is included as a credit in net earnings for the year ended June 30, 1994. SFAS No. 109 requires the Savings Bank to establish a deferred tax liability for the tax bad debt reserves over the base year amounts. The Savings Bank's base year tax bad debt reserves are $1,798,626. The estimated deferred tax liability on such amount is approximately $611,000, which has not been recorded in the accompanying consolidated financial statements. As of June 30, 1996 tax bad debt reserves of $1,539,000 exist, on which no federal income taxes have been provided for tax return purposes. Legislation was enacted in August 1996 which repeals the percentage of taxable income method, effective July 1, 1996 for the Savings Bank. The legislation is not expected to have a significant effect on the financial position or results of operations of the Savings Bank. 39 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995, 1994 and 1993 The components of net deferred tax assets are summarized as follows: 1996 1995 Deferred tax assets: Provision for losses on loans and foreclosed real estate $ 363,358 379,022 Accrued compensation and benefits 66,815 77,117 Base year tax bad debt reserve at 12/31/87 in excess of current tax bad debt reserve 88,273 94,393 Unrealized loss on available for sale securities 218,583 59,576 Gross deferred tax assets 737,029 610,108 Valuation allowance (88,273) (94,393) Total deferred tax assets 648,756 515,715 Deferred tax liabilities: FHLB stock dividends 166,566 156,366 Purchase accounting adjustments 66,072 34,518 Premises and equipment, tax vs book accumulated depreciation 17,484 1,702 Total deferred tax liabilities 250,122 192,586 Net deferred tax assets $ 398,634 323,129 The valuation allowance decreased by $6,120 during the year ended June 30, 1996. Income taxes are summarized as follows: Year Ended June 30, 1996 1995 1994 Current: Federal $ 496,658 434,411 662,121 State 93,855 36,447 - 590,513 470,858 662,121 Deferred: Federal 60,898 (11,354) (36,000) State 2,000 (5,200) - 62,898 (16,554) (36,000) $ 653,411 454,304 626,121 The provision for income taxes varies from the amount of income tax determined by applying the statutory Federal income tax rate to income before income taxes as a result of the following differences: Year Ended June 30, 1996 1995 1994 Tax at statutory Federal rate $ 720,777 578,599 715,566 Increase (reduction) in taxes resulting from: Nontaxable municipal income (150,428) (152,203) (89,445) State tax, net of Federal benefit 63,264 20,623 - Nondeductible ESOP expenses 38,625 14,051 - Other, net (18,827) (6,766) - Actual provision $ 653,411 454,304 626,121 40 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 Deferred income tax expense represents the tax effects of reporting income and expense in different periods for financial reporting purposes than tax purposes as follows: Year Ended June 30, 1996 1995 1994 FHLB stock dividend $ 10,200 - - Accrued income and expense (10,302) (5,519) (33,736) Purchase accounting adjustments 31,554 11,979 27,958 Provision for losses on loans and foreclosed real estate 15,664 (24,716) (30,222) Premises and equipment, tax vs book accumulated depreciation 15,782 1,702 - $ 62,898 (16,554) (36,000) State income tax for 1995 and 1994 reflects credits of $72,536 and $118,490, respectively as a result of settling litigation with the State of Missouri. All remaining credits were utilized in 1995. NOTE 11: Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989 The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) requires that savings institutions maintain "core capital" of at least 3% of adjusted total assets. Under proposals currently being evaluated by the Office of Thrift Supervision (OTS), a savings institution's core capital requirement could be increased to between 4% and 5% of adjusted total assets. Core capital is defined to include stockholders' equity among other components. Savings institutions also must maintain "tangible capital" of not less than 1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is defined, generally as core capital minus any "intangible assets." In addition to requiring compliance with the core and tangible capital standards, FIRREA and the OTS regulation also require that savings institutions satisfy a risk-based capital standard. The minimum level of such capital is based on a credit risk component and is calculated by multiplying the value of each asset (including off-balance sheet commitments) by one of four risk factors. The four risk categories range from zero for cash to 100% for certain delinquent loans and repossessed property. Savings institutions must maintain an 8.0% risk-based capital level. Beginning June 30, 1995, savings institutions are required to reflect an interest rate risk component in their risk-based capital requirements. Savings institutions with less than $300 million in assets and a risk-based capital ratio of 12% or more will not be subject to the interest rate risk requirement. 41 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 The following table presents the Savings Bank's capital position relative to its regulatory capital requirements under FIRREA at June 30, 1996: Regulatory Capital Tangible Core Risk-Based Capital Capital Capital Stockholders' equity per consol- idated financial statements $ 26,227,294 26,227,294 26,227,294 Stockholders' equity of Southern Missouri Bancorp, Inc. not available for regulatory capital purposes 6,532,301 6,532,301 6,532,301 GAAP capital 19,694,993 19,694,993 19,694,993 General valuation allowances - - 627,564 Non-includable unrealized loss on investment and mortgage- backed and related securities available for sale 424,307 424,307 424,307 Non-includable deferred tax assets (411,583) (411,583) (411,583) Non-includable intangible assets (87,306) (87,306) (87,306) Regulatory capital 19,620,411 19,620,411 20,247,975 Regulatory capital requirement 2,324,000 4,648,000 6,119,000 Regulatory capital-excess $ 17,296,411 14,972,411 14,128,975 Regulatory capital ratio 12.67% 12.67% 26.47% Regulatory capital requirement (1.50) (3.00) (8.00) Regulatory capital excess 11.17% 9.67% 18.47% NOTE 12: Commitments and Contingencies In the ordinary course of business, the Savings Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. The Savings Bank is involved in litigation and investigations of a routine nature which are being defended and handled in the ordinary course of business. These matters are not considered significant to the Company's financial condition or results of operations. Proposals recently have been introduced in the U.S. Congress that, if adopted, would overhaul the savings association industry. The most significant of these proposals would recapitalize the SAIF through a one-time special assessment of approximately 80 basis points on the annual amount of deposits held by the institution. Should the Savings Bank be required to pay such special assessment, the Saving's Bank capital will be reduced by approximately $634,000, based on deposits of $120.1 million as of June 30, 1996 and a tax rate of 34%. In the event the assessment is not deductible for tax purposes, capital would be reduced by approximately $961,000. Management cannot predict whether the special assessment proposal will be enacted, or, if enacted, the amount of any one-time fee or the date to be used for determining deposits on which the assessment will be based. 42 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 NOTE 13: Off-Balance-Sheet and Credit Risk The Company's consolidated financial statements do not reflect various financial instruments to extend credit to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the statement of financial condition. A summary of the Company's commitments to extend credit and standby letters of credit is as follows: Contract or Notional Amount June 30, 1996 1995 Commitments to extend credit $ 4,045,907 3,905,257 Standby letters of credit $ 126,370 5,250 At June 30, 1996, total commitments to originate fixed rate loans were $629,000 at interest rates ranging from 7% to 10%. Commitments to extend credit and standby letters of credit include exposure to some credit loss in the event of nonperformance of the customer. The Company's policies for credit commitments and financial guarantees are the same as those for extension of credit that are recorded in the statement of financial condition. The commitments extend over varying periods of time with the majority being disbursed within a thirty-day period. The Company grants collateralized commercial, real estate, and consumer loans to customers in southeast Missouri. Although the Company has a diversified portfolio, loans aggregating $69,368,000 at June 30, 1996, are secured by single and multifamily residential real estate in the Company's primary lending area. 43 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 NOTE 14: Fair Value of Financial Instruments The carrying amounts and estimated fair values of the Company's financial instruments at June 30, 1996, are summarized as follows: Carrying Fair Amount Value Non-trading instruments and nonderivatives: Cash and cash equivalents $ 4,477,872 4,477,872 Certificates of deposits 186,512 186,512 Investment and mortgage-backed and related securities: Available for sale 49,980,348 49,980,348 Held to maturity 4,851,454 4,888,427 Stock in FHLB of Des Moines 1,519,700 1,519,700 Loans receivable, net 95,534,657 96,466,000 Accrued interest receivable 1,141,099 1,141,099 Deposits 120,138,066 119,940,000 Advances from FHLB of Des Moines 11,550,478 11,505,000 The following methods and assumptions were used in estimating the fair values of financial instruments: Cash and cash equivalents and certificates of deposit are valued at their carrying amounts due to the relatively short period to maturity of the instruments. Fair values of securities and mortgage-backed and related securities are based on quoted market prices or, if unavailable, quoted market prices of similar securities. Stock in FHLB of Des Moines is valued at cost, which represents redemption value and approximates fair value. Fair values are computed for each loan category using market spreads to treasury securities for similar existing loans in the portfolio and management's estimates of prepayments. Deposits with no defined maturities, such as NOW accounts, savings accounts and money market deposit accounts, are valued at the amount payable on demand at the reporting date. The fair value of certificates of deposit is computed at fixed spreads to treasury securities with similar maturities. Fair value of advances from the FHLB of Des Moines is estimated by discounting maturities using an estimate of the current market for similar instruments. The carrying amounts of accrued interest approximates their fair value. 44 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 NOTE 15: Mutual to Stock Conversion On April 13, 1994, Southern Missouri Savings Bank completed its conversion from mutual to stock form and became the wholly-owned subsidiary of a newly formed Delaware holding company, Southern Missouri Bancorp, Inc. The Company issued 1,785,375 shares of common stock at $10 per share in conjunction with the offering and an additional 17,826 shares of common stock were granted to the Savings Bank's Management Recognition Plan. Net proceeds from the sale of common stock in the offering were $15,160,161 after deduction of conversion costs of $729,369, and unearned compensation related to shares issued to the Employee Stock Ownership Plan and MRP. The Company retained 50% of the net conversion proceeds, less the funds used to originate a loan to the Savings Bank's ESOP for the purchase of shares of common stock, and used the balance of the net proceeds to purchase all of the stock of the Savings Bank in the conversion. Deposit account holders and borrowers do not have voting rights in the Savings Bank. Voting rights are vested exclusively with the stockholders of the holding company. Deposit account holders will continue to be insured by the SAIF. A liquidation account was established at the time of conversion in an amount equal to the capital of the Savings Bank as of the date of the latest balance sheet contained in the final prospectus. Each eligible account holder and supplemental eligible account holder is entitled to a proportionate share of this account in the event of a complete liquidation of the Savings Bank, and only in such event. This share will be reduced if the account holder's or supplemental eligible account holder's deposit balance falls below the amounts on the date of record and will cease to exist if the account is closed. The liquidation account will never be increased despite any increase in the related deposit balance. An OTS regulation restricts the stock savings bank's ability to make capital distributions, including paying dividends. The regulation provides that an institution meeting its capital requirements, both before and after its proposed capital distribution, may generally distribute the greater of (1) 75% of its net earnings for the prior four quarters or (2) 100% of its net earnings to date during the calendar year, plus the amount that would reduce by one-half its surplus capital ratio (defined as the percentage by which the institution's capital-to-asset ratio exceeds the ratio of its capital requirements to its assets) at the beginning of the calendar year without prior supervisory approval. The regulation provides more significant restrictions on payment of dividends in the event that the capital requirements are not met. The conversion and formation of the holding company was accounted for in a manner similar to a pooling of interest. No goodwill or other intangibles were recorded as a result of the transaction. 45 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 NOTE 16: Condensed Parent Company Only Financial Statements The following condensed statements of financial condition and condensed statements of income and cash flows for Southern Missouri Bancorp, Inc. should be read in conjunction with the consolidated financial statements and the notes thereto. STATEMENTS OF FINANCIAL CONDITION At June 30, Assets 1996 1995 Cash and cash equivalents $ 868,400 1,608,326 Investment securities - available for sale 4,616,518 - Investment securities - held to maturity - 5,578,275 ESOP note receivable 918,206 1,122,251 Accrued interest receivable 115,991 133,822 Income taxes receivable 10,285 18,779 Fixed assets 9,510 - Prepaid expenses 9,445 11,656 Equity in net assets of the Savings Bank 19,694,993 18,580,407 Total assets $ 26,243,348 27,053,516 Liabilities and Stockholders' Equity Accrued expense $ 16,054 6,540 Total liabilities 16,054 6,540 Stockholders' equity 26,227,294 27,046,976 Total liabilities and stockholders' equity $ 26,243,348 27,053,516 STATEMENTS OF INCOME Year Ended June 30, 1996 1995 Interest income $ 434,458 411,176 Dividend from Savings Bank 300,000 722,240 734,458 1,133,416 Operating expenses 154,690 179,453 Income before income taxes and equity in undistributed income of the Savings Bank 579,768 953,963 Income taxes 62,493 43,596 Income before equity in undistributed income of the Savings Bank 517,275 910,367 Equity in undistributed income of the Savings Bank 949,247 337,090 Net income $ 1,466,522 1,247,457 46 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 STATEMENTS OF CASH FLOWS Year Ended June 30, 1996 1995 Cash flows from operating activities: Net income $ 1,466,522 1,247,457 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 865 - Equity in undistributed income of the Savings Bank (949,247) (337,090) Amortization of premiums (discounts) on investment securities 93,996 128,855 Decrease (increase) in accrued interest receivable 17,831 (11,208) Decrease (increase) in prepaid expenses 2,211 (11,656) Decrease (increase) in income taxes receivable 8,493 (35,279) Decrease in dividends payable - (135,240) Increase in accrued expenses 7,184 6,540 Net cash provided by operating activities 647,855 852,379 Cash flows from investing activities: Principal collected on loan to ESOP 204,045 306,069 Purchase of investment securities, available for sale (2,075,386) - Proceeds from maturities of investment securities, available for sale 2,950,000 - Purchase of investment securities, held to maturity - (2,480,639) Proceeds from maturities of investment securities, held to maturity - 500,000 Purchase of fixed assets (10,375) - Net cash provided by (used for) investing activities 1,068,284 (1,674,570) Cash flows from financing activities: Dividends on common stock (765,035) (586,040) Exercise of stock options 108,120 - Payments to acquire treasury stock (1,799,150) - Net cash used in financing activities (2,456,065) (586,040) Net decrease in cash and cash equivalents (739,926) (1,408,231) Cash and cash equivalents at beginning of period 1,608,326 3,016,557 Cash and cash equivalents at end of period $ 868,400 1,608,326 47 PAGE SOUTHERN MISSOURI BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996, 1995 and 1994 NOTE 17: Quarterly Financial Data (Unaudited) Quarterly operating data for the years ended June 30 is summarized as follows (in thousands): First Second Third Fourth 1996: Quarter Quarter Quarter Quarter Interest income $ 2,613 2,687 2,883 2,827 Interest expense 1,527 1,578 1,622 1,582 Net interest income 1,086 1,109 1,261 1,245 Provision for loan losses 15 15 15 15 Noninterest income 134 145 212 149 Noninterest expense 800 825 793 743 Income before income taxes 405 414 665 636 Income taxes 103 111 211 228 Net income $ 302 303 454 408 First Second Third Fourth 1995: Quarter Quarter Quarter Quarter Interest income $ 2,312 2,422 2,410 2,497 Interest expense 1,184 1,236 1,325 1,442 Net interest income 1,128 1,186 1,085 1,055 Provision for loan losses - 5 15 75 Noninterest income 120 115 97 123 Noninterest expense 773 759 824 756 Income before income taxes 475 537 343 347 Income taxes 140 148 97 70 Net income $ 335 389 246 277 NOTE 18: SUPERVISORY AGREEMENT On December 21, 1994, the Savings Bank voluntarily entered into a Supervisory Agreement with the OTS as a result of its latest OTS examination. The Supervisory Agreement generally concerns the Savings Bank's investment portfolio and more specifically focuses on the reporting, monitoring and assessment of interest rate risk in connection with the Savings Bank's portfolio of collateralized mortgage obligations (CMOs). As part of the Supervisory Agreement, the Savings Bank hired a Chief Financial Officer. In addition, the Savings Bank revised its Investment Policy to conform more closely to the OTS's policy on securities activities and implemented additional procedures to review the investment activities and monitor interest rate risk management. 48 PAGE DIRECTORS AND OFFICERS SOUTHERN MISSOURI BANCORP SOUTHERN MISSOURI SAVINGS BANK DIRECTORS: DIRECTORS: Robert A. Seifert Leonard W. Ehlers Chairman of the Board Chairman of the Board Retired Butler County Retired court reporter of Recorder of Deeds the 36th Judicial Circuit Donald R. Crandell James W. Tatum President, Vice-Chairman Chief Executive Officer Retired certified public accountant Chief Financial Officer Donald R. Crandell Leonard W. Ehlers President, Retired court reporter of Chief Executive Officer the 36th Judicial Circuit Robert A. Seifert Thadis R. Seifert Retired Butler County Recorder of Deeds Retired former executive vice president of Savings Thadis R. Seifert Bank Retired former executive vice president of Savings Bank Samuel H. Smith Engineer and majority owner of Samuel H. Smith S.H. Smith and Company, Inc. Engineer and majority owner of S.H. Smith and Company, Inc. James W. Tatum Ron Black Retired certified public Stewardship Director General Association accountant of General Baptist Douglas Bagby General Manager Municipal Utilities of City of Poplar Bluff OFFICERS: OFFICERS: Donald R. Crandell Donald R. Crandell President, President, Chief Executive Officer Chief Executive Officer Chief Financial Officer Wilma Case Samuel H. Smith Senior Vice President Secretary Chief Operations Officer Kent Nichols Senior Vice President Chairman Loan Department Wilma Pratte Secretary Robert Stanley Jones Vice President Chief Financial Officer 49 PAGE CORPORATE INFORMATION CORPORATE HEADQUARTERS TRANSFER AGENT 531 Vine Street Registrar and Transfer Company Poplar Bluff, Missouri 63901 10 Commerce Drive Cranford, New Jersey 07016 INDEPENDENT AUDITORS COMMON STOCK Kraft, Miles and Tatum Nasdaq National Market System Poplar Bluff, Missouri 63901 Nasdaq Symbol: SMBC SPECIAL COUNSEL Breyer & Aguggia Washington, D.C. ANNUAL MEETING The Annual Meeting of Stockholders will be held Monday, October 28, 1996, at 9:00 a.m., Central Time, at Greater Poplar Bluff Area Chamber of Commerce Building, 1111 West Pine, Poplar Bluff, Missouri 63901. FORM 10-KSB A copy of Form 10-KSB, including financial statement schedules as filed with the Securities and Exchange Commission will be furnished without charge to stockholders as of the record date upon written request to the Secretary, Southern Missouri Bancorp, Inc., 531 Vine Street, Poplar Bluff, Missouri 63901. 50 Exhibit 21 Subsidiaries of the Registrant Parent Southern Missouri Bancorp, Inc. Percentage Jurisdiction or Subsidiaries (a) of Ownership State of Incorporation Southern Missouri Savings Bank, FSB 100% United States SMS Financial Services, Inc. (b) 100% Missouri (a) The operation of the Company's wholly owned subsidiaries are included in the Company's Financial Statements contained in Item 7 hereof. (b) Wholly-owned subsidiary of Southern Missouri Savings Bank, FSB. Exhibit 23 Consent of Auditors [Kraft, Miles & Tatum Letterhead] CONSENT OF INDEPENDENT AUDITORS We have issued our report dated August 16, 1996, accompanying the Consolidated Financial Statements incorporated by reference in the Annual Report of Southern Missouri Bancorp, Inc. on Form 10-KSB for the year ending June 30, 1996. We hereby consent to the incorporation by reference of said reports in the Registration Statement of Southern Missouri Bancorp, Inc. on Form S-8 (File No. 333-2320, effective March 13, 1996). /s/Kraft, Miles & Tatum KRAFT, MILES & TATUM Poplar Bluff, Missouri September 27, 1996 EX-27 2
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