Southern Missouri Bancorp, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2020. The provided filing is not a 2019 fourth-quarter filing; it is the fiscal 2020 annual report, filed September 14, 2020. Southern Missouri Bancorp is the holding company for Southern Bank, a community bank operating primarily in Missouri, Arkansas, and Illinois.
Business Context
- The Bank funds residential, commercial real estate, construction, commercial business, agricultural, and consumer lending primarily with customer deposits and FHLB borrowings.
- At June 30, 2020, the Bank operated 45 full-service and two limited-service branches, with a new Arkansas branch opened in July 2020.
- The Company completed the all-cash acquisition of Central Federal Bancshares on May 22, 2020. Central contributed approximately $70.6 million of assets, $51.4 million of loans, and $46.7 million of deposits at closing, and generated a $123,000 bargain purchase gain.
- COVID-19 materially affected operations, credit-risk assessments, branch access, and loan modifications during the period.
Key Financial Metrics
| Metric | FY 2020 | FY 2019 | Change |
|---|
| Total assets | $2.542 billion | $2.214 billion | +14.8% |
| Net loans receivable | $2.142 billion | $1.846 billion | +16.0% |
| Deposits | $2.185 billion | $1.894 billion | +15.4% |
| Stockholders’ equity | $258.3 million | $238.4 million | +8.4% |
| Net interest income | $80.1 million | $72.8 million | +10.1% |
| Provision for loan losses | $6.0 million | $2.0 million | +195.4% |
| Noninterest income | $14.8 million | $13.1 million | +12.7% |
| Noninterest expense | $54.5 million | $47.9 million | +13.7% |
| Net income | $27.5 million | $28.9 million | -4.7% |
| Diluted EPS | $2.99 | $3.14 | -4.8% |
| Net interest margin | 3.72% | 3.78% | -6 basis points |
| Return on assets | 1.18% | 1.38% | Down 20 basis points |
| Return on average common equity | 11.11% | 13.13% | Down 202 basis points |
Loan Portfolio and Credit Quality
- Gross loans were $2.250 billion at June 30, 2020. Commercial real estate represented $887.4 million, or 41.4%, and commercial business loans represented $468.4 million, or 21.9%.
- Commercial real estate and commercial business loans together represented approximately 63.3% of net loans, increasing sensitivity to local economic conditions and business cash flows.
- PPP loans outstanding totaled $132.3 million at year-end. Through August 31, 2020, the Company had originated almost 1,700 PPP loans totaling $133.7 million.
- The allowance for loan losses increased to $25.1 million from $19.9 million, and the allowance ratio increased to 1.16% of gross loans from 1.07%.
- Nonperforming assets declined to $11.2 million, or 0.44% of total assets, from $24.8 million, or 1.12%, primarily because of resolutions of acquired Gideon nonperforming loans.
- Net charge-offs increased to $766,000, or 0.04% of average loans, from $343,000, or 0.02%.
- At June 30, 2020, approximately 900 loans totaling $380.2 million had payment deferrals or interest-only modifications under COVID-19 relief provisions. By August 31, 2020, this declined to approximately 600 loans totaling $305.6 million.
Cash Flow, Liquidity, and Debt
| Cash flow or funding item | FY 2020 |
|---|
| Cash provided by operating activities | $40.3 million |
| Cash used in investing activities | $272.4 million |
| Cash provided by financing activities | $250.9 million |
| Ending cash and cash equivalents | $54.2 million |
| FHLB advances | $70.0 million |
| Subordinated debt | $15.1 million |
| Commitments to extend credit | $416.2 million |
- Liquidity was supported by a $291.2 million increase in deposits and available FHLB borrowing capacity. The Company reported approximately $296.6 million of additional FHLB borrowing capacity on pledged collateral and $179.7 million of Federal Reserve discount-window capacity, with no discount-window balance outstanding.
- Certificates of deposit totaling $499.4 million mature within one year, creating a significant deposit-renewal and funding requirement.
- The Company had no securities sold under agreements to repurchase at June 30, 2020, compared with $4.4 million in the prior year.
Material Changes Versus the Prior Comparable Period
- Balance-sheet growth accelerated, driven by PPP lending, organic loan growth, deposit inflows, and the Central Federal acquisition.
- Net interest income increased because average interest-earning assets grew 11.8%, but the net interest margin declined as market rates fell and loan yields decreased.
- Net income declined despite higher net interest income because the provision for loan losses and operating expenses increased substantially.
- Noninterest expense included $1.2 million of merger-related costs, compared with $829,000 in FY 2019. FDIC assessment credits reduced deposit insurance expense during FY 2020; management expected expense to normalize in FY 2021.
- The Company repurchased 182,598 shares for $5.8 million during FY 2020 and suspended repurchases effective after March 26, 2020.
- Available-for-sale securities increased to $176.5 million from $165.5 million, while accumulated other comprehensive income increased to $4.4 million from $1.2 million, largely reflecting unrealized securities gains.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that current funding sources are expected to meet foreseeable liquidity needs and that the allowance was adequate at June 30, 2020, while emphasizing substantial uncertainty regarding COVID-19-related credit losses.
- The Company expects fair-value discount accretion from earlier acquisitions to decline in FY 2021; full-year accretion from the Central acquisition is expected to partially offset that decline.
- Management expects the commercial business loan percentage to decline somewhat as PPP loans are forgiven, but expects commercial lending to remain important over the long term.
- The Company estimated that adoption of CECL in the first quarter of FY 2021 would increase the allowance for credit losses by approximately 27% to 35% versus the June 30, 2020 allowance, producing an estimated allowance ratio of 1.48% to 1.57% of gross loans. The estimate was subject to change.
- Principal risks include COVID-19-related borrower stress, increased deferrals and future delinquencies, commercial real estate and construction concentrations, agricultural exposure, interest-rate and liquidity risk, acquisition integration, cybersecurity, regulatory changes, and potential goodwill or securities impairment.
- At June 30, 2020, the Bank and Company were categorized as well capitalized. The Bank’s total risk-based capital ratio was 12.88%, Tier 1 leverage ratio was 9.66%, and CET1 ratio was 11.63%.
- A Missouri income-tax audit was ongoing. Management reported no material pending litigation and no unresolved SEC staff comments.
- The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting.
Investor Verification Checklist
- Verify the reporting period: the source is FY 2020, not 2019 Q4.
- Track the performance of the $380.2 million of COVID-19-modified loans at June 30, 2020, and the subsequent $305.6 million balance at August 31, 2020.
- Assess whether the allowance increase and planned CECL adoption adequately capture losses in commercial real estate, hotel, restaurant, construction, and agricultural portfolios.
- Reconcile PPP loan balances, SBA guarantees, forgiveness timing, fee income, and any potential lender litigation or guarantee risk.
- Monitor the $499.4 million of certificates of deposit maturing within one year and the Company’s ability to retain deposits at lower market rates.
- Evaluate the impact of declining net interest margin, low interest rates, and the large fixed-rate loan portfolio on future earnings.
- Review Central Federal integration results, expected synergies, acquisition-related expenses, and the absence of goodwill recognized in that transaction.
- Confirm regulatory capital ratios, dividend capacity, share repurchase activity, and the approximately $16.8 million principal amount of junior subordinated debt that can restrict dividends if interest is deferred.
