Business Context and Reporting Period
Southern Missouri Bancorp, Inc. is the holding company for Southern Bank, a community bank operating in Missouri and Arkansas. Its primary activities are gathering retail deposits and funding residential, commercial real estate, agricultural, commercial business, construction, and consumer lending. The supplied filing is a Form 10-K for the fiscal year ended June 30, 2016, filed September 13, 2016; this differs from the request metadata identifying “2015 Q4.”
At June 30, 2016, the Company operated 33 full-service and three limited-service offices, with 299 full-time and 43 part-time employees. Total assets were $1.404 billion, deposits were $1.121 billion, and stockholders’ equity was $126.0 million.
Key Financial Metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Total assets | $1.404 billion | $1.300 billion | 8.0% increase |
| Net loans receivable | $1.135 billion | $1.053 billion | 7.8% increase |
| Deposits | $1.121 billion | $1.055 billion | 6.2% increase |
| Net interest income | $47.0 million | $46.5 million | 0.9% increase |
| Net interest margin | 3.80% | 3.92% | 12 basis-point decline |
| Net income | $14.8 million | $13.7 million | 8.6% increase |
| Net income available to common stockholders | $14.8 million | $13.5 million | 9.6% increase |
| Diluted EPS | $1.98 | $1.79 | 10.6% increase |
| Return on average assets | 1.11% | 1.07% | 4 basis-point increase |
| Return on average common equity | 12.34% | 12.48% | 14 basis-point decline |
| Net charge-offs to average loans | 0.09% | 0.01% | Increase |
Interest income increased to $56.3 million from $55.3 million, while interest expense increased to $9.4 million from $8.8 million. Noninterest income rose 12.7% to $9.8 million, and noninterest expense increased 1.2% to $32.7 million. The efficiency ratio is not clearly provided in the filing text.
Cash provided by operating activities was $17.7 million. Investing activities used $100.3 million, primarily because of $82.5 million of net loan growth, $29.3 million of available-for-sale securities purchases, $9.8 million of premises and equipment purchases, and a $10.0 million purchase of bank-owned life insurance. Financing activities provided $88.4 million, including $45.8 million of net FHLB borrowing proceeds and $65.5 million of deposit growth, partly offset by the $20.0 million redemption of preferred stock and $2.7 million of common dividends. Cash and cash equivalents increased to $22.6 million from $16.8 million.
At June 30, 2016, FHLB advances were $110.2 million, securities sold under agreements to repurchase were $27.1 million, and subordinated debt was $14.8 million. The Bank had approximately $138.2 million of additional FHLB borrowing capacity and $112.6 million of Federal Reserve discount-window borrowing capacity, with no discount-window borrowings outstanding. Commitments to extend credit totaled $163.8 million, including $104.0 million of unused lines of credit; standby letters of credit totaled $3.5 million.
Material Changes Versus the Prior Comparable Period
- Loan growth was concentrated in commercial real estate, residential real estate, commercial business, and construction lending. Gross loans increased to $1.171 billion from $1.090 billion.
- The loan portfolio remained commercially oriented: commercial real estate represented $452.1 million and commercial business loans represented $202.0 million. Together, commercial real estate and commercial business loans accounted for approximately 57.6% of net loans.
- Deposits increased $65.5 million, primarily through growth in NOW, noninterest-bearing, and money market accounts. Savings accounts and certificates of deposit declined.
- FHLB advances increased $45.4 million, or 70.1%, to support strong loan demand, including seasonal fourth-quarter funding needs.
- The allowance for loan losses increased 12.1% to $13.8 million, or 1.20% of gross loans, from 1.15%. Provision expense declined to $2.5 million from $3.2 million, but net charge-offs increased to $1.0 million from $146,000.
- Nonperforming assets increased to $9.0 million from $8.3 million, remaining 0.64% of total assets. Nonaccrual loans rose to $5.6 million from $3.8 million.
- Noninterest income benefited from nonrecurring items, including bank-owned life insurance income, proceeds associated with the sale of the Company’s investment in Ozark Trust and Investment Corporation, and the sale of a low-income housing tax credit investment.
- Noninterest expense benefited from the absence of the $508,000 of merger-related charges recorded in fiscal 2015, although occupancy and equipment costs increased following facility construction and expansion.
- The Company redeemed all $20.0 million of SBLF preferred stock in October 2015. This reduced stockholders’ equity but eliminated the preferred stock balance and reduced related dividend obligations. The Company also had repurchased the Treasury warrant for $2.7 million in May 2015.
- The impact of purchase-accounting accretion from the Peoples Acquisition declined. Management expects this benefit to decline further in fiscal 2017. Excluding the related after-tax effect, management reported fiscal 2016 net income available to common stockholders of $13.7 million and adjusted ROAA of 1.03%.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management expects continued focus on residential, commercial real estate, commercial business, agricultural, construction, and consumer lending. It expects agricultural lending to continue growing, but does not expect the rapid growth of recent years to continue. Management stated that current funding sources should be adequate for foreseeable liquidity needs.
Management intends to maintain or increase the proportion of commercial real estate lending and maintain the current percentage of commercial business lending. This strategy may support asset yields but increases exposure to local economic conditions, borrower cash flows, agricultural conditions, collateral values, and regulatory scrutiny of commercial real estate concentrations.
Interest-rate risk remains significant. The net interest margin declined to 3.80% from 3.92%, and management reported that a hypothetical immediate 300-basis-point increase in rates would reduce estimated net portfolio value by 12%; the filing cautions that these model results are not forecasts. A prolonged low-rate environment, rising deposit costs, or mismatched repricing could pressure earnings.
Key credit risks include commercial real estate, construction, agricultural real estate, and agricultural operating loans. Nonperforming assets, troubled debt restructurings, classified assets, and the allowance for loan losses depend on management estimates of borrower cash flows and collateral values. At June 30, 2016, troubled debt restructurings totaled $8.4 million, including $2.3 million considered nonperforming; classified assets totaled $16.0 million.
The Company reported four pooled trust preferred securities with a fair value of approximately $1.0 million and book value of $1.6 million. One security continued to pay payment-in-kind interest rather than cash interest, and future impairment remains possible. Management did not identify additional other-than-temporary impairment at June 30, 2016.
The Bank and Company exceeded regulatory capital requirements. Southern Bank was categorized as well capitalized, with total risk-based capital of 11.50%, Tier 1 risk-based capital of 10.33%, common equity Tier 1 capital of 10.33%, and Tier 1 leverage capital of 9.37%. The Company reported corresponding ratios of 11.95%, 10.79%, 9.63%, and 9.75%.
The filing identifies risks from acquisition integration, competition for deposits and loans, liquidity access, regulatory changes, technology and cybersecurity, litigation, economic weakness in Missouri and Arkansas, real estate and agricultural downturns, and potential insufficiency of the allowance for loan losses. Management reported no material pending legal proceedings and no unresolved SEC staff comments. The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the applicable reporting period, because the supplied metadata says “2015 Q4” while the filing covers the fiscal year ended June 30, 2016.
- Assess whether continued loan growth, particularly in commercial real estate, agricultural, construction, and commercial business lending, is consistent with credit quality and capital levels.
- Monitor nonaccrual loans, classified assets, TDRs, net charge-offs, and the adequacy of the $13.8 million allowance.
- Evaluate the effect of the declining Peoples purchase-accounting accretion on future net interest income, margin, and earnings.
- Review funding concentration and near-term maturities: $245.9 million of certificates of deposit and $79.8 million of FHLB advances mature within one year.
- Verify the sustainability of noninterest income, given the identified nonrecurring bank-owned life insurance, investment-sale, and tax-credit-related items.
- Review sensitivity to interest-rate changes, deposit repricing, FHLB borrowing costs, and the availability of pledged collateral.
- Confirm restrictions on dividends from Southern Bank, including the requirement for regulatory approval for certain special dividends and the Company’s dependence on Bank dividends.
- Evaluate potential future effects of the CECL, lease, financial-instrument, and revenue-recognition accounting standards identified in the filing.