SOUTHERN MISSOURI BANCORP, INC. quarterly report, Q3 FY2018

Business Context and Reporting Period

Southern Missouri Bancorp, Inc., the holding company for Southern Bank, filed this unaudited Form 10-Q for the quarter and nine months ended March 31, 2018. The company operated 38 full-service and three limited-service branches. The filing indicates that the bank generates substantially all consolidated revenue and holds substantially all assets and liabilities.

The request metadata identifies “2017 Q3,” but the filing itself clearly reports the fiscal 2018 third quarter ended March 31, 2018, with comparisons to March 31, 2017, and June 30, 2017.

Financial Highlights

Metric	Three months ended March 31, 2018	Nine months ended March 31, 2018	Comparable period
Total interest income	$19.4 million	$57.0 million	$15.0 million and $45.1 million
Net interest income	$15.7 million	$46.5 million	$12.4 million and $37.6 million
Net interest margin	3.74%	3.80%	3.64% and 3.72%
Provision for loan losses	$550,000	$2.1 million	$376,000 and $2.0 million
Noninterest income	$3.9 million	$10.3 million	$2.9 million and $8.2 million
Noninterest expense	$11.9 million	$33.2 million	$9.6 million and $27.4 million
Net income	$5.3 million	$15.3 million	$4.0 million and $11.8 million
Diluted earnings per share	$0.60	$1.77	$0.53 and $1.59

Amounts are in dollars unless otherwise stated. The filing reports a three-month return on average assets of 1.15%, return on average equity of 11.2%, and an efficiency ratio of 61.8%. For the nine-month period, return on average assets was 1.15%, return on average equity was 11.3%, and the efficiency ratio was 58.8%.

Total assets were $1.850 billion at March 31, 2018, up $142.1 million, or 8.3%, from June 30, 2017.
Net loans were $1.522 billion, up $124.7 million, or 8.9%, primarily from organic growth and the Southern Missouri Bancshares acquisition.
Deposits were $1.574 billion, up $118.7 million, or 8.2%, including $68.2 million assumed in the acquisition.
Stockholders’ equity was $196.5 million, up $23.4 million, or 13.5%.
Cash and cash equivalents were $30.8 million; available-for-sale securities were $146.1 million.
FHLB advances were $50.9 million, securities sold under repurchase agreements were $3.8 million, note payable was $3.0 million, and subordinated debt was $14.9 million.
Allowance for loan losses was $17.3 million, compared with $15.5 million at June 30, 2017.

Cash Flow, Liquidity, Capital, and Credit

For the nine months ended March 31, 2018, operating activities provided $21.2 million of cash, investing activities used $64.7 million, and financing activities provided $43.4 million. Cash and cash equivalents decreased by only $5,000 to $30.8 million.
Outstanding loan commitments and approvals totaled approximately $272.4 million, including $197.7 million of unused lines of credit.
FHLB collateral supported approximately $328.8 million of available credit, of which $50.9 million was outstanding. Additional Federal Reserve collateral provided access to approximately $144.1 million of primary credit borrowings.
Management stated that liquid resources should be sufficient to meet liquidity needs.
The Bank was categorized as well capitalized. At March 31, 2018, Southern Bank’s total risk-based capital ratio was 13.00%, Tier 1 risk-based capital ratio was 11.85%, common equity Tier 1 ratio was 11.85%, and Tier 1 leverage ratio was 10.74%.
Nonperforming loans increased to $6.2 million from $3.2 million at June 30, 2017. Total nonperforming assets increased to $10.4 million from $6.3 million.
Adversely classified loans declined to $11.9 million, or 0.77% of total loans, from $13.3 million, or 0.94%, at June 30, 2017.

Material Changes Versus Comparable Period

Third-quarter net income increased 33.0%, while nine-month net income increased 29.2%. Diluted EPS rose 13.2% for the quarter and 11.3% for the nine-month period.
Nine-month net interest income increased 23.7%, driven by a 21.0% increase in average interest-earning assets and an eight-basis-point increase in net interest margin.
Average yields on interest-earning assets increased, but the average cost of interest-bearing liabilities also increased as deposit and short-term borrowing rates rose.
Nine-month noninterest income increased 25.8%, benefiting from higher bank-card interchange income, deposit fees, loan fees, servicing fees, and realized securities gains.
Nine-month noninterest expense increased 21.0%, primarily from compensation, occupancy, amortization of core deposit intangibles, bank-card network expense, and merger-related costs.
The company completed the acquisition of Southern Missouri Bancshares, Inc. and Southern Missouri Bank of Marshfield on February 23, 2018, for total consideration of $16.8 million, including $13.0 million of common stock and $3.9 million of cash. The acquisition added $68.3 million of loans at fair value, $68.2 million of deposits, and $4.4 million of goodwill.
Accumulated other comprehensive income declined to a loss of $1.8 million, primarily reflecting unrealized losses on available-for-sale securities. The company recognized $254,000 of realized gains on AFS securities in the quarter.

Guidance, Outlook, Risks, and Unusual Items

Management expects continued asset growth through loan origination, occasional loan purchases, and investment securities purchases, funded primarily by retail deposits, brokered funding, and FHLB borrowings.
Assuming consistent tax-advantaged activity, management expected a fiscal 2018 effective tax rate of 27% to 29%, a fourth-quarter rate of 24% to 26%, and a fiscal 2019 rate of 18% to 20%.
The Tax Cuts and Jobs Act reduced the federal corporate tax rate and required a deferred tax asset revaluation that increased nine-month tax expense by approximately $1.1 million. Management did not expect significant additional adjustments but noted that further tax-return adjustments remained possible.
Management viewed higher interest rates as generally favorable but identified the flatter yield curve as a concern. Interest-rate sensitivity analysis estimated that a 300-basis-point increase could reduce net portfolio value by 14%, while a 300-basis-point decrease could increase it by 34%; these estimates depend on assumptions and are not forecasts of actual results.
Key risks include credit losses, increasing nonaccrual loans, real estate values, agricultural conditions, deposit and funding costs, interest-rate movements, regulatory requirements, acquisition integration, and the ability to realize expected merger synergies and cost savings.
The company incurred $638,000 of third-party acquisition-related costs through March 31, 2018; $458,000 was recorded in third-quarter noninterest expense. Nine-month merger and acquisition costs totaled $776,000, compared with $173,000 in the prior-year period.
Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2018.

Important Facts for Investors to Verify

Whether the increase in nonperforming loans and nonperforming assets is temporary or signals broader deterioration, particularly in residential and commercial real estate exposures.
The sustainability of earnings growth after adjusting for acquisition-related costs, securities gains, purchase-accounting accretion, and other unusual items.
The pace and cost of deposit growth, the decline in brokered funding, and reliance on FHLB advances and other wholesale liquidity sources.
The effect of rising deposit costs and a flatter yield curve on future net interest margin.
The integration progress, operating costs, goodwill, and expected benefits of the Southern Missouri Bancshares acquisition.
The eventual impact of the current expected credit loss standard, ASU 2016-13; management had not yet estimated its effect and was evaluating data, systems, and software requirements.
The adequacy of the $17.3 million allowance for loan losses relative to loan growth, classified loans, nonaccrual loans, and changing economic and collateral conditions.