Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2018, the first quarter of fiscal 2019. The filing was signed November 9, 2018. Southern Missouri Bancorp operates primarily through Southern Bank, which had 37 full-service and three limited-service branches at quarter-end.
Financial condition and key metrics
| Metric | September 30, 2018 | Comparable period or prior date |
|---|---|---|
| Total assets | $1.944 billion | $1.886 billion at June 30, 2018 |
| Net loans | $1.624 billion | $1.563 billion at June 30, 2018 |
| Deposits | $1.591 billion | $1.580 billion at June 30, 2018 |
| FHLB advances | $118.3 million | $76.7 million at June 30, 2018 |
| Stockholders’ equity | $206.1 million | $200.7 million at June 30, 2018 |
| Cash and cash equivalents | $22.1 million | $26.3 million at June 30, 2018 |
| Net income | $6.8 million | $4.9 million in Q1 fiscal 2018 |
| Diluted EPS | $0.76 | $0.56 in Q1 fiscal 2018 |
| Net interest margin | 3.92% | 3.79% in Q1 fiscal 2018 |
| Return on average assets | 1.43% | 1.12% in Q1 fiscal 2018 |
| Return on average common equity | 13.4% | 11.1% in Q1 fiscal 2018 |
Quarterly results
- Total interest income increased 19.7% to $22.0 million, driven by loan growth, higher loan yields, higher market rates, and acquisition-related discount accretion.
- Interest expense increased 47.4% to $4.9 million as deposit and borrowing costs rose and interest-bearing liabilities increased.
- Net interest income increased 13.7% to $17.2 million. The net interest margin expanded 13 basis points to 3.92%, while the interest-rate spread increased to 3.73% from 3.66%.
- Provision for loan losses declined 21.4% to $682,000. The allowance for loan losses increased to $18.8 million from $18.2 million at June 30, 2018.
- Noninterest income increased 4.9% to $3.4 million, primarily from higher bank-card interchange income and deposit-account service charges.
- Noninterest expense increased 6.5% to $11.4 million, reflecting higher compensation, occupancy, advertising, bank-card network, electronic banking, and foreclosed-asset-related costs. The efficiency ratio improved to 55.6% from 58.5%.
- Income tax expense decreased 11.8% to $1.7 million. The effective tax rate was 19.7%, compared with 28.0%, primarily because of the lower federal corporate tax rate under the Tax Cuts and Jobs Act.
- Quarterly operating cash flow was $7.0 million. Investing activities used $63.3 million, mainly because of a $62.1 million net increase in loans. Financing activities provided $52.1 million, including net FHLB funding.
Material changes versus prior periods
- Total assets increased $57.5 million, or 3.0%, from June 30, 2018, primarily because net loans increased $60.8 million, or 3.9%.
- Loan growth was concentrated in commercial loans, commercial real estate, construction loans, and residential real estate; consumer loans declined.
- Deposits increased $11.2 million, or 0.7%, but the funding mix shifted. Public-unit deposits decreased $22.6 million, brokered certificates of deposit increased $37.9 million, and brokered nonmaturity deposits increased $901,000.
- FHLB advances increased $41.7 million, or 54.3%, as the Company used overnight and term funding to support loan growth exceeding deposit growth. The average loan-to-deposit ratio was 101.6%, compared with 97.8% a year earlier.
- Nonaccrual loans declined to $7.6 million from $9.2 million at June 30, 2018, but increased from $2.3 million a year earlier. Total nonperforming assets were $12.5 million, compared with $13.1 million at June 30, 2018, and $6.0 million a year earlier.
- Adversely classified loans declined to $11.7 million, or 0.71% of total loans, from $14.2 million, or 0.90%, at June 30, 2018.
- Accumulated other comprehensive loss increased as higher market interest rates reduced the fair value of available-for-sale securities. Unrealized losses on those securities totaled $3.6 million at quarter-end.
Guidance, outlook, risks, and unusual items
- Management expects continued asset growth through loan originations and occasional investment purchases, funded by retail deposits, brokered funding, and short- and long-term FHLB borrowings.
- Management considers higher market rates generally favorable, but views the flattening yield curve and rising funding costs as concerns. Acquisition-related loan discount accretion increased net interest income by approximately $1.2 million in the quarter, but management generally expects this benefit to decline over time.
- The Company agreed to acquire Gideon Bancshares Company and First Commercial Bank in a stock-and-cash transaction valued at approximately $23.2 million. The transaction was expected to close in the fourth quarter of calendar 2018, subject to customary conditions. Gideon reported approximately $217.0 million of assets, $147.7 million of net loans, and $162.2 million of deposits at September 30, 2018. Acquisition-related costs incurred through quarter-end were $208,000, including $133,000 recorded in quarterly noninterest expense.
- The Company had approximately $305.0 million of outstanding commitments and approvals to extend credit, including $188.0 million of unused lines of credit.
- Liquidity was supported by $345.1 million of available FHLB credit, of which $119.5 million was advanced, and $180.7 million of primary credit availability at the Federal Reserve discount window. Management stated that liquidity resources were sufficient for expected needs.
- The Bank was categorized as well capitalized. At September 30, 2018, Southern Bank reported total risk-based capital of 12.95%, Tier 1 risk-based capital of 11.78%, common equity Tier 1 capital of 11.78%, and a Tier 1 leverage ratio of 10.67%.
- Key risks include interest-rate and yield-curve changes, funding availability and cost, credit losses, real estate and agricultural conditions, regulatory actions, acquisition integration, and changes in accounting standards. Management is evaluating the future current expected credit loss standard and cannot yet reasonably estimate its effect.
- The filing reports no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2018.
Important facts for investors to verify
- Whether loan growth funded through brokered deposits and substantially higher FHLB advances remains profitable as deposit and borrowing costs rise.
- The sustainability of quarterly earnings given the unusually elevated acquisition-related loan discount accretion and management’s expectation that it will decline.
- Credit performance in the commercial real estate, commercial business, construction, and residential real estate portfolios, including the increase in nonperforming assets versus the prior year.
- The final purchase price, closing, integration costs, and realized synergies from the Gideon and First Commercial acquisition.
- The impact of future CECL adoption on the allowance for loan losses, retained earnings, capital, and reported profitability.
- The effect of further interest-rate increases or yield-curve flattening on net interest margin, securities values, liquidity, and borrower repayment capacity.