Business Context and Reporting Period
Southern Missouri Bancorp, Inc. is the holding company for Southern Bank, a Missouri-based community bank operating 46 full-service and two limited-service branches at September 30, 2020. The filing is a Form 10-Q for the quarter ended September 30, 2020, the first quarter of fiscal 2021. Amounts are in thousands unless otherwise stated.
Key Financial Metrics
| Metric | Quarter ended September 30, 2020 | Comparable period or date |
|---|---|---|
| Total assets | $2.541 billion | $2.542 billion at June 30, 2020 |
| Net loans | $2.150 billion | $2.142 billion at June 30, 2020 |
| Deposits | $2.168 billion | $2.185 billion at June 30, 2020 |
| FHLB advances | $85.6 million | $70.0 million at June 30, 2020 |
| Net interest income | $22.1 million | $19.6 million in Q1 fiscal 2020 |
| Net interest margin | 3.73% | 3.81% in Q1 fiscal 2020 |
| Net income | $10.0 million | $7.8 million in Q1 fiscal 2020 |
| Diluted EPS | $1.09 | $0.85 in Q1 fiscal 2020 |
| Cash flow from operating activities | $5.9 million | $5.2 million in Q1 fiscal 2020 |
| Cash and cash equivalents | $41.9 million | $54.2 million at June 30, 2020 |
- Total interest income was $27.0 million, while interest expense declined to $4.9 million from $7.4 million.
- Provision for credit losses was $774,000, compared with $896,000 in the prior-year quarter. Net charge-offs were $162,000.
- Noninterest income increased to $4.9 million from $3.5 million, led by $1.2 million of net realized gains on loan sales.
- Noninterest expense increased to $13.5 million from $12.4 million. The efficiency ratio improved to 50.0% from 53.6%.
- Annualized return on average assets was 1.57%, and return on average common equity was 15.6%.
- Stockholders’ equity was $260.0 million at September 30, 2020. The quarterly common dividend was $0.15 per share.
Material Changes Versus Comparable Period
- Net income rose 27.6%, driven by higher net interest income and noninterest income and a lower credit-loss provision, partially offset by higher operating expenses and taxes.
- Average interest-earning assets increased 15.2%, but the average yield declined 69 basis points to 4.56%. The cost of interest-bearing liabilities declined 66 basis points to 1.01%.
- Net interest margin declined eight basis points, primarily because of lower loan yields, reduced acquired-loan discount accretion, and the absence of prior-year income from resolutions of certain nonperforming loans.
- Gross loans increased approximately 0.9% from June 30, 2020. Commercial loans and residential real estate loans increased, while commercial real estate and drawn construction balances were modestly lower.
- Deposits declined 0.8%, primarily because of lower certificates of deposit and public-unit balances. FHLB advances increased 22.3% to fund loan growth and deposit outflows.
- The May 2020 Central Federal Bancshares acquisition contributed to balance-sheet growth, revenue, and expenses during the quarter.
Accounting, Credit, Liquidity, and Capital Developments
- Effective July 1, 2020, the company adopted ASU 2016-13, the CECL standard. The allowance for credit losses increased by $9.3 million at adoption, including $8.9 million from the incurred-loss-to-CECL transition and $434,000 from converting PCI loans to PCD loans. Retained earnings was reduced by approximately $7.2 million, net of taxes and related adjustments.
- The allowance for credit losses on loans was $35.1 million at September 30, 2020, compared with $25.1 million under the prior model at June 30, 2020.
- Nonperforming assets were $11.3 million, or approximately 0.44% of total assets, versus $11.2 million at June 30, 2020 and $17.9 million at September 30, 2019. Nonaccrual loans were $8.8 million.
- Adversely classified loans were $25.2 million, or 1.15% of total loans, compared with $24.5 million, or 1.13%, at June 30, 2020.
- The company originated approximately 1,700 PPP loans totaling $138.6 million through September 30, 2020; outstanding PPP balances were $133.7 million. Forgiveness processing remained limited as of October 31, 2020.
- COVID-19-related deferrals and modifications declined from approximately 900 loans totaling $380.2 million at June 30, 2020 to approximately 250 loans totaling $93.6 million at September 30, 2020, and to approximately 59 loans totaling $37.2 million at October 31, 2020.
- Outstanding credit commitments and approvals totaled approximately $451.9 million, including $314.9 million of unused lines. FHLB collateral supported approximately $411.4 million of available credit, of which $86.0 million was advanced. Additional Federal Reserve discount-window capacity was approximately $203.2 million.
- Management stated that the company and bank met applicable capital requirements. At September 30, 2020, the bank’s total risk-based capital ratio was 13.20%, Tier 1 leverage ratio was 10.00%, and common equity Tier 1 ratio was 11.95%; the bank was categorized as well capitalized.
Guidance, Outlook, Commentary, and Risks
- No formal earnings or revenue guidance was provided. Management expects to continue growing through loan originations, occasional loan purchases, investment securities, retail deposits, brokered funding, and FHLB borrowings, while continuing to evaluate strategic expansion opportunities.
- Management described the COVID-19 economic outlook as generally unchanged from June 30, 2020, but emphasized significant uncertainty regarding the pandemic’s duration, borrower performance, government relief programs, and regional and global economic effects.
- Management believes the allowance for credit losses is adequate, but acknowledged that worsening economic conditions could materially increase past-due loans and require additional provisions.
- Low market interest rates may continue to pressure asset yields, while the ability to reduce funding costs further is limited. Acquired-loan discount accretion is expected to decline over time.
- Key exposures include commercial real estate, construction, agricultural lending, restaurants, hotels, retail and multi-tenant retail borrowers, interest-rate changes, real estate values, deposit retention, funding access, regulatory requirements, and changes in accounting estimates.
- Interest-rate sensitivity modeling indicated that net portfolio value would decline 10% under an instantaneous 300-basis-point rate increase and increase 8% under a 300-basis-point decrease; management cautioned that these scenarios rely on assumptions and are not forecasts.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material pending legal proceedings were disclosed, and no material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Whether PPP loan forgiveness proceeds are received timely and how any remaining PPP balances affect future earnings, liquidity, and capital.
- Whether COVID-19-related deferrals and modifications continue to decline or produce delayed credit deterioration, particularly in commercial real estate, hotels, restaurants, and retail.
- The adequacy of the $35.1 million CECL allowance as forecasts, collateral values, delinquencies, and charge-offs evolve.
- The sustainability of the 3.73% net interest margin as loan yields, funding costs, and acquired-loan discount accretion change.
- The effect of deposit outflows and increased FHLB borrowings on liquidity, funding costs, and the loan-to-deposit ratio.
- The integration and continuing financial contribution of the Central Federal Bancshares acquisition.
- The company’s regulatory capital ratios after the five-year transition for the CECL adoption impact and after any future balance-sheet growth.