Southern Missouri Bancorp, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2015, with comparative fiscal years 2014 and 2013. The request metadata references “2014 Q4,” but the filing is a fiscal 2015 annual report; fourth-quarter data are included for the quarter ended June 30, 2015.
Business context
Southern Missouri Bancorp is the holding company for Southern Bank, a community bank operating in Missouri and Arkansas. The Bank funds lending primarily through retail deposits, Federal Home Loan Bank advances and, to a lesser extent, repurchase agreements and brokered deposits. Its principal lending categories are commercial real estate, residential real estate, commercial business, construction, agricultural and consumer loans.
The August 2014 acquisition of Peoples Service Company, Peoples Banking Company and Peoples Bank of the Ozarks materially expanded the franchise. Peoples was merged into Southern Bank in December 2014. At June 30, 2015, the Company reported 32 full-service and three limited-service offices, approximately 327 employees, $1.3 billion of assets, $1.1 billion of deposits and $132.6 million of stockholders’ equity.
Financial performance and condition
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total assets | $1.300 billion | $1.021 billion | +27.3% |
| Net loans receivable | $1.053 billion | $801.1 million | +31.5% |
| Total deposits | $1.055 billion | $785.8 million | +34.3% |
| Net interest income | $46.5 million | $33.0 million | +41.1% |
| Provision for loan losses | $3.2 million | $1.6 million | +93.6% |
| Noninterest income | $8.7 million | $6.1 million | +41.2% |
| Noninterest expense | $32.3 million | $23.6 million | +36.5% |
| Net income | $13.7 million | $10.1 million | +35.6% |
| Net income available to common stockholders | $13.5 million | $9.9 million | +36.3% |
| Diluted EPS | $1.79 | $1.45 | +23.4% |
| Return on assets | 1.07% | 1.09% | Down 2 bps |
| Return on average common equity | 12.48% | 11.55% | Up 93 bps |
| Net interest margin | 3.92% | 3.81% | Up 11 bps |
Growth was driven primarily by the Peoples acquisition and continued organic loan production. Loans originated increased to $391.2 million from $289.7 million, while acquired loans contributed approximately $190.4 million at fair value. The reported net interest margin benefited from approximately $2.1 million of purchase-accounting accretion related to Peoples; management expects this benefit to decline as acquired loans mature or prepay. Excluding acquisition-related accretion and other purchase-accounting effects, FY2015 net interest margin was 3.72%.
Cash provided by operating activities was $19.9 million. Investing activities used $26.3 million, primarily reflecting net loan growth and capital expenditures. Financing activities provided $8.2 million, and cash and cash equivalents ended at $16.8 million, compared with $14.9 million at June 30, 2014.
Loan portfolio, credit quality and liquidity
- Gross loans totaled $1.090 billion. Commercial real estate represented $404.7 million, residential real estate $377.5 million, commercial business $191.9 million and construction $69.2 million.
- Commercial real estate and commercial business loans together represented approximately 56.7% of net loans, creating heightened sensitivity to local economic, business and real estate conditions.
- The allowance for loan losses increased to $12.3 million from $9.3 million, or 1.15% of gross loans versus 1.14%. Net charge-offs declined to $146,000 from $773,000.
- Nonperforming assets increased to $8.3 million, or 0.64% of total assets, from $4.4 million, or 0.43%. Nonperforming loans were $3.8 million, including $3.8 million of nonaccrual loans.
- Classified assets totaled $20.9 million, or 1.61% of assets, versus $11.6 million, or 1.14%, primarily because of acquired Peoples credit-impaired loans and foreclosed real estate.
- Troubled debt restructurings totaled $9.3 million, of which $2.8 million was nonperforming. Management attributed much of the increase in nonperforming assets to the Peoples acquisition and the migration of a purchased credit-impaired relationship to nonaccrual status.
- FHLB advances were $64.8 million, securities sold under repurchase agreements were $27.3 million and subordinated debt was $14.7 million. Total borrowings and subordinated debt were approximately $106.8 million.
- The Bank had $130.6 million of commitments to extend credit, including $94.0 million of unused lines of credit, and $2.6 million of standby letters of credit.
- Management stated that existing funding sources and liquidity were adequate for foreseeable needs. FHLB borrowing capacity remained substantial, although a post-year-end collateral eligibility review reduced available FHLB credit to $238.7 million.
Material changes and unusual items
- The Peoples acquisition added approximately $222.2 million of deposits, $190.4 million of loans, $31.3 million of securities, $16.0 million of FHLB advances and $6.5 million of junior subordinated debt, and generated approximately $3.0 million of goodwill.
- FY2015 included $528,000 of acquisition-related charges, compared with $1.2 million in FY2014.
- The Company repurchased the Treasury’s TARP-related common stock warrant for $2.7 million in May 2015.
- A two-for-one common stock split was completed in January 2015; all per-share data in the filing are split-adjusted.
- The Company maintained $20.0 million of SBLF preferred stock. Its dividend rate was 1% during FY2015 but is scheduled to increase to 9% after January 2016, potentially increasing annual preferred dividends from approximately $200,000 to $1.8 million.
- Two construction projects were underway: a new corporate headquarters estimated at $11.2 million and a Springfield branch project estimated at $1.4 million.
- Management reported no goodwill impairment, no additional other-than-temporary impairment on investment securities and no material pending legal proceedings.
Capital, outlook and risks
The Bank was categorized as well capitalized. At June 30, 2015, the Bank reported a 12.62% Tier 1 risk-based capital ratio, a 13.82% total risk-based capital ratio, a 10.65% Tier 1 leverage ratio and a 12.62% common equity Tier 1 ratio. The Company reported a 14.22% total risk-based capital ratio and a 10.98% Tier 1 leverage ratio. Management stated that the Company and Bank met the Basel III requirements, including the fully phased-in capital conservation buffer, as of the reporting date.
Management expects continued emphasis on commercial real estate, commercial business, agricultural and residential lending. It expects agricultural lending to grow, but not at the pace of recent years, and expects to maintain or increase the commercial real estate percentage of the portfolio. No quantitative earnings or revenue guidance was provided.
Key risks include integration and realization of synergies from the Peoples acquisition; rising nonperforming and classified assets; concentration in commercial real estate, commercial business and agricultural lending; construction and land-development credit risk; changes in real estate values; interest-rate and repricing risk; deposit retention and funding costs; liquidity availability; regulatory and compliance costs; potential increases in the SBLF dividend rate; impairment of securities, goodwill or deferred tax assets; technology and cybersecurity risks; and competitive pressure.
Interest-rate sensitivity modeling indicated that a 300-basis-point increase in rates could reduce estimated net portfolio value by 18%, while a 300-basis-point decrease could increase it by 22%. These are hypothetical estimates and do not represent earnings guidance.
Investor verification checklist
- Verify the extent to which FY2015 earnings and the 3.92% net interest margin depended on Peoples purchase-accounting accretion.
- Track nonperforming assets, classified assets, TDRs and allowance coverage as acquired loans season.
- Assess concentrations and collateral sensitivity in commercial real estate, construction, agricultural and commercial business loans.
- Confirm the post-January 2016 impact of the SBLF preferred dividend increasing from 1% to 9%.
- Review deposit maturities, jumbo certificates, loan-to-deposit levels and the reduced post-year-end FHLB borrowing capacity.
- Evaluate the effect of Basel III capital-conservation requirements on dividends, share repurchases and discretionary compensation.
- Reconcile reported annual results with the unaudited fourth-quarter data and confirm that all per-share comparisons reflect the January 2015 stock split.