Business Context and Reporting Period
Southern Missouri Bancorp, Inc. is the holding company for Southern Bank, which provides banking and financial services through 44 full-service and two limited-service branches. The filing is a Form 10-Q for the quarter and nine months ended March 31, 2019, within fiscal 2019. The supplied metadata identifies “2018 Q3,” but the filing itself clearly reports March 31, 2019 results.
The company completed its acquisition of Gideon Bancshares Company and First Commercial Bank on November 21, 2018, adding approximately $216.8 million of assets and $171.2 million of deposits at fair value.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2019 | Nine Months Ended March 31, 2019 | Comparable Period |
|---|---|---|---|
| Total interest income | $25.2 million | $71.4 million | $19.4 million and $57.0 million |
| Net interest income | $18.6 million | $53.8 million | $15.7 million and $46.5 million |
| Provision for loan losses | $491,000 | $1.5 million | $550,000 and $2.1 million |
| Noninterest income | $3.9 million | $11.4 million | $3.9 million and $10.3 million |
| Noninterest expense | $13.2 million | $37.2 million | $11.9 million and $33.2 million |
| Net income | $7.1 million | $21.3 million | $5.3 million and $15.3 million |
| Diluted earnings per share | $0.76 | $2.33 | $0.60 and $1.77 |
| Net interest margin | 3.73% | 3.78% | 3.74% and 3.80% |
| Return on average assets | 1.30% | 1.38% | 1.15% and 1.15% |
| Return on average equity | 12.5% | 13.2% | 11.2% and 11.3% |
Financial Condition, Liquidity and Capital
- Total assets were $2.18 billion at March 31, 2019, up 15.4% from June 30, 2018.
- Net loans were $1.82 billion, up 16.6% from June 30, 2018. Commercial real estate, commercial, and residential real estate loans were the primary growth categories.
- Deposits were $1.87 billion, up 18.6% from June 30, 2018. Certificates of deposit increased to $682.7 million from $533.5 million.
- Available-for-sale securities were $161.5 million, compared with $146.3 million at June 30, 2018.
- Cash and cash equivalents increased to $31.4 million from $26.3 million.
- FHLB advances declined to $38.4 million from $76.7 million. Brokered certificates of deposit totaled $55.8 million, and brokered nonmaturity deposits totaled $10.0 million.
- Stockholders’ equity was $231.4 million, compared with $200.7 million at June 30, 2018.
- Cash provided by operating activities was $30.2 million for the first nine months, while investing activities used $85.2 million and financing activities provided $60.1 million. Ending cash and equivalents were $31.4 million.
- The allowance for loan losses was $19.4 million, compared with $18.2 million at June 30, 2018. Net charge-offs were $266,000 for the nine-month period.
- The Bank was categorized as well capitalized. At March 31, 2019, Southern Bank reported total risk-based capital of 12.52%, Tier 1 risk-based capital of 11.43%, common equity Tier 1 capital of 11.43%, and Tier 1 leverage capital of 10.19%.
- Management reported approximately $346.4 million of outstanding loan commitments and approvals, including $237.7 million of unused lines of credit. FHLB collateral supported approximately $368.6 million of available credit, of which $38.8 million was drawn.
Material Changes Versus Prior Comparable Period
- Third-quarter net income increased 34.9% to $7.1 million; nine-month net income increased 39.6% to $21.3 million.
- Nine-month net interest income increased 15.7%, primarily from larger earning-asset balances and higher asset yields, partially offset by higher funding costs.
- Interest expense increased 78.8% in the quarter and 67.3% year to date, reflecting higher deposit and borrowing costs and increased interest-bearing liabilities.
- The net interest margin declined modestly to 3.73% for the quarter and 3.78% year to date, from 3.74% and 3.80%, respectively.
- Nine-month noninterest income increased 10.8%, while noninterest expense increased 12.0%. The efficiency ratio improved to 57.2% from 58.8% year to date.
- The effective tax rate declined to 19.6% from 25.6% for the quarter and to 19.6% from 29.0% for the nine-month period, primarily reflecting the lower federal corporate tax rate under the Tax Cuts and Jobs Act.
- Nonaccrual loans increased to $22.7 million from $9.2 million at June 30, 2018, and total nonperforming assets increased to $26.3 million from $13.1 million. The increase was primarily associated with the Gideon acquisition and new foreclosures.
- Adversely classified loans increased to $27.9 million, or 1.52% of total loans, from $14.2 million, or 0.90%, at June 30, 2018. Approximately $14.7 million was added through the Gideon acquisition.
- The company authorized repurchases of up to 450,000 common shares, but reported no repurchases during the quarter.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued asset growth through loan originations, occasional loan purchases, and investment securities purchases, funded primarily by retail deposits, public-unit and brokered funding, and FHLB borrowings.
- Management expects acquisition-related discount accretion to decline over time as acquired assets mature or prepay, although Gideon and other recent acquisitions are expected to offset part of that decline. Resolution of acquired impaired loans may cause volatility in interest income.
- Management identified concern regarding the partially inverted yield curve and rising funding costs. The company remains exposed to interest-rate risk, credit risk, real estate values, economic conditions, deposit competition, regulatory actions, and the availability and cost of funding.
- The company acquired Gideon for total consideration of $22.0 million, including $11.3 million in cash and $10.8 million in common stock. Acquisition accounting remains incomplete, and the company acquired a $154.0 million loan portfolio at an estimated $9.7 million fair-value discount.
- Gideon contributed $2.7 million of revenue and $481,000 of earnings from November 21, 2018 through March 31, 2019. Acquisition-related costs totaled $873,000 through March 31, 2019.
- Other unusual items included a $185,000 nonrecurring benefit related to a broker-dealer agreement, a $346,000 nonrecurring bank-owned life insurance benefit year to date, and $185,000 of nonrecurring wealth-management hiring expenses in the quarter.
- Management is preparing for adoption of the current expected credit loss standard, or CECL. The expected impact cannot yet be reasonably estimated; preliminary calculations were expected to be ready for detailed review in the fourth quarter of fiscal 2019.
- Management stated that no material legal proceedings are pending and that there were no material changes to previously disclosed risk factors. Disclosure controls and procedures were considered effective.
Investor Verification Items
- Verify the final accounting, fair-value adjustments, goodwill, intangible assets, and expected synergies from the Gideon acquisition.
- Monitor the increase in nonaccrual loans, adversely classified loans, TDRs, past-due loans, and nonperforming assets.
- Assess whether deposit pricing, brokered funding, and FHLB borrowing costs continue to compress the net interest margin.
- Evaluate the sustainability of earnings that include acquisition-related discount accretion and nonrecurring benefits.
- Review the company’s CECL implementation progress and the eventual effect on the allowance for loan losses and retained earnings.
- Confirm liquidity capacity against the $346.4 million of loan commitments and the company’s reliance on brokered deposits and FHLB funding.
- Review interest-rate sensitivity: management’s model estimated a 20% decline in net portfolio value under an instantaneous 300-basis-point rate increase.