Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2020; comparative periods ended December 31, 2019. Balance-sheet comparisons are to June 30, 2020. The filing was signed February 9, 2021. Southern Missouri Bancorp operates primarily through Southern Bank, which had 48 offices at December 31, 2020.
Financial condition and key metrics
| Metric | Three months ended December 31, 2020 | Six months ended December 31, 2020 |
|---|---|---|
| Net income | $12.0 million, up 56.1% | $22.0 million, up 41.7% |
| Diluted EPS | $1.32, versus $0.84 | $2.42, versus $1.68 |
| Net interest income | $23.5 million, up 21.4% | $45.6 million, up 17.1% |
| Net interest margin | 3.92%, versus 3.70% | 3.83%, versus 3.76% |
| Noninterest income | $5.7 million, up 55.7% | $10.7 million, up 48.9% |
| Noninterest expense | $13.4 million, up 3.1% | $26.9 million, up 6.1% |
| Provision for credit losses | $612,000 | $1.4 million |
| Return on average assets | 1.87% | 1.72% |
| Return on average common equity | 18.3% | 17.0% |
At December 31, 2020, total assets were $2.623 billion, up $80.8 million, or 3.2%, from June 30, 2020. Cash and cash equivalents were $149.5 million, compared with $54.2 million; available-for-sale securities were $181.1 million, compared with $176.5 million; and net loans were $2.121 billion, compared with $2.142 billion.
Deposits increased to $2.265 billion from $2.185 billion. FHLB advances declined to $63.3 million from $70.0 million. Subordinated debt was $15.2 million. Stockholders’ equity increased to $267.7 million from $258.3 million. The company paid $2.7 million in dividends and repurchased 90,793 shares for $2.6 million during the six months.
Cash provided by operating activities was $19.9 million and cash provided by investing activities was $7.3 million. Financing activities provided $68.1 million, producing a $95.3 million increase in cash and cash equivalents to $149.5 million.
Material changes versus prior comparable periods
- Net income growth reflected higher net interest income, substantially lower funding costs, higher loan-sale gains, bank-owned life insurance earnings and servicing income.
- Average interest-earning assets increased 15.0% for the six-month period, while the average yield declined 57 basis points. The cost of interest-bearing liabilities declined 71 basis points.
- Net interest margin improved to 3.83% for the six months, partly due to $968,000 of accelerated PPP loan-fee accretion from SBA forgiveness payments. Management expects acquired-loan discount accretion to decline over time.
- Noninterest income benefited from increased residential mortgage originations and sales, refinancing activity, servicing growth, card activity and a $696,000 nonrecurring bank-owned life insurance benefit.
- The efficiency ratio improved to 47.9% for the six months from 55.0% in the prior-year period.
- The company adopted CECL on July 1, 2020. The allowance for credit losses increased by $9.333 million at adoption, and retained earnings decreased by $7.151 million, net of tax. The allowance for loans was $35.5 million at December 31, 2020, compared with the pre-CECL allowance of $25.1 million at June 30, 2020.
- Gross loans declined modestly, primarily because PPP loan balances declined $36.8 million year to date as loans were forgiven. Deposits grew faster than loan demand, substantially increasing liquidity.
Credit quality, liquidity and capital
Nonperforming assets were $11.1 million, or approximately 0.42% of total assets, compared with $11.2 million at June 30, 2020 and $14.1 million at December 31, 2019. Nonaccrual loans were $8.3 million. Total past-due loans increased to $7.7 million from $6.4 million at June 30, 2020, while adversely classified loans were $24.8 million, or 1.15% of total loans.
At December 31, 2020, approximately $40.3 million of loans remained under CARES Act interest-only modifications, compared with approximately $380.2 million modified or deferred at June 30, 2020. The company reported approximately $38.7 million of such loans on watch status. Management cautions that current delinquency measures may be understated because of COVID-19-related modifications and relief programs.
The company originated approximately 1,700 PPP loans totaling $138.6 million through December 31, 2020. Outstanding PPP balances were $95.5 million at year-end, and approximately $34.7 million had received SBA forgiveness payments. Through January 31, 2021, first-round PPP balances had declined further to approximately $75.9 million; the company had also received approval for approximately $18.0 million of second-draw or newly eligible loans and funded approximately $10.3 million.
Liquidity was supported by $150.5 million of cash and time deposits, $2.265 billion of deposits, available FHLB borrowing capacity of approximately $479.7 million, and Federal Reserve discount-window borrowing capacity of approximately $193.5 million. The company had not used the PPP Lending Facility as of the filing date. Outstanding loan commitments and approvals totaled approximately $460.0 million, including $319.6 million of unused lines.
Southern Bank remained categorized as well capitalized. At December 31, 2020, its total risk-based capital ratio was 13.74%, Tier 1 risk-based capital ratio was 12.49%, common equity Tier 1 ratio was 12.49%, and Tier 1 leverage ratio was 10.27%. The company and bank elected the five-year regulatory capital transition for CECL adoption.
Outlook, commentary and risks
- Management expects continued significant PPP forgiveness payments during the quarter ending March 31, 2021, partly offset by second-draw PPP funding.
- The loan pipeline was $85.1 million at December 31, 2020, excluding second-draw PPP loans.
- Management expects overall acquired-loan discount accretion to decline, and notes that low market rates may continue to pressure asset yields while funding costs have limited room to decline further.
- COVID-19 remains the principal uncertainty. Management identified elevated or uncertain risks from unemployment, weak historical GDP, watch-list growth, commercial real estate, retail, restaurants, hotels and other affected borrowers.
- Future credit losses could exceed current estimates and require additional ACL provisions. CECL adoption may materially affect future earnings.
- Other risks include interest-rate and real-estate-value changes, funding access, regulatory actions, changes in accounting standards, acquisition integration, competition, technology and economic conditions in the company’s markets.
- No material pending legal proceedings were reported, and management stated that there were no material changes to the risk factors in the fiscal 2020 Form 10-K.
Most important facts for investors to verify
- Whether COVID-19 modifications, watch-list loans and expiring relief programs lead to higher delinquencies, nonaccruals, charge-offs or ACL provisions.
- The sustainability of earnings growth after excluding the $968,000 PPP fee acceleration and $696,000 nonrecurring BOLI benefit.
- The pace of PPP forgiveness and second-draw originations, including effects on loan balances, fee income, liquidity and capital.
- Whether the 3.83% net interest margin can be maintained as asset yields decline and acquired-loan accretion diminishes.
- Credit exposure to commercial real estate, hotels, restaurants, retail, multifamily and other pandemic-sensitive sectors.
- The effect of share repurchases, dividends and CECL regulatory-capital transition on future capital ratios.
- The company’s ability to fund approximately $460.0 million of loan commitments while maintaining liquidity and cost-effective funding.