SOUTHERN MISSOURI BANCORP, INC. quarterly report, Q1 FY2020

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Southern Missouri Bancorp, Inc. — Form 10-Q Summary

Reporting period: Three months ended September 30, 2019, the first quarter of fiscal 2020. The filing is unaudited and compares results with the three months ended September 30, 2018. The company operates primarily through Southern Bank, which had 44 full-service and two limited-service branches.

Financial Condition and Results

  • Net income: $7.8 million, up 15.1% from $6.8 million; basic and diluted earnings per share were $0.85 versus $0.76.
  • Interest income: $26.9 million, up 22.1%. Net interest income was $19.6 million, up 13.9%, despite the net interest margin declining to 3.81% from 3.92%.
  • Interest-rate spread and funding costs: The spread declined to 3.58% from 3.73%. Average interest-bearing liability costs increased 36 basis points, while average earning-asset yields increased 21 basis points.
  • Provision and credit costs: Provision for loan losses was $896,000 versus $682,000. Net charge-offs were $89,000, and the allowance for loan losses increased to $20.7 million from $19.9 million.
  • Noninterest income: $4.1 million, up 19.6%, driven primarily by higher bank-card interchange income, deposit service charges, wealth management and insurance commissions, and gains on residential loan sales.
  • Noninterest expense: $13.0 million, up 13.2%, mainly due to compensation, occupancy, and bank-card network expenses. The efficiency ratio improved to 54.8% from 55.6%.
  • Profitability: Annualized return on average assets was 1.40% versus 1.43%; return on average common equity was 13.0% versus 13.4%. The effective tax rate was 20.2% versus 19.7%.
  • Assets and loans: Total assets were $2.25 billion, up 1.7% from June 30, 2019. Net loans were $1.87 billion, up 1.5%, while available-for-sale securities were $171.0 million.
  • Deposits: Deposits were $1.87 billion, down 1.1% from June 30, 2019. Public unit deposits and brokered certificates of deposit declined, partly offset by higher brokered nonmaturity deposits.
  • Debt and funding: FHLB advances increased to $103.3 million from $44.9 million, primarily replacing brokered deposits and funding loan growth. Securities sold under repurchase agreements declined to zero. Subordinated debt was $15.1 million and the note payable was $3.0 million.
  • Liquidity and capital: Cash and cash equivalents were $31.4 million. Operating activities provided $5.2 million of cash, investing activities used $37.9 million, and financing activities provided $28.7 million. The Bank was categorized as well capitalized; its total risk-based capital ratio was 13.80%, Tier 1 risk-based ratio was 12.61%, and Tier 1 leverage ratio was 10.49%.
  • Shareholder returns: The quarterly dividend increased to $0.15 per share from $0.13. The company repurchased 86,050 shares for $2.8 million at an average price of $32.70.

Material Changes Versus Prior Comparable Period

  • Net income, earnings per share, net interest income, and noninterest income increased, largely reflecting balance-sheet growth and contributions from the November 2018 Gideon Acquisition.
  • Average interest-earning assets increased 17.2%, but the net interest margin declined 11 basis points because funding costs rose and acquired-loan discount accretion diminished.
  • Interest expense increased 51.0%, primarily because of higher deposit balances and rates, particularly certificates of deposit and money-market accounts.
  • Acquired-loan discount accretion contributed $508,000 to net interest income versus $1.2 million in the prior-year quarter. Management generally expects this benefit to decline over time.
  • Nonperforming assets increased to $17.9 million from $12.5 million a year earlier but declined from $24.8 million at June 30, 2019. Nonaccrual loans declined to $14.0 million from $21.0 million at June 30, 2019.
  • Adversely classified loans declined to $25.8 million, or 1.36% of total loans, from $28.3 million, or 1.51%, at June 30, 2019, but remained above $11.7 million at September 30, 2018.
  • The company adopted the new lease standard on July 1, 2019, recording approximately $2.0 million of operating lease right-of-use assets and corresponding liabilities without a material income-statement effect.
  • No merger-related charges were recorded in the current quarter, compared with $175,000 in the prior-year quarter. FDIC assessment credits resulted in no deposit insurance expense in the current quarter.

Guidance, Outlook, Risks, and Unusual Items

  • Management expects to continue growing assets through loan originations, occasional loan purchases, and investment securities, funded by retail deposits, brokered funding, and FHLB borrowings. No quantitative earnings guidance was provided.
  • Management identified the flat or partially inverted yield curve and rising funding costs as concerns. The company remains exposed to interest-rate risk because assets generally reprice from longer-term rates while liabilities reprice from shorter-term rates.
  • In a modeled 300-basis-point increase in rates, net portfolio value would decline 20% and the NPV ratio would be 8.69%; the filing cautions that these estimates depend on assumptions regarding repayments, deposit runoff, and management actions.
  • Credit risks include commercial and residential real estate exposure, construction lending, agricultural conditions, classified loans, nonperforming assets, collateral values, and the subjectivity of the allowance methodology.
  • At September 30, 2019, the company had approximately $354.9 million of outstanding loan commitments and approvals, including $193.5 million of unused lines of credit. Management believes available liquidity is sufficient.
  • The company expects to adopt the current expected credit losses standard in the quarter ending September 30, 2020. It expects a one-time cumulative adjustment to the allowance but cannot yet determine the amount or overall financial-statement impact.
  • Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2019.

Facts Investors Should Verify

  1. Whether deposit outflows and increased reliance on FHLB advances affect funding costs and future net interest margin.
  2. The sustainability of earnings as acquired-loan discount accretion declines and the yield curve remains flat or inverted.
  3. Trends in nonperforming assets, adversely classified loans, troubled debt restructurings, and commercial real estate and construction exposure.
  4. The eventual impact of CECL adoption in September 2020 on the allowance for loan losses, retained earnings, and regulatory capital.
  5. Whether loan growth, credit quality, and the $354.9 million of commitments remain consistent with management’s liquidity and capital resources.
  6. The extent to which current-quarter benefits from FDIC assessment credits, resolved nonperforming loans, and the absence of merger costs recur.