Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
Southern Missouri Bancorp, Inc. is the holding company for Southern Bank, which provides banking and financial services through its headquarters, 37 full-service branches, and three limited-service branches. The filing covers the quarter and six-month period ended December 31, 2017, representing the second quarter of fiscal 2018. Amounts are in thousands unless otherwise stated.
The company’s principal business is lending, funded primarily by deposits and supplemented by Federal Home Loan Bank advances, brokered deposits, repurchase agreements, and subordinated debt.
Key financial metrics
| Metric | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2017 |
|---|---|---|
| Total interest income | $19.2 million | $37.6 million |
| Net interest income | $15.7 million | $30.8 million |
| Provision for loan losses | $642,000 | $1.5 million |
| Noninterest income | $3.2 million | $6.4 million |
| Noninterest expense | $10.5 million | $21.3 million |
| Income before taxes | $7.7 million | $14.5 million |
| Net income | $5.2 million | $10.0 million |
| Diluted earnings per share | $0.60 | $1.16 |
| Net interest margin | 3.87% | 3.83% |
| Return on average assets | 1.17% | 1.15% |
| Return on average equity | 11.6% | 11.3% |
At December 31, 2017, total assets were $1.777 billion, net loans were $1.453 billion, available-for-sale securities were $148.4 million, deposits were $1.509 billion, total liabilities were $1.596 billion, and stockholders’ equity was $180.5 million.
Cash and cash equivalents were $35.2 million. FHLB advances were $59.9 million, securities sold under repurchase agreements were $3.7 million, note payable was $3.0 million, and subordinated debt was $14.9 million. The Bank was categorized as well capitalized. Southern Bank’s total risk-based capital ratio was 12.40%, Tier 1 risk-based capital ratio was 11.25%, common equity Tier 1 ratio was 11.25%, and Tier 1 leverage ratio was 10.02%.
For the six months, operating activities provided $11.5 million of cash, investing activities used $68.4 million, and financing activities provided $61.4 million. Cash and cash equivalents increased $4.5 million during the period.
Material changes versus comparable periods
- Second-quarter net income increased 23.8% from $4.2 million to $5.2 million; six-month net income increased 27.2% from $7.9 million to $10.0 million.
- Six-month net interest income increased 22.5% to $30.8 million, driven by a 20.1% increase in average interest-earning assets and a 7-basis-point increase in net interest margin to 3.83%.
- Six-month noninterest income increased 22.2% to $6.4 million, while noninterest expense increased 19.1% to $21.3 million. The six-month efficiency ratio improved to 57.2% from 58.7%.
- Loan growth was the primary driver of balance-sheet expansion. Net loans increased $55.2 million, or 4.0%, from June 30, 2017, led principally by commercial real estate lending.
- Deposits increased $53.4 million, or 3.7%, from June 30, 2017. Interest-bearing transaction accounts grew, while certificates of deposit declined. FHLB advances increased $16.3 million, and repurchase agreements declined $6.5 million.
- The allowance for loan losses increased to $16.9 million from $15.5 million at June 30, 2017. Six-month provision expense declined modestly to $1.5 million from $1.6 million, while six-month net charge-offs were $182,000 versus $380,000.
- Nonperforming assets increased to $11.0 million from $6.3 million at June 30, 2017. Nonperforming loans increased to $7.3 million from $3.2 million, primarily because of loans 90 days or more past due and still accruing interest.
- Accumulated other comprehensive income declined from $527,000 to a loss of $372,000, principally reflecting unrealized losses on available-for-sale securities.
Guidance, outlook, risks and unusual items
Management expects continued asset growth through loan originations and occasional loan purchases and securities investments, funded by retail deposits, brokered funding, and short- and long-term FHLB borrowings. Management also intends to pursue strategic expansion opportunities. These statements are forward-looking and are not guarantees of future performance.
Following enactment of the Tax Cuts and Jobs Act, the company recorded an approximately $1.1 million increase in tax expense from revaluation of its net deferred tax asset, partially offset by a lower annual effective tax rate. Management estimated a fiscal 2018 second-half effective tax rate of 24% to 26%, a full-year fiscal 2018 rate of 27% to 29%, and a fiscal 2019 rate of 18% to 20%, assuming a consistent level of tax-advantaged activity and investment.
The company announced a proposed acquisition of Southern Missouri Bancshares, Inc. and Southern Missouri Bank of Marshfield for approximately $15.1 million in cash and stock. At December 31, 2017, the target reported approximately $86.7 million of assets, $68.4 million of net loans, and $70.1 million of deposits. Closing was expected in the first quarter of calendar 2018, subject to regulatory and shareholder approvals. Acquisition-related costs totaled $152,000 through December 31, 2017.
Management identified a flattening yield curve as a concern. Its interest-rate sensitivity analysis estimated that a 300-basis-point instantaneous increase in rates would reduce net portfolio value by 13%, while a 300-basis-point decrease would increase it by 28%; management cautioned that these model results depend on assumptions and may not predict actual outcomes.
Liquidity resources included approximately $272.4 million of outstanding commitments and approvals to extend credit, including $170.0 million of unused lines of credit. The Bank had approximately $325.1 million of FHLB borrowing capacity supported by pledged loans, of which $59.9 million was outstanding, and access to approximately $139.3 million of Federal Reserve primary credit supported by pledged agricultural loans.
Key risks include interest-rate and yield-curve changes, credit losses, real estate and agricultural market conditions, deposit and funding competition, regulatory actions, acquisition integration, technology, accounting changes, and the possibility that the allowance for loan losses or asset valuations require further adjustments. Management reported no material pending legal proceedings and no material changes to the risk factors in the prior Form 10-K.
Most important facts for investors to verify
- Whether the proposed Southern Missouri Bancshares acquisition closed on schedule and the final consideration, purchase accounting, and integration costs.
- Whether the increase in nonperforming assets, past-due loans, and performing TDRs persists or results in higher provisions or charge-offs.
- The sustainability of loan and deposit growth, particularly commercial real estate concentration and reliance on public, brokered, and FHLB funding.
- The effect of rising short-term rates and a flatter yield curve on deposit costs, net interest margin, liquidity, and capital.
- Whether management’s projected effective tax rates are achieved following the Tax Act deferred-tax-asset revaluation.
- The level and composition of unrealized securities losses and whether any available-for-sale securities require other-than-temporary impairment.
- Future adoption effects of the current expected credit loss standard, for which management stated the impact could not yet be reasonably estimated.