Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: The provided filing is for the quarter and nine-month period ended March 31, 2017, not 2016 Q3. Southern Missouri Bancorp owns Southern Bank, which operated 32 full-service and three limited-service branches at period-end. Financial statements are unaudited and prepared under interim GAAP.
Financial condition and key metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net interest income | $12.4 million, up 8.0% | $37.6 million, up 7.0% |
| Net income | $4.0 million, up 19.0% | $11.8 million, up 6.8% versus net income available to common shareholders |
| Net income per diluted share | $0.53, versus $0.45 | $1.59, versus $1.49 |
| Net interest margin | 3.64%, versus 3.72% | 3.72%, versus 3.83% |
| Noninterest income | $2.9 million, up 34.3% | $8.2 million, up 14.3% |
| Noninterest expense | $9.6 million, up 15.8% | $27.4 million, up 12.4% |
| Provision for loan losses | $376,000, versus $563,000 | $2.0 million, versus $1.7 million |
| Effective tax rate | 27.0%, versus 31.7% | 27.8%, versus 31.1% |
- Total assets were $1.496 billion at March 31, 2017, up $92.1 million, or 6.6%, from June 30, 2016.
- Net loans were $1.226 billion, up $90.5 million, or 8.0%; growth was concentrated in commercial real estate and residential real estate loans.
- Deposits were $1.273 billion, up $151.8 million, or 13.5%. Growth included public unit deposits, brokered certificates of deposit and brokered nonmaturity deposits.
- Available-for-sale securities were $134.0 million, up 3.7%. Cash and time deposits totaled $21.5 million, down 7.6% from June 30, 2016.
- The allowance for loan losses was $15.2 million, up from $13.8 million. Nonaccrual loans declined to $3.1 million from $5.6 million, and total nonperforming assets declined to $6.5 million from $9.0 million.
- Stockholders’ equity was $134.0 million, up 6.4%. The Bank was categorized as well capitalized; its March 31, 2017 total risk-based capital ratio was 11.80%, Tier 1 risk-based ratio was 10.57%, CET1 ratio was 10.57%, and leverage ratio was 9.34%.
Cash flow, debt and liquidity
- Cash provided by operating activities for the nine months was $17.2 million, compared with $12.9 million in the prior-year period.
- Cash used in investing activities was $100.9 million, primarily reflecting a $92.7 million net increase in loans and $26.8 million of securities purchases.
- Cash provided by financing activities was $82.2 million, principally from deposit growth, partly offset by repayments of FHLB advances and repurchase agreements. Cash and cash equivalents ended at $21.0 million.
- FHLB advances were $51.6 million, down 53.2% from June 30, 2016. Securities sold under repurchase agreements were $17.9 million, down 33.9%. Subordinated debt was $14.8 million.
- The Bank had approximately $163.5 million of outstanding loan commitments and approvals, including $112.6 million of unused lines of credit. FHLB collateral supported approximately $291.8 million of available borrowing capacity, of which $51.4 million was advanced; Federal Reserve collateral supported approximately $117.1 million of primary credit access.
- Management stated that available liquidity should be sufficient for funding commitments, deposit withdrawals, maturities and operating needs.
Material changes versus comparable periods
- Profitability improved despite margin compression. Net interest income increased because average interest-earning assets grew approximately 10%, while the net interest margin declined 11 basis points for the nine-month period.
- Loan yields declined amid the low-rate environment and lower accretion of acquisition-related loan discounts. Acquisition-related accretion contributed $1.1 million to nine-month net interest income, versus $1.3 million previously.
- Noninterest income benefited from higher loan fees, residential loan-sale gains, card interchange income, deposit fees and bank-owned life insurance earnings. The quarter also included $302,000 of nonrecurring bank-owned life insurance benefits and $41,000 from a tax-credit partnership sale.
- Noninterest expense increased, including $335,000 of prepayment penalties related to the early repayment of $16.5 million of FHLB term advances. The efficiency ratio increased to 59.9% for the nine-month period from 57.7%.
- Credit quality improved overall, although total past-due loans increased to $6.4 million from $5.3 million at June 30, 2016. Performing TDRs increased to $8.7 million from $6.1 million, while total TDRs increased to $9.5 million from $8.4 million.
Outlook, unusual items and risks
- Management expects continued asset growth through loan originations and securities purchases, funded by retail deposits, brokered funding and FHLB borrowings. No quantified earnings or revenue guidance was provided.
- Management viewed higher market interest rates as generally favorable, but the company remains exposed to yield-curve changes, repricing mismatches, deposit costs, loan prepayments and borrower credit performance. A modeled instantaneous 300-basis-point rate increase reduced estimated net portfolio value by 23%; the filing cautions that these scenarios are not forecasts.
- The company announced a planned acquisition of Tammcorp, Inc., the 91% owner of Capaha Bank, in a cash-and-stock transaction valued at approximately $23.4 million. Closing was expected in the second calendar quarter of 2017, subject to regulatory, shareholder and other customary conditions. Acquisition-related costs through March 31, 2017 were $173,000.
- On April 30, 2017, flooding affected the Doniphan, Missouri branch. Repair costs had not been quantified; the facility and equipment had combined net book value of approximately $486,000, and the company did not maintain flood insurance on the facility or equipment.
- Material risks include economic and real estate conditions, interest-rate volatility, loan delinquencies and charge-offs, adequacy of the allowance, access to cost-effective funding, regulatory actions, technology, competition and execution of merger integration. Management reported no material changes to the risk factors in the prior Form 10-K and no material pending legal proceedings.
- The company elected early adoption of ASU 2017-08 with no material impact. Management did not expect the other disclosed pending accounting standards to have a material impact, although the impact of the expected-credit-loss standard remained under evaluation.
Investor verification points
- Confirm the applicable reporting period, since the source metadata identifies “2016 Q3” while the filing reports March 31, 2017.
- Assess whether rapid loan and deposit growth, including brokered funding, is sustainable and consistent with the company’s liquidity and interest-rate-risk profile.
- Review commercial real estate concentrations, classified loans, TDRs, past-due loans and the adequacy of the $15.2 million allowance.
- Separate recurring earnings from nonrecurring bank-owned life insurance benefits, tax-credit proceeds, acquisition costs and FHLB prepayment penalties.
- Monitor net interest margin pressure as acquisition-related accretion declines and deposit pricing responds to higher short-term rates.
- Verify completion terms, regulatory approvals, integration costs and purchase accounting for the planned Tammcorp/Capaha Bank acquisition.
- Follow the financial and insurance impact of the Doniphan branch flooding, which was not quantified at filing.