SOUTHERN MISSOURI BANCORP, INC. annual report, FY2018

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

Reporting period: Fiscal year ended June 30, 2018. The request metadata references “2017 Q4,” but the supplied filing is the 2018 annual report, not a quarterly filing. Dollar amounts are generally in thousands unless stated otherwise.

Business Context

Southern Missouri Bancorp is the holding company for Southern Bank, a Missouri-chartered, federally insured community bank operating primarily in Missouri, Arkansas and Illinois. The Bank funds residential, commercial real estate, agricultural, construction, commercial business and consumer lending through deposits, Federal Home Loan Bank advances and other borrowings. At June 30, 2018, the Company operated 38 full-service and three limited-service offices and had approximately 374 full-time and 41 part-time employees.

Total assets were $1.886 billion; deposits were $1.580 billion; and stockholders’ equity was $200.7 million.
The Bank completed the acquisition of Southern Missouri Bank of Marshfield on February 23, 2018, and announced the planned acquisition of Gideon Bancshares Company and First Commercial Bank, expected to close in the fourth calendar quarter of 2018, subject to regulatory and shareholder approvals.

Financial Performance and Key Metrics

Metric	Fiscal 2018	Fiscal 2017	Change
Net income available to common stockholders	$20.9 million	$15.6 million	Up 34.6%
Diluted earnings per share	$2.39	$2.07	Up 15.5%
Net interest income	$62.4 million	$51.1 million	Up 22.0%
Noninterest income	$13.9 million	$11.1 million	Up 25.1%
Noninterest expense	$44.5 million	$38.3 million	Up 16.3%
Provision for loan losses	$3.0 million	$2.3 million	Up 30.2%
Return on average assets	1.17%	1.05%	Up 12 basis points
Return on average common equity	11.30%	11.70%	Down 40 basis points
Net interest margin	3.78%	3.74%	Up 4 basis points

Interest income increased 25.5% to $77.2 million, reflecting a 20.9% increase in average interest-earning assets and higher average yields.
Interest expense increased 42.7% to $14.8 million, primarily because of higher interest-bearing deposit balances and rates.
The effective tax rate was 27.2%, compared with 28.0% in fiscal 2017. The Tax Cuts and Jobs Act produced a one-time tax expense of approximately $998,000 related primarily to deferred tax asset and liability remeasurement. Management expects a fiscal 2019 effective tax rate of approximately 18% to 20%.
Cash provided by operating activities was $30.6 million. Investing activities used $108.5 million, principally from loan growth and securities purchases, while financing activities provided $73.4 million. Cash and cash equivalents declined to $26.3 million from $30.8 million.

Balance Sheet, Lending, Debt and Liquidity

Net loans increased 11.9% to $1.563 billion. Gross loans were $1.628 billion, including $704.6 million of commercial real estate loans, $281.3 million of commercial business loans, $450.9 million of residential real estate loans and $112.7 million of construction loans.
Commercial real estate and commercial business loans represented approximately 60.6% of net loans, increasing exposure to local economic, real estate, agricultural and borrower cash-flow conditions.
Deposits increased 8.5% to $1.580 billion. Non-maturity deposits totaled approximately $1.046 billion, while certificates of deposit totaled $533.5 million, including $311.4 million maturing within one year.
FHLB advances increased to $76.7 million from $43.6 million. Securities sold under agreements to repurchase declined to $3.3 million from $10.2 million. The Company also had a $3.0 million note payable and $14.9 million of subordinated debt.
The Bank had approximately $267.0 million of additional FHLB borrowing capacity and $163.2 million of Federal Reserve discount-window borrowing capacity, with no discount-window borrowings outstanding.
Outstanding commitments to extend credit were $266.8 million, including $181.9 million of unused lines of credit. Standby letters of credit totaled $2.5 million.
At June 30, 2018, the Bank reported a 10.60% Tier 1 leverage ratio, 12.00% Tier 1 risk-based capital ratio and 13.18% total risk-based capital ratio. The Bank was categorized as “well capitalized.”

Asset Quality and Credit Risk

Nonperforming loans increased to $9.2 million from $3.2 million, and total nonperforming assets increased to $13.1 million from $6.3 million. Nonperforming assets were 0.69% of total assets versus 0.37% in the prior year.
The increase was attributed primarily to three relationships involving commercial, agricultural, multifamily and residential rental-property collateral.
The allowance for loan losses increased to $18.2 million, or 1.15% of gross loans, from $15.5 million, or 1.10%. Net charge-offs were $371,000, compared with $593,000 in fiscal 2017.
Troubled debt restructurings totaled $13.0 million, of which $1.3 million was nonperforming. Classified assets totaled $18.2 million, or 0.96% of total assets.
Management identified an additional $10.2 million of performing loans with elevated risk and possible future classification.

Material Changes, Outlook and Unusual Items

The Marshfield acquisition added approximately $86.2 million of assets, $68.3 million of loans and $68.2 million of deposits at closing; it generated $4.4 million of goodwill. Fiscal 2018 included $925,000 of merger-related charges.
The proposed Gideon acquisition is valued at approximately $23.2 million. Gideon reported approximately $226.7 million of assets, $154.8 million of net loans and $170.9 million of deposits at June 30, 2018. The filing does not provide a completed transaction accounting estimate.
Management expects continued focus on residential, commercial real estate, commercial business, agricultural and consumer lending. It expects agricultural lending to grow, but not necessarily at the recent pace, and expects to maintain or increase the commercial real estate share of the portfolio.
Interest-rate sensitivity analysis indicated that a hypothetical 300-basis-point increase would reduce estimated net portfolio value by 16%, while a 300-basis-point decrease would increase it by 32%. Management cautions that these estimates depend on assumptions regarding repricing, prepayments and deposit behavior.
The Company adopted ASU 2018-02 early and reclassified $65,000 from accumulated other comprehensive income to retained earnings. It was evaluating the future current expected credit loss standard, ASU 2016-13, and had purchased Sageworks software to support implementation.
The Company held $146.3 million of available-for-sale securities with $3.3 million of gross unrealized losses. Management concluded the losses were temporary, but future other-than-temporary impairment charges remain possible.
Quarterly common dividends increased to $0.11 per share during fiscal 2018 from $0.10 per share in fiscal 2017. Future dividends depend on earnings, regulatory restrictions, capital requirements and the Bank’s ability to distribute dividends to the Company.

Principal Risks and Contingencies

Credit losses may exceed the allowance, particularly given the concentration in commercial real estate, agricultural lending, construction and commercial business loans.
Weakness in southern Missouri, northern Arkansas or other operating markets could increase delinquencies, defaults, foreclosures and collateral losses.
Higher interest rates could increase deposit and borrowing costs, reduce net interest margin and impair borrower repayment capacity; lower rates could affect asset yields and prepayment behavior.
Acquisition integration may be delayed or more costly than expected, and anticipated synergies may not be realized. The Gideon transaction remains subject to closing conditions.
Liquidity depends on deposit retention, FHLB funding, loan repayments, securities maturities and market access. A significant portion of certificates of deposit matures within one year.
Regulatory changes, deposit insurance assessments, cybersecurity events, technology failures, litigation and changes in accounting standards could adversely affect results.
Management reported no material pending legal proceedings and concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2018. The independent auditor issued unqualified opinions.

Investor Verification Points

Verify the closing date, consideration, purchase accounting and integration progress for the Gideon and First Commercial acquisition.
Monitor nonperforming loans, troubled debt restructurings, classified assets and the adequacy of the allowance as the commercial and agricultural portfolios season.
Reconcile loan growth, deposit growth and increased FHLB borrowing with liquidity needs and the maturity profile of certificates of deposit.
Assess the effect of rising funding costs on net interest margin and the extent to which acquisition-related fair-value accretion supports reported interest income.
Confirm the fiscal 2019 effective tax rate and any final adjustments related to the Tax Cuts and Jobs Act.
Evaluate implementation effects of the current expected credit loss standard, including any opening retained-earnings adjustment and future provision volatility.