Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2014, the first quarter of fiscal 2015. The filing was signed November 10, 2014. The company operates Southern Bank and Peoples Bank of the Ozarks and provides banking services to individuals and businesses in Missouri and Arkansas. The interim financial statements are unaudited.
Financial performance and condition
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total interest income | $13.2 million | $9.2 million | 44.2% increase |
| Net interest income | $11.1 million | $7.4 million | 50.9% increase |
| Provision for loan losses | $827,000 | $500,000 | 65.6% increase |
| Noninterest income | $2.0 million | $1.3 million | 54.8% increase |
| Noninterest expense | $7.6 million | $4.6 million | 66.4% increase |
| Net income | $3.3 million | $2.6 million | 28.7% increase |
| Net income available to common shareholders | $3.2 million | $2.5 million | 29.3% increase |
| Diluted EPS | $0.89 | $0.74 | 20.3% increase |
| Net interest margin | 3.93% | 3.90% | 3 basis-point increase |
| Return on average assets | 1.09% | 1.27% | 18 basis-point decrease |
| Return on average common equity | 13.16% | 12.23% | 93 basis-point increase |
Excluding acquisition-related purchase-accounting effects, net interest margin was 3.75%, compared with 3.79% in the prior-year quarter. Management attributed the reported margin improvement primarily to loan discount accretion and the amortization of premiums on assumed deposits from acquisitions. The efficiency ratio, excluding securities gains or losses, deteriorated to 58.0% from 52.8% because expenses grew faster than revenue while integration savings had not yet been realized.
Balance sheet, liquidity, and capital
- Total assets increased 27.3% to $1.30 billion from $1.02 billion at June 30, 2014.
- Net loans increased 27.3% to $1.02 billion; total loans before the allowance were approximately $1.03 billion.
- Deposits increased 30.0% to $1.02 billion, including $416.5 million of certificates of deposit.
- Available-for-sale securities increased to $156.8 million from $130.2 million.
- FHLB advances increased to $108.8 million from $85.5 million; subordinated debt increased to $14.6 million from $9.7 million.
- Cash and cash equivalents were $21.0 million, compared with $14.9 million at June 30, 2014.
- Operating activities provided $4.2 million of cash. Investing activities used $17.3 million, primarily because of loan growth. Financing activities provided $19.2 million, principally from FHLB funding and deposit growth.
- Stockholders’ equity increased to $126.3 million from $111.1 million, largely from shares issued in the Peoples acquisition and retained earnings.
- The company reported $171.9 million of outstanding commitments and approvals to extend credit, including $118.4 million of unused lines of credit. Management stated that available liquidity should be sufficient, supported by cash, operating cash flow, FHLB borrowing capacity, and Federal Reserve discount-window access.
- Southern Bank and Peoples Bank were categorized as well capitalized. At September 30, 2014, Southern Bank’s total risk-based capital ratio was 13.58% and Peoples Bank’s was 15.29%.
Material changes and unusual items
- On August 5, 2014, the company acquired Peoples Service Company and Peoples Bank of the Ozarks for total consideration of $24.4 million, consisting of $12.1 million in cash and $12.3 million in common stock. The acquired institution contributed approximately $190.4 million of loans, $221.9 million of deposits, and $3.0 million of goodwill. The bank was expected to merge into Southern Bank in December 2014.
- The acquisition substantially increased the company’s average balance sheet, revenue, operating expenses, intangible assets, goodwill, deposits, borrowings, and loan balances. Acquisition-related costs recognized in the quarter were approximately $127,000, while total third-party acquisition costs incurred through September 30 were $277,000.
- Loan growth increased the allowance for loan losses to $10.1 million from $9.3 million. The quarter had $31,000 of gross charge-offs and $55,000 of recoveries, producing $24,000 of net recoveries.
- Nonperforming assets increased to $6.8 million from $4.4 million at June 30, 2014, including $2.9 million of nonaccrual loans and $3.8 million of foreclosed assets. Total nonaccrual loans increased from $1.3 million to $2.9 million.
- Adversely classified loans increased to $13.0 million, or 1.26% of total loans, from $7.0 million, or 0.87%, at June 30, 2014. The increase was primarily associated with acquired loans.
- Performing troubled debt restructurings totaled $9.0 million, with total TDRs of $9.3 million, compared with total TDRs of $5.1 million at June 30, 2014.
- Available-for-sale securities included three pooled trust preferred securities with an estimated fair value of $749,000 and unrealized losses of $700,000 that had been in a continuous loss position for more than twelve months. Management concluded that no additional other-than-temporary impairment was required, but acknowledged that future impairment losses remain possible.
Outlook, management commentary, and risks
Management expects modest organic asset growth through loan originations and investment purchases, funded primarily by retail deposits, FHLB borrowings, and, as needed, brokered certificates of deposit. Near-term priorities include integrating Peoples Bank and prior acquisitions; management expects integration costs and operating expenses to remain elevated before anticipated cost savings are realized.
- Low interest rates and a flattening yield curve may pressure asset yields and net interest income. Management noted that the core net interest margin declined year over year when acquisition-related accretion was excluded.
- Future results depend on local and national economic conditions, interest rates, real estate values, loan demand, deposit competition, funding access, regulatory actions, and the adequacy of the allowance for loan losses.
- Credit risk is concentrated in residential and commercial real estate, construction, commercial, and agricultural lending. Management cautioned that rapid loan growth and changing market conditions could increase nonperforming assets and charge-offs.
- Acquisition synergies, cost savings, customer and employee retention, and successful systems conversion may not occur within expected time frames or may not occur at all.
- The company is exposed to interest-rate risk. Its modeled net portfolio value declined 7% under an immediate 100-basis-point rate increase and 19% under a 300-basis-point increase; management cautioned that these scenarios rely on assumptions and are not forecasts.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2014.
Important facts for investors to verify
- Confirm the completion and financial impact of the planned Peoples Bank merger and systems conversion, including realized versus expected cost savings.
- Monitor core net interest margin excluding acquisition-related accretion and the effect of future changes in interest rates.
- Track nonperforming assets, classified loans, TDRs, delinquencies, charge-offs, and allowance coverage as acquired loans season.
- Assess funding mix and liquidity, particularly reliance on FHLB advances, brokered deposits, and certificates of deposit.
- Evaluate the carrying value and future cash flows of pooled trust preferred securities and other securities with substantial unrealized losses.
- Reconcile the filing’s period labeling: the filing covers the quarter ended September 30, 2014, described in the filing as the first quarter of fiscal 2015, not calendar-year 2014 Q1.