Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2014. The request metadata identifies “2014 Q2,” but the filing covers the second quarter of fiscal 2015. Financial statements are unaudited and should be read with the fiscal 2014 Form 10-K.
Business context
Southern Missouri Bancorp is the parent of Southern Bank, which provides commercial banking and financial services through offices in Missouri and Arkansas. Results were materially affected by the August 5, 2014 acquisition of Peoples Service Company and Peoples Bank of the Ozarks, which was merged into Southern Bank in December 2014.
Key financial metrics
| Metric | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 |
|---|---|---|
| Total interest income | $14.4 million | $27.6 million |
| Net interest income | $12.2 million | $23.3 million |
| Provision for loan losses | $862,000 | $1.7 million |
| Noninterest income | $2.2 million | $4.2 million |
| Noninterest expense | $8.6 million | $16.2 million |
| Net income | $3.4 million | $6.7 million |
| Net income available to common shareholders | $3.4 million | $6.6 million |
| Diluted earnings per share | $0.89 | $1.78 |
| Net interest margin | 4.03% | 3.98% |
| Return on average assets | 1.06% | 1.07% |
| Return on average common equity | 12.5% | 12.8% |
Compared with the prior-year periods, six-month net income increased 32.6%, net income available to common shareholders increased 33.2%, net interest income increased 48.3%, noninterest income increased 41.4%, and noninterest expense increased 50.0%. The efficiency ratio was 59.9% for the quarter and 59.0% for the six months.
Financial condition, liquidity and capital
- Total assets increased 26.9% from June 30, 2014 to $1.30 billion, primarily due to the Peoples acquisition and organic loan growth.
- Net loans increased 26.6% to $1.01 billion. Deposits increased 35.3% to $1.06 billion, including $221.9 million of deposits acquired from Peoples.
- Available-for-sale securities totaled $146.0 million, up from $130.2 million at June 30, 2014. Cash and cash equivalents totaled $33.4 million.
- FHLB advances declined to $63.0 million from $85.5 million, while securities sold under repurchase agreements declined to $21.4 million from $25.6 million. Subordinated debt increased to $14.6 million, primarily because of assumed debt from Peoples.
- Stockholders’ equity increased 16.9% to $129.9 million. The Bank was categorized as well capitalized. Southern Bank reported total risk-based capital of 14.45%, Tier 1 risk-based capital of 13.25%, and Tier 1 leverage capital of 11.64%.
- Six-month operating cash flow was $7.5 million. Investing activities used $1.8 million, and financing activities provided $11.7 million, resulting in an $18.4 million increase in cash and cash equivalents.
- At December 31, 2014, outstanding loan commitments and approvals totaled approximately $142.2 million, including $89.6 million of unused lines of credit. Management stated that available liquidity was sufficient for expected needs.
Asset quality and credit risk
- The allowance for loan losses increased to $11.0 million from $9.3 million at June 30, 2014. Six-month net recoveries were $10,000, compared with $96,000 of net charge-offs in the prior-year period.
- Nonaccrual loans increased to $4.7 million from $1.3 million at June 30, 2014. Total nonperforming assets increased to $8.8 million from $4.4 million, including $4.1 million of foreclosed real estate.
- Adversely classified loans totaled $13.2 million, or 1.29% of total loans, compared with $7.0 million, or 0.87%, at June 30, 2014. The increase was attributed primarily to the Peoples acquisition.
- Purchased credit-impaired loans increased substantially to $20.0 million carrying value from $3.2 million, reflecting acquired loans. These loans are recorded at fair value and do not carry a conventional allowance at acquisition.
- Management cited continued loan growth and changes in economic and real estate conditions as factors that could cause future nonperforming assets, charge-offs, and provisions to fluctuate.
Material changes and unusual items
- The Peoples acquisition involved $24.4 million of consideration, including $12.1 million of cash and $12.3 million of common stock. The acquisition added approximately $190.4 million of loans, $221.9 million of deposits, and $2.9 million of goodwill.
- Acquisition-related costs totaled $658,000 through December 31, 2014; $508,000 was recorded in noninterest expense during the six-month period. Merger-related charges were $487,000 for the six months.
- Purchase-accounting accretion from acquired loan discounts and amortization of assumed deposit premiums contributed $1.3 million to net interest income in the first six months, compared with $372,000 in the prior-year period. Management expects this benefit to decline as acquired loans pay down.
- Core net interest margin, excluding purchase-accounting effects, was 3.76% for the six months, compared with 3.77% in the prior-year period. Reported margin improvement therefore depended partly on acquisition-related accretion.
- The available-for-sale securities portfolio included three pooled trust preferred securities with approximately $717,000 of unrealized losses in a continuous loss position for more than twelve months. Management did not classify them as other-than-temporarily impaired, but acknowledged increasing credit risk for one security that remained in principal-in-kind status.
- The company paid common dividends of $0.17 per share for the quarter and $0.34 per share for the six-month period. Preferred dividends totaled $100,000 for the six months.
Outlook, risks and contingencies
Management expects modest asset growth through loan originations and investment purchases, funded primarily by retail deposits, FHLB borrowings, and, as needed, brokered certificates of deposit. Near-term management focus is expected to remain on integrating Peoples and prior acquisitions rather than pursuing immediate expansion.
- A flattening yield curve and persistently low interest rates could pressure net interest income and margins. The company’s modeled net portfolio value declined 20% under an instantaneous 300-basis-point rate increase.
- Key risks include credit losses, real estate values, loan and deposit demand, funding costs, regulatory examinations, technology, competition, and failure to realize anticipated acquisition synergies or cost savings.
- The company had no material pending legal proceedings expected to affect financial condition or operations, and reported no material changes to previously disclosed risk factors.
- Management stated that disclosure controls and procedures were effective as of December 31, 2014, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the increase in nonperforming assets and adversely classified loans remains acquisition-related or indicates broader deterioration in the legacy portfolio.
- The sustainability of earnings and margin after purchase-accounting accretion from acquired loans declines.
- Progress toward realizing expected cost savings and integration benefits from Peoples and other recent acquisitions.
- Future performance of the pooled trust preferred securities, particularly the security in principal-in-kind status and the potential for other-than-temporary impairment.
- The adequacy of the $11.0 million allowance for loan losses as the portfolio continues to grow.
- Funding and interest-rate sensitivity, including reliance on deposits, FHLB advances, brokered certificates of deposit, and the effect of future rate changes.