Business Context and Reporting Period
Southern Missouri Bancorp, Inc. is the holding company for Southern Bank, which provides commercial banking and financial services in Missouri and Arkansas. This unaudited Form 10-Q covers the quarter and nine-month periods ended March 31, 2014. The request metadata identifies “2013 Q3,” but the filing itself reports fiscal 2014 third-quarter results.
The company completed acquisitions of Ozarks Legacy Community Financial and Bank of Thayer on October 4, 2013, and Citizens State Bankshares of Bald Knob on February 21, 2014. The acquired operations contributed materially to balance-sheet growth and operating expenses.
Financial Condition and Key Metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Total interest income | $10.3 million, up 17.8% | $29.7 million, up 8.8% |
| Net interest income | $8.4 million, up 22.4% | $24.1 million, up 11.5% |
| Provision for loan losses | $253,000 | $1.0 million, down 19.5% |
| Noninterest income | $1.5 million, up 27.9% | $4.4 million, up 32.7% |
| Noninterest expense | $6.6 million, up 49.1% | $17.4 million, up 33.7% |
| Net income | $2.2 million, down 9.1% | $7.3 million, down 2.8% |
| Net income available to common shareholders | $2.2 million, down 9.2% | $7.2 million, down 0.9% |
| Diluted earnings per share | $0.64, versus $0.71 | $2.11, versus $2.14 |
| Net interest margin | 3.72%, versus 3.77% | 3.82%, versus 4.08% |
| Return on average assets | 0.93%, versus 1.26% | 1.09%, versus 1.33% |
| Return on average common equity | 10.2%, versus 12.1% | 11.3%, versus 12.4% |
At March 31, 2014, total assets were $994.4 million, up 24.9% from June 30, 2013. Net loans were $767.3 million, up 18.6%; available-for-sale securities were $134.2 million, up 67.7%; deposits were $794.5 million, up 25.6%; and stockholders’ equity was $107.4 million, up 5.5%.
Cash and cash equivalents were $18.0 million. FHLB advances were $51.7 million, compared with $24.5 million at June 30, 2013. Subordinated debt was $9.7 million, and securities sold under repurchase agreements were $26.9 million. Nine-month operating cash flow was $10.2 million, investing cash flow was negative $55.7 million, financing cash flow was $50.7 million, and ending cash increased by $5.2 million.
The allowance for loan losses was $8.7 million, compared with $8.4 million at June 30, 2013. Nonaccrual loans were $2.0 million, total nonperforming assets were $5.1 million, and troubled debt restructurings totaled $5.4 million, of which $5.2 million were performing. Regulatory capital remained strong; Southern Bank was categorized as well capitalized, with total risk-based capital of 15.28% and Tier 1 leverage capital of 10.76%.
Material Changes Versus Prior Comparable Period
- Balance-sheet growth was driven by organic loan growth and the two fiscal 2014 acquisitions. Acquisitions contributed approximately $51.4 million of loans, $84.8 million of securities, and $132.6 million of deposits.
- Net interest income increased, but the net interest margin declined because asset yields fell and the benefit from accretion of acquired-loan discounts decreased. Acquisition-related accretion was $481,000 for the first nine months, versus $1.1 million in the prior-year period.
- Noninterest income increased from higher deposit fees, bank-card interchange income, loan fees, loan-sale gains, and $108,000 of realized securities gains during the nine-month period.
- Noninterest expense increased substantially due to acquired operations, compensation, occupancy, professional fees, core-deposit-intangible amortization, merger costs, and a $376,000 charge to terminate the company’s debit-card processing contract.
- Credit costs were mixed: the provision declined year over year, but nine-month net charge-offs were $746,000. A $501,000 commercial-loan charge-off represented most of the quarter’s charge-offs and related to a previously acquired credit-impaired loan that had been fully reserved in prior periods.
- The common dividend increased to $0.16 per share for the quarter and $0.48 per share for the nine-month period, compared with $0.15 and $0.45, respectively.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects modest asset growth through loan originations and securities purchases, funded primarily by retail deposits, FHLB borrowings and, as needed, brokered certificates of deposit. Near-term management attention is expected to focus on integrating the fiscal 2014 acquisitions and completing the pending acquisition of Peoples Service Company.
The pending Peoples Service Company transaction was expected to close in the third calendar quarter of 2014, subject to regulatory and shareholder approvals and other customary conditions. The acquired institution was expected to merge into Southern Bank in the fourth quarter of 2014 or first quarter of 2015. The filing does not provide the expected purchase price or final financial impact.
At March 31, 2014, the company had approximately $33.3 million of outstanding loan commitments and approvals. FHLB collateral supported approximately $265 million of available credit, of which $51.6 million was drawn; farmland and agricultural loans provided access to approximately $65.2 million of Federal Reserve discount-window credit.
- Primary risks include interest-rate changes, narrowing margins, credit losses, real-estate values, local economic conditions, deposit and funding availability, regulatory actions, and acquisition integration.
- The investment portfolio included pooled trust-preferred securities with significant unrealized losses. Two securities were receiving payment-in-kind interest, increasing credit exposure and reducing current cash flow. Management concluded that no additional other-than-temporary impairment was required, but future impairment remains possible.
- The company had $3.0 million of foreclosed and repossessed assets held for sale and $125,000 of nonperforming investments at March 31, 2014.
- All available-for-sale securities were classified as such; accumulated other comprehensive loss was $262,000 at March 31, 2014.
- Management reported no material pending legal proceedings and no material changes to previously disclosed risk factors, other than discussion of potential Volcker Rule effects on the investment portfolio.
- Disclosure controls and procedures were considered effective, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the effect of the Bank of Thayer and Citizens State Bank acquisitions on ongoing revenue, expenses, asset quality, capital, and deposit retention.
- Monitor whether net interest margin continues to decline as acquired-loan discount accretion runs off and securities represent a larger share of earning assets.
- Assess the sustainability of elevated noninterest expense, including merger costs, integration spending, debit-card conversion costs, and acquired-branch operating costs.
- Review classified loans, nonaccrual loans, TDRs, foreclosed assets, charge-offs, and allowance coverage as the loan portfolio expands.
- Evaluate the liquidity impact of increased FHLB borrowings and the company’s ability to fund approximately $33.3 million of loan commitments.
- Verify the status, approvals, consideration, and integration timetable for the pending Peoples Service Company acquisition.
- Assess valuation assumptions and future impairment risk for pooled trust-preferred securities and other Level 3 assets.