Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Southern Missouri Bancorp, Inc. is the holding company for Southern Bank, which provides deposit, mortgage, commercial real estate, construction, consumer, agricultural, and commercial business lending services in Missouri and Arkansas. This unaudited filing covers the three and six months ended December 31, 2011, the second quarter and first six months of fiscal 2012, compared with the same periods of fiscal 2011. The filing was signed February 14, 2012.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2011 | Six Months Ended Dec. 31, 2011 |
|---|---|---|
| Total interest income | $9.9 million | $20.2 million |
| Net interest income | $7.3 million | $14.8 million |
| Provision for loan losses | $345,000 | $862,000 |
| Net income | $2.7 million | $5.5 million |
| Net income available to common shareholders | $2.6 million | $5.2 million |
| Diluted earnings per common share | $0.95 | $2.12 |
| Net interest margin | 4.12% | 4.27% |
| Net interest margin excluding acquisition-related accretion | 3.56% | 3.64% |
| Return on average assets | 1.44% | 1.53% |
| Return on average common equity | 17.07% | 19.27% |
At December 31, 2011, total assets were $772.6 million, net loans were $542.7 million, deposits were $609.0 million, and stockholders’ equity was $91.2 million. Cash and cash equivalents were $118.6 million. The allowance for loan losses was $7.0 million, compared with $6.4 million at June 30, 2011.
Six-month operating cash flow was $2.1 million. Investing activities used $662,000, while financing activities provided $83.2 million, resulting in an $84.7 million increase in cash and cash equivalents. Financing inflows included $19.9 million of common-stock proceeds, $20.0 million of SBLF preferred-stock proceeds, deposit growth, and higher repurchase-agreement balances.
Debt and funding at December 31, 2011 included $33.5 million of FHLB advances, $29.9 million of securities sold under agreements to repurchase, and $7.2 million of subordinated debt. The Bank reported regulatory capital well above minimum requirements; its total risk-based capital ratio was 15.54% and Tier 1 leverage ratio was 9.90%.
Material Changes Versus Prior Comparable Period
- Six-month net income declined 19.7% to $5.5 million, and diluted earnings per share declined 31.8% to $2.12. The principal driver was the absence of the $7.0 million bargain purchase gain recognized in the prior-year period from the First Southern Bank acquisition.
- Six-month net interest income increased 59.5% to $14.8 million. The net interest margin increased to 4.27% from 3.38%, supported by acquisition-related loan discount accretion, asset growth, and lower funding costs.
- Management cautioned that the full margin benefit from acquired loans is not expected to persist as those loans pay down and new assets are originated at lower spreads.
- Six-month noninterest income decreased 76.8% to $2.0 million, primarily because the prior-year period included the bargain purchase gain. Six-month noninterest expense increased 16.9% to $7.7 million, primarily from compensation, advertising, card-network fees, amortization, occupancy, and office expenses.
- Total assets increased 12.3% from June 30, 2011. Cash increased 249.9% to $118.6 million, available-for-sale securities increased 17.7% to $74.5 million, deposits increased 8.7% to $609.0 million, and net loans decreased 2.5% to $542.7 million.
- Stockholders’ equity increased 63.6% to $91.2 million, reflecting the SBLF preferred-stock issuance, the common-stock offering, retained earnings, and accumulated other comprehensive income, partly offset by dividends and the TARP preferred-stock redemption.
- Nonperforming assets declined to $1.8 million from $2.4 million at June 30, 2011. Nonaccrual loans increased to approximately $394,000, while total loans more than 90 days past due and accruing declined to approximately $13,000.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects to redeploy elevated cash balances over time into loans and investment securities and to grow assets modestly. Expected funding sources include deposits, existing cash, FHLB borrowings, and, if needed, brokered certificates of deposit.
- The Company expects operating expenses to continue increasing with balance-sheet growth, expansion, compensation, and inflation.
- Management expects the acquisition-related improvement in net interest margin to moderate as acquired loans pay down. A steep yield curve and lower deposit costs were favorable, but a flatter curve or rising funding costs could pressure earnings.
- Credit risk remains concentrated in commercial real estate, construction, agricultural, and commercial business lending. The allowance for loan losses is judgmental and may require additional provisions if economic conditions, collateral values, delinquencies, or charge-offs deteriorate.
- The Company held pooled trust-preferred securities with approximately $1.2 million of unrealized losses at December 31, 2011. Two securities were receiving payment-in-kind interest, expected to continue for four to eight years; management did not classify the losses as other-than-temporary, but acknowledged possible future OTTI charges.
- At December 31, 2011, the Company had approximately $93.2 million of outstanding commitments and approvals to fund loans. The Bank had approximately $181.0 million of available FHLB credit, of which $33.5 million was drawn, and access to approximately $52.2 million of Federal Reserve primary credit based on pledged collateral.
- The SBLF preferred-stock dividend rate was 2.43425% for the quarter. The rate can vary with qualified small-business lending and increases to 9% after four and one-half years. The Company used approximately $9.6 million of the SBLF proceeds to redeem its TARP preferred stock.
- The Company completed a public offering of 1.15 million common shares at $19.00 per share in November 2011, generating approximately $19.9 million of net proceeds.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, no material pending legal proceedings, and no material changes to the risk factors in the fiscal 2011 Form 10-K.
Important Facts for Investors to Verify
- Verify the sustainability of the 4.27% reported net interest margin after excluding acquisition-related accretion, which was 3.64% for the six-month period.
- Monitor the runoff and credit performance of the acquired loan portfolio, including the $6.2 million carrying amount of purchased credit-impaired loans and related accretable yield.
- Assess future allowance requirements and charge-offs, particularly in commercial real estate, construction, agricultural, and commercial lending.
- Review the valuation, payment-in-kind status, and potential OTTI exposure of the pooled trust-preferred securities.
- Evaluate liquidity deployment, the $93.2 million loan commitment pipeline, deposit pricing, and reliance on FHLB or other wholesale funding.
- Confirm the effect of the SBLF dividend-rate formula, redemption restrictions, and the eventual 9% dividend rate on common-shareholder earnings.
- Consider that the interim results are unaudited and are not necessarily indicative of full-year fiscal 2012 performance.