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 retail, residential and commercial real estate, construction, consumer, agricultural and commercial business lending and deposit services in Missouri and Arkansas. This report covers the three months ended September 30, 2011, the first quarter of fiscal 2012, with unaudited comparisons to the three months ended September 30, 2010. The company completed the acquisition of most assets and substantially all liabilities of the former First Southern Bank in December 2010, significantly affecting year-over-year comparisons.
Key financial metrics
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Total interest income | $10.2 million | $7.3 million | +40.0% |
| Net interest income | $7.5 million | $4.5 million | +65.6% |
| Provision for loan losses | $0.5 million | $0.6 million | -19.6% |
| Noninterest income | $1.1 million | $0.8 million | +36.2% |
| Noninterest expense | $3.8 million | $2.9 million | +32.2% |
| Income before taxes | $4.3 million | $1.8 million | +134.6% |
| Net income | $2.9 million | $1.3 million | +118.8% |
| Net income available to common shareholders | $2.6 million | $1.2 million | +123.0% |
| Diluted earnings per common share | $1.21 | $0.56 | +116.1% |
| Net interest margin | 4.42% | 3.41% | +101 basis points |
| Efficiency ratio | 44.0% | 53.6% | Improved |
| Return on average assets | 1.62% | 0.94% | Improved |
| Return on average common equity | 22.0% | 12.8% | Improved |
Excluding acquisition-related accretion of acquired-loan fair value discounts and amortization of assumed deposit premiums, net interest income was $6.3 million, net interest margin was 3.72%, return on average assets was approximately 1.20%, and return on average common equity was 15.84%.
Financial condition, liquidity and capital
- Total assets increased 4.4% from June 30, 2011, to $718.5 million at September 30, 2011.
- Net loans increased 1.4% to $564.1 million. Growth was concentrated in commercial and commercial real estate loans and was partly offset by lower construction and residential real estate balances.
- Deposits increased 3.3% to $578.8 million, primarily through transaction accounts, savings accounts and certificates of deposit.
- Cash and cash equivalents increased to $54.8 million from $33.9 million. Investing activities used $9.3 million, while financing activities provided $28.9 million.
- Stockholders’ equity increased 23.7% to $68.9 million, primarily due to the Small Business Lending Fund preferred stock issuance, retained earnings and accumulated other comprehensive income.
- At September 30, 2011, liabilities included $33.5 million of FHLB advances, $25.4 million of repurchase agreements and $7.2 million of subordinated debt.
- The company issued $20.0 million of SBLF preferred stock in July 2011 and used approximately $9.6 million of proceeds to redeem its prior TARP preferred stock. The initial SBLF dividend rate was 2.8155% and may change based on qualified small-business lending.
- Management stated that the Bank was well capitalized. The Bank’s total risk-based capital ratio was 10.10%, Tier 1 risk-based capital ratio was 13.43%, and Tier 1 leverage ratio was 14.69%.
- The Bank had approximately $179.4 million of available FHLB credit, with $33.5 million advanced, and access to approximately $65.1 million of Federal Reserve discount-window borrowing based on pledged collateral. Management believes liquidity is sufficient.
Material changes versus the prior comparable period
- Profitability improved substantially, primarily because the December 2010 acquisition expanded the loan base and produced significant accretion income from acquired loans, while funding costs declined.
- The average balance of interest-earning assets increased 27.9%, and the average balance of interest-bearing liabilities increased 24.8%.
- The average yield on interest-earning assets rose to 6.03% from 5.51%, while the average cost of interest-bearing liabilities declined to 1.83% from 2.32%.
- Noninterest income benefited from income related to settlement of an acquisition-related legal claim, secondary-market loan sale gains and bank-card activity. Noninterest expense increased because of higher compensation, occupancy, technology, advertising, bank-card and amortization costs associated partly with the acquisition.
- The allowance for loan losses increased to $6.75 million from $6.44 million. Net charge-offs were $203,000, compared with $55,000 in the prior-year quarter.
- Nonperforming assets declined to $2.04 million from $2.38 million at June 30, 2011, but exceeded $1.78 million at September 30, 2010. Nonaccrual loans increased to $585,000 from $262,000 at June 30, 2011.
- Adoption of ASU 2011-02 resulted in $2.1 million of loans being identified as troubled debt restructurings; management reported no allowance impact from the adoption. Total TDRs were $2.1 million, of which approximately $1,000 was nonperforming.
Guidance, outlook, commentary and risks
- Management expects modest asset growth through loan originations, occasional loan purchases and investment securities purchases, funded primarily by retail deposits, FHLB borrowings and, if needed, brokered certificates of deposit.
- Management does not expect the full improvement in net interest spread to persist because acquired loans will pay down and new assets are not expected to carry comparable spreads.
- Management expects operating expenses to increase with balance-sheet growth, expansion and inflation.
- Loan-loss estimates remain subject to significant judgment and may require additional provisions if loan growth continues, economic conditions weaken, collateral values decline or credit quality deteriorates. Regulatory examinations could also require additional reserves or asset write-downs.
- The company held pooled trust preferred securities with approximately $1.0 million of unrealized losses and two securities receiving payment-in-kind interest. Management did not classify the losses as other-than-temporary, but acknowledged that future market or cash-flow deterioration could require impairment charges.
- Interest-rate risk, credit risk, real estate values, local economic conditions, deposit competition, funding access, regulatory changes, acquisition integration and potential reductions in bank-card interchange revenue are identified risks.
- Management’s hypothetical interest-rate analysis estimated that net portfolio value would decline 17% under an instantaneous 300-basis-point rate decrease, while increasing 12% under a 300-basis-point increase. These estimates depend on assumptions and are not forecasts.
- No material changes were reported to the risk factors in the company’s June 30, 2011 Form 10-K. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Determine how much of the reported net interest margin and earnings growth is attributable to temporary accretion from acquired loans and how quickly that benefit is declining.
- Monitor commercial real estate, construction and commercial-business loan concentrations, classified loans, nonaccrual loans, TDRs and the allowance for loan losses.
- Review the valuation, cash-flow assumptions and potential impairment exposure of pooled trust preferred securities and other securities with unrealized losses.
- Verify the sustainability and cost of deposit growth, including the above-market rewards checking product and certificate-of-deposit funding.
- Assess the future dividend cost, rate adjustments and redemption conditions of the $20.0 million SBLF preferred stock, including the 9% rate after four and one-half years.
- Reconcile the filing’s cash, liquidity and regulatory-capital disclosures with subsequent filings; the MD&A contains a reference to cash and cash equivalents of $55.6 million, while the balance sheet reports $54.8 million.