Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
Southern Missouri Bancorp, Inc. is a Missouri bank holding company whose primary operating subsidiary is Southern Bank. The Bank provides deposit, lending and related financial services through its headquarters, 44 full-service branches and two limited-service branches. This unaudited filing covers the three and six months ended December 31, 2019, the second quarter and first six months of fiscal 2020. Comparisons are primarily with December 31, 2018, and June 30, 2019.
Key financial metrics
| Metric | Three months ended December 31, 2019 | Six months ended December 31, 2019 |
|---|---|---|
| Net income | $7.7 million | $15.5 million |
| Year-over-year change in net income | 3.5% | 9.1% |
| Diluted earnings per share | $0.84 | $1.68 |
| Net interest income | $19.4 million | $38.9 million |
| Net interest margin | 3.70% | 3.76% |
| Noninterest income | $4.3 million | $8.4 million |
| Noninterest expense | $13.7 million | $26.6 million |
| Provision for loan losses | $388,000 | $1.3 million |
| Operating cash flow | Not separately presented for the quarter | $17.7 million |
Total interest income increased 10.1% to $26.6 million in the quarter and 15.8% to $53.6 million year to date. Total interest expense increased 18.4% to $7.3 million in the quarter and 32.8% to $14.6 million year to date. The efficiency ratio was 57.7% for the quarter and 56.3% year to date. Return on average assets was 1.36% for the quarter and 1.38% year to date; return on average common equity was 12.6% and 12.8%, respectively.
| Balance-sheet metric | December 31, 2019 | Change from June 30, 2019 |
|---|---|---|
| Total assets | $2.312 billion | +$97.5 million, or 4.4% |
| Net loans | $1.923 billion | +$76.4 million, or 4.1% |
| Available-for-sale securities | $175.8 million | +$10.3 million, or 6.2% |
| Deposits | $1.915 billion | +$20.9 million, or 1.1% |
| FHLB advances | $114.6 million | +$69.7 million, or 155.3% |
| Stockholders’ equity | $248.9 million | +$10.5 million, or 4.4% |
| Cash and cash equivalents | $41.0 million | +$5.6 million |
The allowance for loan losses was $20.8 million, compared with $19.9 million at June 30, 2019. Nonperforming assets declined to $14.1 million from $24.8 million at fiscal year-end, including nonaccrual loans of $10.4 million. The loan-to-deposit ratio averaged 100.4% in the second quarter.
Material changes versus comparable periods
- Net interest income grew primarily from higher average interest-earning assets and loan growth, despite a decline in the year-to-date net interest margin to 3.76% from 3.81%.
- Average interest-earning assets increased 12.1% year to date. Average funding costs increased, with the average cost of interest-bearing liabilities rising 25 basis points year over year.
- Loan discount accretion declined to $1.0 million year to date from $1.7 million, and management expects this acquisition-related benefit to decline over time.
- Noninterest income increased 12.7% year to date, supported by deposit service charges, bank-card interchange income, wealth-management and insurance commissions, and gains on residential loan sales.
- Noninterest expense increased 11.0% year to date, reflecting higher compensation, occupancy, bank-card network and other operating costs. Merger-related expenses declined substantially to $25,000 from $595,000 in the prior-year period.
- The Company repurchased 86,050 shares for $2.8 million during the six months and paid $2.8 million in common dividends, or $0.30 per share.
- Net cash provided by operating activities increased to $17.7 million from $16.9 million. Investing activities used $92.7 million, primarily for net loan growth and securities purchases, while financing activities provided $80.7 million, principally through FHLB advances.
Guidance, outlook, risks and unusual items
- Management expects continued asset growth through loan originations, loan purchases and investment securities. Expected funding sources include retail and brokered deposits and short- and long-term FHLB borrowings.
- The increase in FHLB advances was used to fund loan and securities growth exceeding deposit growth and to replace brokered funding; management does not expect the elevated increase to continue into the March quarter because of normal seasonality.
- Management expects deposit insurance expense to remain relatively small for the quarter ending March 31, 2020, before returning to a normalized level for the quarter ending June 30, 2020, assuming the Deposit Insurance Fund ratio remains above 1.35%.
- On January 17, 2020, the Company announced an agreement to acquire Central Federal Bancshares, Inc. in an all-cash transaction valued at approximately $24.0 million. Closing is expected late in the second quarter of calendar 2020, subject to regulatory and shareholder approvals. Central reported approximately $69 million of assets, $53 million of loans and $46 million of deposits at September 30, 2019.
- Management identified interest-rate risk, credit risk, real-estate and agricultural conditions, funding access, regulatory changes, competition, technology, economic conditions and merger integration as key risks.
- Interest-rate sensitivity modeling estimated that a 300-basis-point instantaneous increase in rates would reduce net portfolio value by 24%, while a 300-basis-point decrease would increase it by 20%. Management cautions that these are model-based estimates and not forecasts.
- The Company adopted the new lease standard on July 1, 2019, recognizing approximately $2.0 million of operating lease right-of-use assets and liabilities without a material income-statement effect.
- The Company expects to adopt the current expected credit loss standard for the quarter ending September 30, 2020, but cannot yet determine the amount of the resulting one-time adjustment to retained earnings and the allowance for loan losses.
- A $327,000 loss on the disposal of two facilities acquired in the Gideon acquisition and a $362,000 charge related to increased off-balance-sheet credit exposures affected the current quarter.
Important facts for investors to verify
- Verify the fiscal-period labeling: the filing is for the quarter ended December 31, 2019, although the request metadata describes it as 2019 Q2.
- Assess whether loan growth and the 100.4% average loan-to-deposit ratio can be sustained without continued reliance on FHLB advances, brokered deposits or other wholesale funding.
- Review the effect of rising funding costs and declining acquisition-related loan discount accretion on future net interest margin and earnings.
- Evaluate concentrations in commercial real estate, construction and other commercial lending, together with the allowance for loan losses and potential effects of CECL adoption.
- Monitor nonperforming assets, classified loans, troubled debt restructurings and changes in collateral values; reported credit-quality ratios are affected by acquired-credit-impaired loan accounting.
- Confirm regulatory and shareholder approvals, purchase accounting, funding and integration risks associated with the planned Central Federal acquisition.
- Confirm the Company’s regulatory capital position and liquidity availability under adverse interest-rate, deposit-flow and credit-loss scenarios.