Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2015, the first quarter of fiscal 2016. The filing is unaudited and should be read with the fiscal 2015 Form 10-K. Southern Missouri Bancorp is the parent of Southern Bank, which generates substantially all consolidated revenue and holds substantially all assets and liabilities. At September 30, 2015, the Bank operated 31 full-service and three limited-service branches.
Financial condition and key metrics
| Metric | September 30, 2015 | Comparable / prior period |
|---|---|---|
| Total assets | $1.320 billion | $1.300 billion at June 30, 2015 |
| Net loans | $1.069 billion | $1.053 billion at June 30, 2015 |
| Deposits | $1.058 billion | $1.055 billion at June 30, 2015 |
| FHLB advances | $82.1 million | $64.8 million at June 30, 2015 |
| Stockholders’ equity | $135.9 million | $132.6 million at June 30, 2015 |
| Cash and cash equivalents | $18.5 million | $16.8 million at June 30, 2015 |
| Available-for-sale securities | $127.5 million | $129.6 million at June 30, 2015 |
| Allowance for loan losses | $12.8 million | $12.3 million at June 30, 2015 |
| Three months ended September 30 | 2015 | 2014 | Change |
|---|---|---|---|
| Total interest income | $14.0 million | $13.2 million | +5.7% |
| Net interest income | $11.7 million | $11.1 million | +5.2% |
| Provision for loan losses | $618,000 | $827,000 | -25.3% |
| Noninterest income | $2.2 million | $2.0 million | +11.2% |
| Noninterest expense | $8.0 million | $7.6 million | +5.1% |
| Income before taxes | $5.3 million | $4.7 million | +13.2% |
| Net income | $3.6 million | $3.3 million | +10.2% |
| Net income available to common shareholders | $3.6 million | $3.2 million | +10.3% |
| Diluted earnings per share | $0.48 | $0.44 | +9.1% |
| Net interest margin | 3.87% | 3.93% | -6 basis points |
| Return on average assets | 1.12% | 1.09% | +3 basis points |
| Return on average common equity | 12.55% | 13.16% | -61 basis points |
| Efficiency ratio | 57.4% | 58.0% | Improved |
Material changes versus comparable periods
- Loans increased $15.9 million, or 1.5%, from June 30, 2015, led by commercial and agricultural loans, residential real estate loans and commercial real estate loans. Construction and consumer loan balances declined.
- Total assets grew $19.7 million, or 1.5%, during the quarter. Growth was funded primarily by a $17.3 million increase in FHLB advances and modest deposit growth; repurchase agreements declined $2.9 million.
- Net interest income increased because of balance-sheet growth, particularly loan growth, and $412,000 of purchase-accounting accretion associated with the Peoples Bank acquisition. The core net interest margin, excluding acquisition-related accretion, declined to 3.74% from 3.79%.
- Noninterest income benefited from higher bank-card interchange income, deposit service charges and loan fees. Noninterest expense rose primarily because of compensation, benefits and occupancy costs, partly offset by lower legal and professional fees and the absence of $128,000 of merger-related charges recorded in the prior-year quarter.
- The provision for loan losses declined to $618,000, but the allowance increased to $12.8 million because of loan growth and provision expense. Net charge-offs were $104,000, compared with net recoveries of $24,000 in the prior-year quarter.
- Nonaccrual loans increased to $4.0 million from $3.8 million at June 30, 2015 and $2.9 million a year earlier. Total nonperforming assets increased to $8.6 million from $8.3 million at June 30, 2015 and $6.8 million a year earlier.
Liquidity, capital and debt
- At September 30, 2015, the Bank had approximately $137.5 million of outstanding loan commitments and approvals, including $94.8 million of unused lines of credit.
- FHLB collateral supported approximately $238.7 million of available credit, of which $81.4 million was advanced. Loans pledged to the Federal Reserve provided access to approximately $102.2 million of primary credit borrowings.
- Management stated that available liquidity was sufficient to meet expected needs. The average loan-to-deposit ratio was 101.8% for the quarter.
- The Bank was categorized as well capitalized. At September 30, 2015, Southern Bank reported total risk-based capital of 13.86%, Tier 1 risk-based capital of 12.63%, common equity Tier 1 capital of 12.63% and Tier 1 leverage capital of 10.78%.
- Subordinated debt was $14.7 million and consisted primarily of floating-rate junior subordinated debt associated with trust preferred securities.
Cash flow and unusual items
- Operating activities provided $3.1 million of cash, compared with $4.2 million in the prior-year quarter.
- Investing activities used $17.7 million, principally from a $16.0 million net increase in loans and $3.6 million of premises and equipment purchases, including construction of a new headquarters and improvements to leased office space.
- Financing activities provided $16.4 million, including $88.5 million of FHLB borrowings and $71.1 million of repayments.
- Cash and cash equivalents increased $1.8 million to $18.5 million.
- The Company held three pooled trust preferred securities with approximately $791,000 of fair value and $643,000 of unrealized losses in a continuous loss position for more than 12 months. Management concluded that no additional other-than-temporary impairment was required, but acknowledged that future impairment losses remain possible.
- On October 16, 2015, after quarter-end, the Company redeemed all 20,000 shares of its SBLF preferred stock for $20.0 million plus accrued dividends. The preferred dividend rate for the quarter ended September 30, 2015 was 1%.
Outlook, management commentary and risks
Management expects continued asset growth through loan originations, occasional loan purchases and investment-security purchases, funded by retail deposits, brokered funding and short- and long-term FHLB borrowings. Management also expects the positive effect of purchase-accounting accretion from the Peoples acquisition to decline as acquired loans pay down.
- The low-rate and flattening yield-curve environment pressured loan yields, net interest margin and funding costs. Management noted that further rate changes could materially affect earnings.
- Loan growth is concentrated substantially in real estate and commercial lending, creating exposure to borrower cash flows, collateral values, construction activity and local economic conditions.
- The allowance for loan losses is based on estimates and may require additional provisions or regulatory adjustments if credit quality, economic conditions or collateral values deteriorate.
- Management identified risks from interest-rate volatility, access to cost-effective funding, deposit competition, regulatory changes, examinations, technology, acquisition integration and the realization of expected acquisition synergies.
- The filing states that there were no material changes to the risk factors disclosed in the fiscal 2015 Form 10-K, no material pending legal proceedings and no material changes affecting internal control over financial reporting.
Investor verification checklist
- Verify the sustainability of loan growth and whether the increased reliance on FHLB advances affects funding costs and liquidity.
- Monitor nonaccrual loans, nonperforming assets, classified loans, TDRs and the allowance for loan losses, particularly within commercial and real estate portfolios.
- Assess reported earnings excluding the $412,000 of acquisition-related purchase-accounting accretion and determine the future run-off of that benefit.
- Review net interest margin sensitivity to further yield-curve flattening or changes in short-term interest rates.
- Evaluate the carrying value and future impairment risk of pooled trust preferred securities and other securities with prolonged unrealized losses.
- Confirm the financial and capital effects of the October 2015 redemption of SBLF preferred stock, which occurred after the reporting date.
- Reconcile management’s non-GAAP measures with GAAP results when comparing operating performance across periods or with peers.