Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
Southern Missouri Bancorp is the parent of Southern Bank, which provides banking and financial services through its Missouri and Arkansas markets. This unaudited report covers the three months ended September 30, 2013, the first quarter of fiscal 2014, compared primarily with the three months ended September 30, 2012 and the balance sheet at June 30, 2013.
Key financial metrics
| Metric | Q1 FY2014 | Comparable period or date |
|---|---|---|
| Total assets | $831.8 million at September 30, 2013 | $796.4 million at June 30, 2013 |
| Net loans receivable | $678.2 million | $647.2 million at June 30, 2013 |
| Deposits | $635.7 million | $632.4 million at June 30, 2013 |
| FHLB advances | $61.9 million | $24.5 million at June 30, 2013 |
| Net interest income | $7.4 million | $7.4 million in Q1 FY2013 |
| Net interest margin | 3.90% | 4.30% in Q1 FY2013 |
| Net income | $2.6 million | $2.6 million in Q1 FY2013 |
| Net income available to common shareholders | $2.5 million | $2.4 million in Q1 FY2013 |
| Diluted EPS | $0.74 | $0.71 in Q1 FY2013 |
| Return on average assets | 1.27% | 1.41% in Q1 FY2013 |
| Return on average common equity | 12.23% | 12.64% in Q1 FY2013 |
| Efficiency ratio | 52.8% | 48.8% in Q1 FY2013 |
| Cash flow from operating activities | $2.3 million provided | $0.9 million used in Q1 FY2013 |
| Cash flow from investing activities | $38.3 million used | $25.2 million used in Q1 FY2013 |
| Cash flow from financing activities | $33.7 million provided | $1.8 million provided in Q1 FY2013 |
| Ending cash and cash equivalents | $10.5 million | $9.0 million at September 30, 2012 |
Total interest income declined 2.1% to $9.2 million, while interest expense declined 7.7% to $1.8 million. The average yield on interest-earning assets fell to 4.85% from 5.43%, while the average cost of interest-bearing liabilities declined to 1.09% from 1.32%.
The allowance for loan losses increased to $8.8 million from $8.4 million at June 30, 2013. Provision expense was $500,000, net charge-offs were $91,000, and nonperforming assets were $3.6 million, or lower than $4.6 million at June 30, 2013 and $6.8 million at September 30, 2012.
Stockholders’ equity was $103.2 million at September 30, 2013. The company paid a common dividend of $0.16 per share. The SBLF preferred dividend rate was 1% for the quarter, resulting in $50,000 of preferred dividends.
Material changes versus prior comparable periods
- Assets increased $35.4 million, or 4.4%, from June 30, 2013, driven primarily by $31.1 million of loan growth and $3.9 million of additional available-for-sale securities.
- Loan growth was concentrated in residential real estate, commercial real estate, and commercial loans; construction loans declined.
- FHLB advances increased $37.4 million and were used primarily to fund loan growth. Repurchase-agreement balances declined $6.4 million.
- Net interest income decreased $47,000, or 0.6%, and reported net interest margin declined 40 basis points. Core net interest margin, excluding acquisition-related fair-value accretion and deposit-premium amortization, declined to 3.79% from 4.00%.
- Acquisition-related loan discount accretion and assumed-deposit premium amortization contributed $204,000 to net interest income, down from $529,000 in the prior-year quarter.
- Noninterest income increased $220,000, or 20.8%, primarily from higher deposit fees, card-network revenue, and gains on secondary-market loan sales.
- Noninterest expense increased $429,000, or 10.4%, driven primarily by compensation, legal and professional fees, occupancy, and advertising.
- Net income declined 1.0%, but income available to common shareholders increased 4.9% because preferred dividends declined from $195,000 to $50,000.
- Comprehensive income declined to $1.9 million from $2.8 million because unrealized losses on available-for-sale securities produced $689,000 of other comprehensive loss.
Guidance, outlook, commentary, risks and unusual items
Management expects to continue modest asset growth through loan originations and investment purchases, funded primarily by retail deposits, FHLB borrowings and, as needed, brokered certificates of deposit. Management also expects to continue evaluating strategic expansion opportunities.
Management attributed margin pressure to low market interest rates, lower loan and investment yields, and the ongoing reduction in acquisition-related discount accretion. The company expects the positive effect of acquired-loan discount accretion to continue declining as the acquired portfolio pays down.
Liquidity resources included $10.5 million of cash and cash equivalents, approximately $227 million of available FHLB borrowing capacity against pledged collateral, and approximately $74.7 million of Federal Reserve discount-window capacity. Outstanding loan commitments and approvals totaled approximately $53.9 million. Management stated that liquidity should be sufficient for anticipated needs.
The Bank was categorized as well capitalized. At September 30, 2013, Southern Bank reported total risk-based capital of 14.69%, Tier 1 risk-based capital of 13.44%, and Tier 1 leverage capital of 10.94%.
Key risks include interest-rate sensitivity, credit losses, real-estate values, economic conditions, deposit and funding competition, regulatory changes, liquidity access, technology, and the execution and integration of acquisitions. A 300-basis-point increase in rates was modeled to reduce net portfolio value by 14%; management cautioned that these estimates depend on assumptions and may not predict actual results.
The securities portfolio included four pooled trust-preferred securities with approximately $1.1 million of unrealized losses and an estimated fair value of $465,000. Two were receiving payment-in-kind interest, increasing their credit risk. Management did not classify the remaining investment losses as other-than-temporary but warned that future OTTI charges could occur.
Subsequent to quarter-end, the company acquired Ozarks Legacy Community Financial, Inc. for $6.3 million in cash and assumed $4.1 million of debt. The acquired company had approximately $80.0 million of assets, $38.7 million of net loans, and $68.2 million of deposits. The accounting for the acquisition was incomplete at issuance. The company also announced an agreement to acquire Citizens State Bankshares of Bald Knob, Inc. for approximately $5.9 million, with closing expected in the first half of calendar 2014.
Management reported no material changes to previously disclosed risk factors, no material pending litigation, and effective disclosure controls as of September 30, 2013.
Important facts for investors to verify
- Confirm that the period is the first quarter of fiscal 2014, despite the request metadata referring to “2013 Q1.”
- Assess whether rapid loan growth funded by increased FHLB borrowing creates additional liquidity, funding-cost, or credit risk.
- Monitor the decline in core net interest margin and the fading contribution from acquired-loan discount accretion.
- Review credit quality, allowance adequacy, classified loans, nonaccrual loans, TDRs, and the effect of purchased credit-impaired loan accounting on comparability.
- Evaluate the potential for additional OTTI losses on pooled trust-preferred securities and other available-for-sale investments.
- Verify the completed accounting, goodwill, fair-value adjustments, integration costs, and funding effects of the Ozarks acquisition.
- Verify the terms, closing conditions, and regulatory approvals for the proposed Citizens acquisition.
- Reconcile reported GAAP earnings with management’s non-GAAP measures excluding acquisition-related accretion and amortization.