Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended March 31, 2020; filed May 11, 2020. The request metadata identifies “2019 Q3,” but the filing reports fiscal 2020 third-quarter results. Southern Missouri Bancorp owns Southern Bank, which operated 44 full-service and two limited-service branches at March 31, 2020.
Financial condition and results
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net interest income | $19.4 million, up 4.7% | $58.4 million, up 8.5% |
| Provision for loan losses | $2.9 million, versus $0.5 million | $4.1 million, versus $1.5 million |
| Noninterest income | $3.9 million, down 2.3% | $12.3 million, up 7.5% |
| Noninterest expense | $14.2 million, up 7.6% | $40.8 million, up 9.8% |
| Net income | $5.1 million, down 28.1% | $20.6 million, down 3.3% |
| Diluted earnings per share | $0.55, versus $0.76 | $2.24, versus $2.33 |
| Net interest margin | 3.63%, versus 3.73% | 3.71%, versus 3.78% |
| Return on average assets | 0.88%, versus 1.30% | 1.21%, versus 1.38% |
| Return on average equity | 8.1%, versus 12.5% | 11.2%, versus 13.2% |
- Balance sheet: Total assets were $2.374 billion at March 31, 2020, up 7.2% from June 30, 2019. Net loans were $1.968 billion, up 6.6%; available-for-sale securities were $180.6 million; and cash and cash equivalents were $56.1 million.
- Funding and liquidity: Deposits were $1.972 billion, up 4.1%. FHLB advances increased to $123.4 million from $44.9 million. Securities sold under repurchase agreements declined to zero. Management stated that liquidity was sufficient and had not been significantly affected by COVID-19 as of the filing.
- Credit quality: The allowance for loan losses increased to $23.5 million from $19.9 million. Nonaccrual loans declined to $11.4 million from $21.0 million, and total nonperforming assets declined to $14.9 million from $24.8 million. Total past-due loans increased to $15.9 million from $11.6 million.
- Capital: Stockholders’ equity was $249.9 million, up 4.8% from June 30, 2019. The Bank remained categorized as well capitalized; its total risk-based capital ratio was 12.94%, Tier 1 risk-based ratio was 11.71%, common equity Tier 1 ratio was 11.71%, and Tier 1 leverage ratio was 10.51%.
- Cash flow: For the nine months, operating activities provided $28.4 million, investing activities used $149.8 million, and financing activities provided $142.1 million. Cash and cash equivalents increased $20.7 million to $56.1 million.
Material changes versus prior comparable periods
- Net income declined despite higher net interest income because loan-loss provisions and operating expenses rose materially, while the third quarter also experienced lower noninterest income.
- The provision for loan losses increased sharply as management incorporated heightened economic uncertainty and COVID-19 exposure, particularly among borrowers in retail, restaurants, hotels, multi-tenant retail, and other affected industries.
- Net interest margin compressed as funding costs and balance-sheet growth offset higher average earning-asset balances. Acquisition-related loan discount accretion declined to $1.4 million for the nine months from $2.3 million.
- Noninterest income benefited from higher deposit fees, card interchange income, wealth-management and insurance commissions, and residential loan-sale gains. These benefits were partly offset by mortgage servicing-rights impairment and the absence of prior-year securities-sale gains.
- Noninterest expense increased partly because of personnel, facilities, data-processing, card-network, foreclosed-property, and fixed-asset disposal costs. A $327,000 nonrecurring fixed-asset loss occurred in the December 2019 quarter.
- The Company repurchased 182,598 shares for $5.8 million during the fiscal year to date, then suspended the repurchase program effective March 26, 2020, to preserve capital and liquidity. The quarterly dividend remained $0.15 per share.
COVID-19 response, outlook, and risks
- By May 7, 2020, the Company had originated 1,476 SBA Paycheck Protection Program loans totaling $127.8 million. By May 6, 2020, it had deferred or modified payments on 762 loans totaling $323.6 million, primarily for otherwise current and performing borrowers.
- COVID-19-related qualifying modifications totaled $89.6 million at March 31, 2020. The filing warns that payment deferrals may not prevent future delinquencies, charge-offs, increased provisions, or capital pressure.
- Management expects near-term pressure on net interest income and margin from lower market rates, reduced loan demand, and economic disruption. Deposit fees and card-interchange income may also decline as consumer activity falls.
- The Company expects acquired-loan discount accretion to decline over time absent additional acquisitions. It announced an approximately $24 million all-cash acquisition of Central Federal Bancshares, expected to close in late May 2020, subject to regulatory and shareholder approvals.
- Liquidity resources included approximately $407.6 million of available FHLB credit, with $123.5 million advanced, and $175.2 million of Federal Reserve discount-window capacity, with no balance drawn. The Company expected to use the PPP Lending Facility if PPP-related deposit balances declined.
- Management identified risks from the pandemic, borrower failures, real-estate values, interest-rate changes, funding access, cybersecurity and remote work, third-party vendors, regulatory actions, PPP litigation or guarantee issues, and potential goodwill impairment.
- Adoption of the current expected credit loss standard was expected for the quarter ending September 30, 2020, but the filing did not provide a clear estimate of the resulting cumulative adjustment.
Investor verification items
- Verify the scale and performance of COVID-19-modified loans, including subsequent delinquency, charge-off, and reserve trends.
- Assess exposure to hotels, restaurants, retail, multi-tenant retail, construction, and other economically sensitive commercial real-estate segments.
- Reconcile the allowance for loan losses and evaluate the impact of adopting the expected credit loss standard.
- Monitor net interest margin, deposit pricing, FHLB borrowing levels, and liquidity after PPP funds are spent or transferred.
- Confirm completion, purchase accounting, integration costs, and expected benefits of the Central Federal transaction.
- Review the sustainability of the $0.15 quarterly dividend and the status of the suspended share-repurchase program.
- Evaluate potential goodwill or securities impairment if economic deterioration, market-value declines, or credit losses persist.