Southern Missouri Bancorp, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019. The provided filing is not a 2018 fourth-quarter report; it is the Company’s fiscal 2019 annual report. Southern Missouri Bancorp is the parent of Southern Bank, a Missouri-chartered, federally insured community bank operating primarily in Missouri, Arkansas and Illinois.
Business Context
The Bank funds loans primarily through retail deposits, supplemented by Federal Home Loan Bank advances, brokered deposits and repurchase agreements. Its portfolio emphasizes commercial real estate, agricultural lending, commercial business loans, residential real estate, construction and consumer lending. At June 30, 2019, the Bank operated 44 full-service and two limited-service branches.
The Company completed the acquisition of Gideon Bancshares Company and First Commercial Bank on November 21, 2018. Gideon contributed approximately $217 million of assets, $144 million of loans and $171 million of deposits at closing. The acquisition generated approximately $1.0 million of goodwill and $4.1 million of core deposit intangible assets.
Financial Performance and Position
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Total assets | $2.214 billion | $1.886 billion | Up 17.4% |
| Net loans receivable | $1.846 billion | $1.563 billion | Up 18.1% |
| Deposits | $1.894 billion | $1.580 billion | Up 19.9% |
| Stockholders’ equity | $238.4 million | $200.7 million | Up 18.8% |
| Net interest income | $72.8 million | $62.4 million | Up 16.7% |
| Net income | $28.9 million | $20.9 million | Up 38.1% |
| Basic earnings per share | $3.14 | $2.40 | Up 30.8% |
| Net interest margin | 3.78% | 3.78% | Flat |
| Return on assets | 1.38% | 1.17% | Improved |
| Return on average common equity | 13.13% | 11.30% | Improved |
Interest income rose 26.3% to $97.5 million, driven by larger average earning-asset balances and higher yields. Interest expense increased 67.0% to $24.7 million as deposit and borrowing costs rose. The average yield on interest-earning assets increased from 4.67% to 5.06%, while the average cost of interest-bearing liabilities increased from 1.05% to 1.50%.
Noninterest income increased 9.4% to $15.2 million. Noninterest expense increased 12.4% to $50.0 million, reflecting acquisition-related operations, compensation, occupancy, card-network costs, deposit insurance premiums and intangible amortization. Fiscal 2019 included $829,000 of merger-related charges and a $346,000 nonrecurring BOLI-related benefit.
The provision for loan losses declined 33.3% to $2.0 million. Net charge-offs were $343,000, or 0.02% of average loans. The allowance for loan losses increased to $19.9 million, but declined to 1.07% of gross loans from 1.15%, primarily because acquired loans were recorded at fair value under purchase accounting.
Cash Flow, Liquidity and Debt
- Net cash provided by operating activities was $38.6 million, compared with $30.6 million in fiscal 2018.
- Investing activities used $113.0 million, primarily from a $139.1 million net increase in loans and $7.7 million of capital expenditures, partly offset by securities sales and maturities.
- Financing activities provided $83.5 million, principally from deposit growth and net certificate-of-deposit inflows.
- Cash and cash equivalents increased to $35.4 million from $26.3 million.
- FHLB advances totaled $44.9 million, down from $76.7 million; securities sold under repurchase agreements totaled $4.4 million.
- The Company had $15.0 million of subordinated debt principal outstanding in carrying value and a $3.0 million note payable. Aggregate junior subordinated debt securities had principal of approximately $16.8 million.
- FHLB borrowing capacity was approximately $320.1 million based on pledged collateral, and Federal Reserve discount-window availability was approximately $181.7 million; neither facility was fully utilized.
- Outstanding commitments to extend credit totaled $317.4 million, including $224.6 million of unused lines of credit, and standby letters of credit totaled $2.6 million.
Management stated that existing funding sources and liquid resources are expected to meet foreseeable liquidity needs. The average loan-to-deposit ratio was 97.6% in the fourth quarter of fiscal 2019.
Material Changes Versus the Prior Comparable Period
- The Gideon acquisition materially increased assets, loans, deposits, branches and operating expenses and contributed $4.1 million of revenue and $565,000 of earnings from closing through June 30, 2019.
- Loan growth was concentrated in commercial real estate, commercial business and residential real estate. Commercial real estate loans increased to $840.8 million from $704.6 million, and commercial business loans increased to $355.9 million from $281.3 million.
- Deposits increased by $313.8 million, including substantial growth in certificates of deposit and money market accounts. Brokered certificates increased to $44.9 million from $13.6 million.
- Nonperforming assets increased to $24.8 million, or 1.12% of total assets, from $13.1 million, or 0.69%. Management attributed much of the increase to nonperforming loans acquired from Gideon.
- Nonaccrual loans increased to $21.0 million from $9.2 million. Troubled debt restructurings increased to $19.0 million from $13.0 million, with $5.8 million classified as nonperforming.
- Adversely classified assets increased to $32.0 million, or 1.45% of total assets, from $18.2 million, or 0.96%.
- Available-for-sale securities increased 13.1% to $165.5 million, while mortgage-backed securities increased to $110.4 million from $90.2 million.
- The effective tax rate declined to 19.6% from 27.2%, primarily reflecting the full fiscal-year impact of the Tax Cuts and Jobs Act’s lower federal corporate tax rate. Fiscal 2018 included a one-time tax expense of approximately $998,000 related to deferred-tax-asset remeasurement.
- Accumulated other comprehensive income improved to $1.2 million from a $2.3 million loss, primarily due to improved available-for-sale securities valuations.
Outlook, Risks and Unusual Items
Management expects fair-value discount accretion from earlier acquisitions to decline in fiscal 2020, although a full year of Gideon-related accretion is expected to partially offset that reduction. Management expects to continue emphasizing commercial real estate, agricultural real estate, commercial business and consumer lending, while acknowledging that prior acquisition-driven growth rates may not be sustainable.
- Credit concentration: Commercial real estate and commercial business loans represented approximately 64.8% of net loans. Agricultural real estate loans totaled $182.7 million, and agricultural production and equipment loans totaled $95.5 million.
- Interest-rate risk: A modeled 300-basis-point increase in rates reduced estimated net portfolio value by 20%, while a 300-basis-point decrease increased it by 21%. Actual results may differ materially from the model.
- Asset quality: Rising nonperforming assets, classified loans and acquired credit-impaired loans could require higher provisions or charge-offs. Management’s allowance estimate depends on collateral values, borrower cash flows and economic conditions.
- CECL adoption: The current expected credit loss standard is expected to apply beginning July 1, 2020. The Company could not yet determine the amount of the initial adjustment to the allowance, retained earnings or regulatory capital.
- Liquidity and funding: The Company relies heavily on deposits, including certificates of deposit, and uses brokered funding and FHLB advances. Deposit pricing and retention may be affected by competition and interest rates.
- Acquisition and integration risk: Expected synergies may not be realized, and acquired assets may produce additional credit losses or integration costs.
- Regulatory and operational risk: The Company is subject to extensive banking regulation, cybersecurity and third-party vendor risks, changing capital requirements and potential regulatory examinations.
- Capital and dividends: The Bank and Company were categorized as well capitalized. However, dividends from the Bank are subject to regulatory and capital restrictions, and the Company’s junior subordinated debt agreements may restrict common dividends if interest payments are deferred or defaults occur.
- The filing reports no material pending legal proceedings and no goodwill impairment as of June 30, 2019. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the increase in nonperforming assets, classified loans and troubled debt restructurings remains primarily acquisition-related or reflects deterioration in the legacy portfolio.
- The performance, delinquency trends and collateral values of the large commercial real estate, agricultural and commercial business portfolios.
- The expected CECL adoption impact on the allowance for credit losses, retained earnings and regulatory capital.
- The sustainability of deposit growth, brokered funding levels, certificate-of-deposit pricing and the nearly 98% loan-to-deposit ratio.
- The durability of the 3.78% net interest margin as deposit and borrowing costs rise and acquisition-related accretion declines.
- The amount and timing of future acquisition, integration and intangible-amortization expenses.
- Whether the Company can maintain well-capitalized status while continuing loan growth, acquisitions, share repurchases and quarterly dividends.