Business Context and Reporting Period
Southern Missouri Bancorp, Inc. is the holding company for Southern Bank, which provides banking and financial services through 17 full-service branches in Missouri and Arkansas. The filing is a Form 10-Q for the fiscal quarter ended December 31, 2012, covering the three and six months ended December 31, 2012. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three months ended December 31, 2012 | Six months ended December 31, 2012 |
|---|---|---|
| Total interest income | $9.2 million | $18.6 million |
| Net interest income | $7.3 million | $14.8 million |
| Net interest margin | 4.17% | 4.23% |
| Provision for loan losses | $462,000 | $1.1 million |
| Noninterest income | $1.1 million | $2.2 million |
| Noninterest expense | $4.4 million | $8.6 million |
| Net income | $2.5 million | $5.1 million |
| Net income available to common shareholders | $2.4 million | $4.8 million |
| Diluted earnings per share | $0.72 | $1.43 |
| Return on average assets | 1.32% | 1.36% |
| Return on average common equity | 12.47% | 12.55% |
At December 31, 2012, total assets were $770.2 million, net loans were $619.4 million, available-for-sale securities were $77.7 million, and stockholders’ equity was $98.9 million. Deposits totaled $606.4 million. Debt and other funding included $30.9 million of repurchase agreements, $24.5 million of FHLB advances, and $7.2 million of subordinated debt.
Operating cash flow for the six months was $4.1 million. Investing activities used $46.9 million, primarily because of a $40.1 million increase in loans and $21.4 million of securities purchases. Financing activities provided $25.7 million, mainly from deposit growth and repurchase agreements. Cash and cash equivalents declined from $33.4 million at June 30, 2012 to $16.3 million at December 31, 2012.
The allowance for loan losses was $7.9 million, compared with $7.5 million at June 30, 2012. Nonperforming assets totaled $5.8 million, including $2.2 million of nonperforming loans, $125,000 of nonperforming investments, and $3.5 million of foreclosed and repossessed assets. The Bank was reported as well capitalized, with a total risk-based capital ratio of 14.99% and a Tier 1 leverage ratio of 10.87% at December 31, 2012.
Material Changes Versus Comparable Periods
- Six-month net income declined 8.2% to $5.1 million, while net income available to common shareholders declined 6.7% to $4.8 million.
- Six-month diluted EPS fell to $1.43 from $2.12, primarily reflecting lower earnings and the larger share count following the November 2011 common stock offering.
- Net interest income was broadly stable, decreasing 0.3% for the six-month period. The reported net interest margin declined to 4.23% from 4.27%; however, the core margin excluding acquisition-related fair-value accretion increased to 3.98% from 3.64%.
- Acquisition-related loan discount accretion and assumed deposit premium amortization contributed $895,000 to net interest income in the first six months, down from $2.2 million in the prior-year period. Management expects this benefit to continue declining as acquired loans pay down.
- Noninterest income increased 8.1% for the six-month period to $2.2 million, driven by deposit fees, bank-card activity, bank-owned life insurance earnings, and loan-sale gains.
- Noninterest expense increased 11.9% to $8.6 million, driven mainly by compensation, occupancy, foreclosed-property costs, and other operating expenses. The efficiency ratio deteriorated to 50.7% from 45.6%.
- Loans grew 6.2% from June 30, 2012, led by residential and commercial real estate lending. Deposits increased 3.7%, while cash and cash equivalents fell 51.2%.
- Net charge-offs increased to $644,600 for the six months from $254,000 in the prior-year period, and provision expense increased 24.4%.
- Nonperforming assets increased to $5.8 million from $4.0 million at June 30, 2012, primarily due to one credit relationship that moved from classified status to nonaccrual and then to foreclosed real estate.
Guidance, Outlook, Risks, and Unusual Items
- Management expects modest asset growth through loan originations, occasional loan purchases, and investment-security purchases, funded primarily by retail deposits, FHLB borrowings, and, if needed, brokered certificates of deposit.
- Management stated that available liquidity should be sufficient. The Company had approximately $96.5 million of outstanding loan commitments and approvals. FHLB collateral supported approximately $197.6 million of available credit, with approximately $31 million advanced; Federal Reserve collateral supported access to approximately $61.1 million of primary credit borrowings.
- Primary risks include interest-rate fluctuations, credit losses, real estate values, local economic conditions, deposit and loan demand, funding access, regulatory changes, and the adequacy of the allowance for loan losses.
- The securities portfolio included pooled trust preferred securities with approximately $1.2 million of unrealized losses. Two securities were receiving principal-in-kind interest and were expected to remain in that status for four to five years. Management did not classify the securities as other-than-temporarily impaired but warned that future impairment charges remain possible.
- At December 31, 2012, the Company had $4.7 million of troubled debt restructurings, including $1.2 million classified as nonperforming. Construction-loan maturity extensions were described as unrelated to borrower financial difficulty and were not treated as TDRs.
- The Company retained $20 million of SBLF preferred stock. The dividend rate for the quarter ended December 31, 2012 was 1%, subject to the program’s lending-based terms, and the rate increases to 9% after four and one-half years from issuance.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It also reported no material pending legal proceedings and no material changes to the risk factors in the prior Form 10-K.
Important Facts for Investors to Verify
- Confirm the sustainability of loan growth and whether the higher commercial real estate exposure produces additional credit losses.
- Monitor nonperforming assets, TDRs, charge-offs, foreclosed real estate, and the allowance for loan losses as a percentage of loans.
- Assess earnings without the declining acquisition-related fair-value accretion benefit.
- Evaluate whether elevated compensation, occupancy, and foreclosed-property costs improve relative to revenue growth.
- Review liquidity after the decline in cash balances and the funding requirements associated with approximately $96.5 million of loan commitments.
- Track the valuation and cash flows of pooled trust preferred securities, including securities in principal-in-kind status and the potential for future OTTI charges.
- Reconcile the filing’s MD&A narrative with the financial statements where descriptions appear inconsistent, particularly the discussion of six-month noninterest income and the cash-flow statement heading.