Southern Missouri Bancorp, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2017. The supplied metadata references “2016 Q4,” but the filing is the fiscal 2017 Form 10-K and includes comparative fiscal 2016 and 2015 data.
Business Context
Southern Missouri Bancorp is the holding company for Southern Bank, a Missouri-chartered bank serving communities primarily in Missouri, Arkansas and, following the Capaha acquisition, Illinois. The Bank funds loans through deposits, Federal Home Loan Bank advances and other wholesale sources, and primarily originates residential, commercial real estate, agricultural, commercial business and consumer loans.
At June 30, 2017, the Company operated 39 full-service and three limited-service offices, had 352 full-time and 38 part-time employees, and reported total assets of $1.71 billion.
Financial Performance and Position
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Total assets | $1.708 billion | $1.404 billion | Up 21.6% |
| Loans receivable, net | $1.398 billion | $1.135 billion | Up 23.1% |
| Deposits | $1.456 billion | $1.121 billion | Up 29.9% |
| Stockholders’ equity | $173.1 million | $126.0 million | Up 37.4% |
| Net interest income | $51.1 million | $47.0 million | Up 8.9% |
| Net income | $15.6 million | $14.8 million | Up 4.7% |
| Net income available to common stockholders | $15.6 million | $14.8 million | Up 5.3% |
| Basic diluted EPS | $2.08 / $2.07 | $1.99 / $1.98 | Increased |
Net interest income benefited from a 10.5% increase in average interest-earning assets, partially offset by a decline in net interest margin from 3.80% to 3.74%. Interest income increased 9.2% to $61.5 million, while interest expense increased 10.7% to $10.4 million. The provision for loan losses declined 6.2% to $2.3 million.
Noninterest income increased 13.6% to $11.1 million, led by higher deposit fees, bank-card interchange income, loan servicing and origination-related income, gains on residential loan sales and BOLI earnings. Noninterest expense increased 17.0% to $38.3 million, reflecting higher compensation, occupancy, professional fees, technology and deposit-service costs, merger-related expenses and other unusual operating items.
Return on assets was 1.05%, return on average common equity was 11.70%, and the net interest margin was 3.74%. The common dividend increased to $0.40 per share from $0.36 per share.
Cash Flow, Liquidity, Debt and Capital
- Cash provided by operating activities was $25.6 million. Cash used in investing activities was $123.1 million, primarily reflecting loan growth and securities purchases. Cash provided by financing activities was $105.7 million, resulting in an $8.2 million increase in cash and cash equivalents to $30.8 million.
- FHLB advances declined to $43.6 million from $110.2 million. Securities sold under repurchase agreements declined to $10.2 million from $27.1 million.
- The Company had $14.8 million of subordinated debt and a $3.0 million note payable at June 30, 2017. It also entered into a $15.0 million revolving line of credit and had drawn $3.0 million at year-end.
- FHLB borrowing capacity backed by pledged loans was approximately $251.8 million; Federal Reserve discount-window availability was approximately $143.9 million, with no outstanding balance.
- Outstanding commitments to extend credit totaled $251.9 million, including $170.4 million of unused lines of credit. Standby letters of credit totaled $3.6 million.
- The Bank was categorized as well capitalized. Its total risk-based capital ratio was 12.15%, Tier 1 risk-based capital ratio was 11.05%, common equity Tier 1 ratio was 11.05%, and Tier 1 leverage ratio was 10.98%.
Material Changes Versus the Prior Comparable Period
- The June 16, 2017 acquisition of Tammcorp, Inc. and Capaha Bank added approximately $152.2 million of loans, $166.8 million of deposits, $9.1 million of investment securities and $4.1 million of goodwill. The transaction was funded with cash and common stock and materially contributed to balance-sheet growth.
- The Company completed a June 2017 at-the-market offering of 794,762 common shares at an average price of approximately $31.46, generating gross proceeds of approximately $25.0 million.
- Loan originations increased to $494.9 million from $425.9 million. Gross loans increased to $1.464 billion, with commercial real estate representing 43.2% of the portfolio and commercial business loans representing 17.7%.
- Deposits increased by $334.9 million, with notable growth in noninterest-bearing accounts, transaction accounts and certificates of deposit. Certificates of deposit in excess of $100,000 increased to $342.5 million.
- Credit quality improved overall: nonperforming assets declined to $6.3 million, or 0.37% of total assets, from $9.0 million, or 0.64%. Net charge-offs declined to $593,000 from $1.0 million.
- The allowance for loan losses increased to $15.5 million, although it declined to 1.10% of gross loans from 1.20%, partly because acquired loans were initially recorded at fair value without a conventional allowance.
- The net interest margin declined by six basis points, while noninterest expense grew faster than revenue. Fiscal 2017 included $685,000 of Capaha-related acquisition expenses according to Note 16, while MD&A separately describes $710,000 of merger-related charges; this difference should be reconciled to the financial statements.
Outlook, Risks and Unusual Items
Management expects current funding sources to meet foreseeable liquidity needs and intends to continue lending across residential, commercial real estate, agricultural, commercial business and consumer categories. Management expects continued agricultural and commercial real estate lending, but does not expect the unusually high recent agricultural growth rate to continue.
The Company’s principal risks include concentration in commercial real estate, construction, agricultural real estate and commercial business lending; interest-rate and margin pressure; deposit competition and liquidity risk; reliance on acquisitions for growth; integration and goodwill impairment risk; regulatory changes; and exposure to local economic, agricultural and real estate conditions.
Commercial real estate concentration exceeded the 300% supervisory threshold for non-owner-occupied commercial real estate relative to regulatory capital during much of fiscal 2017, reaching 303% at December 31, 2016, before declining to 271% at June 30, 2017. Management may slow growth in this category or incur additional risk-management expense.
The allowance for credit losses on off-balance-sheet exposures increased to $1.1 million from $745,000. The Company also held pooled trust preferred securities with an estimated fair value of $1.2 million, including securities with significant unrealized losses. Management concluded that no additional other-than-temporary impairment was required, but future impairment remains possible.
On August 17, 2017, the Company announced an agreement to acquire Southern Missouri Bancshares, Inc. and Southern Missouri Bank of Marshfield for approximately $15.1 million in cash and stock. The transaction, involving a target with approximately $91.6 million of assets, $69.1 million of net loans and $73.6 million of deposits, was expected to close in the first quarter of calendar 2018, subject to regulatory and shareholder approvals.
Important Facts for Investors to Verify
- Reconcile the reported Capaha acquisition-related expense of $685,000 in Note 16 with the $710,000 merger-related charge described in MD&A.
- Assess the sustainability of loan and deposit growth after separating acquisition-related balances from organic growth.
- Monitor commercial real estate, agricultural and construction concentrations against regulatory supervisory thresholds.
- Review the allowance methodology, purchased-credit-impaired loans and the effect of purchase accounting on reported credit-quality ratios and net interest income.
- Evaluate the sensitivity of earnings and net portfolio value to interest-rate changes; the filing estimates a 15% decline in net portfolio value under an instantaneous 300-basis-point rate increase.
- Review the maturity and repricing profile of $326.6 million of certificates of deposit and $38.1 million of FHLB advances due within one year.
- Confirm the timing, consideration, regulatory approvals and integration risks associated with the announced Marshfield acquisition.
- Confirm that the Company remains well capitalized and able to fund dividends, acquisitions and future growth without excessive dilution or leverage.