Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Southern Missouri Bancorp, Inc. is the parent of Southern Bank, which provides banking and financial services through 37 full-service and three limited-service branches. The filing covers the three months ended September 30, 2017, the first quarter of fiscal 2018; the source metadata labels this as 2017 Q1. Financial statements are unaudited and should be read with the fiscal 2017 Form 10-K.
Key Financial Metrics
| Metric | September 30, 2017 / Quarter | Comparable Period or June 30, 2017 |
|---|---|---|
| Total assets | $1.763 billion | $1.708 billion at June 30, 2017 |
| Loans, net | $1.450 billion | $1.398 billion at June 30, 2017 |
| Deposits | $1.472 billion | $1.456 billion at June 30, 2017 |
| Stockholders' equity | $177.0 million | $173.1 million at June 30, 2017 |
| Net interest income | $15.1 million | $12.6 million in Q1 fiscal 2017 |
| Net income | $4.862 million | $3.709 million in Q1 fiscal 2017 |
| Diluted earnings per share | $0.56 | $0.50 in Q1 fiscal 2017 |
| Net interest margin | 3.79% | 3.81% in Q1 fiscal 2017 |
| Return on average assets | 1.12% | 1.03% in Q1 fiscal 2017 |
| Return on average common equity | 11.1% | 11.6% in Q1 fiscal 2017 |
| Allowance for loan losses | $16.4 million | $15.5 million at June 30, 2017 |
| Nonperforming assets | $6.0 million | $6.3 million at June 30, 2017; $8.3 million in Q1 fiscal 2017 |
| Cash and cash equivalents | $25.1 million | $30.8 million at June 30, 2017 |
Net interest income increased 20.1% year over year, driven primarily by a 20.5% increase in average interest-earning assets and loan growth. Total interest income increased 21.9% to $18.4 million, while interest expense increased 30.8% to $3.3 million as funding costs rose. Noninterest income increased 27.0% to $3.3 million. Noninterest expense increased 17.4% to $10.8 million, and the efficiency ratio improved to 58.5% from 60.5%.
Provision for loan losses was $868,000, compared with $925,000 in the prior-year quarter. Net charge-offs were $49,000, or approximately 0.01% annualized of average loans. The allowance was approximately 1.1% of gross loans, although comparisons are affected by purchased credit-impaired loans.
Net cash provided by operating activities was $4.5 million. Investing activities used $62.9 million, primarily because of a $52.8 million net increase in loans. Financing activities provided $52.7 million, including $41.1 million of net FHLB advance funding and a $16.1 million increase in deposits. Cash declined by $5.7 million during the quarter.
Material Changes Versus Comparable Periods
- Net income increased $1.2 million, or 31.1%, to $4.9 million.
- Loans, net of the allowance, increased $51.8 million, or 3.7%, from June 30, 2017. Growth was concentrated in commercial real estate, commercial operating, and residential lending.
- Deposits increased $16.1 million, or 1.1%; public unit deposits increased $15.5 million, while brokered certificates of deposit declined $25.6 million.
- FHLB advances increased $41.0 million, or 94.0%, to $84.7 million, funding loan growth and allowing some brokered certificates to mature.
- The net interest margin declined two basis points year over year because the higher cost of funds more than offset higher loan yields.
- Nonaccrual loans declined to $2.3 million from $2.8 million at June 30, 2017 and $5.0 million a year earlier.
- Adversely classified loans declined to $12.2 million, or 0.83% of total loans, from $13.3 million, or 0.94%, at June 30, 2017.
Guidance, Outlook, Risks, and Unusual Items
Management expects continued asset growth through loan originations, occasional loan purchases, and investment securities purchases. Expected funding sources include retail deposits, brokered funding, and short- and long-term FHLB borrowings. Management described recent measured increases in market interest rates as generally favorable but noted that a flatter yield curve or higher short-term funding costs could pressure net interest income.
The Company agreed to acquire Southern Missouri Bancshares, Inc. and Southern Missouri Bank of Marshfield in a stock-and-cash transaction valued at approximately $15.1 million. The transaction was expected to close in the first quarter of calendar 2018, subject to shareholder and regulatory approvals. The target had approximately $91.6 million of assets, $69.1 million of net loans, and $73.6 million of deposits at June 30, 2017. The Company incurred $75,000 of third-party acquisition costs through September 30, 2017, including $50,000 recognized in the quarter; management also reported $222,000 of total merger and acquisition expenses in the quarter.
Key risks include credit losses, commercial and residential real estate exposure, agricultural conditions, interest-rate and liquidity risk, dependence on FHLB and brokered funding, regulatory changes, potential acquisition integration issues, changes in collateral values, and estimates underlying the allowance for loan losses and purchased credit-impaired loans. The securities portfolio included three pooled trust preferred securities with an aggregate fair value of $874,000 and unrealized losses of $536,000; management concluded the losses were not other-than-temporary based on expected cash flows.
At September 30, 2017, the Bank was categorized as well capitalized. Its total risk-based capital ratio was 12.09%, Tier 1 risk-based capital ratio was 10.97%, common equity Tier 1 ratio was 10.97%, and Tier 1 leverage ratio was 9.95%. The Company stated that disclosure controls and procedures were effective and that there were no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the closing, consideration, accounting treatment, and integration results of the Southern Missouri Bancshares acquisition.
- Monitor whether rapid loan growth, particularly in commercial real estate and commercial lending, changes asset-quality trends or required loan-loss provisions.
- Assess the effect of rising deposit and wholesale funding costs on the 3.79% net interest margin.
- Review liquidity dependence on FHLB advances, brokered deposits, and available borrowing capacity relative to the $254.8 million of outstanding loan commitments and approvals.
- Evaluate the collectability and valuation of purchased credit-impaired loans and the three pooled trust preferred securities with extended unrealized losses.
- Review future adoption effects of the expected-credit-loss standard, ASU 2016-13; management stated that the impact could not yet be reasonably estimated.
- Consider the filing's forward-looking statements and the stated limitations of interest-rate sensitivity estimates, which assume instantaneous rate changes and may not reflect management actions or actual customer behavior.