Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended March 31, 2016, compared with March 31, 2015; balance-sheet comparisons are to June 30, 2015. The provided request metadata states “2015 Q3,” but the filing clearly covers fiscal 2016 third quarter. Southern Missouri Bancorp owns Southern Bank, which operated 32 full-service and three limited-service branches at March 31, 2016.
Financial condition and key metrics
| Metric | Three months ended March 31, 2016 | Three months ended March 31, 2015 | Nine months ended March 31, 2016 | Nine months ended March 31, 2015 |
|---|---|---|---|---|
| Total interest income | $13.849 million | $13.909 million | $42.055 million | $41.484 million |
| Net interest income | $11.508 million | $11.697 million | $35.112 million | $34.988 million |
| Provision for loan losses | $563 thousand | $837 thousand | $1.677 million | $2.526 million |
| Noninterest income | $2.178 million | $2.094 million | $7.171 million | $6.261 million |
| Noninterest expense | $8.257 million | $8.091 million | $24.410 million | $24.282 million |
| Net income | $3.322 million | $3.366 million | $11.166 million | $10.103 million |
| Net income available to common shareholders | $3.322 million | $3.316 million | $11.081 million | $9.953 million |
| Diluted earnings per share | $0.45 | $0.44 | $1.49 | $1.33 |
- Balance sheet: Total assets were $1.344 billion, up 3.4% from June 30, 2015. Net loans were $1.095 billion, up 4.0%, while deposits were $1.122 billion, up 6.3%.
- Liquidity and funding: Cash and cash equivalents were $17.545 million; available-for-sale securities were $128.735 million. FHLB advances were $48.647 million, down 24.9%, while repurchase agreements were $31.575 million, up 15.5%.
- Capital: Stockholders’ equity was $122.247 million, down 7.8%, primarily because the company redeemed $20.0 million of SBLF preferred stock in October 2015. Southern Bank remained categorized as well capitalized. Its March 31, 2016 capital ratios included 11.79% total risk-based capital, 10.56% Tier 1 risk-based capital, 10.56% CET1 capital and 9.45% Tier 1 leverage.
- Margins and returns: Net interest margin was 3.72% for the quarter and 3.83% year to date, compared with 3.89% and 3.95%, respectively. Return on average assets was 0.99% for the quarter and 1.13% year to date; return on average common equity was 11.0% and 12.5%, respectively.
- Cash flow: Operating activities provided $12.925 million during the first nine months. Investing activities used $45.504 million, primarily due to $41.210 million of net loan growth and $8.749 million of premises and equipment purchases. Financing activities provided $33.349 million. Cash increased $770 thousand to $17.545 million.
Material changes versus comparable periods
- Year-to-date net income increased 10.5%, and net income available to common shareholders increased 11.3%. Quarterly net income declined 1.3%, while quarterly earnings available to common shareholders increased 0.2% because no preferred dividend was paid in the current quarter.
- Year-to-date net interest income increased only 0.4%, despite loan growth, as lower asset yields and reduced purchase-accounting accretion offset volume benefits. The core net interest margin, excluding Peoples Acquisition accretion and deposit premium amortization, was 3.69%, compared with 3.76%.
- The provision for loan losses declined 33.6% year to date, reflecting slower loan growth and generally stable credit quality. The allowance increased to $13.693 million from $12.298 million at June 30, 2015.
- Year-to-date noninterest income increased 14.5%, including nonrecurring benefits of approximately $323 thousand from bank-owned life insurance and $301 thousand related to the company’s investment in Ozarks Trust and Investment Corporation.
- Year-to-date noninterest expense increased 0.5%. The prior-year period included approximately $508 thousand of merger-related charges that did not recur.
- Nonaccrual loans increased to $4.890 million from $3.757 million at June 30, 2015, while total nonperforming assets were broadly unchanged at $8.294 million versus $8.306 million.
- The company redeemed all $20.0 million of SBLF preferred stock, reducing equity but eliminating future preferred dividends. Common dividends increased to $0.09 per share in the quarter from $0.085.
Outlook, risks and unusual items
- Management expects continued asset growth through loan originations and investment purchases, funded primarily by retail deposits, brokered funding and FHLB borrowings. Management also expects to continue exploring strategic expansion opportunities.
- Management identified a flattening yield curve, low reinvestment yields and rising funding costs as pressures on net interest income. Purchase-accounting accretion from the Peoples acquisition is expected to decline as acquired loans pay down.
- Interest-rate sensitivity modeling estimated that a 300-basis-point increase in rates would reduce net portfolio value by 15%, while a 300-basis-point decrease would increase it by 19%. These estimates depend on assumptions regarding repricing, repayments, deposit runoff and other behavior.
- At March 31, 2016, outstanding loan commitments and approvals totaled approximately $175.0 million, including $108.6 million of unused lines of credit. Management stated that existing liquidity and borrowing capacity should be sufficient to meet funding needs.
- Credit risk remains concentrated in real estate lending. Adversely classified loans were $12.9 million, or 1.16% of total loans. Management noted that future losses could exceed estimates and that regulators may require additional provisions or asset write-downs.
- The available-for-sale portfolio included pooled trust preferred securities with approximately $730 thousand of unrealized losses. Management did not classify these losses as other-than-temporary impairment but acknowledged that future impairment losses remain possible.
- The filing reports no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2016.
Investor verification points
- Reconcile reported earnings growth with the contribution and expected runoff of Peoples Acquisition purchase-accounting accretion.
- Monitor the net interest margin, deposit pricing, loan yields and the effect of further yield-curve changes.
- Review trends in nonaccrual loans, past-due loans, classified loans, troubled debt restructurings and the allowance for loan losses.
- Assess the sustainability of noninterest income, particularly the bank-owned life insurance and investment-related items identified as nonrecurring.
- Evaluate liquidity against the $175.0 million of loan commitments and the company’s reliance on deposits, FHLB advances and repurchase agreements.
- Confirm regulatory capital ratios after the preferred-stock redemption and assess the effect of the phased-in capital conservation buffer.
- Review the valuation and cash-flow assumptions supporting the pooled trust preferred securities and other Level 3 assets.