Southern Missouri Bancorp, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2013. The request metadata references “2012 Q4,” but the supplied filing is the fiscal 2013 Form 10-K, filed September 24, 2013.
Business Context
Southern Missouri Bancorp is a Missouri bank holding company whose primary subsidiary, Southern Bank, provides community banking services in southeast Missouri and northeast and north central Arkansas. The Bank funds lending primarily through retail deposits, supplemented by Federal Home Loan Bank advances, repurchase agreements and, to a lesser extent, brokered deposits. Lending is concentrated in residential real estate, commercial real estate, agricultural real estate, commercial business and consumer loans.
At June 30, 2013, the Company operated 18 full-service offices, had 159 full-time and 22 part-time employees, and reported total assets of $796.4 million, deposits of $632.4 million and stockholders’ equity of $101.8 million.
Financial Performance and Position
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total assets | $796.4 million | $739.2 million | +7.7% |
| Net loans receivable | $647.2 million | $583.5 million | +10.9% |
| Deposits | $632.4 million | $584.8 million | +8.1% |
| Stockholders’ equity | $101.8 million | $94.7 million | +7.5% |
| Net interest income | $28.8 million | $29.0 million | -0.8% |
| Net income | $10.1 million | $10.1 million | -0.3% |
| Net income available to common stockholders | $9.7 million | $9.6 million | +1.5% |
| Diluted EPS | $2.88 | $3.32 | -13.3% |
| Dividends per share | $0.60 | $0.48 | +25.0% |
Profitability: Net interest margin declined to 4.02% from 4.12%; interest rate spread declined to 3.85% from 3.90%. Return on assets was 1.32%, versus 1.37%, and return on average common equity was 12.34%, versus 15.15%. The reported effective income tax rate declined to 28.1% from 31.3%.
Cash flow: Net cash provided by operating activities was $15.3 million, compared with $7.4 million in FY2012. Investing activities used $83.3 million, principally because of a $68.7 million net increase in loans and $40.1 million of available-for-sale securities purchases. Financing activities provided $47.4 million, primarily from deposit growth and changes in certificates of deposit. Cash and cash equivalents declined to $12.8 million from $33.4 million.
Credit quality: The allowance for loan losses increased to $8.4 million, or 1.28% of gross loans, from $7.5 million, or 1.27%. Net charge-offs were $822,000, compared with $731,000. Nonperforming loans declined to $1.4 million from $2.4 million, while total nonperforming assets increased to $4.6 million from $4.0 million, primarily because real estate owned increased to $3.0 million.
Liquidity and debt: The Company had $24.5 million of FHLB advances, $27.8 million of repurchase agreements and $7.2 million of subordinated debt outstanding. FHLB borrowing capacity was approximately $188.7 million at year-end, and the Bank was approved to borrow up to $65.0 million from the Federal Reserve discount window, with no outstanding balance. Commitments to extend credit totaled approximately $97.3 million, and standby letters of credit totaled $3.5 million.
Capital: The Bank was categorized as well capitalized. At June 30, 2013, Southern Bank reported a total risk-based capital ratio of 15.10%, Tier 1 risk-based capital ratio of 13.85% and Tier 1 leverage ratio of 10.87%, compared with well-capitalized thresholds of 10.00%, 6.00% and 5.00%, respectively.
Material Changes Versus the Prior Comparable Period
- Loans grew substantially, led by residential and commercial real estate lending; commercial real estate loans increased to $242.3 million from $201.0 million.
- Loan originations increased to $250.2 million from $200.8 million.
- Deposits increased $47.6 million, with certificates of deposit rising to $272.2 million from $231.3 million.
- Interest income declined 6.9% because average yields fell, but interest expense declined 25.8% as funding costs decreased.
- Noninterest income increased 10.0% to $4.5 million, while noninterest expense increased 5.5% to $17.5 million.
- Fair-value accretion from the 2010 FDIC-assisted acquisition declined materially, contributing approximately 19 basis points to FY2013 net interest margin versus 57 basis points in FY2012. Management expects this benefit to continue declining as acquired assets mature or prepay.
- Available-for-sale securities increased to $80.0 million from $75.1 million, while accumulated other comprehensive income declined to a $179,000 loss from income of $700,000, primarily because of lower securities valuations.
- Premises and equipment increased 54.4% to $17.5 million as the Company completed or continued construction of branch facilities.
Guidance, Outlook, Risks and Unusual Items
Management expects to continue emphasizing residential, commercial real estate, agricultural and commercial business lending. It expects agricultural lending to grow, but not at the elevated pace of prior years, and expects commercial real estate and commercial business loans to remain significant portions of the portfolio. Management stated that existing funding sources should meet foreseeable liquidity needs.
On June 21, 2013, the Company agreed to acquire Ozarks Legacy Community Financial, Inc. and Bank of Thayer. The target had approximately $83.6 million of assets, $38.2 million of net loans, $69.7 million of deposits and $5.2 million of equity at June 30, 2013. The transaction was expected to close in the fourth calendar quarter of 2013 and involved approximately $6.2 million of cash consideration, assumed debt of approximately $3.7 million and $262,000 payable to minority shareholders, subject to adjustments and regulatory and shareholder approvals.
The Company participates in the Treasury’s Small Business Lending Fund. The $20.0 million preferred stock carries a dividend rate linked to qualified small-business lending and may increase to 9% after four and one-half years. The fiscal 2013 average rate was approximately 1.73%, or approximately $345,000 of annualized cost. Higher rates could reduce liquidity and funds available for common dividends.
- Credit risk is elevated by commercial real estate, commercial business, agricultural and construction lending; these categories are sensitive to local economic conditions, property values, commodity prices and borrower cash flows.
- The allowance for loan losses is based on significant management estimates and could require increases if delinquencies, charge-offs, collateral losses or regulatory findings worsen.
- The securities portfolio included pooled trust preferred securities with a fair value of $446,000 and book value of $1.6 million; several securities had deferred or payment-in-kind interest. Additional impairment losses remain possible.
- Interest-rate changes could affect net interest margin, funding costs, loan demand, prepayments and the value of available-for-sale securities. A modeled 300-basis-point rate increase reduced estimated net portfolio value by 12% at June 30, 2013.
- The Company is subject to extensive federal and state regulation, including new Basel III capital requirements expected to apply beginning in 2015. Management’s pro forma analysis indicated compliance, including the full capital conservation buffer, as of June 30, 2013.
- The filing reports no material pending legal proceedings and no unresolved SEC staff comments. Management concluded disclosure controls and internal control over financial reporting were effective; the independent auditor was not required to attest to internal controls because the Company is a smaller reporting company.
Most Important Facts for Investors to Verify
- Confirm the actual filing period and use fiscal year ended June 30, 2013 rather than the “2012 Q4” metadata.
- Assess whether rapid loan growth, particularly in commercial real estate, agricultural and commercial business lending, is producing commensurate risk-adjusted returns.
- Monitor nonperforming assets, real estate owned, troubled debt restructurings and the adequacy of the $8.4 million loan-loss allowance.
- Evaluate the effect of declining acquisition-related accretion on future net interest income and reported earnings.
- Review deposit repricing and maturities, including $161.0 million of certificates of deposit due within one year, against available liquidity and borrowing capacity.
- Verify the terms, dividend-rate reset and eventual 9% cost of the $20.0 million SBLF preferred stock, including restrictions on common dividends and repurchases.
- Track completion, financing, regulatory approvals and integration risks related to the proposed Bank of Thayer acquisition.
- Review unrealized securities losses and the potential for future other-than-temporary impairment, particularly for pooled trust preferred securities.