Business Context and Reporting Period
Southern Missouri Bancorp, Inc. is a Missouri bank holding company whose principal subsidiary, Southern Bank, provides deposit, lending, and related financial services. The Form 10-Q covers the three- and six-month periods ended December 31, 2016, the second quarter and first six months of fiscal 2017. The interim financial statements are unaudited.
At December 31, 2016, Southern Bank operated 32 full-service and three limited-service branches. The company reported 7,450,041 common shares outstanding as of February 8, 2017.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2016 | Comparable change |
|---|---|---|---|
| Total interest income | $15.1 million | $30.2 million | 6.0% and 7.0% higher, respectively |
| Net interest income | $12.6 million | $25.1 million | 5.7% and 6.5% higher |
| Provision for loan losses | $656,000 | $1.6 million | Up $160,000 and $467,000 |
| Noninterest income | $2.7 million | $5.3 million | Down 3.3% for the quarter; up 5.7% year to date |
| Noninterest expense | $8.7 million | $17.9 million | Up 6.6% and 10.6% |
| Net income | $4.2 million | $7.9 million | Down 0.8% and up 0.5% |
| Net income available to common shareholders | $4.2 million | $7.9 million | Down 0.0% and up 1.6% |
| Diluted earnings per share | $0.56 | $1.06 | Unchanged and up from $1.04 |
- Net interest margin was 3.71% for the quarter and 3.76% for the six months, compared with 3.88% for both comparable 2015 periods.
- Annualized return on average assets was 1.13% for the quarter and 1.08% for the six months; return on average common equity was 12.9% and 12.3%, respectively.
- Efficiency ratio was 57.0% for the quarter and 58.7% for the six months, versus 55.6% and 56.5% in the prior-year periods.
- Total assets were $1.49 billion, up 6.3% from June 30, 2016. Net loans were $1.21 billion, up 6.6%, and deposits were $1.21 billion, up 8.1%.
- Allowance for loan losses was $15.0 million, compared with $13.8 million at June 30, 2016. Net charge-offs were $380,000 for the six months.
- Cash and cash equivalents were $30.4 million, compared with $22.6 million at June 30, 2016. Available-for-sale securities were $132.1 million.
- FHLB advances were $107.5 million, securities sold under repurchase agreements were $22.5 million, and subordinated debt was $14.8 million.
- Stockholders’ equity was $130.4 million, compared with $126.0 million at June 30, 2016. Accumulated other comprehensive income declined to a loss of $638,000, primarily because of unrealized securities losses as market interest rates increased.
- Cash provided by operating activities was $9.7 million. Investing activities used $84.6 million, primarily for net loan growth of $75.7 million and securities purchases. Financing activities provided $82.7 million, primarily from deposit growth.
Material Changes Versus Prior Comparable Period
- Loan growth increased net interest income, but lower loan yields and reduced accretion from acquired-loan fair-value discounts compressed the net interest margin by 12 basis points for the six-month period.
- Average interest-earning assets increased 10.0% for the six months, while the average yield declined to 4.51% from 4.63%.
- Interest expense increased 9.5% for the six months because of higher average interest-bearing liabilities, partly offset by lower FHLB borrowing costs after early repayment of higher-cost advances.
- The company incurred approximately $335,000 of FHLB prepayment penalties during the first quarter of fiscal 2017.
- Quarterly noninterest income declined because the prior-year period included nonrecurring benefits of approximately $323,000 from bank-owned life insurance and $301,000 related to the company’s investment in Ozark Trust and Investment Corporation. Year-to-date noninterest income still increased because of higher loan fees, loan-sale gains, card interchange income, and deposit fees.
- Nonperforming assets were $9.0 million, broadly unchanged from June 30, 2016, but higher than $7.6 million at December 31, 2015. Nonaccrual loans were $5.6 million.
- Total troubled debt restructurings increased to $10.4 million from $8.4 million at June 30, 2016; $2.7 million was classified as nonperforming.
- Commercial real estate loans increased to $519.4 million from $452.1 million at June 30, while construction loans declined to $61.7 million from $77.4 million.
Guidance, Outlook, Risks, and Unusual Items
- Management expects continued asset growth through loan originations and occasional loan purchases and securities investments. Expected funding sources include retail and brokered deposits and short- and long-term FHLB borrowings.
- Management described the increase in market interest rates as favorable but noted that earnings remain sensitive to the yield curve, deposit pricing, loan yields, prepayments, and repricing behavior.
- The company expects to continue strategic expansion in markets it considers attractive. On January 11, 2017, it announced an agreement to acquire Tammcorp, Inc., the 91% owner of Capaha Bank, in a cash-and-stock transaction valued at approximately $23.4 million. Closing was expected in the second quarter of calendar 2017, subject to regulatory and shareholder approvals and other conditions. Tammcorp reported September 30, 2016 consolidated assets of $193.8 million, loans net of $157.0 million, and deposits of $165.4 million. Acquisition-related costs of $100,000 had been incurred through December 31, 2016.
- At December 31, 2016, outstanding commitments and approvals to extend credit totaled approximately $143.7 million, including $97.7 million of unused lines of credit.
- Management reported approximately $292.1 million of available FHLB credit backed by pledged loans, of which $107.2 million was advanced. Additional borrowing capacity was available through other pledged loan portfolios and the Federal Reserve discount window.
- The Bank was categorized as well capitalized. Southern Bank’s total risk-based capital ratio was 11.72%, Tier 1 risk-based capital ratio was 10.51%, common equity Tier 1 ratio was 10.51%, and Tier 1 leverage ratio was 9.18%.
- Interest-rate sensitivity modeling estimated that a 300-basis-point instantaneous increase in rates would reduce net portfolio value by 22%, while a 300-basis-point decrease would increase it by 27%. Management cautioned that these modeled results depend on assumptions and may not predict actual outcomes.
- Risks include credit losses, real estate values, interest-rate movements, access to cost-effective funding, deposit competition, regulatory actions, technology changes, and the execution and integration of acquisitions.
- Three pooled trust preferred securities had an aggregate fair value of approximately $753,000 and unrealized losses of approximately $681,000 for more than 12 months. Management concluded the securities were not other-than-temporarily impaired because it expected to collect the contracted principal and interest and did not intend to sell them.
- Management reported no material pending legal proceedings, no material changes to the Form 10-K risk factors, and effective disclosure controls as of December 31, 2016.
Important Facts for Investors to Verify
- Confirm the effect of continued loan growth and higher provisions on allowance coverage, nonperforming assets, charge-offs, and future earnings.
- Monitor net interest margin and funding costs as market rates rise and brokered deposits, certificates of deposit, and FHLB borrowings become more significant.
- Assess the terms, regulatory approvals, accounting treatment, and integration risks of the Tammcorp and Capaha Bank acquisition.
- Review the company’s exposure to commercial real estate, construction lending, and acquired credit-impaired loans.
- Evaluate liquidity against $143.7 million of outstanding loan commitments and the company’s reliance on brokered funding and FHLB advances.
- Reconcile the filing’s fiscal-period labeling with the reporting date: the filing is for the quarter ended December 31, 2016, which is fiscal 2017 second quarter, rather than calendar 2016 second quarter.