Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
Southern Missouri Bancorp, Inc. is the holding company for Southern Bank, which provides banking and financial services to individuals and businesses. At September 30, 2016, the Bank operated 32 full-service and three limited-service branches. The filing covers the three months ended September 30, 2016, the first quarter of fiscal 2017, although the request metadata identifies the period as 2016 Q1. Financial statements are unaudited.
Financial condition and key metrics
| Metric | September 30, 2016 / Quarter | Comparable period or June 30, 2016 |
|---|---|---|
| Total assets | $1.470 billion | $1.404 billion at June 30, 2016 |
| Net loans receivable | $1.204 billion | $1.135 billion at June 30, 2016 |
| Deposits | $1.167 billion | $1.121 billion at June 30, 2016 |
| FHLB advances | $129.2 million | $110.2 million at June 30, 2016 |
| Stockholders’ equity | $128.8 million | $126.0 million at June 30, 2016 |
| Net interest income | $12.6 million | $11.7 million in Q1 fiscal 2016 |
| Net income | $3.7 million | $3.6 million in Q1 fiscal 2016 |
| Net income available to common shareholders | $3.7 million | $3.6 million in Q1 fiscal 2016 |
| Diluted earnings per share | $0.50 | $0.48 in Q1 fiscal 2016 |
| Net interest margin | 3.81% | 3.87% in Q1 fiscal 2016 |
| Efficiency ratio | 60.5% | 57.4% in Q1 fiscal 2016 |
| Return on average assets | 1.03% | 1.12% in Q1 fiscal 2016 |
| Return on average common equity | 11.6% | 12.6% in Q1 fiscal 2016 |
Interest income increased 8.1% to $15.1 million, while interest expense increased 11.6% to $2.5 million. Noninterest income rose 16.9% to $2.6 million, and noninterest expense increased 14.7% to $9.2 million. The provision for loan losses was $925,000, compared with $618,000 in the prior-year quarter. The effective tax rate declined to 26.8% from 31.4%, partly because of the Bank’s REIT structure.
Operating cash flow was $1.1 million, compared with $3.1 million in the prior-year quarter. Investing activities used $65.5 million, primarily because net loans increased by $67.8 million. Financing activities provided $63.4 million, including $144.2 million of FHLB borrowings and $37.9 million of net certificate-of-deposit growth, partly offset by $125.1 million of FHLB repayments. Cash and cash equivalents ended at $21.5 million.
The allowance for loan losses was $14.5 million, or approximately 1.2% of reported net loans. Nonperforming assets were $8.3 million, including $5.0 million of nonaccrual loans and $3.2 million of foreclosed real estate. The Bank was categorized as well capitalized; its September 30, 2016 total risk-based capital ratio was 11.47%, Tier 1 leverage ratio was 9.20%, and common equity Tier 1 ratio was 10.28%.
Material changes versus prior comparable period
- Net income increased 2.0%, while earnings available to common shareholders increased 3.5% because preferred dividends were eliminated following the October 2015 preferred share repurchase.
- Net interest income increased $872,000, driven primarily by 9.3% growth in average interest-earning assets, but the net interest margin declined six basis points to 3.81%.
- Loan growth was substantial: net loans increased 6.0% from June 30, 2016, primarily in commercial real estate, commercial, residential real estate, and construction loans.
- Deposits increased 4.2% from June 30, 2016, including $38.2 million of new brokered certificates of deposit used to support loan growth and repay higher-cost term FHLB advances.
- The provision for loan losses increased 49.7% year over year, and net charge-offs increased to $260,000 from $104,000.
- Noninterest expense increased partly because of a $335,000 prepayment penalty on $16.5 million of term FHLB advances. Management stated that the prepaid advances carried a weighted average rate of 3.95%, compared with 0.92% for replacement brokered funding.
- Nonperforming assets declined from $9.0 million at June 30, 2016 and $8.6 million at September 30, 2015 to $8.3 million.
Outlook, commentary, risks, and unusual items
Management expects to continue growing assets through loan originations, occasional loan purchases, and investment securities purchases. Planned funding sources include retail deposits, brokered funding, and short- and long-term FHLB borrowings. No specific earnings or revenue guidance was provided.
Management identified the low-rate environment and a flattening yield curve as pressures on net interest margin. Interest-rate sensitivity modeling estimated that net portfolio value would decline 4% under an instantaneous 100-basis-point rate increase and 12% under a 300-basis-point increase; management cautioned that these estimates depend on assumptions and are not forecasts.
Key risks include credit losses, commercial and construction lending exposure, changing real estate values, interest-rate and liquidity risk, reliance on brokered deposits and FHLB funding, regulatory examinations, economic conditions, competition, technology, and integration of acquisitions. The allowance for loan losses remains judgmental and could require additional provisions. The filing also notes $159.7 million of outstanding loan commitments and approvals, including $97.2 million of unused lines of credit.
The securities portfolio included $124.2 million of available-for-sale securities. Three pooled trust preferred securities had an estimated fair value of $702,000 and unrealized losses of approximately $740,000; one remained in payment-in-kind interest status. Management did not consider these securities other-than-temporarily impaired but acknowledged that future impairment losses remain possible.
Management reported no material pending litigation, no material changes to previously disclosed risk factors, effective disclosure controls, and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether rapid loan growth, particularly in commercial real estate, commercial, agricultural, and construction lending, leads to higher delinquencies, charge-offs, or allowance requirements.
- The sustainability of the 3.81% net interest margin as deposit and wholesale funding costs change and the yield curve evolves.
- The extent and cost of reliance on brokered certificates of deposit and FHLB advances to fund growth and liquidity needs.
- The performance and eventual recoverability of the pooled trust preferred securities, including the security receiving payment-in-kind interest.
- Whether the $159.7 million of loan commitments can be funded without materially increasing leverage or liquidity risk.
- The effect of the REIT structure, tax credits, and other tax-related items on future effective tax rates.
- The impact of future adoption of new accounting standards, especially the expected-credit-loss standard, on the allowance for loan losses and capital.