Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended March 31, 2015. The filing metadata references “2014 Q3,” but the Form 10-Q clearly reports fiscal 2015 third-quarter results and compares them with the periods ended March 31, 2014. Financial statements are unaudited and presented in thousands, except per-share data.
Business Context
Southern Missouri Bancorp is the parent of Southern Bank, which provides banking and financial services through offices in Missouri and Arkansas. The August 5, 2014 acquisition of Peoples Service Company and Peoples Bank of the Ozarks materially increased the Company's assets, loans, deposits, branches and operating expenses. Peoples was merged into Southern Bank in December 2014.
Key Financial Metrics
| Metric | Three months ended March 31, 2015 | Nine months ended March 31, 2015 |
|---|---|---|
| Total interest income | $13.9 million | $41.5 million |
| Net interest income | $11.7 million | $35.0 million |
| Provision for loan losses | $837,000 | $2.5 million |
| Noninterest income | $2.1 million | $6.3 million |
| Noninterest expense | $8.1 million | $24.3 million |
| Net income | $3.4 million | $10.1 million |
| Net income available to common shareholders | $3.3 million | $10.0 million |
| Diluted earnings per common share | $0.44 | $1.33 |
| Net interest margin | 3.89% | 3.95% |
| Return on average assets | 1.04% | 1.06% |
| Return on average common equity | 11.88% | 12.49% |
Balance Sheet, Funding and Liquidity
- Total assets were $1.303 billion at March 31, 2015, up 27.6% from June 30, 2014.
- Net loans were $1.050 billion, up 31.0%; loan growth was primarily attributable to the Peoples acquisition and organic growth.
- Deposits were $1.057 billion, up 34.5%, including $221.9 million of deposits acquired from Peoples.
- Available-for-sale securities were $133.6 million. Cash and cash equivalents were $20.8 million.
- FHLB advances were $65.1 million, down from $85.5 million at June 30, 2014. Securities sold under repurchase agreements were $28.0 million.
- Subordinated debt was $14.6 million, compared with $9.7 million at June 30, 2014, primarily reflecting assumed debt from the Peoples acquisition.
- Stockholders’ equity was $133.0 million, compared with $111.1 million at June 30, 2014.
- Management stated that liquid resources were sufficient for expected needs. Outstanding loan commitments and approvals were approximately $121.3 million, including $99.0 million of unused lines of credit. FHLB collateral supported approximately $347.7 million of available credit, of which $64.2 million was advanced.
Cash Flow and Capital
- For the nine months ended March 31, 2015, operating activities provided $14.4 million of cash, investing activities used $22.5 million, and financing activities provided $14.0 million.
- Cash and cash equivalents increased $5.9 million to $20.8 million.
- The Bank was categorized as well capitalized under the prompt corrective action framework. At March 31, 2015, Southern Bank reported total risk-based capital of 13.09%, Tier 1 risk-based capital of 12.03%, common equity Tier 1 capital of 12.03%, and Tier 1 leverage capital of 10.44%.
Material Changes Versus Prior Comparable Period
- Nine-month net income increased 37.9% to $10.1 million; net income available to common shareholders increased 38.7% to $10.0 million.
- Nine-month diluted EPS increased to $1.33 from $1.06, on a split-adjusted basis.
- Net interest income increased 45.0% to $35.0 million, primarily from balance-sheet growth and acquisition-related purchase-accounting accretion.
- Net interest margin increased to 3.95% from 3.82%. Excluding acquisition-related accretion and deposit premium amortization, the nine-month margin was 3.73% versus 3.75% in the prior year.
- Noninterest income increased 42.0% to $6.3 million, while noninterest expense increased 39.5% to $24.3 million.
- The provision for loan losses increased 141.1% to $2.5 million, largely reflecting loan growth and portfolio migration, although net charge-offs declined materially.
- The allowance for loan losses increased to $11.7 million from $9.3 million. Nonaccrual loans increased to $4.2 million from $1.3 million, and total nonperforming assets increased to $8.7 million from $4.4 million, primarily due to acquired assets and migration of a previously classified relationship.
- The Company completed a two-for-one common stock split on January 30, 2015. All share and per-share amounts in the filing are split-adjusted.
Outlook, Commentary, Risks and Unusual Items
- Management expects to continue modest asset growth through loan originations, occasional loan purchases and investment securities purchases, funded primarily by retail deposits, FHLB borrowings and, as needed, brokered certificates of deposit.
- Immediate management priorities include integrating the Peoples acquisition and prior acquisitions, while continuing to explore strategic expansion opportunities.
- Management noted that a flat or flattening yield curve could pressure net interest income and margins. Interest-rate risk modeling indicated that a 300-basis-point increase in rates would reduce estimated net portfolio value by 21%, while a 300-basis-point decrease would increase it by 24%; management cautioned that these are model-based estimates and not forecasts.
- Acquisition-related loan discount accretion contributed $1.9 million to net interest income during the first nine months, compared with $481,000 in the prior-year period. Management expects this benefit to decline as acquired loans pay down.
- The investment portfolio included pooled trust preferred securities with significant unrealized losses. Management did not consider the losses other-than-temporary, but acknowledged the possibility of future impairment if expected cash flows decline. One security remained in payment-in-kind status, increasing its credit risk.
- Management identified credit risk, real-estate values, interest rates, deposit and loan demand, funding access, regulatory actions, acquisition integration and economic conditions as significant risks. The filing states there were no material changes to previously disclosed risk factors.
- On May 8, 2015, the Treasury accepted the Company’s $2.7 million offer to repurchase its warrant for 231,891 common shares at an exercise price of $6.18 per share. Settlement was expected around May 13, 2015.
- No material pending legal proceedings were reported. Disclosure controls and procedures were determined to be effective as of March 31, 2015.
Important Facts for Investors to Verify
- Reconcile reported growth and earnings with the Peoples acquisition, including purchase-accounting accretion, acquisition expenses and integration costs.
- Monitor nonaccrual loans, classified loans, troubled debt restructurings, foreclosed assets and the adequacy of the $11.7 million allowance for loan losses.
- Assess the sustainability of the 3.95% reported net interest margin after acquisition-related accretion declines.
- Review exposure to commercial real estate, construction lending, fixed-rate assets and a potentially flattening yield curve.
- Evaluate liquidity capacity, including FHLB availability, deposit retention, brokered-deposit reliance and the $121.3 million of loan commitments.
- Review the valuation and future impairment risk of pooled trust preferred securities and other Level 3 assets.
- Confirm the cash impact and accounting treatment of the Treasury warrant repurchase after March 31, 2015.