Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six-month period ended December 31, 2013. The filing is unaudited and covers Southern Missouri Bancorp and its wholly owned banking subsidiary, Southern Bank. The company operates community banking businesses in Missouri and Arkansas through its home office and 21 full-service branches.
Financial condition and results
| Metric | Three months ended Dec. 31, 2013 | Six months ended Dec. 31, 2013 | Comparable prior period |
|---|---|---|---|
| Total interest income | $10.2 million | $19.4 million | $9.2 million / $18.6 million |
| Net interest income | $8.3 million | $15.7 million | $7.3 million / $14.8 million |
| Provision for loan losses | $295,000 | $794,000 | $462,000 / $1.1 million |
| Net income | $2.5 million | $5.1 million | $2.5 million / $5.1 million |
| Net income available to common shareholders | $2.5 million | $5.0 million | $2.4 million / $4.8 million |
| Diluted earnings per share | $0.73 | $1.47 | $0.72 / $1.43 |
| Net interest margin | 3.83% | 3.86% | 4.17% / 4.23% |
| Return on average assets | 1.09% | 1.18% | 1.32% / 1.36% |
| Noninterest income | $1.7 million | $2.9 million | $1.1 million / $2.2 million |
| Noninterest expense | $6.2 million | $10.8 million | $4.4 million / $8.6 million |
- Total assets were $950.2 million at December 31, 2013, up 19.3% from June 30, 2013.
- Net loans were $748.7 million, up 15.7%; available-for-sale securities were $113.3 million, up 41.6%.
- Deposits were $729.8 million, up 15.4%. FHLB advances increased to $80.9 million from $24.5 million.
- Cash and cash equivalents were $19.9 million, compared with $12.8 million at June 30, 2013.
- Stockholders’ equity was $105.0 million, compared with $101.8 million at June 30, 2013.
- Allowance for loan losses was $9.1 million, compared with $8.4 million at June 30, 2013. Net charge-offs were $95,000 for the six-month period.
- Nonperforming assets were $4.8 million, including $1.6 million of nonaccrual loans, $125,000 of nonperforming investments and approximately $3.1 million of foreclosed or repossessed assets.
Cash flow, liquidity, debt and capital
- Six-month operating cash flow was $4.8 million. Investing activities used $74.0 million, primarily for net loan growth, securities purchases, tax-credit investments and the Bank of Thayer acquisition. Financing activities provided $76.3 million, primarily through deposit growth and $55.3 million of net FHLB borrowings.
- Outstanding commitments to extend credit were $111.9 million, including $79.6 million of unused lines of credit.
- The Bank had approximately $234 million of available FHLB borrowing capacity secured by pledged loans, of which approximately $80.8 million was drawn. It also had access to approximately $67.8 million of Federal Reserve discount-window borrowing based on pledged agricultural loans.
- Management stated that liquid resources were sufficient to meet expected liquidity needs.
- As of December 31, 2013, Southern Bank was categorized as well capitalized. Its total risk-based capital ratio was 14.78%, Tier 1 risk-based capital ratio was 13.53%, and Tier 1 leverage ratio was 10.50%.
Material changes versus the prior comparable period
- Six-month net interest income increased 6.5%, and noninterest income increased 35.3%, but noninterest expense increased 25.8%.
- Net income was essentially unchanged year over year because higher interest and noninterest income and lower credit-loss provisions and taxes were largely offset by higher operating expenses.
- Net interest margin declined 37 basis points to 3.86%. Core margin, excluding acquisition-related fair-value accretion, declined to 3.77% from 3.98%, primarily due to lower market yields.
- The October 4, 2013 acquisition of Ozarks Legacy Community Financial and Bank of Thayer contributed approximately $74.9 million of asset growth, including $39.4 million of loans, $34.3 million of securities and $68.2 million of deposits.
- Acquisition-related and merger-related costs contributed to higher legal and professional expenses and totaled $745,000 for the six-month period.
- Accumulated other comprehensive loss increased to $1.0 million, principally because rising market interest rates reduced the fair value of available-for-sale securities.
- Preferred-stock dividends declined to $100,000 for the six-month period from $245,000, benefiting earnings available to common shareholders. The SBLF preferred dividend rate was 1% for the quarter.
Outlook, commentary, risks and unusual items
- Management expects modest future asset growth funded primarily by retail deposits, FHLB borrowings and, as needed, brokered certificates of deposit. It also expects operating expenses to rise with expansion, compensation and inflation.
- The company entered into an agreement to acquire Citizens State Bankshares of Bald Knob, Inc. in an all-cash transaction valued at approximately $5.9 million. Closing was anticipated in February 2014. At December 31, 2013, Citizens reported assets of $70.2 million, net loans of $11.6 million and deposits of $62.3 million.
- Management expects the benefit from accretion of acquired-loan discounts to continue declining as the acquired portfolio pays down.
- Key risks include interest-rate changes, compression of the net interest margin, credit losses, real-estate values, local economic conditions, funding access, regulatory actions, technology risks and the ability to realize acquisition synergies.
- The company held pooled trust-preferred securities with approximately $1.0 million of unrealized losses in securities that had been impaired for more than 12 months. Management concluded that no additional other-than-temporary impairment was required, but acknowledged that future impairment losses remain possible. Certain securities were receiving payment-in-kind interest, increasing their credit risk.
- The company identified no material pending litigation and reported effective disclosure controls as of December 31, 2013.
Important facts for investors to verify
- Whether the Citizens State Bank acquisition closed as anticipated and the final purchase accounting, funding and integration costs.
- The sustainability of loan and deposit growth after separating organic growth from Bank of Thayer acquisition effects.
- Whether lower loan and securities yields continue to pressure the net interest margin.
- The adequacy of the $9.1 million allowance for loan losses as the loan portfolio expands, particularly in commercial real estate and commercial lending.
- The performance, cash distributions and potential impairment exposure of pooled trust-preferred securities.
- The effect of increased FHLB borrowings and future funding needs on liquidity, interest expense and capital ratios.
- Whether acquisition-related expenses and the efficiency ratio improve after integration; the six-month efficiency ratio was 58.2%, compared with 50.7% in the prior-year period.