Southern Missouri Bancorp, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2012. The supplied metadata references “2011 Q4,” but the filing is an annual report for fiscal 2012; quarterly data includes the fourth quarter ended June 30, 2012.
Business Context
Southern Missouri Bancorp is the holding company for Southern Bank, a community bank operating in Missouri and Arkansas. The Bank funds primarily residential, commercial real estate, agricultural, commercial business, construction and consumer loans with retail deposits, FHLB advances, repurchase agreements and, to a lesser extent, brokered deposits. At June 30, 2012, the Bank operated 18 full-service offices and had 155 full-time and 24 part-time employees.
The loan portfolio is concentrated in the Bank’s regional markets and includes substantial commercial, agricultural and real estate exposure. Commercial real estate and commercial business loans represented approximately 57.9% of net loans.
Financial Performance and Condition
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Total assets | $739.2 million | $688.2 million | 7.4% increase |
| Net loans receivable | $583.5 million | $556.6 million | 4.8% increase |
| Deposits | $584.8 million | $560.2 million | 4.4% increase |
| Stockholders’ equity | $94.7 million | $55.7 million | 70.0% increase |
| Net interest income | $29.0 million | $23.8 million | 22.1% increase |
| Provision for loan losses | $1.8 million | $2.4 million | 25.2% decrease |
| Noninterest income | $4.1 million | $10.5 million | 61.3% decrease |
| Noninterest expense | $16.6 million | $14.5 million | 14.8% increase |
| Net income | $10.1 million | $11.5 million | 12.0% decrease |
| Net income available to common stockholders | $9.6 million | $11.0 million | 12.6% decrease |
| Diluted EPS | $3.32 | $5.12 | Decrease |
Return on average assets was 1.37%, compared with 1.81% in fiscal 2011. Return on average common equity was 15.15%, compared with 27.08%. The net interest margin improved to 4.12% from 3.92%, while the interest rate spread increased to 3.90% from 3.71%.
Fiscal 2012 fourth-quarter net income was $2.4 million, compared with $2.6 million in the fourth quarter of fiscal 2011. Fourth-quarter net interest income was $6.9 million, compared with $7.1 million.
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $8.0 million, compared with $14.5 million in fiscal 2011.
- Investing activities used $53.3 million, primarily reflecting a $29.3 million net increase in loans, $51.2 million of available-for-sale security purchases and a $7.5 million purchase of bank-owned life insurance.
- Financing activities provided $44.8 million, including $19.9 million of net proceeds from common stock issuance and $20.0 million of SBLF preferred stock proceeds, partially offset by the $9.6 million redemption of TARP preferred stock.
- Cash and cash equivalents declined slightly to $33.4 million from $33.9 million.
- FHLB advances were $24.5 million, down from $33.5 million. Repurchase agreements were $25.6 million, and subordinated debt was $7.2 million.
- The Bank reported approximately $153.4 million of additional FHLB borrowing capacity and $65.0 million of Federal Reserve discount-window availability, with no discount-window borrowings outstanding.
- Commitments to extend credit totaled $100.4 million, including $61.2 million of unused lines of credit. Standby letters of credit totaled $1.1 million.
Management stated that existing funding sources and liquid resources were expected to meet foreseeable liquidity needs. However, $158.9 million of certificates of deposit matured within one year, creating refinancing and retention exposure.
Material Changes Versus the Prior Period
- Loan growth was concentrated in commercial real estate, up $15.8 million, and commercial business loans, up $10.7 million.
- Deposits increased $24.7 million, driven by $22.0 million of noninterest-bearing deposits and $41.4 million of NOW accounts, partly offset by a $33.3 million decline in certificates of deposit.
- Noninterest income fell primarily because fiscal 2011 included a $7.0 million bargain purchase gain from the FDIC-assisted First Southern Bank acquisition.
- Core earnings excluding acquisition-related fair-value accretion, time-deposit premium amortization and the prior-year bargain purchase gain increased to $7.1 million from $5.5 million.
- The November 2011 common stock offering generated $19.9 million of net proceeds and contributed to the increase in equity.
- The $20.0 million SBLF preferred stock issuance replaced the $9.6 million of TARP preferred stock, which was redeemed in July 2011. The outstanding TARP warrant for 114,326 common shares remained in place.
- The allowance for loan losses increased to $7.5 million, or 1.27% of gross loans, from $6.4 million, or 1.14%.
Asset Quality, Outlook and Risks
Nonperforming assets increased to $4.0 million, or 0.54% of total assets, from $2.4 million, or 0.35%. Nonperforming loans increased to $2.4 million from $701,000. Troubled debt restructurings totaled $4.9 million, including $1.7 million classified as nonperforming. Classified assets totaled $12.2 million, or 1.65% of assets.
Net charge-offs were $731,000, compared with $455,000. Management considered the allowance adequate but stated that future additions could be required if economic, collateral or borrower conditions deteriorate.
Management expected continued emphasis on commercial real estate, commercial business and agricultural lending, while acknowledging that agricultural loan growth was unlikely to continue at its recent pace. The Company also expected acquisition-related fair-value discount accretion to decline as acquired loans mature or prepay.
Key risks include concentration in commercial real estate, agricultural and commercial business loans; construction lending; local economic and real estate weakness; loan seasoning; interest-rate and repricing risk; deposit competition and liquidity; regulatory changes; FDIC assessment costs; acquisition integration; and potential impairment of loans, securities, goodwill or deferred tax assets.
The SBLF preferred dividend rate averaged approximately 2.14% in fiscal 2012. Management disclosed that annual cost would rise to approximately $1.0 million at a 5% rate and $1.8 million at a 9% rate. The SBLF terms and the subordinated debt documents also restrict common dividends and share repurchases in specified circumstances.
The Bank was categorized as well capitalized. At June 30, 2012, its total risk-based capital ratio was 15.21%, Tier 1 risk-based capital ratio was 13.96%, and Tier 1 leverage ratio was 10.52%. Management reported effective disclosure controls and internal control over financial reporting; the independent auditor expressed an unqualified opinion on the consolidated financial statements but did not attest to internal controls because the Company qualified as a smaller reporting company.
Investor Verification Items
- Reconcile reported GAAP earnings with management’s non-GAAP core earnings and quantify the remaining contribution from acquisition-related accretion.
- Review the deterioration in nonperforming loans, TDRs, classified assets and commercial/agricultural loan concentrations.
- Assess whether the $7.5 million allowance adequately covers expected losses, particularly as the commercial loan portfolio seasons.
- Verify deposit stability and the ability to refinance or retain the $158.9 million of certificates maturing within one year.
- Model the effect of higher SBLF dividend rates and the restrictions on common dividends and share repurchases.
- Evaluate liquidity capacity, pledged collateral and availability of FHLB and Federal Reserve funding.
- Review the valuation and cash-flow assumptions for pooled trust preferred securities, including securities in payment-in-kind status and the $1.3 million of related unrealized losses.
- Consider the effect of proposed Basel III and other regulatory changes on capital requirements, dividends and future growth.