Southern Missouri Bancorp: book value increase of more than $4/share per year (NASDAQ: SMBC)

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introduction

I’m always interested in finding value in smaller regional banks and it’s too bad Southern Missouri Bancorp (SMBC) doesn’t get more attention here on Seeking Alpha as there has only been one article on this bank for the past 7.5 years. Given the bank’s performance in the first half of its fiscal year, I believe this regional bank deserves more attention from the investment community.

SMBC Chart

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A rather strong result in the first half bodes well for the future

Southern Missouri has seen its earnings profile improve in recent quarters as interest income increases while interest expense declines. This translates into higher net interest income and in the first half, SMBC saw its net interest income increase by more than 10% to $50.7 million.

income statement

SMBC Investor Relations

The bank reported total non-interest income of $9.8 million and non-interest expense of $29.3 million, resulting in net non-interest expense of $19.5 million. This means that the provision for pre-tax and pre-loan losses in the first half was about $31 million. Southern Missouri Bancorp was also able to write off just over $0.3 million of previously recorded loan loss provisions, boosting reported pretax profit to $31.5 million and resulting in a net income of $24.7 million, or $2.78 per share.

The second quarter was relatively weaker than the first quarter, with EPS declining from $1.43 to $1.35 due to slightly lower net interest income and no provision reversal of 0 $.3 million which was fully recorded in the first quarter of the year.

Southern Missouri pays only a nominal dividend and the $0.20 per share on a quarterly basis represents a dividend yield of just over 1.5%. That means Southern Missouri isn’t exactly a good fit for an income-focused portfolio, but it also means the dividend is extremely safe. The payout ratio in the first half was below 15%, and even in the weaker second quarter of the year the payout ratio did not exceed 15%. Low yield, but sure yield.

I like exposure to residential real estate

When I look at these regional banks, I’m always keen to see what the asset side of the balance sheet looks like. As explained in a previous article on PCB Bancorp, I don’t necessarily mind higher exposure to, say, commercial real estate as long as LTV ratios are reasonable as a local bank may have a better view of the local real estate market .

On the asset side of the balance sheet

SMBC Investor Relations

Looking at Southern Missouri’s balance sheet, of the $2.92 billion in total assets, about $400 million was in fairly safe assets with nearly $185 million in cash and over $200 million in securities that are supposed to be rather liquid. I mainly want to zoom in on the $2.36 billion loan book to see the breakdown.

Breakdown of loan portfolio

SMBC Investor Relations

I was pleasantly surprised to see that about a third of the loan portfolio consists of residential real estate and another 40% is focused on commercial real estate loans. This should not be a deterrent as the most important factor here is to see what percentage of the loan portfolio is outstanding and what percentage of the loans are past due.

Lending book quality

SMBC Investor Relations

According to footnotes to the financial statements, Southern Missouri Bancorp customers appear to be making their payments on time. Of the total loan portfolio size of nearly $2.4 billion, only $3.3 billion of loans are classified as delinquent. This means that 99.85% of loans are performing, but it also means that the total amount of more than $30 million recorded for future loan losses is more than enough to cover potential problems here. It also explains why Southern Missouri was able to write off some of the historical loan loss provisions because its loan loss provision is high enough to cover current potential issues. There is, however, a point of caution here: under the CARES Act, some borrowers have been allowed to suspend payments due to the impact of COVID-19. That doesn’t mean these borrowers are insolvent because they’re just taking advantage of an opportunity offered by the government, but at the end of 2021, Southern Missouri had $23.7 million in loans that were modified under of the CARES Act. These loans are currently flagged as outstanding, but once the grace period ends, some of these loans may need to be reclassified as past due after a period of time.

Investment thesis

I don’t currently have a long position in Southern Missouri Bancorp, but the bank is definitely on my watch list. The tangible book value per share is currently around $31.5, which means the bank is trading at around 1.6 times its tangible book value, but since the bank retains most of its earnings, the book value tangible book value per share increases by more than $4/year and by the end of calendar year 2023, I expect the tangible book value to exceed $40/share.

Trading at less than 10x earnings and seeing very few loans in arrears, Southern Missouri Bancorp piqued my interest. I noticed there are options available on SMBC so I might try to write an out of the money put on southern Missouri but options are pretty illiquid there isn’t therefore has no guarantee that an order will be affected.

So for now, I’m on the sidelines but I can’t wait to see how the “new” entity after completing the acquisition of Fortune Financial will perform. This was a very small transaction, but will add approximately $250 million to the balance sheet assets.

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