Southern Missouri Bancorp: Coming Of Age

Jun. 3.14 | About: Southern Missouri (SMBC)


Due to rapid growth, SMBC is approaching a size where its trading volume will expand, raising its PE ratio as institutional investors are able to buy.

SMBC's PE ratio is significantly below its peers, yet it has more loan growth.

SMBC has a history of strong asset quality.

Southern Missouri Bancorp, Inc. (NASDAQ:SMBC) is a bank holding company that does substantially all of its activity through its wholly owned subsidiary, Southern Bank. Until recently, SMBC was a sleepy stock, with little trading volume, moderate loan growth and small in size. This is in the process of changing. SMBC is based in Poplar Bluff, Missouri, which had a population of 17,023 in 2010, and most of its branches are in even smaller markets. The average daily trading volume is currently 1,047 shares. Total assets as of June 30, 2013, the end of its most recent fiscal year, were $796 million. SMBC has 25 branches located mostly in smaller towns in Missouri and Arkansas.


Big changes are afoot. First of all, SMBC has been on the acquisition trail. On June 21, 2013, SMBC announced an agreement to acquire Ozarks Legacy Community Financial, Inc. for $6.2 million. On November 7, 2013, it announced an agreement to acquire Citizens State Bankshares of Bard Knob, Arkansas, for $5.9 million. These two small acquisitions have now been consummated, adding $51.4 million of loans and $132.6 million of deposits.

SMBC was not done. On February 25, 2014, it announced a larger acquisition. It will acquire Peoples Service Company, the parent of a subsidiary that owns Peoples Bank of the Ozarks, for $22.9 million plus the assumption or retirement of $9.4 million of debt. SMBC is paying a 15% premium for Peoples. Peoples is a healthy bank that had $194.6 million in loans and $225.0 million of deposits as of March 31, 2014.

One positive to this acquisition is Peoples has eight branches in the Springfield, Missouri MSA, a much larger market than the others currently served by SMBC. SMBC opened its first branch in Springfield in 2011 and has experienced significant loan growth out of that office. Springfield had a population of 159,498 in 2010. Larger markets such as Springfield represent better opportunities for growth than rural markets do. This transaction is expected to close early in the next quarter. The transaction will take total assets to about $1.3 billion, well above the $796 million on June 30, 2013.

Loan Growth

Also changing is loan growth, which has accelerated. Loan growth averaged 5-10% over the four years ended June 30, 2013. While moderate, this was well above the industry. In the year ended March 31, 2014, organic loan growth was 14.8%. Reaching traction out of the new office in Springfield has helped. The loan portfolio is diversified and the growth has come from all sectors. As of March 31, 2014, the $773 million portfolio was comprised of: residential 32%, commercial real estate 28%, agricultural 12%, commercial 10%, multi-family 9%, construction and land development 5%, and other 3%.


Despite all the organic and acquired growth, leverage remains moderate. Net worth totaled $107 million on March 31, 2004, $103 million of which was tangible. Tangible net worth was 10.3% of assets on that date. After the Peoples transaction, tangible net worth will drop to 8.6%. This is still well above regulatory requirements. It should be noted that the tangible common equity to assets ratio will be 7.1%. This is an important ratio because the interest on SMBC's $20 million of government preferred stock increases from 1% to 9% after 2015. The 7.1% level is still more than adequately capitalized so the bank can just pay it off without diluting common. However, that level will limit any larger acquisitions for a while.

Asset Quality

Asset quality has always been strong. Non-performing loans to net loans was under 0.50% in each of the past five-year ends. This was during a period that many of its peers either went under or suffered large losses. The Allowance for Loan Loss was 1.28% of total loans on March 31, 2014, an adequate level. The Chief Lending Officer has been in that position for eight years, long enough to have taken the bank through the recession with few problems. Peoples Bank, the bank being acquired, had a non-performing loans to total loans ratio of 0.88% on March 31, 2014, also a low level.


SMBC is solidly profitable. Net income was $2,193,000 in the quarter, which was $0.64 per share. However, there were $356,000 of merger related costs and $376,000 of other non-recurring costs regarding the termination of a debit card contract. Assuming a 35% tax rate, adjusted net income was $2,669,000 in the quarter, which was $0.78 per share. Earnings per share for the past four quarters, adjusted for non-recurring items, was $3.29. At the current market price of $35.24 per share (as of May 30, 2014), this indicates a P/E ratio of 10.7.

Price Versus Peers

On May 30, 2014, SMBC had a price to book value of 1.35 and as noted above, an adjusted P/E ratio of 10.7. The P/E ratio is significantly below that of similar sized Midwest banks, while the price to book is in-line with them. However, SMBC is getting greater loan growth than its peers and should actually have a higher P/E ratio versus them to account for this. A listing of similar sized Midwest Banks is shown below.

Bank (State)


Assets (millions)3/31/14



Price to Book

Loan GrowthYr. Ended 3/14

Avg. Daily Volume Price 5/30/14
Ames National (IA) ATLO $1,258 14.2 1.43 -1.1% 12,445 $22.70
First Business (WI) EFSC 1,274 13.1 1.60 7.8 16,098 45.96

LNB Bancorp (OH)

LNBB 1,255 16.6 0.99 2.2 12,398 10.98
First Citizens (OH) FCZA 1,251 12.9 0.80 6.8 7,855 8.71
Averages 1,260 14.2 1.21 3.9 12,199 22.09

Southern Missouri (MO)

SMBC 994 10.7 1.32 14.8 1,047 35.24
Click to enlarge

Note that while the peer selection has larger assets than SMBC as of March 31, 2014, after the pending merger, they will be similar in size. This is the peer group SMBC is moving into. The adjusted P/E ratio for SMBC was used; the actual P/E ratio is 12.4.

Part of the reason for the underperformance of the stock price appears to be the low daily share trade volume versus the peers. Low share volume limits institutional ownership and thus the supply of buyers. If SMBC can create higher trading volumes through stock splits, mergers, and greater awareness, the stock price will increase as institutional investors become able to buy. The current low share trade volume will be slightly helped by the Peoples merger which will add 345,897 shares. It can also be helped by a stock split. As shown above, SMBC trades for a higher stock price than its peers so a split makes sense. Horizon Bank (NASDAQ:HBNC) is a $1.8 billion in assets Midwestern bank that had a similar issue two years ago. At that time, it had a daily share trade volume of about 1,500. Since then, it has split its stock and it had a merger, and average daily volume is now over 24,000. SMBC is rapidly reaching an asset level where it will become discovered by the institutions. This is supported by the peers in its new peer group, all of which have much higher daily share trade volume.


SMBC's days as a sleepy stock with a low P/E ratio are numbered. Rapid growth has put them into a new, larger peer group who trade more often and have higher P/E ratios. SMBC deserves a higher P/E ratio versus its peers due to its growth, both organic and acquired and asset quality. Yet it has a P/E ratio below its peers. Look for significant daily volume and P/E expansion as SMBC gets discovered.

Disclosure: I am long SMBC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.