Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
Southern Missouri Bancorp, Inc. is the holding company for Southern Bank, which provides banking and financial services through 62 full-service and three limited-service branches as of December 31, 2023. The filing covers the three- and six-month periods ended December 31, 2023, the Company’s fiscal second quarter and first six months of fiscal 2024. Unless otherwise stated, amounts are in thousands.
The January 2023 acquisition of Citizens Bancshares and its bank subsidiary materially increased the Company’s balance sheet, earning assets, deposits, personnel, facilities, intangible amortization, and operating expenses.
Key financial metrics
| Metric | Three months ended Dec. 31, 2023 | Six months ended Dec. 31, 2023 | Comparable prior period |
|---|---|---|---|
| Net interest income | $34.5 million | $69.9 million | $28.3 million and $56.8 million |
| Provision for credit losses | $0.9 million | $1.8 million | $1.1 million and $6.2 million |
| Noninterest income | $5.6 million | $11.5 million | $5.5 million and $11.0 million |
| Noninterest expense | $23.9 million | $47.6 million | $17.6 million and $34.6 million |
| Net income | $12.2 million | $25.3 million | $11.7 million and $21.3 million |
| Diluted earnings per share | $1.07 | $2.23 | $1.26 and $2.30 |
| Net interest margin | 3.25% | 3.34% | 3.45% and 3.55% |
| Return on average assets | 1.07% | 1.13% | 1.35% and 1.26% |
| Return on average common equity | 10.6% | 11.1% | 14.2% and 13.0% |
Financial condition, liquidity, and capital
- Total assets were $4.64 billion at December 31, 2023, up $283.3 million, or 6.5%, from June 30, 2023.
- Net loans were $3.68 billion, up $110.7 million, or 3.1%. Gross loans were $3.9966 billion, with commercial real estate loans of $1.5586 billion and residential real estate loans of $1.1603 billion.
- Deposits were $3.995 billion, up $269.4 million, or 7.2%. Certificates of deposit increased to $1.384 billion, including $180.0 million of brokered certificates.
- Cash and cash equivalents were $216.4 million, compared with $54.0 million at June 30, 2023. Available-for-sale securities were $417.4 million.
- FHLB advances declined to $113.0 million from $133.5 million. Subordinated debt was $23.1 million.
- Stockholders’ equity was $470.2 million, up $24.1 million. Accumulated other comprehensive loss improved to $18.8 million from $21.9 million, primarily as investment values benefited from lower market rates.
- Six-month operating cash flow was $31.2 million. Investing activities used $112.9 million, primarily because of a $111.4 million net increase in loans. Financing activities provided $244.1 million, principally from deposit growth and net FHLB funding activity. Cash increased by $162.4 million to $216.4 million.
- The Bank reported approximately $959.6 million of outstanding loan commitments and approvals, including $677.0 million of unused lines of credit. Management stated that available liquidity is sufficient for expected needs.
- The Bank had approximately $686.5 million of available FHLB credit backed by pledged loans, with $113.2 million advanced, and access to $300.0 million of Federal Reserve primary credit backed by pledged agricultural loans; none was outstanding from the Federal Reserve at period-end.
- The Bank was categorized as well capitalized. At December 31, 2023, Southern Bank’s total risk-based capital ratio was 12.28%, Tier 1 risk-based capital ratio was 11.03%, common equity Tier 1 ratio was 11.03%, and Tier 1 leverage ratio was 9.45%.
Material changes versus prior comparable periods
- Six-month net income increased 19.2% to $25.3 million, while diluted EPS declined 3.0% to $2.23 because of the substantially larger share base following the Citizens transaction.
- Net interest income increased 23.1%, driven primarily by a 30.7% increase in average interest-earning assets. However, net interest margin declined to 3.34% from 3.55% as funding costs increased faster than asset yields.
- Average interest-bearing liability costs increased 162 basis points, while average earning-asset yields increased 110 basis points. Deposit pricing, special-rate deposits, certificates of deposit, and brokered funding contributed to higher funding costs.
- Noninterest expense increased 37.7% for the six-month period, principally from higher compensation, occupancy, data processing, deposit insurance, and intangible amortization expenses associated with the Citizens acquisition and broader operating growth.
- Noninterest income increased 4.8%, supported by higher interchange, fiduciary and wealth-management fees, and bank-owned life insurance earnings, partially offset by a realized securities loss and lower loan-related fees.
- Loan origination volume declined 34.3% from the prior-year six-month period. Fixed-rate commercial and commercial real estate originations declined to $151.4 million from $407.2 million.
- The allowance for credit losses on loans increased to $50.1 million from $47.8 million, equal to 1.34% of gross loans versus 1.32%. Net charge-offs were $1.2 million for the six months, or seven basis points annualized, compared with $0.3 million and two basis points in the prior period.
- Nonperforming assets were $9.8 million, down from $11.3 million at June 30, 2023, but up from $6.6 million at December 31, 2022. Nonaccrual loans were $5.9 million.
Guidance, outlook, risks, contingencies, and unusual items
- No quantitative earnings or financial guidance was provided. Management expects to continue growing assets through loan origination and purchases of investment securities, funded by retail deposits, brokered funding, and FHLB borrowings, and will continue evaluating strategic expansion opportunities.
- Management noted that the inverted yield curve and competitive deposit market have pressured net interest margin. Recent declines in short-term rates and more stable longer-term rates may provide future relief, but funding costs may continue to rise faster than asset yields.
- The Company sold securities with a $12.4 million book value during the quarter and recognized a $682,000 loss. Proceeds were reinvested in $11.9 million of higher-yielding fixed-rate securities, which management expects will recover the loss in less than two years. The loss reduced after-tax quarterly net income by approximately $541,000.
- Unrealized losses on available-for-sale securities totaled $26.2 million at December 31, 2023. Management attributed the losses to higher market interest rates rather than credit deterioration and recorded no related credit-loss allowance.
- Management believes the loan ACL is adequate, but acknowledges uncertainty related to monetary policy, economic conditions, real estate values, agricultural conditions, borrower performance, and regulatory review. Hotel borrowers and other credits affected by the COVID-19 recovery remain under heightened monitoring.
- Commercial real estate, construction, agricultural, and commercial lending expose the Company to collateral values, vacancies, borrower cash flow, refinancing, commodity prices, weather, and broader economic risks.
- Interest-rate sensitivity analysis estimated that net portfolio value would decline 11% under an immediate parallel 300-basis-point rate increase and 17% under a 300-basis-point decrease. Management cautioned that the estimates depend on assumptions and should not be viewed as predictions.
- Two commercial loan modifications for borrowers experiencing financial difficulty totaled $867,000 during the quarter. Performing modified loans totaled $24.0 million at period-end, or 0.65% of total loans, while $1.6 million was nonperforming.
- The Company stated that it is not party to pending legal proceedings expected to have a material effect. A Missouri tax audit covering fiscal years 2016 through 2018 remains ongoing; no material tax penalties or interest were recognized.
- Disclosure controls and procedures were deemed effective, and management reported no material change in internal control over financial reporting during the quarter. No material changes were reported to the risk factors in the prior Form 10-K.
Important facts for investors to verify
- Whether deposit repricing, certificate-of-deposit renewals, and brokered funding cause additional net interest margin compression.
- Whether loan growth, especially in commercial real estate, construction, agriculture, hotel, and commercial portfolios, leads to higher delinquencies, charge-offs, or ACL requirements.
- The sustainability of Citizens acquisition-related revenue synergies and the pace at which compensation, occupancy, data processing, deposit insurance, and intangible amortization expenses normalize.
- The market value and duration sensitivity of the available-for-sale securities portfolio, including the potential effect of future interest-rate movements on accumulated other comprehensive loss and capital.
- Execution of the liquidity plan, including the concentration of deposits in certificates, brokered deposits, public funds, and reliance on FHLB or Federal Reserve facilities.
- The effect of the $682,000 securities-sale loss and expected reinvestment yield on future earnings, as well as the validity of management’s less-than-two-year earn-back expectation.
- Whether regulatory capital remains comfortably above minimum and well-capitalized thresholds as assets grow and credit conditions change.