Southern Missouri Bancorp, Inc. — FY2022 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2022. The request metadata references 2021 Q4, but the supplied filing is the Company’s FY2022 annual report, not a quarterly filing. Southern Missouri Bancorp is the parent of Southern Bank, a community bank serving Missouri, Arkansas, and Illinois.
Business Context
- Southern Bank primarily funds residential, commercial real estate, construction, commercial business, agricultural, and consumer loans with deposits and Federal Home Loan Bank funding.
- At June 30, 2022, the Bank operated 49 full-service and two limited-service offices and had 544 employees.
- The Company completed the Fortune Financial acquisition on February 25, 2022, and acquired the Cairo, Illinois branch on December 15, 2021.
Financial Performance and Position
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Total assets | $3.215 billion | $2.701 billion | Up 19.0% |
| Net loans receivable | $2.686 billion | $2.200 billion | Up 22.1% |
| Deposits | $2.815 billion | $2.331 billion | Up 20.8% |
| Stockholders’ equity | $320.8 million | $283.4 million | Up 13.2% |
| Net interest income | $103.6 million | $92.7 million | Up 11.7% |
| Net income | $47.2 million | $47.2 million | Essentially unchanged |
| Diluted EPS | $5.21 | $5.22 | Essentially unchanged |
| Net interest margin | 3.72% | 3.77% | Down 5 basis points |
| Return on average assets | 1.59% | 1.79% | Down 20 basis points |
| Return on average common equity | 15.44% | 17.69% | Down 225 basis points |
- Interest income increased 6.8% to $116.9 million, while interest expense declined 20.8% to $13.3 million as deposit and borrowing costs fell.
- Noninterest income increased 5.8% to $21.2 million. Gains on residential loan sales declined, partially offset by higher deposit fees, loan fees, government-guaranteed loan sale gains, and other income.
- Noninterest expense increased 17.3% to $63.4 million, including approximately $1.4 million of acquisition-related costs and higher compensation, occupancy, and data-processing expenses.
- The provision for credit losses was $1.5 million, compared with a $1.0 million recovery in FY2021. Excluding Fortune acquisition-related charges, management estimated a provision recovery of approximately $533,000.
- Net cash provided by operating activities was $67.3 million. Investing activities used $303.9 million, primarily because loan growth exceeded funding from operating activities. Financing activities provided $199.8 million, primarily from deposit growth.
- Cash and cash equivalents declined to $86.8 million from $123.6 million.
Loan Portfolio, Credit Quality, Debt, and Liquidity
- Gross loans totaled $2.843 billion. Commercial real estate represented $1.147 billion, or 42.7%; residential real estate $904.2 million, or 33.7%; commercial business loans $441.6 million, or 16.4%; construction loans $258.1 million, or 9.6%; and consumer loans $93.0 million, or 3.5%.
- Commercial real estate and commercial business loans together represented 59.1% of net loans, creating sensitivity to local economic conditions, property values, business cash flows, and borrower concentration.
- Nonperforming loans declined to $4.1 million, or 0.15% of gross loans, from $5.9 million, or 0.26%. Total nonperforming assets declined to $6.3 million, or 0.20% of assets, from $8.1 million, or 0.30%.
- The allowance for credit losses was $33.2 million, or 1.22% of gross loans, compared with 1.49% in FY2021. The allowance covered 806% of nonperforming loans. The allowance for off-balance-sheet credit exposures increased to $3.4 million from $1.8 million.
- Four COVID-related modified loans totaling approximately $24.2 million remained on interest-only terms at year-end. One loan of $9.3 million was classified as special mention and three loans totaling $14.9 million were substandard; all were scheduled to transition to principal and interest payments in the first quarter of FY2023.
- FHLB advances declined to $38.0 million from $57.5 million. The Company had no short-term borrowings or overnight FHLB advances at year-end.
- Available FHLB borrowing capacity secured by pledged loans was approximately $500.1 million, and Federal Reserve discount-window availability was approximately $248.1 million, with no outstanding discount-window balance.
- Commitments to extend credit totaled $707.7 million, including $123.7 million of construction loans in process and $584.1 million of other loan commitments. Standby letters of credit totaled $3.7 million.
- The Bank and Company were categorized as well capitalized. Southern Bank’s total risk-based capital ratio was 12.90%, Tier 1 risk-based capital ratio was 11.91%, and Tier 1 leverage ratio was 10.22%.
Material Changes Versus FY2021
- Balance-sheet expansion accelerated, primarily from the Fortune acquisition, loan growth, and higher available-for-sale securities.
- Fortune contributed approximately $202.1 million of loans, $213.7 million of deposits, $12.8 million of goodwill, and $1.6 million of core deposit intangible assets.
- Net interest income grew strongly from asset growth and lower funding costs, but the net interest margin narrowed from 3.77% to 3.72%.
- Net income was flat despite higher net interest income because of materially higher operating expenses and acquisition-related costs.
- Accumulated other comprehensive income declined by $20.4 million, primarily because rising market interest rates reduced the fair value of available-for-sale securities.
- AFS securities increased to $235.4 million from $207.0 million, while unrealized losses increased substantially. Management attributed the losses to interest-rate changes and recorded no credit-loss allowance on those securities.
- Shareholders received $0.80 per share in dividends versus $0.62 per share in FY2021. The Company repurchased 132,194 shares for $5.8 million at an average price of $44.17.
Outlook, Management Commentary, Risks, and Unusual Items
- Management stated that existing liquid assets and available borrowing lines should satisfy foreseeable liquidity needs and current financial obligations for at least the next 12 months.
- The Company projected approximately $4.0 million to $6.0 million of FY2023 capital expenditures, $442,000 of lease and other fixed payments, and $1.1 million of scheduled subordinated-note interest payments.
- Management expected to continue emphasizing commercial real estate, commercial business, agricultural, and residential lending. Non-owner-occupied commercial real estate exposure reached 313% of Tier 1 capital plus includable allowance at June 30, 2022, above the 300% supervisory concentration threshold referenced in the filing.
- Key risks include rising interest rates, inflation, recession, deposit competition, funding access, commercial real estate and construction concentrations, agricultural conditions, loan seasoning, potential increases in credit losses, COVID-19-related borrower stress, acquisition integration, goodwill impairment, cybersecurity, vendor dependency, regulatory changes, and the transition away from LIBOR.
- The Company’s interest-rate sensitivity increased during FY2022 because of growth in fixed-rate lending. Its modeled net portfolio value declined 10% under an instantaneous 100-basis-point rate increase and 40% under a 300-basis-point increase.
- Goodwill was $27.3 million at June 30, 2022. Management concluded that goodwill was not impaired, but future adverse economic conditions, a sustained decline in the stock price, or weaker operating results could trigger an impairment charge.
- The Company’s Missouri income tax returns for fiscal years 2016 through 2018 were under audit by the Missouri Department of Revenue. Management reported no material pending litigation.
- FORVIS issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matters were the allowance for credit losses and the Fortune business combination.
Investor Verification Checklist
- Verify the sustainability of loan and deposit growth following the Fortune acquisition and the effect of integration costs on the efficiency ratio and earnings.
- Monitor net interest margin, deposit pricing, uninsured deposits, loan-to-deposit levels, and the effect of further Federal Reserve rate increases.
- Review commercial real estate, construction, hotel, agricultural, and other concentrated exposures, including the 313% non-owner-occupied commercial real estate concentration measure.
- Track the four modified COVID-related loans as they transition to principal and interest payments in FY2023.
- Assess whether the $33.2 million allowance for credit losses remains adequate as loans season and economic conditions change.
- Evaluate unrealized available-for-sale securities losses, accumulated other comprehensive income, and potential effects on tangible capital and liquidity.
- Review acquisition-related goodwill, core deposit intangibles, subordinated debt, and the expected realization of projected operating synergies.
- Confirm dividend capacity and share repurchase activity, considering regulatory capital requirements and restrictions tied to subordinated debt.