SOUTHERN MISSOURI BANCORP, INC. annual report, FY2021

Southern Missouri Bancorp, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended June 30, 2021. The supplied metadata references “2020 Q4,” but the filing is an annual fiscal 2021 Form 10-K, with fiscal 2020 comparative information. Southern Missouri Bancorp is the holding company for Southern Bank, a community bank operating primarily in Missouri, Arkansas, and Illinois.

Business Context

Southern Bank funds residential, commercial real estate, construction, commercial business, agricultural, and consumer lending primarily through deposits and Federal Home Loan Bank borrowings.
At June 30, 2021, the Company operated 47 full-service and two limited-service offices, with 488 employees.
The Company completed the Central Federal acquisition in May 2020; the acquisition generated a $123,000 bargain purchase gain and no goodwill.
COVID-19 materially affected operations and borrowers, but management reported substantial improvement in loan modifications, PPP forgiveness activity, liquidity, and credit trends during fiscal 2021.

Financial Performance and Key Metrics

Metric	Fiscal 2021	Fiscal 2020	Change
Total assets	$2.701 billion	$2.542 billion	Up 6.2%
Net loans receivable	$2.200 billion	$2.142 billion	Up 2.7%
Deposits	$2.331 billion	$2.185 billion	Up 6.7%
Stockholders’ equity	$283.4 million	$258.3 million	Up 9.7%
Net interest income	$92.7 million	$80.1 million	Up 15.7%
Net income	$47.2 million	$27.5 million	Up 71.3%
Diluted EPS	$5.22	$2.99	Up 74.6%
Noninterest income	$20.0 million	$14.8 million	Up 35.9%
Noninterest expense	$54.0 million	$54.5 million	Down 0.7%

Net interest margin increased to 3.77% from 3.72%; the interest-rate spread increased to 3.61% from 3.50%.
Return on average assets was 1.79%, compared with 1.18%; return on average common equity was 17.69%, compared with 11.11%.
The provision for credit losses was a benefit of $1.0 million, compared with a $6.0 million provision in fiscal 2020. The fiscal 2021 benefit reflected a $602,000 reduction in the allowance for loan losses and a $422,000 reduction in the allowance for off-balance-sheet exposures.
Noninterest income benefited from higher residential loan-sale gains, servicing income, debit-card interchange income, and BOLI earnings. BOLI earnings included $696,000 of nonrecurring benefits.
The effective tax rate increased to 21.0% from 20.0%, primarily because of reduced tax-advantaged investments relative to pretax income.

Cash Flow, Liquidity, Debt, and Capital

Net cash provided by operating activities was $51.8 million, compared with $40.3 million in fiscal 2020.
Net cash used in investing activities was $101.9 million, primarily reflecting net loan growth and purchases of available-for-sale securities.
Net cash provided by financing activities was $119.5 million, driven primarily by growth in demand and savings deposits.
Cash and cash equivalents increased to $123.6 million from $54.2 million.
Available-for-sale securities totaled $207.0 million; mortgage-backed securities totaled $138.3 million.
FHLB advances declined to $57.5 million from $70.0 million. The Bank had approximately $383.0 million of additional FHLB borrowing capacity and $216.8 million of Federal Reserve discount-window capacity, none of which was drawn.
Subordinated debt was $15.2 million. Total junior subordinated debt securities had an aggregate principal amount of approximately $16.8 million and were tied to LIBOR.
The Company and Bank were categorized as well capitalized. The Bank reported a 10.43% Tier 1 leverage ratio, 13.96% total risk-based capital ratio, and 12.79% Tier 1 risk-based capital ratio.
The Company paid $0.62 per share in dividends and repurchased 238,482 shares for $8.3 million during fiscal 2021. A new authorization allowed repurchases of up to an additional 445,000 shares.

Material Changes Versus Fiscal 2020

Net income increased substantially because of higher net interest income, sharply lower funding costs, higher noninterest income, and the shift from a provision to a benefit for credit losses.
The Company adopted CECL on July 1, 2020. Adoption increased the loan allowance by $9.3 million, increased the off-balance-sheet allowance by $268,000, and reduced retained earnings by approximately $7.2 million after tax.
Gross loans increased 3.1%, but commercial business loans declined to $414.1 million from $468.4 million, primarily because PPP loans were forgiven. PPP balances declined to $63.0 million at June 30, 2021, from $132.3 million.
Deposits shifted toward lower-cost, non-maturity accounts, while certificates of deposit declined to $562.6 million from $674.5 million.
Nonperforming loans declined to $5.9 million from $8.7 million, and nonperforming assets declined to $8.1 million from $11.2 million. Nonperforming assets represented 0.30% of total assets.
The allowance for credit losses increased to $33.2 million, or 1.49% of gross loans, from $25.1 million, or 1.16%. Net charge-offs were $648,000, or 0.03% of average loans.
COVID-related payment deferrals declined from approximately 900 loans totaling $380.2 million at June 30, 2020, to six interest-only modified loans totaling $23.9 million at June 30, 2021. No loans remained on COVID-related payment deferrals.

Outlook, Commentary, Risks, and Unusual Items

Management expects current funding sources to be adequate for foreseeable liquidity needs and intends to continue lending in residential, commercial real estate, commercial business, agricultural, and consumer markets.
Management expects commercial business loans to decline modestly in the near term as remaining PPP loans are forgiven, while commercial lending should remain relatively stable over the long term.
The filing provides no formal earnings or revenue guidance. Management cautions that the duration and economic effects of COVID-19 remain uncertain, particularly for hotel, restaurant, retail, and other pandemic-sensitive borrowers.
Commercial real estate and commercial business loans represented approximately 59.3% of net loans, creating concentration and local-economic risks. Non-owner-occupied commercial real estate concentrations remained below applicable supervisory thresholds but were still significant.
Other loans of concern totaled $48.4 million, including $23.7 million of construction and commercial real estate loans, primarily involving hotel properties and borrowers affected by COVID-19.
Outstanding commitments to extend credit were $491.6 million, including $4.0 million of standby letters of credit. The related off-balance-sheet credit-loss allowance was $1.8 million.
The Company identified LIBOR discontinuation as a risk because certain subordinated debt instruments and other contracts reference LIBOR.
Fiscal 2021 included $3.4 million of accelerated PPP fee accretion, $1.9 million of acquisition-related loan discount accretion, and $696,000 of nonrecurring BOLI benefits. These items may not recur at the same level.
Available-for-sale securities had $1.1 million of unrealized losses at June 30, 2021, including $257,000 on pooled trust preferred securities. Management reported no credit-related impairment and no credit losses recognized on investments.
Missouri tax returns for fiscal years 2016 through 2018 were under audit by the Missouri Department of Revenue. Management reported no material pending litigation.
The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of June 30, 2021.

Important Facts for Investors to Verify

Whether COVID-related modifications, especially the $23.9 million of interest-only loans, transition to normal payment terms without increased delinquencies or charge-offs.
Whether the $33.2 million CECL allowance adequately covers future losses, particularly in commercial real estate, construction, agricultural, hotel, and commercial business portfolios.
The sustainability of fiscal 2021 earnings after excluding accelerated PPP fee accretion, nonrecurring BOLI benefits, acquisition-related accretion, and the negative credit-loss provision.
The effect of PPP forgiveness and the runoff of related fees on future loan growth, interest income, and net interest margin.
Deposit retention and pricing as certificates mature, including the $358.8 million of certificates maturing within one year and $668.8 million of deposits with minimum denominations of $250,000.
Interest-rate sensitivity, including the substantial fixed-rate loan portfolio, securities duration, and the modeled decline in net portfolio value under rising-rate scenarios.
The transition away from LIBOR for subordinated debt and any other contracts or pricing arrangements tied to that benchmark.
The Company’s continued share repurchases and dividend capacity, which depend on Bank dividends, earnings, capital requirements, regulatory limits, and the terms of subordinated debt.