Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended March 31, 2022. The request metadata identifies “2021 Q3,” but the filing is for fiscal 2022 third quarter. Financial statements are unaudited and presented in thousands, except per-share data.
Business Context and Reporting Period
Southern Missouri Bancorp is the holding company for Southern Bank, which provides banking and financial services through 48 full-service and two limited-service branches. Results are primarily driven by net interest income, loan growth, deposit funding, credit quality, interest-rate conditions, and merger activity.
The company completed the acquisition of Fortune Financial Corporation and FortuneBank on February 25, 2022, in a transaction valued at approximately $35.5 million, funded with $12.7 million of cash and $22.9 million of common stock. It also acquired the Cairo, Illinois branch of First National Bank on December 15, 2021.
Key Financial Metrics
| Metric | Three months ended March 31, 2022 | Year-ago period | Nine months ended March 31, 2022 | Year-ago period |
|---|---|---|---|---|
| Net interest income | $25.1 million | $23.1 million | $75.8 million | $68.7 million |
| Provision for credit losses | $1.6 million | ($0.4 million) benefit | $1.2 million | $1.6 million |
| Noninterest income | $4.9 million | $4.5 million | $14.7 million | $15.2 million |
| Noninterest expense | $16.8 million | $13.5 million | $46.0 million | $39.8 million |
| Net income | $9.4 million | $11.5 million | $34.1 million | $33.5 million |
| Diluted earnings per share | $1.03 | $1.27 | $3.80 | $3.69 |
| Net interest margin | 3.48% | 3.68% | 3.74% | 3.78% |
| Efficiency ratio | 55.8% | 49.0% | 50.9% | 47.5% |
For the quarter, net income declined 18.4%, while nine-month net income increased 1.8%. Annualized return on average assets was 1.22% for the quarter and 1.58% for the nine-month period; return on average common equity was 11.9% and 15.2%, respectively.
Financial Condition, Liquidity, and Capital
- Total assets were $3.264 billion at March 31, 2022, up 20.9% from June 30, 2021.
- Net loans were $2.579 billion, up 17.2%; gross loans increased primarily from the Fortune acquisition and growth in residential and commercial real estate lending.
- Deposits were $2.855 billion, up 22.5%, including deposits acquired in the Fortune and Cairo transactions.
- Cash and cash equivalents were $248.6 million, compared with $123.6 million at June 30, 2021. Available-for-sale securities were $226.4 million.
- FHLB advances declined to $42.9 million from $57.5 million. Subordinated debt increased to $23.0 million, primarily because of debt assumed in the Fortune acquisition.
- Stockholders’ equity increased to $325.2 million from $283.4 million, despite a $9.4 million decline in accumulated other comprehensive income from unrealized securities losses.
- Operating cash flow for the nine months was $45.9 million. Investing activities used $172.0 million, principally reflecting net loan growth and securities purchases. Financing activities provided $251.1 million, primarily from deposit growth.
- Outstanding loan commitments and approvals totaled approximately $656.8 million, including $406.2 million of unused lines of credit. Management stated that available liquidity should be sufficient to meet expected needs.
- The Bank was categorized as well capitalized. At March 31, 2022, the Bank’s total risk-based capital ratio was 13.07%, Tier 1 risk-based capital ratio was 11.94%, common equity Tier 1 ratio was 11.94%, and Tier 1 leverage ratio was 10.31%.
Material Changes Versus Comparable Periods
- Quarterly net interest income rose 8.5% and nine-month net interest income rose 10.3%, primarily because of larger earning-asset balances and lower funding costs.
- Net interest margin declined 20 basis points for the quarter and four basis points for the nine-month period. Management attributed pressure to increased cash and securities balances, lower loan yields, and reduced PPP fee accretion.
- PPP fee accretion contributed approximately $3.2 million to nine-month interest income, compared with $2.1 million in the prior-year period. Only approximately $137,000 of deferred PPP fees remained at March 31, 2022, limiting future benefit.
- Quarterly provision expense increased from a prior-year benefit of $409,000 to $1.6 million. The current-quarter provision included approximately $1.9 million for non-PCD loans acquired from Fortune and $120,000 for increased off-balance-sheet exposure. Excluding Fortune-related charges, management indicated the quarter would have produced a provision benefit of approximately $468,000.
- Noninterest expense increased 23.9% in the quarter and 15.6% for the nine-month period. Merger-related costs were approximately $1.1 million for the quarter and $1.3 million for the nine-month period.
- Noninterest income decreased 3.2% for the nine-month period, primarily because of lower mortgage loan sale gains, lower loan servicing income, and lower BOLI earnings. These declines were partly offset by higher wealth-management, deposit-service, card-interchange, and other loan-fee income.
- Comprehensive income was $1.9 million for the quarter and $24.7 million for the nine-month period, substantially below net income because of after-tax unrealized losses on available-for-sale securities.
- Nonaccrual loans declined to $3.9 million from $5.9 million at June 30, 2021, while total nonperforming assets declined to $7.1 million from $8.1 million.
Guidance, Outlook, Risks, and Unusual Items
Management expects continued asset growth through loan originations, occasional loan purchases, and securities purchases, funded primarily by retail deposits, brokered funding, and FHLB borrowings. Management also expects to pursue strategic expansion opportunities. No formal earnings or revenue guidance was provided.
- Management expects some unusually high customer deposit balances to decline during calendar 2022, although public-unit deposits may continue to increase in the current calendar year.
- The Federal Reserve began withdrawing extraordinary monetary support and raising rates. Management warned that a faster increase in deposit costs, a flattening yield curve, or slower repricing of loans could pressure net interest income and margin.
- Interest-rate sensitivity increased because of growth in fixed-rate lending. A modeled instantaneous 300-basis-point rate increase reduced estimated net portfolio value by 26%; the analysis is subject to significant assumptions and is not a forecast.
- COVID-19 conditions improved, but management continues to identify uncertainty around economic recovery, borrower performance, government relief, and exposure to hotels, restaurants, retail, and other affected sectors.
- Three CARES Act-modified loans totaling $14.9 million had not returned to principal-and-interest payments at March 31, 2022 and were classified as substandard pending final restructuring. Loans with such modifications totaling $14.9 million were still reported as current.
- Adversely classified loans increased to $27.7 million, or 1.06% of total loans, from $18.1 million, or 0.81%, at June 30, 2021, primarily because of the modified loans.
- The allowance for credit losses was $33.6 million, equal to 1.29% of gross loans and 867% of nonperforming loans. Management considered the allowance adequate but noted that economic, regulatory, and pandemic-related uncertainty could require additional provisions.
- Available-for-sale securities had $9.1 million of gross unrealized losses at March 31, 2022. Management attributed the losses to interest-rate changes rather than credit deterioration and recorded no related ACL.
- The company reported no material pending legal proceedings and no material changes to the risk factors in its fiscal 2021 Form 10-K. Missouri tax returns for fiscal years 2016 through 2018 were under audit.
Most Important Facts for Investors to Verify
- Whether Fortune integration delivers expected cost savings, synergies, deposit retention, loan performance, and revenue benefits.
- Whether the $14.9 million of CARES Act-modified loans return to contractual payment terms or generate additional credit losses.
- Trends in commercial real estate, hotel, retail, agricultural, and construction loan concentrations and classifications.
- Future provision expense, charge-offs, nonaccrual loans, and the adequacy of the $33.6 million ACL as pandemic support wanes.
- The effect of Federal Reserve rate increases and the flattening yield curve on deposit costs, net interest margin, liquidity, and securities valuations.
- Sustainability of earnings after the largely completed PPP fee accretion benefit and after excluding merger-related and other nonrecurring items.
- Whether elevated deposits remain stable and whether available liquidity supports the $656.8 million of loan commitments and approvals.
- Potential dilution, capital effects, and integration costs from the Fortune stock issuance and other acquisition activity.