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 to individuals and businesses. The filing covers the three months ended September 30, 2023, the first quarter of fiscal 2024, with comparisons to the three months ended September 30, 2022. The interim financial statements are unaudited.
The Bank operated 62 full-service and three limited-service branches at September 30, 2023. The January 2023 acquisition of Citizens Bancshares, Co. and Citizens Bank and Trust Company contributed materially to balance-sheet growth and operating expenses.
Financial performance and key metrics
| Metric | Three months ended September 30, 2023 | Comparable period |
|---|---|---|
| Total interest income | $58.1 million | $35.0 million |
| Net interest income | $35.4 million | $28.5 million |
| Net interest margin | 3.44% | 3.65% |
| Provision for credit losses | $0.9 million | $5.1 million |
| Noninterest income | $5.9 million | $5.5 million |
| Noninterest expense | $23.7 million | $16.9 million |
| Net income | $13.2 million | $9.6 million |
| Diluted earnings per share | $1.16 | $1.04 |
| Return on average assets | 1.20% | 1.16% |
| Return on average common equity | 11.7% | 11.7% |
- Net income increased 36.9%, while net interest income increased 24.2%.
- Average interest-earning assets increased 31.6%, and the average yield on those assets rose 117 basis points to 5.65%.
- Interest expense increased 250% to $22.7 million as the average cost of interest-bearing liabilities rose 171 basis points to 2.73%. The interest-rate spread declined to 2.92% from 3.46%.
- Noninterest expense increased 40.1%, primarily from higher compensation, data processing, occupancy, FDIC insurance, electronic banking costs, and intangible amortization.
- The quarterly dividend was $0.21 per share.
Financial condition, liquidity and capital
- Total assets were $4.47 billion at September 30, 2023, up 2.5% from June 30, 2023. Net loans increased 2.2% to $3.65 billion, while available-for-sale securities declined 3.0% to $405.2 million.
- Deposits increased 3.1% to $3.84 billion. Certificates of deposit increased to $1.28 billion, and brokered certificates increased to $202.7 million. Brokered deposits totaled $223.0 million under the MD&A presentation.
- FHLB advances declined 14.6% to $114.0 million. Subordinated debt was $23.1 million.
- Cash and cash equivalents increased to $88.2 million from $54.0 million. Operating activities provided $14.2 million of cash, investing activities used $73.7 million, and financing activities provided $93.7 million.
- Loan-to-deposit ratio was 96.3%. Outstanding loan commitments and approvals were approximately $1.0 billion, including $720.4 million of unused lines of credit.
- FHLB collateral supported approximately $675.5 million of available credit, of which $114.2 million was advanced. Additional Federal Reserve borrowing capacity was approximately $313.5 million, with no amount advanced.
- Stockholders’ equity increased to $453.9 million. Accumulated other comprehensive loss increased to $25.2 million, primarily because higher interest rates reduced the market value of investment securities.
- The Bank remained categorized as well capitalized. At September 30, 2023, Southern Bank’s total risk-based capital ratio was 12.06%, Tier 1 risk-based capital ratio was 10.81%, common equity Tier 1 ratio was 10.81%, and Tier 1 leverage ratio was 9.56%.
Material changes versus the prior comparable period
- Loan growth and the Citizens acquisition increased the scale of interest-earning assets and contributed to higher interest income.
- Funding costs rose substantially as deposit pricing increased and the Company used certificates of deposit, brokered funding and FHLB advances in a higher-rate environment.
- Net interest margin contracted by 21 basis points despite higher asset yields because liability costs increased faster.
- The provision for credit losses declined by 82.2% to $0.9 million. The loan allowance increased to $49.1 million from $37.4 million one year earlier, representing 1.33% of gross loans.
- Nonperforming assets were $10.8 million, compared with $5.7 million one year earlier and $11.3 million at June 30, 2023. Nonaccrual loans were $5.7 million.
- Total past-due loans increased to $28.4 million from $10.7 million at June 30, 2023. Management stated that 96% of the increase related to one borrower group whose notes were past maturity and not renewed because of a partnership dispute; management expected no loss because of the guarantor’s liquidity and net worth.
- The Company adopted ASU 2022-02 on July 1, 2023; adoption had no material financial statement impact. No loans were modified during the quarter for borrowers experiencing financial difficulty, although $30.0 million of such performing and nonperforming modifications remained outstanding at quarter-end.
Outlook, commentary, risks and unusual items
- Management expects continued asset growth through loan origination and occasional loan and securities purchases, funded by retail deposits, brokered funding and FHLB borrowings. No quantitative earnings guidance was provided.
- Management described interest rates as volatile and higher, with an inverted yield curve. It warned that funding costs could continue to rise faster than asset yields in the near term.
- Interest-rate sensitivity analysis indicated that a hypothetical 300-basis-point increase in rates would reduce modeled net portfolio value by 30%, while a 300-basis-point decrease would increase it by 30%. Management cautioned that these estimates depend on assumptions and may not predict actual results.
- Hotel loans that have been slow to recover from the COVID-19 pandemic remained an elevated and increasing credit-risk factor. Management also cited risks from commercial real estate, construction lending, agricultural conditions, deposit competition, bank-industry sentiment, economic weakness, regulatory changes and liquidity access.
- The Citizens acquisition generated $6.2 million of revenue and $1.7 million of earnings during the quarter. Acquisition-related charges were $134,000, and additional intangible amortization from the acquisition was approximately $616,000.
- Available-for-sale securities had $33.8 million of gross unrealized losses at quarter-end. Management attributed the losses to higher interest rates rather than credit deterioration and recorded no related credit-loss allowance.
- Management stated that the ACL was adequate, but acknowledged that future losses could exceed estimates and that regulators could require additional allowances. No material pending litigation was reported, and management identified no material changes to previously disclosed risk factors.
Investor verification checklist
- Verify whether deposit repricing and brokered funding costs continue to compress net interest margin.
- Monitor commercial real estate, construction, hotel and agricultural loan performance, including the single borrower group driving most of the increase in past-due loans.
- Reconcile the allowance for credit losses, classified loans, nonaccrual loans and charge-offs as the loan portfolio grows.
- Assess liquidity coverage against approximately $1.0 billion of commitments and the high 96.3% loan-to-deposit ratio.
- Track the effect of higher rates on accumulated other comprehensive loss, securities values and modeled interest-rate sensitivity.
- Evaluate whether Citizens acquisition synergies offset the continuing increases in compensation, occupancy, technology and intangible-amortization costs.
- Confirm regulatory capital ratios and the Bank’s continued “well capitalized” status in subsequent filings.