Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2022. Comparative periods are the three and six months ended December 31, 2021; balance-sheet comparisons are to June 30, 2022. Unless stated otherwise, amounts are in thousands. The filing was signed February 9, 2023.
Business Context
Southern Missouri Bancorp is the parent of Southern Bank, which provides residential, commercial real estate, construction, commercial, consumer and deposit banking services. At December 31, 2022, the Bank operated 48 full-service and two limited-service branches. The Company’s February 2022 acquisition of Fortune Financial Corporation contributed to balance-sheet and expense growth. The Company also completed its merger with Citizens Bancshares on January 20, 2023, after the reporting date.
Financial Highlights
| Metric | Three months ended December 31, 2022 | Year-over-year change | Six months ended December 31, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net interest income | $28,251 | +12.7% | $56,758 | +12.0% |
| Provision for credit losses | $1,138 | Compared with none | $6,194 | Compared with a $305 recovery |
| Noninterest income | $5,456 | +3.2% | $10,970 | +11.9% |
| Noninterest expense | $17,638 | +17.0% | $34,557 | +18.0% |
| Net income | $11,664 | -2.7% | $21,267 | -14.0% |
| Diluted EPS | $1.26 | Down from $1.35 | $2.30 | Down from $2.78 |
| Net interest margin | 3.45% | Down from 3.77% | 3.55% | Down from 3.89% |
- Balance sheet: Total assets were $3.451 billion, up 7.3% from June 30, 2022. Net loans were $2.958 billion, up 10.1%, while deposits were $3.006 billion, up 6.8%.
- Funding and debt: FHLB advances were $61.5 million, up 62.0% from June 30, 2022. Subordinated debt was $23.1 million. Brokered CDs contributed $89.3 million of the $139.9 million increase in certificate deposits.
- Liquidity: Cash and cash equivalents were $53.1 million, down from $86.8 million at June 30, 2022. Cash and time deposits combined declined 39.8% to $55.1 million as loan growth outpaced deposit growth. The Bank had approximately $523.4 million of available FHLB credit and $262.3 million of Federal Reserve discount-window borrowing capacity, with none drawn from the latter.
- Cash flow: For the six months, operating activities provided $28.6 million, investing activities used $272.6 million, and financing activities provided $210.3 million. Cash and cash equivalents decreased $33.7 million to $53.1 million.
- Capital: The Bank remained well capitalized. At December 31, 2022, Southern Bank’s total risk-based capital ratio was 12.20%, Tier 1 risk-based capital ratio was 11.05%, common equity Tier 1 ratio was 11.05%, and Tier 1 leverage ratio was 9.81%.
Material Changes Versus Prior Periods
- Net interest income increased because average interest-earning assets grew 22.7% for the six-month period, but the net interest margin contracted as funding costs rose faster than asset yields. The average cost of interest-bearing liabilities increased 71 basis points, compared with a 25-basis-point increase in asset yields.
- Interest expense increased 173.0% for the six months, reflecting higher deposit rates, greater certificate-of-deposit balances, increased FHLB borrowing and higher subordinated-debt costs.
- The allowance for credit losses on loans increased to $37.5 million from $33.2 million at June 30, 2022, or 1.25% of gross loans versus 1.22%. The separate allowance for off-balance-sheet exposures increased to $4.9 million from $3.3 million.
- Adversely classified loans increased to $37.6 million, or 1.25% of total loans, from $27.1 million at June 30, 2022. Past-due loans increased to $8.9 million from $4.6 million, while nonperforming assets increased to $6.6 million from $6.3 million.
- Noninterest expense increased primarily because of compensation, professional fees, occupancy, data processing, deposit insurance and acquisition-related costs. Merger and acquisition costs were $777,000 for the six months, compared with $230,000 in the prior-year period.
- Mortgage production for sale declined as higher rates reduced refinancing and purchase activity. PPP loans outstanding declined to $888,000, and related deferred-fee accretion became immaterial compared with the prior year.
- Accumulated other comprehensive loss was $18.8 million at December 31, 2022, primarily reflecting unrealized losses on available-for-sale securities caused by higher market interest rates.
Outlook, Risks and Unusual Items
- Management expects continued asset growth through loan origination and periodic securities purchases, funded by retail deposits, brokered deposits and FHLB borrowings.
- Management identified the inverted yield curve and rapidly rising short-term rates as significant concerns because funding costs may increase faster than asset yields. The reported net portfolio value model indicated a 15% decline under an instantaneous 100-basis-point rate increase and a 42% decline under a 300-basis-point increase.
- Credit risk remains concentrated in real estate, construction, commercial lending and hotel borrowers. Management cited weakening GDP and unemployment projections, elevated hotel-industry risk and increasing loan growth as factors supporting higher reserves.
- Available-for-sale securities had $24.1 million of gross unrealized losses at December 31, 2022. Management attributed the losses to higher interest rates rather than credit deterioration and recorded no credit-loss allowance on these securities.
- The Company announced completion of the Citizens Bancshares merger after quarter-end. Citizens reported approximately $973 million of assets, $463 million of net loans and $838 million of deposits at December 31, 2022. Management expected a subsequent systems conversion and bank merger in late February 2023; expected synergies and integration results were not yet realized in this filing.
- The filing identifies risks from economic weakness, inflation, interest-rate changes, recession, deposit competition, funding access, real-estate values, agricultural conditions, regulatory actions, acquisition integration, technology and potential changes in credit-loss estimates.
- The Company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of December 31, 2022.
Investor Verification Checklist
- Verify post-quarter-end execution and integration of the Citizens Bancshares merger, including actual acquired assets, deposits, capital effects, expenses and realized cost savings.
- Monitor deposit pricing, brokered-CD reliance, FHLB borrowings, liquidity availability and the loan-to-deposit ratio, which averaged 103.1% in the second quarter.
- Assess whether the net interest margin continues to compress as deposit and borrowing costs reprice.
- Track adversely classified, past-due, nonaccrual and hotel-related loans, as well as construction and commercial real estate exposures.
- Evaluate reserve adequacy if economic forecasts weaken, loan growth continues or charge-offs increase; management states that actual losses could exceed current estimates.
- Reconcile the reported capital ratios and liquidity capacity after the Citizens transaction and any subsequent balance-sheet growth.