Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2022. Although the request identifies “2022 Q1,” the filing describes this as the first quarter of fiscal 2023. Southern Missouri Bancorp is the holding company for Southern Bank, which provides retail, commercial, agricultural, mortgage and consumer banking services through 50 branches.
Financial performance and condition
| Metric | Q1 FY2023 | Prior comparable period or date |
|---|---|---|
| Total assets | $3.445 billion | $3.215 billion at June 30, 2022 |
| Net loans | $2.939 billion | $2.686 billion at June 30, 2022 |
| Deposits | $2.851 billion | $2.815 billion at June 30, 2022 |
| FHLB advances | $225.0 million | $38.0 million at June 30, 2022 |
| Net interest income | $28.5 million | $25.6 million |
| Net interest margin | 3.65% | 4.01% |
| Provision for credit losses | $5.1 million expense | $305,000 recovery |
| Noninterest income | $5.5 million | $4.5 million |
| Noninterest expense | $16.9 million | $14.2 million |
| Net income | $9.6 million | $12.7 million |
| Diluted EPS | $1.04 | $1.43 |
| Return on average assets | 1.16% | 1.87% |
| Return on average common equity | 11.7% | 17.7% |
- Total interest income increased 21.3% to $35.0 million, primarily because average interest-earning assets increased 22.1%.
- Interest expense increased 101.4% to $6.5 million as deposit and borrowing costs rose. The average cost of interest-bearing liabilities increased to 1.02% from 0.63%.
- Net interest margin declined to 3.65% from 4.01%, and the interest-rate spread declined to 3.46% from 3.88%.
- Net charge-offs were only $24,000, or less than one annualized basis point of average loans. The allowance for credit losses increased to $37.4 million, or 1.26% of gross loans, from $33.2 million, or 1.22%.
- Comprehensive income was $7.5 million, versus $12.8 million, reflecting a $2.1 million after-tax reduction in accumulated other comprehensive income from unrealized securities losses.
Material changes versus comparable periods
- Net income decreased 24.7%, and diluted EPS decreased 27.3%, primarily because of the higher credit-loss provision, increased operating expenses and lower net interest margin.
- Loans increased $253.0 million, or 9.4%, from June 30, 2022, with growth in residential and commercial real estate, commercial and agricultural lending, and consumer loans.
- Deposits increased $35.9 million, or 1.3%, while FHLB advances increased $187.0 million to fund loan growth. The average loan-to-deposit ratio was 98.5%, compared with 96.4% in the prior-year quarter.
- Cash and cash equivalents plus time deposits declined $41.8 million to $49.7 million. Available-for-sale securities were substantially unchanged at $235.1 million, but had $25.1 million of gross unrealized losses, which management attributed to interest-rate movements rather than credit deterioration.
- Noninterest income increased 22.1%, while noninterest expense increased 19.0%. Merger and acquisition-related charges were $169,000, compared with $25,000 in the prior-year quarter.
- PPP loans outstanding declined to $1.4 million, and related deferred-fee accretion fell to $37,000 from $2.2 million in the prior-year quarter.
Liquidity, capital, outlook and risks
- Management reported approximately $769.3 million of outstanding loan commitments and approvals, including $429.2 million of unused lines of credit.
- FHLB collateral supported approximately $508.1 million of available credit, of which $225.9 million was advanced. Farmland and agricultural loans provided access to approximately $270.5 million of Federal Reserve discount-window borrowing; none was advanced.
- Management believes liquidity is sufficient, but funding costs and liquidity requirements may increase because loan growth is outpacing deposit growth and deposit competition is rising.
- The Bank was categorized as well capitalized. At September 30, 2022, the Bank’s total risk-based capital ratio was 12.10%, Tier 1 risk-based capital ratio was 10.95%, common equity Tier 1 ratio was 10.95%, and Tier 1 leverage ratio was 9.99%.
- Management cited a deteriorating modeled economic outlook, higher inflation, weaker GDP and unemployment projections, Federal Reserve tightening, an inverted yield curve, and continuing COVID-19-related uncertainty as credit and earnings risks.
- Management specifically identified hotel exposure, commercial real estate, agricultural conditions, collateral values, borrower cash flow, loan growth and interest-rate sensitivity as areas requiring monitoring.
- At September 30, 2022, a 100-basis-point instantaneous rate increase was estimated to reduce net portfolio value by $45.3 million, or 14%; a 300-basis-point increase was estimated to reduce it by $162.1 million, or 51%. These are model-based estimates and do not reflect possible management actions.
- On September 20, 2022, the Company agreed to acquire Citizens Bancshares, parent of Citizens Bank and Trust Company, in a transaction valued at approximately $140 million, with consideration consisting of 75% stock and 25% cash. Closing was expected in the first calendar quarter of 2023, subject to shareholder and regulatory approvals.
- The filing states that no material changes occurred to the risk factors in the fiscal 2022 Form 10-K, and no pending legal proceedings were expected to materially affect financial condition or operations.
Most important facts to verify
- Whether rapid loan growth and reliance on FHLB advances continue to pressure liquidity, funding costs and capital ratios.
- Whether the $5.1 million credit-loss provision and higher allowance adequately cover risks from commercial real estate, hotels, agriculture and a weakening economic outlook.
- Whether deposit pricing and the inverted yield curve cause further compression of net interest margin.
- Progress, final consideration, regulatory approvals, integration costs and expected synergies related to the Citizens transaction.
- Changes in unrealized securities losses, accumulated other comprehensive income and tangible capital as interest rates move.
- Whether the Company’s reported capital and liquidity resources remain sufficient to fund approximately $769.3 million of commitments and approvals.