Business Context and Reporting Period
Southern Missouri Bancorp, Inc. is the holding company for Southern Bank, which provides banking and financial services through 62 full-service and two limited-service branches. This unaudited Form 10-Q covers the three- and nine-month periods ended March 31, 2023, compared primarily with March 31, 2022, and the balance sheet is compared with June 30, 2022. The provided metadata identifies “2022 Q3,” but the filing period is fiscal 2023 third quarter.
On January 20, 2023, the Company acquired Citizens Bancshares Company and Citizens Bank and Trust Company in a transaction funded with $32.5 million of cash and $98.3 million of common stock. The bank subsidiary was merged into Southern Bank in February 2023.
Key Financial Metrics
| Metric | Three months ended March 31, 2023 | Year-ago period | Nine months ended March 31, 2023 | Year-ago period |
|---|---|---|---|---|
| Net interest income | $33.8 million | $25.1 million | $90.5 million | $75.8 million |
| Provision for credit losses | $10.1 million | $1.6 million | $16.3 million | $1.2 million |
| Noninterest income | $6.3 million | $4.9 million | $17.3 million | $14.7 million |
| Noninterest expense | $27.0 million | $16.8 million | $61.6 million | $46.0 million |
| Net income | $2.4 million | $9.4 million | $23.7 million | $34.1 million |
| Diluted EPS | $0.22 | $1.03 | $2.41 | $3.80 |
| Net interest margin | 3.48% | 3.48% | 3.52% | 3.74% |
Net income declined 74.2% in the quarter and 30.5% for the nine-month period. The filing attributes the deterioration primarily to higher credit-loss provisions, merger-related costs, and ongoing expenses associated with the larger organization.
- Total assets were $4.29 billion at March 31, 2023, up 33.5% from June 30, 2022.
- Net loans were $3.43 billion, up 27.9%; gross loans increased primarily through the Citizens acquisition and legacy growth.
- Deposits were $3.76 billion, up 33.4%. Brokered certificates totaled $97.9 million versus $10.8 million at June 30, 2022.
- Available-for-sale securities were $429.8 million, up 82.6% from June 30, 2022, with $25.4 million of gross unrealized losses. Management attributed the losses primarily to higher market interest rates and recorded no credit-loss allowance on the securities.
- FHLB advances were $45.0 million and subordinated debt was $23.1 million at March 31, 2023. There were no overnight borrowings or short-term repo balances at period-end.
- Stockholders’ equity was $436.6 million, up 36.1%, primarily reflecting $98.3 million of stock issued to Citizens shareholders and retained earnings.
- Cash flow from operating activities was $39.4 million for the nine months, compared with $45.9 million in the prior-year period. Net cash used in investing activities was $73.7 million, while financing activities provided $62.1 million. Cash and cash equivalents ended at $114.5 million.
- The Bank remained categorized as well capitalized. At March 31, 2023, Southern Bank reported total risk-based capital of 11.87%, Tier 1 risk-based capital of 10.62%, common equity Tier 1 capital of 10.62%, and Tier 1 leverage of 10.58%.
Material Changes Versus Prior Comparable Period
- Average interest-earning assets increased substantially, supporting a 34.5% increase in quarterly net interest income and a 19.4% increase for the nine-month period.
- Funding costs rose sharply. For the quarter, the average cost of interest-bearing liabilities increased to 1.86% from 0.55%; for the nine-month period, it increased to 1.52% from 0.58%.
- The nine-month net interest margin declined to 3.52% from 3.74%, and the interest-rate spread declined to 3.32% from 3.63%, reflecting higher deposit and borrowing costs.
- Noninterest expense increased 61.1% in the quarter and 33.7% year to date. Citizens-related acquisition costs were $3.3 million in the quarter and $4.1 million year to date, compared with $1.1 million and $1.3 million, respectively, in the prior-year periods.
- The allowance for credit losses on loans increased to $45.7 million from $33.2 million at June 30, 2022. The allowance represented 1.31% of gross loans, compared with 1.22% at June 30, 2022.
- Nonperforming assets increased to $12.7 million from $6.3 million at June 30, 2022. Nonaccrual loans increased to $7.4 million from $4.1 million, while adversely classified loans increased to $46.9 million from $27.1 million.
- Quarterly and year-to-date results benefited from Citizens operations beginning January 20, 2023, and from $1.4 million and $2.4 million, respectively, of acquisition-related loan discount accretion and deposit premium amortization in net interest income.
Outlook, Management Commentary, Risks and Unusual Items
Management expects continued asset growth through loan origination, occasional loan purchases, and investment securities purchases, funded by retail deposits, brokered funding, and FHLB borrowings. No specific quantitative earnings, revenue, margin, or balance-sheet guidance was provided.
- Management expects the inverted yield curve and higher short-term rates could cause funding costs to increase faster than asset yields, pressuring net interest income and margins.
- The Company had approximately $1.1 billion of outstanding commitments and approvals to extend credit, including $723.2 million of unused lines of credit. Management believes available liquidity is sufficient.
- At March 31, 2023, FHLB collateral supported approximately $606.6 million of available credit, of which $45.2 million was advanced. Additional Federal Reserve discount-window capacity of approximately $237.5 million was available, with none advanced.
- Management identified elevated and stable risk in hotel lending, moderate and increasing risk from rapid loan growth, and continuing sensitivity to interest rates, inflation, recession risk, real estate values, deposit competition, and access to cost-effective funding.
- The non-owner-occupied commercial real estate portfolio was approximately $1.5 billion, or 42% of total loans and 334% of regulatory capital. Key exposures included multifamily residential, hotels and motels, and retail properties.
- The Company recorded $10.1 million of quarterly provision expense, including approximately $5.2 million for non-PCD loans acquired from Citizens and $1.8 million for acquired off-balance-sheet credit exposures. Excluding Citizens-related charges, quarterly provision expense would have been approximately $3.0 million.
- The Company reported no material pending legal proceedings and stated that disclosure controls were effective as of March 31, 2023.
- Recent regional-bank failures created additional liquidity and deposit-outflow risk. Management noted that deposit outflows, increased borrowing costs, and stronger competition for liquidity could materially affect results.
- The Missouri Department of Revenue is auditing the Company’s Missouri income tax returns for fiscal years ended June 30, 2016 through 2018.
Important Facts for Investors to Verify
- Verify the final purchase-price allocation, integration costs, expected synergies, and ongoing expense base associated with the Citizens acquisition.
- Monitor deposit retention, uninsured deposit levels, brokered funding usage, FHLB borrowing capacity, and liquidity under stressed scenarios.
- Assess whether higher funding costs continue to compress the net interest margin and interest-rate spread.
- Review trends in adversely classified loans, nonaccrual loans, hotel and commercial real estate exposures, construction lending, and the adequacy of the allowance for credit losses.
- Reconcile reported earnings with unusual items, including acquisition-related expenses, purchase-accounting accretion, securities valuation changes, and gains on asset sales.
- Evaluate the effect of the $25.4 million unrealized loss position in available-for-sale securities on tangible capital and liquidity if securities must be sold.
- Confirm the effect of the Company’s approximately $1.1 billion of unfunded loan commitments on future liquidity and credit-loss reserves.