Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six-month period ended December 31, 2021. The filing is unaudited and compares results with the periods ended December 31, 2020; balance-sheet comparisons are with June 30, 2021. Southern Missouri Bancorp is the parent of Southern Bank, which generates substantially all consolidated revenue and holds substantially all assets and liabilities.
Business Context and Financial Condition
- The Bank operated 47 full-service and two limited-service branches at December 31, 2021.
- Total assets were $2.919 billion, up 8.1% from June 30, 2021, primarily from loan growth and higher cash balances.
- Net loans were $2.359 billion, up 7.2%; deposits were $2.552 billion, up 9.5%.
- Cash and cash equivalents were $184.5 million, and available-for-sale securities were $206.6 million.
- FHLB advances declined to $36.5 million from $57.5 million. Subordinated debt was $15.3 million.
- Stockholders’ equity was $301.6 million, up 6.4% from June 30, 2021. The Company had 8,895,616 common shares outstanding at February 7, 2022.
Key Financial Metrics
| Metric | Three months ended December 31, 2021 | Six months ended December 31, 2021 |
|---|---|---|
| Total interest income | $28.1 million | $57.0 million |
| Net interest income | $25.1 million | $50.7 million |
| Provision for credit losses | $0 | $(0.3) million benefit |
| Noninterest income | $5.3 million | $9.8 million |
| Noninterest expense | $15.1 million | $29.3 million |
| Net income | $12.0 million | $24.7 million |
| Diluted EPS | $1.35 | $2.78 |
| Net interest margin | 3.77% | 3.89% |
| Return on average assets | 1.69% | 1.78% |
| Return on average common equity | 16.1% | 16.9% |
| Efficiency ratio | 49.7% | 48.4% |
Cash Flow, Liquidity, Debt and Capital
- Operating activities provided $29.6 million of cash during the six months ended December 31, 2021.
- Investing activities used $135.8 million, driven primarily by a $156.7 million net increase in loans, partially offset by $27.2 million of net cash received from the Cairo branch acquisition.
- Financing activities provided $167.2 million, principally from a $206.3 million increase in demand and savings deposits, offset by FHLB repayments and dividends.
- Cash and cash equivalents increased $60.9 million to $184.5 million.
- Outstanding loan commitments and approvals totaled approximately $556.9 million, including $345.2 million of unused lines of credit. Management stated that liquidity resources were sufficient to meet expected needs.
- At December 31, 2021, Southern Bank’s total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios were 13.51%, 12.44%, 10.65% and 12.44%, respectively. The Bank was categorized as well capitalized.
Material Changes Versus Prior Comparable Period
- Six-month net income increased 12.2% to $24.7 million from $22.0 million; diluted EPS increased to $2.78 from $2.42.
- Six-month net interest income increased 11.2% to $50.7 million, supported by 9.4% growth in average interest-earning assets and lower funding costs.
- The six-month provision for credit losses changed from a $2.0 million expense to a $305,000 benefit, reflecting improved economic and credit-quality expectations.
- Noninterest income declined 8.1% to $9.8 million, principally because of lower residential loan-sale gains, servicing fees and BOLI earnings.
- Noninterest expense increased 11.3% to $29.3 million, driven by compensation, occupancy, data processing, foreclosed-property costs and acquisition-related expenses.
- Second-quarter net income declined 0.5% to $12.0 million despite a 6.5% increase in net interest income, as higher expenses and lower noninterest income offset the benefit of no credit-loss provision.
- Net interest margin increased for the six-month period but declined in the second quarter to 3.77% from 3.92%, reflecting lower asset yields despite lower funding costs.
- Nonperforming assets declined to $4.8 million from $8.1 million at June 30, 2021 and $11.1 million at December 31, 2020. Nonaccrual loans declined to $3.0 million from $5.9 million at June 30, 2021.
Credit Quality, Outlook and Unusual Items
- The allowance for credit losses was $32.5 million, or 1.36% of gross loans, compared with $33.2 million, or 1.49%, at June 30, 2021. Net charge-offs were $14,000 for the six-month period.
- Management cited improving economic conditions, low net charge-offs and reduced delinquency and nonperforming-loan levels, but continued to identify COVID-19 uncertainty and hotel exposure as risks. Four COVID-related modified loans totaling $23.7 million remained outstanding and were classified as special mention.
- PPP loans outstanding declined to $11.5 million at December 31, 2021, with $301,000 of deferred PPP fees remaining. Management expected most remaining PPP loans to receive forgiveness during the quarter ending March 31, 2022, limiting future fee accretion.
- The Company completed its acquisition of the Cairo, Illinois branch on December 15, 2021. The acquisition added $28.5 million of deposits and generated $442,000 of goodwill and $168,000 of core deposit intangible assets.
- The Company announced the planned acquisition of Fortune Financial Corporation and FortuneBank in a transaction valued at approximately $29.9 million. Closing was expected late in the first calendar quarter of 2022, subject to regulatory and shareholder approvals. Fortune reported $261.2 million of assets, $199.4 million of net loans and $219.6 million of deposits at December 31, 2021.
- Acquisition-related expenses were $230,000 for the six-month period. The Company also recorded a $130,000 write-down of its legacy Cairo facility and higher foreclosed-property losses.
- Management expects above-trend compensation increases beginning in January 2022. It also expects unusually high deposit balances to decline during calendar 2022.
- Interest-rate risk increased as the Company originated additional long-term fixed-rate loans. Under the Company’s model, a hypothetical 300-basis-point rate increase reduced estimated net portfolio value by 21%; the model is subject to significant assumptions and limitations.
- Management identified risks from COVID-19, interest-rate movements, real-estate values, credit losses, funding access, regulatory changes, acquisition integration, competition and economic conditions. No material changes were reported to the risk factors in the prior Form 10-K.
Important Facts for Investors to Verify
- Confirm that the filing period is the fiscal second quarter ended December 31, 2021, despite any metadata identifying it simply as “2021 Q2.”
- Assess the sustainability of earnings after the $3.1 million of accelerated PPP-fee accretion recognized in the six-month period and the limited remaining deferred fees.
- Monitor commercial real-estate and hotel exposure, the $23.7 million of COVID-related modified loans and the adequacy of the $32.5 million ACL.
- Review completion, purchase accounting and integration risks for the planned Fortune acquisition.
- Evaluate the effect of higher compensation costs, lower mortgage origination activity and potential deposit runoff on future profitability and liquidity.
- Review the Company’s interest-rate sensitivity, including the impact of additional fixed-rate lending and any future increases in funding costs.
- Note that disclosure controls were deemed effective and management reported no material pending legal proceedings or material changes to previously disclosed risk factors.