Southern Missouri Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
Southern Missouri Bancorp, Inc. is the parent of Southern Bank, which provides retail, commercial, agricultural, mortgage, construction and consumer banking services. The filing covers the three months ended September 30, 2021, the first quarter of fiscal 2022, with comparisons to September 30, 2020. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total assets | $2.739 billion | $2.538 billion average assets | Period-end assets increased 1.4% from June 30, 2021 |
| Net interest income | $25.6 million | $22.1 million | Up 16.2% |
| Net interest margin | 4.01% | 3.73% | Up 28 basis points |
| Net income | $12.7 million | $10.0 million | Up 27.6% |
| Diluted EPS | $1.43 | $1.09 | Up $0.34 |
| Return on average assets | 1.87% | 1.57% | Improved |
| Return on average equity | 17.7% | 15.6% | Improved |
| Efficiency ratio | 47.2% | 49.1% | Improved |
| Cash flow from operations | $14.2 million | $5.9 million | Increased |
All dollar amounts are presented in thousands in the filing unless otherwise stated.
- Total interest income was $28.9 million, up 7.0%; interest expense was $3.2 million, down 34.4%.
- The provision for credit losses was a $305,000 benefit versus a $1.0 million provision in the prior-year quarter.
- Noninterest income was $4.5 million, down 8.6%, primarily because of lower residential loan-sale gains and servicing income.
- Noninterest expense was $14.2 million, up 7.2%, driven mainly by compensation, occupancy, data processing and advertising costs.
- Net loans were $2.249 billion at September 30, 2021, up $49.2 million, or 2.2%, from June 30, 2021. Deposits were $2.372 billion, up $40.9 million, or 1.8%.
- Cash and cash equivalents were $111.4 million, down $12.2 million from June 30, 2021. Available-for-sale securities were $209.4 million.
- FHLB advances were $46.5 million, down $11.0 million from June 30, 2021. Subordinated debt was $15.3 million.
- Stockholders’ equity was $293.3 million, up $9.8 million from June 30, 2021. The company paid a $0.20 per-share dividend and repurchased 26,607 shares for $1.2 million.
Material changes versus comparable periods
- Profitability benefited from higher average interest-earning assets, lower funding costs and a $2.2 million acceleration of deferred PPP loan-fee accretion. Management expects this PPP-related benefit to decline as outstanding PPP balances and deferred fees decrease.
- The average yield on interest-earning assets declined five basis points, while the average cost of interest-bearing liabilities fell 38 basis points. The interest-rate spread increased to 3.88% from 3.55%.
- PPP loan balances declined by $36.6 million during the quarter to $26.4 million at September 30, 2021; deferred fee income was approximately $1.3 million. As of October 31, 2021, PPP loans outstanding were $21.8 million.
- The allowance for credit losses on loans declined to $32.5 million from $33.2 million at June 30, 2021. The allowance represented 1.43% of gross loans and 530.6% of nonperforming loans.
- Nonperforming assets were $8.4 million, compared with $8.1 million at June 30, 2021 and $11.3 million at September 30, 2020. Nonaccrual loans increased to $6.1 million from $5.9 million at June 30, 2021 but remained below the prior-year level of $8.8 million.
- Past-due loans increased to $4.8 million from $3.8 million at June 30, 2021, but were below $6.9 million at September 30, 2020.
- The company’s loan portfolio remains heavily concentrated in real estate, including $901.3 million of commercial real estate loans, $762.2 million of residential real estate loans and $235.5 million of construction loans at September 30, 2021.
Guidance, outlook, risks and unusual items
- Management expects continued asset growth through loan originations and securities purchases, funded primarily by retail deposits, brokered funding and FHLB borrowings.
- Management expects some unusually high customer deposit balances to decline during calendar 2022. The average loan-to-deposit ratio was 96.4% in the quarter.
- Management believes liquidity is sufficient. At September 30, 2021, the company had $541.5 million of outstanding loan commitments and approvals, including $326.1 million of unused lines of credit. FHLB collateral supported approximately $414.7 million of available credit, of which $46.5 million was advanced; farmland and agricultural loans provided access to approximately $242.9 million of Federal Reserve discount-window borrowing.
- The ongoing COVID-19 pandemic remains a source of uncertainty, particularly for hotel, retail, restaurant and other affected commercial borrowers. Four hotel-related loans totaling $23.7 million remained under CARES Act interest-only modifications and were classified as special mention credits.
- The company’s allowance estimate incorporates economic forecasts and remains subject to changes in delinquencies, collateral values, economic conditions, regulatory review and pandemic effects. Management identified hotel exposure as an elevated and stable risk factor.
- On September 28, 2021, the company announced a planned stock-and-cash acquisition of Fortune Financial Corporation and FortuneBank for approximately $29.9 million. Closing was expected in late calendar 2022’s first quarter, subject to regulatory and shareholder approvals. The target reported June 30, 2021 assets of $253.7 million, loans of $209.3 million and deposits of $214.5 million.
- On October 20, 2021, the company announced an agreement to acquire the Cairo, Illinois branch of First National Bank, subject to regulatory approval and expected completion by year-end 2021.
- Interest-rate sensitivity analysis estimated that a 300-basis-point instantaneous increase in rates would reduce net portfolio value by 16%, while a 300-basis-point decrease would increase it by 17%. Actual results may differ materially because the analysis depends on assumptions about repricing, prepayments, deposit runoff and management actions.
- The company and Southern Bank met applicable regulatory capital requirements, and Southern Bank was categorized as well capitalized. The filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether PPP fee accretion and unusually high deposits continue to support earnings and liquidity as those benefits diminish.
- Trends in hotel and other commercial real estate exposure, including the $23.7 million of CARES Act-modified hotel loans and related special mention classifications.
- Whether the $32.5 million ACL remains adequate as pandemic-related relief expires and loan growth continues.
- Execution, regulatory approval, purchase accounting and integration risks related to the Fortune transaction and the Cairo branch acquisition.
- Future net interest margin performance given historically low rates, declining asset yields, limited additional funding-cost reductions and the company’s fixed-rate loan exposure.
- The company’s ability to fund approximately $541.5 million of loan commitments while maintaining regulatory capital and liquidity.