Southern Missouri Bancorp, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2023. The provided metadata references “2022 Q4,” but the filing is an annual Form 10-K for fiscal 2023, not a quarterly filing. Amounts are generally in thousands unless stated otherwise.
Business Context
Southern Missouri Bancorp is the parent of Southern Bank, a Missouri-chartered, federally insured community bank operating 62 full-service and three limited-service branches across Missouri, Arkansas, Illinois and Kansas. The Bank gathers retail, public-unit and brokered deposits and invests primarily in residential, commercial real estate, construction, commercial business and consumer loans, as well as available-for-sale securities.
On January 20, 2023, the Company completed its acquisition of Citizens Bancshares and Citizens Bank. The transaction added approximately $985.7 million of assets before purchase accounting adjustments, 14 branches, $851.0 million of deposits and $456.0 million of loans, and generated $23.5 million of goodwill.
Financial Performance and Condition
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Total assets | $4.360 billion | $3.215 billion | Up 35.6% |
| Net loans receivable | $3.571 billion | $2.686 billion | Up 32.9% |
| Deposits | $3.726 billion | $2.815 billion | Up 32.3% |
| Stockholders’ equity | $446.1 million | $320.8 million | Up 39.1% |
| Net interest income | $126.7 million | $103.6 million | Up 22.4% |
| Provision for credit losses | $17.1 million | $1.5 million | Higher by $15.6 million |
| Net income | $39.2 million | $47.2 million | Down 16.8% |
| Diluted EPS | $3.85 | $5.21 | Down 26.1% |
| Net interest margin | 3.54% | 3.72% | Down 18 basis points |
| Return on assets | 1.03% | 1.59% | Down 56 basis points |
| Return on average common equity | 10.39% | 15.44% | Down 505 basis points |
Interest income increased 51.0% to $176.4 million as average interest-earning assets grew 28.5% and the average yield increased to 4.93% from 4.20%. Interest expense increased 273.5% to $49.7 million as deposit and borrowing costs rose sharply. The average rate paid on interest-bearing liabilities increased to 1.72% from 0.59%.
Noninterest income increased 23.6% to $26.2 million, supported by the Citizens acquisition and higher deposit fees, interchange income, loan servicing fees, other loan fees and bank-owned life insurance earnings. Noninterest expense increased 36.4% to $86.4 million, including $4.9 million of acquisition-related costs, higher compensation, occupancy, data processing, deposit insurance and intangible amortization expense.
Cash provided by operating activities was $62.0 million. Investing activities used $213.4 million, primarily reflecting net loan growth and securities purchases, partly offset by acquisition proceeds and securities sales. Financing activities provided $118.6 million, including net FHLB borrowing activity. Cash and cash equivalents declined to $54.0 million from $86.8 million.
Liquidity, Debt and Capital
- FHLB advances increased to $133.5 million from $38.0 million, including $33.5 million of overnight borrowings.
- Subordinated debt was $23.1 million. The Company also had $24.3 million of aggregate principal amount of junior subordinated debt securities outstanding.
- At June 30, 2023, approximately $690.5 million of certificates of deposit matured within one year, creating deposit repricing and retention requirements.
- Estimated uninsured deposits totaled $750.0 million, of which $227.8 million was collateralized.
- Commitments to extend credit totaled $912.0 million, including $552.1 million of unused lines of credit. Standby letters of credit totaled $7.1 million.
- Management stated that liquid assets and available credit facilities should be adequate for current obligations and foreseeable liquidity needs.
- The Bank remained well capitalized: Tier 1 leverage was 9.54%, total risk-based capital was 11.77%, and tangible common equity was 10.56%. Consolidated ratios were 9.95%, 12.52% and 10.70%, respectively.
Material Changes Versus the Prior Comparable Period
- The Citizens acquisition materially expanded assets, loans, deposits, branches, equity and operating expenses. The acquired business contributed $11.6 million of revenue and $3.3 million of earnings from acquisition through fiscal year-end.
- Loan growth was concentrated in commercial real estate, construction, residential real estate and commercial business lending. Commercial real estate loans totaled $1.562 billion, construction loans $550.1 million and commercial business loans $599.0 million.
- The allowance for credit losses increased to $47.8 million from $33.2 million, or 1.32% of gross loans versus 1.22%. The allowance for off-balance-sheet exposures increased to $6.3 million from $3.4 million.
- Nonperforming assets increased to $11.3 million, or 0.26% of total assets, from $6.3 million, or 0.20%. Management attributed much of the increase to nonaccrual loans and other real estate acquired from Citizens.
- Adversely classified assets increased to $50.0 million, or 1.15% of total assets, from $29.3 million, or 0.91%, primarily involving commercial real estate and hotel-related exposures.
- Available-for-sale securities increased to $417.6 million from $235.4 million. The portfolio had $29.6 million of gross unrealized losses, but management recorded no credit-related allowance for those securities.
- Accumulated other comprehensive loss increased to $21.9 million from $17.5 million, primarily because of higher interest rates and lower securities fair values.
- The quarterly pattern was volatile: fourth-quarter fiscal 2023 net income was $15.6 million, compared with $2.4 million in the third quarter, which included a $10.1 million provision for credit losses.
Outlook, Commentary, Risks and Unusual Items
Management expects current funding sources to meet foreseeable liquidity needs and projects approximately $6.0 million to $8.0 million of fiscal 2024 capital expenditures for technology, property and equipment. The filing does not provide formal earnings or revenue guidance.
- Interest-rate risk is significant. A modeled instantaneous 300-basis-point increase in rates reduced estimated net portfolio value by 31% at June 30, 2023; these estimates are not forecasts of actual results.
- Commercial real estate, construction, agricultural and commercial business lending create meaningful concentration and credit risk. Non-owner-occupied commercial real estate exposure was approximately 330% of Tier 1 capital plus includable allowance, above the 300% supervisory reference threshold.
- Future credit losses may exceed the allowance, particularly if economic conditions, hotel performance, real estate values, agricultural conditions or borrower cash flows deteriorate.
- Funding risk includes competition for deposits, rising deposit costs, uninsured deposits, brokered deposits and reliance on FHLB advances. Brokered deposits increased to $146.5 million from $10.8 million.
- The Company identified bank failures and broader banking-system concerns as potential sources of deposit outflows, higher funding costs, higher FDIC assessments and regulatory changes.
- LIBOR transition remains a risk. At June 30, 2023, AFS securities with a face amount of $97.9 million were tied to USD LIBOR. The Company began using SOFR for new originations in 2021.
- Acquisition integration, customer and employee retention, realization of synergies, goodwill impairment and fair-value estimates remain material risks. Goodwill was $50.8 million at year-end, with no impairment indicated by the qualitative assessment.
- The Missouri Department of Revenue was auditing fiscal 2016 through 2018 Missouri income tax returns. Management reported no material pending litigation.
- Management and the auditor concluded that internal control over financial reporting was effective, although Citizens, representing approximately 23% of consolidated assets, was excluded from the fiscal 2023 control assessment and audit scope.
Investor Verification Priorities
- Verify the sustainability of deposit growth, the retention and repricing of the $690.5 million of certificates maturing within one year, and the effect of higher funding costs on net interest margin.
- Review Citizens purchase accounting, including the $23.5 million goodwill balance, $24.7 million of acquired intangible assets, loan fair-value discounts and final measurement-period adjustments.
- Monitor commercial real estate, construction, hotel, agricultural and commercial business concentrations, including adversely classified assets and the 330% non-owner-occupied commercial real estate measure.
- Compare future charge-offs, delinquencies, nonaccrual loans and allowance levels with the $47.8 million loan ACL and $6.3 million off-balance-sheet ACL at June 30, 2023.
- Assess liquidity under deposit outflow scenarios, including uninsured deposits, brokered deposits, FHLB maturities and the $912.0 million of unfunded credit commitments.
- Track the effect of interest-rate changes on securities fair values, accumulated other comprehensive loss, deposit costs and modeled net portfolio value.
- Confirm the scope and effectiveness of internal controls after Citizens is fully incorporated into the Company’s control environment.