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Southern Missouri Bancorp(SMBC) - 2023 Q4 - Annual Report

PART I Item 1. Description of Business Southern Missouri Bancorp, Inc. is a bank holding company with $4.4 billion in assets, primarily funding real estate loans through deposits, with growth driven by acquisitions - Financial Highlights as of June 30, 2023 | Metric | Value (in billions) | | :--- | :--- | | Total Assets | $4.4 | | Total Deposits | $3.7 | | Stockholders' Equity | $0.446 | - The company's principal business is attracting retail deposits to invest in various loan types, including residential, commercial real estate, commercial business, and consumer loans16 Acquisitions Strategic acquisitions, notably the January 2023 Citizens Bancshares Co. merger, significantly expanded the company's market presence and asset base - Key Recent Acquisitions (Amounts in Millions) | Acquired Company | Completion Date | Assets at Closing | Goodwill Generated | | :--- | :--- | :--- | :--- | | Citizens Bancshares, Co. | Jan 20, 2023 | $985.7 | $23.5 | | Fortune Financial, Inc. | Feb 25, 2022 | $253.0 | $12.8 | | Cairo, IL Branch (First National Bank) | Dec 15, 2021 | N/A | $0.442 | - The primary strategic purpose for these acquisitions is to expand commercial banking activities into markets where the company's business model is expected to perform well and to gain long-term value from the acquired core deposit franchises27 Market Area and Competition The Bank operates 65 branches across four states, facing strong competition for deposits and loans in diverse regional markets - The Bank's operations are geographically diversified across five regional markets, serving a mix of rural and metropolitan statistical areas (MSAs) like Kansas City, St Louis, and Springfield3334 - The company faces intense competition, competing with dozens of other banking groups for billions in deposits in each of its five regions38 Lending Activities The Bank's $3.6 billion loan portfolio focuses on real estate, with nonperforming assets increasing to $11.3 million due to the Citizens merger - Loan Portfolio Composition (June 30, 2023 vs 2022, Amounts in Thousands) | Loan Type | 2023 Amount | 2023 Percent | 2022 Amount | 2022 Percent | | :--- | :--- | :--- | :--- | :--- | | Mortgage Loans | | | | | | Residential real estate | $1,133,417 | 31.74% | $904,160 | 33.66% | | Commercial real estate | $1,562,379 | 43.75% | $1,146,673 | 42.69% | | Construction | $550,052 | 15.40% | $258,072 | 9.61% | | Other Loans | | | | | | Commercial business | $599,030 | 16.77% | $441,598 | 16.44% | | Other (Consumer, etc.) | $133,515 | 3.75% | $92,996 | 3.46% | | Net Loans Receivable | $3,571,078 | 100.00% | $2,686,198 | 100.00% | - Non-Performing Assets (NPA, Amounts in Millions) | Metric | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Total Nonperforming Assets | $11.3 | $6.3 | | NPA to Total Assets | 0.26% | 0.20% | - The increase in nonperforming assets in fiscal 2023 was primarily attributed to nonaccrual loans and other real estate owned acquired in the Citizens merger95 - Allowance for Credit Losses (ACL, Amounts in Millions) | Metric | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | ACL Balance | $47.8 | $33.2 | | ACL to Gross Loans | 1.32% | 1.22% | | ACL to Nonaccrual Loans | 633.97% | 806.02% | Investment Activities The company manages a $417.6 million available-for-sale investment portfolio for liquidity and asset/liability management, primarily MBS and other debt securities - Investment Portfolio Composition (Fair Value, Amounts in Millions) | Security Type | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Debt and Other Securities | $147.3 | $64.8 | | Mortgage-Backed Securities (MBS) | $270.3 | $170.6 | | Total AFS Securities | $417.6 | $235.4 | - All investment securities are classified as available-for-sale (AFS), with unrealized gains and losses recorded as a separate component of stockholders' equity115 Deposit Activities and Other Sources of Funds Primary funding sources include $3.7 billion in deposits, with over 51% in non-interest bearing and NOW accounts, supplemented by FHLB advances - Deposit Composition as of June 30, 2023 (Amounts in Thousands) | Deposit Type | Balance | Percentage of Total | | :--- | :--- | :--- | | Non-interest Bearing | $597,600 | 16.04% | | NOW Accounts | $1,328,423 | 35.66% | | Savings Accounts | $282,753 | 7.59% | | Money Market Accounts | $452,728 | 12.15% | | Certificates of Deposit | $1,064,036 | 28.56% | | Total Deposits | $3,725,540 | 100.00% | - As of June 30, 2023, an estimated $750.0 million of the deposit portfolio was uninsured, of which $227.8 million was collateralized133 - The company actively uses FHLB advances for liquidity and funding, with $133.5 million outstanding and approximately $539.5 million in available credit as of June 30, 2023144145 Government Supervision and Regulation The Company and Bank operate in a highly regulated environment, subject to extensive federal and state supervision covering capital adequacy and lending practices - The Bank is a state-chartered, federally insured trust company, with the FRB as its primary federal regulator and the Missouri Division of Finance as its primary state regulator168 - The Company and Bank are subject to minimum regulatory capital requirements, including CET1, Tier 1, and total capital ratios, and must maintain a capital conservation buffer to avoid limitations on dividends and share repurchases187190 - As a bank holding company, the Company is regulated by the FRB under the Bank Holding Company Act, which requires it to serve as a source of financial strength for its subsidiary bank210 Item 1A. Risk Factors The company faces significant risks from macroeconomic factors, credit concentrations in real estate, interest rate fluctuations, and operational vulnerabilities - Macroeconomic risks include the potential adverse effects of recent bank failures on depositor confidence, economic slowdowns impacting loan demand and collateral values, and inflationary pressures on business customers' ability to repay loans229232236 - Significant credit risks stem from the loan portfolio's concentration in commercial real estate (60.5% of net loans), construction lending (15.4%), and agricultural lending, which are more vulnerable to economic downturns246248251 - The company exceeds interagency guidance thresholds for commercial real estate concentrations, which may lead to increased supervisory scrutiny or require slowing growth in this loan category257259 - The business is exposed to interest rate risk, which can negatively affect net interest income, and risks associated with the transition from LIBOR to alternative benchmark rates like SOFR263265 - Operational risks include potential failures in technology systems, cybersecurity breaches, and reliance on third-party vendors, which could lead to financial loss and reputational damage279282286 Item 2. Description of Properties The Bank operates from a headquarters and 65 branch offices, with the majority of these properties owned rather than leased - The Bank owns the majority of its physical locations, including its headquarters and 58 of its 65 branch offices304 Item 3. Legal Proceedings Management states no material pending legal proceedings are expected to significantly impact the company's financial condition or operations - There are no material pending legal proceedings expected to significantly impact the company's financial condition or operations306307 Item 4A. Information About Our Executive Officers This section provides biographical information for the company's executive officers, including Chairman and CEO Greg A. Steffens and President Matthew T. Funke - Greg A Steffens serves as Chairman and CEO, having been with the company since 1998311 - Matthew T Funke is the President and Chief Administrative Officer, promoted to the role effective July 1, 2022312 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'SMBC', with 11.3 million shares outstanding, and a policy of quarterly dividends - The company's common stock (SMBC) is traded on the Nasdaq Global Market327 - A share repurchase program authorized in May 2021 has 306,375 shares remaining for purchase as of June 30, 2023 No repurchases were made during the three months ended June 30, 2023329331 - Cumulative Total Return Comparison | Index | 6/30/2022 | 6/30/2023 | | :--- | :--- | :--- | | Southern Missouri Bancorp, Inc. | 124.49 | 107.78 | | KBW NASDAQ Bank Index | 109.47 | 90.06 | | S&P U.S. SmallCap Banks Index | 106.94 | 87.01 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal year 2023 net income decreased 16.8% to $39.2 million, driven by higher provision for credit losses and noninterest expenses, despite net interest income growth - Key Operating Data (Fiscal Year Ended June 30, Amounts in Millions) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $39.2 | $47.2 | | Diluted EPS | $3.85 | $5.21 | | Net Interest Income | $126.7 | $103.6 | | Provision for Credit Losses | $17.1 | $1.5 | | Return on Assets (ROA) | 1.03% | 1.59% | | Return on Equity (ROE) | 10.39% | 15.44% | Financial Condition As of June 30, 2023, the company's financial condition showed significant growth, with total assets increasing 35.6% to $4.4 billion due to the Citizens merger - Total assets grew by $1.1 billion (35.6%) during fiscal 2023, largely driven by the Citizens merger348 - Net loans increased by $884.9 million (32.9%), with $447.4 million of the increase attributable to the Citizens merger351352 - Deposits increased by $910.5 million (32.3%), with the Citizens merger contributing $851.1 million of the growth361 - Stockholders' equity increased by $125.3 million (39.1%), primarily due to $98.3 million in equity issued to Citizens shareholders366 Comparison of Operating Results for the Years Ended June 30, 2023 and 2022 Fiscal year 2023 net income decreased 16.8% to $39.2 million, primarily due to increased provision for credit losses and noninterest expense - Net income decreased by $7.9 million (16.8%) compared to the prior fiscal year367 - Net interest margin decreased from 3.72% to 3.54% due to a 113 basis point increase in the average rate paid on interest-bearing liabilities, which outpaced the 73 basis point increase in the average yield on interest-earning assets368369372 - The provision for credit losses increased to $17.1 million from $1.5 million, partly due to a $5.2 million charge to fund the ACL for non-PCD loans and a $1.8 million charge for off-balance sheet exposures from the Citizens merger376 - Noninterest expense increased by $23.0 million (36.4%), which included $4.9 million in merger-related costs and higher compensation, data processing, and occupancy expenses from the expanded operations378 Liquidity and Capital Resources The company maintains adequate liquidity through deposit growth and FHLB advances, exceeding all regulatory capital requirements to be "well capitalized" - The Bank has substantial borrowing capacity, with $541.3 million available from the FHLB and $276.6 million from the Federal Reserve discount window as of June 30, 2023397 - Regulatory Capital Ratios (Southern Bank) - June 30, 2023 | Ratio | Actual | Well Capitalized Minimum | | :--- | :--- | :--- | | Total Capital (to Risk-Weighted Assets) | 11.77% | 10.00% | | Tier I Capital (to Risk-Weighted Assets) | 10.56% | 8.00% | | Tier I Capital (to Average Assets) | 9.54% | 5.00% | | Common Equity Tier I Capital | 10.56% | 6.50% | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed to maximize net interest income, with a 100 basis point rate increase decreasing Net Portfolio Value by 11% - Net Portfolio Value (NPV) Sensitivity Analysis (June 30, 2023, Amounts in Thousands) | Change in Rates | NPV Change | % Change | | :--- | :--- | :--- | | +300 bp | $(114,765) | (31)% | | +200 bp | $(77,850) | (21)% | | +100 bp | $(40,138) | (11)% | | 0 bp | $374,364 | — | | -100 bp | $51,879 | 14% | - The company's asset/liability strategy aims to match the repricing intervals of assets and liabilities, utilizing strategies like originating shorter-duration commercial loans and using longer-term FHLB advances to manage risk from fixed-rate residential lending422423 Item 8. Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for fiscal year 2023, including balance sheets, income statements, and detailed notes Report of Independent Registered Public Accounting Firm FORVIS, LLP issued an unqualified opinion on the financial statements, identifying ACL estimation and business combination accounting as Critical Audit Matters - The auditor, FORVIS, LLP, issued an unqualified opinion on the company's consolidated financial statements434 - Critical Audit Matters identified were the Allowances for Credit Losses (ACL) and the accounting for the recent Business Combination, both of which involved significant management judgment and subjectivity439441446 Consolidated Financial Statements The consolidated financial statements detail the company's financial position, with total assets of $4.4 billion and net income of $39.2 million for fiscal 2023 - Consolidated Balance Sheet Highlights (June 30, Amounts in Thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total Assets | $4,360,211 | $3,214,782 | | Loans Receivable, Net | $3,571,078 | $2,686,198 | | Total Deposits | $3,725,540 | $2,815,075 | | Total Liabilities | $3,914,153 | $2,894,010 | | Total Stockholders' Equity | $446,058 | $320,772 | - Consolidated Statement of Income Highlights (Year Ended June 30, Amounts in Thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Interest Income | $126,745 | $103,567 | | Provision for Credit Losses | $17,061 | $1,487 | | Noninterest Income | $26,204 | $21,203 | | Noninterest Expense | $86,425 | $63,379 | | Net Income | $39,237 | $47,169 | Notes to Consolidated Financial Statements The notes provide critical details supporting financial statements, covering accounting policies, loan portfolio analysis, business combinations, and regulatory capital - The company adopted the Current Expected Credit Loss (CECL) standard on July 1, 2020, which requires estimating credit losses over the life of financial assets The adoption resulted in a $7.2 million after-tax adjustment to retained earnings464504 - Note 14 details the Citizens merger, showing total consideration of $133.2 million, resulting in $23.5 million of goodwill and $24.7 million in identifiable intangible assets619621 - Note 3 provides a detailed breakdown of the loan portfolio's credit quality, including risk ratings (Pass, Watch, Substandard) and aging analysis As of June 30, 2023, $46.3 million in loans were rated Substandard551557 Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective, excluding the recently acquired Citizens Bancshares Co. operations - Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of June 30, 2023648654 - The assessment of internal controls explicitly excluded the operations of Citizens Bancshares Co., which was acquired during fiscal year 2023 and represented approximately 23% of consolidated assets654661 PART III This section incorporates information by reference from the company's definitive proxy statement, covering directors, executive compensation, security ownership, and related transactions Items 10-14 (Incorporated by Reference) Information for Items 10-14 is incorporated by reference from the forthcoming proxy statement, covering governance, compensation, ownership, and auditor fees - Information regarding directors, executive compensation, security ownership, and principal accountant fees is incorporated by reference from the forthcoming proxy statement670675677681682 - The company has adopted a Code of Conduct and Ethics applicable to all directors, officers, and employees673 PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report, including articles of incorporation and material contracts - This section lists all financial statements and exhibits included with or incorporated by reference into the Form 10-K filing685686