Quarterly Report (10-q)

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-23406


Southern Missouri Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Missouri		43-1665523
(State or jurisdiction of incorporation)		(IRS employer id. no.)

2991 Oak Grove Road Poplar Bluff, MO		63901
(Address of principal executive offices)		(Zip code)

(573) 778-1800

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common	SMBC	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes	☒	No	☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).


Yes	☒	No	☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):


Large accelerated filer	☐	Accelerated filer	☒	Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act)


Yes	☐	No	☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:


Class		Outstanding at May 9, 2023
Common Stock, Par Value $.01		11,330,712 shares

Table of Contents

SOUTHERN MISSOURI BANCORP, INC.

FORM 10-Q

INDEX


PART I.	Financial Information	PAGE NO.

Item 1.	Condensed Consolidated Financial Statements	3

	- Condensed Consolidated Balance Sheets	3

	- Condensed Consolidated Statements of Income	4

	- Condensed Consolidated Statements of Comprehensive Income	5

	- Condensed Consolidated Statements of Stockholders’ Equity	6

	- Condensed Consolidated Statements of Cash Flows	7

	- Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	62

Item 4.	Controls and Procedures	65

PART II.	OTHER INFORMATION	66

Item 1.	Legal Proceedings	66

Item 1a.	Risk Factors	66

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66

Item 3.	Defaults upon Senior Securities	66

Item 4.	Mine Safety Disclosures	67

Item 5.	Other Information	67

Item 6.	Exhibits	68

	- Signature Page	70

Table of Contents

PART I: Item 1: Condensed Consolidated Financial Statements

SOUTHERN MISSOURI BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2023 AND JUNE 30, 2022


	March 31, 2023		June 30, 2022
(dollars in thousands)	(unaudited)

Assets
Cash and cash equivalents	$	114,540	$	86,792
Interest-bearing time deposits		1,251		4,768
Available for sale securities		429,798		235,394
Stock in FHLB of Des Moines		7,855		5,893
Stock in Federal Reserve Bank of St. Louis		8,491		5,790
Loans receivable, net of ACL of $45,685 and $33,192 at March 31, 2023 and June 30, 2022, respectively		3,434,519		2,686,198
Accrued interest receivable		16,372		11,052
Premises and equipment, net		92,343		71,347
Bank owned life insurance – cash surrender value		71,202		48,705
Goodwill		50,657		27,288
Other intangible assets, net		31,144		8,175
Prepaid expenses and other assets		34,494		23,380
Total assets	$	4,292,666	$	3,214,782

Liabilities and Stockholders' Equity
Deposits	$	3,755,193	$	2,815,075
Advances from FHLB		45,002		37,957
Accounts payable and other liabilities		29,011		17,122
Accrued interest payable		3,721		801
Subordinated debt		23,092		23,055
Total liabilities		3,856,019		2,894,010

Commitments and contingencies

Common stock, $.01 par value; 25,000,000 shares authorized; 11,919,337 and 9,815,736 shares issued at March 31, 2023 and June 30, 2022, respectively		119		98
Additional paid-in capital		218,182		119,162
Retained earnings		257,539		240,115
Treasury stock of 588,625 shares at March 31, 2023 and June 30, 2022, at cost		(21,116)		(21,116)
Accumulated other comprehensive loss		(18,077)		(17,487)
Total stockholders' equity		436,647		320,772
Total liabilities and stockholders' equity	$	4,292,666	$	3,214,782

See Notes to Condensed Consolidated Financial Statements

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SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE- AND NINE- MONTH PERIODS ENDED MARCH 31, 2023 AND 2022 (Unaudited)


	Three months ended				Nine months ended
	March 31,				March 31,
(dollars in thousands except per share data)	2023		2022		2023		2022

Interest Income
Loans	$	43,115	$	27,060	$	113,288	$	81,614
Investment securities		2,076		524		3,519		1,608
Mortgage-backed securities		1,652		646		3,654		1,833
Other interest-earning assets		1,443		109		1,672		239
Total interest income		48,286		28,339		122,133		85,294
Interest Expense
Deposits		13,705		2,871		28,061		8,426
Securities sold under agreements to repurchase		213		—		213		—
Advances from FHLB		206		167		2,300		613
Subordinated debt		395		187		1,033		447
Total interest expense		14,519		3,225		31,607		9,486
Net Interest Income		33,767		25,114		90,526		75,808
Provision for Credit Losses		10,072		1,552		16,266		1,247
Net Interest Income After Provision for Credit Losses		23,695		23,562		74,260		74,561
Noninterest Income
Deposit account charges and related fees		2,089		1,560		5,578		4,743
Bank card interchange income		1,374		1,025		3,471		2,952
Loan late charges		161		135		402		414
Loan servicing fees		265		170		834		504
Other loan fees		465		606		1,959		1,556
Net realized gains on sale of loans		132		204		550		934
Earnings on bank owned life insurance		368		291		1,006		854
Other income		1,430		913		3,454		2,746
Total noninterest income		6,284		4,904		17,254		14,703
Noninterest Expense
Compensation and benefits		14,188		9,223		33,733		25,745
Occupancy and equipment, net		3,024		2,399		7,914		6,710
Data processing expense		2,505		1,935		5,380		4,501
Telecommunications expense		449		308		1,127		946
Deposit insurance premiums		231		178		710		536
Legal and professional fees		2,324		341		3,587		931
Advertising		409		312		1,074		917
Postage and office supplies		331		202		779		582
Intangible amortization		812		363		1,615		1,040
Foreclosed property expenses/losses		280		115		275		449
Other operating expense		2,439		1,381		5,356		3,692
Total noninterest expense		26,992		16,757		61,550		46,049
Income Before Income Taxes		2,987		11,709		29,964		43,215
Income Taxes		578		2,358		6,288		9,133
Net Income	$	2,409	$	9,351	$	23,676	$	34,082

Basic earnings per share	$	0.22	$	1.03	$	2.42	$	3.81
Diluted earnings per share	$	0.22	$	1.03	$	2.41	$	3.80
Dividends paid	$	0.21	$	0.20	$	0.63	$	0.60

See Notes to Condensed Consolidated Financial Statements

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SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE- AND NINE- MONTH PERIODS ENDED MARCH 31, 2023 AND 2022 (Unaudited)


	Three months ended				Nine months ended
	March 31,				March 31,
(dollars in thousands)	2023		2022		2023		2022

Net Income	$	2,409	$	9,351	$	23,676	$	34,082
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale		901		(9,579)		(756)		(12,014)
Tax benefit (expense)		(198)		2,108		166		2,643
Total other comprehensive income (loss)		703		(7,471)		(590)		(9,371)
Comprehensive Income	$	3,112	$	1,880	$	23,086	$	24,711

See Notes to Condensed Consolidated Financial Statements

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Table of Contents

SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE- AND NINE- MONTH PERIODS ENDED MARCH 31, 2023 AND 2022 (Unaudited)


	For the three-and nine- month period ended March 31, 2023
			Additional						Accumulated Other		Total
	Common		Paid-In		Retained		Treasury			Comprehensive		Stockholders'
(dollars in thousands)	Stock		Capital		Earnings		Stock		Income (Loss)		Equity

BALANCE AS OF DECEMBER 31, 2022	$	98	$	119,271	$	257,506	$	(21,116)	$	(18,780)	$	336,979

Net Income						2,409						2,409
Change in unrealized loss on available for sale securities										703		703
Dividends paid on common stock ($.21 per share)						(2,376)						(2,376)
Stock option expense				68								68
Stock grant expense				584								584
Common stock issued		21		98,259								98,280
BALANCE AS OF MARCH 31, 2023	$	119	$	218,182	$	257,539	$	(21,116)	$	(18,077)	$	436,647

BALANCE AS OF JUNE 30, 2022	$	98	$	119,162	$	240,115	$	(21,116)	$	(17,487)	$	320,772

Net Income						23,676						23,676
Change in unrealized loss on available for sale securities										(590)		(590)
Dividends paid on common stock ($.63 per share)						(6,252)						(6,252)
Stock option expense				177								177
Stock grant expense				584								584
Common stock issued		21		98,259								98,280
BALANCE AS OF MARCH 31, 2023	$	119	$	218,182	$	257,539	$	(21,116)	$	(18,077)	$	436,647


	For the three- and nine- month period ended March 31, 2022
			Additional						Accumulated Other		Total
	Common		Paid-In		Retained		Treasury		Comprehensive		Stockholders'
(dollars in thousands)	Stock		Capital		Earnings		Stock		Income (Loss)		Equity

BALANCE AS OF DECEMBER 31, 2021	$	94	$	95,675	$	221,312	$	(16,452)	$	982	$	301,611

Net Income						9,351						9,351
Change in unrealized loss on available for sale securities										(7,471)		(7,471)
Dividends paid on common stock ($.20 per share)						(1,778)						(1,778)
Stock option expense				44								44
Stock grant expense				515								515
Common stock issued		4		22,881								22,885
BALANCE AS OF MARCH 31, 2022	$	98	$	119,115	$	228,885	$	(16,452)	$	(6,489)	$	325,157

BALANCE AS OF JUNE 30, 2021	$	94	$	95,585	$	200,140	$	(15,278)	$	2,882	$	283,423

Net Income						34,082						34,082
Change in unrealized loss on available for sale securities										(9,371)		(9,371)
Dividends paid on common stock ($.60 per share)						(5,337)						(5,337)
Stock option expense				117								117
Stock grant expense				532								532
Common stock issued		4		22,881								22,885
Treasury stock purchased								(1,174)				(1,174)
BALANCE AS OF MARCH 31, 2022	$	98	$	119,115	$	228,885	$	(16,452)	$	(6,489)	$	325,157

See Notes to Condensed Consolidated Financial Statements

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SOUTHERN MISSOURI BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE- MONTH PERIODS ENDED MARCH 31, 2023 AND 2022 (Unaudited)


	Nine months ended
	March 31,
(dollars in thousands)	2023		2022

Cash Flows From Operating Activities:
Net Income	$	23,676	$	34,082
Items not requiring (providing) cash:
Depreciation		3,429		3,307
(Gain) loss on disposal of fixed assets		(317)		3
Stock option and stock grant expense		761		649
Loss on sale/write-down of REO		140		392
Amortization of intangible assets		1,615		1,040
Accretion of purchase accounting adjustments		(2,166)		(1,036)
Increase in cash surrender value of bank owned life insurance (BOLI)		(1,006)		(854)
Provision (benefit) for credit losses		16,266		1,247
Net amortization of premiums and discounts on securities		646		855
Originations of loans held for sale		(14,673)		(38,454)
Proceeds from sales of loans held for sale		14,723		38,164
Gain on sales of loans held for sale		(550)		(934)
Changes in:
Accrued interest receivable		(2,901)		252
Prepaid expenses and other assets		(815)		2,311
Accounts payable and other liabilities		136		3,910
Deferred income taxes		(1,981)		1,019
Accrued interest payable		2,383		(79)
Net cash provided by operating activities		39,366		45,874
Cash flows from investing activities:
Net increase in loans		(311,095)		(174,600)
Net change in interest-bearing deposits		1,244		(1,488)
Proceeds from maturities of available for sale securities		27,987		33,863
Proceeds from sales of available for sale securities		136,714		—
Net (purchases) redemptions of Federal Home Loan Bank stock		(788)		502
Net purchases of Federal Reserve Bank of St. Louis stock		(2,701)		(4)
Purchases of available-for-sale securities		(131,827)		(66,168)
Purchases of long-term investment		(165)		(133)
Purchases of premises and equipment		(4,225)		(4,365)
Net cash received in acquisition		210,704		48,768
Investments in state & federal tax credits		(4,423)		(9,786)
Proceeds from sale of fixed assets		3,464		928
Proceeds from sale of foreclosed assets		1,122		471
Proceeds from BOLI claim		270		—
Net cash used in investing activities		(73,719)		(172,012)
Cash flows from financing activities:
Net (decrease) increase in demand deposits and savings accounts		(104,729)		303,499
Net increase (decrease) in certificates of deposits		193,749		(21,571)
Net decrease in securities sold under agreements to repurchase		(27,629)		—
Proceeds from Federal Home Loan Bank advances		1,579,630		—
Repayments of Federal Home Loan Bank advances		(1,572,668)		(24,287)
Purchase of treasury stock		—		(1,174)
Dividends paid on common stock		(6,252)		(5,337)
Net cash provided by financing activities		62,101		251,130
Increase in cash and cash equivalents		27,748		124,992
Cash and cash equivalents at beginning of period		86,792		123,592
Cash and cash equivalents at end of period	$	114,540	$	248,584
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Conversion of loans to foreclosed real estate	$	1,073	$	127
Conversion of loans to repossessed assets		58		14
Right of use assets obtained in exchange for lease obligations: Operating Leases		82		109

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The Company purchased all of the Citizens Bancshares Company on January 20, 2023.
In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired	$	1,017,837	$	—
Less: common stock issued		98,280		—
Cash paid		32,522		—
Liabilities assumed		887,035		—

The Company purchased all of the Fortune Financial Corporation on February 25, 2022.
In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired	$	—	$	267,913
Less: common stock issued		—		22,885
Cash received		—		12,663
Liabilities assumed		—		232,365

The Company assumed the liabilities and purchased associated assets of the First National Bank -Cairo branch on December 15, 2021.
In conjunction with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired	$	—	$	1,707
Cash paid for the capital stock		—		27,151
Liabilities assumed		—		28,859

Cash paid during the period for:
Interest (net of interest credited)	$	3,717	$	1,487
Income taxes		4,062		262

See Notes to Condensed Consolidated Financial Statements

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SOUTHERN MISSOURI BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all material adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated balance sheet of the Company as of June 30, 2022, has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the three- and nine- month periods ended March 31, 2023, are not necessarily indicative of the results that may be expected for the entire fiscal year. For additional information, refer to the audited consolidated financial statements included in the Company’s June 30, 2022 Form 10-K, which was filed with the SEC.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Note 2: Organization and Summary of Significant Accounting Policies

Organization. Southern Missouri Bancorp, Inc., a Missouri corporation (‘the Company’) was organized in 1994 and is the parent company of Southern Bank (“the Bank”). Substantially all of the Company’s consolidated revenues are derived from the operations of the Bank, and the Bank represents substantially all of the Company’s consolidated assets and liabilities. SB Real Estate Investments, LLC is a wholly-owned subsidiary of the Bank formed to hold Southern Bank Real Estate Investments, LLC. Southern Bank Real Estate Investments, LLC is a real estate investment trust (REIT) which is controlled by SB Real Estate Investments, LLC, and has other preferred shareholders in order to meet the requirements to be a REIT. At March 31, 2023, assets of the REIT were approximately $1.3 billion, and consisted primarily of real estate loan participations acquired from the Bank.

The Bank is primarily engaged in providing a full range of banking and financial services to individuals and corporate customers in its market areas. The Bank and Company are subject to competition from other financial institutions. The Bank and Company are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.

Basis of Financial Statement Presentation. The condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In the normal course of business, the Company encounters two significant types of risk: economic and regulatory. Economic risk is comprised of interest rate risk, credit risk, and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities reprice on a different basis than its interest-earning assets. Credit risk is the risk of default on the Company’s investment or loan portfolios resulting from the borrowers’ inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of the investment portfolio, collateral underlying loans receivable, and the value of the Company’s investments in real estate.

Principles of Consolidation. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the

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financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses, estimated fair values of purchased loans, and certain other assumptions and judgmental factors relating to investment securities.

Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash equivalents includes cash, due from depository institutions and interest-bearing deposits in other depository institutions with original maturities of three months or less. Interest-bearing deposits in other depository institutions were $55.0 million and $47.3 million at March 31, 2023 and June 30, 2022, respectively. The deposits are held in various commercial banks with a total of $2.2 million and $5.8 million exceeding the FDIC’s deposit insurance limits at March 31, 2023 and June 30, 2022, respectively, as well as at the Federal Reserve and the Federal Home Loan Banks of Des Moines and Chicago.

Interest-bearing Time Deposits. Interest bearing deposits in banks mature within seven years and are carried at cost.

Available for Sale Securities. Available for sale securities (“AFS”), which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses, net of tax, are reported in accumulated other comprehensive loss, a component of stockholders’ equity. All securities have been classified as available for sale.

Premiums and discounts on debt securities are amortized or accreted as adjustments to income over the estimated life of the security using the level yield method. Realized gains or losses on the sale of securities is based on the specific identification method. The fair value of securities is based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

The Company does not invest in collateralized mortgage obligations that are considered high risk.

For AFS securities with fair value less than amortized cost that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income (loss). The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections, and is recorded to the Allowance for Credit Losses (“ACL”), by a charge to provision for credit losses. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired AFS security, or, if it is more likely than not the Company will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.

The Company evaluates impaired AFS securities at the individual level on a quarterly basis, and considers factors including, but not limited to: the extent to which the fair value of the security is less than the amortized cost basis; adverse conditions specifically related to the security, an industry, or geographic area; the payment structure of the security and likelihood of the issuer to be able to make payments that may increase in the future; failure of the issuer to make scheduled interest or principal payments; any changes to the rating of the security by a rating agency; and the ability and intent to hold the security until maturity. A qualitative determination as to whether any portion of the impairment is attributable to credit risk is acceptable. There were no credit related factors underlying unrealized losses on AFS securities at March 31, 2023, or June 30, 2022.

Changes in the ACL are recorded as expense. Losses are charged against the ACL when management believes the uncollectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

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Federal Reserve Bank and Federal Home Loan Bank Stock. The Bank is a member of the Federal Reserve and the Federal Home Loan Bank (“FHLB”) systems. Capital stock of the Federal Reserve and the FHLB is a required investment of the Bank based upon a predetermined formula and is carried at cost.

Loans. Loans are generally stated at unpaid principal balances, less the ACL, any net deferred loan origination fees, and unamortized premiums or discounts on purchased loans.

Interest on loans is accrued based upon the principal amount outstanding. The accrual of interest on loans is discontinued when, in management’s judgment, the collectability of interest or principal in the normal course of business is doubtful. The Company complies with regulatory guidance which indicates that loans should be placed in nonaccrual status when 90 days past due, unless the loan is both well-secured and in the process of collection. A loan that is “in the process of collection” may be subject to legal action or, in appropriate circumstances, through other collection efforts reasonably expected to result in repayment or restoration to current status in the near future. A loan is considered delinquent when a payment has not been made by the contractual due date. Interest income previously accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. Cash receipts on a nonaccrual loan are applied to principal and interest in accordance with its contractual terms unless full payment of principal is not expected, in which case cash receipts, whether designated as principal or interest, are applied as a reduction of the carrying value of the loan. A nonaccrual loan is generally returned to accrual status when principal and interest payments are current, full collectability of principal and interest is reasonably assured, and a consistent record of performance has been demonstrated.

The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans, and is established through provision for credit losses (“PCL”) charged to current earnings. The ACL is increased by the provision for losses on loans charged to expense and reduced by loans charged off, net of recoveries. Loans are charged off in the period deemed uncollectible, based on management’s analysis of expected cash flows (for non-collateral dependent loans) or collateral value (for collateral-dependent loans). Subsequent recoveries of loans previously charged off, if any, are credited to the allowance when received.

Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Adjustments may be made to historical loss information for differences identified in current loan-specific risk characteristics, such as differences in underwriting standards or terms; lending review systems; experience, ability, or depth of lending management and staff; portfolio growth and mix; delinquency levels and trends; as well as for changes in environmental conditions, such as changes in economic activity or employment, agricultural economic conditions, property values, or other relevant factors. The Company generally incorporates a reasonable and supportable forecast period of four quarters, and a four-quarter, straight-line reversion period to return to long-term historical averages.

The ACL is measured on a collective (pool) basis when similar risk characteristics exist. For loans that do not share general risk characteristics with the collectively evaluated pools, the Company estimates credit losses on an individual loan basis, and these loans are excluded from the collectively evaluated pools. An ACL for an individually evaluated loan is recorded when the amortized cost basis of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value, less estimated costs to sell, of the collateral for certain collateral dependent loans. For the collectively evaluated pools, the Company segments the loan portfolio primarily by loan purpose and collateral into 24 pools, which are homogeneous groups of loans that possess similar loss potential characteristics. The Company primarily utilizes the discounted cash flow (“DCF”) methodology for measurement of the required ACL. For a limited number of pools with a relatively small balance of unpaid principal balance, the Company utilizes the remaining life method. The DCF model implements probability of default (“PD”) and loss given default (“LGD”) calculations at the instrument level. PD and LGD are determined based on statistical analysis and correlation of historical losses with various economic factors over time. In general, the Company’s losses have not correlated well with economic factors, and the Company has utilized peer data where more appropriate. The Company defines a default to include an event of charge off, an adverse (substandard or worse) internal credit rating, becoming delinquent 90 days or more, or being

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placed on nonaccrual status. A PD/LGD estimate is applied to a projected model of the loan’s cashflow, including principal and interest payments, with consideration for prepayment speeds, principal curtailments, and recovery lag.

Loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial ACL is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial ACL is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to non-credit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans.

Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans.

Off-Balance Sheet Credit Exposures. Off-balance sheet credit instruments include commitments to make loans, and commercial letters of credit, issued to meet customer financing needs. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The ACL on off-balance sheet credit exposures is estimated by loan pool on a quarterly basis under the current CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur and is included in other liabilities on the Company’s consolidated balance sheets. The Company records an ACL on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable.

Foreclosed Real Estate. Real estate acquired by foreclosure or by deed in lieu of foreclosure is initially recorded at fair value less estimated selling costs, establishing a new cost basis. Costs for development and improvement of the property are capitalized.

Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated fair value, less estimated selling costs.

Loans to facilitate the sale of real estate acquired in foreclosure are discounted if made at less than market rates. Discounts are amortized over the fixed interest period of each loan using the interest method.

Premises and Equipment. Premises and equipment are stated at cost less accumulated depreciation and include expenditures for major betterments and renewals. Maintenance, repairs, and minor renewals are expensed as incurred. When property is retired or sold, the retired asset and related accumulated depreciation are removed from the accounts and the resulting gain or loss taken into income. The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment loss recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets.

Depreciation is computed by use of straight-line and accelerated methods over the estimated useful lives of the assets. Estimated lives are generally seven to forty years for premises, three to seven years for equipment, and three years for software.

Bank Owned Life Insurance. Bank owned life insurance policies are reflected in the condensed consolidated balance sheets at the estimated cash surrender value. Changes in the cash surrender value of these policies, as well as a portion of the insurance proceeds received, are recorded in noninterest income in the condensed consolidated statements of income.

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Goodwill. The Company’s goodwill is evaluated annually for impairment or more frequently if impairment indicators are present. A qualitative assessment is performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value is less than the carrying amount, including goodwill. If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. As of June 30, 2022, there was no impairment indicated, based on a qualitative assessment of goodwill, which considered: the market value of the Company’s common stock, concentrations of credit; profitability; nonperforming assets; capital levels; and results of recent regulatory examinations. The Company believes there was no impairment of goodwill at March 31, 2023.

Intangible Assets. The Company’s intangible assets at March 31, 2023 included gross core deposit intangibles of $39.1 million with $13.1 million accumulated amortization, gross other identifiable intangibles of $6.4 million with accumulated amortization of $3.9 million, and mortgage and SBA servicing rights of $2.6 million. At June 30, 2022, the Company’s intangible assets included gross core deposit intangibles of $17.0 million with $11.5 million accumulated amortization, gross other identifiable intangibles of $3.8 million with accumulated amortization of $3.8 million, and mortgage and SBA servicing rights of $2.7 million. The Company’s core deposit and other intangible assets are being amortized using the straight line method, over periods ranging from five to ten years, with amortization expense expected to be approximately $1.0 million in the remainder of fiscal 2023, $4.1 million in fiscal 2024, $3.5 million in fiscal 2025, $3.0 million in fiscal 2026, $2.7 million in fiscal 2027, and $14.2 million thereafter. As of June 30, 2022, there was no impairment indicated, and the Company believes there was no impairment of other intangible assets at March 31, 2023.

Income Taxes. The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Company recognizes interest and penalties, if any, on income taxes as a component of income tax expense.

The Company files consolidated income tax returns with its subsidiaries, the Bank and SB Real Estate Investments, LLC, with a tax year ended June 30. Southern Bank Real Estate Investments, LLC files a separate REIT return for federal tax purposes, and also files state income tax returns with a tax year ended December 31.

Incentive Plans. The Company accounts for its Equity Incentive Plan (EIP), and Omnibus Incentive Plan (OIP) in accordance with ASC 718, “Share-Based Payment.” Compensation expense is based on the market price of the Company’s stock on the date the shares are granted and is recorded over the vesting period. The difference between the grant-date fair value and the fair value on the date the shares are considered earned represents a tax benefit to the Company that is recorded as an adjustment to income tax expense.

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Outside Directors’ Retirement. The Bank entered into directors’ retirement agreements beginning in April 1994 for non-employee directors and for new non-employee directors through December 2014. These directors’ retirement agreements provide that each participating non-employee director (participant) shall receive, upon termination of service on the Board on or after age 60, other than termination for cause, a benefit in equal annual installments over a five year period. The benefit will be based upon the product of the participant’s vesting percentage and the total Board fees paid to the participant during the calendar year preceding termination of service on the Board. The vesting percentage shall be determined based upon the participant’s years of service on the Board.

In the event that the participant dies before collecting any or all of the benefits, the Bank shall pay the participant’s beneficiary. Benefits shall not be payable to anyone other than the beneficiary, and shall terminate on the death of the beneficiary.

Stock Options. Compensation cost is measured based on the grant-date fair value of the equity instruments issued, and recognized over the vesting period during which an employee provides service in exchange for the award.

Earnings Per Share. Basic earnings per share available to common stockholders is computed using the weighted-average number of common shares outstanding. Diluted earnings per share available to common stockholders includes the effect of all weighted-average dilutive potential common shares (stock options and restricted stock grants) outstanding during each period.

Comprehensive Income. Comprehensive income consists of net income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on available-for-sale securities, unrealized appreciation (depreciation) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income, and changes in the funded status of defined benefit pension plans.

Transfers Between Fair Value Hierarchy Levels. Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the period ending date.

New Accounting Pronouncements:

In March 2020, the CARES Act was signed into law, creating a forbearance program for federally backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the National Emergency, and provides financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings (TDR) for a limited period of time to account for the effects of COVID-19. The Company elected to not apply ASC Subtopic 310-40 for loans eligible under the CARES Act, based on the modification’s (1) relation to COVID-19, (2) execution for a loan that was not more than 30-days past due as of December 31, 2019, and (3) execution between March 1, 2020, and the earlier of the date that falls 60 days following the termination of the declared National Emergency, or December 31, 2020. The 2021 Consolidated Appropriations Act, signed into law in December 2020, extended the window during which loans could have been modified without classification as TDRs under ASC Subtopic 310-40, to the earlier of January 1, 2022, or 60 days following the termination of the declared National Emergency.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848)," to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR and other interbank offered rates are widely used benchmarks or reference rates in the United States and globally. Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make short-term loans to each other. With global capital markets expected to move away from LIBOR and other interbank offered rates and move toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period.

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Originally, an entity could apply this ASU as of the beginning of an interim period that includes the March 12, 2020 issuance date of the ASU, through December 31, 2022. With the issuance of ASU 2022-06 - Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, the sunset date for adoption of ASU 2020-04 was extended from December 31, 2022 to December 31, 2024. The Company expects to adopt the practical expedients included in this ASU in 2023 as it transitions its loans and other financial instruments to another reference rate. The adoption of ASU 2020-04 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2021, the FASB has published ASU 2021-01, “Reference Rate Reform. (Topic 848)”. ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply the amendments in this update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. If an entity elects to apply any of the amendments in this update for an eligible hedging relationship, any adjustments as a result of those elections must be reflected as of the date the entity applies the election. Originally, the amendments in this update did not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022 except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after December 31, 2022). With the issuance of ASU 2022-06 Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, the sunset date for adoption of ASU 2021-01 was extended from December 31, 2022 to December 31, 2024. The Company expects to adopt the practical expedients included in this ASU in 2023 as it transitions its loans and other financial instruments to another reference rate, and is not expected to have a material impact on the consolidated financial statements.

In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 eliminates the accounting guidance for TDRs in ASC 310-40, “Receivables – Troubled Debt Restructurings by Creditors” for entities that have adopted the CECL model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2022-02 also requires that public business entities disclose current-period gross charge offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, “Financial Instruments – Credit Losses – Measured at Amortized Cost.” ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, for entities that have adopted the amendments in ASU 2016-13, and is not expected to have a material impact on the consolidated financial statements.

In March 2023, the FASB issued ASU 2023-02, “Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” This ASU permits reporting entities to elect to account for tax equity investments, regardless of the tax credit program for which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense. A reporting entity makes an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. This ASU also requires specific disclosures of investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method. The ASU is effective for fiscal years beginning after December 15, 2023. The adoption of ASU 2023-02 is not expected to have a material impact on the consolidated financial statements.

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Note 3: Available for Sale Securities

The amortized cost, gross unrealized gains, gross unrealized losses, ACL, and approximate fair value of securities available for sale consisted of the following:


	March 31, 2023
			Gross		Gross		Allowance		Estimated
	Amortized		Unrealized		Unrealized		for		Fair
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Value
Debt and equity securities:
U.S. government-sponsored enterprises (GSEs)	$	8,476	$	265	$	—	$	—	$	8,741
Obligations of states and political subdivisions		45,740		43		(2,377)		—		43,406
Corporate obligations		36,644		68		(2,416)		—		34,296
Asset backed securities		59,592		850		(95)		—		60,347
Other securities		3,600		46		(60)		—		3,586
Total debt and equity securities		154,052		1,272		(4,948)		—		150,376

Mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs):
Residential MBS issued by governmental sponsored enterprises (GSEs)		100,054		738		(7,440)		—		93,352
Commercial MBS issued by GSEs		60,485		83		(5,747)		—		54,821
CMOs issued by GSEs		138,512		8		(7,271)		—		131,249
Total MBS and CMOs		299,051		829		(20,458)		—		279,422
Total AFS securities	$	453,103	$	2,101	$	(25,406)	$	—	$	429,798


	June 30, 2022
			Gross		Gross		Allowance		Estimated
	Amortized		Unrealized		Unrealized		for		Fair
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Value

Debt and equity securities:
Obligations of states and political subdivisions	$	47,383	$	77	$	(2,981)	$	—	$	44,479
Corporate obligations		20,818		32		(963)		—		19,887
Other securities		486		—		(43)		—		443
Total debt and equity securities		68,687		109		(3,987)		—		64,809

Mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs):
Residential MBS issued by governmental sponsored enterprises (GSEs)		76,345		—		(7,177)		—		69,168
Commercial MBS issued by GSEs		51,435		—		(5,705)		—		45,730
CMOs issued by GSEs		61,293		—		(5,606)		—		55,687
Total MBS and CMOs		189,073		—		(18,488)		—		170,585
Total AFS securities	$	257,760	$	109	$	(22,475)	$	—	$	235,394

The amortized cost and estimated fair value of investment and mortgage-backed securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

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	March 31, 2023
	Amortized		Estimated
(dollars in thousands)	Cost		Fair Value
Within one year	$	3,227	$	3,216
After one year but less than five years		29,339		28,156
After five years but less than ten years		64,436		61,923
After ten years		57,050		57,081
Total investment securities		154,052		150,376
MBS and CMOs		299,051		279,422
Total AFS securities	$	453,103	$	429,798

The carrying value of investment and mortgage-backed securities pledged as collateral to secure public deposits amounted to $243.6 million at March 31, 2023, and $198.3 million at June 30, 2022. The securities pledged consist of marketable securities, including $99.1 million and $126.3 million of Mortgage-backed Securities, $111.5 million and $27.3 million of Collateralized Mortgage Obligations, $24.4 million and $42.3 million of State and Political Subdivisions Obligations, and $8.6 million and $2.4 million of other securities at March 31, 2023 and June 30, 2022, respectively.

The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position for which an ACL has not been recorded at March 31, 2023 and June 30, 2022:


	March 31, 2023
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
(dollars in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Obligations of state and political subdivisions	$	9,413	$	98	$	26,218	$	2,279	$	35,631	$	2,377
Corporate obligations		18,451		750		13,760		1,666		32,211		2,416
Asset backed securities		7,013		95		—		—		7,013		95
Other securities		1,962		19		354		41		2,316		60
MBS and CMOs		109,361		1,528		135,113		18,930		244,474		20,458
Total AFS securities	$	146,200	$	2,490	$	175,445	$	22,916	$	321,645	$	25,406


	June 30, 2022
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
(dollars in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Obligations of state and political subdivisions	$	31,985	$	2,639	$	1,600	$	342	$	33,585	$	2,981
Corporate obligations		10,944		420		6,911		543		17,855		963
Other securities		418		43		—		—		418		43
MBS and CMOs		137,590		12,482		29,834		6,006		167,424		18,488
Total AFS securities	$	180,937	$	15,584	$	38,345	$	6,891	$	219,282	$	22,475

Obligations of state and political subdivisions. The unrealized losses on the Company’s investments in obligations of state and political subdivisions include 22 individual securities which have been in an unrealized loss position for less than 12 months and 51 individual securities which have been in an unrealized loss position for more than 12 months. The securities are performing and are of high credit quality. The unrealized losses were caused by increases in market interest rates since purchase or acquisition. Because the Company does not intend to sell these securities and it is likely that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

Corporate Obligations. The unrealized losses on the Company’s investments in corporate obligations include 13 individual securities which have been in an unrealized loss position for less than 12 months and ten individual securities which have been in an unrealized loss position for more than 12 months. The securities are performing and are of high credit quality. The unrealized losses were caused by increases in market interest rates since purchase or acquisition.

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Because the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

At March 31, 2023, corporate obligations included two pooled trust preferred securities with an estimated fair value of $770,000 and unrealized losses of $209,000 in a continuous unrealized loss position for twelve months or more. These unrealized losses were primarily due to the long-term nature of the pooled trust preferred securities, a reduced demand for these securities, and concerns regarding the issuers of the underlying trust preferred securities.

A cash flow analysis performed as of March 31, 2023, for these two securities indicated it is probable the Company will receive all contracted principal and related interest projected. The cash flow analysis used in making this determination was based on anticipated default, recovery, and prepayment rates, and the resulting cash flows were discounted based on the yield spread anticipated at the time the securities were purchased. Because the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

Other securities. The unrealized losses on the Company’s investments in other securities includes ten individual securities which has been in an unrealized loss position for less than 12 months and two individual securities which have been in an unrealized loss position for more than 12 months. The securities are performing and are of high credit quality. The unrealized loss was caused by increases in market interest rates since purchase or acquisition. Because the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

MBS and CMOs. As of March 31, 2023, the unrealized losses on the Company’s investments in MBS and CMOs include 33 individual securities which have been in an unrealized loss position for less than 12 months, and 113 individual securities which have been in an unrealized loss position for 12 months or more. The securities are performing and are of high credit quality. The unrealized losses were caused by increases in market interest rates since purchase or acquisition. Because the Company does not intend to sell these securities and it is likely that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

The Company does not believe that any individual unrealized loss as of March 31, 2023, is the result of a credit loss. However, the Company could be required to recognize an ACL in future periods with respect to its available for sale investment securities portfolio.

Credit losses recognized on investments. There were no credit losses recognized in income and other losses or recorded in other comprehensive income (loss) for the three- and nine- month periods ended March 31, 2023 and 2022.

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Note 4: Loans and Allowance for Credit Losses

Classes of loans are summarized as follows:


(dollars in thousands)	March 31, 2023		June 30, 2022
Real Estate Loans:
Residential	$	1,120,970	$	904,160
Construction		517,967		258,072
Commercial		1,460,314		1,146,673
Consumer loans		125,483		92,996
Commercial loans		560,979		441,598
		3,785,713		2,843,499
Loans in process		(305,193)		(123,656)
Deferred loan fees, net		(316)		(453)
Allowance for credit losses		(45,685)		(33,192)
Total loans	$	3,434,519	$	2,686,198

The Company’s lending activities consist of origination of loans secured by mortgages on one- to four-family residences and commercial and agricultural real estate, construction loans on residential and commercial properties, commercial and agricultural business loans and consumer loans. At March 31, 2023, the Bank had purchased participations in 77 loans totaling $104.7 million, as compared to 31 loans totaling $70.0 million at June 30, 2022.

Residential Mortgage Lending. The Company actively originates loans for the acquisition or refinance of one- to four-family residences. This category includes both fixed-rate and adjustable-rate mortgage (“ARM”) loans amortizing over periods of up to 30 years, and the properties securing such loans may be owner-occupied or non-owner-occupied. Single-family residential loans do not generally exceed 90% of the lower of the appraised value or purchase price of the secured property. Substantially all of the one- to four-family residential mortgage originations in the Company’s portfolio are located within the Company’s primary lending area. General risks related to one- to four-family residential lending include stability of borrower income and collateral values.

The Company also originates loans secured by multi-family residential properties that are often located outside the Company’s primary lending area but made to borrowers who operate within our primary lending area. The majority of the multi-family residential loans that are originated by the Company are amortized over periods generally up to 25 years, with balloon maturities typically up to ten years. Both fixed and adjustable interest rates are offered and it is typical for the Company to include an interest rate “floor” and “ceiling” in the loan agreement. Generally, multi-family residential loans do not exceed 85% of the lower of the appraised value or purchase price of the secured property. General risks related to multi-family residential lending include rental demand and supply, rental rates, and vacancies, as well as collateral values and borrower leverage.

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Commercial Real Estate Lending. The Company actively originates loans secured by owner- and non-owner-occupied commercial real estate including farmland, single- and multi-tenant retail properties, restaurants, hotels, land (improved and unimproved), nursing homes and other healthcare facilities, warehouses and distribution centers, convenience stores, automobile dealerships and other automotive-related services, and other businesses. These properties are typically owned and operated by borrowers headquartered within the Company’s primary lending area, however, the property may be located outside our primary lending area. Risks to owner-occupied commercial real estate lending generally include the continued profitable operation of the borrower’s enterprise, as well as general collateral values, and may be heightened by unique, specific uses of the property serving as collateral. Non-owner-occupied commercial real estate lending risks include tenant demand and performance, lease rates, and vacancies, as well as collateral values and borrower leverage. These factors may be influenced by general economic conditions in the region, or in the United States generally. Risks to lending on farmland include unique factors such as commodity prices, yields, input costs, and weather, as well as farmland values.

Most commercial real estate loans originated by the Company generally are based on amortization schedules of up to 25 years with monthly principal and interest payments. Generally, the interest rate received on these loans is fixed for a maturity of up to ten years, with a balloon payment due at maturity. Alternatively, for some loans, the interest rate adjusts at least annually after an initial period up to seven years. The Company typically includes an interest rate “floor” in the loan agreement. Generally, improved commercial real estate loan amounts do not exceed 80% of the lower of the appraised value or the purchase price of the secured property. Agricultural real estate terms offered differ slightly, with amortization schedules of up to 25 years with an 80% loan-to-value ratio, or 30 years with a 75% loan-to-value ratio.

Construction Lending. The Company originates real estate loans secured by property or land that is under construction or development. Construction loans originated by the Company are generally to finance the construction of owner occupied residential real estate, or to finance speculative construction of residential real estate, land development, or owner-operated or non-owner occupied commercial real estate. During construction, these loans typically require monthly interest-only payments, with single-family residential construction loans having maturities ranging from six to twelve months, while multi-family and commercial construction loans typically mature in 12 to 36 months. Once construction is completed, permanent construction loans may be converted to monthly payments using amortization schedules of up to 30 years on residential and generally up to 25 years on commercial real estate. Construction and development lending risks generally include successful timely and on-budget completion of the project, followed by the sale of the property in the case of land development or non-owner-occupied real estate, or the long-term occupancy of the property by the builder in the case of owner-occupied construction. Changes in real estate values or other economic conditions may impact the ability of a borrower to sell property developed for that purpose.

While the Company typically utilizes relatively short maturity periods to closely monitor the inherent risks associated with construction loans for these loans, weather conditions, change orders, availability of materials and/or labor, and other factors may contribute to the lengthening of a project, thus necessitating the need to renew the construction loan at the balloon maturity. Such extensions are typically executed in incremental three month periods to facilitate project completion. The Company’s average term of construction loans is approximately 12 months. During construction, loans typically require monthly interest-only payments which may allow the Company an opportunity to monitor for early signs of financial difficulty should the borrower fail to make a required monthly payment. Additionally, during the construction phase, the Company typically performs interim inspections which further allow the Company opportunity to assess risk. At March 31, 2023, construction loans outstanding included 79 loans, totaling $68.5 million, for which a modification had been agreed to. At June 30, 2022, construction loans outstanding included 57 loans, totaling $13.8 million, for which a modification had been agreed to. In general, these modifications were solely for the purpose of extending the maturity date due to conditions described above, pursuant to the Company’s normal underwriting and monitoring procedures. As these modifications were not executed due to financial difficulty on the part of the borrower, they were not accounted for as troubled debt restructurings (TDRs).

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Consumer Lending. The Company offers a variety of secured consumer loans, including home equity, direct and indirect automobile loans, second mortgages, mobile home loans and loans secured by deposits. The Company originates substantially all of its consumer loans in its primary lending area. Usually, consumer loans are originated with fixed rates for terms of up to 66 months, with the exception of home equity lines of credit, which are variable, tied to the prime rate of interest and are for a period of ten years.

Home equity lines of credit (HELOCs) are secured with a deed of trust and are issued up to 100% of the appraised or assessed value of the property securing the line of credit, less the outstanding balance on the first mortgage and are typically issued for a term of ten years. Interest rates on the HELOCs are generally adjustable. Interest rates are based upon the loan-to-value ratio of the property with better rates given to borrowers with more equity. Risks related to HELOC lending generally include the stability of borrower income and collateral values.

Automobile loans originated by the Company include both direct loans and a smaller amount of loans originated by auto dealers. The Company generally pays a negotiated fee back to the dealer for indirect loans. Typically, automobile loans are made for terms of up to 66 months for new and used vehicles. Loans secured by automobiles have fixed rates and are generally made in amounts up to 100% of the purchase price of the vehicle. Risks to automobile and other consumer lending generally include the stability of borrower income and borrower willingness to repay.

Commercial Business Lending. The Company’s commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance accounts receivable, inventory, equipment and operating lines of credit, including agricultural production and equipment loans. The Company offers both fixed and adjustable rate commercial business loans. Generally, commercial loans secured by fixed assets are amortized over periods up to five years, while commercial operating lines of credit or agricultural production lines are generally for a one year period. Commercial lending risk is primarily driven by the borrower’s successful generation of cash flow from their business enterprise sufficient to service debt, and may be influenced by factors specific to the borrower and industry, or by general economic conditions in the region or in the United States generally. Agricultural production or equipment lending includes unique additional risk factors such as commodity prices, yields, input costs, and weather, as well as farm equipment values.

Allowance for Credit Losses. The PCL for the three- and nine- month periods ended March 31, 2023, was $10.1 million and $16.3 million, respectively, compared to $1.6 million and $1.2 million in the same period of the prior fiscal year. The ACL required for PCD loans acquired in the Citizens merger was $1.1 million, and was funded through purchase accounting adjustments, while the ACL required for non-PCD loans acquired in the Citizens merger was $5.2 million, and was funded through a charge to PCL. Additionally, the allowance for off-balance sheet credit exposures was increased by $1.8 million due to the Citizens merger and funded through a charge to PCL. Exclusive of the charges required as a result of the Citizens merger, the Company would have recorded a PCL of approximately $3.1 million and $9.3 million for the three- and nine-month periods ended March 31, 2023, of which $2.0 million and $6.6 million, respectively, are attributable to the required ACL for loan balances outstanding, while $1.1 million and $2.7 million, respectively, are attributable to the required allowance for off-balance sheet credit exposures, for the three- and nine-month periods. Exclusive of provisioning required by the Citizens merger, increased provisioning for loan balances outstanding in the three-month period is attributable primarily to qualitative adjustments to modeled results based on levels and trends of industry past due loans, and increased ACL estimates for classified hotel loans that have been slow to recover from the COVID-19 pandemic and the unguaranteed portion of a small pool of SBA loans exhibiting signs of credit stress, while increased provisioning for loan balances outstanding in the nine-month period is attributable primarily to loan growth and qualitative adjustments to modeled results based on the pace of growth of the Company’s loan portfolio, exclusive of acquisitions or government-guaranteed loans, relative to overall economic growth. Increased provisioning for off-balance sheet credit exposures is attributable primarily to changes in the level and mix of outstanding credit commitments. The Company has estimated its expected credit losses as of March 31, 2023, under ASC 326-20, and management believes the ACL as of that date is adequate based on that estimate. As a percentage of average loans outstanding, the Company recorded net charge offs of 0.02% (annualized) during the nine months ended March 31, 2023, as compared to less than one basis point (annualized) during the same period of the prior fiscal year. Specifically, management considered the following primary items in its estimate of the ACL:

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● economic conditions and projections as provided by Moody’s Analytics, including baseline and downside scenarios, were utilized in the Company’s estimate at March 31, 2023. Economic factors considered in the projections included national and state levels of unemployment, and national and state rates of inflation-adjusted growth in the gross domestic product. Economic conditions are considered to be a moderate and stable risk factor, relative to June 30, 2022;

● the pace of growth of the Company’s loan portfolio, exclusive of acquisitions or government guaranteed loans, relative to overall economic growth. This measure is considered to be a moderate and increasing risk factor, relative to June 30, 2022;

● levels and trends for loan delinquencies nationally and in the region. This measure as reported remains relatively stable, and the level of uncertainty about loan delinquencies is considered to be diminishing. This is considered to be a moderate and stable risk factor, relative to June 30, 2022;

● exposure to the hotel industry, in particular, metropolitan area hotels which were negatively impacted by activity restrictions and a lack of business or convention-related travel. This is considered to be an elevated and stable risk factor, relative to June 30, 2022.

PCD Loans. In connection with the acquisition of Citizens Bancshares, Co. (“Citizens”) on January 20, 2023, and Fortune Financial Corporation (“Fortune”) on February 25, 2022, the Company acquired loans both with and without evidence of credit quality deterioration since origination. Acquired loans are recorded at their fair value at the time of acquisition with no carryover from the acquired institution’s previously recorded allowance for loan and lease losses. Acquired loans are accounted for under ASC 326, Financial Instruments – Credit Losses.

The fair value of acquired loans recorded at the time of acquisition is based upon several factors, including the timing and payment of expected cash flows, as adjusted for estimated credit losses and prepayments, and then discounting these cash flows using comparable market rates. The resulting fair value adjustment is recorded in the form of a premium or discount to the unpaid principal balance of the respective loans. As it relates to acquired loans that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination (“PCD”), the net premium or net discount is adjusted to reflect the Company’s allowance for credit losses recorded for PCD loans at the time of acquisition, and the remaining fair value adjustment is accreted or amortized into interest income over the remaining life of the respective loans. As it relates to loans not classified as PCD (“non-PCD”) loans, the credit loss and yield components of their fair value adjustment are aggregated, and the resulting net premium or net discount is accreted or amortized into interest income over the remaining life of the respective loans. The Company records an ACL for non-PCD loans at the time of acquisition through provision expense, and therefore, no further adjustments are made to the net premium or net discount for non-PCD loans.

Loans that the Company acquired from Citizens and Fortune, that at the time of acquisition had more-than-insignificant deterioration of credit quality since origination, are classified as PCD loans and presented in the tables below at acquisition carrying value:


(dollars in thousands)	January 20, 2023
PCD Loans - Citizens
Purchase price of PCD loans at acquisition	$	27,481
Allowance for credit losses at acquisition		(1,121)
Fair value of PCD loans at acquisition	$	26,360


(dollars in thousands)	February 25, 2022
PCD Loans - Fortune
Purchase price of PCD loans at acquisition	$	15,055
Allowance for credit losses at acquisition		(120)
Fair value of PCD loans at acquisition	$	14,935

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The following tables present the balance in the ACL based on portfolio segment as of March 31, 2023 and 2022, and activity in the ACL for the three- and nine- month periods ended March 31, 2023 and 2022:


	At period end and for the nine months ended March 31, 2023
	Residential		Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for credit losses:
Balance, beginning of period	$	8,908	$	2,220	$	16,838	$	710	$	4,516	$	33,192
Initial ACL on PCD loans		96		12		628		164		221		1,121
Provision charged to expense		4,462		1,406		1,324		283		4,325		11,800
Losses charged off		(2)		—		(245)		(189)		(17)		(453)
Recoveries		1		—		—		18		6		25
Balance, end of period	$	13,465	$	3,638	$	18,545	$	986	$	9,051	$	45,685


	At period end and for the three months ended March 31, 2023
	Residential		Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for loan losses:
Balance, beginning of period	$	12,499	$	2,754	$	16,806	$	761	$	4,663	$	37,483
Initial ACL on PCD loans		96		12		628		164		221		1,121
Provision (benefit) charged to expense		870		872		1,111		165		4,167		7,185
Losses charged off		—		—		—		(113)		—		(113)
Recoveries		—		—		—		9		—		9
Balance, end of period	$	13,465	$	3,638	$	18,545	$	986	$	9,051	$	45,685


	At period end and for the nine months ended March 31, 2022
	Residential		Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for credit losses:
Balance, beginning of period	$	11,192	$	2,170	$	14,535	$	916	$	4,409	$	33,222
Initial ACL on PCD loans		23		4		52		—		41		120
Provision (benefit) charged to expense		30		(187)		963		(93)		(340)		373
Losses charged off		(62)		—		—		(57)		(17)		(136)
Recoveries		3		—		—		57		2		62
Balance, end of period	$	11,186	$	1,987	$	15,550	$	823	$	4,095	$	33,641


	At period end and for the three months ended March 31, 2022
	Residential		Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for credit losses:
Balance, beginning of period	$	10,757	$	2,126	$	14,727	$	830	$	4,089	$	32,529
Initial ACL on PCD loans		23		4		52		—		41		120
Provision (benefit) charged to expense		434		(143)		771		19		(29)		1,052
Losses charged off		(30)		—		—		(32)		(6)		(68)
Recoveries		2		—		—		6		—		8
Balance, end of period	$	11,186	$	1,987	$	15,550	$	823	$	4,095	$	33,641

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The following tables present the balance in the allowance for off-balance sheet credit exposure based on portfolio segment as of March 31, 2023 and 2022, and activity in the allowance for the three- and nine- month periods ended March 31, 2023 and 2022:


	At period end and for the nine months ended March 31, 2023
	Residential			Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for off-balance sheet credit exposure:
Balance, beginning of period	$	58	$	2,178	$	421	$	61	$	640	$	3,358
Provision (benefit) charged to expense		47		3,400		(80)		41		1,058		4,466
Balance, end of period	$	105	$	5,578	$	341	$	102	$	1,698	$	7,824


	At period end and for the three months ended March 31, 2023
	Residential			Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for off-balance sheet credit exposure:
Balance, beginning of period	$	70	$	3,629	$	480	$	56	$	702	$	4,937
Provision (benefit) charged to expense		35		1,949		(139)		46		996		2,887
Balance, end of period	$	105	$	5,578	$	341	$	102	$	1,698	$	7,824


	At period end and for the nine months ended March 31, 2022
	Residential			Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for off-balance sheet credit exposure:
Balance, beginning of period	$	37	$	502	$	188	$	218	$	860	$	1,805
Provision (benefit) charged to expense		46		1,221		147		(144)		(396)		874
Balance, end of period	$	83	$	1,723	$	335	$	74	$	464	$	2,679


	At period end and for the three months ended March 31, 2022
	Residential			Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for off-balance sheet credit exposure:
Balance, beginning of period	$	34	$	1,673	$	170	$	58	$	244	$	2,179
Provision (benefit) charged to expense		49		50		165		16		220		500
Balance, end of period	$	83	$	1,723	$	335	$	74	$	464	$	2,679

Credit Quality Indicators. The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on all loans at origination, and is updated on a quarterly basis for loans risk rated Watch, Special Mention, Substandard, or Doubtful. In addition, lending relationships of $3 million or more, exclusive of any consumer or owner-occupied residential loan, are subject to an annual credit analysis which is prepared by the loan administration department and presented to a loan committee with appropriate lending authority. A sample of lending relationships in excess of $1 million (exclusive of single-family residential real estate loans) are subject to an independent loan review annually, in order to verify risk ratings. The Company uses the following definitions for risk ratings:

Watch – Loans classified as watch exhibit weaknesses that require more than usual monitoring. Issues may include deteriorating financial condition, payments made after due date but within 30 days, adverse industry conditions or management problems.

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Special Mention – Loans classified as special mention exhibit signs of further deterioration but still generally make payments within 30 days. This is a transitional rating and loans should typically not be rated Special Mention for more than 12 months.

Substandard – Loans classified as substandard possess weaknesses that jeopardize the ultimate collection of the principal and interest outstanding. These loans exhibit continued financial losses, ongoing delinquency, overall poor financial condition, and insufficient collateral. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses of substandard loans, and have deteriorated to the level that there is a high probability of substantial loss.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans.

A periodic review of selected credits (based on loan size and type) is conducted to identify loans with heightened risk or probable losses and to assign risk grades. The primary responsibility for this review rests with loan administration personnel. This review is supplemented with periodic examinations of both selected credits and the credit review process by the Company’s internal audit function and applicable regulatory agencies. The information from these reviews assists management in the timely identification of problems and potential problems and provides a basis for deciding whether the credit continues to share similar risk characteristics with collectively evaluated loan pools, or whether credit losses for the loan should be evaluated on an individual loan basis.

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The following table presents the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and fiscal year of origination as of March 31, 2023. This table includes PCD loans, which are reported according to risk categorization after acquisition based on the Company’s standards for such classification:


(dollars in thousands)													Revolving
March 31,	2023		2022		2021		2020		2019		Prior		loans		Total
Residential Real Estate
Pass	$	283,090	$	329,020	$	260,233	$	106,337	$	26,467	$	100,592	$	7,511	$	1,113,250
Watch		283		1,147		580		2,307		201		27		56		4,601
Special Mention		—		—		—		—		—		—		—		—
Substandard		799		724		448		85		—		1,063		—		3,119
Doubtful		—		—		—		—		—		—		—		—
Total Residential Real Estate	$	284,172	$	330,891	$	261,261	$	108,729	$	26,668	$	101,682	$	7,567	$	1,120,970

Construction Real Estate
Pass	$	112,913	$	68,069	$	11,896	$	9,193	$	94	$	—	$	5,616	$	207,781
Watch		155		—		—		3,190		—		—		—		3,345
Special Mention		—		—		—		—		—		—		—		—
Substandard		1,280		368		—		—		—		—		—		1,648
Doubtful		—		—		—		—		—		—		—		—
Total Construction Real Estate	$	114,348	$	68,437	$	11,896	$	12,383	$	94	$	—	$	5,616	$	212,774

Commercial Real Estate
Pass	$	272,653	$	480,124	$	290,963	$	98,101	$	86,394	$	132,560	$	33,128	$	1,393,923
Watch		7,251		9,895		165		6,874		—		119		—		24,304
Special Mention		2,940		—		—		—		—		—		—		2,940
Substandard		3,141		29,623		2,438		303		478		1,913		1,251		39,147
Doubtful		—		—		—		—		—		—		—		—
Total Commercial Real Estate	$	285,985	$	519,642	$	293,566	$	105,278	$	86,872	$	134,592	$	34,379	$	1,460,314

Consumer
Pass	$	27,171	$	17,498	$	6,581	$	2,048	$	854	$	1,510	$	68,727	$	124,389
Watch		74		596		64		10		—		—		—		744
Special Mention		—		—		—		—		—		—		—		—
Substandard		15		4		81		8		—		95		147		350
Doubtful		—		—		—		—		—		—		—		—
Total Consumer	$	27,260	$	18,098	$	6,726	$	2,066	$	854	$	1,605	$	68,874	$	125,483

Commercial
Pass	$	106,504	$	87,601	$	77,257	$	12,466	$	9,302	$	11,427	$	245,911	$	550,468
Watch		667		1,876		121		78		6		—		5,107		7,855
Special Mention		—		—		—		—		—		—		—		—
Substandard		466		798		137		155		192		621		287		2,656
Doubtful		—		—		—		—		—		—		—		—
Total Commercial	$	107,637	$	90,275	$	77,515	$	12,699	$	9,500	$	12,048	$	251,305	$	560,979

Total Loans
Pass	$	802,331	$	982,312	$	646,930	$	228,145	$	123,111	$	246,089	$	360,893	$	3,389,811
Watch		8,430		13,514		930		12,459		207		146		5,163		40,849
Special Mention		2,940		—		—		—		—		—		—		2,940
Substandard		5,701		31,517		3,104		551		670		3,692		1,685		46,920
Doubtful		—		—		—		—		—		—		—		—
Total	$	819,402	$	1,027,343	$	650,964	$	241,155	$	123,988	$	249,927	$	367,741	$	3,480,520

At March 31, 2023, PCD loans comprised $27.3 million of credits rated “Pass”; $25.1 million rated “Watch”; none rated “Special Mention”; $6.7 million of credits rated “Substandard”; and none rated “Doubtful”.

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The following table presents the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and fiscal year of origination as of June 30, 2022. This table includes PCD loans, which were reported according to risk categorization after acquisition based on the Company’s standards for such classification:


(dollars in thousands)													Revolving
June 30,	2022		2021		2020		2019		2018		Prior		loans		Total
Residential Real Estate
Pass	$	380,502	$	295,260	$	118,464	$	19,383	$	22,143	$	58,545	$	6,074	$	900,371
Watch		44		242		1,083		56		—		30		—		1,455
Special Mention		—		—		—		—		—		—		—		—
Substandard		266		918		87		440		18		605		—		2,334
Doubtful		—		—		—		—		—		—		—		—
Total Residential Real Estate	$	380,812	$	296,420	$	119,634	$	19,879	$	22,161	$	59,180	$	6,074	$	904,160

Construction Real Estate
Pass	$	100,114	$	34,082	$	—	$	—	$	—	$	—	$	220	$	134,416
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Total Construction Real Estate	$	100,114	$	34,082	$	—	$	—	$	—	$	—	$	220	$	134,416

Commercial Real Estate
Pass	$	487,486	$	284,736	$	105,893	$	71,380	$	51,804	$	78,115	$	23,669	$	1,103,083
Watch		4,763		769		1,818		—		668		2,000		548		10,566
Special Mention		9,297		—		—		—		—		—		—		9,297
Substandard		22,086		481		140		13		22		93		65		22,900
Doubtful		827		—		—		—		—		—		—		827
Total Commercial Real Estate	$	524,459	$	285,986	$	107,851	$	71,393	$	52,494	$	80,208	$	24,282	$	1,146,673

Consumer
Pass	$	28,519	$	10,989	$	3,662	$	1,524	$	916	$	676	$	46,521	$	92,807
Watch		21		71		—		—		—		—		—		92
Special Mention		—		—		—		—		—		—		—		—
Substandard		23		6		4		—		10		31		23		97
Doubtful		—		—		—		—		—		—		—		—
Total Consumer	$	28,563	$	11,066	$	3,666	$	1,524	$	926	$	707	$	46,544	$	92,996

Commercial
Pass	$	111,370	$	93,906	$	20,795	$	10,496	$	3,253	$	7,612	$	190,235	$	437,667
Watch		1,319		194		38		6		—		186		1,206		2,949
Special Mention		—		—		—		—		—		—		—		—
Substandard		295		11		—		186		—		167		323		982
Doubtful		—		—		—		—		—		—		—		—
Total Commercial	$	112,984	$	94,111	$	20,833	$	10,688	$	3,253	$	7,965	$	191,764	$	441,598

Total Loans
Pass	$	1,107,991	$	718,973	$	248,814	$	102,783	$	78,116	$	144,948	$	266,719	$	2,668,344
Watch		6,147		1,276		2,939		62		668		2,216		1,754		15,062
Special Mention		9,297		—		—		—		—		—		—		9,297
Substandard		22,670		1,416		231		639		50		896		411		26,313
Doubtful		827		—		—		—		—		—		—		827
Total	$	1,146,932	$	721,665	$	251,984	$	103,484	$	78,834	$	148,060	$	268,884	$	2,719,843

At June 30, 2022, PCD loans comprised $23.1 million of credits rated “Pass”; $4.7 million of credits rated “Watch”, none rated “Special Mention”, $1.1 million of credits rated “Substandard” and none rated “Doubtful”.

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Past-due Loans. The following tables present the Company’s loan portfolio aging analysis (excluding loans in process and deferred loan fees) as of March 31, 2023 and June 30, 2022. These tables include PCD loans, which are reported according to aging analysis after acquisition based on the Company’s standards for such classification:


	March 31, 2023
					Greater Than								Greater Than 90
	30-59 Days		60-89 Days		90 Days		Total				Total Loans		Days Past Due
	Past Due		Past Due		Past Due		Past Due		Current		Receivable		and Accruing
(dollars in thousands)
Real Estate Loans:
Residential	$	2,110	$	203	$	636	$	2,949	$	1,118,021	$	1,120,970	$	—
Construction		141		368		—		509		212,265		212,774		—
Commercial		281		97		1,675		2,053		1,458,261		1,460,314		—
Consumer loans		536		244		176		956		124,527		125,483		—
Commercial loans		185		96		634		915		560,064		560,979		—
Total loans	$	3,253	$	1,008	$	3,121	$	7,382	$	3,473,138	$	3,480,520	$	—


	June 30, 2022
					Greater Than								Greater Than 90
	30-59 Days		60-89 Days		90 Days		Total				Total Loans		Days Past Due
	Past Due		Past Due		Past Due		Past Due		Current		Receivable		and Accruing
(dollars in thousands)
Real Estate Loans:
Residential	$	1,402	$	—	$	1,064	$	2,466	$	901,694	$	904,160	$	—
Construction		—		—		—		—		134,416		134,416		—
Commercial		416		615		288		1,319		1,145,354		1,146,673		—
Consumer loans		340		45		57		442		92,554		92,996		—
Commercial loans		274		72		13		359		441,239		441,598		—
Total loans	$	2,432	$	732	$	1,422	$	4,586	$	2,715,257	$	2,719,843	$	—

At March 31, 2023, there was one PCD loan totaling $139,000 that was greater than 90 days past due and on nonaccrual, and none at June 30, 2022.

Loans that experience insignificant payment delays and payment shortfalls generally are not adversely classified or determined to not share similar risk characteristics with collectively evaluated pools of loans for determination of the ACL estimate. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Significant payment delays or shortfalls may lead to a determination that a loan should be individually evaluated for estimated credit losses.

Collateral Dependent Loans. The following table presents the Company’s collateral dependent loans and related ACL at March 31, 2023, and June 30, 2022:



	March 31, 2023
	Amortized cost basis of
	loans determined to be		Related allowance
(dollars in thousands)	collateral dependent		for credit losses
Residential real estate loans
1- to 4-family residential loans	$	841	$	170
Total loans	$	841	$	170

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	June 30, 2022
	Amortized cost basis of
	loans determined to be		Related allowance
(dollars in thousands)	collateral dependent		for credit losses
Residential real estate loans
1- to 4-family residential loans	$	864	$	193
Total loans	$	864	$	193

Nonaccrual Loans. The following table presents the Company’s amortized cost basis of nonaccrual loans segmented by class of loans at March 31, 2023, and June 30, 2022. The table excludes performing TDRs.



(dollars in thousands)	March 31, 2023		June 30, 2022
Residential real estate	$	1,175	$	1,647
Construction real estate		368		—
Commercial real estate		4,741		2,259
Consumer loans		183		73
Commercial loans		930		139
Total loans	$	7,397	$	4,118

At March 31, 2023, there were no nonaccrual loans individually evaluated for which no ACL was recorded. Interest income recognized on nonaccrual loans in the three-and nine- month periods ended March 31, 2023 and 2022, was immaterial.

Troubled Debt Restructurings. TDRs are evaluated to determine whether they share similar risk characteristics with collectively evaluated loan pools, or must be individually evaluated. These concessions typically result from our loss mitigation activities, and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. In general, the Company’s loans that have been subject to classification as TDRs are the result of guidance under ASU No. 2011-02, which indicates that the Company may not consider the borrower’s effective borrowing rate on the old debt immediately before the restructuring in determining whether a concession has been granted. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

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During the three- and nine- month periods ended March 31, 2023 and 2022, certain loans modified were classified as TDRs. They are shown, segregated by class, in the tables below:


	For the three-month periods ended
	March 31, 2023			March 31, 2022
	Number of	Recorded		Number of	Recorded
(dollars in thousands)	modifications	Investment		modifications	Investment
Residential real estate	—	$	—	—	$	—
Construction real estate	—		—	—		—
Commercial real estate	—		—	—		—
Consumer loans	—		—	—		—
Commercial loans	—		—	1		185
Total	—	$	—	1	$	185


	For the nine-month periods ended
	March 31, 2023			March 31, 2022
	Number of	Recorded		Number of	Recorded
(dollars in thousands)	modifications	Investment		modifications	Investment
Residential real estate	—	$	—	1	$	150
Construction real estate	—		—	—		—
Commercial real estate	—		—	—		—
Consumer loans	—		—	—		—
Commercial loans	—		—	1		185
Total	—	$	—	2	$	335

Performing loans classified as TDRs and outstanding at March 31, 2023, and June 30, 2022, segregated by class, are shown in the table below. Nonperforming TDRs are included in the nonaccrual loans table above.


	March 31, 2023			June 30, 2022
	Number of	Recorded		Number of	Recorded
(dollars in thousands)	modifications	Investment		modifications	Investment
Residential real estate	10	$	3,383	11	$	3,625
Construction real estate	—		—	—		—
Commercial real estate	6		24,241	8		25,132
Consumer loans	—		—	—		—
Commercial loans	6		2,735	8		1,849
Total	22	$	30,359	27	$	30,606

Residential Real Estate Foreclosures. The Company may obtain physical possession of real estate collateralizing a residential mortgage loan or home equity loan via foreclosure or in-substance repossession. As of March 31, 2023 and June 30, 2022, the carrying value of foreclosed residential real estate properties as a result of obtaining physical possession was $589,000 and $580,000, respectively. In addition, as of March 31, 2023, and June 30, 2022, the Company had residential mortgage loans and home equity loans with a carrying value of $1.1 million and $486,000, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process.

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Note 5: Premises and Equipment

Following is a summary of premises and equipment:



(dollars in thousands)	March 31, 2023		June 30, 2022
Land	$	15,403	$	13,532
Buildings and improvements		78,831		64,730
Construction in progress		1,266		142
Furniture, fixtures, equipment and software		24,953		20,838
Automobiles		122		120
Operating leases ROU asset		6,259		3,849
		126,834		103,211
Less accumulated depreciation		34,491		31,864
	$	92,343	$	71,347

Leases. The Company elected certain relief options under ASU 2016-02, Leases (Topic 842), including the option not to recognize right of use asset and lease liabilities that arise from short-term leases (leases with terms of twelve months or less). The Company has 11 leased properties, which includes banking facilities, administrative offices and ground leases, and numerous office equipment lease agreements in which it is the lessee, with lease terms exceeding twelve months.

All of the Company’s leases are classified as operating leases. These operating leases are now included as a ROU asset in the premises and equipment line item on the Company’s consolidated balance sheets. The corresponding lease liability is included in the accounts payable and other liabilities line item on the Company’s consolidated balance sheets.

In the February 2022 acquisition of Fortune, the Company assumed a ground lease with an entity that is controlled by a Company insider. This property is in St. Louis County, MO and is in its fourth year of a twenty year term.

ASU 2016-02 also requires certain other accounting elections. The Company elected the short-term lease recognition exemption for all leases that qualify, meaning those with terms under twelve months. ROU assets or lease liabilities are not to be recognized for short-term leases. The calculated amount of the ROU assets and lease liabilities in the table below are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, the ASU requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception over a similar term. The discount rate utilized was 5%. The expected lease terms range from 18 months to 20 years.


	March 31, 2023		June 30, 2022
Consolidated Balance Sheet
Operating leases ROU asset	$	6,259	$	3,849
Operating leases liability	$	6,259	$	3,849

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	For the three-month periods ended				For the nine-month periods ended
	March 31,				March 31,
(dollars in thousands)	2023		2022		2023		2022
Consolidated Statement of Income
Operating lease costs classified as occupancy and equipment expense	$	189	$	117	$	467	$	315
(includes short-term lease costs)

Supplemental disclosures of cash flow information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	148	$	92	$	354	$	261
ROU assets obtained in exchange for operating lease obligations:	$	—	$	—	$	—	$	—

At March 31, 2023, future expected lease payments for leases with terms exceeding one year were as follows:


(dollars in thousands)
2023	$	236
2024		712
2025		656
2026		604
2027		587
Thereafter		7,579
Future lease payments expected	$	10,374

The Company leases facilities it owns or portions of facilities it owns to other third parties. The Company has determined that all of these lease agreements, in terms of being the lessor, are classified as operating leases. For the three- and nine- month periods ended March 31, 2023, income recognized from these lessor agreements was $39,000 and $171,000, respectively. For the three- and nine- month periods ended March 31, 2022, income recognized from these lessor agreements was $64,000 and $208,000, respectively. Income from lessor agreements was included in net occupancy and equipment expense.

Note 6: Deposits

Deposits are summarized as follows:



(dollars in thousands)	March 31, 2023		June 30, 2022
Non-interest bearing accounts	$	618,598	$	426,929
NOW accounts		1,430,019		1,171,620
Money market deposit accounts		448,622		303,612
Savings accounts		304,663		274,283
Certificates		953,291		638,631
Total Deposit Accounts	$	3,755,193	$	2,815,075

Brokered certificates totaled $97.9 million at March 31, 2023, compared to $10.8 million at June 30, 2022.

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Note 7: Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:


	Three months ended				Nine months ended
	March 31,				March 31,
(dollars in thousands except per share data)	2023		2022		2023		2022


Net income	$	2,409	$	9,351	$	23,676	$	34,082
Less: distributed earnings allocated to participating securities		(10)		(8)		(31)		(22)
Less: undistributed earnings allocated to participating securities		(8)		(33)		(89)		(118)
Net income available to common shareholders	$	2,391	$	9,310	$	23,556	$	33,942

Weighted-average common shares outstanding, including participating securities		10,893,199		9,060,272		9,783,773		8,948,856
Less: weighted-average participating securities outstanding (restricted shares)		(49,510)		(39,230)		(44,100)		(36,998)
Denominator for basic earnings per share -
Weighted-average shares outstanding		10,843,689		9,021,042		9,739,673		8,911,858
Effect of dilutive securities stock options or awards		14,652		23,004		20,459		18,488
Denominator for diluted earnings per share		10,858,341		9,044,046		9,760,132		8,930,346

Basic earnings per share available to common stockholders	$	0.22	$	1.03	$	2.42	$	3.81
Diluted earnings per share available to common stockholders	$	0.22	$	1.03	$	2.41	$	3.80

Certain option and restricted stock awards were excluded from the computation of diluted earnings per share because they were anti-dilutive, based on the average market prices of the Company’s common stock for these periods. Outstanding options and shares of restricted stock totaling 84,740 and 66,440 were excluded from the computation of diluted earnings per share for each of the three- and nine- month periods ended March 31, 2023, while outstanding options and shares of restricted stock totaling 14,500 and 22,750 were excluded from the computation of diluted earnings per share for each of the three- and nine- month periods ended March 31, 2022.

Note 8: Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction and various states. The Company is no longer subject to federal and state examinations by tax authorities for tax years ending June 30, 2017 and before. The Company’s Missouri income tax returns for the fiscal years ending June 30, 2016 through 2018 are under audit by the Missouri Department of Revenue. The Company recognized no interest or penalties related to income taxes for the periods presented.

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The Company’s income tax provision is comprised of the following components:


	For the three-month periods ended				For the nine-month periods ended
(dollars in thousands)	March 31, 2023		March 31, 2022		March 31, 2023		March 31, 2022
Income taxes
Current	$	2,572	$	1,852	$	8,269	$	8,114
Deferred		(1,994)		506		(1,981)		1,019
Total income tax provision	$	578	$	2,358	$	6,288	$	9,133

The components of net deferred tax assets (included in other assets on the condensed consolidated balance sheet) are summarized as follows:


(dollars in thousands)	March 31, 2023		June 30, 2022
Deferred tax assets:
Provision for losses on loans	$	11,560	$	7,761
Accrued compensation and benefits		881		828
NOL carry forwards acquired		846		57
Tax credit carry forward		1,035		—
Unrealized loss on other real estate		868		72
Unrealized loss on available for sale securities		5,087		4,921
Total deferred tax assets		20,277		13,639

Deferred tax liabilities:
Purchase accounting adjustments		728		224
Depreciation		4,327		1,974
FHLB stock dividends		120		120
Prepaid expenses		545		415
Other		1,777		181
Total deferred tax liabilities		7,497		2,914
Net deferred tax asset	$	12,780	$	10,725

As of March 31, 2023, the Company had approximately $3.8 million and $0 in federal and state net operating loss carryforwards, respectively, which were acquired in the July 2009 acquisition of Southern Bank of Commerce, the February 2014 acquisition of Citizens State Bankshares of Bald Knob, Inc., the April 2020 acquisition of Central Federal Savings and Loan, the February 2022 acquisition of Fortune Bank, and the January 2023 acquisition of Citizens Bank and Trust. The amount reported is net of the IRC Sec. 382 limitation, or state equivalent, related to utilization of net operating loss carryforwards of acquired corporations. Unless otherwise utilized, the net operating losses will begin to expire in 2027.

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A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:


	For the three-month periods ended				For the nine-month periods ended
(dollars in thousands)	March 31, 2023		March 31, 2022		March 31, 2023		March 31, 2022
Tax at statutory rate	$	627	$	2,459	$	6,292	$	9,075
Increase (reduction) in taxes resulting from:
Nontaxable municipal income		(54)		(80)		(211)		(273)
State tax, net of Federal benefit		(179)		32		—		501
Cash surrender value of Bank-owned life insurance		(77)		(61)		(211)		(179)
Tax credit benefits		(3)		(13)		(7)		(34)
Other, net		264		21		425		43
Actual provision	$	578	$	2,358	$	6,288	$	9,133

For the three- and nine- month periods ended March 31, 2023 and 2022, income tax expense at the statutory rate was calculated using a 21% annual effective tax rate (AETR).

Tax credit benefits are recognized under the deferral method of accounting for investments in tax credits.

Note 9: 401(k) Retirement Plan

The Bank has a 401(k) retirement plan that covers substantially all eligible employees. The Bank made “safe harbor” matching contributions to the Plan of up to 4% of eligible compensation, depending upon the percentage of eligible pay deferred into the plan by the employee, and also made additional, discretionary profit-sharing contributions for fiscal 2022. For fiscal 2023, the Company has maintained the safe harbor matching contribution of up to 4%, and expects to continue to make additional, discretionary profit-sharing contributions. During the three- and nine- month periods ended March 31, 2023 retirement plan expenses recognized for the Plan totaled approximately $619,000 and $1.7 million, as compared to $456,000 and $1.4 million for the same period of the prior fiscal year. Employee deferrals and safe harbor contributions are fully vested. Profit-sharing or other contributions vest over a period of five years.

Note 10: Subordinated Debt

In March 2004, the Company established Southern Missouri Statutory Trust I as a statutory business trust, to issue Floating Rate Capital Securities (the “Trust Preferred Securities”). The securities mature in 2034, became redeemable after five years, and bear interest at a floating rate based on LIBOR. The securities represent undivided beneficial interests in the trust, which was established by the Company for the purpose of issuing the securities. The Trust Preferred Securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended (the “Act”) and have not been registered under the Act. The securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Southern Missouri Statutory Trust I used the proceeds from the sale of the Trust Preferred Securities to purchase Junior Subordinated Debentures (the “Debentures”) of the Company which have terms identical to the Trust Preferred Securities. At March 31, 2023, the current rate was 7.66%. The carrying value of the Debentures outstanding was $7.2 million at March 31, 2023 and June 30, 2022. The Company used the net proceeds from the sale of the Debentures for working capital and investment in its subsidiaries.

In connection with its October 2013 acquisition of Ozarks Legacy Community Financial, Inc. (OLCF), the Company assumed $3.1 million in floating rate junior subordinated debt securities. The debt securities had been issued in June 2005 by OLCF in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. At March 31, 2023, the current rate was 7.32%. The carrying value of the debt securities was approximately $2.7 million at March 31, 2023 and June 30, 2022.

In connection with its August 2014 acquisition of Peoples Service Company, Inc. (PSC), the Company assumed $6.5 million in floating rate junior subordinated debt securities. The debt securities had been issued in 2005 by PSC’s subsidiary bank holding company, Peoples Banking Company, in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. At March 31, 2023, the

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current rate was 6.67%. The carrying value of the debt securities was approximately $5.5 million at March 31, 2023 and June 30, 2022, respectively.

The Company’s investment at a face amount of $505,000 in the three trusts noted above is included with Prepaid Expenses and Other Assets in the consolidated balance sheets, and is carried at a value of $463,000 and $461,000 at March 31, 2023 and June 30, 2022, respectively.

In connection with its February 2022 acquisition of Fortune, the Company assumed $7.5 million in fixed-to-floating rate subordinated notes. The notes had been issued in May 2021 by Fortune to a multi-lender group, bear interest through May 2026 at a fixed rate of 4.5%, and will bear interest thereafter at SOFR plus 3.77%. The notes will be redeemable at par beginning in May 2026, and mature in May 2031. The carrying value of the notes was approximately $7.7 million at March 31, 2023 and June 30, 2022.

Note 11: Fair Value Measurements

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or liabilities

Recurring Measurements. The following table presents the fair value measurements recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2023 and June 30, 2022:


	Fair Value Measurements at March 31, 2023, Using:
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. government sponsored enterprises (GSEs)	$	8,741	$	—	$	8,741	$	—
Obligations of state and political subdivisions		43,406				43,406
Corporate obligations		34,296		—		34,296		—
Asset backed securities		60,347				60,347
Other securities		3,586		—		3,586		—
MBS and CMOs		279,422		—		279,422		—


	Fair Value Measurements at June 30, 2022, Using:
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Obligations of state and political subdivisions	$	44,479	$	—	$	44,479	$	—
Corporate obligations		19,887		—		19,887		—
Other securities		443		—		443		—

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MBS and CMOs

170,585

—

170,585

—

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Available-for-sale Securities. When quoted market prices are available in an active market, securities are classified within Level 1. If quoted market prices are not available, then fair values are estimated using pricing models, or quoted prices of securities with similar characteristics. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Nonrecurring Measurements. There were no assets measured at fair value on a nonrecurring basis within the ASC 820 fair value hierarchy.

The following table presents losses recognized on assets measured on a non-recurring basis for the nine- month periods ended March 31, 2023 and 2022:


	For the nine months ended
(dollars in thousands)	March 31, 2023		March 31, 2022
Foreclosed and repossessed assets held for sale	$	(123)	$	(435)
Total losses on assets measured on a non-recurring basis	$	(123)	$	(435)

The following is a description of valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. For assets classified within Level 3 of fair value hierarchy, the process used to develop the reported fair value process is described below.

Foreclosed and Repossessed Assets Held for Sale. Foreclosed and repossessed assets held for sale are valued at the time the loan is foreclosed upon or collateral is repossessed and the asset is transferred to foreclosed or repossessed assets held for sale. The value of the asset is based on third party or internal appraisals, less estimated costs to sell and appropriate discounts, if any. The appraisals are generally discounted based on current and expected market conditions that may impact the sale or value of the asset and management’s knowledge and experience with similar assets. Such discounts typically may be significant and result in a Level 3 classification of the inputs for determining fair value of these assets. Foreclosed and repossessed assets held for sale are continually evaluated for additional impairment and are adjusted accordingly if impairment is identified.

Unobservable (Level 3) Inputs. There were no Level 3 fair value measurements at March 31, 2023 or June 30, 2022.

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Fair Value of Financial Instruments. The following table presents estimated fair values of the Company’s financial instruments not reported at fair value and the level within the fair value hierarchy in which the fair value measurements fell at March 31, 2023 and June 30, 2022.


	March 31, 2023
			Quoted Prices
			in Active				Significant
			Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
(dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and cash equivalents	$	114,540	$	114,540	$	—	$	—
Interest-bearing time deposits		1,251		—		1,251		—
Stock in FHLB		7,855		—		7,855		—
Stock in Federal Reserve Bank of St. Louis		8,491		—		8,491		—
Loans receivable, net		3,434,519		—		—		3,272,957
Accrued interest receivable		16,372		—		16,372		—
Financial liabilities
Deposits		3,755,193		2,801,811		—		941,690
Advances from FHLB		45,002		—		44,088		—
Accrued interest payable		3,721		—		3,721		—
Subordinated debt		23,092		—		—		20,345
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—


	June 30, 2022
			Quoted Prices
			in Active				Significant
			Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
(dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and cash equivalents	$	86,792	$	86,792	$	—	$	—
Interest-bearing time deposits		4,768		—		4,768		—
Stock in FHLB		5,893		—		5,893		—
Stock in Federal Reserve Bank of St. Louis		5,790		—		5,790		—
Loans receivable, net		2,686,198		—		—		2,655,882
Accrued interest receivable		11,052		—		11,052		—
Financial liabilities
Deposits		2,815,075		2,176,444		—		637,163
Advances from FHLB		37,957		—		35,916		—
Accrued interest payable		801		—		801		—
Subordinated debt		23,055		—		—		22,070
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—

Note 12: Business Combinations

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On January 20, 2023, the Company completed its acquisition of Citizens Bancshares, Co., Kansas City, Missouri (“Citizens”), and its wholly owned subsidiary, Citizens Bank and Trust Company, in a stock and cash transaction. In late February 2023, the Company merged Citizens Bank and Trust Company with and into Southern Bank, coincident to the data systems conversion. For the three- and nine- month periods ended March 31, 2023, the Company incurred $3.3 million and $4.1 million respectively, of third-party acquisition-related costs, included in noninterest expense in the Company’s condensed consolidated statements of income.

Under the acquisition method of accounting, the total purchase price is allocated to the net tangible and intangible assets acquired based on their estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price for the Citizens acquisition is detailed in the following table. If, prior to the end of the one-year measurement period for finalizing the purchase price allocation, information becomes available about facts and circumstances that existed as of the acquisition date, which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively.


Citizens Bancshares Company
Fair Value of Consideration Transferred
(dollars in thousands)
Cash	$	32,522
Common stock, at fair value		98,280
Total consideration	$	130,802

Recognized amounts of identifiable assets acquired and liabilities assumed

Cash and cash equivalents	$	243,225
Investment securities		226,451
Loans		447,388
Premises and equipment		23,430
BOLI		21,733
Identifiable intangible assets		24,645
Miscellaneous other assets		7,596

Deposits		(851,140)
Securities sold under agreements to repurchase		(27,629)
Miscellaneous other liabilities		(8,266)
Total identifiable net assets		107,433
Goodwill	$	23,369

Of the total purchase price, $22.1 million was allocated to core deposit intangible, and will be amortized over ten years on a straight line basis, $2.5 million was allocated to trust intangible and will be amortized over ten years on a straight line basis, and $23.4 million was allocated to goodwill. None of the purchase price is deductible. Goodwill is attributable to synergies and economies of scale expected from combining the operations of the Citizens Bank. To the extent that management revises any of the fair value of the above fair value adjustments as a result of continuing evaluation, the amount of goodwill recorded in the acquisition will change.

The Company acquired the $461.5 million loan portfolio at an estimated fair value discount of $14.1 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-30. Loans acquired that were not subject to guidance relating to PCD loans include loans with a fair value of $419.5 million and gross contractual amounts receivable of $520.0 million at the date of acquisition. Management identified 48 PCD loans, with a book balance of $27.5 million, associated with the Citizens acquisition (ASC 310-30).

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The acquired business contributed revenues of $5.7 million and earnings of $1.2 million for the period from January 20, 2023 through March 31, 2023. The following unaudited pro forma summaries present consolidated information of the Company as if the business combination had occurred on the first day of each period:


	Pro Forma
	For the three months ended
	March 31,
(dollars in thousands)		2023		2022
Revenue	$	43,232	$	40,529
Earnings	$	4,103	$	11,987


	Pro Forma
	For the nine months ended
	March 31,
(dollars in thousands)		2023		2022
Revenue	$	138,709	$	121,128
Earnings	$	35,595	$	41,265

On February 25, 2022, the Company completed its acquisition of Fortune, and its wholly owned subsidiary, Fortune Bank (“FB”), in a stock and cash transaction valued at approximately $35.5 million. The acquired financial institution was merged with and into Southern Bank simultaneously with the acquisition of Fortune. For the three- and nine- month periods ended March 31, 2023, the Company incurred $0 and $45,000, respectively, compared to $1.1 million and $1.3 million in the same periods of the prior fiscal year, of third-party acquisition-related costs, included in noninterest expense in the Company’s condensed consolidated statements of income.


Fortune Financial Corporation
Fair Value of Consideration Transferred
(dollars in thousands)
Cash	$	12,664
Common stock, at fair value		22,884
Total consideration	$	35,548

Recognized amounts of identifiable assets acquired and liabilities assumed

Cash and cash equivalents	$	34,280
Interest bearing time deposits		2,300
Loans		202,053
Premises and equipment		7,690
BOLI		3,720
Identifiable intangible assets		1,602
Miscellaneous other assets		3,512

Deposits		(213,670)
FHLB Advances		(9,681)
Subordinated debt		(7,800)
Miscellaneous other liabilities		(1,214)
Total identifiable net assets		22,792

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Goodwill

12,756

Of the total purchase price, $1.6 million was allocated to core deposit intangible, and will be amortized over seven years on a straight line basis. Additionally, $12.8 million was allocated to goodwill, and none of the purchase price is deductible. Goodwill is attributable to synergies and economies of scale expected from combining the operations of the Bank and Fortune. To the extent that management revises any of the fair value of the above fair value adjustments as a result of continuing evaluation, the amount of goodwill recorded in the acquisition will change.

The Company acquired the $204.1 million loan portfolio at an estimated fair value discount of $2.1 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-30. Loans acquired that were not subject to guidance relating to PCD loans include loans with a fair value and gross contractual amounts receivable of $187.0 million and $211.0 million at the date of acquisition. Management identified 31 PCD loans, with a book balance of $15.1 million, associated with the Fortune acquisition (ASC 310-30).

On December 15, 2021, the Company completed its acquisition of the Cairo, Illinois, branch of First National Bank, Oldham, South Dakota. The deal resulted in Southern Bank relocating its facility from its prior location to the First National Bank location in Cairo. The Company views the acquisition and updates to the new facility as an expression of its continuing commitment to the Cairo community. For the three- and nine- month periods ended March 31, 2023, the Company incurred no third-party acquisition-related costs, compared to $26,000 and $50,000, respectively, in the same periods of the prior fiscal year.

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Based on valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price for the Cairo acquisition is detailed in the following table.


First National Bank - Cairo Branch
Fair Value of Consideration Transferred
(dollars in thousands)
Cash	$	(26,932)

Recognized amounts of identifiable assets acquired and liabilities assumed

Cash and cash equivalents	$	220
Loans		408
Premises and equipment		468
Identifiable intangible assets		168
Miscellaneous other assets		1

Deposits		(28,540)
Miscellaneous other liabilities		(99)
Total identifiable net liabilities		(27,374)
Goodwill	$	442

Of the total purchase price, $168,000 was allocated to core deposit intangible, and will be amortized over seven years on a straight line basis. Additionally, $442,000 was allocated to goodwill, and none of the purchase price is deductible. Goodwill is attributable to synergies and economies of scale expected from combining the operations of the Southern Bank existing facility with the acquired Cairo branch.

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PART I: Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

SOUTHERN MISSOURI BANCORP, INC.

General

Southern Missouri Bancorp, Inc. (Southern Missouri or Company) is a Missouri corporation and owns all of the outstanding stock of Southern Bank (the Bank). The Company’s earnings are primarily dependent on the operations of the Bank. As a result, the following discussion relates primarily to the operations of the Bank. The Bank’s deposit accounts are generally insured up to a maximum of $250,000 by the Deposit Insurance Fund (DIF), which is administered by the Federal Deposit Insurance Corporation (FDIC). At March 31, 2023, the Bank operated from its headquarters, 62 full-service branch offices, and two limited-service branch offices. The Bank owns the office building and related land in which its headquarters are located, and 58 of its other branch offices. The remaining six branches are either leased or partially owned.

The significant accounting policies followed by Southern Missouri and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments, which are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported, have been included in the accompanying condensed consolidated condensed financial statements.

The condensed consolidated balance sheet of the Company as of June 30, 2022, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission.

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes. The following discussion reviews the Company’s condensed consolidated financial condition at March 31, 2023, and results of operations for the three-and nine- month periods ended March 31, 2023 and 2022.

Forward Looking Statements

This document contains statements about the Company and its subsidiaries which we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities, interest rates, cost savings and funding advantages expected or anticipated to be realized by management. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by the Company and its management are based on beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions of management and are not guarantees of future performance. The important factors we discuss below, as well as other factors discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and identified in this filing and in our other filings with the SEC and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this document:

●

potential adverse impacts to the economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, generally, resulting from the continuing COVID-19 pandemic and any governmental or societal responses thereto;

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●

expected cost savings, synergies and other benefits from our merger and acquisition activities, including our ongoing and recently completed acquisitions, might not be realized within the anticipated time frames, to the extent anticipated, or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention and labor shortages, might be greater than expected;

●

the strength of the United States economy in general and the strength of the local economies in which we conduct operations, including unemployment levels and labor shortages;

●

fluctuations in interest rates and inflation, including the effects of a potential recession or slowed economic growth caused by changes in oil prices or supply chain disruptions;

●

monetary and fiscal policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the U.S. Government and other governmental initiatives affecting the financial services industry;

●

the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

●

our ability to access cost-effective funding and maintain sufficient liquidity;

●

the timely development of and acceptance of our new products and services and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services;

●

fluctuations in real estate values and both residential and commercial real estate markets, as well as agricultural business conditions;

●

demand for loans and deposits in our market area;

●

legislative or regulatory changes that adversely affect our business;

●

changes in accounting principles, policies, or guidelines;

●

results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses or to write-down assets;

●

the impact of technological changes; and

●

our success at managing the risks involved in the foregoing.

The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.

Critical Accounting Policies

Accounting principles generally accepted in the United States of America are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. Management of the Company must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of the Company’s significant accounting policies, see “Notes to the Consolidated Financial Statements” in the Company’s 2022 Annual Report on Form 10-k. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of the Company’s Board of Directors. For a discussion of applying critical accounting policies, see “Critical Accounting Policies and Estimates” beginning on page 62 in the Company’s 2022 Annual Report.

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COVID-19 Pandemic Response

During the global pandemic that took center stage during the past three years, the Company continued to serve our communities and our customers. The Company continues to actively monitor and respond to any remaining effects of the COVID-19 pandemic.

General operating conditions. From the initial onset of the pandemic in March, 2020, the Company worked to increase our telework capabilities, and we had as many as 10-15% of our team members working remotely during the height of the pandemic either on a regular or rotating basis. The Company chose not to extend beyond March 31, 2021, the additional leave provisions (over and above the Company’s standard paid time off policy) provided for under the Families First Coronavirus Response Act (the FFCRA) or the CARES Act. The operations of the Company’s internal controls have not been significantly impacted by changes in our work environment.

SBA Paycheck Protection Program Lending. In the first and second rounds of funding made available through the Small Business Administration’s Paycheck Protection Program (PPP), the Company originated just over 3,200 loans totaling $197.2 million through the program’s expiration on May 31, 2021. The Company has made substantial progress in processing and receiving approval from the SBA for applications by borrowers for forgiveness, and as of March 31, 2023, total PPP loans outstanding were reduced to $642,000.

Deferrals and modifications. In the months following the onset of the pandemic, the Company adhered to regulatory guidance encouraging financial institutions to work with borrowers affected by the pandemic to defer or temporarily modify payment arrangements. Under the CARES Act and subsequent legislation, in instances where the borrower was otherwise current and performing prior to the pandemic, the Company was permitted the option of temporarily suspending certain requirements under U.S. GAAP related to troubled debt restructurings (TDRs). As of June 30, 2020, the Company had provided such relief for approximately 900 loans totaling $380.2 million. As of June 30, 2021, the number of such modifications was reduced to six loans with balances totaling $23.9 million. At its January 1, 2022 expiration, the CARES Act was not further extended; therefore, the provisions to temporarily suspend certain requirements under U.S. GAAP as related to TDRs were no longer available. For more information regarding these deferrals and modifications, see discussion included in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (specifically: Financial Condition, Allowance for Credit Losses).

Executive Summary

Our results of operations depend primarily on our net interest margin, which is directly impacted by the interest rate environment. The net interest margin represents interest income earned on interest-earning assets (primarily real estate loans, commercial and agricultural loans, and the investment portfolio), less interest expense paid on interest-bearing liabilities (primarily interest-bearing transaction accounts, certificates of deposit, savings and money market deposit accounts, and borrowed funds), as a percentage of average interest-earning assets. Net interest margin is directly impacted by the spread between long-term interest rates and short-term interest rates, as our interest-earning assets, particularly those with initial terms to maturity or repricing greater than one year, generally price off longer term rates while our interest-bearing liabilities generally price off shorter term interest rates. This difference in longer term and shorter term interest rates is often referred to as the steepness of the yield curve. A steep yield curve – in which the difference in interest rates between short term and long term periods is relatively large – could be beneficial to our net interest income, as the interest rate spread between our interest-earning assets and interest-bearing liabilities would be larger. Conversely, a flat or flattening yield curve, in which the difference in rates between short term and long term periods is relatively small or shrinking, or an inverted yield curve, in which short term rates exceed long term rates, could have an adverse impact on our net interest income, as our interest rate spread could decrease.

Our results of operations may also be affected significantly by general and local economic and competitive conditions, particularly those with respect to changes in market interest rates, government policies and actions of regulatory authorities.

During the first nine months of fiscal 2023, total assets increased by $1.1 billion. The increase was primarily attributable to the Citizens merger, and in total reflected increases in net loans receivable, available-for-sale securities, intangible assets, and other assets. Cash equivalents and time deposits increased by a combined $24.2 million; AFS securities

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increased $194.4 million; and loans, net of the ACL, increased $748.3 million. Liabilities increased $962 million, including an increase in deposits of $940.2 million, and advances from the Federal Home Loan Bank (FHLB) increased $7.0 million. Equity increased $115.9 million, attributable primarily to $98.3 million in equity issued to Citizens shareholders, as well as earnings retained after cash dividends paid, partially offset by a slight increase in accumulated other comprehensive loss as the market value of the Company’s investments declined due to increases in market interest rates.

Net income for the first nine months of fiscal 2023 was $23.7 million, a decrease of $10.4 million, or 30.5% as compared to the same period of the prior fiscal year. Compared to the year-ago period, the Company’s decrease in net income was attributable to increases in provision for credit losses and noninterest expense, partially offset by increases in net interest income and noninterest income, and a decrease in provision for income taxes. Diluted net income was $2.41 per common share for the first nine months of fiscal 2023, as compared to $3.80 per common share for the same period of the prior fiscal year. For the first nine months of fiscal 2023, as compared to the same period of the prior fiscal year, net interest income increased $14.7 million or 19.4%; provision for credit losses (“PCL”) increased from $1.2 million to $16.3 million; noninterest income increased $2.6 million, or 17.4%; noninterest expense increased $15.5 million, or 33.7%; and provision for income tax decreased $2.8 million, or 31.2%. For more information see “Results of Operations.”

Interest rates during the first nine months of fiscal 2023 remained volatile and moved higher, while the yield curve further inverted, with shorter-term obligations yielding more than longer-term obligations. While the Federal Reserve’s Open Market Committee (FOMC) has raised short-term rates significantly since March 2022, market expectations for economic growth over the next several years have become pessimistic. At March 31, 2023, as compared to June 30, 2022, the yield on three-month treasuries increased from 1.72% to 4.85%; the yield on two-year treasuries increased from 2.92% to 4.06%; the yield on five-year treasuries increased from 3.01% to 3.60%; the yield on ten-year treasuries increased from 2.98% to 3.48%; and the yield on 30-year treasuries increased from 3.14% to 3.67%.

As compared to the first nine months of the prior fiscal year, our average yield on earning assets increased by 54 basis points, primarily attributable to increases in the market interest rates at which earning assets were originated, acquired, or renewed, as well as a shift in the earning asset mix to loans receivable from cash and cash equivalents from year-ago levels. Our cost of interest-bearing liabilities increased by 94 basis points, as the Company increased offering rates on nonmaturity accounts and maturing time deposits to maintain funding in a more competitive environment. Brokered CD funding was utilized to reduce the Company’s overnight borrowing position resulting from loan growth outpacing deposit growth, but average balance of FHLB advances were higher for the current period and contributed to the increased cost of interest-bearing liabilities. Higher market rates reflected the policy of the FOMC, which has increased overnight funding rates and began a “quantitative tightening” program to reverse some of the excess reserves placed into the financial system since March 2020. (See “Results of Operations: Comparison of the nine-month periods ended March 31, 2023 and 2022 – Net Interest Income”.) The rapid increase in the level of short-term market interest rates, along with the magnitude of the yield curve inversion is concerning, as our cost of funds could increase at a faster pace than our asset yields over the near term.

As PPP loan forgiveness declined, the Company’s accretion of interest income from deferred origination fees on these loans was reduced to $44,000 for the first nine months of the fiscal year, which impacted net interest margin by less than one basis point, compared to $3.2 million in the same period a year ago, which impacted net interest margin by 13 basis points.

The Company’s net income is also affected by the level of its noninterest income and noninterest expenses. Noninterest income generally consists primarily of deposit account service charges, bank card interchange income, loan-related fees, earnings on bank-owned life insurance, gains on sales of loans, and other general operating income. Noninterest expenses consist primarily of compensation and employee benefits, occupancy-related expenses, deposit insurance assessments, professional fees, advertising, postage and office expenses, insurance, the amortization of intangible assets, and other general operating expenses.

The Company’s noninterest income for the nine-month period ended March 31, 2023, was $17.3 million, an increase $2.6 million, or 17.4%, as compared to the same period of the prior fiscal year. In the current period, increases in deposit

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account service charges, bank card interchange income, other loan fees, loan servicing fees, and other income were partially offset by a decrease in gains realized on the sale of residential real estate loans originated for that purpose. The increase in other income was attributable to a gain on the sale of fixed assets of $317,000 as the Company sold previously acquired properties not currently being utilized as banking facilities, trust management services income, and the sale of the guaranty portion of newly originated government-guaranteed loans. These increases were partially offset by the inclusion in the year ago period of a non-recurring benefit of $278,000 recognized on the Company’s exit from a renewable energy tax credit partnership. Origination of residential real estate loans for sale on the secondary market was down 65.1% as compared to the year ago period, as both refinancing and purchase activity declined due to the increase in market interest rates, resulting in a decrease to both gains on sale of these loans and recognition of new mortgage servicing rights, partially offset by income from the servicing and gain on sale of the guaranty portion of government-guaranteed loans.

Noninterest expense for the nine-month period ended March 31, 2023, was $61.6 million, an increase of $15.5 million, or 33.7%, as compared to the same period of the prior fiscal year The increase was attributable primarily to compensation and benefits, legal and professional fees occupancy expenses, data processing expenses, amortization of core deposit intangibles, deposit insurance premiums, and other noninterest expenses, and was partially offset by decreases in foreclosed property expenses. Charges related to merger and acquisition activities totaled $4.1 in the current fiscal year, reflected in data processing, and legal and professional fees. In the year ago period, similar charges totaled $1.3 million.

We expect, over time, to continue to grow our assets through the origination and occasional purchase of loans, and purchases of investment securities. The primary funding for this asset growth is expected to come from retail deposits, brokered funding, and short- and long-term FHLB borrowings. We have grown and intend to continue to grow deposits by offering desirable deposit products for our current customers and by attracting new depository relationships. We will also continue to explore strategic expansion opportunities in market areas that we believe will be attractive to our business model.

Comparison of Financial Condition at March 31, 2023 and June 30, 2022

The Company experienced balance sheet growth in the first nine months of fiscal 2023, with total assets of $4.3 billion at March 31, 2023, reflecting an increase of $1.1 billion, or 33.5%, as compared to June 30, 2022. Growth was attributable in large part to the Citizens merger and in total reflected an increase in cash and cash equivalents, available-for-sale securities, net loans receivable and intangible assets.

Cash equivalents and time deposits were a combined $115.8 million at March 31, 2023, an increase of $24.2 million, or 26.5%, as compared to June 30, 2022. The increase was primarily a result of the Citizens acquisition, partially offset by loan growth. AFS securities were $429.8 million at March 31, 2023, up $194.4 million, or 82.6%, as compared to June 30, 2022, primarily as a result of the Citizens acquisition.

Loans, net of the allowance for credit losses (“ACL"), were $3.4 billion at March 31, 2023, an increase of $748 million, or 27.9%, as compared to June 30, 2022. Gross loans increased by $760.8 million, while the ACL attributable to outstanding loan balances increased $12.5 million, or 37.6%, as compared to June 30, 2022. An increase of $447.4 million in loan balances was attributable to the Citizens acquisition with the rest attributable to legacy growth in residential and commercial real estate loans, drawn construction loan balances, commercial loans, and a modest contribution from consumer loans. Residential real estate loan balances increased primarily due to growth in multi-family loans. Commercial real estate balances increased primarily from an increase in loans secured by nonresidential structures, along with growth in loans secured by farmland, offset by a decline in land only loans. Commercial construction loan balances increased due to increases in drawn balances, with nonowner-occupied nonresidential real estate and multi-family residential real estate representing the majority of the increase in drawn balances. The increase in commercial loans was attributable to commercial and industrial loans, partially offset by decreases in agricultural loans. Total remaining PPP balances at March 31, 2023, were $642,000, while unrecognized deferred fee income on these loans was immaterial.

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Loans anticipated to fund in the next 90 days totaled $164.4 million at March 31, 2023, as compared to $235.0 million at June 30, 2022, and $181.9 million at March 31, 2022.

The Bank’s concentration in non-owner occupied commercial real estate was approximately $1.5 billion, or 334% of regulatory capital, as defined, at March 31, 2023, as compared to 299% one year ago, representing 42% of total loans at March 31, 2023. Multi-family residential real estate totaled $395.0 million, or 11.3% of total loans, hotels/motels totaled $123.9 million, or 3.5% of total loans, and retail stand-alone and strip centers totaled $173.5 million, or 5.0% of total loans, and represent the most common collateral types within the non-owner occupied commercial real estate portfolio. The multi-family residential real estate portfolio commonly includes loans collateralized by properties currently in the low-income housing tax credit (LIHTC) program or having exited the program. Hotels/motels and retail stand-alone segments include primarily franchised businesses, and the strip centers can be defined as non-mall shopping centers with a variety of tenants. Office property types totaled $33.5 million, or 0.96% of total loans at March 31, 2023, and are comprised, in general, of smaller spaces with diverse tenants. The Company continues to monitor this concentration and the individual segments closely.

Deposits were $3.8 billion at March 31, 2023, an increase of $940.2 million, or 33.4%, as compared to June 30, 2022. The deposit portfolio saw fiscal year-to-date increases in certificates of deposit, interest-bearing transaction accounts, money market deposit accounts, and noninterest bearing transaction accounts, primarily as a result of the Citizens merger. Public unit balances totaled $636.6 million at March 31, 2023, an increase of $163.4 million compared to June 30, 2022, and as compared to $524.0 million at December 31, 2022. The average loan-to-deposit ratio for the third quarter of fiscal 2023 was 91.2%, as compared to 91.3% for the same period of the prior fiscal year. Uninsured deposits, excluding public unit funds which are collateralized, were estimated at 14% of total deposits as of March 31, 2023. In addition to the $250,000 of insurance available to depositors through the FDIC, Southern Bank also provides its customers an opportunity to obtain FDIC insurance on balances up to $150 million per depositor through the Insured Cash Sweep (“ICS”) program offered by IntraFi Network, LLC.

FHLB advances were $45.0 million at March 31, 2023, an increase of $7.0 million, or 18.6%, as compared to June 30, 2022, and a decrease of $16.5 million from December 31, 2022, the linked quarter, as the Company utilized cash acquired in the Citizens merger to partially fund loan growth. There were no overnight borrowings or short-term repo balances at March 31, 2023.

The Company’s stockholders’ equity was $436.6 million at March 31, 2023, an increase of $115.9 million, or 36.1%, as compared to June 30, 2022. The increase was attributable primarily to $98.3 million in equity issued to Citizens shareholders, as well as earnings retained after cash dividends paid, partially offset by a slight increase in accumulated other comprehensive losses (“AOCL”) as the market value of the Company’s investments declined due to increases in market interest rates. The AOCL increased from $17.5 million at June 30, 2022, to $18.1 million at March 31, 2023. The Company does not hold any securities classified as held-to-maturity.

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Average Balance Sheet, Interest, and Average Yields and Rates for the Three- and Nine- Month Periods Ended

March 31, 2023 and 2022

The tables below presents certain information regarding our financial condition and net interest income for the three- and nine- month periods ended March 31, 2023 and 2022. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. Yields on tax-exempt obligations were not computed on a tax equivalent basis.


	Three-month period ended							Three-month period ended
	March 31, 2023							March 31, 2022
(dollars in thousands)	Average			Interest and		Yield/		Average			Interest and		Yield/
	Balance			Dividends		Cost (%)		Balance			Dividends		Cost (%)
Interest-earning assets:
Mortgage loans ⁽¹⁾	$	2,738,256		$	33,740	4.93		$	2,010,318		$	22,094	4.40
Other loans ⁽¹⁾		596,641			9,375	6.29			451,048			4,966	4.40
Total net loans		3,334,897			43,115	5.17			2,461,366			27,060	4.40
Mortgage-backed securities		294,029			1,652	2.25			149,527			646	1.73
Investment securities ⁽²⁾		129,755			2,076	6.40			77,416			524	2.71
Other interest-earning assets		129,977			1,443	4.55			199,754			109	0.22
TOTAL INTEREST- EARNING ASSETS ⁽¹⁾		3,888,658			48,286	4.97			2,888,063			28,339	3.92
Other noninterest-earning assets ⁽³⁾		270,131			—				188,549			—
TOTAL ASSETS	$	4,158,789		$	48,286			$	3,076,612		$	28,339

Interest-bearing liabilities:
Savings accounts	$	332,890		$	517	0.62		$	263,192		$	171	0.26
NOW accounts		1,416,933			5,605	1.58			1,137,278			1,288	0.45
Money market accounts		394,996			2,191	2.22			281,949			213	0.30
Certificates of deposit		901,344			5,392	1.58			591,868			1,199	0.81
TOTAL INTEREST- BEARING DEPOSITS		3,046,163			13,705	1.80			2,274,287			2,871	0.50
Borrowings:
Securities sold under agreements to repurchase		16,592			213	5.13			—			—	—
FHLB advances		35,645			206	2.31			39,114			167	1.71
Junior subordinated debt		23,086			395	6.84			19,170			187	3.90
TOTAL INTEREST- BEARING LIABILITIES		3,121,486			14,519	1.86			2,332,571			3,225	0.55
Noninterest-bearing demand deposits		608,782			—				421,898			—
Other liabilities		15,718			—				8,345			—
TOTAL LIABILITIES		3,745,986			14,519				2,762,814			3,225
Stockholders’ equity		412,803			—				313,798			—
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	4,158,789		$	14,519			$	3,076,612		$	3,225

Net interest income				$	33,767						$	25,114
Interest rate spread ⁽⁴⁾						3.11	%						3.37	%
Net interest margin ⁽⁵⁾						3.48	%						3.48	%
Ratio of average interest-earning assets to average interest-bearing liabilities		124.48	%						123.81	%

(1)	Calculated net of deferred loan fees, loan discounts and loans-in-process. Non-accrual loans are not included in average loans.

(2)	Includes FHLB and Federal Reserve Bank of St. Louis membership stock and related cash dividends.

(3)	Includes average balances for fixed assets and BOLI of $78.4 million and $65.6 million, respectively, for the three-month period ended March 31, 2023, as compared to $67.6 million and $45.8 million, respectively, for the same period of the prior fiscal year.

(4)	Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities.

(5)	Net interest margin represents annualized net interest income divided by average interest-earning assets.

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	Nine- month period ended							Nine- month period ended
	March 31, 2023							March 31, 2022
(dollars in thousands)	Average			Interest and		Yield/		Average			Interest and		Yield/
	Balance			Dividends		Cost (%)		Balance			Dividends		Cost (%)
Interest-earning assets:
Mortgage loans ⁽¹⁾	$	2,486,600		$	88,679	4.76		$	1,881,354		$	66,383	4.70
Other loans ⁽¹⁾		564,178			24,609	5.82			463,846			15,231	4.38
Total net loans		3,050,778			113,288	4.95			2,345,200			81,614	4.64
Mortgage-backed securities		223,304			3,654	2.18			141,756			1,833	1.72
Investment securities ⁽²⁾		100,441			3,519	4.67			77,232			1,608	2.78
Other interest-earning assets		53,398			1,672	4.17			136,632			239	0.25
TOTAL INTEREST- EARNING ASSETS ⁽¹⁾		3,427,921			122,133	4.75			2,700,820			85,294	4.21
Other noninterest-earning assets ⁽³⁾		213,767			—				177,644			—
TOTAL ASSETS	$	3,641,688		$	122,133			$	2,878,464		$	85,294

Interest-bearing liabilities:
Savings accounts	$	285,276		$	1,190	0.56		$	246,459		$	476	0.26
NOW accounts		1,253,592			12,094	1.29			1,031,130			3,606	0.47
Money market accounts		357,777			5,018	1.87			265,109			573	0.29
Certificates of deposit		751,418			9,759	1.73			567,925			3,771	0.89
TOTAL INTEREST- BEARING DEPOSITS		2,648,063			28,061	1.41			2,110,623			8,426	0.53
Borrowings:
Securities sold under agreements to repurchase		5,531			213	5.13			—			—	—
FHLB advances		101,669			2,300	3.02			44,278			613	1.84
Junior subordinated debt		23,074			1,033	5.97			16,569			447	3.60
TOTAL INTEREST- BEARING LIABILITIES		2,778,337			31,607	1.52			2,171,470			9,486	0.58
Noninterest-bearing demand deposits		493,618			—				397,718			—
Other liabilities		13,389			—				9,521			—
TOTAL LIABILITIES		3,285,344			31,607				2,578,709			9,486
Stockholders’ equity		356,344			—				299,755			—
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	3,641,688		$	31,607			$	2,878,464		$	9,486

Net interest income				$	90,526						$	75,808
Interest rate spread ⁽⁴⁾						3.32	%						3.63	%
Net interest margin ⁽⁵⁾						3.52	%						3.74	%
Ratio of average interest-earning assets to average interest-bearing liabilities		123.38	%						124.38	%

(1)	Calculated net of deferred loan fees, loan discounts and loans-in-process. Non-accrual loans are not included in average loans.

(2)	Includes FHLB and Federal Reserve Bank of St. Louis membership stock and related cash dividends.

(3)	Includes average balances for fixed assets and BOLI of $73.1 million and $54.5 million, respectively, for the nine-month period ended March 31, 2023, as compared to $66.0 million and $44.6 million, respectively, for the same period of the prior fiscal year.

(4)	Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities.

(5)	Net interest margin represents annualized net interest income divided by average interest-earning assets.

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Rate/Volume Analysis

The following tables set forth the effects of changing rates and volumes on the Company’s net interest income for the three- and nine- month periods ended March 31, 2023, compared to the three- and nine- month periods ended March 31, 2022. Information is provided with respect to (i) effects on interest income and expense attributable to changes in volume (changes in volume multiplied by the prior rate), (ii) effects on interest income and expense attributable to change in rate (changes in rate multiplied by prior volume), and (iii) changes in rate/volume (change in rate multiplied by change in volume).


	Three-month period ended March 31, 2023
	Compared to three-month period ended March 31, 2022
	Increase (Decrease) Due to
					Rate/
(dollars in thousands)	Rate		Volume		Volume		Net
Interest-earning assets:
Loans receivable ⁽¹⁾	$	4,762	$	9,603	$	1,690	$	16,055
Mortgage-backed securities		194		625		187		1,006
Investment securities ⁽²⁾		715		354		483		1,552
Other interest-earning deposits		2,161		(40)		(787)		1,334
Total net change in income on interest-earning assets		7,832		10,542		1,573		19,947

Interest-bearing liabilities:
Deposits		7,141		1,074		2,619		10,834
Securities sold under agreements to repurchase		—		—		213		213
FHLB advances		141		38		29		208
Subordinated debt		59		(15)		(5)		39
Total net change in expense on interest-bearing liabilities		7,341		1,097		2,856		11,294
Net change in net interest income	$	491	$	9,445	$	(1,283)	$	8,653

(1)	Does not include interest on loans placed on nonaccrual status.

(2)	Does not include dividends earned on equity securities.


	Nine Months Ended March 31, 2023
	Compared to nine-month period ended March 31, 2022
	Increase (Decrease) Due to
					Rate/
(dollars in thousands)	Rate		Volume		Volume		Net
Interest-earning assets:
Loans receivable ⁽¹⁾	$	5,712	$	24,651	$	1,311	$	31,674
Mortgage-backed securities		487		1,054		280		1,821
Investment securities ⁽²⁾		1,098		483		330		1,911
Other interest-earning deposits		4,038		(146)		(2,459)		1,433
Total net change in income on interest-earning assets		11,335		26,042		(538)		36,839

Interest-bearing liabilities:
Deposits		13,643		2,272		3,720		19,635
Securities sold under agreements to repurchase		—		—		213		213
FHLB advances		389		794		504		1,687
Subordinated debt		294		176		116		586
Total net change in expense on interest-bearing liabilities		14,326		3,242		4,553		22,121
Net change in net interest income	$	(2,991)	$	22,800	$	(5,091)	$	14,718

(1)	Does not include interest on loans placed on nonaccrual status.

(2)	Does not include dividends earned on equity securities.

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Results of Operations – Comparison of the three-month periods ended March 31, 2023 and 2022

General. Net income for the three-month period ended March 31, 2023, was $2.4 million, a decrease of $6.9 million, or 74.2%, as compared to the same period of the prior fiscal year. The decrease was attributable primarily to merger-related charges including noninterest expense of $3.3 million and provision for credit losses on the acquired loan portfolio and off-balance sheet credit exposures totaling $7.0 million. Inclusive of these non-recurring charges, the decline in net income was the result of increases in noninterest expense and the provision for credit losses, partially offset by increases in net interest income and noninterest income, and a decrease in provision for income taxes.

For the three-month period ended March 31, 2023, basic and fully-diluted net income per share available to common shareholders was $0.22 under both measures, as compared to $1.03 under both measures for the same period of the prior fiscal year, which represented decreases of $0.81, or 78.6% under both measures. Our annualized return on average assets for the three-month period ended March 31, 2023, was 0.23%, as compared to 1.22% for the same period of the prior fiscal year. Our return on average common stockholders’ equity for the three-month period ended March 31, 2023, was 2.3%, as compared to 11.9% in the same period of the prior fiscal year.

Net Interest Income. Net interest income for the three-month period ended March 31, 2023, was $33.8 million, an increase of $8.7 million, or 34.5%, as compared to the same period of the prior fiscal year. The increase was attributable to a 34.5% increase in the average balance of interest-earning assets in the current three-month period compared to the same period a year ago, with no change in net interest margin. As PPP loan forgiveness declined, the Company’s accretion of interest income from deferred origination fees on these loans was reduced to $3,000 in the current quarter, which had no impact on net interest margin, as compared to $180,000 in the same quarter a year ago, which added two basis points to the net interest margin in that period. Future accretion of deferred origination fees on PPP loans will be immaterial.

Loan discount accretion and deposit premium amortization related to the Company’s August 2014 acquisition of Peoples Bank of the Ozarks, the June 2017 acquisition of Capaha Bank, the February 2018 acquisition of Southern Missouri Bank of Marshfield, the November 2018 acquisition of First Commercial Bank, the May 2020 acquisition of Central Federal Savings & Loan Association, the February 2022 merger of Fortune, and the January 2023 acquisition of Citizens Bank & Trust resulted in $1.4 million in net interest income for the three-month period ended March 31, 2023, as compared to $446,000 in net interest income for the same period a year ago. Combined, this component of net interest income contributed 14 basis points to net interest margin in the three-month period ended March 31, 2023, as compared to a six-basis point contribution for the same period of the prior fiscal year.

For the three-month period ended March 31, 2023 our net interest rate spread was 3.11%, as compared to 3.37% in the year-ago period. The decrease in net interest rate spread, compared to the same period a year ago, resulted from a 131 basis point increase in the average cost of interest-bearing liabilities, offset by a 105 basis point increase in the average yield on interest-earning assets.

Interest Income. Total interest income for the three-month period ended March 31, 2023, was $48.3 million, an increase of $19.9 million, or 70.4%, as compared to the same period of the prior fiscal year. The increase was attributed to a 34.5% increase in the average balance of assets, and a 105 basis point increase in the average yield earned on interest-earning assets, as compared to the same period of the prior fiscal year. Increased average interest-earning balances were attributable primarily to growth in the loan portfolio, mortgage-backed securities and other investment securities, partially offset by decreases in other interest-earning assets, including cash and cash equivalents. The increase in interest-earning asset yield was attributable primarily to an increase in market interest rates.

Interest Expense. Total interest expense for the three-month period ended March 31, 2023, was $14.5 million, an increase of $11.3 million, or 350.2%, as compared to the same period of the prior fiscal year. The increase was attributable to a 131 basis point increase in the average cost of interest-bearing liabilities, combined with a 33.8% increase in the average balance of interest-bearing liabilities. The increase in the average cost of interest-bearing liabilities was attributable primarily to the increased rates paid on certificates of deposit, nonmaturity deposit accounts, and FHLB advances, while the increased average balance was attributable primarily to growth in interest-bearing nonmaturity deposit accounts and certificates of deposit.

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Provision for Credit Losses. The PCL for the three-month period ended March 31, 2023, was a charge of $10.1 million, as compared to $1.6 million in the same period of the prior fiscal year The ACL required for PCD loans acquired in the Citizens merger was $1.1 million, and was funded through purchase accounting adjustments, while the ACL required for non-PCD loans acquired in the Citizens merger was $5.2 million, and was funded through a charge to PCL. Additionally, the allowance for off-balance sheet credit exposures was increased by $1.8 million due to the Citizens merger, and funded through a charge to PCL. Exclusive of the charges required as a result of the Citizens merger, the Company would have recorded a PCL of approximately $3.0 million, of which $1.9 million was attributable to the ACL for outstanding loans, while $1.1 million was attributable to the allowance for off-balance sheet credit exposures. The Company’s assessment of the economic outlook at March 31, 2023, was little changed as compared to the assessment as of June 30, 2022, but improved modestly as compared to the assessment as of December 31, 2022. The Company modestly increased qualitative adjustments attributable to levels and trends of industry past due loans, a consideration in the Company’s ACL model. Additionally, the Company modestly increased adjustments related to classified hotel loans that have been slow to recover from the COVID-19 pandemic and the unguaranteed portion of a small pool of SBA loans exhibiting signs of credit stress. As a percentage of average loans outstanding, the Company recorded net charge offs of 0.01% (annualized) during the current period, unchanged from the same period of the prior fiscal year. (See “Critical Accounting Policies”, “Allowance for Credit Loss Activity” and “Nonperforming Assets”).

Noninterest Income. Noninterest income for the three-month period ended March 31, 2023, was $6.3 million, an increase of $1.4 million, or 28.1%, as compared to the same period of the prior fiscal year. In the current quarter, the increase in noninterest income was higher in general due to the inclusion of results from the Citizens operation beginning January 20, 2023, and was attributable to higher deposit account service charges, bank card interchange income, insurance commissions, trust management services income, gains on the sale of the guaranty portion of newly originated government-guaranteed loans, and other income, and was partially offset by a decrease in other loan fees and gains realized on the sale of residential real estate loans originated for that purpose. Origination of residential real estate loans for sale on the secondary market was down 65.1% as compared to the year ago period, as both refinancing and purchase activity declined due to the increase in market interest rates, resulting in a decrease to both gains on sale of these loans and recognition of new mortgage servicing rights, partially offset by income resulting from the servicing of and gain on sale of the guaranty portion of newly originated government-guaranteed loans.

Noninterest Expense. Noninterest expense for the three-month period ended March 31, 2023, was $27.0 million, an increase of $10.2 million, or 61.1%, as compared to the same period of the prior fiscal year. In the current quarter, noninterest expense was higher in general due to charges directly related to merger and acquisition activities, which totaled $3.3 million in the current period, as well as ongoing operating costs of the larger organization beginning January 20, 2023. In total, the increase was attributable primarily to increases in compensation and benefits, legal and professional fees, occupancy expenses, data processing expenses, charges related to foreclosed property, and other noninterest expenses. Direct charges related to merger and acquisition activity were reflected primarily in legal and professional fees, data processing fees (including contract termination and data conversion fees), marketing activities, and other miscellaneous merger operating expenses. In the year ago period, similar charges totaled $1.1 million. The increase in compensation and benefits as compared to the prior year period was primarily due to increased headcount resulting from the Citizen merger, and a trend increase in legacy employee headcount, as well as annual merit increases which, for most team members, took effect in January 2023. Occupancy expenses increased primarily due to facilities added through the Citizens merger, and other equipment purchases. Other noninterest expenses increased due to miscellaneous merger-related expenses, expenses related to loan originations, deposit operations, and employee travel and training.

Income Taxes. The income tax provision for the three-month period ended March 31, 2023, was $578,000, a decrease of $1.8 million, or 75.5% as compared to the same period of the prior fiscal year, primarily due to a reduction of net income before income taxes.

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Results of Operations – Comparison of the nine-month periods ended March 31, 2023 and 2022

General. Net income for the nine-month period ended March 31, 2023, was $23.7 million, a decrease of $10.4 million, or 30.5%, as compared to the same period of the prior fiscal year. The decrease was attributable to increases in PCL and noninterest expense, partially offset by increases in net interest income and noninterest income, and a decrease in provision for income taxes.

For the nine-month period ended March 31, 2023, basic and fully-diluted net income per share available to common shareholders was $2.42 and 2.41, respectively, as compared to $3.81 and $3.80, respectively for the same period of the prior fiscal year, which represented decreases of $1.39, or 36.6% under both measures. Our annualized return on average assets for the nine-month period ended March 31, 2023, was 0.87%, as compared to 1.58% for the same period of the prior fiscal year. Our return on average common stockholders’ equity for the nine-month period ended March 31, 2023, was 8.9%, as compared to 15.2% in the same period of the prior fiscal year.

Net Interest Income. Net interest income for the nine-month period ended March 31, 2023, was $90.5 million, an increase of $14.7 million, or 19.4%, as compared to the same period of the prior fiscal year. The increase was attributable to a 43.2% increase in the average balance of interest-earning assets, partially offset by a decrease in the net interest margin to 3.52%, as compared to 3.74% in the same period a year ago. As PPP loan forgiveness declined, the Company’s accretion of interest income from deferred origination fees on these loans was reduced to $44,000 in the nine-month period, which impacted net interest margin by less than one basis point, as compared to $3.2 million in the same period a year ago, which added 16 basis points to the net interest margin in that period. Future accretion of deferred origination fees on PPP loans will be immaterial.

Loan discount accretion and deposit premium amortization related to the Company’s August 2014 acquisition of Peoples Bank of the Ozarks, the June 2017 acquisition of Capaha Bank, the February 2018 acquisition of Southern Missouri Bank of Marshfield, the November 2018 acquisition of First Commercial Bank, the May 2020 acquisition of Central Federal Savings & Loan Association, the February 2022 merger of Fortune, and the January 2023 merger of Citizens with the Company resulted in $2.4 million in net interest income for the nine-month period ended March 31, 2023, as compared to $1.2 million in net interest income for the same period a year ago. Combined, this component of net interest income contributed four basis points to net interest margin in the nine-month period ended March 31, 2023, as compared to a six basis point contribution for the same period of the prior fiscal year.

For the nine-month period ended March 31, 2023 our net interest rate spread was 3.32%, as compared to 3.63% in the year-ago period. The decrease in net interest rate spread, compared to the same period a year ago, resulted from a 94 basis point increase in the average cost of interest-bearing liabilities, partially offset by a 54 basis point increase in the average yield on interest-earning assets.

Interest Income. Total interest income for the nine-month period ended March 31, 2023, was $122.1 million, an increase of $36.8 million, or 43.2%, as compared to the same period of the prior fiscal year. The increase was attributed to a 26.5% increase in the average balance of assets, combined with an increase of 54 basis points in the average yield earned on interest-earning assets, as compared to the same period of the prior fiscal year. Increased average interest-earning balances were attributable primarily to growth in the loan portfolio, mortgage-backed securities, and other investment securities, partially offset by decreases in other interest-earning assets. The increase in interest-earning asset yield was attributable primarily to increased market interest rates, loans originated or renewed at higher market yields, adjustable-rate loans which re-priced at higher rates, and a shift in the composition of the Company’s other interest-earning asset balances, partially offset by the reduced impact of accretion of deferred origination fees on PPP loans.

Interest Expense. Total interest expense for the nine-month period ended March 31, 2023, was $31.6 million, an increase of $22.1 million, or 233.2%, as compared to the same period of the prior fiscal year. The increase was attributable to a 94 basis point increase in the average cost of interest-bearing liabilities, combined with a 25.5% increase in the average balance of interest-bearing liabilities. The increase in the average cost of interest-bearing liabilities was attributable primarily to the increased rates paid on certificates of deposit, nonmaturity deposit accounts, and FHLB advances, while the increased average balance was attributable to growth in interest-bearing nonmaturity accounts, certificates of deposit, and FHLB advances.

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Provision for Credit Losses. The PCL for the nine-month period ended March 31, 2023, was a charge of $16.3 million, as compared to $1.2 million in the same period of the prior fiscal year. The increased level of provisioning was driven mostly by loan growth in the fiscal year-to-date, qualitative adjustments to modeled results based on the pace of growth of the Company’s loan portfolio, exclusive of acquisitions or government-guaranteed loans, relative to overall economic growth, and required “Day 1” ACL on the acquired loans and off-balance sheet credit exposures related to the Citizens merger. As a percentage of average loans outstanding, the Company recorded net charge offs of approximately one basis point (annualized) during both the current period and the same period of the prior fiscal year. (See “Critical Accounting Policies”, “Allowance for Credit Loss Activity” and “Nonperforming Assets”).

Noninterest Income. Noninterest income for the nine-month period ended March 31, 2023, was $17.3 million, an increase of $2.6 million, or 17.3%, as compared to the same period of the prior fiscal year. In the current period, increases in deposit account service charges, bank card interchange income, other loan fees, loan servicing fees, and other income were partially offset by a decrease in gains realized on the sale of residential real estate loans originated for that purpose. The increase in other income was attributable to a gain on the sale of fixed assets of $317,000 as the Company sold previously acquired properties not currently being utilized as banking facilities, trust management services income, and the sale of the guaranty portion of newly originated government-guaranteed loans. These increases were partially offset by the inclusion in the year ago period of a non-recurring benefit of $278,000 recognized on the Company’s exit from a renewable energy tax credit partnership. Origination of residential real estate loans for sale on the secondary market was down 65.1% as compared to the year ago period, as both refinancing and purchase activity declined due to the increase in market interest rates, resulting in a decrease to both gains on sale of these loans and recognition of new mortgage servicing rights, partially offset by income from the servicing and gain on sale of the guaranty portion of government-guaranteed loans.

Noninterest Expense. Noninterest expense for the nine-month period ended March 31, 2023, was $61.6 million, an increase of $15.5 million, or 33.7%, as compared to the same period of the prior fiscal year. The increase was attributable primarily to compensation and benefits, legal and professional fees, occupancy expenses, data processing expenses, amortization of core deposit intangibles, deposit insurance premiums, and other noninterest expenses, and were partially offset by decreases in foreclosed property expenses. Charges related to merger and acquisition activities totaled $4.1 million in the current period, reflected primarily in legal and professional fees, data processing fees (including contract termination and data conversion fees), marketing activities and other miscellaneous merger operating costs. In the year ago period, similar charges totaled $1.3 million. The increase in compensation and benefits as compared to the prior year period was primarily due to increased headcount resulting from the Citizens merger, a trend increase in legacy employee headcount, and increased salaries and wages over the prior year. Occupancy expenses increased primarily due to facilities added through the Citizens merger, and other equipment purchases. Other noninterest expenses increased due to increases in miscellaneous merger-related expenses, expenses related to loan originations, and employee travel and training.

Income Taxes. The income tax provision for the nine-month period ended March 31, 2023, was $6.3 million, a decrease of $2.8 million, or 31.2%, as compared to the same period of the prior fiscal year, due primarily to reduced pre-tax income. The effective tax rate declined to 20.1% as compared to 21.1% in the same quarter of the prior fiscal year.

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Allowance for Credit Loss Activity

The Company regularly reviews its ACL and makes adjustments to its balance based on management’s estimate of (1) the total expected losses included in the Company’s financial assets held at amortized cost, which is limited to the Company’s loan portfolio, and (2) any credit deterioration in the Company’s available-for-sale securities as of the balance sheet date. The Company holds no securities classified as held-to-maturity.

Although the Company maintains its ACL at a level that it considers sufficient to provide for losses, there can be no assurance that future losses will not exceed internal estimates. In addition, the amount of the ACL is subject to review by regulatory agencies, which can order the Company to record additional allowances. The required ACL has been estimated based upon the guidelines in ASC Topic 326, Financial Instruments – Credit Losses.

The estimate involves consideration of quantitative and qualitative factors relevant to the loans as segmented by the Company, and is based on an evaluation, at the reporting date, of historical loss experience, coupled with qualitative adjustments to address current economic conditions and credit quality, and reasonable and supportable forecasts. Specific qualitative factors considered include, but may not be limited to:

•Changes in lending policies and/or loan review system

•National, regional, and local economic trends and/or conditions

•Changes and/or trends in the nature, volume, or terms of the loan portfolio

•Experience, ability, and depth of lending management and staff

•Levels and/or trends of delinquent, non-accrual, problem assets, or charge offs and recoveries

•Concentrations of credit

•Changes in collateral values

•Agricultural economic conditions

•Risks from regulatory, legal, or competitive factors

The following table summarizes changes in the ACL over the three- and nine- month periods ended March 31, 2023 and 2022:


	For the three months ended				For the nine months ended
	March 31,				March 31,
(dollars in thousands)	2023		2022		2023		2022
Balance, beginning of period	$	37,483	$	32,529	$	33,192	$	33,222
Initial ACL on PCD loans		1,121		120		1,121		120
Loans charged off:
Residential real estate		—		(30)		(2)		(62)
Construction		—		—		—		—
Commercial business		—		(6)		(17)		(17)
Commercial real estate		—		—		(245)		—
Consumer		(113)		(32)		(189)		(57)
Gross charged off loans		(113)		(68)		(453)		(136)
Recoveries of loans previously charged off:
Residential real estate		—		2		1		3
Construction		—		—		—		—
Commercial business		—		—		—		2
Commercial real estate		—		—		6		—
Consumer		9		6		18		57
Gross recoveries of charged off loans		9		8		25		62
Net charge offs		(104)		(60)		(428)		(74)
Provision charged to expense		7,185		1,052		11,800		373
Balance, end of period	$	45,685	$	33,641	$	45,685	$	33,641

Our ACL at March 31, 2023, totaled $45.7 million, representing 1.31% of gross loans and 618% of nonperforming loans, as compared to an ACL of $33.2 million, representing 1.22% of gross loans and 806% of nonperforming loans at June 30, 2022. The ACL required for PCD loans acquired in the Citizens merger was $1.1 million, and was funded through purchase accounting adjustments, while the ACL required for non-PCD loans acquired in the Citizens merger was $5.2 million, and was funded through a charge to PCL. Additionally, the allowance for off-balance sheet credit

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exposures was increased by $1.8 million due to the Citizens merger, and funded through a charge to PCL. Exclusive of the charges required as a result of the Citizens merger, the Company would have recorded a PCL of approximately $3.0 million, of which $1.9 million was attributable to the ACL for outstanding loans, while $1.1 million was attributable to the allowance for off-balance sheet credit exposures.

The Company has estimated its expected credit losses as of March 31, 2023, under ASC 326-20, and management believes the ACL as of that date is adequate based on that estimate. There remains, however, significant uncertainty as the Federal Reserve tightens monetary policy to address inflation risks. Management continues to closely monitor borrowers in the hotel industry that were slow to recover from the COVID-19 pandemic.

For the nine-month period ended March 31, 2023, the ACL increased by $12.5 million and the allowance for off-balance sheet credit exposures increased by $4.5 million, reflecting the $1.1 million addition to the ACL for PCD loans acquired in the Citizens merger, a PCL of $16.3 million, and net charge offs of $428,000.

At March 31, 2023, the Bank also had accrued within other liabilities an allowance for off-balance sheet credit exposures of $7.8 million, as compared to $3.3 million at June 30, 2022. The increase reflects the component of the PCL attributable to off-balance sheet credit exposures noted above. This amount is maintained as a separate liability account to cover estimated credit losses associated with off-balance sheet credit instruments such as off-balance sheet loan commitments, standby letters of credit, and guarantees. The $4.5 million increase in the estimated allowance for off-balance sheet credit exposures was primarily the result of an increase in the amount of unfunded commitments (unused lines of credit) available and expected to be utilized for loans originated by the legacy branches as well as unfunded commitments acquired with the Citizens merger.

The following table sets forth the sum of the amounts of the ACL attributable to individual loans within each category, or the loan categories in general, and the percentage of the ACL that is attributable to each category, as of the reporting date. The table also reflects the percentage of loans in each category to the total loan portfolio, as of the reporting date.


			% of				% of
	ACL as of		total		ACL as of		total
	March 31, 2023		ACL		June 30, 2022		ACL
Real Estate Loans:
Residential	$	13,465	29.5	%	$	8,908	26.8	%
Construction		3,638	8.0	%		2,220	6.7	%
Commercial		18,545	40.6	%		16,838	50.7	%
Consumer loans		986	2.1	%		710	2.2	%
Commercial loans		9,051	19.8	%		4,516	13.6	%
	$	45,685	100.0	%	$	33,192	100.0	%

For loans that do not exhibit similar risk characteristics, the Company evaluates the loan on an individual basis. Loans that are classified with an adverse internal credit rating or identified as TDRs are most commonly considered for individual evaluation. The ACL for individually evaluated loans may be estimated based on the fair value of the underlying collateral, or based on the present value of expected cash flows.

At March 31, 2023, the Company had loans of $46.9 million, or 1.35% of total loans, adversely classified ($46.9 million classified “substandard”; none classified “doubtful”), as compared to loans of $27.1 million, or 1.00% of total loans, adversely classified ($26.3 million classified “substandard”; $827,000 classified “doubtful”) at June 30, 2022, and $37.6 million, or 1.25% of total loans, adversely classified ($37.6 million classified “substandard”; none classified “doubtful”) at December 31, 2022. The increase as compared to June 30, 2022, was primarily related to $6.1 million acquired via the Citizens merger, the migration from the special mention category to substandard of one $9.0 million relationship, and was offset by the resolution of $5.8 million in legacy adversely classified loans. Classified loans were generally comprised of loans secured by commercial and residential real estate, and other commercial purpose collateral. All loans were classified due to concerns as to the borrowers’ ability to continue to generate sufficient cash flows to service the debt. Of our classified loans, the Company had ceased recognition of interest on loans with a carrying value of $9.5 million at March 31, 2023. As reported in Note 4 to the condensed consolidated financial statements, the Company’s

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total past due loans increased from $4.6 million at June 30, 2022, to $7.4 million at March 31, 2023. Total past due loans were $8.9 million at December 31, 2022. The increase in past due loans as compared to June 30, 2022, was primarily attributable to $2.7 million in non-owner occupied nonresidential real estate acquired with the Citizens merger. Of total delinquent loans, the majority are classified as non-accrual and appropriate collection efforts are being actively monitored.

Nonperforming Assets

The ratio of nonperforming assets to total assets and nonperforming loans to net loans receivable is another measure of asset quality. Nonperforming assets of the Company include nonaccruing loans, accruing loans delinquent/past maturity 90 days or more, and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. The table below summarizes changes in the Company’s level of nonperforming assets over selected time periods:



	March 31, 2023		June 30, 2022		March 31, 2022

Nonaccruing loans:
Residential real estate	$	1,175	$	1,647	$	1,255
Construction		368		—		—
Commercial real estate		4,741		2,259		2,373
Consumer		183		73		9
Commercial business		930		139		245
Total		7,397		4,118		3,882

Loans 90 days past due accruing interest:
Residential real estate		—		—		—
Construction		—		—		—
Commercial real estate		—		—		—
Consumer		—		—		—
Commercial business		—		—		—
Total		—		—		—

Total nonperforming loans		7,397		4,118		3,882
Nonperforming investments		—		—		—
Foreclosed assets held for sale:		—		—		—
Real estate owned		5,258		2,180		3,199
Other nonperforming assets		25		11		—
Total nonperforming assets	$	12,680	$	6,309	$	7,081

At March 31, 2023, TDRs totaled $31.1 million, of which $733,000 was considered nonperforming and included in the nonaccrual loan total above. The remaining $30.4 million in TDRs have complied with the modified terms for a reasonable period of time and are therefore considered by the Company to be accrual status loans. In general, these loans were subject to classification as TDRs at March 31, 2023, on the basis of guidance under ASU No. 2011-02, which indicates that the Company may not consider the borrower’s effective borrowing rate on the old debt immediately before the restructuring in determining whether a concession has been granted. At June 30, 2022, TDRs totaled $31.4 million, of which $807,000 was considered nonperforming and included in the nonaccrual loan total above. The remaining $30.6 million in TDRs at June 30, 2022, had complied with the modified terms for a reasonable period of time and were therefore considered by the Company to be accrual status loans.

At March 31, 2023, nonperforming assets totaled $12.7 million, as compared to $6.3 million at June 30, 2022, and $7.1 million at March 31, 2022. The increase in nonperforming assets as compared to June 30, 2022, was attributable to $1.8 million in nonperforming loans and $2.7 million in other real estate owned obtained via the Citizens merger, a net increase of $355,000 in legacy other real estate owned, and an increase of $1.5 million in legacy nonperforming loans.

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Liquidity Resources

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loans purchases, deposit withdrawals and operating expenses. Our primary sources of funds include deposit growth, FHLB advances, brokered deposits, amortization and prepayment of loan principal and interest, investment maturities and sales, and funds provided by our operations. While the scheduled loan repayments and maturing investments are relatively predictable, deposit flows, FHLB advance redemptions, and loan and security prepayment rates are significantly influenced by factors outside of the Bank’s control, including interest rates, general and local economic conditions and competition in the marketplace. The Bank relies on FHLB advances and brokered deposits as additional sources for funding cash or liquidity needs.

The Company uses its liquid resources principally to satisfy its ongoing cash requirements, which include funding loan commitments, funding maturing certificates of deposit and deposit withdrawals, maintaining liquidity, funding maturing or called FHLB advances, purchasing investments, and meeting operating expenses.

At March 31, 2023, the Company had outstanding commitments and approvals to extend credit of approximately $1.1 billion million (including $723.2 million in unused lines of credit) in mortgage and non-mortgage loans. These commitments and approvals are expected to be funded through existing cash balances, cash flow from normal operations and, if needed, advances from the FHLB, the Federal Reserve Bank of St. Louis’ primary credit facility (“Discount Window”) and the new Bank Term Funding Program (“BTFP”). At March 31, 2023, the Bank had pledged $1.0 billion of its single-family residential and commercial real estate loan portfolios to the FHLB for available credit of approximately $606.6 million, of which $45.2 million was advanced, while an additional $373,000 was encumbered in relation to residential real estate loans sold onto the secondary market through the FHLB, and $29.5 million was utilized as collateral for the issuance of letters of credit to secure public unit deposits. The Bank has the ability to pledge several other loan portfolios, including, for example, its multi-family or home equity loans, which could provide additional collateral for additional borrowings. In total, FHLB borrowings are generally limited to 45% of bank assets, or approximately $1.5 billion, subject to available collateral. Also, at March 31, 2023, the Bank had pledged a total of $297.9 million in loans secured by farmland and agricultural production loans to the Federal Reserve, providing access to $237.5 million in primary credit borrowings from the Federal Reserve’s discount window, none of which was advanced at March 31, 2023. Of our AFS securities carrying value of $429.8 million, investment and mortgage-backed securities pledged as collateral to secure public deposits totaled $243.6 million at March 31, 2023. Management believes its liquid resources will be sufficient to meet the Company’s liquidity needs.

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Regulatory Capital

The Company and Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory - and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under U.S. GAAP, regulatory reporting requirements and regulatory capital standards. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Furthermore, the Company’s and Bank’s regulators could require adjustments to regulatory capital not reflected in the condensed consolidated financial statements.

Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier 1 capital (as defined), and common equity Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average total assets (as defined). Additionally, to make distributions or discretionary bonus payments, the Company and Bank must maintain a capital conservation buffer of 2.5% of risk-weighted assets. Management believes, as of March 31, 2023 and June 30, 2022, that the Company and the Bank met all capital adequacy requirements to which they are subject.

Effective January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a tier 1 leverage ratio of greater than 9 percent, are considered qualifying community banking organizations and are eligible to opt into an alternative, simplified regulatory capital framework, which utilizes a newly-defined “Community Bank Leverage Ratio” (CBLR). The CBLR framework is an optional framework that is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9 percent are considered to have satisfied the risk-based and leverage capital requirements in the agencies’ generally applicable capital rule. In April 2020, the federal bank regulatory agencies announced the issuance of two interim final rules to provide temporary relief to community banking organizations, and adopted the final rule with no changes in October 2020. Under the rules, the CBLR requirement was a minimum of 8.0% for the remainder of calendar year 2020, was 8.5% for calendar year 2021, and 9.0% thereafter. The Company and the Bank have not made an election to utilize the CBLR framework, but will continue to monitor the available option, and could do so in the future.

In August 2020, the Federal banking agencies adopted a final rule updating a December 2018 rule regarding the impact on regulatory capital of adoption of the CECL standard. The rule allows institutions that adopted the CECL standard in 2020 a five-year transition period to recognize the estimated impact of adoption on regulatory capital. The Company and the Bank elected to exercise the option to recognize the impact of adoption over the five-year period.

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As of March 31, 2023, the most recent notification from the Federal banking agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The tables below summarize the Company’s and Bank’s actual and required regulatory capital at the dates indicated:


									To Be Well Capitalized
					For Capital				Under Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
As of March 31, 2023	Amount		Ratio		Amount		Ratio		Amount	Ratio
(dollars in thousands)
Total Capital (to Risk-Weighted Assets)
Consolidated	$	459,771	12.22	%	$	300,924	8.00	%	n/a	n/a
Southern Bank		442,021	11.87	%		297,954	8.00	%	372,443	10.00	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		413,432	10.99	%		225,693	6.00	%	n/a	n/a
Southern Bank		395,685	10.62	%		223,466	6.00	%	297,954	8.00	%
Tier I Capital (to Average Assets)
Consolidated		413,432	10.02	%		165,055	4.00	%	n/a	n/a
Southern Bank		395,685	10.58	%		149,655	4.00	%	186,222	5.00	%
Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated		398,010	10.58	%		169,270	4.50	%	n/a	n/a
Southern Bank		395,685	10.62	%		167,599	4.50	%	242,088	6.50	%


									To Be Well Capitalized
					For Capital				Under Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
As of June 30, 2022	Amount		Ratio		Amount		Ratio		Amount	Ratio
(dollars in thousands)
Total Capital (to Risk-Weighted Assets)
Consolidated	$	370,013	13.42	%	$	220,558	8.00	%	n/a	n/a
Southern Bank		352,169	12.90	%		218,397	8.00	%	272,996	10.00	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		335,316	12.16	%		165,418	6.00	%	n/a	n/a
Southern Bank		325,183	11.91	%		163,797	6.00	%	218,397	8.00	%
Tier I Capital (to Average Assets)
Consolidated		335,316	10.41	%		128,822	4.00	%	n/a	n/a
Southern Bank		325,183	10.22	%		127,333	4.00	%	159,167	5.00	%
Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated		319,971	11.61	%		124,064	4.50	%	n/a	n/a
Southern Bank		325,183	11.91	%		122,848	4.50	%	177,447	6.50	%

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PART I: Item 3: Quantitative and Qualitative Disclosures About Market Risk

SOUTHERN MISSOURI BANCORP, INC.

Asset and Liability Management and Market Risk

The goal of the Company’s asset/liability management strategy is to manage the interest rate sensitivity of both interest-earning assets and interest-bearing liabilities in order to maximize net interest income without exposing the Bank to an excessive level of interest rate risk. The Company employs various strategies intended to manage the potential effect that changing interest rates may have on future operating results. The primary asset/liability management strategy has been to focus on matching the anticipated re-pricing intervals of interest-earning assets and interest-bearing liabilities. At times, however, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the Company may determine to increase its interest rate risk position somewhat in order to maintain its net interest margin.

In an effort to manage the interest rate risk resulting from fixed rate lending, the Bank has utilized longer term FHLB advances (with maturities up to ten years), subject to early redemptions and fixed terms. Other elements of the Company’s current asset/liability strategy include (i) increasing originations of commercial business, commercial real estate, agricultural operating lines, and agricultural real estate loans, which typically provide higher yields and shorter repricing periods, but inherently increase credit risk; (ii) actively soliciting less rate-sensitive deposits, including aggressive use of the Company’s “rewards checking” product, and (iii) offering competitively-priced money market accounts and CDs with maturities of up to five years. The degree to which each segment of the strategy is achieved will affect profitability and exposure to interest rate risk.

The Company continues to originate long-term, fixed-rate residential loans. During the first nine months of fiscal year 2023, fixed rate 1- to 4-family residential loan production totaled $97.2 million (of which $12.7 million was originated for sale into the secondary market), as compared to $204.0 million during the same period of the prior fiscal year (of which $38.9 million was originated for sale into the secondary market). At March 31, 2023, the fixed rate residential loan portfolio was $592.5 million with a weighted average maturity of 194 months, as compared to $464.8 million at March 31, 2022, with a weighted average maturity of 190 months. The Company originated $32.1 million in adjustable-rate 1- to 4-family residential loans during the nine-month period ended March 31, 2023, as compared to $8.0 million during the same period of the prior fiscal year. The Company originated $477.9 million in fixed rate commercial and commercial real estate loans during the nine-month period ended March 31, 2023, as compared to $421.9 million during the same period of the prior fiscal year. The Company also originated $119.4 million in adjustable rate commercial and commercial real estate loans during the nine-month period ended March 31, 2023, as compared to $46.2 million during the same period of the prior fiscal year. At March 31, 2023, adjustable-rate home equity lines of credit increased to $65.9 million, as compared to $41.7 million at March 31, 2022. At March 31, 2023, all fixed rate loans with remaining maturities in excess of 10 years totaled $383.8 million, or 11.2% of net loans receivable, as compared to $302.4 million, or 11.7% of net loans receivable at March 31, 2022. At March 31, 2023, the Company’s investment portfolio had a weighted-average life of 6.1 years, compared to 4.9 years at March 31, 2022, while the effective duration of the portfolio declined to 2.6 at March 31, 2023, as compared to 3.8 at March 31, 2022. Management continues to focus on customer retention, customer satisfaction, and offering new products to customers in order to increase the Company’s amount of less rate-sensitive deposit accounts.

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Interest Rate Sensitivity Analysis

The following table sets forth as of March 31, 2023, management’s estimates of the projected changes in net portfolio value (“NPV”) in the event of 100, 200, and 300 basis point (“bp”) instantaneous, permanent, and parallel increases, and 100, 200, and 300 basis point instantaneous, permanent, and parallel decreases in market interest rates. Dollar amounts are expressed in thousands.


March 31, 2023
						NPV as Percentage of
	Net Portfolio					PV of Assets
Change in Rates	Value		Change		% Change	NPV Ratio	Change

	(Dollars in thousands)					(%)	(basis points)
+300 bp	$	284,065	$	(101,097)	(26)	7.36	(193)
+200 bp		321,356		(63,805)	(17)	8.13	(116)
+100 bp		347,429		(37,733)	(10)	8.60	(69)
0 bp		385,162		—	—	9.29	—
‑100 bp		423,069		37,908	10	9.96	67
‑200 bp		475,209		90,048	23	10.98	169
‑300 bp		517,484		132,323	34	11.77	248


June 30, 2022
						NPV as Percentage of
	Net Portfolio					PV of Assets
Change in Rates	Value		Change		% Change	NPV Ratio	Change

	(Dollars in thousands)					(%)	(basis points)
+300 bp	$	189,624	$	(129,048)	(40)	6.50	(345)
+200 bp		231,603		(87,069)	(27)	7.70	(225)
+100 bp		286,614		(32,058)	(10)	9.20	(75)
0 bp		318,672		—	—	9.95	—
‑100 bp		350,857		32,185	10	10.66	71
‑200 bp		442,479		123,807	39	13.06	311
‑300 bp		523,486		204,814	64	15.09	514

Computations of prospective effects of hypothetical interest rate changes are based on an internally generated model using actual maturity and repricing schedules for the Bank’s loans and deposits, and are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit run-offs, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest rates.

Management cannot accurately predict future interest rates or their effect on the Bank’s net present value (“NPV”) in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have an initial fixed rate period typically from one to seven years and over the remaining life of the asset changes in the interest rate are restricted. In addition, the proportion of adjustable-rate loans in the Bank’s portfolios could decrease in future periods due to refinancing activity if market interest rates remain steady in the future. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

The Company’s growth strategy has included origination of fixed-rate loans, as discussed under “Asset and Liability Management and Market Risk,” above. Through December 31, 2022, the Company reported an increase in interest rate sensitivity, as it booked above-trend loan growth in anticipation of the liquidity and interest rate risk position of the balance sheet it would acquire in the Citizens merger. With the completion of the merger, as of March 31, 2023, the Company’s interest rate sensitivity has declined somewhat as compared to June 30, 2022, as reflected in the tables above. As compared to the prior fiscal year, the Company’s interest rate sensitivity has increased somewhat, as the rapid

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and significant increase in market interest rates and above-trend loan growth prior to the Citizens merger has been partially offset with the benefit of Citizens’ asset-sensitive balance sheet.

The Bank’s board of directors is responsible for reviewing the Bank’s asset and liability policies. The Bank’s Asset/Liability Committee meets monthly to review interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Bank’s management is responsible for administering the policies and determinations of the board of directors with respect to the Bank’s asset and liability goals and strategies.

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PART I: Item 4: Controls and Procedures

SOUTHERN MISSOURI BANCORP, INC.

An evaluation of Southern Missouri’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended, (the “Act”)) as of March 31, 2023 was carried out under the supervision and with the participation of our Chief Executive Officer, our Chief Administrative Officer, our Chief Financial Officer, and several other members of our senior management. Our Chief Executive Officer, our Chief Administrative Officer, and our Chief Financial Officer concluded that, as of March 31, 2023, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to management (including our Chief Executive Officer, our Chief Administrative Officer and our Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Company does not expect that its disclosures and procedures will prevent all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

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PART II: Other Information

SOUTHERN MISSOURI BANCORP, INC.

Item 1: Legal Proceedings

In the opinion of management, the Company is not a party to any pending claims or lawsuits that are expected to have a material effect on the Company’s financial condition or operations. Periodically, there have been various claims and lawsuits involving the Company mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank’s business. Aside from such pending claims and lawsuits, which are incident to the conduct of the Company’s ordinary business, the Company is not a party to any material pending legal proceedings that would have a material effect on the financial condition or operations of the Company.

Item 1a: Risk Factors

Except for the risk factor set forth below, there have been no material changes to the risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2022.

Recent negative events in the financial services industry, primarily involving regional banks, have caused general uncertainty and concern regarding the adequacy of liquidity of the financial services industry. While the Company relies on a number of funding sources to meet potential liquidity needs, our business strategies are largely based on access to funding from customer deposits and supplemental funding provided by wholesale or other secondary liquidity sources. Deposit levels may be affected by various industry factors, including interest rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, conditions in the financial services industry specifically and general economic conditions that impact the amount of liquidity in the economy and savings levels, and also by factors that impact customers’ perception of our financial condition, capital and liquidity levels. This uncertainty may drive deposit outflows, increased borrowing and funding costs, and increased competition for liquidity, any of which could have a material adverse impact on our financial performance or financial condition. Despite the challenges, our focus remains on the fundamentals that have served us well during our 135-year history.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

On May 20, 2021, the Company announced its intention to repurchase up to 445,000 shares of its common stock, or approximately 5.0% of its 8.9 million then-outstanding common shares. The shares will be purchased at prevailing market prices in the open market or in privately negotiated transactions, subject to availability and general market conditions. Repurchased shares will be held as treasury shares to be used for general corporate purposes.

The following table summarizes the Company’s stock repurchase activity for each month during the three months ended March 31, 2023.


				Total # of Shares
		Average		Purchased as Part of a	Maximum Number
	Total #	Price		Publicly	of Shares That
	of Shares	Paid Per		Announced	May Yet Be
	Purchased	Share		Program	Purchased ⁽¹⁾
01/01/23 - 01/31/23 period	—	$	—	—	306,375
02/01/23 - 02/28/23 period	—		—	—	306,375
03/01/23 - 03/31/23 period	—		—	—	306,375

(1)

Represents the remaining shares available for purchase as of the last calendar day of the month shown.

Item 3: Defaults upon Senior Securities

Not applicable

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Item 4: Mine Safety Disclosures

Not applicable

Item 5: Other Information

None

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Item 6: Exhibits


Exhibit Number	Document
3.1(i)	Articles of Incorporation of the Registrant (filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended June 30, 1999 and incorporated herein by reference)
3.1(i)A	Amendment to Articles of Incorporation of Southern Missouri increasing the authorized capital stock of Southern Missouri (filed as an exhibit to Southern Missouri’s Current Report on Form 8-K filed on November 21, 2016 and incorporated herein by reference)
3.1(i)B	Amendment to Articles of Incorporation of Southern Missouri increasing the authorized capital stock of Southern Missouri (filed as an exhibit to Southern Missouri’s Current Report on Form 8-K filed on November 8, 2018 and incorporated herein by reference)
3.1(ii)	Certificate of Designation for the Registrant’s Senior Non-Cumulative Perpetual Preferred Stock, Series A (filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on July 26, 2011 and incorporated herein by reference)
3.2	Bylaws of the Registrant (filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on December 6, 2007 and incorporated herein by reference)
4	Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2020 and incorporated herein by reference).
10	Material Contracts:
	1.	Registrant’s 2017 Omnibus Incentive Plan (attached to the Registrant’s definitive proxy statement filed on September 26, 2017, and incorporated herein by reference)
	2.	2008 Equity Incentive Plan (attached to the Registrant’s definitive proxy statement filed on September 19, 2008 and incorporated herein by reference)
	3.	2003 Stock Option and Incentive Plan (attached to the Registrant’s definitive proxy statement filed on September 17, 2003 and incorporated herein by reference)
	4.	1994 Stock Option and Incentive Plan (attached to the Registrant’s definitive proxy statement filed on October 21, 1994 and incorporated herein by reference)
	5.	Management Recognition and Development Plan (attached to the Registrant’s definitive proxy statement filed on October 21, 1994 and incorporated herein by reference)
	6.	Employment Agreements
		(i)	Employment Agreement with Greg A. Steffens (filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the year ended June 30, 2019 and incorporated herein by reference)
		(ii)	Amended and Restated Employment Agreement with Greg A. Steffens (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, and incorporated herein by reference)
	7.	Director’s Retirement Agreements
		(i)	Director’s Retirement Agreement with Sammy A. Schalk (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2000 and incorporated herein by reference)
		(ii)	Director’s Retirement Agreement with L. Douglas Bagby (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2000 and incorporated herein by reference)
		(iii)	Director’s Retirement Agreement with Rebecca McLane Brooks (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004 and incorporated herein by reference)
		(iv)	Director’s Retirement Agreement with Charles R. Love (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004 and incorporated herein by reference)
		(v)	Director’s Retirement Agreement with Charles R. Moffitt (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004 and incorporated herein by reference)
		(vi)	Director’s Retirement Agreement with Dennis C. Robison (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2008 and incorporated herein by reference)
		(vii)	Director’s Retirement Agreement with David J. Tooley (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011 and incorporated herein by reference)

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			(viii)	Director’s Retirement Agreement with Todd E. Hensley (filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2014 and incorporated herein by reference)
	8.		Tax Sharing Agreement (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 and incorporated herein by reference)
	9.		Change-in-Control Agreements
			(i)	Change-in-control Agreement with Kimberly A. Capps (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
			(ii)	Change-in -Control Agreement with Matthew Funke (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
			(iii)	Change-in-control Agreement with Lora L. Daves (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
			(iv)	Change-in-control Agreement with Justin G. Cox (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
			(v)	Change-in-control Agreement with Rick A. Windes (filed as an exhibit to the Registrant’s Current Report on Form 8-K for the event on March 25, 2022 and incorporated herein by reference)
			(vi)	Change-in -Control Agreement with Mark Hecker (filed as an exhibit to the Registrant’s Current Report on Form 8-K for the event on April 20, 2021 and incorporated herein by reference)
			(vii)	Change-in -Control Agreement with Brett Dorton (filed as an exhibit to the Registrant’s Current Report on Form 8-K for the event on March 25, 2022 and incorporated herein by reference)
			(viii)	Amended and Restated Change-in-Control Agreement with Martin Weishaar
			(ix)	Change-in-Control Agreement with Lance Gruenke
	10.	Named Executive Officer Salary and Bonus Arrangements for 2022 (filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended June 30, 2022 and incorporated herein by reference)
	11. Director Fee Arrangements for 2022 (filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended June 30, 2022 and incorporated herein by reference)
14	Code of Conduct and Ethics (filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2016 and incorporated herein by reference)
21	Subsidiaries of the Registrant (filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended June 30, 2022 and incorporated herein by reference)
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Administrative Officer
31.3	Rule 13a-14(a) Certification of Chief Financial Officer
32	Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
101	Includes the following financial and related information from Southern Missouri Bancorp, Inc.’s Quarterly Report on Form 10-Q as of and for the quarter ended March 31, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (1) the Consolidated Balance Sheets, (2) the Consolidated Statements of Income, (3) the Consolidated Statements of Comprehensive Income, (4) the Consolidated Statements of Changes in Stockholders’ Equity, (5) the Consolidated Statements of Cash Flows, and (6) Notes to Consolidated Financial Statements.
104	The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		SOUTHERN MISSOURI BANCORP, INC.
		Registrant

Date: May 10, 2023		/s/ Greg A. Steffens
		Greg A. Steffens
		Chairman & Chief Executive Officer
		(Principal Executive Officer)

Date: May 10, 2023		/s/ Matthew T. Funke
		Matthew T. Funke
		President & Chief Administrative Officer
		(Principal Financial Officer)
Date: May 10, 2023		/s/ Lora L. Daves
		Lora L. Daves
		Executive Vice President & Chief Financial Officer
		(Principal Accounting Officer)

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