SOUTHERN MISSOURI BANCORP, INC. (SMBC) FY 2021 MD&A

Item 7.​ ​Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and notes thereto, which are included in Item 8 of this Form 10-K. You should read the information in this section in conjunction with the business and financial information regarding us as provided in this Form 10-K.

OVERVIEW

Southern Missouri Bancorp, Inc., is a Missouri corporation originally organized for the principal purpose of becoming the holding company of Southern Bank. The principal business of Southern Bank consists of attracting deposits from the communities it serves and investing those funds in loans secured by residential and commercial real estate, as well as commercial business and consumer loans. These funds have also been used to purchase investment securities, mortgage-backed securities (MBS), U.S. government and federal agency obligations and other permissible securities.

Southern Bank’s results of operations are primarily dependent on the levels of its net interest margin and noninterest income, and its ability to control operating expenses. Net interest margin is dependent primarily on the difference or spread between the average yield earned on interest-earning assets (including loans, mortgage-related securities, and investments) and the average rate paid on interest-bearing liabilities (including deposits, securities sold under agreements to repurchase, and borrowings), as well as the relative amounts of these assets and liabilities. Southern Bank is subject to interest rate risk to the degree that its interest-earning assets mature or reprice at different times, or on a varying basis, from its interest-bearing liabilities.

Southern Bank’s noninterest income consists primarily of fees charged on transaction and loan accounts, interchange income from customer debit and ATM card use, gains on sales of loans originated for sale on the secondary market, and increased cash surrender value of bank owned life insurance (“BOLI”). Southern Bank’s operating expenses include: employee compensation and benefits, occupancy and data processing expenses, legal and professional fees, federal deposit insurance premiums, amortization of intangible assets, and other general and administrative expenses.

Southern Bank’s operations are significantly influenced by general economic conditions including monetary and fiscal policies of the U.S. government and the Federal Reserve Board. Additionally, Southern Bank is subject to policies and regulations issued by financial institution regulatory agencies including the Federal Reserve, the Missouri Division of Finance, and the Federal Deposit Insurance Corporation. Each of these factors may influence interest rates, loan demand, prepayment rates and deposit flows. Interest rates available on competing investments as well as general market interest rates influence the Bank’s cost of funds. Lending activities are affected by the demand for real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered. Lending activities are funded through the attraction of deposit accounts consisting of checking accounts, passbook and statement savings accounts, money market deposit accounts, certificate of deposit accounts with terms of 60 months or less, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank of Des Moines, and, to a lesser extent, brokered deposits. The Bank intends to continue to focus on its lending programs for one- to four-family and multi-family residential real estate, commercial real estate, commercial business and consumer financing on loans secured by properties or collateral located primarily in Missouri and Arkansas.

CRITICAL ACCOUNTING POLICIES

The Company has established various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in Item 8 of this Form 10-K under the Notes to the Consolidated Financial Statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments

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and assumptions made by management, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

Allowance for Credit Losses. The Company's allowance for credit losses is its estimate of credit losses expected in the loan portfolio, on unfunded lending commitments, or in its available-for-sale securities portfolio over the expected life of those assets. While these estimates are based on substantive methods for determining the required allowance, actual outcomes may differ significantly from estimated results, especially when determining required allowances for larger, complex commercial credits or unfunded lending commitments to commercial borrowers. Consumer loans, including single family residential real estate, are individually smaller and generally behave in a similar manner, and loss estimates for these credits are considered more predictable. Additionally, the Company estimates the allowance for credit losses as a calculation of expected lifetime credit losses utilizing a forward-looking forecast of macroeconomic conditions, which may differ significantly from actual results. Further discussion of the methodology used in establishing the allowance is provided in Note 1 and Note 3 to the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K, and in the “Financial Condition – Loans” and “Allowance for Credit Losses” sections of this Item 7.

FINANCIAL CONDITION

General. The Company experienced balance sheet growth in fiscal 2021, with total assets of $2.7 billion at June 30, 2021, reflecting an increase of $158.4 million, or 6.2%, as compared to June 30, 2020. Asset growth was comprised mainly of increases in cash and cash equivalents, loans, and available-for-sale (“AFS”) securities.

Cash and equivalents. Cash and cash equivalents were $123.6 million at June 30, 2021, an increase of $69.3 million, or 127.8%, as compared to June 30, 2020. The increase was primarily a result of deposit growth outpacing loan growth during the period. Interest-bearing time deposits were $1.0 million at June 30, 2021, relatively unchanged as compared to June 30, 2020.

Investments. Available-for-sale (AFS) securities were $207.0 million at June 30, 2021, an increase of $30.5 million, or 17.3%, as compared to June 30, 2020. The Company increased holdings of corporate debt, residential and commercial mortgage-backed securities (MBS), and municipal securities, while holdings of collateralized mortgage obligations (CMOs) issued by government-sponsored entities declined.

Loans. Loans, net of the allowance for credit losses, were $2.2 billion at June 30, 2021, an increase of $58.3 million, or 2.7%, as compared to June 30, 2020. Gross loans increased by $66.4 million, or 3.1%, during the fiscal year, while the ACL at June 30, 2021, reflected an increase of $8.1 million, as compared to the balance of our allowance for loan and lease losses (ALLL) at June 30, 2020. The Company adopted ASU 2016-13, Financial Instruments – Credit Losses, also known as the current expected credit loss (“CECL”) standard, effective as of July 1, 2020, the beginning of our 2021 fiscal year. Adoption resulted in a $9.3 million increase in the ACL, relative to the ALLL as of June 30, 2020, while negative provisioning combined with net charge offs to decrease the ACL by $1.2 million, as compared to July 1, 2020. The increase in loan balances in the portfolio was primarily attributable to increases in residential real estate loans and drawn construction loan balances, partially offset by decreases in commercial loans and consumer loans. Residential real estate loans increased primarily due to growth in multifamily and 1- to 4-family residential lending. Due to its liquidity position, the Company retained some single-family residential loans which it typically would have sold on the secondary market. Commercial loan balances decreased primarily as a result of forgiveness of PPP loans, which declined by $69.3 million during the fiscal year. Remaining unpaid PPP loan balances were $63.0 million at June 30, 2021.

Nonperforming loans were $5.9 million, or 0.26% of gross loans, at June 30, 2021, as compared to $8.7 million, or 0.40% of gross loans at June 30, 2020. The decrease in nonperforming loans over the fiscal year was attributed primarily to the resolution of certain nonperforming loans acquired in the Gideon Acquisition. In connection with the Gideon Acquisition, we acquired nonperforming loans which totaled $10.2 million (at fair value) as of June 30, 2019. This group of loans had declined to $1.8 million as of June 30, 2020, and declined further to an immaterial amount as of June 30, 2021.

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Allowance for Credit Losses. Our ACL at June 30, 2021, totaled $33.2 million, representing 1.49% of gross loans and 566.1% of nonperforming loans, as compared to an ALLL of $25.1 million, representing 1.16% of gross loans and 290.4% of nonperforming loans at June 30, 2020. The ACL at June 30, 2021, also represented 1.53% of gross loans excluding PPP loans. The Company has estimated its credit losses as of June 30, 2021, under ASC 320-20, and management believes the allowance for credit losses as of that date is adequate based on that estimate; however, there remains significant uncertainty regarding the possible length of time before economic activity fully recovers from the COVID-19 pandemic, including uncertainty regarding the effectiveness of recent efforts by the U.S. government and Federal Reserve to respond to the pandemic and its economic impact. Most recently, public health authorities have reported increasing case counts and hospitalizations in parts of our market area. Management considered the potential impact of the pandemic on its consumer and business borrowers, particularly those business borrowers most affected by efforts to contain the pandemic, most notably including our borrowers in the hotel industry. See also, “Provision for Credit Losses, under Comparison of Operating Results for the Years Ended June 30, 2021 and 2020”.

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. For a summary of changes in the ACL during the current and prior fiscal years, and a breakdown of the ACL by loan category as of the current and prior fiscal year end, see Description of Business – Asset Quality, Allowance for Credit Losses, contained within Item 1 of this Form 10-K.

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 peer data, 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

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At our June 30, 2020, fiscal year end, prior to the adoption of ASU 2016-13, the Company’s ALLL was $25.1 million. Upon adoption of the standard, effective July 1, 2020, the Company increased the ACL by $8.9 million, related to the transition from the incurred loss model to the CECL ACL model, increased the ACL by $434,000 related to the transition from purchased credit impaired to purchased credit deteriorated methodology, and reduced retained earnings by $6.9 million, net of deferred taxes, through a one-time cumulative effect adjustment. During fiscal 2021, the ACL decreased by an additional $1.2 million, reflecting a recovery of provision for credit losses on loan balances outstanding of $602,000, and net charge offs of $648,000. The recovery was based on the estimated required ACL, reflecting management’s estimate of the current expected credit losses on the Company’s loan balances outstanding at June 30, 2021, and as of that date the Company’s ACL was $33.2 million. While the Company’s management believes the ACL at June 30, 2021, is adequate, based on that estimate, there remains significant uncertainty regarding the possible length of the COVID-19 pandemic and the aggregate impact that it will have on global and regional economies, including uncertainty regarding the effectiveness of recent efforts by the U.S. government and the Federal Reserve Board to respond to the pandemic and its economic impact. Management considered the impact of the pandemic on its consumer and business borrowers, particularly those business borrowers most affected by efforts to contain the pandemic, including our borrowers in the retail and multi-tenant retail industry, restaurants, and hotels.

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Provisions of the CARES Act and subsequent legislation allow financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings (TDRs) for certain loans that were otherwise current and performing prior to the COVID-19 pandemic, but for which borrowers experienced or expected difficulties due to the impact of the pandemic. Initially, the Company generally granted deferrals under this program for three-month periods, while interest-only modifications were generally for six-month periods. Some borrowers were granted additional periods of deferral or interest-only modifications. The Company did not account for these loans as TDRs. As of June 30, 2021, no loans remained on COVID-related payment deferrals, and six loans with balances totaling approximately $23.9 million remained on interest-only payment modifications. By comparison, at June 30, 2020, approximately 900 loans with balances totaling $380.2 million were provided either such deferrals or modifications. For borrowers whose payment terms have not returned to the original terms under their loan agreement, the Company has generally classified the credit as a “special mention” status credit. Loans remaining under a COVID-related payment deferral or interest-only modification which have been placed on watch or special mention status total $23.7 million. While management considers progress made by our borrowers in responding to the pandemic to be relatively strong, and the performance of our loan portfolio to be encouraging to date, we cannot predict with certainty the difficulties to be faced in coming months. Many communities where our borrowers operate are currently experiencing increases in COVID-19 cases, which could lead to reductions in business activity or employee attendance, and borrowers could be required by local authorities to restrict activity.

Premises and Equipment. Premises and equipment decreased to $64.1 million, down $1.0 million, or 1.6%, as compared to June 30, 2020. The decrease was due primarily to depreciation, along with the sale of properties previously acquired through merger and acquisition activity, partially offset by remodeling investments in existing facilities, capitalization of right-of-use assets on new facilities and ground leases, and investments in furniture, fixtures, and equipment.

BOLI. The Bank has purchased “key person” life insurance policies (BOLI) on employees at various times since fiscal 2003, and has acquired additional BOLI in connection with certain acquisitions. At June 30, 2021, the cash surrender value of all such policies was $43.8 million, up $454,000, or 1.0%, as compared to June 30, 2020.

Intangible Assets. The July 2009 acquisition of the Southern Bank of Commerce resulted in goodwill of $126,000. The October 2013 acquisition of Ozarks Legacy Community Financial, Inc., resulted in goodwill of $1.5 million and a $1.4 million core deposit intangible, which was amortized over a five-year period using the straight-line method and was fully amortized as of June 30, 2021. The February 2014 acquisition of Citizens State Bankshares, Inc., resulted in a $624,000 core deposit intangible, which was amortized over a five-year period using the straight-line method and was fully amortized as of June 30, 2021. The August 2014 acquisition of Peoples Service Company, Inc., and its subsidiary, Peoples Bank of the Ozarks (the “Peoples Acquisition”) resulted in goodwill of $3.0 million and a $3.0 million core deposit intangible, which was amortized over a six-year period using the straight-line method and was fully amortized as of June 30, 2021. The June 2017 acquisition of Tammcorp, Inc., and its subsidiary, Capaha Bank (the “Capaha Acquisition”) resulted in goodwill of $4.1 million and a $3.4 million core deposit intangible, which is being amortized over a seven-year period using the straight-line method. The SMB-Marshfield Acquisition resulted in goodwill of $4.4 million and a $1.3 million core deposit intangible, which is being amortized over a seven-year period using the straight-line method. The Gideon Acquisition resulted in goodwill of $1.0 million and a $4.1 million core deposit intangible, which is being amortized over a seven-year period using the straight-line method. The May 2020 Central Federal Acquisition resulted in a bargain purchase gain of $123,000 and a $540,000 core deposit intangible, which is being amortized over a six-year period using the straight-line method. Goodwill from these acquisitions is not being amortized, but is tested for impairment at least annually.

Deposits. Deposits were $2.3 billion at June 30, 2021, an increase of $146.0 million, or 6.7%, as compared to June 30, 2020. This increase primarily reflected an increase in interest-bearing transaction accounts, noninterest-bearing transaction accounts, savings accounts, and money market deposit accounts, partially offset by a decrease in time deposits. Since June 30, 2020, the Company’s public unit deposits increased by $21.2 million, to total $326.4 million at June 30, 2021, with the increase primarily resulting from higher nonmaturity balances held by our existing customer base. Since June 30, 2020, brokered certificates of deposit decreased by $18.3 million, to total $5.0 million at June 30, 2021, while brokered nonmaturity deposits were little changed at $20.1 million at June 30, 2021. The Company decreased brokered funding during the fiscal year as better core liquidity reduced the Company’s need for wholesale

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funding. Our discussion of brokered deposits excludes those deposits originated through reciprocal arrangements. We continued to utilize reciprocal deposit programs, and at fiscal year end, we had placed deposits of $260.5 million through reciprocal programs, up from $231.9 million a year earlier. At June 30, 2021, $157.4 million reflected deposits we had placed on behalf of our public unit depositors, up from $138.1 million a year ago. Deposit balances saw growth primarily in interest-bearing transaction accounts, noninterest-bearing transaction accounts, money market deposit accounts, and savings accounts, partially offset by declines in certificates of deposit. The average loan-to-deposit ratio for the fourth quarter of fiscal 2021 was 93.0%, as compared to 98.9% for the same period of the prior fiscal year.

Borrowings. FHLB advances were $57.5 million at June 30, 2021, a decrease of $12.5 million, or 17.8%, as the Company’s deposit inflows outpaced loan demand and investment portfolio growth. The Company held no overnight advances at June 30, 2020, or June 30, 2021, but did utilize a comparatively modest amount of overnight borrowings during the first and second quarters of the fiscal year. Usage of overnight borrowings in this seasonal pattern was reduced from common historical levels, as liquidity was elevated in the COVID pandemic environment.

Subordinated Debt. In March 2004, $7.0 million of Floating Rate Capital Securities of Southern Missouri Statutory Trust I, with a liquidation value of $1,000 per share were issued. The securities bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2034. In connection with its October 2013 acquisition of Ozarks Legacy, the Company assumed $3.1 million in floating rate junior subordinated debt securities. The debt securities had been issued in June 2005 by Ozarks Legacy 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. The carrying value of these debt securities was approximately $2.7 million at June 30, 2021, relatively unchanged as compared to June 30, 2020. In connection with the Peoples Acquisition, the Company assumed $6.5 million in floating rate junior subordinated debt securities. The debt securities had been issued in 2005 by Peoples, 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. The carrying value of these debt securities was approximately $5.3 million at June 30, 2021, relatively unchanged as compared to June 30, 2020.

Stockholders’ Equity. The Company’s stockholders’ equity was $283.4 million at June 30, 2021, an increase of $25.1 million, or 9.7%, as compared to June 30, 2020. The increase was attributable to the retention of net income, partially offset by cash dividends paid, a decrease in accumulated other comprehensive income, which was due to an increase in market interest rates, stock repurchase activity totaling 238,482 shares acquired for $8.3 million, at an average price of $34.97 per share, and the adoption of CECL which reduced equity by $7.2 million.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2021 AND 2020

Net Income. The Company’s net income available for the fiscal year ended June 30, 2021, was $47.2 million, an increase of $19.6 million, or 71.3%, as compared to the prior fiscal year.

Net Interest Income. Net interest income for fiscal 2021 was $92.7 million, an increase of $12.6 million, or 15.7%, when compared to the prior fiscal year. The increase, as compared to the prior fiscal year, was attributable to a 14.2% increase in the average balance of interest-earning assets, combined with an increase in the net interest margin, from 3.72% to 3.77%. Average earning asset balance growth was due primarily to loan growth, including higher average balances resulting from PPP loans outstanding over the course of the fiscal year and other loan growth, as well as the effect of the late-fiscal 2020 Central Federal Acquisition. Additionally, significantly higher average cash and cash equivalent balances contributed to the increase in average earning assets, but reduced the Company’s net interest margin. The average balance of investment securities was modestly higher.

As a material amount of PPP loans were forgiven and therefore repaid ahead of their scheduled maturity during fiscal 2021, the Company recognized accelerated accretion of interest income from deferred origination fees on these loans. In fiscal 2021, this component of interest income totaled $3.4 million, adding 14 basis points to the net interest margin, with no comparable item in the prior fiscal year. 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 Gideon Acquisition, and the Central Federal Acquisition, resulted in $1.9 million in net interest income for fiscal 2021, as compared to $1.8 million in net

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interest income for fiscal 2020. The Company generally expects this component of net interest income will continue to decline over time, although volatility may occur to the extent we have periodic resolutions of specific loans. Combined, these components of net interest income contributed eight basis points to net interest margin in fiscal 2021, unchanged from a contribution of eight basis points in fiscal 2020. Additionally, in fiscal 2020, the Company recognized an additional $767,000 in interest income as a result of the resolution of a limited number of nonperforming loans, with no material contribution from similar resolutions in fiscal 2021. This recognition of interest income in the year-ago period contributed four basis points to net interest margin.

Interest Income. Interest income for fiscal 2021 was $109.5 million, an increase of $2.4 million, or 2.3%, when compared to the prior fiscal year. The increase was due to an increase of $306.7 million, or 14.2%, in the average balance of interest-earning assets, partially offset by a 52 basis point decrease in the average yield earned on interest-earning assets, from 4.97% in fiscal 2020, to 4.45% in fiscal 2021.

Interest income on loans receivable for fiscal 2021 was $105.1 million, an increase of $2.9 million, or 2.9%, when compared to the prior fiscal year. The increase was due to a $208.3 million increase in the average balance of loans receivable, partially offset by a 37 basis point decrease in the average yield earned on loans receivable. The decrease in the average yield was attributed primarily to origination and repricing of loans and borrower refinancing as average market interest rates decreased significantly compared to the prior fiscal year, as the economy was impacted by the COVID-19 pandemic. The decrease in loan yields generally was partially offset by the accelerated accretion of deferred origination fees on PPP loans detailed above.

Interest income on the investment portfolio and other interest-earning assets was $4.4 million for fiscal 2021, a decrease of $524,000, or 10.6%, when compared to the prior fiscal year. The decrease was due to a 105 basis point decrease in the average yield earned on these assets, partially offset by a $98.4 million increase in the average balance of these assets. The notable decrease in average yield and increase in average balances was attributable primarily to the increase in cash and cash equivalents.

Interest Expense. Interest expense was $16.8 million for fiscal 2021, a decrease of $10.1 million, or 37.6%, when compared to the prior fiscal year. The decrease was due to a 63 basis point decrease in the average rate paid on interest-bearing liabilities, from 1.47% in fiscal 2020, to 0.84% in fiscal 2021, partially offset by an increase of $176.1 million, or 9.6%, in the average balance of interest-bearing liabilities.

Interest expense on deposits was $14.9 million for fiscal 2021, a decrease of $9.2 million, or 38.2%, when compared to the prior fiscal year. The decrease was due to a 63 basis point decrease in the average rate paid on interest-bearing deposits, partially offset by the $199.9 million increase in the average balance of those deposits. The decrease in the average rate paid on deposits was attributable primarily lower market interest rates over the course of fiscal 2021, as compared to the prior fiscal year.

Interest expense on FHLB advances was $1.4 million for fiscal 2021, a decrease of $566,000, or 29.3%, when compared to the prior fiscal year. The decrease was due to a $21.3 million decrease in the average balance of these advances, combined with a 14 basis point decrease in the average rate paid on advances. The decrease in the average rate paid was attributable primarily to market declines in borrowing rates available on average during fiscal 2021, as compared to the prior fiscal year.

Provision for Credit Losses. The Company recorded a negative provision for credit losses of $1.0 million for fiscal 2021, as compared to a provision for loan losses of $6.0 million for the prior fiscal year. The negative provision in the current period was due both to a $602,000 reduction in the Company’s required allowance for credit losses on outstanding loan balances, as well as a $422,000 reduction in the Company’s required allowance for off-balance sheet credit exposure. (In the prior fiscal year, the provision for off-balance sheet credit exposure was reported as a component of noninterest expense.) Reduced provisioning was attributed primarily to a generally improved economic outlook as compared to the year-ago period, moderated growth in unguaranteed loan balances, along with relatively consistent levels of net charge offs, and reductions in adversely classified credits, delinquent loans, and nonperforming loans. As a percentage of average loans outstanding, the negative provision for credit losses in the current fiscal year represented a recovery of 0.05%, while the Company recorded net charge offs during the current fiscal year of 0.03%. During the prior

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fiscal year, the provision for loan losses as a percentage of average loans outstanding represented a charge of 0.31%, while the Company recorded net charge offs of 0.04% (annualized). (See Note 1 and Note 3 to the consolidated financial statements, “Critical Accounting Policies” and “Financial Condition – Allowance for Credit Losses” in this Item 7, and “Asset Quality” in Item 1 of this Form 10-K.)

Noninterest Income. Noninterest income was $20.0 million for fiscal 2021, an increase of $5.3 million, or 35.9%, when compared to the prior fiscal year. The increase was due primarily to increased gains realized on the sale of residential real estate loans originated for that purpose, loan servicing income, bank card interchange income, earnings on bank owned life insurance (BOLI), and other income, partially offset by a decrease in deposit account service charges and fees. Gains realized on the sale of residential real estate loans originated for that purpose increased due increased to refinancing and home-buying activity in the low market rate environment. Loan servicing income increased as the Company saw increases in the dollar amount of loans serviced, and recognized a $369,000 increase in the fair value of mortgage servicing rights, as compared to a $391,000 decrease in fair value recognized in the prior fiscal year. Bank card interchange income improved as a result of increases in the number and dollar amount of card transactions. Earnings on BOLI increased due to $696,000 in nonrecurring benefits in fiscal 2021. Deposit account service charges decreased as NSF activity was reduced.

Noninterest Expense. Noninterest expense was $54.0 million for fiscal 2021, a decrease of $405,000, or 0.7%, when compared to the prior fiscal year. The decrease in noninterest expense was attributable primarily to expenses included in the prior fiscal year’s results related to the Central Federal acquisition, which totaled $1.2 million, as compared to no material charges for comparable activity in the current fiscal year. Additionally, as noted in “Provision for Credit Losses” above, in the prior year, the provision for off-balance sheet credit exposure, which totaled $648,000, was reported as a component of noninterest expense. The Company reported higher compensation expense, deposit insurance premiums, and occupancy expenses, while expenses related to and losses on the disposition of foreclosed real estate, amortization of core deposit intangibles, data processing expenses, and other expenses were lower. Compensation and occupancy increased as the Company added two facilities, and provided standard year-over-year compensation adjustments, although these came in a more challenging environment for recruitment and retention. The increase in deposit insurance premiums reflected a return to normalized levels for premiums after the Company benefitted from one-time assessment credits for much of the prior fiscal year. Data processing expenses were reduced due to inclusion in the prior fiscal year’s results of charges relating to the Central Federal acquisition, including contract termination charges, and other expenses were lower due in part to losses recognized in fiscal 2020 on disposal of former bank facilities that had been obtained in earlier acquisitions.

Provision for Income Taxes. The Company recorded an income tax provision of $12.5 million for fiscal 2021, an increase of $5.6 million, or 81.9%, as compared to the prior fiscal year, attributable to higher pre-tax income, and an increase in the Company’s effective tax rate, to 21.0% for fiscal 2021, as compared to 20.0% for fiscal 2020. The higher effective tax rate was attributable primarily to reduced tax-advantaged investments relative to the Company’s pre-tax income.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2020 AND 2019

Net Income. The Company’s net income available for the fiscal year ended June 30, 2020, was $27.5 million, a decrease of $1.4 million, or 4.7%, as compared to the prior fiscal year.

Net Interest Income. Net interest income for fiscal 2020 was $80.1 million, an increase of $7.4 million, or 10.1%, when compared to the prior fiscal year. The increase, as compared to the prior fiscal year, was attributable to an 11.8% increase in the average balance of interest-earning assets, partially offset by a decline in the net interest margin, from 3.78% to 3.72%. Average earning asset balance growth was due in part to the full-year effect of the mid-fiscal 2019 Gideon Acquisition and organic growth, a portion of which was attributable to the PPP loans originated in the fourth quarter of the fiscal year. The late fiscal 2020 Central Federal Acquisition contributed a relatively small amount to average earning asset growth for the fiscal year. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Peoples Acquisition was $300,000 in fiscal 2020, as compared to $765,000 in fiscal 2019. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Capaha Acquisition was $238,000 in fiscal 2020, as compared to $1.1 million in fiscal 2019. Accretion of fair value

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discount on loans and amortization of fair value premiums on time deposits related to the SMB-Marshfield Acquisition was $192,000 in fiscal 2020, as compared to $274,000 in fiscal 2019. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Gideon Acquisition was $1.1 million in fiscal 2020, as compared to $808,000 in fiscal 2019 , due to the mid-fiscal 2019 timing of the acquisition, as compared to the full-year effect in fiscal 2020. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Central Federal Acquisition was $23,000 in fiscal 2020, with no comparable contribution in fiscal 2019. In total, these components of net interest income contributed an additional eight basis points to the net interest margin in fiscal 2020, as compared to a contribution of 15 basis points in fiscal 2019. Partially offsetting the decline in the accretion of fair value discount on acquired loans, the Company saw material benefits from the resolution of a limited number of nonperforming loans, at $767,000, while there was no comparable material item in the prior fiscal year, contributing an additional four basis points to the net interest margin in fiscal 2020.

Interest Income. Interest income for fiscal 2020 was $107.1 million, an increase of $9.6 million, or 9.8%, when compared to the prior fiscal year. The increase was due to an increase of $227.9 million, or 11.8%, in the average balance of interest-earning assets, partially offset by a nine basis point decrease in the average yield earned on interest-earning assets, from 5.06% in fiscal 2019, to 4.97% in fiscal 2020.

Interest income on loans receivable for fiscal 2020 was $102.1 million, an increase of $9.8 million, or 10.6%, when compared to the prior fiscal year. The increase was due to a $220.1 million increase in the average balance of loans receivable, partially offset by a nine basis point decrease in the average yield earned on loans receivable. The decrease in the average yield was attributed primarily to origination and repricing of loans and borrower refinancing as market interest rates declined somewhat early in the fiscal year, followed by more significant declines later in the fiscal year as the economy was impacted by the COVID-19 pandemic. Additionally, a reduction in discount accretion on acquired loan portfolios, from $3.0 million in fiscal 2019 to $1.9 million in fiscal 2020, reduced the average yield on loans by eight basis points, while interest income of $767,000 attributable to resolution of a limited number of nonperforming loans in fiscal 2020, with no comparable material items in fiscal 2019, increased the average yield on loans by four basis points.

Interest income on the investment portfolio and other interest-earning assets was $4.9 million for fiscal 2020, a decrease of $232,000, or 4.5%, when compared to the prior fiscal year. The decrease was due to a 23 basis point decrease in the average yield earned on these assets, partially offset by a $7.8 million increase in the average balance of these assets.

Interest Expense. Interest expense was $26.9 million for fiscal 2020, an increase of $2.2 million, or 9.0%, when compared to the prior fiscal year. The increase was due to an increase of $183.3 million, or 11.1%, in the average balance of interest-bearing liabilities, partially offset by a three basis point decrease in the average rate paid on interest-bearing liabilities, from 1.50% in fiscal 2019, to 1.47% in fiscal 2020.

Interest expense on deposits was $24.1 million for fiscal 2020, an increase of $2.9 million, or 13.6%, when compared to the prior fiscal year. The increase was due primarily to the $193.0 million increase in the average balance of those deposits, combined with a two basis point increase in the average rate paid on interest-bearing deposits. The increase in the average rate paid on deposits was attributable primarily to market increases in rates paid to depositors over prior periods, especially through the third quarter of fiscal 2019. The pace of increases in average deposit rates began to slow in the first quarter of fiscal 2020, followed by a modest decline in the second quarter, and more substantial declines in the third and fourth quarters of fiscal 2020.

Interest expense on FHLB advances was $1.9 million for fiscal 2020, a decrease of $445,000, or 18.7%, when compared to the prior fiscal year. The decrease was due to a 36 basis point decrease in the average rate paid on FHLB advances, combined with a $5.1 million decrease in the average balance of these advances. The decrease in the average rate paid was attributable primarily to market declines in borrowing rates available on average during the fiscal year, as compared to the prior year.

Provision for Loan Losses. The provision for loan losses was $6.0 million for fiscal 2020, an increase of $4.0 million, or 195.4%, as compared to the prior fiscal year. The increase in provision was attributed primarily to uncertainty regarding the economic environment resulting from the COVID-19 pandemic and the potential impact on the Company’s

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borrowers, a related increase in the level of watch status loans, and a modest increase in net charge offs. These factors were partially offset by a reduction in adversely classified, nonperforming (See: Financial Condition – Loans), and delinquent loans, and by slower loan growth as compared to the prior fiscal year, exclusive of the 100% SBA-guaranteed PPP loans and acquired loans subject to purchase accounting. In fiscal 2020, net charge offs were $766,000, or 0.04% as a percentage of average loans outstanding, as compared to $343,000, or 0.02% as a percentage of average loans outstanding, for the prior fiscal year. At June 30, 2020, classified loans totaled $24.5 million, or 1.13% of gross loans, as compared to $28.3 million, or 1.51% of gross loans, at June 30, 2019, with the decrease primarily the result of the resolution of classified loans acquired in the Gideon Acquisition, which included classified loans carried at a fair value of $9.1 million at June 30, 2020, as compared to $13.5 million at June 30, 2019. Classified loans were comprised primarily of commercial real estate, residential real estate, and commercial operating loans. All loans so designated were classified due to concerns as to the borrowers’ ability to continue to generate sufficient cash flows to service the debt.

The above provision was made based on management’s analysis of the various factors which affect the loan portfolio and management’s desire to maintain the allowance at a level considered adequate. Management performed a detailed analysis of the loan portfolio, including types of loans, the charge-off history, and an analysis of the allowance for loan losses. Management also considered the continued origination of loans secured by commercial and agricultural real estate, and commercial and agricultural operating loans, which bear an inherently higher level of credit risk. Management believed the allowance for loan losses at June 30, 2020, was adequate to cover all losses inherent in the portfolio; however, there remained significant uncertainty regarding the possible length of the COVID-19 pandemic and the aggregate impact that it will have on global and regional economies, including uncertainty regarding the effectiveness of recent efforts by the U.S. government and Federal Reserve to respond to the pandemic and its economic impact. Management considered the impact of the pandemic on its consumer and business borrowers, particularly those business borrowers most affected by efforts to contain the pandemic, including our borrowers in the retail and multi-tenant retail industry, restaurants, and hotels.

Noninterest Income. Noninterest income was $14.8 million for fiscal 2020, an increase of $1.7 million, or 12.7%, when compared to the prior fiscal year. The increase was attributable in part to the full year impact of the mid-fiscal 2019 Gideon Acquisition, and consisted primarily of higher bank card interchange income, gains realized on the sale of residential real estate loans originated for that purpose, and deposit account service charges. These increases were partially offset by lower earnings on bank owned life insurance (BOLI), which decreased in part due to the inclusion in the prior period’s results of a $346,000 nonrecurring benefit, gains on the sale of available-for-sale securities, loan servicing fees, and other loan fees. Bank card interchange income increased on higher activity levels and benefits under a new affiliation contract. Gains realized on the sale of residential real estate loans originated for that purpose increased primarily due to refinancing activity, and the Company saw increases in the dollar amount of loans serviced. However, the fair value of mortgage servicing rights was impaired due to the lower rate environment, and charges to recognize that impairment resulted in lower noninterest income. Deposit account service charges increased for the full fiscal year as compared to the prior fiscal year, but were notably weak in the fourth quarter of the current fiscal year, reflecting reduced consumer behavior and reduced NSF charges as account balances were higher.

Noninterest Expense. Noninterest expense was $54.5 million for fiscal 2020, an increase of $6.6 million, or 13.7%, when compared to the prior fiscal year. The increase in noninterest expense was attributable in part to the full year impact of the mid-fiscal 2019 Gideon Acquisition, and resulted primarily from higher compensation expense, occupancy and data processing expenses, amortization of core deposit intangibles, advertising, and other operating expenses, including expenses related to and losses on the disposition of foreclosed real estate and provision for off-balance sheet credit exposure. These increases were partially offset by decreases in FDIC deposit insurance assessments, as the Company benefitted from the FDIC’s application of credits against the deposit insurance assessments due from smaller banks, such as the Company’s subsidiary, resulting in no deposit insurance premium expense for the Company for much of the current fiscal year. The credits were exhausted, and the expense will return to a normalized level for the fiscal year that will end June 30, 2021. In total, fiscal 2020 results included $1.2 million in merger-related charges, as compared to $829,000 in comparable expenses for the prior fiscal year.

Provision for Income Taxes. The Company recorded an income tax provision of $6.9 million for fiscal 2020, a decrease of $160,000, or 2.3%, as compared to the prior fiscal year, attributable to lower pre-tax income, partially offset

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by an increase in the Company’s effective tax rate, to 20.0% for fiscal 2020, as compared to 19.6% for fiscal 2019. The higher effective tax rate was attributable primarily to reduced tax-advantaged investments.

LIQUIDITY AND CAPITAL RESOURCES

Southern Missouri’s primary potential sources of funds include deposit growth, FHLB advances, amortization and prepayment of loan principal, investment maturities and sales, and capital generated from ongoing operations. While scheduled repayments on loans and securities as well as the maturity of short-term investments are a relatively predictable source of funding, deposit flows, FHLB advance redemptions and loan and security prepayment rates are significantly influenced by factors outside of the Bank’s control, including general economic conditions and market competition. The Bank has relied on FHLB advances as a source for funding cash or liquidity needs.

Southern Missouri uses its liquid assets as well as other funding sources to meet ongoing commitments, to fund loan demand, to repay maturing certificates of deposit and FHLB advances, to make investments, to fund other deposit withdrawals and to meet operating expenses. At June 30, 2021, the Bank had outstanding commitments to extend credit of $491.6 million (including $315.0 million in unused lines of credit). Total commitments to originate fixed-rate loans with terms in excess of one year were $134.5 million at rates ranging from 2.25% to 5.00%, with a weighted-average rate of 4.04%. Management anticipates that current funding sources will be adequate to meet foreseeable liquidity needs.

For the fiscal year ended June 30, 2021, Southern Missouri increased deposits by $146.0 million. The Company decreased FHLB advances by $12.5 million. During the prior fiscal year, Southern Missouri increased deposits by $291.2 million, and discontinued its offering of securities sold under agreements, resulting in a decline of $4.4 million. The Company increased FHLB advances by $25.1 million during the prior fiscal year. At June 30, 2021, the Bank had reported $769.8 million of its single-family residential and commercial real estate loan portfolios as eligible collateral to the FHLB for available credit of approximately $440.9 million, of which $57.5 million was advanced, while $351,000 was encumbered in relation to residential real estate loans sold onto the secondary market through FHLB, and none was utilized for the issuance of letters of credit to secure public unit deposits. The Bank had also pledged $263.8 million of its agricultural real estate and agricultural operating and equipment loans to the Federal Reserve Bank of St. Louis’s discount window for available credit of approximately $216.8 million, as of June 30, 2021, none of which was advanced. In addition, the Bank has the ability to identify eliglbe loans within several of its other loan portfolios, including, for example, its multi-family residential real estate, home equity, or commercial business loans, for additional credit availability with the FHLB. In total, FHLB borrowings are limited to 45% of Bank assets, or approximately $1.2 billion as most recently reported by the FHLB on June 30, 2021, which means that an amount up to $1.1 billion may still be eligible to be borrowed from the FHLB, subject to available collateral. Along with the ability to borrow from the FHLB and Federal Reserve Bank of St. Louis, management believes its liquid resources will be sufficient to meet the Company’s liquidity needs.

Liquidity management is an ongoing responsibility of the Bank’s management. The Bank adjusts its investment in liquid assets based upon a variety of factors including (i) expected loan demand and deposit flows, (ii) anticipated investment and FHLB advance maturities, (iii) the impact on profitability, and (iv) asset/liability management objectives.

At June 30, 2021, the Bank had $358.8 million in CDs maturing within one year and $1.8 billion in other deposits without a specified maturity, as compared to $499.4 million in CDs maturing within one year and $1.5 billion in other deposits without a specified maturity as of June 30, 2020. Management believes that most maturing interest-bearing liabilities will be retained or replaced by new interest-bearing liabilities. Also, at June 30, 2021, the Bank had no overnight advances from the FHLB, $24.3 million in term FHLB advances maturing within one year, and $33.3 million in FHLB advances with a maturity date in excess of one year. Of the advances with maturity dates in excess of one year, $5.0 million was eligible for early redemption by the lender within one year.

REGULATORY CAPITAL

Federally insured financial institutions are required to maintain minimum levels of regulatory capital. Federal Reserve regulations establish capital requirements, including a tier 1 leverage (or core capital) requirement and risk-

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based capital requirements. The Federal Reserve Board is also authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.

At June 30, 2021, the Bank exceeded regulatory capital requirements with tier 1 leverage, total risk-based capital, and tangible common equity capital of $282.6 million, $308.5 million and $282.6 million, respectively. The Bank’s tier 1 capital represented 10.43% of total adjusted assets and 12.79% of total risk-weighted assets, while total risk-based capital was 13.96% of total risk-weighted assets, and tangible common equity capital was 12.79% of total risk-weighted assets. To be considered adequately capitalized, the Bank must maintain tier 1 leverage capital levels of at least 4.0% of adjusted total assets and 6.0% of risk-weighted assets, total risk-based capital of 8.0% of risk-weighted assets, and tangible common equity capital of 4.5% of risk-weighted assets. To be considered well capitalized, the Bank must maintain tier 1 leverage capital levels of at least 5.0% of adjusted total assets and 8.0% of risk-weighted assets, total risk-based capital of 10.0% of risk-weighted assets, and tangible common equity capital of 6.5% of risk-weighted assets.

At June 30, 2021, the Company exceeded regulatory capital requirements with tier 1 leverage, total risk-based capital, and tangible common equity capital of $287.7 million, $315.5 million and $272.5 million, respectively. The Company’s tier 1 capital represented 10.61% of total adjusted assets and 12.93% of total risk-weighted assets, while total risk-based capital was 14.18% of total risk-weighted assets, and tangible common equity capital was 12.25% of total risk-weighted assets. To be considered adequately capitalized, the Company must maintain tier 1 leverage capital levels of at least 4.0% of adjusted total assets and 6.0% of risk-weighted assets, total risk-based capital of 8.0% of risk-weighted assets, and tangible common equity capital of 4.5% of risk weighted assets.

See Item 1 – Business – Regulation, and Note 11 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K for additional detail on the Company’s capital requirements.

IMPACT OF INFLATION

The consolidated financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates generally have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. In the current interest rate environment, liquidity and maturity structure of the Company’s assets and liabilities are critical to the maintenance of acceptable performance levels.

AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES

The following table sets forth certain information relating to the Company’s average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and the average cost of liabilities for the periods indicated. These yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the years indicated. Nonaccrual loans are included with other noninterest-earning assets.

The table also presents information with respect to the difference between the weighted-average yield earned on interest-earning assets and the weighted-average rate paid on interest-bearing liabilities, or interest rate spread, which financial institutions have traditionally used as an indicator of profitability. Another indicator of an institution’s net interest income is its net yield (or net interest margin) on interest-earning assets, which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the

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relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.

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YIELDS EARNED AND RATES PAID

The following table sets forth for the periods and at the date indicated, the weighted average yields earned on the Company’s assets, the weighted average interest rates paid on the Company’s liabilities, together with the net yield on interest-earning assets.

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RATE/VOLUME ANALYSIS

The following table sets forth the effects of changing rates and volumes on net interest income of the Company. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) changes in rate/volume (change in rate multiplied by change in volume).

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