SOUTHERN MISSOURI BANCORP, INC. (SMBC) FY 2023 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.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

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The following tables set forth selected consolidated financial information and other financial data of the Company. The summary statement of financial condition information and statement of income information are derived from our consolidated financial statements, which have been audited by FORVIS LLP. See Item 8. “Financial Statements and Supplementary Data.”  Results for past periods are not necessarily indicative of results that may be expected for any future period.

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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 municipal, corporate, and asset-backed investment securities, residential and commercial mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs), 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 and net charge offs. 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, trust and wealth management services, 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 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 in its primary lending area or to borrowers who operate within that area.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. provide qualitative and quantitative information necessary to understand the estimation uncertainty and the impact the critical accounting estimate has had or is reasonably likely to have on financial condition or results of operations to the extent the information is material and reasonably available. this information should include why each critical accounting estimate is subject to uncertainty and, to the extent the information is material and reasonably available, how much each estimate and/or assumption has changed over a relevant period, and sensitivity of the reported amount to the methods, assumptions and estimates underlying its calculation.

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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 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 2023, with total assets of $4.4 billion at June 30, 2023, reflecting an increase of $1.1 billion, or 35.6%, as compared to June 30, 2022. Asset growth was attributable in large part to the Citizens merger and was comprised mainly of increases in loans and available-for-sale (“AFS”) securities.

Cash and equivalents. Cash and cash equivalents were $55.2 million at June 30, 2023, a decrease of $36.3 million, or 39.7%, as compared to June 30, 2022. The decrease was primarily a result of organic loan growth outpacing organic deposit growth during the period, partially offset by the net effects of the Citizens merger. Interest-bearing time deposits were $1.2 million at June 30, 2023, a decrease of $3.5 million, or 74.0% as compared to June 30, 2022.

Investments. Available-for-sale (AFS) securities were $417.6 million at June 30, 2023, an increase of $182.2 million, or 77.4%, as compared to June 30, 2022. The increase was primarily attributable to the Citizens merger, and reflected increased holdings of CMOs, asset-backed securities, corporate obligations, and residential MBS.

Loans. Loans, net of the ACL, were $3.6 billion at June 30, 2023, an increase of $884.9 million, or 32.9%, as compared to June 30, 2022. Gross loans increased by $899.5 million, while the ACL attributable to outstanding loan balances increased $14.6 million, or 44.1%, as compared to June 30, 2022.

An increase of $447.4 million in loan balances, net of fair value adjustments, was attributable to the Citizens merger. The Company also noted 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, and unimproved land. Construction loan balances increased primarily due to increases in drawn balances of nonowner-occupied nonresidential and multi-family real estate loans. The increase in commercial loans was attributable to commercial and industrial loans and agricultural loan balances.

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Nonperforming loans were $7.7 million, or 0.21% of gross loans, at June 30, 2023, as compared to $4.1 million, or 0.15% of gross loans at June 30, 2022. The increase in nonperforming loans as compared to the prior fiscal year was attributed primarily to $2.0 million in nonperforming loans obtained via the Citizens merger and an increase of $1.5 million in legacy nonperforming loans.

Allowance for Credit Losses. Our ACL at June 30, 2023, totaled $47.8 million, representing 1.32% of gross loans and 624.9% of nonperforming loans, as compared to $33.2 million, representing 1.22% of gross loans and 806.2% of nonperforming loans at June 30, 2022. The ACL required for purchased credit deteriorated (“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 recognized in the third quarter of fiscal 2023. See also, “Provision for Credit Losses, under Comparison of Operating Results for the Years Ended June 30, 2023 and 2022”.

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 loss experience and 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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Premises and Equipment. Premises and equipment increased to $92.4 million, up $21.1 million, or 29.5%, as compared to June 30, 2022. The increase was due primarily to premises and right-of-use assets acquired in the Citizens merger, partially offset by the sale of some properties not being utilized as Bank facilities.

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 mergers. At June 30, 2023, the cash surrender value of all such policies was $71.7 million, up $23.0 million, or 47.2%, as compared to June 30, 2022, attributable primarily to the Citizens merger.

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. 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. The June 2017 acquisition of Tammcorp, Inc., and its

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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. The December 2021 Cairo acquisition resulted in goodwill of $442,000 and a $168,000 core deposit intangible which is being amortized over a seven-year period using the straight-line method. The February 2022 Fortune acquisition resulted in goodwill of $12.8 million and a $1.6 million core deposit intangible which is being amortized over a seven-year period using the straight-line method. The January 2023 Citizens merger resulted in goodwill of $23.5 million, as well as a $22.1 million core deposit intangible which is being amortized over a ten year period using the straight-line method, and a $2.6 million intangible related to the acquired trust and wealth management business line which is being amortized over a ten 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 $3.7 billion at June 30, 2023, an increase of $910.5 million, or 32.3%, as compared to June 30, 2022. An increase of $851.1 million in deposit balances, net of fair value adjustments, was attributable to the Citizens merger. Inclusive of the merger, 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.

Public unit balances totaled $578.5 million at June 30, 2023, an increase of $105.3 million compared to June 30, 2022. Brokered deposits totaled $159.6 million at June 30, 2023, an increase of $136.7 million compared to June 30, 2022. Our discussion of brokered deposits excludes those deposits originated through reciprocal arrangements. We continued to utilize reciprocal deposit programs, and at June 30, 2023, we had placed deposits of $524.1 million through reciprocal programs, up from $387.9 million a year earlier. At June 30, 2023, $331.3 million of this total reflected deposits we had placed on behalf of our public unit depositors, up from $278.0 million a year ago. The loan-to-deposit ratio for the fourth quarter of fiscal 2023 was 95.8%, as compared to 94.3% for the same period of the prior fiscal year.

Borrowings. FHLB advances were $133.5 million at June 30, 2023, an increase of $95.6 million, or 251.8%, as compared to June 30, 2022. The increase in FHLB advances resulted from organic loan growth outpacing organic deposit growth, partially offset by the net effects of the Citizens merger, and was inclusive of $62.1 million in term advances and $33.5 million in overnight borrowings, as compared to no overnight borrowings at June 30, 2022.

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, 2023, relatively unchanged as compared to June 30, 2022. 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 $5.5 million at June 30, 2023, as compared to $5.4 million at June 30, 2022. In connection with the Fortune acquisition, 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 June 30, 2023, relatively unchanged as compared to June 30, 2022.

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Stockholders’ Equity. The Company’s stockholders’ equity was $446.1 million at June 30, 2023, an increase of $125.3 million, or 39.1%, as compared to June 30, 2022. The increase was attributable primarily to $98.3 million in equity issued to Citizens shareholders, as well as to earnings retained after cash dividends paid, partially offset by a $4.4 million increase in accumulated other comprehensive loss as the market value of the Company’s investments declined due to increases in market interest rates.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2023 AND 2022

Net Income. The Company’s net income for the fiscal year ended June 30, 2023, was $39.2 million, a decrease of $7.9 million, or 16.8%, as compared to the prior fiscal year.

Net Interest Income. Net interest income for fiscal 2023 was $126.7 million, an increase of $23.2 million, or 22.4%, when compared to the prior fiscal year. The increase, as compared to the prior fiscal year, was attributable to a 28.5% increase in the average balance of interest-earning assets, partially offset by a decrease in the net interest margin, from 3.72% to 3.54%. Average earning asset balance growth was due primarily to loan growth and increases in investment securities, attributable in part to the Citizens merger. Lower average cash and cash equivalent balances partially offset increases in other categories of average earning assets, and the change in the interest-earning asset mix also partially offset the decline in interest margin.

Interest Income. Interest income for fiscal 2023 was $176.4 million, an increase of $59.5 million, or 51.0%, when compared to the prior fiscal year. The increase was due to an increase of $794.0 million, or 28.5%, in the average balance of interest-earning assets, combined with a 73 basis point increase in the average yield earned on interest-earning assets, from 4.20% in fiscal 2022, to 4.93% in fiscal 2023.

Interest income on loans receivable for fiscal 2023 was $162.2 million, an increase of $50.7 million, or 45.5%, when compared to the prior fiscal year. The increase was due to a $749.9 million, or 30.9%, increase in the average balance of loans receivable, combined with a 51 basis point increase in the average yield earned on loans receivable. The increase in the average yield was attributed to origination and repricing of loans and borrower refinancing as average market interest rates increased over the course of the fiscal year, combined with the partial-year impact of the Citizens merger, in which the acquired loan portfolio was valued based on current market interest rates at the date of merger.

Interest income on the investment portfolio and other interest-earning assets was $14.2 million for fiscal 2023, an increase of $8.8 million, or 164.2%, when compared to the prior fiscal year. This increase was attributable to a 203-basis point increase in the yield on these assets, combined with a $44.1 million, or 12.3%, increase in the average balance of such assets. The increase in average yield was attributable to the partial-year impact of the Citizens merger, in which the acquired securities portfolio was valued based on current market interest rates at the date of merger, a change in the mix of such assets, as cash and cash equivalents decreased while investment and mortgage backed securities increased, and purchases and reinvestment at market interest rates which were increasing over the course of the fiscal year.

Interest Expense. Interest expense was $49.7 million for fiscal 2023, an increase of $36.4 million, or 273.5%, when compared to the prior fiscal year. The increase was due to a 113-basis point increase in the average rate paid on interest-bearing liabilities, to 1.72% in fiscal 2023, from 0.59% in fiscal 2022, combined with an increase of $654.0 million, or 29.2%, in the average balance of interest-bearing liabilities.

Interest expense on deposits was $44.4 million for fiscal 2023, an increase of $32.6 million, or 275.5%, as compared to the prior fiscal year. The increase was due to a 107-basis point increase in the average rate paid on interest-bearing deposits, combined with the $580.5 million, or 26.6%, increase in the average balance of those deposits. The increase in the average rate paid on deposits was attributable primarily to higher market interest rates over the course of fiscal 2023.

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Interest expense on FHLB advances was $3.6 million for fiscal 2023, an increase of $2.8 million, or 358.0%, when compared to the prior fiscal year. The increase was due primarily to a $64.3 million, or 148.0%, increase in the average balance of these advances, combined with a 154-basis point increase in the average rate paid on advances. The increase in the average rate paid was attributable primarily to higher market interest rates over the course of the fiscal year, which impacted the costs of overnight borrowings and new term advances taken during the fiscal year.

Interest expense on subordinated debt was $1.4 million for fiscal year 2023, an increase of $753,000, or 109.8%, when compared to the prior fiscal year. The increase was due primarily to a 242-basis point increase in the average rate paid on subordinated debt, combined with a $5.1 million, or 27.8%, increase in the average balance of subordinated debt. The increase in the average rate paid was attributable primarily to higher market interest rates over the course of the fiscal year, which impacted adjustable rate debt, while the increase in the average balance was attributable primarily to the mid-fiscal 2022 assumption of subordinated debt in the Fortune merger.

Provision for Credit Losses. The Company recorded a provision for credit losses (PCL) of $17.1 million for fiscal 2023, as compared to a PCL of $1.5 million for the prior fiscal year. In the current period, the PCL was attributable in part to the $5.2 million charge required to fund the ACL for non-purchased credit deteriorated loans acquired in the Citizens merger, along with a $1.8 million charge to fund to the allowance for off-balance sheet credit exposures acquired in the Citizens merger. Exclusive of the charges required as a result of the Citizens merger, the Company would have recorded a PCL of approximately $10.1 million in the current year, reflecting an $9.0 million increase in the Company’s required ACL on outstanding loan balances based on organic loan growth and changes in the current expected credit losses on the portfolio, and a $1.1 million increase in the required allowance for off-balance sheet credit exposure based on increased anticipated draws of available credit and changes in the mix of loan types anticipated to be funded.

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Our ACL at June 30, 2023, totaled $47.8 million, representing 1.32% of gross loans and 634% 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.  As a percentage of average loans outstanding, the Company recorded net charge offs of 0.02% during fiscal year 2023, as compared to net charge offs of less than one basis point in the prior fiscal year. (See Note 1 and Note 3 of the Notes to 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.)

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Noninterest Income. Noninterest income was $26.2 million for fiscal 2023, an increase of $5.0 million, or 23.6%, when compared to the prior fiscal year. Increases in deposit service charges, bank card interchange income, income on non-deposit investment products, loan servicing fees, other loan fees, and earnings on BOLI contributed to the year-over year increase, partially offset by a decrease in gains on sale of residential loans originated for sale into the secondary market. Most categories of noninterest income increased due to the impact of the January 2023 Citizens merger and the February 2022 Fortune merger.

Noninterest Expense. Noninterest expense was $86.4 million for fiscal 2023, an increase of $23.0 million, or 36.4%, when compared to the prior fiscal year. The increase included $4.9 million in charges related to merger and acquisition activity, which was primarily attributable to legal and professional fees, data processing and telecommunications, and team member compensation and expenses. In total, the increase in noninterest expense was attributable primarily to compensation and benefits, legal and professional fees, occupancy expenses, data processing expenses, amortization of intangibles, deposit insurance premiums, and other noninterest expenses. The increase in compensation and benefits as compared to the prior year period primarily reflected increased headcount for part of the fiscal year resulting from recent merger activity, compensation adjustments over the prior year, one-time compensation attributable to the Citizens merger, and a continued trend of increasing legacy employee headcount. Compensation adjustments over the last several fiscal years have exceeded historical trends. Data processing expenses increased primarily as a result of data conversion charges associated with the Citizens merger, and also reflected continued investments in new software and systems. Occupancy expenses increased primarily due to facilities added through the Citizens merger. Other noninterest expenses increased due to miscellaneous acquisition-related expenses, expenses related to loan originations, and expenses related to employee travel and training.

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Provision for Income Taxes. The Company recorded an income tax provision of $10.2 million for fiscal 2023, a decrease of $2.5 million, or 19.7%, as compared to the prior fiscal year, which was attributable to lower pre-tax income and a decrease in the effective tax rate to 20.7% for fiscal 2023, as compared to 21.3% for fiscal 2022.

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COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2022 AND 2021

Net Income. The Company’s net income for the fiscal year ended June 30, 2022, was $47.2 million, roughly unchanged as compared to the prior fiscal year.

Net Interest Income. Net interest income for fiscal 2022 was $103.6 million, an increase of $10.9 million, or 11.7%, when compared to the prior fiscal year. The increase, as compared to the prior fiscal year, was attributable to a 13.1% increase in the average balance of interest-earning assets, partially offset by a decrease in the net interest margin, from 3.77% to 3.72%. Average earning asset balance growth was due primarily to loan growth and increases in investment securities, as well as the effect of the Fortune 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.

Interest Income. Interest income for fiscal 2022 was $116.9 million, an increase of $7.4 million, or 6.8%, when compared to the prior fiscal year. The increase was due to an increase of $322.9 million, or 13.1%, in the average balance of interest-earning assets, partially offset by a 25 basis point decrease in the average yield earned on interest-earning assets, from 4.45% in fiscal 2021, to 4.20% in fiscal 2022.

Interest income on loans receivable for fiscal 2022 was $111.5 million, an increase of $6.4 million, or 6.1%, when compared to the prior fiscal year. The increase was due to a $254.8 million increase in the average balance of loans receivable, partially offset by a 24 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.

Interest income on the investment portfolio and other interest-earning assets was $5.4 million for fiscal 2022, an increase of $974,000, or 22.2%, when compared to the prior fiscal year, attributable to a 23.4% increase in the average balance of such assets, partially offset by a two basis point decrease in the yield on these assets. The decrease in average yield was attributable to the increase in cash and cash equivalents and a decrease in yield on debt securities, partially offset by an increase in the average balance and yield on mortgage-backed securities.

Interest Expense. Interest expense was $13.3 million for fiscal 2022, a decrease of $3.5 million, or 20.8%, when compared to the prior fiscal year. The decrease was due to a 25 basis point decrease in the average rate paid on interest-bearing liabilities, from 0.84% in fiscal 2021, to 0.59% in fiscal 2022, partially offset by an increase of $234.0 million, or 11.7%, in the average balance of interest-bearing liabilities.

Interest expense on deposits was $11.8 million for fiscal 2022, a decrease of $3.1 million, or 20.6%, when compared to the prior fiscal year. The decrease was due to a 23 basis point decrease in the average rate paid on interest-bearing deposits, partially offset by the $253.5 million increase in the average balance of those deposits. The decrease in the average rate paid on deposits was attributable primarily to lower market interest rates over the course of fiscal 2022, as compared to the prior fiscal year.

Interest expense on FHLB advances was $792,000 million for fiscal 2022, a decrease of $574,000, or 42.0%, when compared to the prior fiscal year. The decrease was due to a $22.5 million decrease in the average balance of these advances, combined with a 24 basis point decrease in the average rate paid on advances. The decrease in the average rate paid was attributable primarily to the maturity of advances that had carried higher rates, combined with the assumption of advances at lower rates in the Fortune acquisition.

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Provision for Credit Losses. The Company recorded a provision for credit losses (PCL) of $1.5 million for fiscal 2022, as compared to a negative PCL of $1.0 million for the prior fiscal year. In the current period, the PCL was attributable to the $1.9 million charge required to fund the ACL for purchased credit deteriorated (PCD) loans acquired in the Fortune acquisition, along with a charge of $120,000 to fund to the allowance for off-balance sheet credit exposures acquired in the Fortune acquisition. Exclusive of the charges required as a result of the Fortune acquisition, the Company would have recorded a negative PCL of approximately $533,000 in the current year, reflecting a decrease in the Company’s required ACL on outstanding loan balances, partially offset by an increase in the required allowance for off-balance sheet credit exposure. Negative provisioning, exclusive of the impact of the Fortune acquisition, in the year ended June 30, 2022, was attributed primarily to an improved outlook regarding the economic environment resulting as the economy recovers from the effects of the COVID-19 pandemic, and the Company notes less uncertainty regarding the potential adverse impact on its borrowers, generally low and consistent levels of net charge offs, and a reduction in delinquent or adversely classified credits, and nonperforming loans. While the Company assesses that the economic outlook has continued to improve during the current year as compared to the year ended June 30, 2021, there remains significant uncertainty as economic activity recovers from the COVID-19 pandemic and the Federal Reserve withdraws accommodative monetary policy that was put into effect to respond to the pandemic and its economic impact. In the prior period, the negative PCL was due both to a $602,000 reduction in the Company’s required ACL on outstanding loan balances, as well as a $422,000 reduction in the Company’s required allowance for off-balance sheet credit exposure. Our ACL at June 30, 2022, totaled $33.2 million, representing 1.22% of gross loans and 806% of nonperforming loans, as compared to an ACL of $33.2 million, representing 1.49% of gross loans and 566% of nonperforming loans at June 30, 2021.  As a percentage of average loans outstanding, the Company recorded net charge offs of less than one basis point during fiscal year 2022, as compared to net charge offs of 0.04% in the prior fiscal year. (See Note 1 and Note 3 of the Notes to 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.)

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Noninterest Income. Noninterest income was $21.2 million for fiscal 2022, an increase of $1.2 million, or 5.8%, when compared to the prior fiscal year. Deposit service charge income, loan fees, nondeposit investment products, gains on the sale of the guaranty portion of newly originated government-guaranteed loans, and other income contributed to the year-over year increase, partially offset by a decrease in gains on sale of residential loans originated into the secondary market, loan servicing income, and earnings on bank-owned life insurance (BOLI).

Noninterest Expense. Noninterest expense was $63.4 million for fiscal 2022, an increase of $9.3 million, or 17.3%, when compared to the prior fiscal year. The increase included $1.4 million in charges related to merger and acquisition activity, which was primarily attributable to data processing, compensation, and legal fees. In total, the increase in noninterest expense was attributable primarily to compensation and benefits, occupancy expenses, data processing expenses, and other noninterest expenses. The increase in compensation and benefits as compared to the prior year period primarily reflected compensation adjustments over the prior year, one-time compensation attributable to the Fortune acquisition, increased headcount for part of the fiscal year resulting from the acquisition, and a modest trend increase in legacy employee headcount. Compensation adjustments which took effect in January 2022 were, as expected, above historical trends. Data processing expenses increased primarily as a result of data conversion charges associated with the Fortune acquisition. Occupancy expenses increased due to remodeled and relocated facilities, facilities added through the Fortune acquisition, a de novo facility, new ATM and ITM installations and other equipment purchases, and charges for maintenance of facilities and grounds. Other noninterest expenses increased due to miscellaneous acquisition-related expenses, expenses related to loan originations, and expenses related to employee travel and training.

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Provision for Income Taxes. The Company recorded an income tax provision of $12.7 million for fiscal 2022, an increase of $210,000, or 1.7%, as compared to the prior fiscal year, attributable to higher pre-tax income, and an increase in the effective tax rate to 21.3% for fiscal 2022, as compared to 21.0% for fiscal 2021.

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

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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, 2023, the Bank had outstanding commitments to extend credit of $912.0 million (including $552.1 million in unused lines of credit). Total commitments to originate fixed-rate loans with terms in excess of one year were $213.3 million at rates ranging from 3.95% to 11.0%, with a weighted-average rate of 6.07%. Management anticipates that current funding sources will be adequate to meet foreseeable liquidity needs.

For the fiscal year ended June 30, 2023, Southern Missouri increased deposits by $910.5 million, and increased FHLB advances by $95.6 million. During the prior fiscal year, Southern Missouri increased deposits by $484.3 million and decreased FHLB advances by $19.6 million. At June 30, 2023, the Bank reported $1.1 billion of its single-family residential and commercial real estate loan portfolios as eligible collateral to the FHLB for available credit of approximately $675.7 million, of which $133.7 million was advanced, while $417,000 was encumbered in relation to residential real estate loans sold onto the secondary market through the FHLB, and $305,000 was utilized for the issuance of letters of credit to secure public unit deposits. The Bank had also pledged $344.3 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 $276.6 million, as of June 30, 2023, none of which was advanced. The Bank has also been approved for participation in the BTFP introduced early in calendar year 2023 by the Federal Reserve Bank, but the Bank has not pledged any securities under the program. In addition, the Bank has the ability to identify eligible 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 $1.9 billion as most recently reported by the FHLB as of June 30, 2023, which means that an amount up to $1.8 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, 2023, the Bank had $690.5 million in CDs maturing within one year and $2.7 billion in other deposits without a specified maturity, as compared to $377.8 million in CDs maturing within one year and $2.2 billion in other deposits without a specified maturity as of June 30, 2022. Management believes that most maturing interest-bearing liabilities will be retained or replaced by new interest-bearing liabilities. Also, at June 30, 2023, the Bank had $33.5 million in overnight advances from the FHLB, $13.0 million in term FHLB advances maturing within one year, and $87.0 million in FHLB advances with a maturity date in excess of one year. Of the advances with maturity dates in excess of one year, none was eligible for early redemption by the lender within one year.

We also incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. At June 30, 2023, we had other future obligations and accrued expenses of $18.6 million. Based on our current capital allocation objectives, during fiscal 2024 we project expending approximately $6.0 million to $8.0 million of cash for capital investment in technology, property, plant and equipment. In addition, for the fiscal year ending June 30, 2024, we project that our fixed commitments will include (i) $1.0 million of operating and

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finance lease and other fixed payments and (ii) $1.7 million of scheduled interest payments on subordinate notes. We believe that our liquid assets combined with the available lines of credit provide adequate liquidity to meet our current financial obligations for at least the next 12 months.

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-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, 2023, the Bank exceeded regulatory capital requirements with tier 1 leverage, total risk-based capital, and tangible common equity capital of $407.8 million, $454.7 million and $407.8 million, respectively. The Bank’s tier 1 capital represented 9.54% of total adjusted assets and 10.56% of total risk-weighted assets, while total risk-based capital was 11.77% of total risk-weighted assets, and tangible common equity capital was 10.56% 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, 2023, the Company exceeded regulatory capital requirements with tier 1 leverage, total risk-based capital, and tangible common equity capital of $426.6 million, $481.2 million and $411.2 million, respectively. The Company’s tier 1 capital represented 9.95% of total adjusted assets and 11.10% of total risk-weighted assets, while total risk-based capital was 12.52% of total risk-weighted assets, and tangible common equity capital was 10.70% 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.

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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 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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