Southern Missouri Bancorp (SMBC) 10-Q 2022 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2022

OR

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

For the transition period from        to

Commission file number   0-23406

Southern Missouri Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Missouri	43-1665523
(State or jurisdiction of incorporation)	(IRS employer id. no.)
2991 Oak Grove Road Poplar Bluff, MO	63901
(Address of principal executive offices)	(Zip code)

(573) 778-1800

Registrant’s telephone number, including area code

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

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

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

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

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

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

Yes ☐ No ☒

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

Class	Outstanding at May 9, 2022
Common Stock, Par Value $.01	9,308,373 shares

SOUTHERN MISSOURI BANCORP, INC.

FORM 10-Q

INDEX

PART I.	Financial Information	PAGE NO.
Item 1.	Condensed Consolidated Financial Statements	3
	-   Condensed Consolidated Balance Sheets	3
	-   Condensed Consolidated Statements of Income	4
	-   Condensed Consolidated Statements of Comprehensive Income	5
	-   Condensed Consolidated Statements of Stockholders’ Equity	6
	-   Condensed Consolidated Statements of Cash Flows	7
	-   Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	62
Item 4.	Controls and Procedures	65
PART II.	OTHER INFORMATION	66
Item 1.	Legal Proceedings	66
Item 1a.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	67
	-  Signature Page	69

PART I: Item 1:  Condensed Consolidated Financial Statements

SOUTHERN MISSOURI BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2022 AND JUNE 30, 2021

	March 31, 2022		June 30, 2021
(dollars in thousands)	(unaudited)
Assets
Cash and cash equivalents	$	248,584	$	123,592
Interest-bearing time deposits		4,828		979
Available for sale securities		226,391		207,020
Stock in FHLB of Des Moines		6,081		5,873
Stock in Federal Reserve Bank of St. Louis		5,035		5,031
Loans receivable, net of ACL of $33,641 and $33,222 at March 31, 2022 and June 30, 2021, respectively		2,579,106		2,200,244
Accrued interest receivable		10,409		10,079
Premises and equipment, net		72,253		64,077
Bank owned life insurance – cash surrender value		48,387		43,817
Goodwill		27,738		14,089
Other intangible assets, net		7,830		7,129
Prepaid expenses and other assets		27,376		18,600
Total assets	$	3,264,018	$	2,700,530
Liabilities and Stockholders' Equity
Deposits	$	2,854,906	$	2,330,803
Advances from FHLB		42,941		57,529
Accounts payable and other liabilities		17,102		12,753
Accrued interest payable		869		779
Subordinated debt		23,043		15,243
Total liabilities		2,938,861		2,417,107
Commitments and contingencies
Common stock, $.01 par value; 25,000,000 shares authorized; 9,815,736 and 9,361,629 shares issued at March 31, 2022 and June 30, 2021, respectively		98		94
Additional paid-in capital		119,115		95,585
Retained earnings		228,885		200,140
Treasury stock of 483,038 and 456,431 shares at March 31, 2022 and June 30, 2021, respectively, at cost		(16,452)		(15,278)
Accumulated other comprehensive income (loss)		(6,489)		2,882
Total stockholders' equity		325,157		283,423
Total liabilities and stockholders' equity	$	3,264,018	$	2,700,530

See Notes to Condensed Consolidated Financial Statements

-3-

SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE- AND NINE- MONTH PERIODS ENDED MARCH 31, 2022 AND 2021 (Unaudited)

	Three months ended				Nine months ended
	March 31,				March 31,
(dollars in thousands except per share data)	2022		2021		2022		2021
INTEREST INCOME:
Loans	$	27,060	$	26,005	$	81,614	$	78,737
Investment securities		524		559		1,608		1,568
Mortgage-backed securities		646		466		1,833		1,479
Other interest-earning assets		109		70		239		159
Total interest income		28,339		27,100		85,294		81,943
INTEREST EXPENSE:
Deposits		2,871		3,494		8,426		11,748
Advances from FHLB		167		325		613		1,052
Subordinated debt		187		132		447		403
Total interest expense		3,225		3,951		9,486		13,203
NET INTEREST INCOME		25,114		23,149		75,808		68,740
PROVISION (BENEFIT) FOR CREDIT LOSSES		1,552		(409)		1,247		1,591
NET INTEREST INCOME AFTER PROVISION (BENEFIT) FOR CREDIT LOSSES		23,562		23,558		74,561		67,149
NONINTEREST INCOME:
Deposit account charges and related fees		1,560		1,275		4,743		3,974
Bank card interchange income		1,025		1,004		2,952		2,670
Loan late charges		135		118		414		398
Loan servicing fees		170		217		504		895
Other loan fees		606		266		1,556		898
Net realized gains on sale of loans		204		853		934		3,449
Net realized gains on sale of AFS securities		—		90		—		90
Earnings on bank owned life insurance		291		270		854		1,524
Other income		913		431		2,746		1,287
Total noninterest income		4,904		4,524		14,703		15,185
NONINTEREST EXPENSE:
Compensation and benefits		9,223		7,739		25,745		23,004
Occupancy and equipment, net		2,399		1,990		6,710		5,826
Data processing expense		1,935		1,253		4,501		3,490
Telecommunications expense		308		317		946		940
Deposit insurance premiums		178		174		536		593
Legal and professional fees		341		256		931		690
Advertising		312		240		917		689
Postage and office supplies		202		198		582		585
Intangible amortization		363		338		1,040		1,057
Foreclosed property expenses/losses		115		48		449		137
Other operating expense		1,381		975		3,692		2,836
Total noninterest expense		16,757		13,528		46,049		39,847
INCOME BEFORE INCOME TAXES		11,709		14,554		43,215		42,487
INCOME TAXES		2,358		3,096		9,133		8,996
NET INCOME	$	9,351	$	11,458	$	34,082	$	33,491
Basic earnings per share	$	1.03	$	1.27	$	3.81	$	3.69
Diluted earnings per share	$	1.03	$	1.27	$	3.80	$	3.69
Dividends paid	$	0.20	$	0.16	$	0.60	$	0.46

See Notes to Condensed Consolidated Financial Statements

-4-

SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE- AND NINE- MONTH PERIODS ENDED MARCH 31, 2022 AND 2021 (Unaudited)

	Three months ended				Nine months ended
	March 31,				March 31,
(dollars in thousands)	2022		2021		2022		2021
Net income	$	9,351	$	11,458	$	34,082	$	33,491
Other comprehensive loss:
Unrealized losses on securities available-for-sale		(9,579)		(2,227)		(12,014)		(2,541)
Less: reclassification adjustment for realized gains included in net income		—		90		—		90
Tax benefit		2,108		511		2,643		579
Total other comprehensive loss		(7,471)		(1,806)		(9,371)		(2,052)
Comprehensive income	$	1,880	$	9,652	$	24,711	$	31,439

See Notes to Condensed Consolidated Financial Statements

-5-

SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE- AND NINE- MONTH PERIODS ENDED MARCH 31, 2022 AND 2021 (Unaudited)

	For the three- and nine- month period ended March 31, 2022
			Additional						Accumulated Other		Total
	Common		Paid-In		Retained		Treasury			Comprehensive		Stockholders'
(dollars in thousands)	Stock		Capital		Earnings		Stock		Income (Loss)		Equity
BALANCE AS OF DECEMBER 31, 2021	$	94	$	95,675	$	221,312	$	(16,452)	$	982	$	301,611
Net Income						9,351						9,351
Change in unrealized loss on available for sale securities										(7,471)		(7,471)
Dividends paid on common stock ($.20 per share)						(1,778)						(1,778)
Stock option expense				44								44
Stock grant expense				515								515
Common stock issued		4		22,881								22,885
BALANCE AS OF MARCH 31, 2022	$	98	$	119,115	$	228,885	$	(16,452)	$	(6,489)	$	325,157
BALANCE AS OF JUNE 30, 2021	$	94	$	95,585	$	200,140	$	(15,278)	$	2,882	$	283,423
Net Income						34,082						34,082
Change in unrealized loss on available for sale securities										(9,371)		(9,371)
Dividends paid on common stock ($.60 per share)						(5,337)						(5,337)
Stock option expense				117								117
Stock grant expense				532								532
Common stock issued		4		22,881								22,885
Treasury stock purchased								(1,174)				(1,174)
BALANCE AS OF MARCH 31, 2022	$	98	$	119,115	$	228,885	$	(16,452)	$	(6,489)	$	325,157

	For the three- and nine- month period ended March 31, 2021
			Additional						Accumulated Other		Total
	Common		Paid-In		Retained		Treasury		Comprehensive		Stockholders'
(dollars in thousands)	Stock		Capital		Earnings		Stock		Income		Equity
BALANCE AS OF DECEMBER 31, 2020	$	93	$	95,109	$	177,861	$	(9,575)	$	4,201	$	267,689
Net Income						11,458						11,458
Change in unrealized loss on available for sale securities										(1,806)		(1,806)
Dividends paid on common stock ($.16 per share)						(1,441)						(1,441)
Stock option expense				440								440
Stock grant expense												—
Common stock issued		1										1
Treasury stock purchased								(3,402)				(3,402)
BALANCE AS OF MARCH 31, 2021	$	94	$	95,549	$	187,878	$	(12,977)	$	2,395	$	272,939
BALANCE AS OF JUNE 30, 2020	$	93	$	95,035	$	165,709	$	(6,937)	$	4,447	$	258,347
Impact of ASU 2016-13 adoption						(7,151)						(7,151)
Net Income						33,491						33,491
Change in unrealized loss on available for sale securities										(2,052)		(2,052)
Dividends paid on common stock ($.46 per share)						(4,171)						(4,171)
Stock option expense				514								514
Stock grant expense												—
Common stock issued		1										1
Treasury stock purchased								(6,040)				(6,040)
BALANCE AS OF MARCH 31, 2021	$	94	$	95,549	$	187,878	$	(12,977)	$	2,395	$	272,939

See Notes to Condensed Consolidated Financial Statements

-6-

SOUTHERN MISSOURI BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE- MONTH PERIODS ENDED MARCH 31, 2022 AND 2021 (Unaudited)

	Nine months ended
	March 31,
(dollars in thousands)	2022		2021
Cash Flows From Operating Activities:
Net income	$	34,082	$	33,491
Items not requiring (providing) cash:
Depreciation		3,307		3,030
Loss on disposal of fixed assets		3		27
Stock option and stock grant expense		649		513
Loss on sale/write-down of REO		392		60
Amortization of intangible assets		1,040		1,057
Accretion of purchase accounting adjustments		(1,036)		(1,078)
Increase in cash surrender value of bank owned life insurance (BOLI)		(854)		(1,524)
Provision for credit losses		1,247		1,591
Gains realized on sale of AFS securities		—		(90)
Net amortization of premiums and discounts on securities		855		1,349
Originations of loans held for sale		(38,454)		(131,889)
Proceeds from sales of loans held for sale		38,164		129,637
Gain on sales of loans held for sale		(934)		(3,449)
Changes in:
Accrued interest receivable		252		2,086
Prepaid expenses and other assets		2,311		2,562
Accounts payable and other liabilities		3,910		(3,611)
Deferred income taxes		1,019		(429)
Accrued interest payable		(79)		(728)
Net cash provided by operating activities		45,874		32,605
Cash flows from investing activities:
Net (increase) decrease in loans		(174,600)		2,478
Net change in interest-bearing deposits		(1,488)		(6)
Proceeds from maturities of available for sale securities		33,863		48,668
Proceeds from sales of available for sale securities		—		16,284
Net redemptions of Federal Home Loan Bank stock		502		227
Net purchases of Federal Reserve Bank of St. Louis stock		(4)		(655)
Purchases of available-for-sale securities		(66,168)		(82,725)
Purchases of long-term investment		(133)		—
Purchases of premises and equipment		(4,365)		(1,389)
Net cash received from acquisitions		48,768		—
Investments in state & federal tax credits		(9,786)		(1,682)
Proceeds from sale of fixed assets		928		72
Proceeds from sale of foreclosed assets		471		978
Proceeds from BOLI claim		—		1,351
Net cash used in investing activities		(172,012)		(16,399)
Cash flows from financing activities:
Net increase in demand deposits and savings accounts		303,499		265,514
Net decrease in certificates of deposits		(21,571)		(81,572)
Proceeds from Federal Home Loan Bank advances		—		110,100
Repayments of Federal Home Loan Bank advances		(24,287)		(117,386)
Purchase of treasury stock		(1,174)		(6,040)
Dividends paid on common stock		(5,337)		(4,171)
Net cash provided by financing activities		251,130		166,445
Increase in cash and cash equivalents		124,992		182,651
Cash and cash equivalents at beginning of period		123,592		54,245
Cash and cash equivalents at end of period	$	248,584	$	236,896
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Conversion of loans to foreclosed real estate	$	127	$	721
Conversion of loans to repossessed assets		14		428
Right of use assets obtained in exchange for lease obligations: Operating Leases		109		599

-7-

The Company assumed the liabilities and purchased associated assets of the First National Bank -Cairo branch on December 15, 2021.
In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired	$	1,707	$	—
Cash received		27,151		—
Liabilities assumed		28,859		—
The Company purchased all of the capital stock of Fortune Financial Corporation on February 25, 2022.
In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired	$	267,913	$	—
Less: common stock issued		22,885		—
Cash paid		12,663		—
Liabilities assumed		232,365		—
Cash paid during the period for:
Interest (net of interest credited)	$	1,487	$	2,129
Income taxes		262		7,736

See Notes to Condensed Consolidated Financial Statements

-8-

SOUTHERN MISSOURI BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1:  Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all material adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated balance sheet of the Company as of June 30, 2021, has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the three- and nine-month periods ended March 31, 2022, are not necessarily indicative of the results that may be expected for the entire fiscal year. For additional information, refer to the audited consolidated financial statements included in the Company’s June 30, 2021 Form 10-K, which was filed with the SEC.

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

Note 2:  Organization and Summary of Significant Accounting Policies

Organization. Southern Missouri Bancorp, Inc., a Missouri corporation (the Company) was organized in 1994 and is the parent company of Southern Bank (the Bank). Substantially all of the Company’s consolidated revenues are derived from the operations of the Bank, and the Bank represents substantially all of the Company’s consolidated assets and liabilities. SB Real Estate Investments, LLC is a wholly-owned subsidiary of the Bank formed to hold Southern Bank Real Estate Investments, LLC. Southern Bank Real Estate Investments, LLC is a real estate investment trust (REIT) which is controlled by SB Real Estate Investments, LLC, and has other preferred shareholders in order to meet the requirements to be a REIT. At March 31, 2022, assets of the REIT were approximately $1.2 billion, and consisted primarily of real estate loan participations acquired from the Bank.

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

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

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

Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

-9-

On July 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses, also known as the current expected credit loss (“CECL”) standard, which created material changes to the existing critical accounting policy that existed at June 30, 2020. Effective July 1, 2020, the significant accounting policy which was considered to be the most critical in preparing the Company’s consolidated financial statements is the determination of the allowance for credit losses (“ACL”) on loans.

Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash equivalents includes cash, due from depository institutions and interest-bearing deposits in other depository institutions with original maturities of three months or less. Interest-bearing deposits in other depository institutions were $200.1 million and $83.2 million at March 31, 2022 and June 30, 2021, respectively. The deposits are held in various commercial banks with a total of $3.3 million and $1.8 million exceeding the FDIC’s deposit insurance limits at March 31, 2022 and June 30, 2021, respectively, as well as at the Federal Reserve and the Federal Home Loan Bank of Des Moines and Chicago.

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

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

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

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

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

At adoption of ASU 2016-13, no impairment on AFS securities was attributable to credit. The Company evaluates impaired AFS securities at the individual level on a quarterly basis, and considers factors including, but not limited to: the extent to which the fair value of the security is less than the amortized cost basis; adverse conditions specifically related to the security, an industry, or geographic area; the payment structure of the security and likelihood of the issuer to be able to make payments that may increase in the future; failure of the issuer to make scheduled interest or principal payments; any changes to the rating of the security by a rating agency; and the ability and intent to hold the security until maturity. A qualitative determination as to whether any portion of the impairment is attributable to credit risk is acceptable. There were no credit related factors underlying unrealized losses on AFS securities at March 31, 2022, or June 30, 2021.

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

-10-

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

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

Interest on loans is accrued based upon the principal amount outstanding. The accrual of interest on loans is discontinued when, in management’s judgment, the collectability of interest or principal in the normal course of business is doubtful. The Company complies with regulatory guidance which indicates that loans should be placed in nonaccrual status when 90 days past due, unless the loan is both well-secured and in the process of collection. A loan that is “in the process of collection” may be subject to legal action or, in appropriate circumstances, through other collection efforts reasonably expected to result in repayment or restoration to current status in the near future. A loan is considered delinquent when a payment has not been made by the contractual due date. At March 31, 2022, some loans were modified under the terms of the Coronavirus Aid, Relief and Economic Security Act (the CARES Act), which provides that loans modified after March 1, 2020, due to the COVID-19 pandemic, and which were otherwise current at December 31, 2019, need not be accounted for as troubled debt restructurings (TDRs). While these loans may not have met the contractual due dates of payments under their previous terms, so long as they were compliant with the terms of the modification made under the CARES Act, they would not have been reported as delinquent at June 30, 2021 or March 31, 2022. See further disclosure in Note 4: Loans and Allowance for Credit Losses. Interest income previously accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. Cash receipts on a nonaccrual loan are applied to principal and interest in accordance with its contractual terms unless full payment of principal is not expected, in which case cash receipts, whether designated as principal or interest, are applied as a reduction of the carrying value of the loan. A nonaccrual loan is generally returned to accrual status when principal and interest payments are current, full collectability of principal and interest is reasonably assured, and a consistent record of performance has been demonstrated.

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

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

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

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and the Company has utilized peer data where more appropriate. The Company defines a default as an event of charge off, an adverse (substandard or worse) internal credit rating, becoming delinquent 90 days or more, or being placed on nonaccrual status. A PD/LGD estimate is applied to a projected model of the loan’s cashflow, including principal and interest payments, with consideration for prepayment speeds, principal curtailments, and recovery lag.

Subsequent to the July 1, 2020, adoption of ASU 2016-13, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial ACL is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial ACL is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to non-credit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans.

Upon adoption of ASU 2016-13, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $434,000 to the ACL. The remaining noncredit discount, based on the adjusted amortized cost basis, will be accreted into interest income at the effective interest rate as of July 1, 2020.

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

Off-Balance Sheet Credit Exposures. Off-balance sheet credit instruments include commitments to make loans, and commercial letters of credit, issued to meet customer financing needs. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The ACL on off-balance sheet credit exposures is estimated by loan pool on a quarterly basis under the current CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur and is included in other liabilities on the Company’s consolidated balance sheets. The Company records an ACL on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable. In prior periods the charge for credit loss expense for off-balance sheet credit exposures was included in other non-interest expense in the Company’s consolidated statements of income, whereas under updated regulatory accounting guidelines, that figure is combined with the provision for credit losses beginning July 1, 2020.

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

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

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

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

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

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

Goodwill. The Company’s goodwill is evaluated annually for impairment or more frequently if impairment indicators are present. A qualitative assessment is performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value is less than the carrying amount, including goodwill. If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. As of June 30, 2021, there was 0 impairment indicated, based on a qualitative assessment of goodwill, which considered: the market value of the Company’s common stock, concentrations of credit; profitability; nonperforming assets; capital levels; and results of recent regulatory examinations. The Company believes there was 0 impairment of goodwill at March 31, 2022.

Intangible Assets. The Company’s intangible assets at March 31, 2022 included gross core deposit intangibles of $17.0 million with $11.1 million accumulated amortization, gross other identifiable intangibles of $3.8 million with accumulated amortization of $3.8 million, and mortgage servicing rights of $1.9 million. At June 30, 2021, the Company’s intangible assets included gross core deposit intangibles of $15.3 million with $10.1 million accumulated amortization, gross other identifiable intangibles of $3.8 million with accumulated amortization of $3.8 million, and mortgage servicing rights of $1.9 million. The Company’s core deposit intangible assets are being amortized using the straight line method, over periods ranging from five to seven years, with amortization expense expected to be approximately $402,000 in the remainder of fiscal 2022, $1.6 million in fiscal 2023 and fiscal 2024, $1.1 million in fiscal 2025, and $1.3 million thereafter. As of June 30, 2021, there was 0 impairment indicated, and the Company believes there was 0 impairment of other intangible assets at March 31, 2022.

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

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

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

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

Incentive Plans. The Company accounts for its Equity Incentive Plan (EIP), and Omnibus Incentive Plan (OIP) in accordance with ASC 718, “Share-Based Payment.” Compensation expense is based on the market price of the Company’s stock on the date the shares are granted and is recorded over the vesting period. The difference between the

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grant-date fair value and the fair value on the date the shares are considered earned represents a tax benefit to the Company that is recorded as an adjustment to income tax expense.

Outside Directors’ Retirement. The Bank adopted a directors’ retirement plan in April 1994 for outside directors. The directors’ retirement plan provides that each non-employee director (participant) shall receive, upon termination of service on the Board on or after age 60, other than termination for cause, a benefit in equal annual installments over a five year period. The benefit will be based upon the product of the participant’s vesting percentage and the total Board fees paid to the participant during the calendar year preceding termination of service on the Board. The vesting percentage shall be determined based upon the participant’s years of service on the Board, whether before or after the reorganization date.

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

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

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

Comprehensive Income. Comprehensive income consists of net income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on available-for-sale securities, and changes in the funded status of defined benefit pension plans.

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

New Accounting Pronouncements:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which the Company adopted July 1, 2020. The Update amended guidance on reporting credit losses for financial assets held at amortized cost basis and available for sale debt securities. For financial assets held at amortized cost basis, Topic 326 eliminated the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The Update affects loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, and any other financial assets not excluded from the scope that have the contractual right to receive cash. Adoption was applied on a modified retrospective basis, through a cumulative-effect adjustment to retained earnings. Adoption resulted in an increase to the ACL of $8.9 million, related to the transition from the incurred loss model to the CECL ACL model, and an increase of $434,000 related to the transition from PCI to PCD methodology, relative to the ALLL as of June 30, 2020. The Company also recorded an adjustment to the reserve for unfunded commitments recorded in other liabilities of $268,000. The impact at adoption was reflected as an adjustment to beginning retained earnings, net of income taxes, in the amount of $7.2 million. In accordance with the new standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The adoption of ASU 2016-13 in fiscal 2021 could also impact the Company’s future earnings, perhaps materially.

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The following table illustrates the impact of adoption of ASU 2016-13:

	July 1, 2020
	As reported		As reported		Impact of
	under		prior to		adoption
(dollars in thousands)	ASU 2016-13		ASU 2016-13		ASU 2016-13
Loans receivable	$	2,142,363	$	2,141,929	$	434
Allowance for credit losses on loans:
Real Estate Loans:
Residential		8,396		4,875		3,521
Construction		1,889		2,010		(121)
Commercial		15,988		12,132		3,856
Consumer loans		2,247		1,182		1,065
Commercial loans		5,952		4,940		1,012
Total allowance for credit losses on loans	$	34,472	$	25,139	$	9,333
Total allowance for credit losses on off-balance sheet credit exposures	$	2,227	$	1,959	$	268

The above table includes the impact of ASU 2016-13 adoption for PCD assets previously classified as PCI. The change in the ACL includes $434,000 attributable to residential and commercial real estate loans, and the amortized cost basis of loans receivable was increased for those loans by that total amount.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), that removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. ASU 2019-12 introduces the following new guidance: i) guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction and ii) a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2020. The adoption of ASU 2019-12 did not have a material impact on the Company’s operations, financial position or disclosures.

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

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,”.  The amendments in this update provide optional guidance for a limited period to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. Pursuant to the Interagency Statement on LIBOR Transition issued in November 2020, the Company will not enter into any new LIBOR-based credit agreements after December 31, 2021. The adoption of ASU 2020-04 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. ASU 2021-01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to

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derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance and generally can be applied through December 31, 2022. ASU 2021-01 is not expected to have a material impact on the Company’s consolidated financial statements.

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

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Note 3:  Securities

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

	March 31, 2022
			Gross		Gross		Allowance		Estimated
	Amortized		Unrealized		Unrealized		for		Fair
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Value
Debt and equity securities:
Obligations of states and political subdivisions	$	45,420	$	409	$	(1,346)	$	0	$	44,483
Corporate obligations		19,822		81		(503)		0		19,400
Other securities		462		—		(17)		0		445
Total debt and equity securities		65,704		490		(1,866)		0		64,328
Mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs):
Residential MBS issued by governmental sponsored enterprises (GSEs)		68,354		50		(2,882)		0		65,522
Commercial MBS issued by GSEs		48,617		183		(2,394)		0		46,406
CMOs issued by GSEs		52,061		72		(1,998)		0		50,135
Total MBS and CMOs		169,032		305		(7,274)		0		162,063
Total AFS securities	$	234,736	$	795	$	(9,140)	$	0	$	226,391

	June 30, 2021
			Gross		Gross		Allowance		Estimated
	Amortized		Unrealized		Unrealized		for		Fair
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Value
Debt and equity securities:
Obligations of states and political subdivisions	$	46,257	$	1,479	$	(40)	$	0		47,696
Corporate obligations		20,356		290		(335)		0		20,311
Other securities		647		25		—		0		672
Total debt and equity securities		67,260		1,794		(375)		0		68,679
Mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs):
Residential MBS issued by governmental sponsored enterprises (GSEs)		64,400		932		(379)		0		64,953
Commercial MBS issued by GSEs		35,425		1,394		(338)		0		36,481
CMOs issued by GSEs		36,201		755		(49)		0		36,907
Total MBS and CMOs		136,026		3,081		(766)		0		138,341
Total AFS securities	$	203,286	$	4,875	$	(1,141)	$	0	$	207,020

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

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	March 31, 2022
	Amortized		Estimated
(dollars in thousands)	Cost		Fair Value
Within one year	$	1,347	$	1,349
After one year but less than five years		7,503		7,517
After five years but less than ten years		31,814		31,125
After ten years		25,040		24,337
Total investment securities		65,704		64,328
MBS and CMOs		169,032		162,063
Total AFS securities	$	234,736	$	226,391

The carrying value of investment and mortgage-backed securities pledged as collateral to secure public deposits amounted to $190.0 million at March 31, 2022 and $155.6 million at June 30, 2021. The securities pledged consist of marketable securities, including $98.8 million and $95.4 million of Mortgage-backed Securities, $46.0 million and $18.8 million of Collateralized Mortgage Obligations, $42.8 million and $41.4 million of State and Political Subdivisions Obligations, and $2.4 million and $0 of other securities at March 31, 2022 and June 30, 2021, respectively.

The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position for which an ACL has not been recorded at March 31, 2022 and June 30, 2021:

	March 31, 2022
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
(dollars in thousands)
Obligations of state and political subdivisions	$	20,891	$	1,155	$	1,756	$	191	$	22,647	$	1,346
Corporate obligations		10,723		145		6,096		358		16,819		503
Other securities		445		17		—		—		445		17
MBS and CMOs		91,543		4,078		33,523		3,196		125,066		7,274
Total AFS securities	$	123,602	$	5,395	$	41,375	$	3,745	$	164,977	$	9,140

	June 30, 2021
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
(dollars in thousands)
Obligations of state and political subdivisions	$	3,177	$	40	$	—	$	—	$	3,177	$	40
Corporate obligations		9,331		79		720		256		10,051		335
MBS and CMOs		53,893		764		70		2		53,963		766
Total AFS securities	$	66,401	$	883	$	790	$	258	$	67,191	$	1,141

Obligations of state and political subdivisions. The unrealized losses on the Company’s investments in obligations of state and political subdivisions include 37 individual securities which have been in an unrealized loss position for less than 12 months and 3 individual securities which have been in an unrealized loss position for more than 12 months. The securities are performing and are of high credit quality. The unrealized losses were caused by variations in market interest rates since purchase or acquisition. Because the Company does not intend to sell these securities and it is likely that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

Corporate Obligations. The unrealized losses on the Company’s investments in corporate obligations include 10 individual securities which have been in an unrealized loss position for less than 12 months and 4 individual securities which have been in an unrealized loss position for more than 12 months. The securities are performing and are of high credit quality. The unrealized losses were caused by variations in market interest rates since purchase or acquisition. Because the Company does not intend to sell these securities and it likely that the Company will not be required to sell

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these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

At March 31, 2022, corporate obligations included 2 pooled trust preferred securities with an estimated fair value of $789,000 and unrealized losses of $189,000 in a continuous unrealized loss position for twelve months or more. These unrealized losses were primarily due to the long-term nature of the pooled trust preferred securities and a reduced demand for these securities, and concerns regarding the issuers of the underlying trust preferred securities.

A cash flow analysis performed as of March 31, 2022, for these 2 securities indicated it is probable the Company will receive all contracted principal and related interest projected. The cash flow analysis used in making this determination was based on anticipated default, recovery, and prepayment rates, and the resulting cash flows were discounted based on the yield spread anticipated at the time the securities were purchased. Because the Company does not intend to sell these securities and it is likely that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

Other securities. The unrealized losses on the Company’s investments in other securities includes 1 individual security which has been in an unrealized loss position for less than 12 months and 0 individual securities which have been in an unrealized loss position for more than 12 months. The securities are performing and are of high credit quality. The unrealized loss was caused by variations in market interest rates since purchase or acquisition. Because the Company does not intend to sell these securities and it likely that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

MBS and CMOs. As of March 31, 2022, the unrealized losses on the Company’s investments in MBS and CMOs include 61 individual securities which have been in an unrealized loss position for less than 12 months, and 16 individual securities which have been in an unrealized loss position for 12 months or more. The securities are performing and are of high credit quality. The unrealized losses were caused by variations in market interest rates since purchase or acquisition. Because the Company does not intend to sell these securities and it is likely that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

The Company does not believe that any individual unrealized loss as of March 31, 2022, is the result of a credit loss. However, the Company could be required to recognize an ACL in future periods with respect to its available for sale investment securities portfolio.

Credit losses recognized on investments.  There were 0 credit losses recognized in income and other losses or recorded in other comprehensive income (loss) for the three- and nine-month periods ended March 31, 2022 and 2021.

Note 4:  Loans and Allowance for Credit Losses

Classes of loans are summarized as follows:

(dollars in thousands)	March 31, 2022		June 30, 2021
Real Estate Loans:
Residential	$	894,007	$	721,216
Construction		244,257		208,824
Commercial		1,091,914		889,793
Consumer loans		86,230		77,674
Commercial loans		409,721		414,124
		2,726,129		2,311,631
Loans in process		(112,792)		(74,540)
Deferred loan fees, net		(590)		(3,625)
Allowance for credit losses		(33,641)		(33,222)
Total loans	$	2,579,106	$	2,200,244

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The Company’s lending activities consist of origination of loans secured by mortgages on one- to four-family residences and commercial and agricultural real estate, construction loans on residential and commercial properties, commercial and agricultural business loans and consumer loans. At March 31, 2022 the Company had purchased participations in 34 loans totaling $90.8 million, as compared to 23 loans totaling $83.0 million at June 30, 2021.

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

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

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

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

Construction Lending. The Company originates real estate loans secured by property or land that is under construction or development. Construction loans originated by the Company are generally to finance the construction of owner occupied residential real estate, or to finance speculative construction of residential real estate, land development, or owner-operated or non-owner occupied commercial real estate. During construction, these loans typically require monthly interest-only payments, with single-family residential construction loans having maturities ranging from six to twelve months, while multi-family or commercial construction loans typically mature in 12 to 24 months. Once construction is completed, permanent construction loans may be converted to monthly payments using amortization schedules of up to 30 years on residential and generally up to 25 years on commercial real estate. Construction and development lending risks generally include successful timely and on-budget completion of the project, followed by the sale of the property in the case of land development or non-owner-occupied real estate, or the long-term occupancy of the property by the builder in the case of owner-occupied construction. Changes in real estate values or other economic conditions may impact the ability of a borrower to sell property developed for that purpose.

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While the Company typically utilizes relatively short maturity periods to closely monitor the inherent risks associated with construction loans, weather conditions, change orders, availability of materials and/or labor, and other factors may contribute to the lengthening of a project, thus necessitating the need to renew the construction loan at the balloon maturity. Such extensions are typically executed in incremental three month periods to facilitate project completion. The Company’s average term of construction loans is approximately nine months. During construction, loans typically require monthly interest only payments which may allow the Company an opportunity to monitor for early signs of financial difficulty should the borrower fail to make a required monthly payment. Additionally, during the construction phase, the Company typically performs interim inspections which further afford the Company the opportunity to assess risk. At March 31, 2022, construction loans outstanding included 48 loans, totaling $30.1 million, for which a modification had been agreed to. At June 30, 2021, construction loans outstanding included 48 loans, totaling $28.5 million, for which a modification had been agreed to. In general, these modifications were solely for the purpose of extending the maturity date due to conditions described above, pursuant to the Company’s normal underwriting and monitoring procedures. As these modifications were not executed due to financial difficulty on the part of the borrower, they were not accounted for as troubled debt restructurings (TDRs); nor were they made pursuant to exemptions provided under the CARES Act. Under the CARES Act, financial institutions had the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs through December 31, 2021 to account for the effects of COVID-19. Loans modified under the CARES Act did not include any construction loans with drawn balances at March 31, 2022.

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

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

Automobile loans originated by the Company include both direct loans and a smaller amount of loans originated by auto dealers. The Company generally pays a negotiated fee back to the dealer for indirect loans. Typically, automobile loans are made for terms of up to 60 months for new and used vehicles. Loans secured by automobiles have fixed rates and are generally made in amounts up to 100% of the purchase price of the vehicle. Risks related to automobile and other consumer lending generally include the stability of borrower income and borrower willingness to repay.

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

ACL. The provision for credit losses for the three- and nine-month periods ended March 31, 2022, was $1.6 million and $1.2 million, respectively, compared to a recovery of $409,000 and a charge of $1.6 million, respectively, in the same periods of the prior fiscal year. The allowance for credit losses (ACL) required for purchased credit deteriorated (PCD) loans acquired in the Fortune merger was $120,000, and was funded through purchase accounting adjustments, while the ACL required for non-PCD loans acquired in the Fortune merger was $1.9 million, and was funded through a charge to provision for credit losses (PCL). Additionally, the allowance for off-balance sheet credit exposures was increased by $120,000 due to the Fortune merger and funded through a charge to PCL. Exclusive of the charges required as a result of

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the Fortune merger, the Company would have recorded a negative PCL (recovery) of approximately $468,000 in the current quarter. The recovery was based on the estimated required ACL, reflecting management’s estimate of the current expected credit losses in the Company’s loan portfolio at March 31, 2022, and as of that date the Company’s ACL was $33.6 million. Reduced provisioning in the nine-month period ended March 31, 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, delinquent or adversely classified credits, and nonperforming loans. While the Company assesses that the economic outlook has continued to improve during the current quarter as compared to the year ended June 30, 2021, there remains uncertainty regarding the possible continuing impact of the COVID-19 pandemic or when transmission of the virus will abate to the point that restrictions are no longer being imposed or considered, and consumer behavior can be said to have returned to normal. As such, there remains a potential for the pandemic to negatively impact global and regional economies, or for recent efforts by the U.S. government and the Federal Reserve to respond to the pandemic and its economic impact to fall short of expectations. Specifically, management considered the following:

●  economic conditions and projections as provided by Moody’s Analytics, including baseline and downside scenarios, were utilized in the Company’s estimate at March 31, 2022. Economic factors considered in the projections included national and state levels of unemployment, and national and state rates of inflation-adjusted growth in the gross domestic product. Economic conditions are considered to be a moderate and declining risk factor, relative to June 30, 2021;

● the pace of growth of the Company’s loan portfolio, exclusive of acquisitions or government guaranteed loans, relative to overall economic growth. This measure remained stable in the most recent quarter, and is considered to be a moderate and stable risk factor;

● levels and trends for loan delinquencies nationally and in the region. This measure as reported remains relatively stable, but management considered the potential that the measure remains under-reported due to the availability of modifications under the CARES Act. The level of uncertainty about loan delinquencies is considered to be diminishing as compared to June 30, 2021. This is considered to be a moderate and declining risk factor;

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

Management considered the impact of the COVID-19 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, when making qualitative factor adjustments. To date, various relief efforts, notably including the availability of forgivable Paycheck Protection Program (PPP) loans to borrowers and deferrals or modifications available as encouraged by banking regulatory authorities and the CARES Act, resulted in limited impact on the Company’s credit quality indicators, as is true of the industry generally. It is possible that any continued adverse effects of the pandemic may not be offset by future relief efforts, which could cause the outlook for economic conditions and levels and trends of past-due loans to significantly worsen, and require additions to the ACL.

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

The fair value of acquired loans recorded at the time of acquisition is based upon several factors, including the timing and payment of expected cash flows, as adjusted for estimated credit losses and prepayments, and then discounting these cash flows using comparable market rates. The resulting fair value adjustment is recorded in the form of a premium or discount to the unpaid principal balance of the respective loans. As it relates to acquired loans that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination (“PCD”), the net premium or net discount is adjusted to reflect the Company’s allowance for credit losses recorded for PCD loans at the

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time of acquisition, and the remaining fair value adjustment is accreted or amortized into interest income over the remaining life of the respective loans. As it relates to loans not classified as PCD (“non-PCD”) loans, the credit loss and yield components of their fair value adjustment are aggregated, and the resulting net premium or net discount is accreted or amortized into interest income over the remaining life of the respective loans. The Company records an ACL for non-PCD loans at the time of acquisition through provision expense, and therefore, no further adjustments are made to the net premium or net discount for non-PCD loans.

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

(dollars in thousands)	March 31, 2022
PCD Loans:
Purchase price of PCD loans at acquisition	$	15,055
Allowance for credit losses at acquisition		(120)
Fair value of PCD loans at acquisition	$	14,935

The following tables present the balance in the ACL based on portfolio segment as of March 31, 2022 and 2021, and activity in the ACL for the three- and nine-month periods ended March 31, 2022 and 2021:

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

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

	At period end and for the nine months ended March 31, 2021
	Residential		Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for credit losses:
Balance, beginning of period prior to adoption of CECL	$	4,875	$	2,010	$	12,132	$	1,182	$	4,940	$	25,139
Impact of CECL adoption		3,521		(121)		3,856		1,065		1,012		9,333
Provision charged to expense		1,536		129		1,319		(929)		(670)		1,385
Losses charged off		(178)		—		(90)		(130)		(276)		(674)
Recoveries		1		—		1		16		26		44
Balance, end of period	$	9,755	$	2,018	$	17,218	$	1,204	$	5,032	$	35,227

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	At period end and for the three months ended March 31, 2021
	Residential		Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for loan losses:
Balance, beginning of period	$	10,398	$	2,387	$	15,239	$	1,362	$	6,085	$	35,471
Provision charged to expense		(576)		(369)		2,070		(107)		(1,018)		—
Losses charged off		(68)		—		(91)		(57)		(42)		(258)
Recoveries		1		—		—		6		7		14
Balance, end of period	$	9,755	$	2,018	$	17,218	$	1,204	$	5,032	$	35,227

The following tables present the balance in the allowance for off-balance sheet credit exposure based on portfolio segment as of March 31, 2022 and 2021, and activity in the allowance for the three- and nine-month periods ended March 31, 2022 and 2021:

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

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

	At period end and for the nine months ended March 31, 2021
	Residential			Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for off-balance sheet credit exposure:
Balance, beginning of period prior to CECL adoption	$	19	$	769	$	172	$	153	$	846	$	1,959
Impact of CECL adoption		35		(167)		95		197		108		268
Provision (benefit) charged to expense		(11)		56		(3)		(92)		256		206
Balance, end of period	$	43	$	658	$	264	$	258	$	1,210	$	2,433

	At period end and for the three months ended March 31, 2021
	Residential		Construction		Commercial
(dollars in thousands)	Real Estate	Real Estate		Real Estate		Consumer	Commercial	Total
Allowance for off-balance sheet credit exposure:

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Balance, beginning of period prior to CECL adoption	$	49	$	942	$	285	$	250	$	1,316	$	2,842
Provision (benefit) charged to expense		(6)		(284)		(21)		8		(106)		(409)
Balance, end of period	$	43	$	658	$	264	$	258	$	1,210	$	2,433

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

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

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

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

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

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

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

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The following table presents the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and fiscal year of origination as of March 31, 2022. This table includes PCD loans, which are reported according to risk categorization after acquisition based on the Company’s standards for such classification:

(dollars in thousands)													Revolving
	2022		2021		2020		2019		2018		Prior		loans		Total
Residential Real Estate
Pass	$	316,211	$	307,910	$	143,706	$	24,113	$	25,018	$	66,773	$	6,377	$	890,108
Watch		46		244		1,090		58		—		97		—		1,535
Special Mention		—		—		—		—		—		—		—		—
Substandard		750		1,073		88		123		18		312		—		2,364
Doubtful		—		—		—		—		—		—		—		—
Total Residential Real Estate	$	317,007	$	309,227	$	144,884	$	24,294	$	25,036	$	67,182	$	6,377	$	894,007
Construction Real Estate
Pass	$	67,838	$	41,974	$	—	$	—	$	—	$	—	$	134	$	109,946
Watch		21,333		—		—		—		—		—		—		21,333
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		186		—		—		—		—		—		186
Doubtful		—		—		—		—		—		—		—		—
Total Construction Real Estate	$	89,171	$	42,160	$	—	$	—	$	—	$	—	$	134	$	131,465
Commercial Real Estate
Pass	$	363,133	$	308,930	$	118,973	$	93,121	$	53,638	$	88,182	$	22,386	$	1,048,363
Watch		2,940		857		3,445		—		681		2,018		548		10,489
Special Mention		9,115		—		—		—		—		—		—		9,115
Substandard		20,626		1,648		112		13		22		94		605		23,120
Doubtful		827		—		—		—		—		—		—		827
Total Commercial Real Estate	$	396,641	$	311,435	$	122,530	$	93,134	$	54,341	$	90,294	$	23,539	$	1,091,914
Consumer
Pass	$	21,536	$	13,535	$	4,636	$	1,882	$	1,104	$	807	$	42,616	$	86,116
Watch		—		74		—		—		—		—		—		74
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		9		—		—		—		31		—		40
Doubtful		—		—		—		—		—		—		—		—
Total Consumer	$	21,536	$	13,618	$	4,636	$	1,882	$	1,104	$	838	$	42,616	$	86,230
Commercial
Pass	$	86,125	$	110,827	$	24,785	$	13,429	$	4,611	$	8,521	$	157,462	$	405,760
Watch		1,087		208		57		39		—		193		1,259		2,843
Special Mention		—		—		—		—		—		—		—		—
Substandard		380		11		—		228		—		175		324		1,118
Doubtful		—		—		—		—		—		—		—		—
Total Commercial	$	87,592	$	111,046	$	24,842	$	13,696	$	4,611	$	8,889	$	159,045	$	409,721
Total Loans
Pass	$	854,843	$	783,176	$	292,100	$	132,545	$	84,371	$	164,283	$	228,975	$	2,540,293
Watch		25,406		1,383		4,592		97		681		2,308		1,807		36,274
Special Mention		9,115		—		—		—		—		—		—		9,115
Substandard		21,756		2,927		200		364		40		612		929		26,828
Doubtful		827		—		—		—		—		—		—		827
Total	$	911,947	$	787,486	$	296,892	$	133,006	$	85,092	$	167,203	$	231,711	$	2,613,337

At March 31, 2022, PCD loans comprised $23.2 million of credits rated “Pass”; $4.7 million rated “Watch”; NaN rated “Special Mention”; $1.4 million of credits rated “Substandard”; and NaN rated “Doubtful”.

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The following table presents the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and fiscal year of origination as of June 30, 2021. This table includes PCD loans, which were reported according to risk categorization after acquisition based on the Company’s standards for such classification:

(dollars in thousands)													Revolving
	2021		2020		2019		2018		2017		Prior		loans		Total
Residential Real Estate
Pass	$	361,876	$	175,772	$	43,576	$	32,929	$	23,267	$	71,592	$	5,557	$	714,569
Watch		328		70		410		—		89		809		—		1,706
Special Mention		—		—		—		—		—		—		—		—
Substandard		4,288		89		—		92		—		472		—		4,941
Doubtful		—		—		—		—		—		—		—		—
Total Residential Real Estate	$	366,492	$	175,931	$	43,986	$	33,021	$	23,356	$	72,873	$	5,557	$	721,216
Construction Real Estate
Pass	$	88,371	$	45,866	$	—	$	—	$	—	$	—	$	—	$	134,237
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		47		—		—		—		—		—		—		47
Doubtful		—		—		—		—		—		—		—		—
Total Construction Real Estate	$	88,418	$	45,866	$	—	$	—	$	—	$	—	$	—	$	134,284
Commercial Real Estate
Pass	$	351,732	$	147,670	$	104,746	$	75,967	$	70,927	$	61,194	$	23,699	$	835,935
Watch		4,456		2,365		9,502		1,377		726		10		810		19,246
Special Mention		—		8,806		—		1,793		12,826		—		300		23,725
Substandard		8,191		1,137		505		31		5		99		69		10,037
Doubtful		—		—		850		—		—		—		—		850
Total Commercial Real Estate	$	364,379	$	159,978	$	115,603	$	79,168	$	84,484	$	61,303	$	24,878	$	889,793
Consumer
Pass	$	23,858	$	8,626	$	3,597	$	1,126	$	534	$	650	$	39,071	$	77,462
Watch		80		—		—		—		—		—		48		128
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		30		30		—		24		84
Doubtful		—		—		—		—		—		—		—		—
Total Consumer	$	23,938	$	8,626	$	3,597	$	1,156	$	564	$	650	$	39,143	$	77,674
Commercial
Pass	$	189,280	$	42,549	$	17,960	$	5,591	$	7,265	$	9,120	$	136,603	$	408,368
Watch		1,551		262		1,323		22		—		—		463		3,621
Special Mention		—		—		—		—		—		—		—		—
Substandard		594		81		305		—		176		—		979		2,135
Doubtful		—		—		—		—		—		—		—		—
Total Commercial	$	191,425	$	42,892	$	19,588	$	5,613	$	7,441	$	9,120	$	138,045	$	414,124
Total Loans
Pass	$	1,015,117	$	420,483	$	169,879	$	115,613	$	101,993	$	142,556	$	204,930	$	2,170,571
Watch		6,415		2,697		11,235		1,399		815		819		1,321		24,701
Special Mention		—		8,806		—		1,793		12,826		—		300		23,725
Substandard		13,120		1,307		810		153		211		571		1,072		17,244
Doubtful		—		—		850		—		—		—		—		850
Total	$	1,034,652	$	433,293	$	182,774	$	118,958	$	115,845	$	143,946	$	207,623	$	2,237,091

At June 30, 2021, PCD loans comprised $3.2 million of credits rated “Pass”; $9.0 million of credits rated “Watch”, NaN rated “Special Mention”, $2.7 million of credits rated “Substandard” and NaN rated “Doubtful”.

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Past-due Loans. The following tables present the Company’s loan portfolio aging analysis (excluding loans in process and deferred loan fees) as of March 31, 2022 and June 30, 2021. These tables include PCD loans, which are reported according to aging analysis after acquisition based on the Company’s standards for such classification:

	March 31, 2022
					Greater Than								Greater Than 90
	30-59 Days		60-89 Days		90 Days		Total				Total Loans		Days Past Due
(dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Receivable		and Accruing
Real Estate Loans:
Residential	$	1,573	$	105	$	563	$	2,241	$	891,766	$	894,007	$	—
Construction		—		—		—		—		131,465		131,465		—
Commercial		638		236		400		1,274		1,090,640		1,091,914		—
Consumer loans		478		80		7		565		85,665		86,230		—
Commercial loans		268		49		29		346		409,375		409,721		—
Total loans	$	2,957	$	470	$	999	$	4,426	$	2,608,911	$	2,613,337	$	—

	June 30, 2021
					Greater Than								Greater Than 90
	30-59 Days		60-89 Days		90 Days		Total				Total Loans		Days Past Due
(dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Receivable		and Accruing
Real Estate Loans:
Residential	$	312	$	364	$	613	$	1,289	$	719,927	$	721,216	$	—
Construction		—		—		30		30		134,254		134,284		—
Commercial		363		—		374		737		889,056		889,793		—
Consumer loans		195		66		84		345		77,329		77,674		—
Commercial loans		368		939		110		1,417		412,707		414,124		—
Total loans	$	1,238	$	1,369	$	1,211	$	3,818	$	2,233,273	$	2,237,091	$	—

Under the CARES Act, financial institutions have the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Loans with such modifications in effect at March 31, 2022, included $14.9 million in loans reported as current in the above table, while NaN were reported as past due. Loans with such modifications in effect at June 30, 2021, included $23.9 million in loans reported as current in the above table, while NaN were reported as past due.

At March 31, 2022 and June 30, 2021 there were 0 PCD loans that were greater than 90 days past due.

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

Collateral-dependent Loans. The following table presents the Company’s collateral dependent loans and related ACL at March 31, 2022, and June 30, 2021:

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	March 31, 2022
	Amortized cost basis of
	loans determined to be		Related allowance
	collateral dependent		for credit losses
(dollars in thousands)
Residential real estate loans
1- to 4-family residential loans	$	872	$	201
Total loans	$	872	$	201

	June 30, 2021
	Amortized cost basis of
	loans determined to be		Related allowance
	collateral dependent		for credit losses
(dollars in thousands)
Residential real estate loans
1- to 4-family residential loans	$	895	$	223
Total loans	$	895	$	223

Nonaccrual Loans. The following table presents the Company’s amortized cost basis of nonaccrual loans segmented by class of loans at March 31, 2022, and June 30, 2021. The table excludes performing TDRs.

(dollars in thousands)	March 31, 2022		June 30, 2021
Residential real estate	$	1,255	$	3,235
Construction real estate		—		30
Commercial real estate		2,373		1,914
Consumer loans		9		100
Commercial loans		245		589
Total loans	$	3,882	$	5,868

At March 31, 2022, there were no nonaccrual loans individually evaluated for which no ACL was recorded. Interest income recognized on nonaccrual loans in the three- and nine- month periods ended March 31, 2022 and 2021, was immaterial.

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

During the three- and nine- month periods ended March 31, 2022 and 2021, certain loans modified were classified as TDRs. They are shown, segregated by class, in the tables below:

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	For the three-month periods ended
	March 31, 2022			March 31, 2021
	Number of	Recorded		Number of	Recorded
(dollars in thousands)	modifications	Investment		modifications	Investment
Residential real estate	—	$	—	—	$	—
Construction real estate	—		—	—		—
Commercial real estate	—		—	—		—
Consumer loans	—		—	—		—
Commercial loans	1		185	—		—
Total	1	$	185	—	$	—

	For the nine-month periods ended
	March 31, 2022			March 31, 2021
	Number of	Recorded		Number of	Recorded
(dollars in thousands)	modifications	Investment		modifications	Investment
Residential real estate	1	$	150	1	$	93
Construction real estate	—		—	—		—
Commercial real estate	—		—	2		1,692
Consumer loans	—		—	—		—
Commercial loans	1		185	1		29
Total	2	$	335	4	$	1,814

Performing loans classified as TDRs and outstanding at March 31, 2022, and June 30, 2021, segregated by class, are shown in the table below. Nonperforming TDRs are shown as nonaccrual loans.

	March 31, 2022			June 30, 2021
	Number of	Recorded		Number of	Recorded
(dollars in thousands)	modifications	Investment		modifications	Investment
Residential real estate	11	$	3,674	1	$	895
Construction real estate	—		—	—		—
Commercial real estate	5		973	4		949
Consumer loans	—		—	—		—
Commercial loans	8		1,770	7		1,397
Total	24	$	6,417	12	$	3,241

Residential Real Estate Foreclosures. The Company may obtain physical possession of real estate collateralizing a residential mortgage loan or home equity loan via foreclosure or in-substance repossession. As of March 31, 2022 and June 30, 2021, the carrying value of foreclosed residential real estate properties as a result of obtaining physical possession was $378,000 and $622,000, respectively. In addition, as of March 31, 2022 and June 30, 2021, the Company had residential mortgage loans and home equity loans with a carrying value of $111,000 and $533,000, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process.

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Note 5:  Premises and Equipment

Following is a summary of premises and equipment:

(dollars in thousands)	March 31, 2022		June 30, 2021
Land	$	13,676	$	12,452
Buildings and improvements		63,741		56,422
Construction in progress		8		1,158
Furniture, fixtures, equipment and software		21,567		18,985
Automobiles		120		120
Operating leases ROU asset		3,835		2,770
		102,947		91,907
Less accumulated depreciation		30,694		27,830
	$	72,253	$	64,077

Leases. The Company elected certain relief options under ASU 2016-02, Leases (Topic 842), including the option not to recognize right of use asset and lease liabilities that arise from short-term leases (leases with terms of twelve months or less). The Company has 5 leased properties and numerous office equipment lease agreements in which it is the lessee, with lease terms exceeding twelve months.

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

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

	March 31, 2022		June 30, 2021
Consolidated Balance Sheet
Operating leases ROU asset	$	3,835	$	2,770
Operating leases liability	$	3,835	$	2,770

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2022		2021		2022		2021
Consolidated Statement of Income
Operating lease costs classified as occupancy and equipment expense	$	117	$	107	$	315	$	242
(includes short-term lease costs)
Supplemental disclosures of cash flow information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	92	$	80	$	261	$	205
ROU assets obtained in exchange for operating lease obligations:	$	—	$	599	$	—	$	599

-31-

At March 31, 2022, future expected lease payments for leases with terms exceeding one year were as follows:

(dollars in thousands)
2022	$	107
2023		428
2024		428
2025		420
2026		410
Thereafter		4,423
Future lease payments expected	$	6,216

The Company leases facilities it owns or portions of facilities it owns to other third parties. The Company has determined that all of these lease agreements, in terms of being the lessor, are classified as operating leases. For the three- and nine-month periods ended March 31, 2022, income recognized from these lessor agreements was $64,000 and $208,000, respectively. For the three- and nine-month periods ended March 31, 2021, income recognized from these lessor agreements was $82,000 and $238,000, respectively. Income from lessor agreements was included in net occupancy and equipment expense.

Note 6:  Deposits

Deposits are summarized as follows:

(dollars in thousands)	March 31, 2022		June 30, 2021
Non-interest bearing accounts	$	447,444	$	358,418
NOW accounts		1,166,915		925,280
Money market deposit accounts		315,837		253,614
Savings accounts		276,430		230,905
Certificates		648,280		562,586
Total Deposit Accounts	$	2,854,906	$	2,330,803

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Note 7:  Earnings Per Share

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

	Three months ended				Nine months ended
	March 31,				March 31,
(dollars in thousands except per share data)	2022		2021		2022		2021
Net income	$	9,351	$	11,458	$	34,082	$	33,491
Less: distributed earnings allocated to participating securities		(8)		(5)		(22)		(13)
Less: undistributed earnings allocated to participating securities		(33)		(35)		(118)		(91)
Net income available to common shareholders	$	9,310	$	11,418	$	33,942	$	33,387
Weighted-average common shares outstanding, including participating securities		9,060,272		9,004,034		8,948,856		9,073,545
Less: weighted-average participating securities outstanding (restricted shares)		(39,230)		(31,845)		(36,998)		(28,172)
Denominator for basic earnings per share -
Weighted-average shares outstanding		9,021,042		8,972,189		8,911,858		9,045,373
Effect of dilutive securities stock options or awards		23,004		4,026		18,488		2,579
Denominator for diluted earnings per share		9,044,046		8,976,215		8,930,346		9,047,952
Basic earnings per share available to common stockholders	$	1.03	$	1.27	$	3.81	$	3.69
Diluted earnings per share available to common stockholders	$	1.03	$	1.27	$	3.80	$	3.69

Certain option and restricted stock awards were excluded from the computation of diluted earnings per share because they were anti-dilutive, based on the average market prices of the Company’s common stock for these periods. Outstanding options and shares of restricted stock totaling 14,500 and 22,750 were excluded from the computation of diluted earnings per share for the three- and nine-month periods, respectively, ended March 31, 2022, while outstanding options and shares of restricted stock totaling 86,900 and 110,845 were excluded from the computation of diluted earnings per share for the three- and nine-month periods, respectively, ended March 31, 2021.

Note 8: Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction and various states. The Company is no longer subject to federal and state examinations by tax authorities for tax years ending June 30, 2017 and before. The Company’s Missouri income tax returns for the fiscal years ending June 30, 2016 through 2018 are under audit by the Missouri Department of Revenue. The Company recognized 0 interest or penalties related to income taxes for the periods presented.

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

	For the three-month periods ended				For the nine-month periods ended
(dollars in thousands)	March 31, 2022		March 31, 2021		March 31, 2022		March 31, 2021
Income taxes
Current	$	1,852	$	3,552	$	8,114	$	11,441
Deferred		506		(456)		1,019		(2,445)
Total income tax provision	$	2,358	$	3,096	$	9,133	$	8,996

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

(dollars in thousands)	March 31, 2022		June 30, 2021
Deferred tax assets:
Provision for losses on loans	$	7,690	$	7,626
Accrued compensation and benefits		744		826
NOL carry forwards acquired		67		147
Unrealized loss on other real estate		291		180
Unrealized loss on available for sale securities		1,822		—
Other		0		182
Total deferred tax assets		10,614		8,961
Deferred tax liabilities:
Purchase accounting adjustments		186		210
Depreciation		2,112		1,842
FHLB stock dividends		120		120
Prepaid expenses		505		283
Unrealized gain on available for sale securities		0		821
Other		1,701		1,193
Total deferred tax liabilities		4,624		4,469
Net deferred tax asset	$	5,990	$	4,492

As of March 31, 2022, the Company had approximately $306,000 and $0 in federal and state net operating loss carryforwards, respectively, which were acquired in the July 2009 acquisition of Southern Bank of Commerce, the February 2014 acquisition of Citizens State Bankshares of Bald Knob, Inc., and the April 2020 acquisition of Central Federal Savings and Loan. The amount reported is net of the IRC Sec. 382 limitation, or state equivalent, related to utilization of net operating loss carryforwards of acquired corporations. Unless otherwise utilized, the net operating losses will begin to expire in 2027.

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

	For the three-month periods ended				For the nine-month periods ended
(dollars in thousands)	March 31, 2022		March 31, 2021		March 31, 2022		March 31, 2021
Tax at statutory rate	$	2,459	$	3,056	$	9,075	$	8,922
Increase (reduction) in taxes resulting from:
Nontaxable municipal income		(80)		(117)		(273)		(327)
State tax, net of Federal benefit		32		215		501		717
Cash surrender value of Bank-owned life insurance		(61)		(57)		(179)		(320)
Tax credit benefits		(13)		(2)		(34)		(11)
Other, net		21		1		43		15
Actual provision	$	2,358	$	3,096	$	9,133	$	8,996

For the three- and nine- month periods ended March 31, 2022 and 2021, income tax expense at the statutory rate was calculated using a 21% annual effective tax rate (AETR).

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

Note 9:  401(k) Retirement Plan

The Bank has a 401(k) retirement plan that covers substantially all eligible employees. The Bank made “safe harbor” matching contributions to the Plan of up to 4% of eligible compensation, depending upon the percentage of eligible pay deferred into the plan by the employee, and also made additional, discretionary profit-sharing contributions for fiscal 2021. For fiscal 2022, the Company has maintained the safe harbor matching contribution of up to 4%, and expects to continue to make additional, discretionary profit-sharing contributions. During the three- and nine- month periods ended March 31, 2022, retirement plan expenses recognized for the Plan totaled approximately $456,000 and $1.4 million, respectively, as compared to $416,000 and $1.3 million, respectively, for the same periods of the prior fiscal year. Employee deferrals and safe harbor contributions are fully vested. Profit-sharing or other contributions vest over a period of five years.

Note 10:  Subordinated Debt

In March 2004, the Company established Southern Missouri Statutory Trust I as a statutory business trust, to issue Floating Rate Capital Securities (the “Trust Preferred Securities”). The securities mature in 2034, became redeemable after five years, and bear interest at a floating rate based on LIBOR. The securities represent undivided beneficial interests in the trust, which was established by the Company for the purpose of issuing the securities. The Trust Preferred Securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended (the “Act”) and have not been registered under the Act. The securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Southern Missouri Statutory Trust I used the proceeds from the sale of the Trust Preferred Securities to purchase Junior Subordinated Debentures (the “Debentures”) of the Company which have terms identical to the Trust Preferred Securities. At March 31, 2022, the Debentures carried an interest rate of 3.67%. The balance of the Debentures outstanding was $7.2 million at March 31, 2022 and June 30, 2021. The Company used the net proceeds from the sale of the Debentures for working capital and investment in its subsidiaries.

In connection with its October 2013 acquisition of Ozarks Legacy Community Financial, Inc. (OLCF), the Company assumed $3.1 million in floating rate junior subordinated debt securities. The debt securities had been issued in June 2005 by OLCF in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. At March 31, 2022, the current rate was 3.28%. The carrying value of the debt securities was approximately $2.7 million at March 31, 2022 and June 30, 2021.

In connection with its August 2014 acquisition of Peoples Service Company, Inc. (PSC), the Company assumed $6.5 million in floating rate junior subordinated debt securities. The debt securities had been issued in 2005 by PSC’s subsidiary bank holding company, Peoples Banking Company, in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. At March 31, 2022, the current rate was 2.63%. The carrying value of the debt securities was approximately $5.4 million and $5.3 million at March 31, 2022 and June 30, 2021, respectively.

The Company’s investment at a face amount of $505,000 in the three trusts noted above is included with Prepaid Expenses and Other Assets in the consolidated balance sheets, and is carried at a value of $460,000 at March 31, 2022.

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

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Note 11:  Fair Value Measurements

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

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

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

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

Recurring Measurements. The following table presents the fair value measurements recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2022 and June 30, 2021:

	Fair Value Measurements at March 31, 2022, Using:
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Obligations of state and political subdivisions	$	44,483	$	0	$	44,483	$	0
Corporate obligations		19,400		0		19,400		0
Other securities		445		0		445		0
MBS and CMOs		162,063		0		162,063		0

	Fair Value Measurements at June 30, 2021, Using:
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Obligations of state and political subdivisions	$	47,696	$	0	$	47,696	$	0
Corporate obligations		20,311		0		20,311		0
Other securities		672		0		672		0
MBS and CMOs		138,341		0		138,341		0

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

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

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Nonrecurring Measurements. The following tables present the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fell at March 31, 2022 and June 30, 2021:

	Fair Value Measurements at March 31, 2022, Using:
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Foreclosed and repossessed assets held for sale	$	948	$	—	$	—	$	948

	Fair Value Measurements at June 30, 2021, Using:
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Foreclosed and repossessed assets held for sale	$	280	$	—	$	—	$	280

The following table presents losses recognized on assets measured on a non-recurring basis for the three-month periods ended March 31, 2022 and 2021:

	For the three months ended
(dollars in thousands)	March 31, 2022		March 31, 2021
Foreclosed and repossessed assets held for sale	$	(435)	$	(49)
Total losses on assets measured on a non-recurring basis	$	(435)	$	(49)

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

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

Unobservable (Level 3) Inputs. The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

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					Range
	Fair value at		Valuation	Unobservable	of		Weighted-average
(dollars in thousands)	March 31, 2022		technique	inputs	inputs applied		inputs applied
Nonrecurring Measurements
Foreclosed and repossessed assets	$	948	Third party appraisal	Marketability discount	8.0% - 30.5	%	17.7	%

					Range
	Fair value at		Valuation	Unobservable	of		Weighted-average
(dollars in thousands)	June 30, 2021		technique	inputs	inputs applied		inputs applied
Nonrecurring Measurements
Foreclosed and repossessed assets	$	280	Third party appraisal	Marketability discount	7.2% - 80.6	%	37.1	%

Fair Value of Financial Instruments. The following table presents estimated fair values of the Company’s financial instruments not reported at fair value and the level within the fair value hierarchy in which the fair value measurements fell at March 31, 2022 and June 30, 2021.

	March 31, 2022
			Quoted Prices
			in Active				Significant
			Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
(dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and cash equivalents	$	248,584	$	248,584	$	—	$	—
Interest-bearing time deposits		4,828		—		4,828		—
Stock in FHLB		6,081		—		6,081		—
Stock in Federal Reserve Bank of St. Louis		5,035		—		5,035		—
Loans receivable, net		2,579,106		—		—		2,575,889
Accrued interest receivable		10,409		—		10,409		—
Financial liabilities
Deposits		2,854,906		2,206,626		—		649,093
Advances from FHLB		42,941		—		42,181		—
Accrued interest payable		869		—		869		—
Subordinated debt		23,043		—		—		23,352
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		0		—		—		—
Letters of credit		0		—		—		—
Lines of credit		0		—		—		—

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	June 30, 2021
			Quoted Prices
			in Active				Significant
			Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
(dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and cash equivalents	$	123,592	$	123,592	$	—	$	—
Interest-bearing time deposits		979		—		979		—
Stock in FHLB		5,873		—		5,873		—
Stock in Federal Reserve Bank of St. Louis		5,031		—		5,031		—
Loans receivable, net		2,200,244		—		—		2,218,762
Accrued interest receivable		10,079		—		10,079		—
Financial liabilities
Deposits		2,330,803		1,768,217		—		565,123
Advances from FHLB		57,529		—		58,587		—
Accrued interest payable		779		—		779		—
Subordinated debt		15,243		—		—		15,468
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—

Note 12: Business Combinations

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

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price for the Fortune acquisition is detailed in the following table.

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Fortune Financial Corporation
Fair Value of Consideration Transferred
(dollars in thousands)
Cash	$	12,663
Common stock, at fair value		22,885
Total consideration	$	35,548
Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	$	34,280
Interest bearing time deposits		2,300
Loans		202,053
Premises and equipment		6,516
BOLI		3,720
Identifiable intangible assets		1,602
Miscellaneous other assets		4,236
Deposits		(213,670)
FHLB Advances		(9,681)
Subordinated debt		(7,800)
Miscellaneous other liabilities		(1,214)
Total identifiable net liabilities		22,342
Goodwill	$	13,206

Of the total purchase price, $1.6 million has been allocated to core deposit intangible, and will be amortized over seven years on a straight line basis. Additionally, $13.2 million has been allocated to goodwill, and none of the purchase price is deductible. Goodwill is attributable to synergies and economies of scale expected from combining the operations of the Bank and Fortune. To the extent that management revises any of the fair value of the above fair value adjustments as a result of continuing evaluation, the amount of goodwill recorded in the acquisition will change.

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

On December 15, 2021, the Company completed its acquisition of the Cairo, Illinois, branch (“Cairo”) of First National Bank, Oldham, South Dakota. The deal resulted in Southern Bank relocating its facility from its prior location to the First National Bank location in Cairo. The Company views the acquisition and updates to the new facility as an expression of its continuing commitment to the Cairo community. For the three- and nine-month periods ended March 31, 2022, the Company incurred $26,000 and $50,000, respectively, of third-party acquisition-related costs, included in noninterest expense in the Company’s consolidated statements of income.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price for the Cairo acquisition is detailed in the following table.

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First National Bank - Cairo Branch
Fair Value of Consideration Transferred
(dollars in thousands)
Cash	$	(26,932)
Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	$	220
Loans		408
Premises and equipment		468
Identifiable intangible assets		168
Miscellaneous other assets		1
Deposits		(28,540)
Miscellaneous other liabilities		(99)
Total identifiable net liabilities		(27,374)
Goodwill	$	442

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

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

SOUTHERN MISSOURI BANCORP, INC.

General

Southern Missouri Bancorp, Inc. (Southern Missouri or Company) is a Missouri corporation and owns all of the outstanding stock of Southern Bank (the Bank). The Company’s earnings are primarily dependent on the operations of the Bank. As a result, the following discussion relates primarily to the operations of the Bank. The Bank’s deposit accounts are generally insured up to a maximum of $250,000 by the Deposit Insurance Fund (DIF), which is administered by the Federal Deposit Insurance Corporation (FDIC). At March 31, 2022, the Bank operated from its headquarters, 48 full-service branch offices, and two limited-service branch offices. The Bank owns the office building and related land in which its headquarters are located, and 45 of its other branch offices. The remaining five branches are either leased or partially owned.

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

The consolidated balance sheet of the Company as of June 30, 2021, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission.

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and accompanying notes. The following discussion reviews the Company’s condensed consolidated financial condition at March 31, 2022, and results of operations for the three- and nine-month periods ended March 31, 2022 and 2021.

Forward Looking Statements

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

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

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

● the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

● fluctuations in interest rates and in real estate values;

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

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

● our ability to access cost-effective funding;

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

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

● demand for loans and deposits in our market area;

● legislative or regulatory changes that adversely affect our business;

● changes in accounting principles, policies, or guidelines;

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

● the impact of technological changes; and

● our success at managing the risks involved in the foregoing.

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

Critical Accounting Policies

Accounting principles generally accepted in the United States of America are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. Management of the Company must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of the Company’s significant accounting policies, see “Notes to the Consolidated Financial Statements” in the Company’s 2021 Annual Report on Form 10-k. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of the Company’s Board of Directors. For a discussion of applying critical accounting policies, see “Critical Accounting Policies” beginning on page 52 in the Company’s 2021 Annual Report.

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COVID-19 Pandemic Response

Southern Missouri has remained committed to serving our communities throughout the COVID-19 pandemic, and to the safety of our team members and customers.

General operating conditions. Following an initial closure of lobbies, except by appointment, in the spring of 2020, the Company began re-opening lobbies on Monday, May 4, 2020, subject to guidance by state and local authorities. At times, some facilities were again closed to the public for a short period of time due to unavailability of team members complying with quarantine orders from local health authorities. From the initial onset of the pandemic in March 2020, the Company has worked to increase customer adoption of our online, mobile, drive-thru, or integrated teller machines (ITMs), and to improve our telework capabilities. We have had as many as 10% of our team members working remotely during the month of April 2022, either on a regular or rotating basis. No team members were furloughed throughout the pandemic. While continuing to encourage safety, the Company has relaxed restrictions on business travel, although some training events or conferences our team members would typically have attended have remained in online format. The operations of the Company’s internal controls have not been significantly impacted by changes in our work environment.

SBA Paycheck Protection Program Lending. In the first and second rounds of funding made available through the Small Business Administration’s Paycheck Protection Program (PPP), the Company originated just over 3,200 loans totaling $197.2 million through the program’s expiration on May 31, 2021. The Company has made substantial progress in processing and receiving approval from the SBA for applications by borrowers for forgiveness, and as of April 30, 2022, total Company-originated PPP loans remaining outstanding were reduced to $1.3 million, consisting of three loans. In its February 2022 acquisition of Fortune Financial Corporation (Fortune), the Company acquired additional Fortune-originated PPP loans which totaled $2.2 million, consisting of 18 loans, at April 30, 2022.

Deferrals and modifications. In the months following the onset of the pandemic, the Company adhered to regulatory guidance encouraging financial institutions to work with borrowers affected by the pandemic to defer or temporarily modify payment arrangements. Under the CARES Act and subsequent legislation, in instances where the borrower was otherwise current and performing prior to the pandemic, the Company was permitted the option of temporarily suspending certain requirements under U.S. GAAP related to troubled debt restructurings (TDRs). As of June 30, 2020, the Company had provided such relief for approximately 900 loans totaling $380.2 million. As of June 30, 2021, the number of such modifications were reduced to six loans with balances totaling $23.9 million, and as of December 31, 2021, there were four loans, with balances totaling approximately $23.7 million, remaining on interest-only payment modifications, and not reported as TDRs based on this temporary option provided under the legislation. For those borrowers whose payment terms had not yet returned to the original terms under their loan agreements, the Company had classified the credits as a “special mention” status credit as of December 31, 2021. Since that date, one of these loans totaling $9.1 million has returned to regular principal and interest payments, but remains a “special mention” credit. The other three loans, totaling $14.9 million, have not returned to principal and interest payments as of March 31, 2022, and have been adversely classified as “substandard” credits, but have not been designated as TDRs pending negotiation of a final restructuring modification. For more information regarding these modifications, see discussion included at “Allowance for Credit Loss Activity.”

Executive Summary

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

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periods is relatively small or shrinking, or an inverted yield curve, in which short term rates exceed long term rates, could have an adverse impact on our net interest income, as our interest rate spread could decrease.

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

During the first nine months of fiscal 2022, total assets increased by $563.5 million. The increase was primarily attributable to an increase in loans, net of the allowance for credit losses (ACL), along with an increase in cash and cash equivalents and investment securities. Cash equivalents and time deposits increased by a combined $128.8 million, with the Fortune acquisition contributing to the increase; AFS securities increased by $19.4 million; and loans, net of the ACL, increased by $379.3 million, with the Fortune acquisition contributing to the increase. Liabilities increased $521.7 million, as deposits increased $524.1 million, with the Fortune acquisition contributing to the increase. Advances from the Federal Home Loan Bank (FHLB) decreased $14.6 million, as maturing term advances were partially offset by advances assumed in the Fortune acquisition. Equity increased $41.7 million, attributable primarily to equity issued to Fortune shareholders, as well as earnings retained after cash dividends paid, partially offset by a decrease in accumulated other comprehensive income (loss) and by repurchases of the Company’s common stock.

Net income for the first nine months of fiscal 2022 was $34.1 million, an increase of $591,000, or 1.8% as compared to the same period of the prior fiscal year. Compared to the year-ago period, the Company’s increase in net income was the result of an increase in net interest income and reduction in provision for credit losses (PCL), partially offset by increases in noninterest expense and provision for income taxes, and a decrease in noninterest income. Diluted net income was $3.80 per common share for the first nine months of fiscal 2022, as compared to $3.69 per common share for the same period of the prior fiscal year. For the first nine months of fiscal 2022, as compared to the same period of the prior fiscal year, net interest income increased $7.1 million, or 10.3%; PCL decreased $344,000, or 21.6%; noninterest expense increased $6.2 million, or 15.6%; provision for income tax increased $137,000, or 1.5%; and noninterest income decreased $482,000, or 3.2%. For more information see “Results of Operations.”

Interest rates during the first nine months of fiscal 2022 increased from historical lows, moving notably higher late in the period. By the end of the period, there was relatively little difference in available yield for US Treasury securities maturing in three to thirty years, reflecting market assumptions that the Federal Open Market Committee (FOMC) of the Federal Reserve will rapidly increase rates over the coming quarters, slowing longer-term economic growth and restraining inflation. At March 31, 2022, as compared to June 30, 2021, the yield on two-year Treasuries increased from 0.25% to 2.28%; the yield on five-year Treasuries increased from 0.87% to 2.42%; the yield on ten-year Treasuries increased from 1.45% to 2.32%; and the yield on 30-year Treasuries increased from 2.06% to 2.44%. The spread between two- and ten-year Treasuries was between 100 and 120 basis points for the first five months of the fiscal year-to-date, before steadily declining to less than 10 basis points by the final days of March 2022.

As compared to the first nine months of the prior fiscal year, our average yield on earning assets decreased by 29 basis points, reflecting a larger percentage of our average interest-earning asset balances being comprised of lower-yielding cash deposits and AFS investments, along with downward repricing of our interest-earning assets in the interest rate environment present over the first nine months of the fiscal year. Accelerated recognition of deferred origination fees on PPP loans partially offset lower market yields on new loan originations. Our cost of interest-bearing liabilities decreased by 30 basis points, as the Company continued to offer reduced rates on nonmaturity accounts and renewing time deposits. Time deposits and wholesale funding, which are relatively higher cost sources of funding, declined as a percentage of our funding base. Lower market rates continued to reflect the policy of the FOMC, which held short-term borrowing rates near zero from March 2020 through March 2022, as the FOMC reacted to reduced economic activity at the outset of the COVID-19 pandemic, but has now begun to take steps to remove this extraordinary stimulus (see “Results of Operations: Comparison of the nine-month periods ended March 31, 2022 and 2021 – Net Interest Income”). Planned increases in overnight funding costs by the FOMC may pressure the Company’s cost of funds over the medium-term, while a flattening yield curve may reduce the spread between our assets, which generally price off longer term rates, and our liabilities, which generally price off shorter term rates. Additionally, the Company’s margin may be negatively impacted by the pace of increases by the FOMC, as the Company may be required to adjust deposit pricing more quickly than our loans mature or prepay, depending on the actions of competitors.

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Net interest income increased $7.1 million, or 10.3%, in the first nine months of the fiscal year, as compared to the same period of the prior year, as the Company saw an increase of 11.3% in average interest earning assets, partially offset by a decrease of four basis points in net interest margin. The decrease in margin was attributable primarily to the increased percentage of earning assets held in cash deposits and AFS investments and was offset in part by the accelerated accretion of deferred origination fees on PPP loans as we continued to receive forgiveness payments from the SBA during the period. This acceleration added approximately $3.2 million to interest income, contributing approximately 16 basis points to the net interest margin; in the same period a year ago, accelerated accretion of these deferred PPP origination fees added approximately $2.1 million to interest income as forgiveness payments were received, contributing approximately 12 basis points to the net interest margin. Accretion of deferred fees on PPP loans will be limited in future periods, as the remaining balance of such fees totaled just $137,000 at March 31, 2022. The accretion of discounts on acquired loans carried at fair value resulted in limited change to the net interest margin, as benefits attributable to the accretion of discounts on acquired loans (partially offset by the accretion of discounts on assumed time deposits) resulted in a contribution of six basis points to the net interest margin in the current period, as compared to eight basis points in the none-month period a year ago.

The Company’s net income is also affected by the level of its noninterest income and noninterest expenses. Noninterest income generally consists primarily of deposit account service charges, bank card interchange income, loan-related fees, earnings on bank-owned life insurance, gains on sales of loans, and other general operating income. Noninterest expenses consist primarily of compensation and employee benefits, occupancy-related expenses, deposit insurance assessments, professional fees, advertising, postage and office expenses, insurance, the amortization of intangible assets, and other general operating expenses. During the nine-month period ended March 31, 2022, noninterest income decreased $482,000, or 3.2%, as compared to the same period of the prior fiscal year, attributable primarily to reduced gains realized on sales of residential loans originated for that purpose, loan servicing income, and earnings on bank-owned life insurance, partially offset by increases in other income items, including wealth management revenues and a gain realized on the Company’s exit from a renewable energy tax credit investment, as well as increases in deposit account service charges, bank card interchange income, and other loan fees. Noninterest expense for the nine-month period ended March 31, 2022, increased $6.2 million, or 15.6%, as compared to the same period of the prior fiscal year. The increase was attributable primarily to increases in compensation and benefits, data processing charges, occupancy expenses, charges related to foreclosed property, and other expenses. Included in noninterest expense during the nine months ended March 31, 2022, was $1.3 million related to merger and acquisition activity, with no such material charges in the year ago period.

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

Comparison of Financial Condition at March 31, 2022 and June 30, 2021

The Company experienced balance sheet growth in the first nine months of fiscal 2022, with total assets of $3.3 billion at March 31, 2022, reflecting an increase of $563.5 million, or 20.9%, as compared to June 30, 2021. Growth primarily reflected an increase in net loans receivable combined with an increase in cash and cash equivalents. A significant portion of the Company’s balance sheet growth was a result of the Fortune merger.

Cash equivalents and time deposits were a combined $253.4 million at March 31, 2022, an increase of $128.8 million, or 103.4%, as compared to June 30, 2021. The increase was primarily a result of deposit growth outpacing loan growth during the period, including net cash acquired in the Fortune merger.

AFS securities were $226.4 million at March 31, 2022, an increase of $19.4 million, or 9.4%, as compared to June 30, 2021, as the Company deployed some excess liquidity into higher-yielding assets. AFS categories noting increases

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primarily included collateralized mortgage obligations and commercial mortgage-backed securities issued by government sponsored entities, partially offset by a decrease in obligations of state and political subdivisions.

Loans, net of the allowance for credit losses (ACL), were $2.6 billion at March 31, 2022, an increase of $378.9 million, or 17.2%, as compared to June 30, 2021. Gross loans increased by $379.3 million, while the ACL attributable to outstanding loan balances increased by $419,000. The increase in loan balances was primarily attributable to the Fortune merger, which included loan balances recorded at a fair value of $202.1 million. Inclusive of the acquisition, the loan portfolio shows fiscal year-to-date increases in commercial and residential real estate loans, along with a modest contribution from consumer loans, partially offset by decreases in commercial loans and drawn balances on construction loans. Residential real estate loan balances increased due to growth in single- and multi-family loans. Commercial real estate balances increased primarily from loans secured by nonresidential structures, along with growth in loans secured by farmland. Commercial loan balances decreased primarily due to lower balances in agricultural loans, partially offset by increased commercial and industrial lending. Company-originated PPP loan balances declined by $58.8 million during the fiscal year to date, while $2.4 million was acquired in the Fortune merger. Total remaining PPP balances at March 31, 2022, were $6.6 million, while unrecognized deferred fee income on these loans was approximately $137,000 at that date. Management hopes to receive forgiveness payments on all remaining PPP loans by our June 30 fiscal year end. Substantially all outstanding balances are from the second round of the PPP programs.

Loans anticipated to fund in the next 90 days totaled $181.9 million at March 31, 2022, as compared to $158.2 million at December 31, 2021, and $145.8 million at March 31, 2021.

Deposits were $2.9 billion at March 31, 2022, an increase of $524.1 million, or 22.5%, as compared to June 30, 2021. This increase was attributable in part to the February 2022 Fortune merger, providing $218.3 million in deposits at fair value, including $13.6 million in brokered time deposits and $10.9 million in public unit deposits. Additionally, we closed a branch acquisition in December 2021, through which the Company acquired the former Cairo, Illinois, location of the First National Bank (Fulda, SD), and its related deposits of $28.5 million at fair value, including $15.4 million in public unit deposits. Inclusive of the merger and branch acquisition, the deposit portfolio saw fiscal year-to-date increases in interest-bearing transaction accounts, non-interest bearing transaction accounts, certificates of deposit, money market deposit accounts, and savings accounts. The increase was inclusive of a $131.5 million increase in public unit funds, and a $5.9 million increase in brokered deposits. Public unit funds totaled $458.0 million at March 31, 2022, primarily in nonmaturity deposits, while brokered deposits totaled $30.9 million, also primarily in nonmaturity deposits. The Company’s customers have held unusually high balances on deposit during recent periods. The Company expects that some of the higher-than-normal balances may dissipate over the course of calendar year 2022, but public unit balances, which historically have seen seasonal declines in the June and September quarters, are expected to continue to increase in the current calendar year. The average loan-to-deposit ratio for the third quarter of fiscal 2022 was 91.3%, as compared to 92.4% for the same period of the prior fiscal year.

FHLB advances were $42.9 million at March 31, 2022, a decrease of $14.6 million, or 25.4%, as compared to June 30, 2021, as the Company utilized cash to repay maturing term advances, partially offset by the assumption, at fair value, of $9.7 million in term advances in the Fortune merger.

The Company’s stockholders’ equity was $325.2 million at March 31, 2022, an increase of $41.7 million, or 14.7%, as compared to June 30, 2021. The increase was attributable primarily to $22.9 million in equity issued to Fortune shareholders, as well as earnings retained after cash dividends paid, partially offset by a $9.4 million reduction in accumulated other comprehensive income (loss) as the market value of the Company’s investments declined as market interest rates increased, and by $1.2 million utilized for repurchases of 26,607 shares of the Company’s common stock during the first nine months of the fiscal year, at an average price of $44.15.

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

March 31, 2022 and 2021

The table below presents certain information regarding our financial condition and net interest income for the three- and nine-month periods ended March 31, 2022 and 2021. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. Yields on tax-exempt obligations were not computed on a tax equivalent basis.

	Three-month period ended							Three-month period ended
	March 31, 2022							March 31, 2021
(dollars in thousands)	Average			Interest and		Yield/		Average			Interest and		Yield/
	Balance			Dividends		Cost (%)		Balance			Dividends		Cost (%)
Interest-earning assets:
Mortgage loans (1)	$	2,010,318			22,094	4.40			1,676,469			21,068	5.03
Other loans (1)		451,048			4,966	4.40			469,895			4,937	4.20
Total net loans		2,461,366			27,060	4.40			2,146,364			26,005	4.85
Mortgage-backed securities		149,527			646	1.73			121,453			466	1.54
Investment securities (2)		77,416			524	2.71			76,531			559	2.92
Other interest-earning assets		199,754			109	0.22			171,403			70	0.16
TOTAL INTEREST- EARNING ASSETS (1)		2,888,063			28,339	3.92			2,515,751			27,100	4.31
Other noninterest-earning assets (3)		188,549			—				170,301			—
TOTAL ASSETS	$	3,076,612		$	28,339			$	2,686,052		$	27,100
Interest-bearing liabilities:
Savings accounts	$	263,192			171	0.26			207,664			135	0.26
NOW accounts		1,137,278			1,288	0.45			905,816			1,286	0.57
Money market accounts		281,949			213	0.30			243,877			178	0.29
Certificates of deposit		591,868			1,199	0.81			607,833			1,895	1.25
TOTAL INTEREST- BEARING DEPOSITS		2,274,287			2,871	0.50			1,965,190			3,494	0.71
Borrowings:
FHLB advances		39,114			167	1.71			63,068			325	2.06
Junior subordinated debt		19,170			187	3.90			15,205			132	3.48
TOTAL INTEREST- BEARING LIABILITIES		2,332,571			3,225	0.55			2,043,463			3,951	0.77
Noninterest-bearing demand deposits		421,898			—				357,746			—
Other liabilities		8,345			—				14,221			—
TOTAL LIABILITIES		2,762,814			3,225				2,415,430			3,951
Stockholders’ equity		313,798			—				270,622			—
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	3,076,612		$	3,225			$	2,686,052		$	3,951
Net interest income				$	25,114						$	23,149
Interest rate spread (4)						3.37	%						3.54	%
Net interest margin (5)						3.48	%						3.68	%
Ratio of average interest-earning assets to average interest-bearing liabilities		123.81	%						123.11	%

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

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

(3) Includes average balances for fixed assets and BOLI of $67.6 million and $45.8 million, respectively, for the three-month period ended March 31, 2022, as compared to $63.8 million and $43.4 million, respectively, for the same period of the prior fiscal year.

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

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

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	Nine- month period ended							Nine- month period ended
	March 31, 2022							March 31, 2021
(dollars in thousands)	Average			Interest and		Yield/		Average			Interest and		Yield/
	Balance			Dividends		Cost (%)		Balance			Dividends		Cost (%)
Interest earning assets:
Mortgage loans (1)	$	1,881,354			66,383	4.70			1,650,541			62,900	5.08
Other loans (1)		463,846			15,231	4.38			511,619			15,837	4.13
Total net loans		2,345,200			81,614	4.64			2,162,160			78,737	4.86
Mortgage-backed securities		141,756			1,833	1.72			118,393			1,479	1.67
Investment securities (2)		77,232			1,608	2.78			69,723			1,568	3.00
Other interest earning assets		136,632			239	0.25			77,362			159	0.27
Total interest earning assets (1)		2,700,820			85,294	4.21			2,427,638			81,943	4.50
Other noninterest earning assets (3)		177,644			—				171,677			—
Total assets	$	2,878,464		$	85,294			$	2,599,315		$	81,943
Interest bearing liabilities:
Savings accounts	$	246,459			476	0.26		$	195,516			418	0.28
NOW accounts		1,031,130			3,606	0.47			836,917			3,764	0.60
Money market deposit accounts		265,109			573	0.29			238,701			659	0.37
Certificates of deposit		567,925			3,771	0.89			634,770			6,907	1.45
Total interest bearing deposits		2,110,623			8,426	0.53			1,905,904			11,748	0.82
Borrowings:
FHLB advances		44,278			613	1.84			67,777			1,052	2.07
Subordinated debt		16,569			447	3.60			15,180			403	3.55
Total interest bearing liabilities		2,171,470			9,486	0.58			1,988,861			13,203	0.89
Noninterest bearing demand deposits		397,718			—				333,278			—
Other noninterest bearing liabilities		9,521			—				13,971			—
Total liabilities		2,578,709			9,486				2,336,110			13,203
Stockholders’ equity		299,755			—				263,205			—
Total liabilities and stockholders' equity	$	2,878,464		$	9,486			$	2,599,315		$	13,203
Net interest income				$	75,808						$	68,740
Interest rate spread (4)						3.63	%						3.61	%
Net interest margin (5)						3.74	%						3.78	%
Ratio of average interest-earning assets to average interest-bearing liabilities		124.38	%						122.06	%

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

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

(3) Includes average balances for fixed assets and BOLI of $66.0 million and $44.6 million, respectively, for the nine-month period ended March 31, 2022, as compared to $64.4 million and $43.4 million, respectively, for the same period of the prior fiscal year.

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

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

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Rate/Volume Analysis

The following tables sets forth the effects of changing rates and volumes on the Company’s net interest income for the three- and nine-month periods ended March 31, 2022, compared to the three- and nine-month periods ended March 31, 2021. Information is provided with respect to (i) effects on interest income and expense attributable to changes in volume (changes in volume multiplied by the prior rate), (ii) effects on interest income and expense attributable to change in rate (changes in rate multiplied by prior volume), and (iii) changes in rate/volume (change in rate multiplied by change in volume).

	Three-month period ended March 31, 2022
	Compared to three-month period ended March 31, 2021
	Increase (Decrease) Due to
					Rate/
(dollars in thousands)	Rate		Volume		Volume		Net
Interest-earning assets:
Loans receivable (1)	$	(2,408)	$	3,816	$	(353)	$	1,055
Mortgage-backed securities		59		108		13		180
Investment securities (2)		(41)		6		—		(35)
Other interest-earning deposits		24		12		3		39
Total net change in income on interest-earning assets		(2,366)		3,942		(337)		1,239
Interest-bearing liabilities:
Deposits		(918)		343		(48)		(623)
FHLB advances		16		35		4		55
Subordinated debt		(55)		(123)		20		(158)
Total net change in expense on interest-bearing liabilities		(957)		255		(24)		(726)
Net change in net interest income	$	(1,409)	$	3,687	$	(313)	$	1,965

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

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

	Nine Months Ended March 31, 2022
	Compared to nine-month period ended March 31, 2021
	Increase (Decrease) Due to
					Rate/
(dollars in thousands)	Rate		Volume		Volume		Net
Interest-earning assets:
Loans receivable (1)	$	(3,698)	$	7,317	$	(742)	$	2,877
Mortgage-backed securities		52		292		10		354
Investment securities (2)		(117)		169		(12)		40
Other interest-earning deposits		(24)		122		(18)		80
Total net change in income on interest-earning assets		(3,787)		7,900		(762)		3,351
Interest-bearing liabilities:
Deposits		(3,704)		327		55		(3,322)
FHLB advances		(114)		(365)		40		(439)
Subordinated debt		6		37		1		44
Total net change in expense on interest-bearing liabilities		(3,812)		(1)		96		(3,717)
Net change in net interest income	$	25	$	7,901	$	(858)	$	7,068

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

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

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Results of Operations – Comparison of the three-month periods ended March 31, 2022 and 2021

General. Net income for the three-month period ended March 31, 2022, was $9.4 million, a decrease of $2.1 million, or 18.4%, as compared to the same period of the prior fiscal year. The decrease was attributable to increases in noninterest expense and PCL, partially offset by increases in net interest income and noninterest income, and by a decrease in provision for income taxes.

For the three-month period ended March 31, 2022, basic and fully-diluted net income per share available to common shareholders was $1.03 under both measures, as compared to $1.27 under both measures for the same period of the prior fiscal year, which represented a decrease of $0.24, or 18.9%. Our annualized return on average assets for the three-month period ended March 31, 2022, was 1.22%, as compared to 1.71% for the same period of the prior fiscal year. Our return on average common stockholders’ equity for the three-month period ended March 31, 2022, was 11.9%, as compared to 16.9% in the same period of the prior fiscal year.

Net Interest Income. Net interest income for the three-month period ended March 31, 2022, was $25.1 million, an increase of $2.0 million, or 8.5%, as compared to the same period of the prior fiscal year. The increase was attributable to a 14.8% increase in the average balance of interest-earning assets, partially offset by a decrease in net interest margin to 3.48% in the current three-month period, from 3.68% in the same period a year ago. As PPP loan forgiveness declined, the Company’s accelerated accretion of interest income from deferred origination fees on these loans was reduced to $180,000 in the current quarter, which added two basis points to the net interest margin, as compared to $1.2 million in the same quarter a year ago, which added 18 basis points to the net interest margin in that period. In the linked quarter, ended December 31, 2021, accelerated accretion of deferred PPP origination fees totaled $890,000, adding 13 basis points to the net interest margin. The remaining balance of deferred origination fees is significantly less than the amount accreted in recent quarters.

Loan discount accretion and deposit premium amortization related to the Company’s acquisitions dating back to 2014, including most notably the November 2018 acquisition of First Commercial Bank and the February 2022 acquisition of Fortune, resulted in $448,000 in net interest income for the three-month period ended March 31, 2022, as compared to $614,000 in net interest income for the same period a year ago. This component of net interest income contributed six basis points to net interest margin in the three-month period ended March 31, 2022, as compared to a contribution of ten basis points in the same period of the prior fiscal year, and a six basis point contribution in the linked quarter, ended December 31, 2021, when net interest margin was 3.77%.

For the three-month period ended March 31, 2022, our net interest rate spread was 3.37%, as compared to 3.54% in the year-ago period. The decrease in net interest rate spread, compared to the same period a year ago, resulted from a 39 basis point decrease in the average yield on interest-earning assets, partially offset by a 22 basis point decrease in the average cost of interest-bearing liabilities.

Interest Income. Total interest income for the three-month period ended March 31, 2022, was $28.3 million, an increase of $1.2 million, or 4.6%, as compared to the same period of the prior fiscal year. The increase was attributed to a 14.8% increase in the average balance of interest-earning assets, partially offset by a 39 basis point decrease in the average yield earned on interest-earning assets, as compared to the same period of the prior fiscal year. Increased average interest-earning balances were attributable primarily to growth in the loan portfolio, while average investment balances also increased, and average cash and equivalent balances increased at a modestly more substantial rate in percentage terms. The decrease in the average yield on interest-earning assets was attributable primarily to loans originated and renewed at lower market yields, adjustable-rate loans which re-priced at lower rates, the composition of our average interest-earning asset balances shifting to include a modestly higher proportion of cash and cash equivalents, as well as a reduced impact from accelerated accretion of interest income from deferred origination fees on PPP loans and accretable yield on acquired loan portfolios.

Interest Expense. Total interest expense for the three-month period ended March 31, 2022, was $3.2 million, a decrease of $726,000, or 18.4%, as compared to the same period of the prior fiscal year. The decrease was attributable to a 22 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a 14.1% increase in the average balance of interest-bearing liabilities, as compared to the same period of the prior fiscal year. The decrease in the average

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cost of interest-bearing liabilities was attributable primarily to the Company’s reduction in rates offered on certificates of deposit, nonmaturity accounts, and wholesale funding, and a decline in the percentage of our interest-bearing liabilities comprised of time deposits and wholesale funding. Increased average interest-bearing balances were attributable primarily to increases in interest-bearing transaction accounts, savings accounts, and money market deposit accounts, partially offset by lower FHLB borrowings and certificate of deposit balances.

Provision for Credit Losses. The Company recorded a PCL of $1.6 million in the three-month period ended March 31, 2022, as compared to a negative PCL of $409,000 in the same period of the prior fiscal year. The allowance for credit losses (ACL) required for purchased credit deteriorated (PCD) loans acquired in the Fortune merger was $120,000, and was funded through purchase accounting adjustments, while the ACL required for non-PCD loans acquired in the Fortune merger was $1.9 million, and was funded through a charge to provision for credit losses (PCL). Additionally, the allowance for off-balance sheet credit exposures was increased by $120,000 due to the Fortune merger and funded through a charge to PCL. Exclusive of the charges required as a result of the Fortune merger, the Company would have recorded a negative PCL of approximately $468,000 in the current quarter. The Company assesses that the economic outlook has modestly improved as compared to the assessment as of June 30, 2021, though uncertainty remains as noted in our discussion of the ACL. As a percentage of average loans outstanding, the Company recorded net charge offs of 0.01% (annualized) during the current period. During the same period of the prior fiscal year, the Company recorded net charge offs of 0.05% (annualized), while the negative PCL represented a recovery of 0.08% (annualized). (See “Critical Accounting Policies”, “Allowance for Credit Loss Activity” and “Nonperforming Assets”).

Noninterest Income. Noninterest income for the three-month period ended March 31, 2022, was $4.9 million, an increase of $380,000, or 8.4%, as compared to the same period of the prior fiscal year. In the current period, increases in other noninterest income, other loan fees, and deposit account service charges were partially offset by reduced gains realized on the sale of residential real estate loans originated for that purpose and loan servicing fees. Other income improved primarily from wealth management and insurance agency production, boosted in part by a non-recurring payment of $152,000 to assist in bringing on new advisors from the Fortune merger. Other loan fees increased on increased applications and prepayment charges. Deposit service charges increased primarily due to an increase in NSF activity as compared to the year ago period. Origination of residential real estate loans for sale on the secondary market was down 71.4% as compared to the year ago period, as both refinancing and purchase activity declined, resulting in a decrease in both gains on sale of these loans and recognition of new mortgage servicing rights.

Noninterest Expense. Noninterest expense for the three-month period ended March 31, 2022, was $16.8 million, an increase of $3.2 million, or 23.9%, as compared to the same period of the prior fiscal year. The increase included $1.1 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, data processing expenses, occupancy expenses, and other noninterest expenses. The increase in compensation and benefits as compared to the prior year period primarily reflected increases in compensation and benefits over the prior year, one-time compensation attributable to the Fortune merger, increased headcount for part of the current quarter resulting from the merger, 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 merger. Occupancy expenses increased due to remodeled and relocated facilities, facilities added through the Fortune merger, 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 merger-related expenses, expenses related to loan originations, and expenses related to employee travel and training.

The efficiency ratio for the three-month period ended March 31, 2022, was 55.8%, as compared to 49.0% in the same period of the prior fiscal year, with the change attributable primarily to the current period’s increase in noninterest expense, partially offset by increases in net interest income and noninterest income.

Income Taxes. The income tax provision for the three-month period ended March 31, 2022, was $2.4 million, a decrease of $738,000, or 23.8% as compared to the same period of the prior fiscal year. This was primarily the result of the decline in pre-tax income, coupled with a decrease in the effective tax rate to 20.1%, as compared to 21.3% in the

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same period a year ago. The decrease in the effective tax rate was attributed to the reduction in pre-tax income, while tax-advantaged investments remained relatively steady.

Results of Operations – Comparison of the nine-month periods ended March 31, 2022 and 2021

General. Net income for the nine-month period ended March 31, 2022, was $34.1 million, an increase of $591,000, or 1.8%, as compared to the same period of the prior fiscal year. The increase was attributable to an increase in net interest income and a decrease in PCL, partially offset by increases in noninterest expense and provision for income taxes, along with a decrease in noninterest income.

For the nine-month period ended March 31, 2022, basic and fully-diluted net income per share available to common shareholders was $3.81 and $3.80, respectively, as compared to $3.69 under both measures in the same period of the prior fiscal year, which represented increases of $0.12, or 3.3%, and $0.11, or 3.0%, respectively. Our annualized return on average assets for the nine-month period ended March 31, 2022, was 1.58%, as compared to 1.72% for the same period of the prior fiscal year. Our return on average common stockholders’ equity for the nine-month period ended March 31, 2022, was 15.2%, as compared to 17.0% in the same period of the prior fiscal year.

Net Interest Income. Net interest income for the nine-month period ended March 31, 2022, was $75.8 million, an increase of $7.1 million, or 10.3%, as compared to the same period of the prior fiscal year. The increase was attributable to an 11.3% increase in the average balance of interest-earning assets, partially offset by a decrease in net interest margin to 3.74% in the current nine-month period, from 3.78% in the same period a year ago. The decrease was attributable primarily to the increased percentage of earning assets held in cash deposits and AFS investments, and was offset in part by the accelerated accretion of deferred origination fees on PPP loans as we continued to receive forgiveness payments from the SBA during the period. This acceleration added approximately $3.2 million to interest income, contributing approximately 16 basis points to the net interest margin; in the same period a year ago, accelerated accretion of these deferred PPP origination fees added approximately $2.1 million to interest income as forgiveness payments were received, contributing approximately 12 basis points to the net interest margin. The remaining balance of deferred origination fees is significantly less than the amount accreted in recent quarters.

Loan discount accretion and deposit premium amortization related to the Company’s acquisitions dating back to 2014, including most notably the November 2018 acquisition of First Commercial Bank, resulted in $1.2 million in net interest income for the nine-month period ended March 31, 2022, as compared to $1.5 million in net interest income for the same period a year ago. This component of net interest income contributed six basis points to net interest margin in the nine-month period ended March 31, 2022, as compared to a contribution of eight basis points in the same period of the prior fiscal year.

For the nine-month period ended March 31, 2022, our net interest rate spread was 3.63%, as compared to 3.61% in the year-ago period. The increase in net interest rate spread, compared to the same period a year ago, resulted from a 31 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a 29 basis point decrease in the average yield on interest-earning assets.

Interest Income. Total interest income for the nine-month period ended March 31, 2022, was $85.3 million, an increase of $3.4 million, or 4.1%, as compared to the same period of the prior fiscal year. The increase was attributed to an 11.3% increase in the average balance of interest-earning assets, partially offset by a 29 basis point decrease in the average yield earned on interest-earning assets, as compared to the same period of the prior fiscal year. Increased average interest-earning balances were attributable primarily to growth in the loan portfolio, while average investment balances increased at a faster pace, and average cash and equivalent balances increased at a substantial rate, accounting for an unusually significant percentage of overall interest-earning asset growth. The decrease in the average yield on interest-earning assets was attributable to the composition of our average interest-earning asset balances shifting to include a higher proportion of cash and cash equivalents and investment securities, loans originated and renewed at lower market yields, adjustable-rate loans which re-priced at lower rates, lower reinvestment yields available for the AFS securities portfolio, and lower yields on cash and cash equivalents, partially offset by an increase in the amount of interest income recognized on the accelerated accretion of deferred origination fees on PPP loans.

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Interest Expense. Total interest expense for the nine-month period ended March 31, 2022, was $9.5 million, a decrease of $3.7 million, or 28.2%, as compared to the same period of the prior fiscal year. The decrease was attributable to a 30 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a 9.2% increase in the average balance of interest-bearing liabilities, as compared to the same period of the prior fiscal year. The decrease in the average cost of interest-bearing liabilities was attributable primarily to the Company’s reduction in rates offered on certificates of deposit and nonmaturity accounts, and a decline in the percentage of our interest-bearing liabilities comprised of time deposits and wholesale funding. Increased average interest-bearing balances were attributable primarily to increases in interest-bearing transaction accounts, savings accounts, and money market deposit accounts, partially offset by lower certificate of deposit balances and FHLB balances.

Provision for Credit Losses. The Company recorded a PCL of $1.2 million in the nine-month period ended March 31, 2022, as compared to $1.6 million in the same period of the prior fiscal year. The allowance for credit losses (ACL) required for purchased credit deteriorated (PCD) loans acquired in the Fortune merger was $120,000, and was funded through purchase accounting adjustments, while the ACL required for non-PCD loans acquired in the Fortune merger was $1.9 million, and was funded through a charge to provision for credit losses (PCL). Additionally, the allowance for off-balance sheet credit exposures was increased by $120,000 due to the Fortune merger and funded through a charge to PCL. Exclusive of the charges required as a result of the Fortune merger, the Company would have recorded a negative PCL of approximately $773,000 in the nine-month period ended March 31, 2022. The Company assesses that the economic outlook has modestly improved as compared to the assessment as of June 30, 2021, though uncertainty remains as noted in our discussion of the ACL. As a percentage of average loans outstanding, the Company recorded net charge offs of less than one basis point (annualized) during the current nine-month period. During the same period of the prior fiscal year, the Company recorded net charge offs of 0.04% (annualized), while the PCL represented a charge of 0.10% (annualized). (See “Critical Accounting Policies”, “Allowance for Credit Loss Activity” and “Nonperforming Assets”).

Noninterest Income. Noninterest income for the nine-month period ended March 31, 2022, was $14.7 million, a decrease of $482,000, or 3.2%, as compared to the same period of the prior fiscal year. In the current period, decreases in gains realized on the sale of residential real estate loans originated for that purpose, earnings on bank-owned life insurance, and loan servicing fees were partially offset by increases in other noninterest income, deposit account service charges, other loan fees, and bank card interchange income. Origination of residential real estate loans for sale on the secondary market was down 71.0% as compared to the year ago period, as both refinancing and purchase activity declined, resulting in a decrease in both gains on sale of these loans and recognition of new mortgage servicing rights. Earnings on bank-owned life insurance decreased as a result of the inclusion in the same period of the prior year of a non-recurring benefit of $696,000. Other income improved as wealth management income increased by $863,000 compared to the same period a year ago, primarily due to an individually significant sale of an annuity in the second quarter of the current fiscal year, a non-recurring payment to assist in bringing on new advisors from the Fortune merger, and growth in assets under management. Other income also increased due to a benefit of $278,000 recognized on the Company’s exit from a renewable energy tax credit investment. Deposit service charges increased primarily due to an increase in NSF activity as compared to the year ago period. Bank card interchange income increased due to a 9.7% increase in the number of bank card transactions and a 15.4% increase in bank card dollar volume, as compared to the same quarter a year ago.

Noninterest Expense. Noninterest expense for the nine-month period ended March 31, 2022, was $46.0 million, an increase of $6.2 million, or 15.6%, as compared to the same period of the prior fiscal year. The increase included $1.3 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, data processing expenses, occupancy expenses, charges related to foreclosed property, and other noninterest expenses. The increase in compensation and benefits as compared to the prior year period primarily reflected increases in compensation and benefits over the prior year, a modest trend increase in legacy employee headcount aside from the Fortune acquisition, increases in commission payments resulting from improved revenue generation by the growing wealth management and insurance operations, one-time compensation attributable to the Fortune merger, and increased headcount for part of the current period resulting from the merger. 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 merger, as well as due to growth in our legacy operations and resulting

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increases in core processing charges, ancillary software licensing, and network security expenses. Occupancy expenses increased due to remodeled and relocated facilities, a de novo facility, new ATM and ITM installations and other equipment purchases, and charges for maintenance of facilities and grounds, and facilities added late in the current period through the Fortune merger. Other noninterest expenses increased due to miscellaneous merger-related expenses, expenses related to employee travel and training, and expenses related to loan and deposit services.

The efficiency ratio for the nine-month period ended March 31, 2022, was 50.9%, as compared to 47.5% in the same period of the prior fiscal year, with the change attributable to the current period’s increase in noninterest expense, combined with a decline in noninterest income, partially offset by an increase in net interest income.

Income Taxes. The income tax provision for the nine-month period ended March 31, 2022, was $9.1 million, an increase of $137,000, or 1.5% as compared to the same period of the prior fiscal year. The increase was the result of an increase in pre-tax income, partially offset by a decrease in the effective tax rate to 21.1%, as compared to 21.2% in the same period a year ago.

Allowance for Credit Loss Activity

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

Although the Company maintains its ACL at a level that it considers sufficient to provide for losses, there can be no assurance that future losses will not exceed internal estimates. In addition, the amount of the ACL is subject to review by regulatory agencies, which can order the Company to record additional allowances. The required ACL has been estimated based upon the guidelines in ASC Topic 326, Financial Instruments – Credit Losses, following the July 1, 2020 adoption of ASU 2016-13, also known as the current expected credit loss, or CECL, standard.

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

•Changes in lending policies and/or loan review system

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

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

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

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

•Concentrations of credit

•Changes in collateral values

•Agricultural economic conditions

•Risks from regulatory, legal, or competitive factors

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The following table summarizes changes in the ACL over the three- and nine-month periods ended March 31, 2022 and 2021:

	For the three months ended				For the nine months ended
	March 31,				March 31,
(dollars in thousands)	2022		2021		2022		2021
Balance, beginning of period	$	32,529	$	35,471	$	33,222	$	25,139
Impact of CECL adoption		—		—		—		9,333
Initial ACL on PCD loans		120		—		120		—
Loans charged off:
Residential real estate		(30)		(68)		(62)		(178)
Construction		—		—		—		—
Commercial business		(6)		(42)		(17)		(276)
Commercial real estate		—		(91)				(90)
Consumer		(32)		(57)		(57)		(130)
Gross charged off loans		(68)		(258)		(136)		(674)
Recoveries of loans previously charged off:
Residential real estate		2		1		3		1
Construction		—		—		—		—
Commercial business		—		7		2		26
Commercial real estate		—		—		—		1
Consumer		6		6		57		16
Gross recoveries of charged off loans		8		14		62		44
Net charge offs		(60)		(244)		(74)		(630)
Provision charged to expense		1,052		—		373		1,385
Balance, end of period	$	33,641	$	35,227	$	33,641	$	35,227

Our ACL at March 31, 2022, totaled $33.6 million, representing 1.29% of gross loans and 867% 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. The ACL also represents 1.29% of gross loans excluding PPP loans at March 31, 2022, as compared to 1.53% at June 30, 2021. For the nine-month period ended March 31, 2022, the ACL was increased by $419,000 and the allowance for off-balance sheet credit exposures was increased by $874,000, reflecting a PCL of $1.2 million, an addition to the ACL for $120,000 related to PCD loans acquired in the Fortune acquisition, and net charge offs of $74,000.

The PCL was based on the estimated required ACL, reflecting management’s estimate of the current expected credit losses in the Company’s loan portfolio at March 31, 2022, and management believes the ACL as of that date is adequate based on that estimate. There remains, however, 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. Since January, COVID-19 cases and hospitalizations have declined substantially in our market areas. Management continues to consider the potential impact of the lengthy pandemic on borrowers most affected by mitigation efforts, most notably including our borrowers in the hotel industry.

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 PCI to PCD methodology, increased the allowance for off-balance sheet credit exposure by $268,000, and reduced retained earnings by $7.2 million, net of deferred taxes, through a one-time cumulative effect adjustment. For the nine-month period ended March 31, 2021, the ACL increased by an additional $755,000 and the allowance for off-balance sheet credit exposures increased by an additional $206,000, reflecting a charge to PCL of $1.6 million, and net charge offs of $630,000.

At March 31, 2022, the Bank also had accrued within other liabilities an allowance for off-balance sheet credit exposures of $2.7 million, as compared to $1.8 million at June 30, 2021. The increase reflects the component of the PCL attributable to off-balance sheet credit exposures noted above. This amount is maintained as a separate liability account to cover estimated credit losses associated with off-balance sheet credit instruments such as off-balance sheet loan commitments, standby letters of credit, and guarantees. The increase in the estimated allowance for off-balance sheet

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credit exposures was primarily the result of an increase in the amount of unfunded commitments (unused lines of credit) available and expected to be utilized.

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

			% of				% of
	ACL as of		total		ACL as of		total
	March 31, 2022		ACL		June 30, 2021		ACL
Real Estate Loans:
Residential	$	11,186	33.3	%	$	11,192	33.7	%
Construction		1,988	5.9	%		2,170	6.5	%
Commercial		15,550	46.2	%		14,535	43.8	%
Consumer loans		823	2.4	%		916	2.7	%
Commercial loans		4,094	12.2	%		4,409	13.3	%
	$	33,641	100.0	%	$	33,222	100.0	%

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

Provisions of the CARES Act and subsequent legislation allowed financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings (TDRs) through December 31, 2021, 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. As of December 31, 2021, there were four loans, with balances totaling approximately $23.7 million, remaining on interest-only payment modifications, and not reported as TDRs based on this temporary option provided under the legislation. For those borrowers whose payment terms had not yet returned to the original terms under their loan agreements, the Company had classified the credits as a “special mention” status credit as of December 31, 2021. Since that date, one of these loans totaling $9.1 million has returned to regular principal and interest payments, but remains a “special mention” credit. The other three loans, totaling $14.9 million, have not returned to principal and interest payments as of March 31, 2022, and have been adversely classified as “substandard” credits, but have not been designated as TDRs pending negotiation of a final restructuring modification.

At March 31, 2022, the Company had loans of $27.7 million, or 1.06% of total loans, adversely classified ($26.8 million classified “substandard”; $827,000 classified “doubtful”), as compared to loans of $18.1 million, or 0.81% of total loans, adversely classified ($17.2 million classified “substandard”; $850,000 classified “doubtful”) at June 30, 2021, and $20.8 million, or 0.96% of total loans, adversely classified ($20.0 million classified “substandard”; $857,000 classified “doubtful”) at March 31, 2021. The increase is attributable to adverse classification of the three loans modified under the CARES Act noted above, which have not yet returned to principal and interest payments. Classified loans were generally comprised of loans secured by commercial and residential real estate, and other commercial purpose collateral. All loans were classified due to concerns as to the borrowers’ ability to continue to generate sufficient cash flows to service the debt. Of our classified loans, the Company had ceased recognition of interest on loans with a carrying value of $2.8 million at March 31, 2022. As reported in Note 4 to the condensed consolidated financial statements, the Company’s total past due loans increased from $3.8 million at June 30, 2021, to $4.4 million at March 31, 2022. Total past due loans were $4.3 million at March 31, 2021.

Nonperforming Assets

The ratio of nonperforming assets to total assets and nonperforming loans to net loans receivable is another measure of asset quality. Nonperforming assets of the Company include nonaccruing loans, accruing loans delinquent/past maturity

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90 days or more, and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. The table below summarizes changes in the Company’s level of nonperforming assets over selected time periods:

	March 31, 2022		June 30, 2021		March 31, 2021
Nonaccruing loans:
Residential real estate	$	1,255	$	3,235	$	3,463
Construction		—		30		—
Commercial real estate		2,373		1,914		2,496
Consumer		9		100		181
Commercial business		245		589		616
Total		3,882		5,868		6,756
Loans 90 days past due accruing interest:
Residential real estate		—		—		—
Construction		—		—		—
Commercial real estate		—		—		—
Consumer		—		—		—
Commercial business		—		—		—
Total		—		—		—
Total nonperforming loans		3,882		5,868		6,756
Nonperforming investments		—		—		—
Foreclosed assets held for sale:		—		—		—
Real estate owned		3,199		2,227		2,651
Other nonperforming assets		—		23		—
Total nonperforming assets	$	7,081	$	8,118	$	9,407

At March 31, 2022, TDRs totaled $7.3 million, of which $880,000 was considered nonperforming and included in the nonaccrual loan total above. The remaining $6.4 million in TDRs have complied with the modified terms for a reasonable period of time and are therefore considered by the Company to be accrual status loans. In general, these loans were subject to classification as TDRs at March 31, 2022, on the basis of guidance under ASU No. 2011-02, which indicates that the Company may not consider the borrower’s effective borrowing rate on the old debt immediately before the restructuring in determining whether a concession has been granted. At June 30, 2021, TDRs totaled $6.5 million, of which $3.3 million was considered nonperforming and included in the nonaccrual loan total above. The remaining $3.2 million in TDRs at June 30, 2021, had complied with the modified terms for a reasonable period of time and were therefore considered by the Company to be accrual status loans.

At March 31, 2022, nonperforming assets totaled $7.1 million, as compared to $8.1 million at June 30, 2021, and $9.4 million at March 31, 2021. The decrease in nonperforming assets since June 30, 2021, was attributable primarily to a decrease in nonaccrual loans, as the Company returned a loan relationship secured by single family residential rental property to accrual status, partially offset by an increase in nonaccrual loans of $801,000 relating to the Fortune acquisition. Other real estate owned increased primarily as a result of $1.7 million in assets acquired in the Fortune acquisition.

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Liquidity Resources

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

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

At March 31, 2022, the Company had outstanding commitments and approvals to extend credit of approximately $656.8 million (including $406.2 million in unused lines of credit) in mortgage and non-mortgage loans. These commitments and approvals are expected to be funded through existing cash balances, cash flow from normal operations and, if needed, advances from the FHLB or the Federal Reserve’s discount window. At March 31, 2022, the Bank had pledged $821.2 million of its single-family residential and commercial real estate loan portfolios to the FHLB for available credit of approximately $469.9 million, of which $43.3 million was advanced, while $329,000 was encumbered in relation to residential real estate loans sold onto the secondary market through the FHLB, and $305,000 was utilized as collateral for the issuance of letters of credit to secure public unit deposits. The Bank has the ability to pledge several other loan portfolios, including, for example, its commercial and home equity loans, which could provide additional collateral for additional borrowings. In total, FHLB borrowings are generally limited to 45% of bank assets, or approximately $1.3 billion, subject to available collateral. Also, at March 31, 2022, the Bank had pledged a total of $275.5 million in loans secured by farmland and agricultural production loans to the Federal Reserve, providing access to $230.8 million in primary credit borrowings from the Federal Reserve’s discount window, of which none was advanced at March 31, 2022. Management believes its liquid resources will be sufficient to meet the Company’s liquidity needs.

Regulatory Capital

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

Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier 1 capital (as defined), and common equity Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average total assets (as defined). Additionally, to make distributions or discretionary bonus payments, the Company and Bank must maintain a capital conservation buffer of 2.5% of risk-weighted assets. Management believes, as of March 31, 2022 and June 30, 2021, that the Company and the Bank met all capital adequacy requirements to which they are subject.

Effective January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a tier 1 leverage ratio of greater than 9 percent, are considered qualifying community banking organizations and are eligible to opt into an alternative, simplified regulatory capital framework, which utilizes a newly-defined “Community Bank Leverage Ratio” (CBLR). The CBLR

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framework is an optional framework that is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9 percent are considered to have satisfied the risk-based and leverage capital requirements in the agencies’ generally applicable capital rule. In April 2020, the federal bank regulatory agencies announced the issuance of two interim final rules to provide temporary relief to community banking organizations, and adopted the final rule with no changes in October 2020. Under the rules, the CBLR requirement was a minimum of 8.0% for the remainder of calendar year 2020, was 8.5% for calendar year 2021, and 9.0% thereafter. The Company and the Bank have not made an election to utilize the CBLR framework, but will continue to monitor the available option, and could do so in the future.

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

As of March 31, 2022, the most recent notification from the Federal banking agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

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

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									To Be Well Capitalized
					For Capital				Under Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
As of March 31, 2022	Amount		Ratio		Amount		Ratio		Amount	Ratio
(dollars in thousands)
Total Capital (to Risk-Weighted Assets)
Consolidated	$	362,490	13.59	%	$	213,464	8.00	%	n/a	n/a
Southern Bank		345,363	13.07	%		211,329	8.00	%	264,162	10.00	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		335,677	12.58	%		160,098	6.00	%	n/a	n/a
Southern Bank		315,462	11.94	%		158,497	6.00	%	211,329	8.00	%
Tier I Capital (to Average Assets)
Consolidated		335,677	10.97	%		122,384	4.00	%	n/a	n/a
Southern Bank		315,462	10.31	%		122,349	4.00	%	132,081	5.00	%
Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated		312,634	11.72	%		120,073	4.50	%	n/a	n/a
Southern Bank		315,462	11.94	%		118,873	4.50	%	171,705	6.50	%

									To Be Well Capitalized
					For Capital				Under Prompt Corrective
	Actual				Adequacy Purposes					Action Provisions
As of June 30, 2021	Amount		Ratio		Amount		Ratio		Amount		Ratio
(dollars in thousands)
Total Capital (to Risk-Weighted Assets)
Consolidated	$	315,490	14.18	%	$	177,938	8.00	%	n/a		n/a
Southern Bank		308,482	13.96	%		176,816	8.00	%	221,019		10.00	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		287,701	12.93	%		133,453	6.00	%	n/a		n/a
Southern Bank		282,638	12.79	%		132,612	6.00	%	176,816		8.00	%
Tier I Capital (to Average Assets)
Consolidated		287,701	10.61	%		108,505	4.00	%	n/a		n/a
Southern Bank		282,638	10.43	%		108,369	4.00	%	135,461		5.00	%
Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated		272,458	12.25	%		100,090	4.50	%	n/a		n/a
Southern Bank		282,638	12.79	%		99,459	4.50	%	143,663		6.50	%

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

SOUTHERN MISSOURI BANCORP, INC.

Asset and Liability Management and Market Risk

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

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

The Company continues to originate long-term, fixed-rate residential loans. During the first nine months of fiscal year 2022, fixed rate 1- to 4-family residential loan production totaled $204.0 million (of which $38.9 million was originated for sale into the secondary market), as compared to $238.9 million during the same period of the prior fiscal year (of which $133.2 million was originated for sale into the secondary market). At March 31, 2022, the fixed rate residential loan portfolio was $464.8 million with a weighted average maturity of 190 months, as compared to $313.4 million at March 31, 2021, with a weighted average maturity of 183 months. The Company originated $8.0 million in adjustable-rate 1- to 4-family residential loans during the nine-month period ended March 31, 2022, as compared to $15.9 million during the same period of the prior fiscal year. At March 31, 2022, fixed rate loans with remaining maturities in excess of 10 years totaled $302.4 million, or 11.7% of net loans receivable, as compared to $187.3 million, or 8.8% of net loans receivable at March 31, 2021. The Company originated $421.9 million in fixed rate commercial and commercial real estate loans during the nine-month period ended March 31, 2022, as compared to $246.0 million during the same period of the prior fiscal year. The Company also originated $46.2 million in adjustable rate commercial and commercial real estate loans during the nine-month period ended March 31, 2022, as compared to $55.1 million during the same period of the prior fiscal year. At March 31, 2022, adjustable-rate home equity lines of credit increased to $41.7 million, as compared to $38.2 million at March 31, 2021. At March 31, 2022, the Company’s investment portfolio had an expected weighted-average life of 4.9 years, compared to 4.8 years at March 31, 2021. Management continues to focus on customer retention, customer satisfaction, and offering new products to customers in order to increase the Company’s amount of less rate-sensitive deposit accounts.

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Interest Rate Sensitivity Analysis

The following table sets forth as of March 31, 2022, management’s estimates of the projected changes in net portfolio value (“NPV”) in the event of 100, 200, and 300 basis point (“bp”) instantaneous and permanent increases, and 100, 200, and 300 basis point instantaneous and permanent decreases in market interest rates. Dollar amounts are expressed in thousands.

March 31, 2022
						NPV as Percentage of
	Net Portfolio					PV of Assets
Change in Rates	Value		Change		% Change	NPV Ratio	Change
	(Dollars in thousands)					(%)	(basis points)
+300 bp	$	242,715	$	(83,728)	(26)	8.08	(190)
+200 bp		288,553		(37,890)	(12)	9.31	(67)
+100 bp		320,763		(5,681)	(2)	10.06	8
0 bp		326,443		—	—	9.98	—
‑100 bp		392,306		65,863	20	11.68	170
‑200 bp		473,754		147,310	45	13.76	378
‑300 bp		488,977		162,533	50	14.14	416

June 30, 2021
						NPV as Percentage of
	Net Portfolio					PV of Assets
Change in Rates	Value		Change		% Change	NPV Ratio	Change
	(Dollars in thousands)					(%)	(basis points)
+300 bp	$	252,800	$	(46,274)	(15)	10.05	(96)
+200 bp		277,898		(21,176)	(7)	10.76	(25)
+100 bp		297,372		(1,702)	(1)	11.23	21
0 bp		299,074		—	—	11.01	—
‑100 bp		334,713		35,638	12	12.11	109
‑200 bp		347,520		48,446	16	12.51	149
‑300 bp		352,759		53,685	18	12.67	165

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

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

The Company’s growth strategy has included origination of fixed-rate loans, as discussed under “Asset and Liability Management and Market Risk,” above. The Company’s interest rate sensitivity has increased during the nine months ended March 31, 2022, primarily as a result of these originations. This increased sensitivity is reflected in the tables above.

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

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PART I: Item 4:  Controls and Procedures

SOUTHERN MISSOURI BANCORP, INC.

An evaluation of Southern Missouri’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended, (the “Act”)) as of March 31, 2022 was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, and several other members of our senior management. The Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2022, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to management (including the Chief Executive and Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

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PART II: Other Information

SOUTHERN MISSOURI BANCORP, INC.

Item 1:  Legal Proceedings

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

Item 1a:  Risk Factors

There have been no material changes to the risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2021.

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

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

The following table summarizes the Company’s stock repurchase activity for each month during the three months ended March 31, 2022.

				Total # of Shares
		Average		Purchased as Part of a	Maximum Number
	Total #	Price		Publicly	of Shares That
	of Shares	Paid Per		Announced	May Yet Be
	Purchased	Share		Program	Purchased (1)
01/01/22 - 01/31/22 period	—	$	—	—	411,962
02/01/22 - 02/28/22 period	—		—	—	411,962
03/01/22 - 03/31/22 period	—		—	—	411,962

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

Item 3:  Defaults upon Senior Securities

Not applicable

Item 4:  Mine Safety Disclosures

Not applicable

Item 5:  Other Information

None

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Item 6:  Exhibits

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

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		(viii)	Director’s Retirement Agreement with Todd E. Hensley (filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2015 and incorporated herein by reference)
	8.	Tax Sharing Agreement (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 and incorporated herein by reference)
	9.	Change-in-Control Agreements
		(i)	Change-in-control Agreement with Kimberly A. Capps (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(ii)	Change-in -Control Agreement with Matthew Funke (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(iii)	Change-in-control Agreement with Lora L. Daves (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(iv)	Change-in-control Agreement with Justin G. Cox (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(v)	Change-in-control Agreement with Rick A. Windes (filed as an exhibit to the Registrant’s Current Report on Form 8-K for the event on March 22, 2022 and incorporated herein by reference)
		(vi)	Change-in -Control Agreement with Mark Hecker (filed as an exhibit to the Registrant’s Current Report on Form 8-K for the event on April 20, 2021 and incorporated herein by reference)
		(vii)	Change-in -Control Agreement with Brett Dorton (filed as an exhibit to the Registrant’s Current Report on Form 8-K for the event on March 22, 2022 and incorporated herein by reference)
		(viii)	Change-in -Control Agreement with Martin Weishaar (filed as an exhibit to the Registrant’s Current Report on Form 8-K for the event on April 20, 2021 and incorporated herein by reference)
10.1	Named Executive Officer Salary and Bonus Arrangements for 2021 (filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended June 30, 2021 and incorporated herein by reference)
10.2	Director Fee Arrangements for 2021 (filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended June 30, 2021 and incorporated herein by reference)
14	Code of Conduct and Ethics (filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2016 and incorporated herein by reference)
21	Subsidiaries of the Registrant (filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended June 30, 2020 and incorporated herein by reference)
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32	Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
101	Includes the following financial and related information from Southern Missouri Bancorp, Inc.’s Quarterly Report on Form 10-Q as of and for the quarter ended March 31, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (1) the Consolidated Balance Sheets, (2) the Consolidated Statements of Income, (3) the Consolidated Statements of Comprehensive Income, (4) the Consolidated Statements of Changes in Stockholders’ Equity, (5) the Consolidated Statements of Cash Flows, and (6) Notes to Consolidated Financial Statements.
104	The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL.

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SIGNATURES

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

	SOUTHERN MISSOURI BANCORP, INC.
	Registrant
Date:  May 10, 2022	/s/ Greg A. Steffens
	Greg A. Steffens
	President & Chief Executive Officer
	(Principal Executive Officer)
Date:  May 10, 2022	/s/ Matthew T. Funke
	Matthew T. Funke
	Executive Vice President & Chief Financial Officer
	(Principal Financial and Accounting Officer)

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