SOUTHERN MISSOURI BANCORP INC

Previous wording

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 December 31, 2023, the Bank operated from its headquarters, 62 full-service branch offices, and three limited-service branch offices. The Bank owns the office building and related land in which its headquarters are located, and 58 of its other branch offices. The remaining seven branches are either leased or partially owned.

Current wording

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, 2024, the Bank operated from its headquarters, 62 full-service branch offices, and three limited-service branch offices. The Bank owns the office building and related land in which its headquarters are located, and 59 of its other branch offices. The remaining six branches are either leased or partially owned.

Previous wording

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

Current wording

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes. The following discussion reviews the Company’s condensed consolidated financial condition at March 31, 2024, and results of operations for the three-and nine- month periods ended March 31, 2024 and 2023.

Previous wording

•the impact of technological changes; and

Current wording

•the impact of technological changes;

Previous wording

During the first six months of fiscal 2024, total assets increased by $283.3 million. The increase was primarily attributable to an increase in cash equivalents and loans, net of the allowance for credit losses (ACL). Cash equivalents and time deposits increased by a combined $161.9 million; AFS securities decreased $148,000; and loans, net of the ACL, increased $110.7 million. Liabilities increased $259.2 million, as deposits increased $269.4 million and advances from the Federal Home Loan Bank (FHLB) decreased $20.5 million. Equity increased $24.1 million, attributable primarily to earnings retained after cash dividends paid, in combination with a $3.1 million reduction in accumulated other comprehensive losses (“AOCL”) as the market value of the Company’s investments appreciated due to the decrease in market interest rates.

Current wording

During the first nine months of fiscal 2024, total assets increased by $286.8 million. The increase was primarily attributable to an increase in net loans receivable, cash equivalents, and available for sale (AFS) securities. Cash equivalents increased by $113.5 million; AFS securities increased $16.1 million; and loans, net of the ACL, increased $148.8 million. Liabilities increased $253.3 million, including an increase in deposits of $270.0 million, partially offset by a decrease in advances from the Federal Home Loan Bank (FHLB) of $31.5 million. Equity increased $33.5 million, attributable primarily to earnings retained after cash dividends paid, in combination with a $2.9 million reduction in accumulated other comprehensive losses (“AOCL”) due to losses recognized on the sale of AFS securities and as the market value of the Company’s investments appreciated due to the tightening of interest rate spreads.

Previous wording

Net income for the first six months of fiscal 2024 was $25.3 million, an increase of $4.1 million, or 19.2% 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 attributable to an increase in net interest income, noninterest income, and a lower provision for credit losses (“PCL”) that was partially offset by an increase in noninterest expense and provision for income taxes. Diluted net income was $2.23 per common share for the first six months of fiscal 2024, as compared to $2.30 per common share for the same period of the prior fiscal year. For the first six months of fiscal 2024, as compared to the same period of the prior fiscal year, net interest income increased $13.1 million or 23.1%; PCL decreased $4.4 million; noninterest income increased $522,000, or 4.8%; noninterest expense increased $13.0 million, or 37.7%; and provision for income tax increased $950,000, or 16.6%. During the December quarter, the Bank’s second quarter of the fiscal year, the Bank sold bonds with a book value of $12.4 million, realizing a loss of $682,000 recognized in noninterest income. These proceeds were reinvested

Current wording

Net income for the first nine months of fiscal 2024 was $36.7 million, an increase of $13.0 million, or 54.8% 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 attributable to an increase in net interest income and a lower provision for credit losses (“PCL”) that was partially offset by increased noninterest expense, an increase in provision for income taxes, and slightly lower noninterest income. Diluted net income was $3.22 per common share for the first nine months of fiscal 2024, as compared to $2.41 per common share for the same period of the prior fiscal year. For the first nine months of fiscal 2024, as compared to the same period of the prior fiscal year, net interest income increased $13.9 million or 15.3%; provision for credit losses (“PCL”) decreased from $13.6 million to $2.7 million; noninterest income decreased $177,000, or 1.0%; noninterest expense increased $11.1 million, or 18.0%; and provision for income tax increased $3.2 million, or 51.0%. During the first nine months of fiscal 2024, the Bank sold bonds with a book value of $30.8 million,

Previous wording

into $11.9 million in higher yielding fixed rate securities, which is expected to result in an earn back of the realized loss in under two years. Recognition of this loss during the quarter reduced after-tax net income by $541,000. For more information see “Results of Operations.”

Current wording

realizing a loss of $1.5 million recognized in noninterest income. These proceeds were reinvested into in higher yielding fixed rate securities, which is expected to result in an earn back of the realized loss in under two years. Recognition of this loss reduced after-tax net income by $1.2 million. For more information see “Results of Operations.”

Previous wording

Interest rates during the first six months of fiscal 2024 remained volatile, while the yield curve remained inverted, with shorter-term obligations yielding more than longer-term obligations. During the period, however, the curve’s inversion began to reverse somewhat, as yields decreased at the short end of the curve. The Federal Reserve’s Open Market Committee (FOMC) has raised short-term rates significantly since March 2022. Recently, market expectations for economic stability over the next several years have improved, while economic measures have shown a reduced pace of inflation, which has led to relatively stable longer-term yields and modestly reduced yields at the shorter end of the yield curve. At December 31, 2023, as compared to June 30, 2023, the yield on two-year treasuries decreased from 4.87% to 4.23%; the yield on five-year treasuries decreased from 4.13% to 3.84%; the yield on ten-year treasuries increased from 3.81% to 3.88%; and the yield on 30-year treasuries increased from 3.85% to 4.03%.

Current wording

Interest rates during the first nine months of fiscal 2024 remained volatile. While the yield curve remained inverted, with shorter-term obligations yielding more than longer-term obligations, the curve did flatten some. At times over the current nine-month period, market expectations for an easing of monetary policy by the Federal Reserve’s Open Market Committee (FOMC) driving yields in the mid-to-longer part of the curve lower. Market expectations reversed somewhat in the most recent quarter based mostly on inflation and employment data that was reported at higher-than-expected levels. While the Federal Reserve’s Open Market Committee (FOMC) has raised short-term rates significantly since March 2022, and the market and FOMC expect rates to normalize at some point, with lower longer term rates compared to the short end of the curve, a flattening has occurred in this period due to persistently higher inflation, increasing the mid to longer end of the curve since fiscal year end 2023. At March 31, 2024, as compared to June 30, 2023, the yield on two-year treasuries decreased from 4.90% to 4.63%; the yield on five-year treasuries increased from 4.16% to 4.22%; the yield on ten-year treasuries increased from 3.82% to 4.21%; and the yield on 30-year treasuries increased from 3.86% to 4.35%.

Previous wording

As compared to the first six months of the prior fiscal year, our average yield on earning assets increased by 110 basis points, primarily attributable to increased yields on loans receivable, available for sale securities, and cash and cash equivalents, as compared to year-ago levels. Our cost of interest-bearing liabilities increased by 162 basis points, as the Company increased offering rates on nonmaturity accounts and maturing time deposits to maintain funding in a more competitive environment. Special deposit rates and some brokered CD funding was utilized to reduce the Company’s overnight borrowing position early in the period. Higher market rates reflected the policy of the FOMC, which has increased overnight funding rates and began a “quantitative tightening” program to reverse some of the excess reserves placed into the financial system since March 2020. (See “Results of Operations: Comparison of the six-month periods ended December 31, 2023 and 2022 – Net Interest Income”.) The impact of the prior fiscal year’s rapid increase in the level of short-term market interest rates, along with the yield curve inversion has been concerning, as our cost of funds has increased at a faster pace than our asset yields over recent periods, and may continue to do so; however the recent decrease in yields on the shorter end of the yield curve, in combination with more stable longer term rates at higher levels may provide some relief to net interest income and net interest margin compression in future periods.

Current wording

As compared to the first nine months of the prior fiscal year, our average yield on earning assets increased by 102 basis points, primarily attributable to increased yields on loans receivable, available for sale securities, and cash and cash equivalents, as compared to year-ago levels. Our cost of interest-bearing liabilities increased by 152 basis points, as the Company increased offering rates on nonmaturity accounts and maturing time deposits to adjust to the higher rate environment. Special deposit rates and some brokered CD funding were utilized to reduce the Company’s overnight borrowing position early in the period. (See “Results of Operations: Comparison of the nine-month periods ended March 31, 2024 and 2023 – Net Interest Income”.) Higher market rates reflected the policy of the FOMC, which has increased overnight funding rates and began a “quantitative tightening” program to reverse some of the excess reserves placed into the financial system since March 2020. The impact of the prior fiscal year’s rapid increase in the level of short-term market interest rates, along with the yield curve inversion has been concerning, as our cost of funds has increased at a faster pace than our asset yields over recent periods; however, relatively stable price competition for deposits, along with the increased percentage of our deposits that have already repriced in the current higher rate environment, in combination with new loan originations at higher market liabilities repricing more quickly than assets and the yield curve inversion has been concerning. Because of this, our cost of funds has increased at a faster pace than our asset yields over recent periods and may continue to do so. However, deposit pricing competition has stabilized and our deposits have mostly already adjusted to the higher rate environment. In combination with new loan originations at higher long term rates, may provide some relief to net interest income and net interest margin compression in future periods.

Previous wording

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.

Current wording

The Company’s net income is also affected by the level of its noninterest income and noninterest expense. 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 expense consists primarily of compensation and employee benefits, occupancy-related expenses, data processing expense, telecommunications expense, deposit insurance assessments, professional fees, advertising, postage and office expenses, other insurance expenses, the amortization of intangible assets, and other general operating expenses.

Previous wording

The Company’s noninterest income for the six-month period ended December 31, 2023, was $11.5 million, an increase $522,000, or 4.8%, as compared to the same period of the prior fiscal year. In the current period, the addition of trust and wealth management services from the Citizens merger, increases in bank card interchange income, and earnings on bank owned life insurance were partially offset by realized losses on the sale of AFS securities, decreases in other loan fees and loan servicing fees. Interchange revenue has increased as compared to the year ago period due to the increased customer base as a result of the Citizens merger. Other loan fees were down due to the decrease in loan origination volume of 34.3% compared to the year ago period, which in combination with a decrease specifically in residential real estate loans also resulted in declining recognition of new mortgage servicing rights. Although deposit account charges and related fees have grown in this time period, growth has been constrained due to changes adopted in July 2023 as to how fees are assessed on NSF items.

Current wording

decrease in loan origination volume, in commercial and specifically in and lower originations of residential real estate loans, specifically also resulted in declining recognition of new mortgage servicing rights; and deposit account charges and related fees have decreased due to changes adopted in July 2023 as to how fees are assessed on NSF items.

Previous wording

Noninterest expense for the six-month period ended December 31, 2023, was $47.6 million, an increase of $13.0 million, or 37.7%, as compared to the same period of the prior fiscal year. The increase was attributable primarily to increases in compensation and benefits, occupancy expenses, data processing fees, intangible amortization, and other noninterest expenses. The increase in compensation and benefits as compared to the prior year period was primarily due to increased headcount resulting from the Citizens merger, an increase in legacy employee headcount, as well as annual merit increases. Occupancy expenses increased primarily due to facilities added through the Citizens merger, and other equipment purchases. The Company’s increase in data processing costs relates to the growing volume of transaction activity, increased costs of software licensing, and new programs for lending and fiduciary and asset management.

Current wording

Noninterest expense for the nine-month period ended March 31, 2024, was $72.6 million, an increase of $11.1 million, or 18.0%, as compared to the same period of the prior fiscal year. The increase was attributable primarily to increases in compensation and benefits, occupancy expenses, data processing fees, intangible amortization, and deposit insurance premiums, partially offset by a decrease in legal and professional fees. The increase in compensation and benefits as compared to the prior year period was primarily due to increased headcount resulting from the Citizens merger, an increase in legacy employee headcount, as well as annual merit increases and inflation adjustments. Occupancy expenses increased primarily due to facilities added through the Citizens merger, and other equipment purchases. The Company’s increase in data processing costs relates to the growing volume of transaction activity, increased costs of software licensing, and new programs for lending and wealth management. Intangible amortization also increased due to the Citizens merger. Increased deposit insurance premiums were primarily due to the increase in the assessment base following the Citizens merger as well as the FDIC’s increased base assessment rates effective January 2023. Legal and professional fees declined primarily due to inclusion in that category of merger-related expenses in the same period a year ago.

Previous wording

The Company experienced balance sheet growth in the first six months of fiscal 2024, with total assets of $4.6 billion at December 31, 2023, reflecting an increase of $283.3 million, or 6.5%, as compared to June 30, 2023. Growth primarily reflected an increase in cash equivalents and net loans receivable.

Current wording

The Company experienced balance sheet growth in the first nine months of fiscal 2024, with total assets of $4.6 billion at March 31, 2024, reflecting an increase of $286.8 million, or 6.6%, as compared to June 30, 2023. Growth primarily reflected an increase in net loans receivable, cash and cash equivalents, and available for sale (AFS) securities.

Previous wording

Cash and cash equivalents were a combined $217.1 million at December 31, 2023, an increase of $161.9 million, or 293.1%, as compared to June 30, 2023. The increase was primarily the result of strong deposit generation that outpaced loan growth during the period. AFS securities were $417.4 million at December 31, 2023, down $148,000, or roughly unchanged as compared to June 30, 2023.

Current wording

Cash and cash equivalents were a combined $168.8 million at March 31, 2024, an increase of $113.5 million, or 205.6%, as compared to June 30, 2023. The increase was primarily the result of strong deposit generation that outpaced loan growth during the period. AFS securities were $433.7 million at March 31, 2024, up $16.1 million, or 3.9%, as compared to June 30, 2023.

Previous wording

Loans, net of the allowance for credit losses (ACL), were $3.7 billion at December 31, 2023, an increase of $110.7 million, or 3.1%, as compared to June 30, 2023. Gross loans increased by $113.0 million, while the ACL attributable to outstanding loan balances increased $2.3 million, or 4.7%, as compared to June 30, 2023. The increase in loan balances was attributable to growth in drawn construction loan balances, residential real estate loans, commercial loans, and commercial real estate loans. Our residential real estate loans, which are comprised of single-family and multi-family loans, increased due to increased single-family owner occupied and non-owner occupied real estate loans, which was partially offset by paydowns in loans secured by multi-family property. Commercial loan balances increased as the Company experienced growth in agriculture lines and commercial and industrial loans. Commercial real estate loan balances increased primarily from an increase in loans secured by non-owner occupied properties, partially offset by a decrease in loans secured by owner-occupied properties.

Current wording

Loans, net of the allowance for credit losses (“ACL"), were $3.7 billion at March 31, 2024, an increase of $148.8 million, or 4.2%, as compared to June 30, 2023. Gross loans increased by $152.3 million, while the ACL attributable to outstanding loan balances increased $3.5 million, or 7.4%, as compared to June 30, 2023. The increase in loan balances was attributable to growth in non-owner occupied commercial real estate loans, residential real estate loans, multi-family, and drawn construction loan balances. This was partially offset by pay-offs and paydowns in owner-occupied commercial real estate and commercial and industrial loans.

Previous wording

Loans anticipated to fund in the next 90 days totaled $140.5 million at December 31, 2023, as compared to $134.8 million at June 30, 2023, and $121.6 million at December 31, 2022.

Current wording

Loans anticipated to fund in the next 90 days totaled $117.2 million at March 31, 2024, as compared to $140.5 million at December 31, 2023, and $164.4 million at March 31, 2023.

Previous wording

Deposits were $4.0 billion at December 31, 2023, an increase of $269.4 million, or 7.2%, as compared to June 30, 2023. The deposit portfolio saw year-to-date increases in certificates of deposit and savings accounts, as customers remained willing to move balances into time deposits in the higher rate environment, and responded to special rates offered during the quarter. Public unit balances totaled $594.1 million at December 31, 2023, an increase of $15.6 million compared to June 30, 2023, and as compared to $524.0 million at December 31, 2022. Brokered deposits totaled $200.5 million at December 31, 2023, an increase of $40.9 million as compared to June 30, 2023. Compared to December 31, 2022, brokered deposits increased $91.3 million. The average loan-to-deposit ratio for the second quarter of fiscal 2024 was 94.1%, as compared to 97.8% for the quarter ended June 30, 2023.

Current wording

Deposits were $4.0 billion at March 31, 2024, an increase of $270.0 million, or 7.2%, as compared to June 30, 2023. The deposit portfolio saw year-to-date increases in certificates of deposit and savings accounts, as customers remained willing to move balances into high yield savings accounts and special rate time deposits in the current higher rate environment. Public unit balances totaled $624.5 million at March 31, 2024, an increase of $46.0 million compared to June 30, 2023, and increased $30.4 million from December 31, 2023, the linked quarter, reflecting seasonal trends. Brokered deposits totaled $187.0 million at March 31, 2024, an increase of $27.3 million as compared to June 30, 2023, but a decrease of $13.6 million compared to December 31, 2023, the linked quarter. The average loan-to-deposit ratio for the third quarter of fiscal 2024 was 92.5%, as compared to 95.8% for the quarter ended June 30, 2023, and 91.2% for the same period of the prior fiscal year.

Previous wording

FHLB advances were $113.0 million at December 31, 2023, a decrease of $20.5 million, or 15.3%, as compared to June 30, 2023, as the Company utilized deposit growth to repay maturing FHLB advances and all overnight borrowings.

Current wording

FHLB advances were $102.0 million at March 31, 2024, a decrease of $31.5 million, or 23.6%, as compared to June 30, 2023, as the Company utilized deposit growth to repay overnight and maturing FHLB advances. For the quarter ended March 31, 2024, the Company continued to have no FHLB overnight borrowings.

Previous wording

The Company’s stockholders’ equity was $470.2 million at December 31, 2023, an increase of $24.1 million, or 5.4%, as compared to June 30, 2023. The increase was attributable primarily to earnings retained after cash dividends paid, in combination with a $3.1 million reduction in accumulated other comprehensive losses (“AOCL”) as the market value of

Current wording

The Company’s stockholders’ equity was $479.6 million at March 31, 2024, an increase of $33.5 million, or 7.5%, as compared to June 30, 2023. The increase was attributable primarily to earnings retained after cash dividends paid, in combination with a $2.9 million reduction in accumulated other comprehensive losses (“AOCL”) due to losses recognized on the sale of AFS securities and as the market value of the Company’s investments appreciated during the fiscal year to date due to the tightening of interest rate spreads. The AOCL totaled $19.1 million at March 31, 2024, compared $21.9 million at June 30, 2023. The Company does not hold any securities classified as held-to-maturity. The increase in stockholders’ equity was partially offset by $187,000 utilized for repurchases of 4,438 shares of the Company’s common stock during the third fiscal quarter of 2024 at an average price of $42.04 per share.

Previous wording

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

Current wording

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

Previous wording

The tables below present certain information regarding our financial condition and net interest income for the three- and six- month periods ended December 31, 2023 and 2022. The tables present 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.

Current wording

The tables below present certain information regarding our financial condition and net interest income for the three- and nine- month periods ended March 31, 2024 and 2023. The tables present 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.

Previous wording

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

Current wording

The following tables set forth the effects of changing rates and volumes on the Company’s net interest income for the three- and nine- month periods ended March 31, 2024, compared to the three- and nine- month periods ended March 31, 2023. 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).

Previous wording

For the three-month period ended December 31, 2023, fully-diluted net income per share available to common shareholders was $1.07, down $0.19, or 15.1%, as compared to the same quarter a year ago. Our annualized return on average assets for the three-month period ended December 31, 2023, was 1.07%, as compared to 1.35% for the same period of the prior fiscal year. Our return on average common stockholders’ equity for the three-month period ended December 31, 2023, was 10.6%, as compared to 14.2% in the same period of the prior fiscal year.

Current wording

For the three-month period ended March 31, 2024, basic and fully-diluted net income per share available to common shareholders was $1.00 and $0.99, respectively, as compared to $0.22 for both measures for the same period of the prior fiscal year, which represented increases of $0.78, or 354.5% and $0.77 or 350.0%, respectively. Our annualized return on average assets for the three-month period ended March 31, 2024, was 0.97%, as compared to 0.23% for the same period of the prior fiscal year. Our return on average common stockholders’ equity for the three-month period ended March 31, 2024, was 9.5%, as compared to 2.3% in the same period of the prior fiscal year.

Previous wording

Loan discount accretion and deposit premium amortization related to the Company’s November 2018 merger with First Commercial Bank, the May 2020 merger with Central Federal Savings & Loan Association, the February 2022 merger with FortuneBank, and the January 2023 merger with Citizens resulted in $1.5 million in net interest income for the three-month period ended December 31, 2023, as compared to $493,000 in net interest income for the same period a year ago. Combined, this component of net interest income contributed 14 basis points to net interest margin in the three-month period ended December 31, 2023, compared to six basis points during the same period of the prior fiscal year.

Current wording

Loan discount accretion and deposit premium amortization related to the Company’s June 2017 acquisition of Capaha Bank, the February 2018 acquisition of Southern Missouri Bank of Marshfield, the November 2018 acquisition of First Commercial Bank, the May 2020 acquisition of Central Federal Savings & Loan Association, the February 2022 merger of Fortune, and the January 2023 acquisition of Citizens resulted in $1.2 million in net interest income for the three-month period ended March 31, 2024, as compared to $1.4 million in net interest income for the same period a year ago. Combined, this component of net interest income contributed 11 basis points to net interest margin in the three-month period ended March 31, 2024, as compared to a 14 basis point contribution for the same period of the prior fiscal year, and as compared to a 14 basis point contribution in the linked quarter, ended December 31, 2023, when net interest margin was 3.25%.

Previous wording

Provision for Credit Losses. The PCL for the three-month period ended December 31, 2023, was a charge of $900,000, as compared to $1.1 million in the same period of the prior fiscal year. The current period PCL was the result of a $1.9 million provision attributable to the ACL for loan balances outstanding, partially offset by a recovery of $1.0 million in provision attributable to the allowance for off-balance sheet credit exposures, as construction draws reduced available credit and increased on-balance sheet exposure. Compared to the year ago period, the Company’s modeled assessment of the economic outlook was slightly improved, and the trend during the second quarter of fiscal 2024 was slightly higher, as compared to the year ago period when the trend was stable. Additionally, the required ACL for December 31, 2023, reflected stable qualitative factor adjustments as compared to September 30, 2023, while the ACL as of December 31, 2022, reflected modestly increased qualitative factor adjustments as compared to September 30, 2022. As a percentage of average loans outstanding, the Company recorded net charge offs of 10 basis points (annualized) during the current period, compared to four basis points (annualized) during the same period of the prior fiscal year. In the current period, about half of the realized losses were attributable to one real estate relationship acquired in the Citizens merger. (See “Critical Accounting Policies”, “Allowance for Credit Loss Activity” and “Nonperforming Assets”).

Current wording

Provision for Credit Losses. The PCL for the three-month period ended March 31, 2024, was a charge of $900,000, as compared to a PCL of $10.1 million in the same period of the prior fiscal year. The current period PCL was the result of a $1.4 million provision attributable to the ACL for loan balances outstanding, partially offset by a recovery of $458,000 in provision attributable to the allowance for off-balance sheet credit exposures, as construction draws reduced available credit and increased on-balance sheet exposure. The comparable period PCL was elevated primarily due to the Citizens merger. The Company’s assessment of the economic outlook was little changed as compared to the assessment as of March 31, 2023, but reserves were modestly increased due to individually evaluated credits, slightly expanding the ACL as a percentage of total loans. As a percentage of average loans outstanding, the Company recorded net charge offs of one basis point (annualized) during the current period, unchanged from the same period of the prior fiscal year. (See “Critical Accounting Policies”, “Allowance for Credit Loss Activity” and “Nonperforming Assets”).

Previous wording

General. Net income for the six-month period ended December 31, 2023, was $25.3 million, an increase of $4.1 million, or 19.2% 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 attributable to an increase in net interest income and noninterest income, and a lower PCL, partially offset by an increase in noninterest expense and provision for income taxes.

Current wording

General. Net income for the nine-month period ended March 31, 2024, was $36.7 million, an increase of $13.0 million, or 54.8% 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 attributable to an increase in net interest income and a lower PCL that was partially offset by increased noninterest expense, an increase in provision for income taxes, and slightly lower noninterest income.

Previous wording

For the six-month period ended December 31, 2023, fully-diluted net income per share available to common shareholders was $2.23, as compared to $2.30 for the same period of the prior fiscal year, a decrease of $0.07, or 3.0%. Our annualized return on average assets for the six-month period ended December 31, 2023, was 1.13%, as compared to 1.26% for the same period of the prior fiscal year. Our return on average common stockholders’ equity for the six-month period ended December 31, 2023, was 11.1%, as compared to 13.0% in the same period of the prior fiscal year.

Current wording

For the nine-month period ended March 31, 2024, basic and fully-diluted net income per share available to common shareholders was $3.23 and 3.22, respectively, as compared to $2.42 and $2.41, respectively for the same period of the prior fiscal year, which represented increases of $0.81, or 33.6% under both measures. Our annualized return on average assets for the nine-month period ended March 31, 2024, was 1.08%, as compared to 0.87% for the same period of the prior fiscal year. Our return on average common stockholders’ equity for the nine-month period ended March 31, 2024, was 10.6%, as compared to 8.9% in the same period of the prior fiscal year.

Previous wording

Net Interest Income. Net interest income for the six-month period ended December 31, 2023, was $69.9 million, an increase of $13.1 million, or 23.1%, as compared to the same period of the prior fiscal year. The increase was attributable to a 30.7% increase in the average balance of interest-earning assets, partially offset by a decrease in the net interest margin to 3.34%, as compared to 3.55% in the same period a year ago. The decrease in net interest margin was attributable to a 162 basis point increase in the average cost of interest-bearing liabilities, which was partially offset by a 110 basis point increase in the average yield on interest-earning assets. The increase in the cost of funding was due to savings and CD specials that were offered over recent periods in a competitive deposit environment.

Current wording

Net Interest Income. Net interest income for the nine-month period ended March 31, 2024, was $104.4 million, an increase of $13.9 million, or 15.3%, as compared to the same period of the prior fiscal year. The increase was attributable to a 23.9% increase in the average balance of interest-earning assets, partially offset by a decrease in the net interest margin to 3.28%, as compared to 3.52% in the same period a year ago. The decrease in net interest margin was attributable to a 152 basis point increase in the average cost of interest-bearing liabilities, which was partially offset by a 102 basis point increase in the average yield on interest-earning assets. The increase in the cost of funding was due to savings and CD specials that were offered over recent periods in a competitive deposit environment.

Previous wording

Loan discount accretion and deposit premium amortization related to the Company’s May 2020 acquisition of Central Federal Savings & Loan Association, the February 2022 merger of Fortune Bank, and the January 2023 acquisition of Citizens Bank & Trust resulted in $3.2 million in net interest income for the six-month period ended December 31, 2023, as compared to $1.0 million in net interest income for the same period a year ago. Combined, this component of net interest income contributed 15 basis points to net interest margin in the six-month period ended December 31, 2P023, as compared to a six basis point contribution for the same period of the prior fiscal year.

Current wording

Loan discount accretion and deposit premium amortization related to the Company’s May 2020 acquisition of Central Federal Savings & Loan Association, the February 2022 merger of Fortune, and the January 2023 acquisition of Citizens, resulted in $4.4 million in net interest income for the nine-month period ended March 31, 2024, as compared to $2.4 million in net interest income for the same period a year ago. Combined, this component of net interest income contributed 14 basis points to net interest margin in the nine-month period ended March 31, 2024, as compared to a nine basis point contribution for the same period of the prior fiscal year.

Previous wording

Noninterest Income. Noninterest income for the six-month period ended December 31, 2023, was $11.5 million, an increase $522,000, or 4.8%, as compared to the same period of the prior fiscal year. In the current period, the addition of trust and wealth management services from the Citizens merger, increases in bank card interchange income, and earnings on bank owned life insurance were partially offset by realized losses on the sale of AFS securities, and reduction in other loan fees and loan servicing fees. Interchange revenue has increased as compared to the year ago period due to the increased customer base as a result of the Citizens merger. Other loan fees were down due to the decrease in loan origination volume of 34.3% compared to the year ago period, which in combination with a decrease specifically in residential real estate loans, also resulted in declining recognition of new mortgage servicing rights. Although deposit account charges and related fees have grown in this time period, growth has been constrained due to changes adopted in July 2023 as to how fees are assessed on NSF items.

Current wording

Noninterest Income. Noninterest income for the nine-month period ended March 31, 2024, was $17.1 million, a decrease of $177,000, or 1.0%, as compared to the same period of the prior fiscal year. In the current period, increases in wealth management, bank card interchange income, and earnings on bank owned life insurance (BOLI), were more than offset by realized losses on the sale of AFS securities, as well as lower other income, other loan fees, deposit account charges, and loan servicing fees. Wealth management has benefitted from higher assets under management, and BOLI earnings have improved due mostly to increased investments in policies, both attributable primarily to the Citizens merger; and interchange income has had higher volume year to date, driving fee income growth. These increases were more than offset by the $1.5 million realized losses in the investment portfolio and inclusion in the prior-year period of a one-time gain on the sale of fixed assets of $317,000, resulting in lower other income in the current fiscal year. Other loan fees were down due to the decrease in loan origination volume, and lower originations of residential real estate loans specifically also resulted in declining recognition of new mortgage servicing rights Deposit account charges and related fees have decreased due to changes adopted in July 2023 as to how fees are assessed on NSF items.

Previous wording

Noninterest Expense. Noninterest expense for the six-month period ended December 31, 2023, was $47.6 million, an increase of $13.0 million, or 37.7%, as compared to the same period of the prior fiscal year. The increase was attributable primarily to increases in compensation and benefits, occupancy expenses, data processing fees, intangible amortization, and other noninterest expenses. The increase in compensation and benefits as compared to the prior year period was primarily due to increased headcount resulting from the Citizens merger, an increase in legacy employee headcount, as well as annual merit increases. Occupancy expenses increased primarily due to facilities added through the Citizens merger, and other equipment purchases. The Company’s increase in data processing costs relates to the growing volume of transaction activity, increased costs of software licensing, and new programs for lending and fiduciary and asset management. Intangible amortization also increased due to the Citizen merger adding an additional $1.2 million in intangible amortization expense. Other noninterest expenses increased primarily due to expenses related to deposit insurance premiums was primarily due to the increase in the assessment base following the Citizens merger as well as the FDIC’s increased base assessment rates effective January 2023. Charges related to merger and acquisition activities were immaterial in the current period, as compared to charges in the year ago period totaling $777,000 reflected in data processing, legal and professional fees.

Current wording

Noninterest Expense. Noninterest expense for the nine-month period ended March 31, 2024, was $72.6 million, an increase of $11.1 million, or 18.0%, as compared to the same period of the prior fiscal year. The increase was attributable primarily to increases in compensation and benefits, occupancy expenses, data processing fees, intangible amortization, and deposit insurance premiums, partially offset by a decrease in legal and professional fees. The increase in compensation and benefits as compared to the prior year period was primarily due to increased headcount resulting from the Citizens merger, an increase in legacy employee headcount, as well as annual merit increases and inflation adjustments. Occupancy expenses increased primarily due to facilities added through the Citizens merger, and other equipment purchases. The Company’s increase in data processing costs relates to the growing volume of transaction activity, increased costs of software licensing, and new programs for lending and wealth management. Intangible amortization also increased due to the Citizens merger. Increased deposit insurance premiums were primarily due to the increase in the assessment base following the Citizens merger as well as the FDIC’s increased base assessment rates effective January 2023. Charges related to merger and acquisition activities were $98,000 in the current period, as compared to charges in the year ago period totaling $4.1 million reflected in data processing, legal and professional fees.

Previous wording

Income Taxes. The income tax provision for the six-month period ended December 31, 2023, was $6.7 million, an increase of $950,000, or 16.6%, as compared to the same period of the prior fiscal year, due primarily to increased pre-tax income. The effective tax rate declined to 20.8% as compared to 21.2% over the same period last year.

Current wording

Income Taxes. The income tax provision for the nine-month period ended March 31, 2024, was $9.5 million, an increase of $3.2 million, or 51%, as compared to the same period of the prior fiscal year, due primarily to higher pre-tax income. The increase was primarily attributed to higher pre-tax earnings after the acquisition of Citizens.

Previous wording

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

Current wording

The following table summarizes changes in the ACL over the three- and nine- month periods ended March 31, 2024 and 2023:

Previous wording

Our ACL at December 31, 2023, totaled $50.1 million, representing 1.34% of gross loans and 846% of nonperforming loans, as compared to an ACL of $47.8 million, representing 1.32% of gross loans and 625% of nonperforming loans at June 30, 2023. The ACL relative to gross loans was slightly increased, which was primarily attributable to a relatively stable economic outlook modeled in our ACL methodology and little change in net qualitative adjustments and individually-evaluated loans. For the six-month period ended December 31, 2023, the ACL was increased by $2.3 million and the allowance for off-balance sheet credit exposures had a recovery of $1.7 million, reflecting a net PCL of $1.8 million and net charge offs of $1.2 million.

Current wording

Our ACL at March 31, 2024, totaled $51.3 million, representing 1.36% of gross loans and 693% of nonperforming loans, as compared to an ACL of $47.8 million, representing 1.32% of gross loans and 625% of nonperforming loans at June 30, 2023. The Company’s assessment of the economic outlook was little changed as compared to the assessment as of June 30, 2023, but reserves were modestly increased due to qualitative factors and individually evaluated credits, slightly expanding the ACL as a percentage of total loans. For the nine-month period ended March 31, 2024, the ACL

Previous wording

For the three-month period ended December 31, 2023, the ACL increased by $962,000 and the allowance for off-balance sheet credit exposures decreased by $1.0 million, as compared to the linked quarter September 30, 2023, reflecting a PCL of $900,000, and net charge offs of $960,000.

Current wording

For the three-month period ended March 31, 2024, the ACL increased by $1.3 million and the allowance for off-balance sheet credit exposures decreased by $458,000, as compared to the linked quarter ended December 31, 2023, reflecting a PCL of $900,000, and net charge offs of $106,000.

Previous wording

At December 31, 2023, the Bank also had accrued within other liabilities an allowance for off-balance sheet credit exposures of $4.6 million, as compared to $6.3 million at June 30, 2023. The decrease 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 $1.7 million decrease in the estimated allowance for off-

Current wording

At March 31, 2024, the Bank also had accrued within other liabilities an allowance for off-balance sheet credit exposures of $4.1 million, as compared to $6.3 million at June 30, 2023. The decrease 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 $2.1 million decrease in the estimated allowance for off-balance sheet credit exposures was primarily the result of a decrease in the amount of unfunded commitments (unused lines of credit) available and expected to be utilized.

Previous wording

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 December 31, 2023, and management believes the ACL as of that date is adequate based on that estimate. There remains, however, significant uncertainty as the Federal Reserve tightens monetary policy to address inflation risks. Management continues to closely monitor borrowers in the hotel industry that were slow to recover from the COVID-19 pandemic.

Current wording

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, 2024, and management believes the ACL as of that date was adequate based on that estimate. There remains, however, significant uncertainty as the Federal Reserve tightens monetary policy to address inflation risks. Management continues to closely monitor borrowers in the hotel industry that were slow to recover from the COVID-19 pandemic.

Previous wording

At December 31, 2023, the Company had loans of $39.3 million, or 1.05% of total loans, adversely classified ($39.3 million classified “substandard”; none classified “doubtful”), as compared to loans of $46.3 million, or 1.28% of total loans, adversely classified ($46.3 million classified “substandard”; none classified “doubtful”) at June 30, 2023, and $37.6 million, or 1.25% of total loans, adversely classified ($37.6 million classified “substandard”; none classified “doubtful”), at December 31, 2022. 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 $5.9 million at December 31, 2023. The Company’s total past due loans decreased from $10.7 million at June 30, 2023, to $8.3 million at December 31, 2023. Total past due loans were $8.9 million at December 31, 2022. See Note 4 – “Loans and Allowance for Credit Losses – Past Due Loans” in the Notes to Consolidated Financial Statements.

Current wording

At March 31, 2024, the Company had loans of $43.3 million, or 1.15% of total loans, adversely classified ($43.3 million classified “substandard”; none classified “doubtful”), as compared to loans of $46.3 million, or 1.28% of total loans, adversely classified ($46.3 million classified “substandard”; none classified “doubtful”) at June 30, 2023, and $46.9 million, or 1.35% of total loans, adversely classified ($46.9 million classified “substandard”; none classified “doubtful”), at March 31, 2023. 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 $7.3 million at March 31, 2024. The Company’s total past due loans decreased from $10.7 million at June 30, 2023, to $8.6 million at March 31, 2024. Total past due loans were $7.4 million at March 31, 2023. See Note 4 – “Loans and Allowance for Credit Losses – Past Due Loans” in the Notes to Consolidated Financial Statements.

Previous wording

The Company adopted ASU No. 2022-02 in fiscal 2024, which eliminates the accounting guidance for TDRs, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. At December 31, 2023, modifications to borrowers experiencing financial difficulty totaled $25.8 million, of which $1.6 million was considered nonperforming and included in the nonaccrual loan total above. The remaining $24.2 million in modified loans have complied with the modified terms for a reasonable period of time and are therefore considered by the Company to be accrual status loans. On the basis of guidance under ASU No. 2022-02, in general, these loans were subject to classification as modifications due to term extensions, with only $239,000 being due to payment delay, given to borrowers experiencing financial difficulty at December 31, 2023. At June 30, 2023, these modifications totaled $30.5 million, of which $727,000 was considered nonperforming and included in the nonaccrual loan total above. The remaining $29.8 million in modifications at June 30, 2023, had complied with the modified terms for a reasonable period of time and were therefore considered by the Company to be accrual status loans.

Current wording

The Company adopted ASU No. 2022-02 in fiscal 2024, which eliminates the accounting guidance for TDRs, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. At March 31, 2024, modifications to borrowers experiencing financial difficulty totaled $25.7 million, of which $899,000 was considered nonperforming and included in the nonaccrual loan total above. The remaining $24.8 million in modified loans have complied with the modified terms for a reasonable period of time and are therefore considered by the Company to be accrual status loans. On the basis of guidance under ASU No. 2022-02, in general, these loans were subject to classification as modifications due to term extensions, with only $235,000 being due to payment delay, given to borrowers experiencing financial difficulty at March 31, 2024. At June 30, 2023, these modifications totaled $30.5 million, of which $727,000 was considered nonperforming and included in the nonaccrual loan total above. The remaining $29.8 million in modifications at June 30, 2023, had complied with the modified terms for a reasonable period of time and were therefore considered by the Company to be accrual status loans.

Previous wording

At December 31, 2023, nonperforming assets totaled $9.8 million, as compared to $11.3 million at June 30, 2023, and $6.6 million at December 31, 2022. The decrease in NPAs was due to the decrease in NPLs, primarily attributable to the payoff of a $1.5 million NPL secured by commercial real estate acquired through the Citizens merger, which was partially offset by an increase in other real estate owned.

Current wording

At both March 31, 2024, and June 30, 2023, the nonperforming assets totaled $11.3 million, and at March 31, 2023, they totaled $12.7 million. The decrease in NPAs as compared to March 31, 2023, was due to the decrease in other real estate owned.

Previous wording

At December 31, 2023, the Company had outstanding commitments and approvals to extend credit of approximately $959.6 million (including $677.0 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 December 31, 2023, the Bank had pledged $1.1 billion of its single-family residential and commercial real estate loan portfolios to the FHLB for available credit of approximately $686.5 million, of which $113.2 million was advanced, while an additional $466,000 was encumbered in relation to residential real estate loans sold onto the secondary market through the FHLB, and $15.0 million was utilized as collateral for the issuance of letters of credit to secure public unit deposits. The Bank has the ability to pledge several other loan portfolios, including, for example, its 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 $2.1 billion, subject to available collateral. Also, at December 31, 2023, the Bank had pledged a total of $362.4 million in loans secured by farmland and agricultural production loans to the Federal Reserve, providing access to $300.0 million in primary credit borrowings from the Federal Reserve’s discount window, none of which was advanced at December 31, 2023. Management believes its liquid resources will be sufficient to meet the Company’s liquidity needs.

Current wording

At March 31, 2024, the Company had outstanding commitments and approvals to extend credit of approximately $853.6 million (including $637.9 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, 2024, the Bank had pledged $1.3 billion of its single-family residential and commercial real estate loan portfolios to the FHLB for available credit of approximately $789.7 million, of which $102.2 million was advanced, while an additional $467,000 was encumbered in relation to residential real estate loans sold onto the secondary market through the FHLB. 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 $2.1 billion, subject to available collateral. Also, at March 31, 2024, the Bank had pledged a total of $348.4 million in loans secured by farmland and agricultural production loans to the Federal Reserve, providing access to $290.1 million in primary credit borrowings from the Federal Reserve’s discount window, none of which was advanced at March 31, 2024. Management believes its liquid resources will be sufficient to meet the Company’s liquidity needs.