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 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.

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 September 30, 2024, the Bank operated from its headquarters, 62 full-service branch offices, two limited-service branch offices, and two loan production 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 eight branches and offices are either leased or partially owned.

Previous wording

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

Current wording

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 financial statements.

Previous wording

The condensed consolidated balance sheet of the Company as of June 30, 2023, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission.

Current wording

The consolidated balance sheet of the Company as of June 30, 2024, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission.

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 March 31, 2024, and results of operations for the three-and nine- month periods ended March 31, 2024 and 2023.

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 September 30, 2024, and results of operations for the three-month periods ended September 30, 2024 and 2023.

Previous wording

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 2023 Annual Report on Form 10-K and more recent changes, if any, would be included in Note 2 of the “Notes to the Consolidated Financial Statements” in this Form 10-Q. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of the Company’s Board of Directors. For a discussion of applying critical accounting policies, see “Critical Accounting Policies and Estimates” beginning on page 64 in the Company’s 2023 Annual Report.

Current wording

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 “Note 1 of the Consolidated Financial Statements” in the Company’s 2024 Annual Report on Form 10-K and Note 2 of the Notes to the Consolidated Financial Statements in the form 10-Q. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of the Company’s Board of Directors. For a discussion of applying critical accounting policies, see “Critical Accounting Policies and Estimates” beginning on page 62 in the Company’s 2024 Annual Report.

Previous 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.

Current wording

During the first three months of fiscal 2025, total assets increased by $124.9 million. The increase was primarily attributable to increases in loans, net of the allowance for credit losses (ACL), and cash equivalents, partially offset by a decrease in available-for-sale (AFS) securities. Loans, net of the ACL, increased $114.8 million; cash equivalents increased $14.4 million; and AFS securities decreased $7.7 million. Liabilities increased $108.0 million, as deposits increased $97.1 million; securities sold under agreements to repurchase increased $5.6 million; and advances from the Federal Home Loan Bank (FHLB) increased $5.0 million. Equity increased $16.9 million, attributable primarily to earnings retained after cash dividends paid and a decrease of $6.9 million in accumulated other comprehensive loss as the market value of the Company’s investments appreciated due to decreases in market interest rates. For more information, see “Comparison of Financial Condition at September 30, 2024 and June 30, 2024.”

Previous 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,

Current wording

Net income for the first three months of fiscal 2025 was $12.5 million, a decrease of $693,000, or 5.3% as compared to the same period of the prior fiscal year. Compared to the year-ago period, the Company’s decrease in net income was attributable to an increase in noninterest expense and an increase in provision for credit losses (PCL), partially offset by increases in net interest income and noninterest income. Diluted net income was $1.10 per common share for the first three months of fiscal 2025, as compared to $1.16 per common share for the same period of the prior fiscal year. For the first three months of fiscal 2025, as compared to the same period of the prior fiscal year, net interest income increased $1.3 million, or 3.6%; PCL increased $1.3 million, or 139.9%; noninterest income increased $1.3 million, or 22.6%; noninterest expense increased $2.1 million, or 9.0%; and provision for income tax decreased $110,000, or 3.2%. During the first quarter of fiscal 2025, the Company engaged with a consultant to complete a performance improvement project to enhance operations and revenues of the Bank. The one-time cost associated with this review totaled $840,000,

Previous 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%.

Current wording

Interest rates during the first three months of fiscal 2025 remained volatile and moved lower at the end of the period. As a result the yield curve remained inverted, with shorter-term obligations yielding more than longer-term obligations. However, the two-year part of the curve compared to the longer end of the curve uninverted, with a small positive slope. The Federal Reserve’s Open Market Committee (FOMC) decreased the federal funds rate in September 2024, and market expectations are for additional reductions over the next year. At September 30, 2024, as compared to June 30, 2024, the yield on two-year treasuries decreased from 4.72% to 3.62%; the yield on five-year treasuries decreased from 4.33% to 3.52%; the yield on ten-year treasuries decreased from 4.34% to 3.74%; and the yield on 30-year treasuries decreased from 4.50% to 4.08%.

Previous 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.

Current wording

As compared to the first three months of the prior fiscal year, our average yield on earning assets increased by 54 basis points, primarily attributable to increases during the period in market interest rates at which earning assets were originated, or renewed, as well as a shift in the earning asset mix to loans receivable from cash and cash equivalents from year-ago levels. Our average cost of interest-bearing liabilities increased by 70 basis points, as the Company increased offering rates on nonmaturity accounts and time deposits to adjust to the higher rate environment. Special deposit rates and brokered CD funding was utilized to fund loan growth as noninterest bearing and lower cost nonmaturity deposits decreased. The impact of the rapid increase in the level of short-term market interest rates over the prior two fiscal years, along with the yield curve inversion, caused our cost of funds to increase at a faster pace than our asset yields over prior periods. However, the September federal funds decrease, relatively stable price competition for deposits, and 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 rates allowed the net interest margin to increase over the linked June 30, 2024, quarter, as upward pressure on deposit pricing has subsided and loan portfolio yields have continued to increase due to loan renewals and repricing, as well as new loan originations at higher long term rates.

Previous wording

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.

Current wording

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 through deposits from retail and commercial clients, as well as public units. In addition, we will utilize 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.

Previous 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.

Current wording

The Company experienced balance sheet growth in the first three months of fiscal 2025, with total assets of $4.7 billion at September 30, 2024, reflecting an increase of $124.9 million, or 2.7%, as compared to June 30, 2024. Growth primarily reflected an increase in net loans receivable and cash equivalents and time deposits.

Previous 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.

Current wording

Loans anticipated to fund in the next 90 days totaled $168.0 million at September 30, 2024, as compared to $157.1 million at June 30, 2024, and $158.2 million at September 30, 2023.

Previous 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.

Current wording

Deposits were $4.0 billion at September 30, 2024, an increase of $97.1 million, or 2.5%, as compared to June 30, 2024. The deposit portfolio saw 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 during the higher rate environment. Public unit balances totaled $510.5 million at September 30, 2024, a decrease of $84.1 million compared to June 30, 2024, due to the Company losing the bid to retain a large local public unit depositor, and also experienced expected seasonal decreases in these accounts generally. Brokered deposits totaled $273.2 million at September 30, 2024, an increase of $99.4 million compared to June 30, 2024. The Company increased brokered deposits in the quarter due to more attractive pricing for brokered certificates of deposits relative to local market rates and the need to fund seasonal loan demand. The average loan-to-deposit ratio for the first quarter of fiscal 2025 was 98.5%, as compared to 96.3% for the linked quarter.

Previous 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.

Current wording

The Company’s stockholders’ equity was $505.6 million at September 30, 2024, an increase of $16.9 million, or 3.5%, as compared to June 30, 2024. The increase was attributable primarily to earnings retained after cash dividends paid, in combination with a decrease in accumulated other comprehensive losses (AOCL) as the market value of the Company’s investments appreciated due to decreases in market interest rates. The AOCL decreased from $17.4 million at June 30, 2024, to $10.6 million at September 30, 2024. The Company does not hold any securities classified as held-to-maturity.

Previous wording

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

Current wording

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

Previous 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.

Current wording

The tables below present certain information regarding our financial condition and net interest income for the three-month periods ended September 30, 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 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).

Current wording

The following tables set forth the effects of changing rates and volumes on the Company’s net interest income for the three-month period ended September 30, 2024, compared to the three-month period ended September 30, 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 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.

Current wording

For the three-month period ended September 30, 2024, basic and fully-diluted net income per share available to common shareholders was $1.10 under both measures, as compared to $1.16 under both measures for the same period of the prior fiscal year, which represented decreases of $0.06, or 5.2% under both measures. Our annualized return on average assets (ROA) for the three-month period ended September 30, 2024, was 1.07%, as compared to 1.20% for the same period of the prior fiscal year. Our return on average common stockholders’ equity (ROE) for the three-month period ended September 30, 2024, was 10.0%, as compared to 11.7% for the same period of the prior fiscal year. The one-time cost for the performance improvement review totaled $840,000, reduced after-tax net income by $652,000, or $0.06 per fully diluted common share, and reduced after-tax ROA by six basis points and ROE by 52 basis points.

Previous wording

Net Interest Income. Net interest income for the three-month period ended March 31, 2024, was $34.5 million, an increase of $742,000, or 2.2%, as compared to the same period of the prior fiscal year. The increase was attributable to a 12.8% increase in the average balance of interest-earning assets in the current three-month period compared to the same period a year ago, partially offset by a decrease of 33 basis points in the net interest margin to 3.15%. The primary driver of the net interest margin decline, compared to the year ago period, was the yield on interest earning assets increasing 87 basis points, while the cost of interest-bearing liabilities increased 139 basis points.

Current wording

Net Interest Income. Net interest income for the three-month period ended September 30, 2024, was $36.7 million, an increase of $1.3 million, or 3.6%, as compared to the same period of the prior fiscal year. The increase was attributable to a 5.9% increase in the average balance of interest-earning assets in the current three-month period, as compared to the same period a year ago, partially offset by a seven basis point decrease in net interest margin, from 3.44% to 3.37%, as

Previous 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%.

Current wording

Loan discount accretion and deposit premium amortization related to the November 2018 acquisition of First Commercial Bank, the May 2020 acquisition of Central Federal Savings & Loan Association, the February 2022 merger of FortuneBank, and the January 2023 acquisition of Citizens Bank & Trust resulted in $975,000 in net interest income for the three-month period ended September 30, 2024, as compared to $1.7 million in net interest income for the same period a year ago. Combined, this component of net interest income contributed nine basis points to net interest margin in the three-month period ended September 30, 2024, as compared to a 16 basis point contribution for the same period of the prior fiscal year, and as compared to a ten basis point contribution in the linked quarter ended June 30, 2024, when net interest margin was 3.25%.

Previous 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”).

Current wording

Provision for Credit Losses. The PCL was $2.2 million in the three-month period ended September 30, 2024, as compared to a PCL of $900,000 in the same period of the prior fiscal year. The current period PCL was the result of a $2.0 million provision attributable to the ACL for loan balances outstanding and a $138,000 provision attributable to the allowance for off-balance sheet credit exposures. (See “Critical Accounting Policies”, “Allowance for Credit Loss Activity” and “Nonperforming Assets”).

Previous wording

Income Taxes. The income tax provision for the three-month period ended March 31, 2024, was $2.8 million, an increase of 390.8%, as compared to the same period of the prior fiscal year. The increase was primarily attributed to higher pre-tax earnings after the acquisition of Citizens.

Current wording

Income Taxes. The income tax provision for the three-month period ended September 30, 2024, was $3.4 million, a decrease of 3.2%, as compared to the same period of the prior fiscal year, primarily due to the decrease in net income before income taxes. The effective tax rate was 21.3% as compared to 21.0% in the same quarter of the prior fiscal year.

Previous wording

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.

Current wording

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 does not hold any securities classified as held-to-maturity.

Previous wording

The estimate involves consideration of quantitative and qualitative factors relevant to 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:

Current wording

The estimate involves consideration of quantitative and qualitative factors relevant to the loan portfolio 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:

Previous wording

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

Current wording

The following table summarizes changes in the ACL over the three-month periods ended September 30, 2024 and 2023:

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 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.

Current wording

Our ACL at September 30, 2024, totaled $54.4 million, representing 1.37% of gross loans and 663% of nonperforming loans, as compared to an ACL of $52.5 million, representing 1.36% of gross loans and 786% of nonperforming loans, at June 30, 2024. The Company has estimated its expected credit losses as of September 30, 2024, under ASC 326-20, and management believes the ACL as of that date was adequate based on that estimate. There remains, however, significant uncertainty as the Federal Reserve has tightened monetary policy to address inflation risks. 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 September 30, 2024. Qualitative adjustments in the Company’s ACL model were slightly decreased compared to June 30, 2024. In addition, Company increased the allowance attributable to classified hotel loans that have been slow to recover from the COVID-19 pandemic. The PCL was also increased due to loan growth in the first quarter of fiscal year 2025 and a slight increase in modeled expected losses due to a modest increase in the unemployment rate

Previous 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.

Current wording

At September 30, 2024, the Bank had accrued within other liabilities an allowance for off-balance sheet credit exposures of $3.4 million, as compared to $3.3 million at June 30, 2024. 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 $138,000 increase in the estimated allowance for off-balance sheet credit exposures was primarily the result of an expected increase in credit utilization based on historical usage of these off-balance sheet credit exposures.

Previous 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.

Current wording

At September 30, 2024, the Company had loans of $40.4 million, or 1.02% of total loans, adversely classified ($40.4 million classified “substandard”; none classified “doubtful”), as compared to loans of $40.9 million, or 1.06% of total loans, adversely classified ($40.9 million classified “substandard”; none classified “doubtful”) at June 30, 2024, and $42.5 million, or 1.15% of total loans, adversely classified ($42.5 million classified “substandard”; none classified “doubtful”) at September 30, 2023. Classified loans were generally comprised of loans secured by commercial and residential real estate, and other commercial purpose collateral. All of these 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 $8.2 million at September 30, 2024. As reported in Note 4 of the Notes to Consolidated Financial Statements, the Company’s total past due loans increased from $9.2 million at June 30, 2024, to $13.4 million at September 30, 2024. This increase was primarily from loans collateralized by 1-4 family real estate and agricultural real estate. Total past due loans were $28.4 million at September 30, 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 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.

Current wording

The Company adopted ASU No. 2022-02 in fiscal 2024, which eliminates the accounting guidance for troubled debt restructurings (TDRs), while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. At September 30, 2024, modifications to borrowers experiencing financial difficulty totaled $25.2 million, of which $891,000 was considered nonperforming and included in the nonaccrual loan total above. The remaining $24.3 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 payment delays and term extensions given to borrowers experiencing financial difficulty at September 30, 2024. At June 30, 2024, these modifications totaled $25.5 million, of which $895,000 was considered nonperforming and included in the nonaccrual loan total above. The remaining $24.6 million in modifications at June 30, 2024, 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 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.

Current wording

At September 30, 2024, the Company had outstanding commitments and approvals to extend credit of approximately $902.0 million (including $605.5 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 September 30, 2024, the Bank had pledged $1.5 billion of its single-family residential, home equity, and commercial real estate loan portfolios to the FHLB for available credit of approximately $870.3 million, of which $107.1 million was advanced, while $479,000 was encumbered by residential real estate loans sold onto the secondary market through the FHLB, and none was utilized as collateral for the issuance of letters of credit to secure public unit deposits. The Bank has the ability to pledge other assets, including, for example, additional unpledged real estate loans held by the Bank or the Bank’s REIT, and the unpledged securities in the Bank’s portfolio, which could provide additional collateral for additional borrowings. In total, FHLB borrowings are generally limited to 45% of bank assets, or approximately $2.0 billion, subject to available collateral. Also, at September 30, 2024, the Bank had pledged a total of $415.0 million in loans secured by farmland and agricultural production loans to the Federal Reserve, providing access to $357.9 million in primary credit borrowings from the Federal Reserve’s discount window, none of which was advanced at September 30, 2024. In addition, the Bank has other assets available to pledge to the Federal Reserve, such as commercial loans, which could provide additional collateral for additional borrowings. Management believes its liquid resources will be sufficient to meet the Company’s liquidity needs.

Previous wording

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.

Current wording

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 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 and Bank’s regulators could require adjustments to regulatory capital not reflected in the consolidated financial statements.

Previous wording

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, 2024 and June 30, 2023, that the Company and the Bank met all capital adequacy requirements to which they are subject.

Current wording

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

Previous wording

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.

Current wording

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