SOUTHERN MISSOURI BANCORP, INC. - Quarter Report: 2021 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

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

For the transition period from to

Commission file number 0-23406


Southern Missouri Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Missouri		43-1665523
(State or jurisdiction of incorporation)		(IRS employer id. no.)

2991 Oak Grove Road Poplar Bluff, MO		63901
(Address of principal executive offices)		(Zip code)

(573) 778-1800

Registrant’s telephone number, including area code

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

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

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


Yes	☒	No	☐

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


Yes	☒	No	☐

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


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

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

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


Yes	☐	No	☒

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


Class		Outstanding at May 7, 2021
Common Stock, Par Value $.01		8,934,113 Shares

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SOUTHERN MISSOURI BANCORP, INC.

FORM 10-Q

INDEX


PART I.	Financial Information	PAGE NO.

Item 1.	Condensed Consolidated Financial Statements	3

	- Condensed Consolidated Balance Sheets	3

	- Condensed Consolidated Statements of Income	4

	- Condensed Consolidated Statements of Comprehensive Income	5

	- Condensed Consolidated Statements of Stockholders’ Equity	6

	- Condensed Consolidated Statements of Cash Flows	7

	- Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61

Item 4.	Controls and Procedures	63

PART II.	OTHER INFORMATION	64

Item 1.	Legal Proceedings	64

Item 1a.	Risk Factors	64

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

Item 3.	Defaults upon Senior Securities	64

Item 4.	Mine Safety Disclosures	64

Item 5.	Other Information	64

Item 6.	Exhibits	65

	- Signature Page	67

	- Certifications	69

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PART I: Item 1: Condensed Consolidated Financial Statements

SOUTHERN MISSOURI BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2021 AND JUNE 30, 2020


(dollars in thousands)	March 31, 2021		June 30, 2020
	(unaudited)

Assets
Cash and cash equivalents	$	236,896	$	54,245
Interest-bearing time deposits		977		974
Available for sale securities		190,409		176,524
Stock in FHLB of Des Moines		6,163		6,390
Stock in Federal Reserve Bank of St. Louis		5,018		4,363
Loans receivable, net of allowance for credit losses of $35,227 and $25,139 at March 31, 2021 and June 30, 2020, respectively		2,134,885		2,141,929
Accrued interest receivable		10,030		12,116
Premises and equipment, net		63,908		65,106
Bank owned life insurance – cash surrender value		43,539		43,363
Goodwill		14,089		14,089
Other intangible assets, net		7,079		7,700
Prepaid expenses and other assets		19,064		15,358
Total assets	$	2,732,057	$	2,542,157

Liabilities and Stockholders' Equity
Deposits	$	2,368,761	$	2,184,847
Advances from FHLB		62,781		70,024
Accounts payable and other liabilities		11,440		12,151
Accrued interest payable		918		1,646
Subordinated debt		15,218		15,142
Total liabilities		2,459,118		2,283,810

Common stock, $.01 par value; 25,000,000 shares authorized; 9,361,629 and 9,345,339 shares issued at March 31, 2021 and June 30, 2020, respectively		94		93
Additional paid-in capital		95,549		95,035
Retained earnings		187,878		165,709
Treasury stock of 402,333 and 217,949 shares at March 31, 2021 and June 30, 2020, respectively, at cost		(12,977)		(6,937)
Accumulated other comprehensive income		2,395		4,447
Total stockholders' equity		272,939		258,347
Total liabilities and stockholders' equity	$	2,732,057	$	2,542,157

See Notes to Condensed Consolidated Financial Statements

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SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE- AND NINE- MONTH PERIODS ENDED MARCH 31, 2021 AND 2020 (Unaudited)


	Three months ended				Nine months ended
	March 31,				March 31,
(dollars in thousands except per share data)	2021		2020		2021		2020

INTEREST INCOME:
Loans	$	26,005	$	24,969	$	78,737	$	76,030
Investment securities		559		485		1,568		1,507
Mortgage-backed securities		466		733		1,479		2,141
Other interest-earning assets		70		33		159		110
Total interest income		27,100		26,220		81,943		79,788
INTEREST EXPENSE:
Deposits		3,494		6,135		11,748		19,161
Advances from FHLB		325		439		1,052		1,534
Note payable		—		31		—		102
Subordinated debt		132		197		403		636
Total interest expense		3,951		6,802		13,203		21,433
NET INTEREST INCOME		23,149		19,418		68,740		58,355
PROVISION FOR CREDIT LOSSES		(409)		2,850		1,591		4,134
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		23,558		16,568		67,149		54,221
NONINTEREST INCOME:
Deposit account charges and related fees		1,275		1,538		3,974		4,593
Bank card interchange income		1,004		719		2,670		2,120
Loan late charges		118		149		398		416
Loan servicing fees		217		(285)		895		(52)
Other loan fees		266		370		898		968
Net realized gains on sale of loans		853		178		3,449		653
Net realized gains on sale of AFS securities		90		—		90		—
Earnings on bank owned life insurance		270		247		1,524		755
Other income		431		313		1,287		940
Total noninterest income		4,524		3,229		15,185		10,393
NONINTEREST EXPENSE:
Compensation and benefits		7,739		7,521		23,004		21,638
Occupancy and equipment, net		1,990		1,780		5,826		5,401
Data processing expense		1,253		1,152		3,490		3,089
Telecommunications expense		317		309		940		949
Deposit insurance premiums		174		—		593		—
Legal and professional fees		256		229		690		651
Advertising		240		244		689		837
Postage and office supplies		198		224		585		585
Intangible amortization		338		441		1,057		1,322
Foreclosed property expenses/losses		48		282		137		355
Provision for off balance sheet credit exposure		—		300		—		516
Other operating expense		975		1,087		2,836		3,601
Total noninterest expense		13,528		13,569		39,847		38,944
INCOME BEFORE INCOME TAXES		14,554		6,228		42,487		25,670
INCOME TAXES		3,096		1,129		8,996		5,026
NET INCOME	$	11,458	$	5,099	$	33,491	$	20,644

Basic earnings per common share	$	1.27	$	0.55	$	3.69	$	2.24
Diluted earnings per common share	$	1.27	$	0.55	$	3.69	$	2.24
Dividends per common share	$	0.16	$	0.15	$	0.46	$	0.45

See Notes to Condensed Consolidated Financial Statements

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SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE- AND NINE- MONTH PERIODS ENDED MARCH 31, 2021 AND 2020 (Unaudited)


	Three months ended				Nine months ended
	March 31,				March 31,
(dollars in thousands)	2021		2020		2021		2020

Net income	$	11,458	$	5,099	$	33,491	$	20,644
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale		(2,227)		(178)		(2,541)		335
Less: reclassification adjustment for realized gains included in net income		90		—		90		—
Tax benefit (expense)		511		39		579		(74)
Total other comprehensive income (loss)		(1,806)		(139)		(2,052)		261
Comprehensive income	$	9,652	$	4,960	$	31,439	$	20,905

See Notes to Condensed Consolidated Financial Statements

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SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE- AND NINE- MONTH PERIODS ENDED MARCH 31, 2021 AND 2020 (Unaudited)


	For the three- and nine- month periods ended March 31, 2021
			Additional						Accumulated Other		Total
	Common		Paid-In		Retained		Treasury			Comprehensive		Stockholders'
(dollars in thousands)	Stock		Capital		Earnings		Stock		Income		Equity

BALANCE AS OF DECEMBER 31, 2020	$	93	$	95,109	$	177,861	$	(9,575)	$	4,201	$	267,689

Net Income						11,458						11,458
Change in unrealized gain on available for sale securities										(1,806)		(1,806)
Dividends paid on common stock ($.16 per share)						(1,441)						(1,441)
Stock option expense				440								440
Common stock issued		1										1
Treasury stock purchased								(3,402)				(3,402)
BALANCE AS OF MARCH 31, 2021	$	94	$	95,549	$	187,878	$	(12,977)	$	2,395	$	272,939

BALANCE AS OF JUNE 30, 2020	$	93	$	95,035	$	165,709	$	(6,937)	$	4,447	$	258,347

Impact of ASU 2016-13 adoption						(7,151)						(7,151)
Net Income						33,491						33,491
Change in unrealized gain on available for sale securities										(2,052)		(2,052)
Dividends paid on common stock ($.46 per share)						(4,171)						(4,171)
Stock option expense				514								514
Common stock issued		1										1
Treasury stock purchased								(6,040)				(6,040)
BALANCE AS OF MARCH 31, 2021	$	94	$	95,549	$	187,878	$	(12,977)	$	2,395	$	272,939


	For the three- and nine- month period ended March 31, 2020
			Additional						Accumulated Other		Total
	Common		Paid-In		Retained		Treasury		Comprehensive		Stockholders'
(dollars in thousands)	Stock		Capital		Earnings		Stock		Income		Equity

BALANCE AS OF DECEMBER 31, 2019	$	93	$	94,650	$	156,459	$	(3,980)	$	1,647	$	248,869

Net Income						5,099						5,099
Change in unrealized gain on available for sale securities										(139)		(139)
Dividends paid on common stock ($.15 per share)						(1,381)						(1,381)
Stock option expense				20								20
Stock grant expense				310								310
Exercise of stock options				32								32
Treasury stock purchased								(2,957)				(2,957)
BALANCE AS OF MARCH 31, 2020	$	93	$	95,012	$	160,177	$	(6,937)	$	1,508	$	249,853

BALANCE AS OF JUNE 30, 2019	$	93	$	94,541	$	143,677	$	(1,166)	$	1,247	$	238,392

Net Income						20,644						20,644
Change in unrealized gain on available for sale securities										261		261
Dividends paid on common stock ($.45 per share)						(4,144)						(4,144)
Stock option expense				51								51
Stock grant expense				356								356
Exercise of stock options				64								64
Treasury stock purchased								(5,771)				(5,771)
BALANCE AS OF MARCH 31, 2020	$	93	$	95,012	$	160,177	$	(6,937)	$	1,508	$	249,853

See Notes to Condensed Consolidated Financial Statements

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SOUTHERN MISSOURI BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTH PERIODS ENDED MARCH 31, 2021 AND 2020 (Unaudited)


	Nine months ended
	March 31,
(dollars in thousands)	2021		2020

Cash Flows From Operating Activities:
Net Income	$	33,491	$	20,644
Items not requiring (providing) cash:
Depreciation		3,030		2,841
Loss on disposal of fixed assets		27		295
Stock option and stock grant expense		513		471
Loss on sale/write-down of REO		60		223
Amortization of intangible assets		1,057		1,322
Accretion of purchase accounting adjustments		(1,078)		(1,144)
Increase in cash surrender value of bank owned life insurance (BOLI)		(1,524)		(755)
Provision for credit losses		1,591		4,134
Net amortization of premiums and discounts on securities		1,349		896
Gain on sale of AFS securities		(90)		—
Originations of loans held for sale		(131,889)		(25,705)
Proceeds from sales of loans held for sale		129,637		24,826
Gain on sales of loans held for sale		(3,449)		(653)
Changes in:
Accrued interest receivable		2,086		435
Prepaid expenses and other assets		2,562		310
Accounts payable and other liabilities		(3,611)		557
Deferred income taxes		(429)		19
Accrued interest payable		(728)		(346)
Net cash provided by operating activities		32,605		28,370
Cash flows from investing activities:
Net decrease (increase) in loans		2,478		(123,999)
Net change in interest-bearing deposits		(6)		(3)
Proceeds from maturities of available for sale securities		48,668		34,587
Proceeds from sales of AFS securities		16,284		—
Net redemptions (purchases) of Federal Home Loan Bank stock		227		(3,469)
Net purchases of Federal Reserve Bank of St. Louis stock		(655)		(3)
Purchases of available-for-sale securities		(82,725)		(50,207)
Purchases of premises and equipment		(1,389)		(3,409)
Investments in state & federal tax credits		(1,682)		(4,840)
Proceeds from sale of fixed assets		72		276
Proceeds from sale of foreclosed assets		978		1,317
Proceeds from BOLI claims		1,351		—
Net cash used in investing activities		(16,399)		(149,750)
Cash flows from financing activities:
Net increase in demand deposits and savings accounts		265,514		103,450
Net decrease in certificates of deposits		(81,572)		(25,439)
Net decrease in securities sold under agreements to repurchase		—		(4,376)
Proceeds from Federal Home Loan Bank advances		110,100		521,200
Repayments of Federal Home Loan Bank advances		(117,386)		(442,835)
Purchase of treasury stock		(6,040)		(5,771)
Dividends paid on common stock		(4,171)		(4,144)
Net cash provided by financing activities		166,445		142,085
Increase in cash and cash equivalents		182,651		20,705
Cash and cash equivalents at beginning of period		54,245		35,400
Cash and cash equivalents at end of period	$	236,896	$	56,105
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Conversion of loans to foreclosed real estate	$	721	$	1,035
Conversion of loans to repossessed assets		428		191
Right of use assets obtained in exchange for lease obligations: Operating Leases		599		1,996
Cash paid during the period for:
Interest (net of interest credited)	$	2,129	$	3,084
Income taxes		7,736		1,541

See Notes to Condensed Consolidated Financial Statements

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SOUTHERN MISSOURI BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all material adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated balance sheet of the Company as of June 30, 2020, has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the three- and nine- month periods ended March 31, 2021, are not necessarily indicative of the results that may be expected for the entire fiscal year. For additional information, refer to the audited consolidated financial statements included in the Company’s June 30, 2020 Form 10-K, which was filed with the SEC.

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

Note 2: Organization and Summary of Significant Accounting Policies

Organization. Southern Missouri Bancorp, Inc., a Missouri corporation (the Company) was organized in 1994 and is the parent company of Southern Bank (the Bank). Substantially all of the Company’s consolidated revenues are derived from the operations of the Bank, and the Bank represents substantially all of the Company’s consolidated assets and liabilities. SB Real Estate Investments, LLC is a wholly-owned subsidiary of the Bank formed to hold Southern Bank Real Estate Investments, LLC. Southern Bank Real Estate Investments, LLC is a real estate investment trust (REIT) which is controlled by the SB Real Estate Investments, LLC, and has other preferred shareholders in order to meet the requirements to be a REIT. At March 31, 2021, assets of the REIT were approximately $1.0 billion, and consisted primarily of real estate loan participations acquired from the Bank.

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

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

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

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

On July 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses, also known as the current expected credit loss (“CECL”) standard, which created material changes to the existing critical accounting policy that

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existed at June 30, 2020. Effective July 1, 2020, the significant accounting policy which was considered to be the most critical in preparing the Company’s consolidated financial statements is the determination of the allowance for credit losses (“ACL”) on loans.

Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash equivalents includes cash, due from depository institutions and interest-bearing deposits in other depository institutions with original maturities of three months or less. Interest-bearing deposits in other depository institutions were $199 million and $7 million at March 31, 2021 and June 30, 2020, respectively. The deposits are held in various commercial banks with a total of $2 million and $319,000 exceeding the FDIC’s deposit insurance limits at March 31, 2021 and June 30, 2020, respectively, as well as at the Federal Reserve and the Federal Home Loan Bank of Des Moines and Chicago.

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

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

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

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

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

At adoption of ASU 2016-13, no impairment on AFS securities was attributable to credit. The Company will evaluate impaired AFS securities at the individual level on a quarterly basis, and will consider such factors including, but not limited to: the extent to which the fair value of the security is less than the amortized cost basis; adverse conditions specifically related to the security, an industry, or geographic area; the payment structure of the security and likelihood of the issuer to be able to make payments that may increase in the future; failure of the issuer to make scheduled interest or principal payments; any changes to the rating of the security by a rating agency; and the ability and intent to hold the security until maturity. A qualitative determination as to whether any portion of the impairment is attributable to credit risk is acceptable. There were no credit related factors underlying unrealized losses on AFS securities at March 31, 2021, and June 30, 2020.

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

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

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

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

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

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The ACL is measured on a collective (pool) basis when similar risk characteristics exist. For loans that do not share general risk characteristics with the collectively evaluated pools, the Company estimates credit losses on an individual loan basis, and these loans are excluded from the collectively evaluated pools. An ACL for an individually evaluated loan is recorded when the amortized cost basis of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value, less estimated costs to sell, of the collateral for certain collateral dependent loans. For the collectively evaluated pools, the Company segments the loan portfolio primarily by loan purpose and collateral into 23 pools, which are homogeneous groups of loans that possess similar loss potential characteristics. The Company utilizes the discounted cash flow (“DCF”) methodology for measurement of the required ACL for all loan pools. The DCF model implements probability of default (“PD”) and loss given default (“LGD”) calculations at the instrument level. PD and LGD are determined from the Company’s historical experience over a period of approximately five years. The Company defines a default as an event of charge off, an adverse (substandard or worse) internal credit rating, becoming delinquent 90 days or more, or being placed on nonaccrual status. A PD/LGD estimate is applied to a projected model of the loan’s cashflow, including principal and interest payments, with consideration for prepayment speeds, principal curtailments, and recovery lag. Prepayments, curtailments, and recovery lag have been determined to not have a material impact on estimated credit losses, historically.

Prior to the July 1, 2020, adoption of ASU 2016-13, the allowance for loan and lease losses (ALLL) represented management’s best estimate of probable losses in the existing loan portfolio at the end of the reporting period. Integral to the methodology for determining the adequacy of the ALLL was portfolio segmentation and impairment measurement. Under the Company’s methodology, loans were first segmented into 1) those comprising large groups of homogeneous loans which are collectively evaluated for impairment and 2) all other loans which are individually evaluated. Those loans in the second category were further segmented utilizing a defined grading system which involves categorizing loans by severity of risk based on conditions that may affect the ability of the borrowers to repay their debt, such as current financial information, collateral valuations, historical payment experience, credit documentation, public information, and current trends. Loans were considered impaired if, based on current information and events, it was considered probable that the Company would be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement, and was generally based on the fair value, less estimated costs to sell, of the loan’s collateral. If the loan was not collateral-dependent, the measurement of impairment was based on the present value of expected future cash flows discounted at the historical effective interest rate, or the observable market price of the loan. Impairment identified through this evaluation process was a component of the ALLL. If a loan was not considered impaired, it was grouped together with loans having similar characteristics (i.e., the same risk grade), and an ALLL was based upon a quantitative factor (historical average charge-offs) and qualitative factors such as changes in lending policies; national, regional, and local economic conditions; changes in mix and volume of portfolio; experience, ability, and depth of lending management and staff; entry to new markets; levels and trends of delinquent, nonaccrual, special mention, and classified loans; concentrations of credit; changes in collateral values; agricultural economic conditions; and regulatory risk.

Prior to the July 1, 2020, adoption of ASU 2016-13, loans acquired in an acquisition that had evidence of credit quality deterioration since origination and for which it was probable that the Company would be unable to collect all contractually required payments receivable were considered purchased credit impaired (“PCI”). PCI loans were individually evaluated and recorded at fair value at the date of acquisition with no initial ALLL based on a DCF methodology that considered various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. The difference between the DCFs expected at acquisition and the investment in the loan, or the “accretable yield,” was recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the DCFs expected at acquisition, or the “non-accretable difference,” were not recognized on the balance sheet and did not result in any yield adjustments, loss accruals or valuation allowances. Increases in expected cash flows, including prepayments, subsequent to the initial investment were recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows were recognized as impairment. ALLL on PCI loans reflected only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately were not to be received).

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

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

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

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

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

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

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

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

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

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

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Goodwill. The Company’s goodwill is evaluated annually for impairment or more frequently if impairment indicators are present. A qualitative assessment is performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value is less than the carrying amount, including goodwill. If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. As of June 30, 2020, there was no impairment indicated, based on a qualitative assessment of goodwill, which considered: the decline in the market value of the Company’s common stock, relative to peers; concentrations of credit; profitability; nonperforming assets; capital levels; and results of recent regulatory examinations. The Company believes there is no impairment of goodwill at March 31, 2021.

Intangible Assets. The Company’s intangible assets at March 31, 2021 included gross core deposit intangibles of $15.3 million with $9.7 million accumulated amortization, gross other identifiable intangibles of $3.8 million with accumulated amortization of $3.8 million, and mortgage servicing rights of $1.5 million. At June 30, 2020, the Company’s intangible assets included gross core deposit intangibles of $15.3 million with $8.7 million accumulated amortization, gross other identifiable intangibles of $3.8 million with accumulated amortization of $3.8 million, and mortgage servicing rights of $1.1 million. The Company’s core deposit intangible assets are being amortized using the straight line method, over periods ranging from five to seven years, with amortization expense expected to be approximately $338,000 in the remainder of fiscal 2021, $1.4 million in fiscal 2022 through fiscal 2024, $807,000 in fiscal 2025, and $328,000 thereafter. As of June 30, 2020, there was no impairment indicated, and the Company believes there is no impairment of other intangible assets at March 31, 2021.

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

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

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

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

Incentive Plans. The Company accounts for its Management and Recognition Plan (MRP), Equity Incentive Plan (EIP), and Omnibus Incentive Plan (OIP) in accordance with ASC 718, “Share-Based Payment.” Compensation expense is based on the market price of the Company’s stock on the date the shares are granted and is recorded over the vesting period. The difference between the grant-date fair value and the fair value on the date the shares are considered earned represents a tax benefit to the Company that is recorded as an adjustment to income tax expense.

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

In the event that the participant dies before collecting any or all of the benefits, the Bank shall pay the participant’s beneficiary. No benefits shall be payable to anyone other than the beneficiary, and shall terminate on the death of the beneficiary.

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

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

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

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

New Accounting Pronouncements:

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for certain removed and modified disclosures. Adoption of this standard did not have a significant impact on the Company’s consolidated financial statements.

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

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


	July 1, 2020
	As reported		As reported		Impact of
	under		prior to		adoption
(dollars in thousands)	ASU 2016-13		ASU 2016-13		ASU 2016-13

Loans receivable	$	2,142,363	$	2,141,929	$	434
Allowance for credit losses on loans:
Real Estate Loans:
Residential		8,396		4,875		3,521
Construction		1,889		2,010		(121)
Commercial		15,988		12,132		3,856
Consumer loans		2,247		1,182		1,065
Commercial loans		5,952		4,940		1,012
Total allowance for credit losses on loans	$	34,472	$	25,139	$	9,333
Total allowance for credit losses on off-balance sheet credit exposures	$	2,227	$	1,959	$	268

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

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

Reclassifications. Certain reclassifications have been made to the three- and nine- month periods ended March 31, 2020 consolidated financial statements to conform to the three- and nine- month periods ended March 31, 2021 consolidated financial statement presentation. These reclassifications had no effect on net earnings or stockholders’ equity.

Revisions. Certain immaterial revisions have been made to the three- and nine- month periods ended March 31, 2020 consolidated financial statements for reporting interchange income and expenses related to an agent relationship. These revisions did not have a significant impact on the consolidated financials statement line items impacted.

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Note 3: Securities

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


	March 31, 2021
			Gross		Gross		Allowance		Estimated
	Amortized		Unrealized		Unrealized		for		Fair
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Value

Investment and mortgage backed securities:
State and political subdivisions	$	42,065	$	1,332	$	(105)	$	—	$	43,292
Other securities		21,000		235		(398)		—		20,837
Mortgage-backed GSE residential		124,227		3,188		(1,135)		—		126,280
Total investments and mortgage-backed securities	$	187,292	$	4,755	$	(1,638)	$	—	$	190,409


	June 30, 2020
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value

Investment and mortgage backed securities:
State and political subdivisions	$	40,486	$	1,502	$	—	$	41,988
Other securities		7,919		48		(343)		7,624
Mortgage-backed GSE residential		122,375		4,576		(39)		126,912
Total investment and mortgage-backed securities	$	170,780	$	6,126	$	(382)	$	176,524

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


	March 31, 2021
	Amortized		Estimated
(dollars in thousands)	Cost		Fair Value
Within one year	$	2,003	$	2,025
After one year but less than five years		8,450		8,610
After five years but less than ten years		29,173		29,669
After ten years		23,439		23,825
Total investment securities		63,065		64,129
Mortgage-backed securities		124,227		126,280
Total investment and mortgage-backed securities	$	187,292	$	190,409

The carrying value of investment and mortgage-backed securities pledged as collateral to secure public deposits amounted to $162.5 million at March 31, 2021 and $156.1 million at June 30, 2020. The securities pledged consist of marketable securities, including $120.5 million and $123.9 million of Mortgage-backed Securities, $42.0 million and $32.0 million of State and Political Subdivisions Obligations, and $0 and $200,000 of Other Securities at March 31, 2021 and June 30, 2020, respectively.

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The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position for which an ACL has not been recorded at March 31, 2021 and June 30, 2020:


	March 31, 2021
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
(dollars in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Obligations of state and political subdivisions	$	7,175	$	105	$	—	$	—	$	7,175	$	105
Other securities		10,723		157		735		241		11,458		398
Mortgage-backed securities		45,723		1,135		—		—		45,723		1,135
Total investment and mortgage-backed securities	$	63,621	$	1,397	$	735	$	241	$	64,356	$	1,638


	June 30, 2020
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
(dollars in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Other securities	$	995	$	5	$	643	$	338	$	1,638	$	343
Mortgage-backed securities		9,037		39		—		—		9,037		39
Total investments and mortgage-backed securities	$	10,032	$	44	$	643	$	338	$	10,675	$	382

Mortgage-backed securities. The unrealized losses on the Company’s investments in mortgage-backed securities include 20 individual securities which have been in an unrealized loss position for less than 12 months. The securities are performing and are of high credit quality. The unrealized losses were caused by variations in market interest rates since purchase or acquisition. Because the Company does not intend to sell these securities and it is likely that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

Obligations of state and political subdivisions. The unrealized losses on the Company’s investments in obligations of state and political subdivisions include 13 individual securities which have been in an unrealized loss position for less than 12 months. The securities are performing and are of high credit quality. The unrealized losses were caused by variations in market interest rates since purchase or acquisition. Because the Company does not intend to sell these securities and it is likely that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

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

At March 31, 2021 there were two pooled trust preferred securities with an estimated fair value of $735,000 and unrealized losses of $241,000 in a continuous unrealized loss position for twelve months or more. These unrealized losses were primarily due to the long-term nature of the pooled trust preferred securities and a reduced demand for these securities, and concerns regarding the financial institutions that issued the underlying trust preferred securities.

The March 31, 2021, cash flow analysis for these two securities indicated it is probable the Company will receive all contracted principal and related interest projected. The cash flow analysis used in making this determination was based on anticipated default, recovery, and prepayment rates, and the resulting cash flows were discounted based on the yield spread anticipated at the time the securities were purchased. Other inputs include the actual collateral attributes, which include credit ratings and other performance indicators of the underlying financial institutions, including profitability, capital ratios, and asset quality. Assumptions for these two securities included prepayments averaging 1.8 percent,

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annually, annual defaults averaging 220 basis points over the next two years, and 68 basis points thereafter, and a recovery rate averaging seven percent of gross defaults, lagged two years.

One of these two securities has continued to receive cash interest payments in full since the Company’s purchase; the other security received principal-in-kind (PIK), in lieu of cash interest, for a period of time following the recession and financial crisis which began in 2008, but resumed cash interest payments during fiscal 2014. The Company's cash flow analysis indicates that cash interest payments are expected to continue for both securities. Because the Company does not intend to sell these securities and it is likely that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

The Company does not believe any other individual unrealized loss as of March 31, 2021, is the result of a credit loss. However, the Company could be required to recognize an ACL in future periods with respect to its available for sale investment securities portfolio.

Credit losses recognized on investments. There were no credit losses recognized in income and other losses or recorded in other comprehensive income for the three- and nine- month periods ended March 31, 2021 and 2020.

Note 4: Loans and Allowance for Credit Losses

Classes of loans are summarized as follows:


(dollars in thousands)	March 31, 2021		June 30, 2020
Real Estate Loans:
Residential	$	655,800	$	627,357
Construction		202,945		185,924
Commercial		897,450		887,419
Consumer loans		76,347		80,767
Commercial loans		421,825		468,448
		2,254,367		2,249,915
Loans in process		(80,203)		(78,452)
Deferred loan fees, net		(4,052)		(4,395)
Allowance for credit losses		(35,227)		(25,139)
Total loans	$	2,134,885	$	2,141,929

The Company’s lending activities consist of origination of loans secured by mortgages on one- to four-family residences and commercial and agricultural real estate, construction loans on residential and commercial properties, commercial and agricultural business loans and consumer loans. At March 31, 2021 the Company had purchased participations in 22 loans totaling $75.3 million, as compared to 23 loans totaling $58.2 million at June 30, 2020.

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

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

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General risks related to multi-family residential lending include rental demand, rental rates, and vacancies, as well as collateral values and borrower leverage.

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

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

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

While the Company typically utilizes relatively short maturity periods to closely monitor the inherent risks associated with construction loans for these loans, weather conditions, change orders, availability of materials and/or labor, and other factors may contribute to the lengthening of a project, thus necessitating the need to renew the construction loan at the balloon maturity. Such extensions are typically executed in incremental three month periods to facilitate project completion. The Company’s average term of construction loans is approximately eight months. During construction, loans typically require monthly interest only payments which may allow the Company an opportunity to monitor for early signs of financial difficulty should the borrower fail to make a required monthly payment. Additionally, during the construction phase, the Company typically performs interim inspections which further allow the Company opportunity to assess risk. At March 31, 2021, construction loans outstanding included 52 loans, totaling $28.0 million, for which a modification had been agreed to. At June 30, 2020, construction loans outstanding included 77 loans, totaling $48.8 million, for which a modification had been agreed to. In general, these modifications were solely for the purpose of extending the maturity date due to conditions described above, pursuant to the Company’s normal underwriting and monitoring procedures. As these modifications were not executed due to financial difficulty on the part of the borrower, they were not accounted for as troubled debt restructurings (TDRs); nor were they made pursuant to exemptions provided under the CARES Act. Under the CARES Act, financial institutions have the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Loans modified under the CARES Act did not include any construction loans with drawn balances at March 31, 2021.

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

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

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

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

Allowance for Credit Losses. The provision for credit losses for the three- and nine- month periods ended March 31, 2021, was ($409,000), and $1.6 million, respectively, compared to $2.9 million and $4.1 million in the same periods of the prior fiscal year. The charge 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, 2021, and as of that date the Company’s ACL was $35.2 million. Reduced provisioning was attributed primarily to an improved outlook regarding the economic environment resulting as the economy recovers from the effects of the COVID-19 pandemic and the Company notes less uncertainty regarding the potential impact on its borrowers generally, combined with moderated growth in unguaranteed loan balances, relatively consistent levels of net charge offs, and a reduction in delinquent or adversely classified credits, and nonperforming loans. While the Company assesses that the economic outlook has significantly improved over the previous three months and as compared to the year ended June 30, 2020, there remains uncertainty regarding the possible continuing impact of the COVID-19 pandemic or when transmission of the virus will abate to the point that restrictions are fully released and consumer behavior can be said to have returned to normal. As such, there remains a potential for the pandemic to negatively impact global and regional economies, or for recent efforts by the U.S. government and the Federal Reserve to respond to the pandemic and its economic impact to fall short of expectations. Specifically, management considered:

●

trailing measures (12-month) of national and state unemployment, which continued to increase in the most recent quarter. This is assessed to be an elevated and increasing risk factor;

●

trailing measures (2 years) of GDP growth, which continued to improve in the most recent quarter, but over the lookback period remains very low by historical standards. This is considered to be an elevated and declining risk factor;

●

projected GDP growth, which increased in the most recent quarter, and remains quite high by historical standards. This is considered to be a low and stable risk factor;

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●

the pace of growth of the Company’s loan portfolio, exclusive of acquisitions or government guaranteed loans, relative to overall economic growth. This measure remains elevated, but continued to moderate in the most recent quarter, and is considered to be an elevated and declining risk factor;

●

levels and trends for loan delinquencies nationally and in the region. This measure as reported remains relatively stable, but management considers the measure to currently be under-reported due to the availability of modifications under the CARES Act. This is considered to be an elevated and uncertain risk factor;

●

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

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

The following tables present the balance in the ACL and the recorded investment in loans (excluding loans in process and deferred loan fees) based on portfolio segment as of March 31, 2021 and June 30, 2020, and activity in the ACL and ALLL for the three- and nine- month periods ended March 31, 2021 and 2020:


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

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


	At period end and for the nine months ended March 31, 2020
	Residential		Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for loan losses:
Balance, beginning of period	$	3,706	$	1,365	$	9,399	$	1,046	$	4,387	$	19,903
Provision charged to expense		1,195		246		2,140		156		397		4,134
Losses charged off		(305)		—		(12)		(117)		(173)		(607)
Recoveries		18		—		15		17		28		78
Balance, end of period	$	4,614	$	1,611	$	11,542	$	1,102	$	4,639	$	23,508
Ending Balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Ending Balance: collectively evaluated for impairment	$	4,614	$	1,611	$	11,542	$	1,102	$	4,639	$	23,508
Ending Balance: loans acquired with deteriorated credit quality	$	—	$	—	$	—	$	—	$	—	$	—


	For the three months ended March 31, 2020
	Residential		Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for loan losses:
Balance, beginning of period	$	3,712	$	1,657	$	9,827	$	1,050	$	4,568	$	20,814
Provision charged to expense		1,035		(46)		1,727		64		70		2,850
Losses charged off		(133)		—		(12)		(19)		(26)		(190)
Recoveries		—		—		—		7		27		34
Balance, end of period	$	4,614	$	1,611	$	11,542	$	1,102	$	4,639	$	23,508

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	At June 30, 2020
	Residential			Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for loan losses:
Balance, end of period	$	4,875	$	2,010	$	12,132	$	1,182	$	4,940	$	25,139
Ending Balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Ending Balance: collectively evaluated for impairment	$	4,875	$	2,010	$	12,132	$	1,182	$	4,940	$	25,139
Ending Balance: loans acquired with deteriorated credit quality	$	—	$	—	$	—	$	—	$	—	$	—
Loans:
Ending Balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Ending Balance: collectively evaluated for impairment	$	626,085	$	106,194	$	872,716	$	80,767	$	463,902	$	2,149,664
Ending Balance: loans acquired with deteriorated credit quality	$	1,272	$	1,278	$	14,703	$	—	$	4,546	$	21,799

Included in the Company’s loan portfolio are certain loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination, which are considered purchased credit deteriorated (PCD) loans. Prior to the July 1, 2020 adoption of ASU 2016-13, these loans were accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were described as purchased credit impaired (PCI) loans. Under ASC 310-30, these loans were written down at acquisition to an amount estimated to be collectible, and, unless there was further deterioration following the acquisition, an ALLL was not recognized for these loans. As a result, certain historical ratios regarding the Company’s loan portfolio and credit quality cannot be used to compare the Company to peer companies or to compare the Company’s credit quality over time. The ratios particularly affected by accounting under ASC 310-30 include the allowance as a percentage of loans, nonaccrual loans, and nonperforming assets, and nonaccrual loans and nonperforming loans as a percentage of total loans. For more information about the transition from PCI to PCD status of the Company’s acquired loans, see Note 2: Organization and Summary of Significant Accounting Policies, Loans.

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

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

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

Substandard – Loans classified as substandard possess weaknesses that jeopardize the ultimate collection of the principal and interest outstanding. These loans exhibit continued financial losses, ongoing delinquency, overall poor

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financial condition, and insufficient collateral. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

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

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

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

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The following table presents the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and year of origination as of March 31, 2021. This table includes PCD loans, which are reported according to risk categorization after acquisition based on the Company’s standards for such classification:


													Revolving
	2021		2020		2019		2018		2017		Prior		loans		Total
Residential Real Estate
Pass	$	247,325	$	198,404	$	39,207	$	36,547	$	27,142	$	84,507	$	5,385	$	638,517
Watch		125		71		10,994		—		93		817		—		12,100
Special Mention		—		—		—		—		—		—		—		—
Substandard		4,652		48		17		52		—		414		—		5,183
Doubtful		—		—		—		—		—		—		—		—
Total Residential Real Estate	$	252,102	$	198,523	$	50,218	$	36,599	$	27,235	$	85,738	$	5,385	$	655,800

Construction Real Estate
Pass	$	73,397	$	42,331	$	6,998	$	—	$	—	$	—	$	—	$	122,726
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		16		—		—		—		—		—		—		16
Doubtful		—		—		—		—		—		—		—		—
Total Construction Real Estate	$	73,413	$	42,331	$	6,998	$	—	$	—	$	—	$	—	$	122,742

Commercial Real Estate
Pass	$	264,035	$	174,218	$	109,116	$	105,165	$	76,865	$	84,000	$	25,836	$	839,235
Watch		4,271		813		10,740		5,393		530		460		819		23,026
Special Mention		—		8,806		—		1,793		12,826		—		300		23,725
Substandard		8,713		1,162		506		6		50		101		69		10,607
Doubtful		—		—		857		—		—		—		—		857
Total Commercial Real Estate	$	277,019	$	184,999	$	121,219	$	112,357	$	90,271	$	84,561	$	27,024	$	897,450

Consumer
Pass	$	17,990	$	10,989	$	4,580	$	1,584	$	797	$	689	$	39,459	$	76,088
Watch		83		—		—		—		—		—		48		131
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		26		—		36		32		—		34		128
Doubtful		—		—		—		—		—		—		—		—
Total Consumer	$	18,073	$	11,015	$	4,580	$	1,620	$	829	$	689	$	39,541	$	76,347

Commercial
Pass	$	152,172	$	94,604	$	21,289	$	8,517	$	7,831	$	9,686	$	118,221	$	412,320
Watch		1,284		274		1,791		139		—		7		1,991		5,486
Special Mention		—		—		—		—		—		—		—		—
Substandard		449		1,109		321		1		176		4		1,959		4,019
Doubtful		—		—		—		—		—		—		—		—
Total Commercial	$	153,905	$	95,987	$	23,401	$	8,657	$	8,007	$	9,697	$	122,171	$	421,825

Total Loans
Pass	$	754,919	$	520,546	$	181,190	$	151,813	$	112,635	$	178,882	$	188,901	$	2,088,886
Watch		5,763		1,158		23,525		5,532		623		1,284		2,858		40,743
Special Mention		—		8,806		—		1,793		12,826		—		300		23,725
Substandard		13,830		2,345		844		95		258		519		2,062		19,953
Doubtful		—		—		857		—		—		—		—		857
Total	$	774,512	$	532,855	$	206,416	$	159,233	$	126,342	$	180,685	$	194,121	$	2,174,164

At March 31, 2021, PCD loans comprised $3.2 million of credits rated “Pass” $9.0 million of credits rated “Watch” none rated “Special Mention” $3.7 million of credits rated “Substandard” and none rated “Doubtful”.

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The following table presents the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and payment activity as of June 30, 2020. This table includes PCI loans, which were reported according to risk categorization after acquisition based on the Company’s standards for such classification:


	June 30, 2020
	Residential		Construction		Commercial
(dollars in thousands)	Real Estate		Real Estate		Real Estate		Consumer		Commercial
Pass	$	620,004	$	103,105	$	829,276	$	80,517	$	457,385
Watch		1,900		4,367		45,262		45		4,708
Special Mention		—		—		403		25		—
Substandard		5,453		—		11,590		180		6,355
Doubtful		—		—		888		—		—
Total	$	627,357	$	107,472	$	887,419	$	80,767	$	468,448

At June 30, 2020, PCI loans comprised $5.9 million of credits rated “Pass” $10.3 million of credits rated “Watch”, none rated “Special Mention”, $5.6 million of credits rated “Substandard” and none rated “Doubtful”.

Past-due Loans. The following tables present the Company’s loan portfolio aging analysis (excluding loans in process and deferred loan fees) as of March 31, 2021 and June 30, 2020. These tables include PCD and PCI loans, which are reported according to aging analysis after acquisition based on the Company’s standards for such classification:


	March 31, 2021
					Greater Than								Greater Than 90
	30-59 Days		60-89 Days		90 Days		Total				Total Loans		Days Past Due
(dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Receivable		and Accruing
Real Estate Loans:
Residential	$	1,270	$	—	$	305	$	1,575	$	654,225	$	655,800	$	—
Construction		—		—		—		—		122,742		122,742		—
Commercial		1,329		12		399		1,740		895,710		897,450		—
Consumer loans		322		52		95		469		75,878		76,347		—
Commercial loans		333		39		148		520		421,305		421,825		—
Total loans	$	3,254	$	103	$	947	$	4,304	$	2,169,860	$	2,174,164	$	—


	June 30, 2020
					Greater Than								Greater Than 90
	30-59 Days		60-89 Days		90 Days		Total				Total Loans		Days Past Due
(dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Receivable		and Accruing
Real Estate Loans:
Residential	$	772	$	378	$	654	$	1,804	$	625,553	$	627,357	$	—
Construction		—		—		—		—		107,472		107,472		—
Commercial		641		327		1,073		2,041		885,378		887,419		—
Consumer loans		180		53		193		426		80,341		80,767		—
Commercial loans		93		1,219		810		2,122		466,326		468,448		—
Total loans	$	1,686	$	1,977	$	2,730	$	6,393	$	2,165,070	$	2,171,463	$	—

Under the CARES Act, financial institutions have the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Loans with such modifications in effect at March 31, 2021, included $40.4 million in loans reported as current in the above table, while none were past due. Loans with such modifications in effect at June 30, 2020, included $380.1 million in loans reported as current in the above table, while an additional $29,000 of consumer loans and $1,000 in residential real estate loans with such modifications were reported as 30-59 days past due, and $66,000 of commercial loans with such modifications were reported as 60-89 days past due at such date.

At March 31, 2021 and June 30, 2020 there were no PCD or PCI loans that were greater than 90 days past due.

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

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


	Amortized cost basis of
	loans determined to be		Related allowance
	collateral dependent		for credit losses
(dollars in thousands)
Residential real estate loans
1- to 4-family residential loans	$	904	$	232
Total loans	$	904	$	232

Impairment. Prior to the July 1, 2020, adoption of ASU 2016-13, a loan was considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it was probable the Company would be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans included nonperforming loans, as well as performing loans modified in TDRs where concessions were granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

The table below presents impaired loans (excluding loans in process and deferred loan fees) as of June 30, 2020. The table includes PCI loans at June 30, 2020 for which it was deemed probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable. In an instance where, subsequent to the acquisition, the Company determined it was probable, for a specific loan, that cash flows received would exceed the amount previously expected, the Company will recalculate the amount of accretable yield in order to recognize the improved cash flow expectation as additional interest income over the remaining life of the loan. These loans, however, continued to be reported as impaired loans. In an instance where, subsequent to the acquisition, the Company determined it was probable, for a specific loan, that cash flows received would be less than the amount previously expected, the Company would allocate a specific allowance under the terms of ASC 310-10-35.

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	June 30, 2020
	Recorded		Unpaid Principal		Specific
(dollars in thousands)	Balance		Balance		Allowance
Loans without a specific valuation allowance:
Residential real estate	$	3,811	$	4,047	$	—
Construction real estate		1,277		1,312		—
Commercial real estate		19,271		23,676		—
Consumer loans		—		—		—
Commercial loans		5,040		6,065		—
Loans with a specific valuation allowance:
Residential real estate	$	—	$	—	$	—
Construction real estate		—		—		—
Commercial real estate		—		—		—
Consumer loans		—		—		—
Commercial loans		—		—		—
Total:
Residential real estate	$	3,811	$	4,047	$	—
Construction real estate	$	1,277	$	1,312	$	—
Commercial real estate	$	19,271	$	23,676	$	—
Consumer loans	$	—	$	—	$	—
Commercial loans	$	5,040	$	6,065	$	—

At June 30, 2020, PCI loans comprised $21.8 million of impaired loans without a specific valuation allowance.

The following tables present information regarding interest income recognized on impaired loans:


	For the three-month period ended
	March 31, 2020
	Average
	Investment in		Interest Income
(dollars in thousands)	Impaired Loans		Recognized
Residential Real Estate	$	1,288	$	22
Construction Real Estate		1,292		30
Commercial Real Estate		15,366		309
Consumer Loans		—		—
Commercial Loans		5,909		115
Total Loans	$	23,855	$	476


	For the nine-month period ended
	March 31, 2020
	Average
	Investment in		Interest Income
(dollars in thousands)	Impaired Loans		Recognized
Residential Real Estate	$	1,482	$	67
Construction Real Estate		1,299		114
Commercial Real Estate		16,544		984
Consumer Loans		—		—
Commercial Loans		5,860		329
Total Loans	$	25,185	$	1,494

Interest income on impaired loans recognized on a cash basis in the three- and nine- month periods ended March 31, 2020, was immaterial. For the three- and nine- month periods ended March 31, 2020, the amount of interest income recorded for impaired loans that represented a change in the present value of cash flows attributable to the passage of time was approximately $47,000 and $210,000, respectively.

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Nonaccrual Loans. The following table presents the Company’s amortized cost basis of nonaccrual loans segmented by class of loans at March 31, 2021 and June 30, 2020. The table excludes performing TDRs.


(dollars in thousands)	March 31, 2021		June 30, 2020
Residential real estate	$	3,463	$	4,010
Construction real estate		—		—
Commercial real estate		2,496		3,106
Consumer loans		181		196
Commercial loans		616		1,345
Total loans	$	6,756	$	8,657

At March 31, 2021, there were no nonaccrual loans individually evaluated for which no ACL was recorded. Interest income recognized on nonaccrual loans in the three- and nine- month periods ended March 31, 2021 and 2020, was immaterial.

Troubled Debt Restructurings. Prior to the July 1, 2020, adoption of ASU 2016-13, loans restructured as TDRs were included in certain loan categories classified as impaired loans, where economic concessions have been granted to borrowers who have experienced financial difficulties. Subsequent to the adoption of ASU 2016-13, TDRs are evaluated to determine whether they share similar risk characteristics with collectively evaluated loan pools, or must be individually evaluated. These concessions typically result from our loss mitigation activities, and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. In general, the Company’s loans that have been subject to classification as TDRs are the result of guidance under ASU No. 2011-02, which indicates that the Company may not consider the borrower’s effective borrowing rate on the old debt immediately before the restructuring in determining whether a concession has been granted. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

During the nine- month period ended March 31, 2021, certain loans modified were classified as TDRs. During the three- month periods ended March 31, 2021, and the three- and nine- month periods ended March 31, 2020, there were no loans modified as TDRs. They are shown, segregated by class, in the table below:


	For the three-month periods ended
	March 31, 2021			March 31, 2020
	Number of	Recorded		Number of	Recorded
(dollars in thousands)	modifications	Investment		modifications	Investment
Residential real estate	—	$	—	—	$	—
Construction real estate	—		—	—		—
Commercial real estate	—		—	—		—
Consumer loans	—		—	—		—
Commercial loans	—		—	—		—
Total	—	$	—	—	$	—


	For the nine-month periods ended
	March 31, 2021			March 31, 2020
	Number of	Recorded		Number of	Recorded
(dollars in thousands)	modifications	Investment		modifications	Investment
Residential real estate	1	$	93	—	$	—
Construction real estate	—		—	—		—
Commercial real estate	2		1,692	—		—
Consumer loans	—		—	—		—
Commercial loans	1		29	—		—
Total	4	$	1,814	—	$	—

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Performing loans classified as TDRs and outstanding at March 31, 2021 and June 30, 2020, segregated by class, are shown in the table below. Nonperforming TDRs are shown as nonaccrual loans.


	March 31, 2021			June 30, 2020
	Number of	Recorded		Number of	Recorded
(dollars in thousands)	modifications	Investment		modifications	Investment
Residential real estate	3	$	1,014	3	$	791
Construction real estate	—		—	—		—
Commercial real estate	7		3,401	10		4,544
Consumer loans	—		—	—		—
Commercial loans	8		2,678	7		3,245
Total	18	$	7,093	20	$	8,580

Residential Real Estate Foreclosures. The Company may obtain physical possession of real estate collateralizing a residential mortgage loan or home equity loan via foreclosure or in-substance repossession. As of March 31, 2021 and June 30, 2020, the carrying value of foreclosed residential real estate properties as a result of obtaining physical possession was $775,000 and $563,000, respectively. In addition, as of March 31, 2021 and June 30, 2020, the Company had residential mortgage loans and home equity loans with a carrying value of $261,000 and $435,000, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process.

Purchased Credit Deteriorated Loans. Prior to the July 1, 2020, adoption of ASU 2016-13, loans acquired in an acquisition that had evidence of credit quality since origination and for which it was probable that the Company would be unable to collect all contractually required payments receivable were considered PCI. Subsequent to the July 1, 2020, adoption of ASU 2016-13, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. All loans considered to be PCI prior to July 1, 2020, were converted to PCD on that date.

The carrying amount of $21.8 million in PCI loans was included in the consolidated balance sheet amount of loans receivable at June 30, 2020, with no associated ACL. In accordance with ASU 2016-13, the Company did not reassess whether the PCI loans met the criteria of PCD loans as of the adoption date. The amortized cost of the PCD loans were adjusted to reflect the addition of $434,000 to the ACL. PCD loans receivable, net of ACL, totaling $15.9 million were included in the balance sheet amount of loans receivable at March 31, 2021.

During the three- and nine-month periods ended March 31, 2021, and during the same periods of the prior fiscal year, the Company had no increases to the ALLL or ACL by a charge to the consolidated income statement related to PCI or PCD loans. During the three- and nine-month periods ended March 31, 2021, an ACL of $0 and $209,000, respectively, related to these loans was reversed, while no ALLL related to these loans was reversed during the same periods of the prior fiscal year.

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Note 5: Premises and Equipment

Following is a summary of premises and equipment:


(dollars in thousands)	March 31, 2021		June 30, 2020
Land	$	12,480	$	12,585
Buildings and improvements		56,937		56,039
Construction in progress		173		435
Furniture, fixtures, equipment and software		18,730		18,109
Automobiles		120		120
Operating leases ROU asset		2,507		1,965
		90,947		89,253
Less accumulated depreciation		27,039		24,147
	$	63,908	$	65,106

Leases. The Company adopted ASU 2016-02, Leases (Topic 842), on July 1, 2019, using the modified retrospective transition approach whereby comparative periods were not restated. The Company also elected certain relief options under the ASU, including the option not to recognize right of use asset and lease liabilities that arise from short-term leases (leases with terms of twelve months or less). The Company has five leased properties and numerous office equipment lease agreements in which it is the lessee, with lease terms exceeding twelve months.

All of the leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheets. With the adoption of ASU 2016-02, these operating leases are now included as a ROU asset in the premises and equipment line item on the Company’s consolidated balance sheets. The corresponding lease liability is included in the accounts payable and other liabilities line item on the Company’s consolidated balance sheets. Because these leases are classified as operating leases, the adoption of the new standard did not have a material effect on lease expense on the Company’s consolidated statements of income.

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

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	March 31, 2021		June 30, 2020
Consolidated Balance Sheet
Operating leases right of use asset	$	2,507	$	1,965
Operating leases liability	$	2,507	$	1,965


	Three Months Ended March 31,				Nine Months Ended March 31,
	2021		2020		2021		2020
Consolidated Statement of Income
Operating lease costs classified as occupancy and equipment expense	$	107	$	45	$	242	$	153
(includes short-term lease costs)

Supplemental disclosures of cash flow information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	80	$	39	$	205	$	116
ROU assets obtained in exchange for operating lease obligations:	$	599	$	—	$	599	$	2,004

At March 31, 2021, future expected lease payments for leases with terms exceeding one year were as follows:


(dollars in thousands)
2021	$	76
2022		279
2023		279
2024		279
2025		279
Thereafter		3,126
Future lease payments expected	$	4,318

The Company leases facilities it owns or portions of facilities it owns to other third parties. The Company has determined that all of these lease agreements, in terms of being the lessor, are classified as operating leases. For the three- and nine- month periods ended March 31, 2021, income recognized from these lessor agreements was $82,000 and $238,000, respectively. For the three- and nine- month periods ended March 31, 2020, income recognized from these lessor agreements was $80,000 and $242,000, respectively. Income from lessor agreements was included in net occupancy and equipment expense.

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Note 6: Deposits

Deposits are summarized as follows:


(dollars in thousands)	March 31, 2021		June 30, 2020
Non-interest bearing accounts	$	387,416	$	316,048
NOW accounts		926,488		781,937
Money market deposit accounts		241,933		231,162
Savings accounts		220,025		181,229
Certificates		592,899		674,471
Total Deposit Accounts	$	2,368,761	$	2,184,847

Note 7: Earnings Per Share

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


	Three months ended				Nine months ended
	March 31,				March 31,
	2021		2020		2021		2020

(dollars in thousands except per share data)
Net income	$	11,458	$	5,099	$	33,491	$	20,644
Less: distributed earnings allocated to participating securities		(5)		—		(13)		—
Less: undistributed earnings allocated to participating securities		(35)		—		(91)		—
Net income available to common shareholders	$	11,418	$	5,099	$	33,387	$	20,644

Weighted-average common shares outstanding, including participating securities		9,004,034		9,197,370		9,073,545		9,210,559
Less: weighted-average participating securities outstanding (restricted shares)		(31,845)		—		(28,172)		—
Weighted-average basic common shares outstanding		8,972,189		9,197,370		9,045,373		9,210,559
Add: effect of dilutive securities, stock options, and awards		4,026		7,422		2,579		10,848
Denominator for diluted earnings per share		8,976,215		9,204,792		9,047,952		9,221,407

Basic earnings per share available to common stockholders	$	1.27	$	0.55	$	3.69	$	2.24
Diluted earnings per share available to common stockholders	$	1.27	$	0.55	$	3.69	$	2.24

Certain option and restricted stock awards were excluded from the computation of diluted earnings per share because they were anti-dilutive, based on the average market prices of the Company’s common stock for these periods. Outstanding options and shares of restricted stock totaling 86,900 and 110,845 were excluded from the computation of diluted earnings per share for the three- and nine-month periods, respectively, ended March 31, 2021, as compared to outstanding options and shares of restricted stock totaling 50,500 and 33,000 for the three and nine-month periods, respectively, ended March 31, 2020.

Note 8: Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction and various states. The Company is no longer subject to federal and state examinations by tax authorities for tax years ending June 30, 2015 and before. The Company recognized no interest or penalties related to income taxes for the periods presented.

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


	For the three-month periods ended				For the nine-month periods ended
(dollars in thousands)	March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020
Income taxes
Current	$	3,552	$	1,116	$	11,441	$	5,007
Deferred		(456)		13		(2,445)		19
Total income tax provision	$	3,096	$	1,129	$	8,996	$	5,026

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


(dollars in thousands)	March 31, 2021		June 30, 2020
Deferred tax assets:
Provision for losses on loans	$	8,185	$	5,802
Accrued compensation and benefits		722		825
NOL carry forwards acquired		155		149
Minimum Tax Credit		—		130
Unrealized loss on other real estate		180		257
Other		312		26
Total deferred tax assets		9,554		7,189

Deferred tax liabilities:
Purchase accounting adjustments		191		64
Depreciation		1,494		1,665
FHLB stock dividends		120		120
Prepaid expenses		326		259
Unrealized gain on available for sale securities		686		1,265
Other		—		104
Total deferred tax liabilities		2,817		3,477

Net deferred tax assets	$	6,737	$	3,712

As of March 31, 2021, the Company had approximately $706,000 and $0 in federal and state net operating loss carryforwards, respectively, which were acquired in the July 2009 acquisition of Southern Bank of Commerce, the February 2014 acquisition of Citizens State Bankshares of Bald Knob, Inc., and the April 2020 acquisition of Central Federal Savings and Loan. The amount reported is net of the IRC Sec. 382 limitation, or state equivalent, related to utilization of net operating loss carryforwards of acquired corporations. Unless otherwise utilized, the net operating losses will begin to expire in 2027.

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


	For the three-month periods ended				For the nine-month periods ended
(dollars in thousands)	March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020
Tax at statutory rate	$	3,056	$	1,308	$	8,922	$	5,391
Increase (reduction) in taxes resulting from:
Nontaxable municipal income		(117)		(109)		(327)		(335)
State tax, net of Federal benefit		215		27		717		223
Cash surrender value of Bank-owned life insurance		(57)		(52)		(320)		(159)
Tax credit benefits		(2)		(21)		(11)		(27)
Other, net		1		(24)		15		(67)
Actual provision	$	3,096	$	1,129	$	8,996	$	5,026

For the three- and nine- month periods ended March 31, 2021 and 2020, income tax expense at the statutory rate was calculated using a 21% annual effective tax rate (AETR).

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

Note 9: 401(k) Retirement Plan

The Bank has a 401(k) retirement plan that covers substantially all eligible employees. The Bank made a “safe harbor” matching contribution to the Plan of up to 4% of eligible compensation, depending upon the percentage of eligible pay deferred into the plan by the employee, and also made additional, discretionary profit-sharing contributions for fiscal 2020. For fiscal 2021, the Company has maintained the safe harbor matching contribution of up to 4%, and expects to continue to make additional, discretionary profit-sharing contributions. During the three- and nine- month periods ended March 31, 2021, retirement plan expenses recognized for the Plan totaled approximately $416,000 and$1.3 million, respectively, as compared to $391,000 and $1.1 million, respectively, for the same period of the prior fiscal year. Employee deferrals and safe harbor contributions are fully vested. Profit-sharing or other contributions vest over a period of five years.

Note 10: Subordinated Debt

In March 2004, the Company established Southern Missouri Statutory Trust I as a statutory business trust, to issue Floating Rate Capital Securities (the “Trust Preferred Securities”). The securities mature in 2034, became redeemable after five years, and bear interest at a floating rate based on LIBOR. The securities represent undivided beneficial interests in the trust, which was established by the Company for the purpose of issuing the securities. The Trust Preferred Securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended (the “Act”) and have not been registered under the Act. The securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Southern Missouri Statutory Trust I used the proceeds from the sale of the Trust Preferred Securities to purchase Junior Subordinated Debentures (the “Debentures”) of the Company which have terms identical to the Trust Preferred Securities. At March 31, 2021, the Debentures carried an interest rate of 2.93%. The balance of the Debentures outstanding was $7.2 million at March 31, 2021 and June 30, 2020. The Company used its net proceeds for working capital and investment in its subsidiaries.

In connection with its October 2013 acquisition of Ozarks Legacy Community Financial, Inc. (OLCF), the Company assumed $3.1 million in floating rate junior subordinated debt securities. The debt securities had been issued in June 2005 by OLCF in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. At March 31, 2021, the current rate was 2.63%. The carrying value of the debt securities was approximately $2.7 million at March 31, 2021 and June 30, 2020.

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

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current rate was 1.98%. The carrying value of the debt securities was approximately $5.3 million at March 31, 2021 and June 30, 2020.

The Company’s investment at a face amount of $505,000 in these trusts is included with Prepaid Expenses and Other Assets in the consolidated balance sheets, and is carried at a value of $457,000 at March 31, 2021.

Note 11: Fair Value Measurements

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

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

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

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

Recurring Measurements. The following table presents the fair value measurements recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2021 and June 30, 2020:


	Fair Value Measurements at March 31, 2021, Using:
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
State and political subdivisions	$	43,292	$	—	$	43,292	$	—
Other securities		20,837		—		20,837		—
Mortgage-backed GSE residential		126,280		—		126,280		—


	Fair Value Measurements at June 30, 2020, Using:
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
State and political subdivisions	$	41,988	$	—	$	41,988	$	—
Other securities		7,624		—		7,624		—
Mortgage-backed GSE residential		126,912		—		126,912		—

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

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

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Nonrecurring Measurements. The following tables present the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fell at March 31, 2021 and June 30, 2020:

Fair Value Measurements at March 31, 2021, Using:

Quoted Prices in

Active Markets for

Significant Other

Significant

Identical Assets

Observable Inputs

Unobservable Inputs

(dollars in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)

Foreclosed and repossessed assets held for sale

689

—

689

Fair Value Measurements at June 30, 2020, Using:

Quoted Prices in

Active Markets for

Significant Other

Significant

Identical Assets

Observable Inputs

Unobservable Inputs

(dollars in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)

Foreclosed and repossessed assets held for sale

2,211

—

2,211

The following table presents losses recognized on assets measured on a non-recurring basis for the three-month periods ended March 31, 2021 and 2020:


	For the three months ended
(dollars in thousands)	March 31, 2021		March 31, 2020
Foreclosed and repossessed assets held for sale	$	(49)	$	(96)
Total losses on assets measured on a non-recurring basis	$	(49)	$	(96)

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

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

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

Range

Fair value at

Valuation

Unobservable

Weighted-average

(dollars in thousands)

March 31, 2021

technique

inputs

inputs applied

Nonrecurring Measurements

Foreclosed and repossessed assets

689

Third party appraisal

Marketability discount

0.0% - 64.1

26.7

Range

Fair value at

Valuation

Unobservable

Weighted-average

(dollars in thousands)

June 30, 2020

technique

inputs

inputs applied

Nonrecurring Measurements

Foreclosed and repossessed assets

2,211

Third party appraisal

Marketability discount

8.0% - 56.9

15.7

Fair Value of Financial Instruments. The following table presents estimated fair values of the Company’s financial instruments not reported at fair value and the level within the fair value hierarchy in which the fair value measurements fell at March 31, 2021 and June 30, 2020.


	March 31, 2021
			Quoted Prices
			in Active				Significant
			Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
(dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and cash equivalents	$	236,896	$	236,896	$	—	$	—
Interest-bearing time deposits		977		—		977		—
Stock in FHLB		6,163		—		6,163		—
Stock in Federal Reserve Bank of St. Louis		5,018		—		5,018		—
Loans receivable, net		2,134,885		—		—		2,156,852
Accrued interest receivable		10,030		—		10,030		—
Financial liabilities
Deposits		2,368,761		1,775,862		—		595,978
Advances from FHLB		62,781		—		64,088		—
Accrued interest payable		918		—		918		—
Subordinated debt		15,218		—		—		15,016
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—

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	June 30, 2020
			Quoted Prices
			in Active				Significant
			Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
(dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and cash equivalents	$	54,245	$	54,245	$	—	$	—
Interest-bearing time deposits		974		—		974		—
Stock in FHLB		6,390		—		6,390		—
Stock in Federal Reserve Bank of St. Louis		4,363		—		4,363		—
Loans receivable, net		2,141,929		—		—		2,143,823
Accrued interest receivable		12,116		—		12,116		—
Financial liabilities
Deposits		2,184,847		1,508,740		—		676,816
Advances from FHLB		70,024		—		72,136		—
Accrued interest payable		1,646		—		1,646		—
Subordinated debt		15,142		—		—		11,511
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—

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

SOUTHERN MISSOURI BANCORP, INC.

General

Southern Missouri Bancorp, Inc. (Southern Missouri or Company) is a Missouri corporation and owns all of the outstanding stock of Southern Bank (the Bank). The Company’s earnings are primarily dependent on the operations of the Bank. As a result, the following discussion relates primarily to the operations of the Bank. The Bank’s deposit accounts are generally insured up to a maximum of $250,000 by the Deposit Insurance Fund (DIF), which is administered by the Federal Deposit Insurance Corporation (FDIC). At March 31, 2021, the Bank operated from its headquarters, 46 full-service branch offices, and two limited-service branch offices. The Bank owns the office building and related land in which its headquarters are located, and 44 of its other branch offices. The remaining four branches are either leased or partially owned.

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

The consolidated balance sheet of the Company as of June 30, 2020, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report filed with the Securities and Exchange Commission.

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and accompanying notes. The following discussion reviews the Company’s condensed consolidated financial condition at March 31, 2021, and results of operations for the three- and nine-month periods ended March 31, 2021 and 2020.

Forward Looking Statements

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

●

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

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●

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

●

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

●

fluctuations in interest rates and in real estate values;

●

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

●

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

●

our ability to access cost-effective funding;

●

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

●

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

●

demand for loans and deposits in our market area;

●

legislative or regulatory changes that adversely affect our business;

●

changes in accounting principles, policies, or guidelines;

●

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

●

the impact of technological changes; and

●

our success at managing the risks involved in the foregoing.

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

Critical Accounting Policies

Accounting principles generally accepted in the United States of America are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. Management of the Company must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of the Company’s significant accounting policies, see “Notes to the Consolidated Financial Statements” in the Company’s 2020 Annual Report on Form 10-k. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of the Company’s Board of Directors. For a discussion of applying critical accounting policies, see “Critical Accounting Policies” beginning on page 51 in the Company’s 2020 Annual Report. On July 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses, also known as the current expected credit loss (“CECL”) standard, which created material changes to the existing critical accounting policy that existed at June 30, 2020. See Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 2: Organization and Summary of Significant Accounting Policies, in the Company’s 2020 Annual report on Form 10-k for additional information.

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COVID-19 Pandemic Response

Southern Missouri remains committed to serving our communities in this difficult time, and to the safety of our team members and customers.

General operating conditions. Beginning Monday, March 23, 2020, the Company closed its lobbies to access except by appointment, and encouraged customers to utilize our online, mobile, drive-thru, or integrated teller machines (ITMs) for service when possible. The Company began re-opening lobbies on Monday, May 4, 2020, subject to guidance by state and local authorities. In a limited number of instances, some facility lobbies were again closed to the public for a short period of time due to unavailability of team members complying with quarantine orders from local health authorities, although these instances are notably reduced in recent months. With the initial onset of the pandemic in March, and again on an ongoing basis as the number of cases and hospitalizations in our region increased over the summer months, the Company has worked to increase our telework capabilities, and we have had as many as 10% of our team members working remotely during the month of April, 2021 on a regular basis. No team members have been furloughed, and no furloughs are anticipated. While continuing to encourage safety, the Company has relaxed restrictions on business travel, although some training events or conferences our team members would typically have attended have remained in online format. The Company chose not to extend beyond March 31, 2021, the additional leave provisions (over and above the Company’s standard paid time off policy) provided for under the Families First Coronavirus Response Act (the FFCRA) or the CARES Act. The operations of the Company’s internal controls have not been significantly impacted by changes in our work environment.

SBA Paycheck Protection Program Lending. The Company originated approximately 1,700 loans for $138.6 million under the first round of the Small Business Administration’s Paycheck Protection Program (PPP). A limited number were repaid by the borrower shortly after origination. Through March 31, 2021, forgiveness payments from the SBA have been received for approximately 1,200 of these first round PPP loans, totaling approximately $85.8 million, with approximately $52.5 million remaining outstanding. The Company has been processing borrower requests for “second-draw” PPP loans or for borrowers newly eligible for a first draw (collectively, the “second round” of PPP activity), and through March 31, 2021, we had funded approximately $48.0 million in the second round. The total outstanding under all PPP programs was $100.5 million at March 31, 2021. During April 2021, we funded an additional $6.6 million in the second round of PPP activity, and had received SBA approval, but had not yet funded, an additional $2.5 million. Through April 30, 2021, we have received SBA approval for approximately 1,500 loans under the second round of PPP activity, and have funded 1,400 of these loans. An additional $9.9 million in forgiveness payments was received during April 2021 for first round PPP loans. At April 30, 2021, the total outstanding under all PPP programs was $97.3 million.

Deferrals and modifications. As of April 30, 2021, following regulatory guidance, the Company has agreements in place with borrowers to defer or modify payment arrangements for approximately 19 loans totaling $41 million, a level that is significantly reduced since June 30, 2020. These are loans that were otherwise current and performing, but anticipated difficulties in the coming months due to the pandemic response. Initially, the Company generally agreed to payment deferrals for three-month periods or interest-only modifications for nine-month periods. Most borrowers have been able to return to original payment terms, but borrowers continuing to request modifications may be facing longer-term disruptions in their business operations, and the Company may agree to lengthier modifications. For more information regarding these deferrals and modifications, see discussion included at “Allowance for Credit Loss Activity.”

Executive Summary

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

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our net interest income, as the interest rate spread between our interest-earning assets and interest-bearing liabilities would be larger. Conversely, a flat or flattening yield curve, in which the difference in rates between short term and long term periods is relatively small or shrinking, or an inverted yield curve, in which short term rates exceed long term rates, could have an adverse impact on our net interest income, as our interest rate spread could decrease.

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

During the first nine months of fiscal 2021, total assets increased by $189.9 million. The increase was primarily attributable to increased cash and cash equivalent balances, along with increased available for sale (AFS) securities, partially offset by a decrease in loans, net of the allowance for credit losses (ACL). Cash equivalents and time deposits increased by a combined $182.7 million; AFS securities increased $13.9 million; and loans, net of the ACL, decreased $7.0 million. The impact of the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), increased the ACL by $9.3 million, of which $434,000 related to the transition from PCI to PCD methodology, and reduced retained earnings by $6.9 million, net of deferred taxes, through a one-time cumulative effect adjustment. Additionally, due to adoption of ASU 2016-13, the Company revised its analysis of unused lines of credit and recorded a one-time cumulative effect adjustment to the allowance for off-balance sheet exposures totaling $268,000, offset by a reduction to retained earnings, net of deferred taxes, of $209,000. Deposits increased $183.9 million and advances from the Federal Home Loan Bank (FHLB) decreased $7.2 million. Equity increased $14.6 million, attributable primarily to retention of net income, partially offset by repurchases of common shares, cash dividends paid, and the one-time cumulative effect adjustment due to the adoption of ASU 2016-13.

Net income for the first nine months of fiscal 2021 was $33.5 million, an increase of $12.8 million, or 62.2% 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 the result of increases in net interest income and noninterest income, as well as a decrease in provision for credit losses, partially offset by increases in provision for income taxes and noninterest expense. Diluted net income available to common shareholders was $3.69 per share for the first nine months of fiscal 2021, as compared to $2.24 per share for the same period of the prior fiscal year. For the first nine months of fiscal 2021, net interest income after provision for credit losses increased $12.9 million, or 23.8%; noninterest income increased $4.8 million, or 46.1%; provision for credit losses decreased $2.5 million, or 61.5%; provision for income taxes increased $4.0 million, or 79.0%; and noninterest expense increased $903,000, or 2.3%, as compared to the same period of the prior fiscal year. For more information see “Results of Operations.”

Interest rates during the first nine months of fiscal 2021 remained historically low, but late in the period the steepness of the yield curve improved somewhat. At March 31, 2021, as compared to June 30, 2020, the yield on two-year treasuries was unchanged at 0.16%; the yield on five-year treasuries increased from 0.29% to 0.92%; the yield on ten-year treasuries increased from 0.66% to 1.74%; and the yield on 30-year treasuries increased from 1.41% to 2.41%. The spread between two- and ten-year treasuries was approximately 150 basis points late in the current period, the most since 2015 and much higher than the range noted during the same quarter a year ago. The spread between three-month and 10-year treasuries was slightly wider, at the widest levels since 2017, and represented even more of an improvement compared to the negative spreads seen at times in the year ago period. As compared to the first nine months of the prior fiscal year, our average yield on earning assets decreased by 58 basis points, reflecting loans (including PPP loans) originated and renewed at lower market yields, adjustable-rate loans which re-priced at lower rates and inclusion in the prior period’s results of interest income recognized upon the resolution of a limited number of nonperforming loans, with no material contribution from similar resolutions in the current period, partially offset by the accelerated accretion of deferred origination fees on PPP loans as we began to receive forgiveness payments from the SBA during the period. Our cost of interest-bearing liabilities decreased by 70 basis points, as the Company reduced rates offered on certificates of deposit and nonmaturity accounts, and our wholesale funding balances declined, while the cost of this funding moved lower with market rates. Lower market rates reflected decreases by the Federal Reserve’s Open Market Committee (FOMC), which began at a measured pace in the quarter ended September 30, 2019, and was followed by sharp reductions in March 2020, as the FOMC reacted to reduced economic activity at the outset of the COVID-19 pandemic (see “Results of Operations: Comparison of the nine-month periods ended March 31, 2021 and 2020 – Net Interest Income”). While the improved slope of the yield curve is encouraging in terms of the Company’s net interest margin, the

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overall low level of market interest rates is concerning, as our asset yields are expected to continue to decrease, while the Company’s ability to significantly reduce its cost of funds further may be limited.

Net interest income increased $10.4 million, or 17.8%, in the first nine months of the fiscal year, as compared to the same period of the prior year, as the Company saw an increase of 15.8% in average interest earning assets, combined with an increase of seven basis points in the net interest margin. The increase was attributable in part to the accelerated accretion of deferred origination fees on PPP loans as we began to receive forgiveness payments from the SBA during the period. This acceleration added approximately $2.1 million to interest income, adding approximately 12 basis points to the net interest margin. In the year ago period, the Company recognized an additional $608,000 in net interest income, contributing four basis points to the net interest margin, as a result of the resolution of nonperforming loans, without material comparable contributions in the current period. Outside of these less common contributions to net interest income, the accretion of discounts on acquired loans carried at fair value resulted in limited change to the net interest margin, as benefits attributable to the accretion of discounts on acquired loans (partially offset by the accretion of discounts on assumed time deposits) resulted in a contribution of eight basis points to the net interest margin in the current period, as compared to a contribution of nine basis points in the year-ago period. The dollar impact of this component of net interest income has generally been declining each sequential quarter as assets mature or prepay, although the May 2020 acquisition of Central Federal Bancshares, Inc., (the “Central Federal Acquisition”), partially offsets that decline, as there was no comparable item in the same period a year ago. However, the impact of the Central Federal Acquisition is limited due to the relative size of the acquired portfolio. The Company generally expects this component of net interest income to decline over time.

The Company’s net income is also affected by the level of its noninterest income and noninterest expenses. Non-interest income generally consists primarily of deposit account service charges, bank card interchange income, loan-related fees, earnings on bank-owned life insurance, gains on sales of loans, and other general operating income. Noninterest expenses consist primarily of compensation and employee benefits, occupancy-related expenses, deposit insurance assessments, professional fees, advertising, postage and office expenses, insurance, the amortization of intangible assets, and other general operating expenses. During the nine-month period ended March 31, 2021, noninterest income increased $4.8 million, or 46.1%, as compared to the same period of the prior fiscal year, attributable primarily to gains realized on sales of residential loans originated for that purpose, loan servicing income, earnings on bank-owned life insurance, and bank card interchange income, partially offset by decreases in deposit account service charges. Noninterest expense for the nine-month period ended March 31, 2021, increased $903,000, or 2.3%, as compared to the same period of the prior fiscal year. The increase was attributable primarily to increases in compensation and benefits, deposit insurance premiums, occupancy expenses, and data processing expenses, partially offset by declines in charges to amortize core deposit intangibles, foreclosed property expenses, advertising expense, and other expenses, including losses on the disposition of fixed assets. Additionally, the Company began reporting the provision for off-balance sheet credit exposures as a component of its provision for credit losses for the current fiscal year-to-date, while in the year ago period, the charge was classified as noninterest expense.

Increases in net interest income, noninterest income, and noninterest expense were attributable in part to the Central Federal Acquisition, which was completed in May 2020.

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

Comparison of Financial Condition at March 31, 2021 and June 30, 2020

The Company’s consolidated balance sheet grew modestly in the first nine months of fiscal 2021, with total assets of $2.7 billion at March 31, 2021, reflecting an increase of $189.9 million, or 7.5%, as compared to June 30, 2020. Growth primarily reflected increases in cash and cash equivalents and AFS securities, partially offset by a reduction in loans receivable.

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Cash equivalents and time deposits were a combined $237.9 million at March 31, 2021, an increase of $182.7 million, or 330.8%, as compared to June 30, 2020. The increase was primarily a result of rapid deposit growth. AFS securities were $190.4 million at March 31, 2021, an increase of $13.9 million, or 7.9%, as compared to June 30, 2020.

Loans, net of the ACL, were $2.1 billion at March 31, 2021, a decrease of $7.0 million, or 0.3%, as compared to June 30, 2020. Gross loans increased by $3.0 million, or 0.1%, during the first nine months of the fiscal year, while the ACL at March 31, 2021, reflected an increase of $10.1 million, as compared to the balance of our allowance for loan and lease losses (ALLL) at June 30, 2020. The Company adopted ASU 2016-13, Financial Instruments – Credit Losses, also known as the current expected credit loss (“CECL”) standard, effective as of July 1, 2020, the beginning of our 2021 fiscal year. Adoption resulted in an increase to the ACL of $8.9 million, related to the transition from the incurred loss model to the CECL ACL model, and an increase of $434,000 related to the transition from PCI to PCD methodology, relative to the ALLL as of June 30, 2020, while provisioning in excess of net charge offs during the first quarter of fiscal 2021 increased the ACL by an additional $755,000, as compared to July 1, 2020. The increase in loan balances in the portfolio was primarily attributable to increases in residential real estate loans, drawn construction loan balances, and commercial real estate loans, partially offset by decreases in commercial loans and consumer loans. Residential real estate loans increased primarily due to growth in 1- to 4-family residential lending, as well as increases in multifamily loans. Due to its liquidity position, the Company retained some single-family residential loans which it typically would have sold on the secondary market. Commercial real estate loans increased primarily due to loans secured by nonresidential owner-occupied property. Commercial loan balances decreased primarily as a result of forgiveness of PPP loans, which declined by $31.7 million in the fiscal year to date, but increased by $5.0 million in the quarter ended March 31, 2021, to stand at $100.5 million. “Second draw” PPP loans under the program re-opened by the SBA in January 2021, and funding of these loans more than offset forgiveness payments received during the March quarter. Management expects continued growth of second draw loans to be limited as the program draws to a close in May 2021, and we would expect forgiveness payments to pick up in the next several quarters for larger balance loans originated under the first round of activity and for forgiveness payments to begin to be received for the second round of loans. Loans anticipated to fund in the next 90 days stood at $145.8 million at March 31, 2021, as compared to $85.1 million at December 31, 2020, and $76.6 million at March 31, 2020. The pipeline figures did not include PPP loans, and the amount of PPP loans that were in process at March 31, 2021, was immaterial.

Deposits were $2.4 billion at March 31, 2021, an increase of $183.9 million, or 8.4%, as compared to June 30, 2020. This increase primarily reflected an increase in interest-bearing transaction accounts, noninterest-bearing transaction accounts, savings accounts, and money market deposit accounts, partially offset by a decrease in time deposits. The increase included a $27.0 million increase in public unit funds, and was net of a $13.3 million decrease in brokered deposits. Public unit balances were $332.2 million at March 31, 2021, while brokered time deposits totaled $10.0 million, and brokered money market deposits were $20.1 million. Depositors continue to hold unusually high balances in the uncertain environment. The average loan-to-deposit ratio for the third quarter of fiscal 2021 was 92.4%, as compared to 99.9% for the same period of the prior fiscal year.

FHLB advances were $62.8 million at March 31, 2021, a decrease of $7.2 million, or 10.3%, as compared to June 30, 2020, as the Company’s deposit inflows outpaced loan demand or desired investment portfolio growth. The Company has continued to monitor the availability of the Federal Reserve’s PPP Lending Facility (PPPLF), but has not utilized it to date, given our improved liquidity position and the lack of attractive alternative investment options.

The Company’s stockholders’ equity was $272.9 million at March 31, 2021, an increase of $14.6 million, or 5.6%, as compared to June 30, 2020. The increase was attributable primarily to earnings retained after $4.2 million in cash dividends paid, partially offset by the $7.2 million one-time negative adjustment to retained earnings resulting from the adoption of the CECL standard as well as repurchases of the Company’s common stock. Since re-starting the repurchase program in October 2020, the Company repurchased 184,384 common shares for $6.0 million through March 31, 2021, at an average price of $32.76.

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

March 31, 2021 and 2020

The table below presents certain information regarding our financial condition and net interest income for the three- and nine- month periods ended March 31, 2021 and 2020. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. Yields on tax-exempt obligations were not computed on a tax equivalent basis.


	Three-month period ended							Three-month period ended
	March 31, 2021							March 31, 2020
(dollars in thousands)	Average			Interest and		Yield/		Average			Interest and		Yield/
	Balance			Dividends		Cost (%)		Balance			Dividends		Cost (%)
Interest earning assets:
Mortgage loans (1)	$	1,676,469			21,068	5.03			1,530,387			19,317	5.05
Other loans (1)		469,895			4,937	4.20			420,500			5,652	5.38
Total net loans		2,146,364			26,005	—			1,950,887			24,969	5.12
Mortgage-backed securities		121,453			466	1.54			123,131			733	2.38
Investment securities (2)		76,531			559	2.92			61,258			485	3.16
Other interest earning assets		171,403			70	0.16			7,363			33	1.79
Total interest earning assets (1)		2,515,751			27,100	4.31			2,142,639			26,220	4.89
Other noninterest earning assets (3)		170,301			—				180,981			—
Total assets	$	2,686,052		$	27,100			$	2,323,620		$	26,220

Interest bearing liabilities:
Savings accounts	$	207,664			135	0.26			164,521			277	0.67
NOW accounts		905,816			1,286	0.57			689,571			1,803	1.05
Money market deposit accounts		243,877			178	0.29			216,805			700	1.29
Certificates of deposit		607,833			1,895	1.25			658,430			3,355	2.04
Total interest bearing deposits		1,965,190			3,494	0.71			1,729,327			6,135	1.42
Borrowings:
FHLB advances		63,068			325	2.06			83,916			439	2.09
Note Payable		—			—	—			3,000			31	4.13
Subordinated debt		15,205			132	3.48			15,105			197	5.22
Total interest bearing liabilities		2,043,463			3,951	0.77			1,831,348			6,802	1.49
Noninterest bearing demand deposits		357,746			—				223,865			—
Other noninterest bearing liabilities		14,221			—				17,634			—
Total liabilities		2,415,430			3,951				2,072,847			6,802
Stockholders’ equity		270,622			—				250,773			—
Total liabilities and stockholders’ equity	$	2,686,052		$	3,951			$	2,323,620		$	6,802

Net interest income				$	23,149						$	19,418
Interest rate spread (4)						3.54	%						3.40	%
Net interest margin (5)						3.68	%						3.63	%
Ratio of average interest-earning assets to average interest-bearing liabilities		123.11	%						117.00	%

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

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

(3)	Includes average balances for fixed assets and BOLI of $63.8 million and $43.4 million, respectively, for the three-month period ended March 31, 2021, as compared to $65.0 million and $38.9 million, respectively, for the same period of the prior fiscal year.

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

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

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	Nine-month period ended							Nine-month period ended
	March 31, 2021							March 31, 2020
(dollars in thousands)	Average			Interest and		Yield/		Average			Interest and		Yield/
	Balance			Dividends		Cost (%)		Balance			Dividends		Cost (%)
Interest earning assets:
Mortgage loans (1)	$	1,650,541			62,900	5.08			1,469,320			57,402	5.21
Other loans (1)		511,619			15,837	4.13			437,167			18,628	5.68
Total net loans		2,162,160			78,737	—			1,906,487			76,030	5.32
Mortgage-backed securities		118,393			1,479	1.67			118,577			2,141	2.41
Investment securities (2)		69,723			1,568	3.00			64,010			1,507	3.14
Other interest earning assets		77,362			159	0.27			6,895			110	2.13
Total interest earning assets (1)		2,427,638			81,943	4.50			2,095,969			79,788	5.08
Other noninterest earning assets (3)		171,677			—				183,142			—
Total assets	$	2,599,315		$	81,943			$	2,279,111		$	79,788

Interest bearing liabilities:
Savings accounts	$	195,516			418	0.28		$	164,834			947	0.77
NOW accounts		836,917			3,764	0.60			651,295			5,161	1.06
Money market deposit accounts		238,701			659	0.37			205,495			2,313	1.50
Certificates of deposit		634,770			6,907	1.45			666,549			10,740	2.15
Total interest bearing deposits		1,905,904			11,748	0.82			1,688,173			19,161	1.51
Borrowings:
Securities sold under agreements to repurchse		—			—	—			110			—	0.03
FHLB advances		67,777			1,052	2.07			88,612			1,534	2.31
Note Payable		—			—	—			3,000			102	4.50
Subordinated debt		15,180			403	3.55			15,080			636	5.63
Total interest bearing liabilities		1,988,861			13,203	0.89			1,794,975			21,433	1.59
Noninterest bearing demand deposits		333,278			—				221,603			—
Other noninterest bearing liabilities		13,971			—				17,060			—
Total liabilities		2,336,110			13,203				2,033,638			21,433
Stockholders’ equity		263,205			—				245,473			—
Total liabilities and stockholders' equity	$	2,599,315		$	13,203			$	2,279,111		$	21,433

Net interest income				$	68,740						$	58,355

Interest rate spread (4)						3.61	%						3.49	%
Net interest margin (5)						3.78	%						3.71	%

Ratio of average interest-earning assets to average interest-bearing liabilities		122.06	%						116.77	%

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

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

(3)	Includes average balances for fixed assets and BOLI of $64.4 million and $43.4 million, respectively, for the nine-month period ended March 31, 2021, as compared to $64.5 million and $38.7 million, respectively, for the same period of the prior fiscal year.

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

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

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on the Company’s net interest income for the three- and nine- month periods ended March 31, 2021, compared to the three- and nine- month periods ended March 31, 2020. 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

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change in rate (changes in rate multiplied by prior volume), and (iii) changes in rate/volume (change in rate multiplied by change in volume).


	Three-month period ended March 31, 2021
	Compared to three-month period ended March 31, 2020
	Increase (Decrease) Due to
					Rate/
(dollars in thousands)	Rate		Volume		Volume		Net
Interest-earnings assets:
Loans receivable (1)	$	(1,333)	$	2,502	$	(133)	$	1,036
Mortgage-backed securities		(260)		(10)		3		(267)
Investment securities (2)		(37)		121		(10)		74
Other interest-earning deposits		(30)		735		(668)		37
Total net change in income on interest-earning assets		(1,660)		3,348		(808)		880

Interest-bearing liabilities:
Deposits		(2,838)		466		(269)		(2,641)
Subordinated debt		(66)		1		—		(65)
Note Payable		(31)		(31)		31		(31)
FHLB advances		(7)		(109)		2		(114)
Total net change in expense on interest-bearing liabilities		(2,942)		327		(236)		(2,851)
Net change in net interest income	$	1,282	$	3,021	$	(572)	$	3,731

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

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


	Nine-month period ended March 31, 2021
	Compared to nine-month period ended March 31, 2020
	Increase (Decrease) Due to
					Rate/
(dollars in thousands)	Rate		Volume		Volume		Net
Interest-earnings assets:
Loans receivable (1)	$	(6,503)	$	10,252	$	(1,042)	$	2,707
Mortgage-backed securities		(660)		(3)		1		(662)
Investment securities (2)		(68)		136		(7)		61
Other interest-earning deposits		(96)		1,128		(983)		49
Total net change in income on
interest-earning assets		(7,327)		11,513		(2,031)		2,155

Interest-bearing liabilities:
Deposits		(8,060)		1,510		(863)		(7,413)
FHLB advances		(159)		(361)		38		(482)
Note payable		(101)		(101)		100		(102)
Subordinated debt		(235)		3		(1)		(233)
Total net change in expense on
interest-bearing liabilities		(8,555)		1,051		(726)		(8,230)
Net change in net interest income	$	1,228	$	10,462	$	(1,305)	$	10,385

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

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

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Results of Operations – Comparison of the three-month periods ended March 31, 2021 and 2020

General. Net income for the three-month period ended March 31, 2021, was $11.5 million, an increase of $6.4 million, or 124.7%, as compared to the same period of the prior fiscal year. The increase was attributable to increases in net interest income and noninterest income, and declines in noninterest expense and provision for credit losses, partially offset by an increase in provision for income taxes.

For the three-month period ended March 31, 2021, basic and fully-diluted net income per share available to common shareholders was $1.27 under both measures, as compared to $0.55 under both measures for the same period of the prior fiscal year, which represented increases of $0.72, or 130.9% under both measures. Our annualized return on average assets for the three-month period ended March 31, 2021, was 1.71%, as compared to 0.88% for the same period of the prior fiscal year. Our return on average common stockholders’ equity for the three-month period ended March 31, 2021, was 16.9%, as compared to 8.1% in the same period of the prior fiscal year.

Net Interest Income. Net interest income for the three-month period ended March 31, 2021, was $23.1 million, an increase of $3.7 million, or 19.2%, as compared to the same period of the prior fiscal year. The increase was attributable to a 17.4% increase in the average balance of interest-earning assets, combined with an increase in net interest margin to 3.68% in the current three-month period, from 3.63% in the same period a year ago. Our net interest margin is determined by dividing annualized net interest income by total average interest-earning assets. As a material amount of PPP loans were forgiven and therefore repaid ahead of their scheduled maturity, the Company recognized accelerated accretion of interest income from deferred origination fees on these loans. In the current quarter, this component of interest income totaled $1.2 million, adding 18 basis points to the net interest margin, with no comparable item in the year ago period.

Loan discount accretion and deposit premium amortization related to the Company’s August 2014 acquisition of Peoples Bank of the Ozarks, the June 2017 acquisition of Capaha Bank, the February 2018 acquisition of Southern Missouri Bank of Marshfield, the November 2018 acquisition of Gideon Bancshares Company (the “Gideon Acquisition”), and the Central Federal Acquisition, resulted in $614,000 in net interest income for the three-month period ended March 31, 2021, as compared to $410,000 in net interest income for the same period a year ago. The Company generally expects this component of net interest income will continue to decline over time, although volatility may occur to the extent we have periodic resolutions of specific loans. Combined, these components of net interest income contributed ten basis points to net interest margin in the three-month period ended March 31, 2021, as compared to a contribution of eight basis points in the same period of the prior fiscal year, and as compared to the nine basis point contribution in the linked quarter, ended December 31, 2020, when net interest margin was 3.92%.

For the three-month period ended March 31, 2021, our net interest rate spread was 3.54%, as compared to 3.40% in the year-ago period. The increase in net interest rate spread, compared to the same period a year ago, resulted from a 72 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a 58 basis point decrease in the average yield on interest-earning assets.

Interest Income. Total interest income for the three-month period ended March 31, 2021, was $27.1 million, an increase of $880,000, or 3.4%, as compared to the same period of the prior fiscal year. The increase was attributed to a 17.4% increase in the average balance of interest-earning assets, partially offset by a 58 basis point decrease in the average yield earned on interest-earning assets, as compared to the same period of the prior fiscal year. Increased average interest-earning balances were attributable primarily to growth in the loan portfolio, inclusive of the Central Federal Acquisition and PPP loans originated, while average investment balances increased modestly, and average cash and similar asset balances increased at a substantial rate, accounting for an unusually significant percentage of overall interest-earning asset growth. The decrease in the average yield on interest-earning assets was attributable primarily to loans (including PPP loans) originated and renewed at lower market yields, adjustable-rate loans which re-priced at lower rates, lower reinvestment yields available for the AFS securities portfolio, lower yields on cash and cash equivalents as well as a higher percentage of earning assets held in this category, and inclusion in the prior period’s results of additional interest income resulting from the resolution of a limited number of nonperforming loans without similar material contributions in the current period, partially offset by the accelerated accretion of interest income from deferred origination fees on PPP loans.

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Interest Expense. Total interest expense for the three-month period ended March 31, 2021, was $4.0 million, a decrease of $2.9 million, or 41.9%, as compared to the same period of the prior fiscal year. The decrease was attributable to a 72 basis point decrease in the average cost of interest-bearing liabilities, partially offset by an 11.6% increase in the average balance of interest-bearing liabilities, as compared to the same period of the prior fiscal year. The decrease in the average cost of interest-bearing liabilities was attributable primarily to the Company’s reduction in rates offered on certificates of deposit and nonmaturity accounts, in addition to our cost of wholesale funding moving lower with market rates and making up a smaller percentage of interest-bearing liabilities. Increased average interest-bearing balances were attributable primarily to increases in interest-bearing transaction accounts, savings accounts, and money market deposit accounts, partially offset by lower certificate of deposit balances, FHLB balances, and other borrowing balances.

Provision for Credit Losses. The provision for credit losses for the three-month period ended March 31, 2021, was a credit of $409,000, as compared to a charge of $2.9 million in the same period of the prior fiscal year. The full amount of the recovery in the current period was due to a reduction in the Company’s required allowance for off-balance sheet credit exposure, while the allowance for credit losses was unchanged during the three-month period ended March 31, 2021, aside from net charge offs of $244,000 recognized during the period. The Company assesses that the outlook has generally improved as compared to the year ended June 30, 2020. As a percentage of average loans outstanding, the provision for credit losses in the current three-month period represented a credit of 0.08% (annualized), while the Company recorded net charge offs during the period of 0.05% (annualized). During the same period of the prior fiscal year, the provision for credit losses as a percentage of average loans outstanding represented a charge of 0.58% (annualized), while the Company recorded net charge offs of 0.03% (annualized). (See “Critical Accounting Policies”, “Allowance for Credit Loss Activity” and “Nonperforming Assets”).

Noninterest Income. The Company’s noninterest income for the three-month period ended March 31, 2021, was $4.5 million, an increase of $1.3 million, or 40.1%, as compared to the same period of the prior fiscal year. In the current period, increases in gains realized on the sale of residential real estate loans originated for that purpose, loan servicing income, bank card interchange income, and a gain on AFS securities were partially offset by decreases in deposit account service charges and other loan fees. Gains realized on the sale of residential real estate loans originated for that purpose increased as origination of these loans was up 180% as compared to the year ago period, while pricing was improved. This increase in volume was due to both refinancing activity and purchase activity, while refinancing activity continued to make up the larger percentage of our volume in the low interest rate environment. Loan servicing income increased primarily due to recognition of a $395,000 impairment charge on mortgage servicing rights in the year ago period, as well as due to continued high levels of originations and an increase in the balance of serviced loans. Bank card interchange income increased due to a 15.5% increase in the number of bank card transactions and a 30.1% increase in bank card dollar volume, as compared to the same quarter a year ago. Deposit service charges decreased primarily due to a reduction in NSF activity.

Noninterest Expense. Noninterest expense for the three-month period ended March 31, 2021, was $13.5 million, a decrease of $41,000, or 0.03%, as compared to the same period of the prior fiscal year. The decrease was attributable primarily to inclusion in the year ago period of a $300,000 provision for off-balance sheet credit exposure, which, as noted above, will be combined with the provision for credit losses in the current fiscal year and going forward. Additionally, in the year-ago period, the Company reported $76,000 in expenses related to the Central Federal Acquisition, with no comparable charges in the current period. Otherwise, a reduction in charges related to foreclosed property and a reduction in charges to amortize core deposit intangibles were offset by increases in compensation and benefits, occupancy expenses, deposit insurance premiums, and data processing expenses. The increase in compensation and benefits as compared to the prior year primarily reflected standard increases in compensation and benefits over the prior year. Occupancy expenses increased due in part to additional locations, as well as replacement of some ATMs with ITMs with video teller capability, and timing differences in maintenance expenses and purchases of smaller equipment items not capitalized. Deposit insurance premiums reflected a return to a normalized level of premiums after the Company benefited from one-time assessment credits for much of the prior fiscal year. Data processing expenses increased primarily due to licensing of updated productivity, mobility, and security software. The efficiency ratio for the three-month period ended March 31, 2021, was 49.0%, as compared to 59.9% in the same period of the prior fiscal year, with the improvement attributable primarily to the current period’s increases in net interest income and noninterest income, while noninterest expenses were little changed in total.

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Income Taxes. The income tax provision for the three-month period ended March 31, 2021, was $3.1 million, an increase of $2.0 million, or 174.2% as compared to the same period of the prior fiscal year, as higher pre-tax income combined with an increase in the effective tax rate, to 21.3%, as compared to 18.1% in the same period a year ago. The higher effective tax rate was attributable primarily to the significant increase in pre-tax income, without corresponding increases in tax-advantaged investments.

Results of Operations – Comparison of the nine-month periods ended March 31, 2021 and 2020

General. Net income for the nine-month period ended March 31, 2021, was $33.5 million, an increase of $12.8 million, or 62.2%, as compared to the same period of the prior fiscal year. The increase was attributable to increases in net interest income and noninterest income, as well as a decline in provision for credit losses, partially offset by increases in provision for income taxes and noninterest expense.

For the nine-month period ended March 31, 2021, basic and fully-diluted net income per share were $3.69 under both measures, as compared to $2.24 under both measures for the same period of the prior fiscal year, which represented increases of $1.45, or 64.7%, under both measures. Our annualized return on average assets for the nine-month period ended March 31, 2021, was 1.72%, as compared to 1.38% for the same period of the prior fiscal year. Our return on average common stockholders’ equity for the nine-month period ended March 31, 2021, was 17.0%, as compared to 12.8% in the same period of the prior fiscal year.

Net Interest Income. Net interest income for the nine-month period ended March 31, 2021, was $68.7 million, an increase of $10.4 million, or 17.8%, as compared to the same period of the prior fiscal year. The increase was attributable to a 15.8% increase in the average balance of interest-earning assets, combined with an increase in net interest margin to 3.78% in the current nine-month period, from 3.71% in the nine-month period a year ago. Our net interest margin is determined by dividing annualized net interest income by total average interest-earning assets. As a material amount of PPP loans were forgiven and therefore repaid ahead of their scheduled maturity, the Company recognized accelerated accretion of interest income from deferred origination fees on these loans. In the current nine-month period, this component of interest income totaled $2.1 million, adding twelve basis points to the net interest margin, with no comparable item in the year ago period.

Loan discount accretion and deposit premium amortization related to the Company’s August 2014 acquisition of Peoples Bank of the Ozarks, the June 2017 acquisition of Capaha Bank, the February 2018 acquisition of Southern Missouri Bank of Marshfield, the Gideon Acquisition, and the Central Federal Acquisition, resulted in $1.5 million in net interest income for the nine-month period ended March 31, 2021, as compared to $1.4 million in net interest income for the same period a year ago. The Company generally expects this component of net interest income will continue to decline over time, although volatility may occur to the extent we have periodic resolutions of specific loans. Combined, these components of net interest income contributed eight basis points to net interest margin in the nine-month period ended March 31, 2021, as compared to a contribution of nine basis points in the same period of the prior fiscal year. Additionally, in the year-ago period, the Company recognized an additional $608,000 in interest income as a result of the resolution of a limited number of nonperforming loans, with no material contribution from similar resolutions in the current or linked period. This recognition of interest income in the year-ago period contributed four basis points to net interest margin.

For the nine-month period ended March 31, 2021, our net interest spread was 3.61%, as compared to 3.49% in the nine-month period a year ago. The increase in net interest rate spread, compared to the same period a year ago, resulted from a 70 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a 58 basis point decrease in the average yield on interest-earning assets.

Interest Income. Total interest income for the nine-month period ended March 31, 2021, was $81.9 million, an increase of $2.2 million, or 2.7%, as compared to the same period of the prior fiscal year. The increase was attributed to a 15.8% increase in the average balance of interest-earning assets, partially offset by a 58 basis point decrease in the average yield earned on interest-earning assets, as compared to the same period of the prior fiscal year. Increased average interest-earning balances were attributable primarily to growth in the loan portfolio, inclusive of the Central Federal Acquisition and PPP loans originated, while average investment balances increased modestly, and average cash and similar asset balances experienced a large increase, contributing significantly to overall interest-earning asset growth.

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The decrease in the average yield on interest-earning assets was attributable primarily to loans (including PPP loans) originated and renewed at lower market yields, adjustable-rate loans which re-priced at lower rates, lower reinvestment yields available for the AFS securities portfolio, lower yields on cash and cash equivalents as well as a higher percentage of earning assets held in this category, and inclusion in the prior period’s results of additional interest income resulting from the resolution of a limited number of nonperforming loans without similar material contributions in the current period, partially offset by the accelerated accretion of interest income from deferred origination fees on PPP loans.

Interest Expense. Total interest expense for the nine-month period ended March 31, 2021, was $13.2 million, a decrease of $8.2 million, or 38.4%, as compared to the same period of the prior fiscal year. The decrease was attributable to a 70 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a 10.8% increase in the average balance of interest-bearing liabilities, as compared to the same period of the prior fiscal year. The decrease in the average cost of interest-bearing liabilities was attributable primarily to the Company’s reduction of rates offered on certificates of deposit and nonmaturity accounts, in addition to our cost of wholesale funding moving lower with market rates and making up a smaller percentage of interest-bearing liabilities. Increased average interest-bearing balances were attributable primarily to increases in interest-bearing transaction accounts, money market deposit accounts, and savings accounts, partially offset by lower certificate of deposit balances, FHLB balances, and other borrowing balances.

Provision for Credit Losses. The provision for credit losses for the nine-month period ended March 31, 2021, was $1.6 million, as compared to $4.1 million in the same period of the prior fiscal year. Reduced provisioning was attributed primarily to a generally improved economic outlook as compared to the year-ago period, moderated growth in unguaranteed loan balances, along with relatively consistent levels of net charge offs, and reductions in adversely classified credits, delinquent loans, and nonperforming loans. As a percentage of average loans outstanding, the provision for credit losses in the current nine-month period represented a charge of 0.10% (annualized), while the Company recorded net charge offs during the period of 0.04% (annualized). During the same period of the prior fiscal year, the provision for credit losses as a percentage of average loans outstanding represented a charge of 0.29% (annualized), while the Company recorded net charge offs of 0.04% (annualized). (See “Critical Accounting Policies”, “Allowance for Credit Loss Activity” and “Nonperforming Assets”).

Noninterest Income. The Company’s noninterest income for the nine-month period ended March 31, 2021, was $15.2 million, an increase of $4.8 million, or 46.1%, as compared to the same period of the prior fiscal year. Increases in net gains realized on sales of residential loans originated for sale into the secondary market, loan servicing fees, earnings on bank-owned life insurance, and bank card interchange income were partially offset by a decrease in deposit account service charges. Gains realized on the sale of residential real estate loans originated for that purpose increased as origination of these loans more than tripled as compared to the year ago period, while pricing was improved. This increase in volume was due to both refinancing activity and purchase activity, while refinancing activity continued to make up the larger percentage of our volume in the low interest rate environment. Earnings on bank-owned life insurance were increased by a non-recurring benefit of $696,000. Loan servicing income increased primarily due to recognition of a $395,000 impairment charge on mortgage servicing rights in the previous fiscal year to date, as well as due to continued high levels of originations and an increase in the balance of serviced loans. Bank card interchange income increased as a result of a 11.4% increase in the number of bank card transactions and a 21.3% increase in bank card dollar volume, as compared to the nine-month period a year ago.

Noninterest Expense. Noninterest expense for the nine-month period ended March 31, 2021, was $39.8 million, an increase of $903,000, or 2.3%, as compared to the same period of the prior fiscal year. The increase was attributable primarily to increases in compensation and benefits, deposit insurance premiums, data processing expenses, and occupancy expenses, partially offset by inclusion in the year ago period of a $516,000 provision for off-balance sheet credit exposure, which, as noted above, will be combined with the provision for credit losses in the current fiscal year and going forward. Additionally, the Company noted reductions in amortization of core deposit intangibles, foreclosed property expenses, advertising expense, and other expenses, including losses on the disposition of fixed assets. In the year-ago period, the Company reported $101,000 in expenses related to the Central Federal Acquisition, with no comparable charges in the current fiscal year-to-date. The increase in compensation and benefits as compared to the prior year primarily reflected standard increases in compensation and benefits over the prior year. Deposit insurance premiums reflected a return to a normalized level of premiums after the Company benefited from one-time assessment credits for much of the prior fiscal year. Data processing expenses increased due to licensing of updated productivity, mobility, and security software, and have also been higher since the implementation of a new core data processing

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environment late in the first quarter of fiscal 2020. Occupancy expenses increased in part due to additional locations, as well as replacement of some ATMs with ITMs with video teller capability. The efficiency ratio for the nine-month period ended March 31, 2021, was 47.5%, as compared to 56.6% in the same period of the prior fiscal year, with the improvement attributable primarily to the current period’s increases in net interest income and noninterest income, while expense growth was contained.

Income Taxes. The income tax provision for the nine-month period ended March 31, 2021, was $9.0 million, an increase of $4.0 million, or 79.0%, as higher pre-tax income combined with an increase in the effective tax rate, to 21.2%, as compared to 19.6% in the same period a year ago. The higher effective tax rate was attributable primarily to the significant increase in pre-tax income, without corresponding increases in tax-advantaged investments.

Allowance for Credit Loss Activity

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

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

The following table summarizes changes in the ACL over the three- and nine-month periods ended March 31, 2021 and 2020:


	For the three months ended				For the nine months ended
	March 31,				March 31,
(dollars in thousands)	2021		2020		2021		2020
Balance, beginning of period	$	35,471	$	20,814	$	25,139	$	19,903
Impact of CECL adoption		—		—		9,333		—
Loans charged off:
Residential real estate		(68)		(133)		(178)		(305)
Construction		—		—		—		—
Commercial business		(42)		(26)		(276)		(173)
Commercial real estate		(91)		(12)		(90)		(12)
Consumer		(57)		(19)		(130)		(117)
Gross charged off loans		(258)		(190)		(674)		(607)
Recoveries of loans previously charged off:
Residential real estate		1		—		1		18
Construction		—		—		—		—
Commercial business		7		27		26		28
Commercial real estate		—		—		1		15
Consumer		6		7		16		17
Gross recoveries of charged off loans		14		34		44		78
Net charge offs		(244)		(156)		(630)		(529)
Provision charged to expense		—		2,850		1,385		4,134
Balance, end of period	$	35,227	$	23,508	$	35,227	$	23,508

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

●

Changes in lending policies and/or loan review system

●

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

●

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

●

Experience, ability, and depth of lending management and staff

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●

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

●

Concentrations of credit

●

Changes in collateral values

●

Agricultural economic conditions

●

Risks from regulatory, legal, or competitive factors

At our June 30, 2020, fiscal year end, prior to the adoption of ASU 2016-13, the Company’s ALLL was $25.1 million. Upon adoption of the standard, effective July 1, 2020, the Company increased the ACL by $8.9 million, related to the transition from the incurred loss model to the CECL ACL model, increased the ACL by $434,000 related to the transition from PCI to PCD methodology, and reduced retained earnings by $6.9 million, net of deferred taxes, through a one-time cumulative effect adjustment. For the nine-month period ended March 31, 2021, the ACL increased by an additional $755,000, reflecting a charge to provision for credit losses of $1.4 million, and net charge offs of $630,000. The charge 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, 2021, and as of that date the Company’s ACL was $35.2 million. While the Company’s management believes the ACL at March 31, 2021, is adequate, based on that estimate, there remains significant uncertainty regarding the possible length of the COVID-19 pandemic and the aggregate impact that it will have on global and regional economies, including uncertainty regarding the effectiveness of recent efforts by the U.S. government and the Federal Reserve to respond to the pandemic and its economic impact. Management considered the impact of the pandemic on its consumer and business borrowers, particularly those business borrowers most affected by efforts to contain the pandemic, including our borrowers in the retail and multi-tenant retail industry, restaurants, and hotels.

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


			% of				% of
	ACL as of		total		ALLL as of		total
	March 31, 2021		ACL		June 30, 2020		ALLL
Real Estate Loans:
Residential	$	9,755	27.7	%	$	4,875	19.4	%
Construction		2,018	5.7	%		2,010	8.0	%
Commercial		17,218	48.9	%		12,132	48.3	%
Consumer loans		1,204	3.4	%		1,182	4.7	%
Commercial loans		5,032	14.3	%		4,940	19.6	%
	$	35,227	100.0	%	$	25,139	100.0	%

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

In recent months, following regulatory guidance encouraging financial institutions to work with borrowers affected by the COVID-19 pandemic, the Company has granted payment deferrals or interest-only modifications for borrowers. For loans that were otherwise current and performing prior to the COVID-19 pandemic, but for which borrowers anticipated difficulties in the coming months due to impact of the pandemic, the Company elected to not apply requirements of U.S. GAAP related to TDRs, as allowed for in the CARES Act. At March 31, 2021, interest-only and payment deferral modifications were in effect for approximately 18 loans totaling $40.4 million, as compared to approximately 900 loans totaling $380.2 million either modified or deferred at June 30, 2020. Generally, deferrals were granted for three-month periods, while interest-only modifications were for nine-month periods. Some loans were granted additional deferrals or modifications, and these loans were generally reviewed for potential adverse credit classification. For borrowers whose payment terms have not returned to the original payment terms under their loan agreement as of March 31, 2021, the Company has generally classified the loan as a “watch” status credit. Loans remaining under a CARES Act modification or deferral not accounted for as TDRs at March 31, 2021 and placed on watch status total $15.8 million, while four loans with interest-only modifications in the hotel industry totaling $23.7 million have been downgraded to special mention

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credit status. At April 30, 2021, the balance of 19 loans for which payment deferrals or interest-only modifications were in place under such provisions totaled $40.6 million. The table below illustrates the amount of such deferrals and modifications in relation to our loan portfolio by loan type and collateral or industry.


	As of April 30, 2021						As of March 31, 2021
Loan portfolio balances and CARES Act modifications	Balance		Payment		Interest-only		Payment		Interest-only
(dollars in thousands)	Outstanding		Deferrals		Modifications		Deferrals		Modifications
1‑ to 4‑family residential loans	$	453,599	$	328	$	—	$	97	$	—
Multifamily residential loans		207,917		—		10,581		—		10,581
Total residential loans		661,516		328		10,581		97		10,581
1‑ to 4‑family owner-occupied construction loans		19,116		—		—		—		—
1‑ to 4‑family speculative construction loans		11,501		—		—		—		—
Multifamily construction loans		62,945		—		—		—		—
Other construction loans		36,574		—		—		—		—
Total construction loan balances drawn		130,136		—		—		—		—
Agricultural real estate loans		179,370		—		—		—		—
Loans for vacant land - developed, undeveloped, and other purposes		51,704		—		—		—		—
Owner-occupied commercial real estate loans to:
Churches and nonprofits		20,688		—		621		—		621
Non-professional services		19,326		—		151		—		151
Retail		26,164		—		—		—		—
Automobile dealerships		15,033		—		—		—		—
Healthcare providers		7,318		—		—		—		—
Restaurants		48,286		—		—		—		—
Convenience stores		21,233		—		—		—		—
Automotive services		7,625		—		—		—		—
Manufacturing		12,930		—		—		—		—
Professional services		13,469		—		—		—		—
Warehouse/distribution		5,526		—		—		—		—
Grocery		5,342		—		—		—		—
Other		48,041		—		816		—		816
Total owner-occupied commercial real estate loans		250,981		—		1,588		—		1,588

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	As of April 30,2021						As of March 31, 2021
Loan portfolio balances and CARES Act modifications	Balance		Payment		Interest-only		Payment		Interest-only
(continued, dollars in thousands)	Outstanding		Deferrals		Modifications		Deferrals		Modifications
Non-owner-occupied commercial real estate loans to:
Care facilities		35,321		—		—		—		—
Non-professional services		12,474		—		—		—		—
Retail		25,525		—		—		—		—
Healthcare providers		16,990		—		—		—		—
Restaurants		45,468		—		—		—		—
Convenience stores		15,847		—		—		—		—
Automotive services		4,187		—		—		—		—
Hotels		79,626		—		28,092		—		28,092
Manufacturing		5,080		—		—		—		—
Storage units		13,874		—		—		—		—
Professional services		6,939		—		—		—		—
Multi-tenant retail		72,186		—		—		—		—
Warehouse/distribution		25,118		—		—		—		—
Other		41,388		—		—		—		—
Total non-owner-occupied commercial real estate loans		400,023		—		28,092		—		28,092
Total commercial real estate		882,078		—		29,680		—		29,680
Home equity lines of credit		37,712		—		—		—		—
Deposit-secured loans		3,955		—		—		—		—
All other consumer loans		34,480		19		—		29		—
Total consumer loans		76,147		19		—		29		—
Agricultural production and equipment loans		87,773		—		—		—		—
Loans to municipalities or other public units		8,616		—		—		—		—
Commercial and industrial loans to:		—		—		—		—		—
Forestry, fishing, and hunting		10,020		—		—		—		—
Construction		18,995		—		—		—		—
Finance and insurance		52,125		—		—		—		—
Real estate rental and leasing		20,722		—		—		—		—
Healthcare and social assistance		20,328		—		—		—		—
Accommodations and food services		16,485		—		—		—		—
Manufacturing		11,708		—		—		—		—
Retail trade		39,118		—		—		—		—
Transportation and warehousing		22,244		—		—		—		—
Professional services		3,480		—		—		—		—
Administrative support and waste management		7,709		—		—		—		—
Arts, entertainment, and recreation		3,399		—		—		—		—
Other commercial loans		104,405		—		12		—		12
Total commercial and industrial loans		330,738		—		12		—		12
Total commercial loans		427,127		—		12		—		12
Total gross loans receivable, excluding deferred loan fees	$	2,177,004	$	347	$	40,273	$	126	$	40,273

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At March 31, 2021, the Company had loans of $20.8 million, or 0.96% of total loans, adversely classified ($20.0 million classified “substandard” $857,000 classified “doubtful”), as compared to loans of $24.5 million, or 1.13% of total loans, adversely classified ($23.6 million classified “substandard” $888,000 classified “doubtful”) at June 30, 2020, and $28.4 million, or 1.43% of total loans, adversely classified ($27.5 million classified “substandard” $888,000 classified “doubtful”) at March 31, 2020. 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 $5.8 million at March 31, 2021. As noted in Note 4 to the condensed consolidated financial statements, the Company’s total past due loans decreased from $6.4 million at June 30, 2020, to $4.3 million at March 31, 2021. Total past due loans were $15.9 million at March 31, 2020.

In connection with the adoption of ASU 2016-13, the Company also revised its analysis of its unused lines of credit and recorded a one-time cumulative effect adjustment to the allowance for off-balance sheet exposures totaling $268,000, offset by a reduction to retained earnings, net of deferred taxes, of $209,000. For the nine-month period ended March 31, 2021, the allowance for off-balance sheet exposures increased by an additional $206,000, funded by a charge to provision for credit losses, primarily due to an increase of $51.2 million in unfunded commitments (unused lines of credit). At March 31, 2021, approximately $2.4 million was accrued within other liabilities related to off-balance sheet credit exposures. In prior periods the charge for credit loss expense for off-balance sheet credit exposures was included in other non-interest expense in the Company’s consolidated statements of income, whereas under updated regulatory accounting guidelines, that figure is combined with the provision for credit losses beginning July 1, 2020.

Nonperforming Assets

The ratio of nonperforming assets to total assets and nonperforming loans to net loans receivable is another measure of asset quality. Nonperforming assets of the Company include nonaccruing loans, accruing loans delinquent/past maturity 90 days or more, and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. The table below summarizes changes in the Company’s level of nonperforming assets over selected time periods:


(dollars in thousands)	March 31, 2021		June 30, 2020		March 31, 2020
Nonaccruing loans:
Residential real estate	$	3,463	$	4,010	$	4,524
Construction		—		—		—
Commercial real estate		2,496		3,106		5,938
Consumer		181		196		269
Commercial business		616		1,345		697
Total		6,756		8,657		11,428

Loans 90 days past due accruing interest:
Residential real estate		—		—		—
Construction		—		—		—
Commercial real estate		—		—		—
Consumer		—		—		—
Commercial business		—		—		—
Total		—		—		—

Total nonperforming loans		6,756		8,657		11,428

Foreclosed assets held for sale:
Real estate owned		2,651		2,561		3,401
Other nonperforming assets		—		9		38
Total nonperforming assets	$	9,407	$	11,227	$	14,867

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At March 31, 2021, TDRs totaled $11.3 million, of which $4.3 million was considered nonperforming and is included in the nonaccrual loan total above. The remaining $7.1 million in TDRs have complied with the modified terms for a reasonable period of time and are therefore considered by the Company to be accrual status loans. In general, these loans were subject to classification as TDRs at March 31, 2021, on the basis of guidance under ASU No. 2011-02, which indicates that the Company may not consider the borrower’s effective borrowing rate on the old debt immediately before the restructuring in determining whether a concession has been granted. At June 30, 2020, TDRs totaled $11.2 million, of which $2.6 million was considered nonperforming and is included in the nonaccrual loan total above. The remaining $8.6 million in TDRs at June 30, 2020, had complied with the modified terms for a reasonable period of time and were therefore considered by the Company to be accrual status loans.

At March 31, 2021, nonperforming assets totaled $9.4 million, as compared to $11.2 million at June 30, 2020, and $14.9 million at March 31, 2020. The decrease in nonperforming assets from one year earlier was attributable primarily to a decrease in nonaccrual loans, as the Company resolved some nonaccrual loans which had been acquired in the Gideon Acquisition.

Liquidity Resources

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

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

At March 31, 2021, the Company had outstanding commitments and approvals to extend credit of approximately $536.7 million (including $337.6 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, 2021, the Bank had pledged $808.0 million of its single-family residential and commercial real estate loan portfolios to the FHLB for available credit of approximately $446.9 million, of which $63.2 million had been advanced. The Bank has the ability to pledge several other loan portfolios, including, for example, its commercial and home equity loans, which could provide additional collateral for additional borrowings. In total, FHLB borrowings are generally limited to 45% of bank assets, or approximately $1.2 billion, subject to available collateral. Also, at March 31, 2021, the Bank had pledged a total of $249.5 million in loans secured by farmland and agricultural production loans to the Federal Reserve, providing access to $203.2 million in primary credit borrowings from the Federal Reserve’s discount window. The Company has continued to monitor the availability of the Federal Reserve’s PPP Lending Facility (PPPLF), but has not utilized it to date, and given our improved liquidity position and the lack of attractive alternative investment options, does not expect to do so. The Company has processed PPP loan forgiveness applications totaling $85.8 million in the fiscal year to date as of March 31, 2021 and had outstanding $100.5 million of such loans as of that date. The Company expects continued growth of second draw loans to be limited as the program draws to a close in May 2021, and would expect forgiveness payments to pick up in the next several quarters for larger balance loans originated under the first round of activity and for forgiveness payments to begin to be received for the second round of loans. Management believes its liquid resources will be sufficient to meet the Company’s liquidity needs.

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Regulatory Capital

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

Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier 1 capital (as defined), and common equity Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average total assets (as defined). Additionally, to make distributions or discretionary bonus payments, the Company and Bank must maintain a capital conservation buffer of 2.5% of risk-weighted assets. Management believes, as of March 3, 2021, and June 30, 2020, that the Company and the Bank met all capital adequacy requirements to which they are subject.

Effective January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a tier 1 leverage ratio of greater than 9 percent, are considered qualifying community banking organizations and are eligible to opt into an alternative, simplified regulatory capital framework, which utilizes a newly-defined “Community Bank Leverage Ratio” (CBLR). The CBLR framework is an optional framework that is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9 percent are considered to have satisfied the risk-based and leverage capital requirements in the agencies’ generally applicable capital rule. In April 2020, the federal bank regulatory agencies announced the issuance of two interim final rules to provide temporary relief to community banking organizations, and adopted the final rule with no changes in October 2020. Under the rules, the CBLR requirement was a minimum of 8.0% for the remainder of calendar year 2020, and is 8.5% for calendar year 2021, and 9.0% thereafter. The Company and the Bank have not made an election to utilize the CBLR framework, but will continue to monitor the available option, and could do so in the future.

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

As of March 31, 2021, the most recent notification from the Federal banking agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

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


									To Be Well Capitalized
					For Capital				Under Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
As of March 31, 2021	Amount		Ratio		Amount		Ratio		Amount	Ratio
(dollars in thousands)
Total Capital (to Risk-Weighted Assets)
Consolidated	$	304,620	14.35	%	$	169,790	8.00	%	n/a	n/a
Southern Bank		299,476	14.20	%		168,744	8.00	%	210,930	10.00	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		278,074	13.10	%		127,342	6.00	%	n/a	n/a
Southern Bank		273,092	12.95	%		126,558	6.00	%	168,744	8.00	%
Tier I Capital (to Average Assets)
Consolidated		278,074	10.40	%		106,925	4.00	%	n/a	n/a
Southern Bank		273,092	10.23	%		106,772	4.00	%	133,465	5.00	%
Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated		262,856	12.39	%		95,507	4.50	%	n/a	n/a
Southern Bank		273,092	12.95	%		94,918	4.50	%	137,104	6.50	%


									To Be Well Capitalized
					For Capital				Under Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
As of June 30, 2020	Amount		Ratio		Amount		Ratio		Amount	Ratio
(dollars in thousands)
Total Capital (to Risk-Weighted Assets)
Consolidated	$	278,924	13.17	%	$	169,473	8.00	%	n/a	n/a
Southern Bank		271,137	12.88	%		168,355	8.00	%	210,444	10.00	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		252,609	11.92	%		127,105	6.00	%	n/a	n/a
Southern Bank		244,822	11.63	%		126,266	6.00	%	168,355	8.00	%
Tier I Capital (to Average Assets)
Consolidated		252,609	9.95	%		101,528	4.00	%	n/a	n/a
Southern Bank		244,822	9.66	%		101,370	4.00	%	126,713	5.00	%
Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated		237,467	11.21	%		95,328	4.50	%	n/a	n/a
Southern Bank		244,822	11.63	%		94,700	4.50	%	136,789	6.50	%

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

SOUTHERN MISSOURI BANCORP, INC.

Asset and Liability Management and Market Risk

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

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

The Company continues to originate long-term, fixed-rate residential loans. During the first nine months of fiscal year 2021, fixed rate 1- to 4-family residential loan production totaled $238.9 million (of which $133.2 million was originated for sale into the secondary market), as compared to $100.3 million during the same period of the prior fiscal year (of which $25.7 million was originated for sale into the secondary market). At March 31, 2021, the fixed rate residential loan portfolio was $313.4 million with a weighted average maturity of 183 months, as compared to $218.1 million at March 31, 2020, with a weighted average maturity of 134 months. The Company originated $15.9 million in adjustable-rate 1- to 4-family residential loans during the nine-month period ended March 31, 2021, as compared to $24.4 million during the same period of the prior fiscal year. At March 31, 2021, fixed rate loans with remaining maturities in excess of 10 years totaled $187.3 million, or 8.8% of net loans receivable, as compared to $86.3 million, or 4.4% of net loans receivable at March 31, 2020. The Company originated $246.0 million in fixed rate commercial and commercial real estate loans during the nine-month period ended March 31, 2021, as compared to $292.4 million during the same period of the prior fiscal year. The Company also originated $55.1 million in adjustable rate commercial and commercial real estate loans during the nine-month period ended March 31, 2021, as compared to $30.1 million during the same period of the prior fiscal year. At March 31, 2021, adjustable-rate home equity lines of credit decreased to $38.2 million, as compared to $45.0 million at March 31, 2020. At March 31, 2021, the Company’s investment portfolio had an expected weighted-average life of 4.6 years, compared to 4.2 years at March 31, 2020. Management continues to focus on customer retention, customer satisfaction, and offering new products to customers in order to increase the Company’s amount of less rate-sensitive deposit accounts.

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Interest Rate Sensitivity Analysis

The following table sets forth as of March 31, 2021, management’s estimates of the projected changes in net portfolio value (“NPV”) in the event of 100, 200, and 300 basis point (“bp”) instantaneous and permanent increases, and 100, 200, and 300 basis point instantaneous and permanent decreases in market interest rates. Dollar amounts are expressed in thousands.


March 31, 2021
							NPV as Percentage of
	Net Portfolio						PV of Assets
Change in Rates	Value		Change		% Change		NPV Ratio		Change
+300 bp	$	257,029	$	(32,075)	(11)	%	10.03	%	(0.47)	%
+200 bp		275,651		(13,453)	(5)	%	10.51	%	0.01	%
+100 bp		291,583		2,480	1	%	10.85	%	0.35	%
0 bp		289,103		—	—		10.50	%	—	%
‑100 bp		318,593		29,489	10	%	11.39	%	0.89	%
‑200 bp		333,499		44,395	15	%	11.86	%	1.36	%
‑300 bp		338,644		49,541	17	%	12.02	%	1.52	%


June 30, 2020
							NPV as Percentage of
	Net Portfolio						PV of Assets
Change in Rates	Value		Change		% Change		NPV Ratio		Change
+300 bp	$	238,832	$	(16,824)	(7)	%	9.99	%	(0.07)	%
+200 bp		251,461		(4,196)	(2)	%	10.31	%	0.25	%
+100 bp		262,302		6,645	3	%	10.53	%	0.47	%
0 bp		255,657		—	—		10.06	%	0.00	%
‑100 bp		268,902		13,245	5	%	10.49	%	0.43	%
‑200 bp		277,452		21,795	9	%	10.79	%	0.73	%
‑300 bp		283,773		28,116	11	%	11.01	%	0.95	%

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

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

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

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PART I: Item 4: Controls and Procedures

SOUTHERN MISSOURI BANCORP, INC.

An evaluation of Southern Missouri’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended, (the “Act”)) as of March 31, 2021, was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, and several other members of our senior management. The Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2021, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to management (including the Chief Executive and Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the quarter ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

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PART II: Other Information

SOUTHERN MISSOURI BANCORP, INC.

Item 1: Legal Proceedings

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

Item 1a: Risk Factors

There have been no material changes to the risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2020.

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


					Maximum Number (or
				Total Number of Shares (or	Approximate Dollar Value)
	Total Number of			Units) Purchased as Part of	of Shares (or Units) that
	Shares (or Units)	Average Price Paid per		Publicly Announced Plans	May Yet be Purchased
Period	Purchased	Share (or Unit)		or Programs	Under the Plans or Program
1/1/2021 thru 1/31/2021	25,380	$	32.09	25,380	115,878
2/1/2021 thru 2/29/2021	23,474		34.37	23,474	92,404
3/1/2021 thru 3/31/2021	44,737		39.79	44,737	47,667
Total	93,591	$	36.35	93,591	47,667

Item 3: Defaults upon Senior Securities

Not applicable

Item 4: Mine Safety Disclosures

Not applicable

Item 5: Other Information

None

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Item 6: Exhibits


Exhibit Number	Document
3.1(i)	Articles of Incorporation of the Registrant (filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended June 30, 1999 and incorporated herein by reference)
3.1(i)A	Amendment to Articles of Incorporation of Southern Missouri increasing the authorized capital stock of Southern Missouri (filed as an exhibit to Southern Missouri’s Current Report on Form 8-K filed on November 21, 2016 and incorporated herein by reference)
3.1(i)B	Amendment to Articles of Incorporation of Southern Missouri increasing the authorized capital stock of Southern Missouri(filed as an exhibit to Southern Missouri’s Current Report on Form 8-K filed on November 8, 2018 and incorporated herein by reference)
3.1(ii)	Certificate of Designation for the Registrant’s Senior Non-Cumulative Perpetual Preferred Stock, Series A (filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on July 26, 2011 and incorporated herein by reference)
3.2	Bylaws of the Registrant (filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on December 6, 2007 and incorporated herein by reference)
10	Material Contracts:
	1.	Registrant’s 2017 Omnibus Incentive Plan (attached to the Registrant’s definitive proxy statement filed on September 26, 2017, and incorporated herein by reference)
	2.	2008 Equity Incentive Plan (attached to the Registrant’s definitive proxy statement filed on September 19, 2008 and incorporated herein by reference)
	3.	2003 Stock Option and Incentive Plan (attached to the Registrant’s definitive proxy statement filed on September 17, 2003 and incorporated herein by reference)
	4.	Employment and Change-in-control Agreements
		(i)	Employment Agreement with Greg A. Steffens (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(ii)	Change-in-control Agreement with Kimberly A. Capps (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(iii)	Change-in-control Agreement with Matthew T. Funke (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(iv)	Change-in-control Agreement with Lora L. Daves (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(v)	Change-in-control Agreement with Justin G. Cox (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(vi)	Change-in-control Agreement with Mark E. Hecker (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(vii)	Change-in-control Agreement with Rick A. Windes (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
	5.	Director’s Retirement Agreements
		(i)	Director’s Retirement Agreement with Sammy A. Schalk (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2000 and incorporated herein by reference)
		(ii)	Director’s Retirement Agreement with Ronnie D. Black (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2000 and incorporated herein by reference)
		(iii)	Director’s Retirement Agreement with L. Douglas Bagby (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2000 and incorporated herein by reference)
		(iv)	Director’s Retirement Agreement with Rebecca McLane Brooks (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004 and incorporated herein by reference)
		(v)	Director’s Retirement Agreement with Charles R. Love (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004 and incorporated herein by reference)
		(vi)	Director’s Retirement Agreement with Charles R. Moffitt (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004 and incorporated herein by reference)

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		(vii)	Director’s Retirement Agreement with Dennis C. Robison (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2008 and incorporated herein by reference)
		(viii)	Director’s Retirement Agreement with David J. Tooley (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011 and incorporated herein by reference)
		(ix)	Director’s Retirement Agreement with Todd E. Hensley (filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2015 and incorporated herein by reference)
	6.	Tax Sharing Agreement (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 and incorporated herein by reference)
10.1	Named Executive Officer Salary and Bonus Arrangements for 2020 (filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended June 30, 2020 and incorporated herein by reference)
10.2	Director Fee Arrangements for 2020 (filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended June 30, 2020 and incorporated herein by reference)
14	Code of Conduct and Ethics (filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2016 and incorporated herein by reference)
21	Subsidiaries of the Registrant (filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended June 30, 2020 and incorporated herein by reference)
31.1	Rule 13a-14(a)/15-d14(a) Certifications
31.2	Rule 13a-14(a)/15-d14(a) Certifications
32	Section 1350 Certifications
101	Includes the following financial and related information from Southern Missouri Bancorp, Inc.’s Quarterly Report on Form 10-Q as of and for the quarter ended March 31, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (1) the Consolidated Balance Sheets, (2) the Consolidated Statements of Income, (3) the Consolidated Statements of Comprehensive Income, (4) the Consolidated Statements of Changes in Stockholders’ Equity, (5) the Consolidated Statements of Cash Flows, and (6) Notes to Consolidated Financial Statements.
104	The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL.

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SIGNATURES

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


		SOUTHERN MISSOURI BANCORP, INC.
		Registrant

Date: May 10, 2021		/s/ Greg A. Steffens
		Greg A. Steffens
		President & Chief Executive Officer
		(Principal Executive Officer)

Date: May 10, 2021		/s/ Matthew T. Funke
		Matthew T. Funke
		Executive Vice President & Chief Financial Officer
		(Principal Financial and Accounting Officer)

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