Southern Missouri Bancorp (SMBC) 10-K 2020 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended June 30, 2020                            OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-23406

SOUTHERN MISSOURI BANCORP, INC.
(Exact name of registrant as specified in its charter)
Missouri	43-1665523
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2991 Oak Grove Road, Poplar Bluff, Missouri	63901
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (573) 778-1800

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

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	SMBC	The NASDAQ Stock Market, LLC

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES ◻ NO  ⌧

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES ◻ NO  ⌧

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 and posted on its corporate web site, if any, every interactive data file required to be submitted and posted 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 registration was required to submit and post 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.

Large accelerated filer   ◻ Accelerated filer  ⌧ Non-accelerated filer  ◻ Smaller reporting company  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YES  ☐  NO  ⌧

The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average of the high and low traded price of such stock as of the last business day of the registrant’s most recently completed second fiscal quarter, was $298.2 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)

As of September 11, 2020, there were issued and outstanding 9,126,625 shares of the Registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of Form 10-K - Portions of the Proxy Statement for the 2020 Annual Meeting of Stockholders.

PART I

Item 1.    Description of Business

General

Southern Missouri Bancorp, Inc. ("Company") is a bank holding company and the parent company of Southern Bank (“Bank”). The Company changed its state of incorporation to Missouri on April 1, 1999, and was originally incorporated in Delaware on December 30, 1993 for the purpose of becoming the holding company for the Bank, which was known as Southern Missouri Savings Bank upon completion of its conversion from a state chartered mutual savings and loan association to a state chartered stock savings bank. As part of the conversion in April 1994, the Company sold 1.8 million shares of its common stock to the public. The Company’s Common Stock is quoted on the NASDAQ Global Market under the symbol "SMBC".

Southern Missouri Savings Bank was originally chartered by the state of Missouri as a mutual savings and loan association in 1887. On June 20, 1995, it converted to a federally chartered stock savings bank and took the name Southern Missouri Savings Bank, FSB. On February 17, 1998, Southern Missouri Savings Bank converted from a federally chartered stock savings bank to a Missouri chartered stock savings bank and changed its name to Southern Missouri Bank & Trust Co. On June 4, 2004, Southern Missouri Bank & Trust Co. converted from a Missouri chartered stock savings bank to a Missouri state chartered trust company with banking powers ("Charter Conversion"). On June 1, 2009, the institution changed its name to Southern Bank.

The primary regulator of the Bank is the Missouri Division of Finance. The Bank is a member of the Federal Reserve, and the Board of Governors of the Federal Reserve System ("Federal Reserve Board" or "FRB") is the Bank’s primary federal regulator. The Bank’s deposits continue to be insured up to applicable limits by the Deposit Insurance Fund ("DIF") of the Federal Deposit Insurance Corporation ("FDIC"). With the Bank’s conversion to a trust company with banking powers, the Company became a bank holding company regulated by the FRB.

The principal business of the Bank consists primarily of attracting retail deposits from the general public and using such deposits along with wholesale funding from the Federal Home Loan Bank of Des Moines ("FHLB"), and, to a lesser extent, brokered deposits, to invest in one- to four-family residential mortgage loans, mortgage loans secured by commercial real estate, commercial non-mortgage business loans, and consumer loans. These funds are also used to purchase mortgage-backed and related securities ("MBS"), U.S. Government Agency obligations, municipal bonds, and other permissible investments.

At June 30, 2020, the Company had total assets of $2.5 billion, total deposits of $2.2 billion and stockholders’ equity of $258.3 million. The Company has not engaged in any significant activity other than holding the stock of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank. The Company’s revenues are derived principally from interest earned on loans, debt securities, MBS, CMOs and, to a lesser extent, banking service charges, bank card interchange fees, gains on sales of loans, loan late charges, increases in the cash surrender value of bank owned life insurance, and other fee income.

COVID-19 Pandemic Response

Southern Missouri is 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 facilities have 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. With the initial onset of the pandemic in March, and again in more recent months as the number of cases and hospitalizations in our region again increased over the summer months, the Company has worked to increase our telework capabilities, and we have had as many as 25% of our team members working remotely during the month of August either on a regular or rotating basis. No team members have been furloughed, and no furloughs are anticipated. Business travel has been limited where not considered urgent. A limited number of team members are on full or partial paid leave in accordance with provisions of 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.

2

SBA Paycheck Protection Program Lending. In the first and second rounds of funding made available through the Small Business Administration’s Paycheck Protection Program (PPP), the Company originated almost 1,700 loans totaling $133.7 million through August 31, 2020. The Company has not processed applications by borrowers for forgiveness, anticipating that simplified procedures may be adopted under various legislative improvements proposed in the U.S. Congress.

Deferrals and modifications. As of August 31, 2020, following regulatory guidance, the Company has agreements in place with borrowers to defer or modify payment arrangements for approximately 600 loans totaling $305.6 million. These are loans that were otherwise current and performing, but anticipated difficulties in the coming months due to the pandemic response. Generally, the deferrals are for three-month periods, while interest-only modifications are for six months. For more information regarding these deferrals and modifications, see discussion included in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (specifically: Financial Condition, Allowance for Loan Losses).

Acquisitions

On May 22, 2020, the Company completed its acquisition of Central Federal Bancshares, Inc. (“Central”) and its wholly owned subsidiary, Central Federal Savings & Loan Association of Rolla (“Central Federal”), in an all-cash transaction. At closing, Central held total assets of $70.6 million, loans, net, of $51.4 million, and deposits of $46.7 million. The Company acquired Central primarily for the purpose of conducting commercial banking activities in a market where it believes the Company’s business model will perform well, and for the long-term value of its core deposit franchise. The acquisition resulted in a bargain purchase gain of $123,000, while none of the purchase price was allocated to goodwill.

On November 21, 2018, the Company completed its acquisition of Gideon Bancshares Company (“Gideon”) and its wholly owned subsidiary, First Commercial Bank (“First Commercial”), in a stock and cash transaction. At closing, Gideon held total assets of $217 million, loans, net, of $144 million, and deposits of $171 million. The Company acquired Gideon primarily for the purpose of conducting commercial banking activities in markets where it believes the Company’s business model will perform well, and for the long-term value of its core deposit franchise. The goodwill of $1.0 million arising from the acquisition consists largely of synergies and economies of scale expected from combining the operations of the Bank and First Commercial. Goodwill from this transaction was assigned to the acquisition of First Commercial, and is not expected to be deductible for tax purposes.

On February 23, 2018, the Company completed its acquisition of Southern Missouri Bancshares, Inc. (“Bancshares”), and its wholly owned subsidiary, Southern Missouri Bank of Marshfield (“SMB-Marshfield”), in a stock and cash transaction. SMB-Marshfield was merged into the Bank at acquisition. At closing, Bancshares held total assets of $86.2 million, loans, net, of $68.3 million, and deposits of $68.2 million. The Company acquired SMB-Marshfield primarily for the purpose of conducting commercial banking activities in a market where it believes the Company’s business model will perform well, and for the long-term value of its core deposit franchise. The goodwill of $4.4 million arising from the acquisition consists largely of synergies and economies of scale expected from combining the operations of the Bank and SMB-Marshfield. Goodwill from this transaction was assigned to the acquisition of the bank holding company, and is not expected to be deductible for tax purposes.

On June 16, 2017, the Company completed its acquisition of Tammcorp, Inc. (Tammcorp), and its subsidiary, Capaha Bank (Capaha), Tamms, Illinois, in a stock and cash transaction. Capaha was merged into the Bank at acquisition. At closing, Tammcorp held total assets of $187 million, loans, net, of $153 million, and deposits of $167 million. The Company acquired Capaha primarily for the purpose of expanding its commercial banking activities to markets where it believes the Company’s business model will perform well, and for the long-term value of its core deposit franchise. A Tammcorp note payable of $3.7 million was contractually required to be repaid in conjunction with the acquisition. The goodwill of $4.1 million arising from the acquisition consists largely of synergies and economies of scale expected from combining the operations of the Bank and Capaha. Goodwill from this transaction was assigned to the acquisition of the bank holding company, and is not expected to be deductible for tax purposes.

On August 5, 2014, the Company completed its acquisition of Peoples Service Company (PSC) and its subsidiaries, Peoples Banking Company (PBC) and Peoples Bank of the Ozarks (Peoples), Nixa, Missouri, in a stock and cash transaction (the “Peoples Acquisition”). Peoples was merged into the Bank in early December, 2014, in connection with the conversion of Peoples’ data system. At closing, PSC held total assets of $267 million, loans, net, of $193 million, and deposits of $221 million. The Company acquired Peoples primarily for the purpose of expanding its commercial banking activities to markets where it believes the Company’s business model will perform well, and for the long-term value of its core deposit franchise. Notes payable of $2.9 million were contractually required to be repaid on the date of acquisition. The goodwill of $3.0 million arising from the acquisition consists largely of synergies and economies of scale expected from combining the operations of the Bank and Peoples. Goodwill from this transaction was assigned to the acquisition of the bank holding company, and is not expected to be deductible for tax purposes.

3

The Company completed its acquisition of Ozarks Legacy Community Financial, Inc. (Ozarks Legacy), and its subsidiary, Bank of Thayer, headquartered in Thayer, Missouri, in October 2013. At closing, Ozarks Legacy had total assets of approximately $81 million, loans, net, of $38 million, and deposits of $68 million. The Company completed its acquisition of Citizens State Bankshares of Bald Knob, Inc. (Citizens), and its subsidiary, Citizens State Bank, headquartered in Bald Knob, Arkansas, in February 2014. At closing, Citizens had total assets of approximately $72 million, loans, net, of $12 million, and deposits of $64 million. (The Ozarks Legacy and Citizens acquisitions are referred to as the “Fiscal 2014 Acquisitions” collectively.)

On December 17, 2010, the Bank entered into a Purchase and Assumption Agreement with the FDIC, as receiver, to acquire certain assets and assume certain liabilities of the former First Southern Bank, with headquarters in Batesville, Arkansas, and one branch location in Searcy, Arkansas (the “Fiscal 2011 Acquisition”). As a result of the transaction, the Company acquired loans recorded at a fair value of $115 million and assumed deposits recorded at a fair value of $131 million, at December 17, 2010.

Capital Raising Transactions

On June 20, 2017, the Company completed an at-the-market common stock issuance. A total of 794,762 shares of the Company’s common stock were sold at a weighted-average price of approximately $31.46 per share, representing gross proceeds to the Company of approximately $25.0 million. The proceeds from the transaction have been used for general corporate purposes, including working capital to support organic growth at Southern Bank, and to support acquisitions to the extent available.

On November 22, 2011, the Company completed an underwritten public offering of 1,150,000 shares of common stock at a price to the public of $19.00 per share, for aggregate gross proceeds of $21.9 million. The proceeds from the offering have been used for general corporate purposes, including the funding of loan growth and the purchase of securities.

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 the 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;

· 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 loan losses;

· our ability to access cost-effective funding;

4

· 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.

Market Area

The Bank provides its customers with a full array of community banking services and conducts its business from its headquarters in Poplar Bluff, as well as 45 full service branch offices and two limited service branch offices, as of June 30, 2020. The branch offices are located in Poplar Bluff (4), Van Buren, Dexter (2), Kennett, Doniphan, Sikeston, Qulin, Matthews, Springfield (3), Thayer (2), West Plains, Alton, Clever, Forsyth, Fremont Hills, Kimberling City, Ozark, Nixa, Rogersville, Marshfield, Cape Girardeau (2), Jackson, Gideon, Chaffee, Benton, Advance, Bloomfield, Essex, and Rolla Missouri; Jonesboro (2), Paragould, Batesville, Searcy, Bald Knob and Bradford, Arkansas; and Anna, Cairo, and Tamms, Illinois. In July 2020, a new branch was opened in Cabot, Arkansas.

For purposes of management and oversight of its operations, the Bank has organized its facilities into three regional markets. The Bank’s east region includes 24 of its facilities, one of which is limited service, which are situated in Butler, Cape Girardeau, Carter, New Madrid, Ripley, Scott, and Stoddard counties in Missouri, and Alexander and Union counties in Illinois. These counties have a total population of approximately 250,000, and included within this market area is the Cape Girardeau, Missouri, Metropolitan Statistical Area (MSA), which has a population of approximately 97,000. At June 30, 2020 the Bank’s south region includes 12 of its facilities, one of which is limited service, which are situated in Dunklin, Howell, and Oregon counties in Missouri, and Craighead, Greene, Independence, and White counties in Arkansas. These counties have a total population of approximately 350,000, and included within this market area is the Jonesboro, Arkansas, MSA, which has a population of approximately 134,000. The Cabot, Arkansas, branch in Lonoke County, will add to the Company’s footprint for fiscal 2021 a community located in the northeast corner of the Little Rock, Arkansas, MSA. The city of Cabot has a population of 26,000, and is the largest city in Lonoke County, which has a population of approximately 73,000. The Bank’s west region includes 12 of its facilities, which are situated in Christian, Greene, Phelps, Stone, Taney, and Webster counties in Missouri. These counties have a total population of approximately 550,000, and included within this market area is the Springfield, Missouri, MSA, which has a population of approximately 470,000. Each of these markets also serves a few communities just outside these county borders which do not have a notable impact on the demographics of the market area.

The Bank’s east and south regions are generally rural in nature with economies supported by manufacturing activity, agriculture (livestock, dairy, poultry, rice, timber, soybeans, wheat, melons, corn, and cotton), healthcare, and education. Large employers include hospitals, manufacturers, school districts, and colleges. In the west region, the Bank’s operations are generally more concentrated in the Springfield, Missouri, MSA, and major employers include healthcare providers, educational institutions, federal, local, and state government, retailers, transportation and distribution firms, and leisure, entertainment, and hospitality interests. For purposes of the Bank’s lending policy, the Bank’s primary lending area is considered to be the counties where the Bank has a branch facility, and any contiguous county.

5

Competition

The Bank faces strong competition in attracting deposits (its primary source of lendable funds) and originating loans. At June 30, 2020, the Bank was one of 26 bank or saving association groups located in its east region competing for approximately $5.7 billion in deposits at FDIC-insured institutions, one of 35 bank or saving association groups located in its south region (eight of these institutions overlap with the Bank’s east region) competing for $8.0 billion in deposits, and one of 46 bank or savings association groups located in its west region (13 of these overlap with the Bank’s east or south regions) competing for $12.4 billion in deposits.

Competitors for deposits include commercial banks, credit unions, digital payment applications, money market funds, and other investment alternatives, such as mutual funds, full service and discount broker-dealers, equity markets, brokerage accounts and government securities. The Bank’s competition for loans comes principally from other financial institutions, mortgage banking companies, mortgage brokers and life insurance companies. The Bank expects competition to continue to increase in the future as a result of legislative, regulatory and technological changes within the financial services industry. Technological advances, for example, have lowered barriers to market entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. The Gramm-Leach-Bliley Act, which permits affiliation among banks, securities firms and insurance companies, also has changed the competitive environment in which the Bank conducts business.

Lending Activities

General. The Bank’s lending activities consist of originating loans secured by mortgages on one- to four-family and multi-family residential real estate, commercial and agricultural real estate, construction loans on residential and commercial properties, commercial and agricultural business loans and consumer loans. The Bank has also occasionally purchased loan participation interests originated by other lenders. At June 30, 2020, the Bank had purchased participations in 23 loans totaling $58.2 million.

Supervision of the loan portfolio is the responsibility of our Chief Lending Officer, Rick Windes, Regional President Justin G. Cox, and our Chief Credit Officer, Mark E. Hecker. The Chief Lending Officer and Regional President are responsible for oversight of loan production. The Chief Credit Officer is responsible for oversight of underwriting, loan policy, and administration. Loan officers have varying amounts of lending authority depending upon experience and types of loans. Loans beyond their authority are presented to the next level of authority, which may include one of three Regional Small Business Loan Committees, one of three Regional Senior Loan Committees, an Agricultural Loan Committee, or a Senior Agricultural Loan Committee.

The Regional Small Business Loan Committees each consists of lenders selected by the Chief Lending Officer, Regional President, and Chief Credit Officer (our “Senior Lending and Credit Officers”), and is authorized to approve lending relationships up to $1.5 million. The Regional Senior Loan Committees each consists of one director appointed by the Board of Directors, and senior lenders selected by our Senior Lending and Credit Officers. Each Regional Senior Loan Committee is authorized to approve lending relationships up to $3.0 million. The Bank’s Agricultural Loan Committee consists of several lending officers with agricultural lending experience selected by our Senior Lending and Credit Officers, and is authorized to approve agricultural lending relationships up to $1.5 million. The Senior Agricultural Loan Committee consists of our Chief Credit Officer, as well as several senior lending officers with agricultural lending experience selected by our Senior Lending and Credit Officers. The Senior Agricultural Loan Committee is authorized to approve agricultural lending relationships up to $3.0 million.

Lending relationships above $3.0 million require approval of our Bank Senior Loan Committee, comprised of our Senior Lending and Credit Officers, and two senior lenders from each region, or the approval of our Executive Loan Committee, comprised of our Chief Executive Officer, and our Senior Lending and Credit Officers. In addition to the approval of the Bank Senior Loan Committee or the Executive Loan Committee, lending relationships in excess of $4.0 million require the approval of the Discount Committee, which is comprised of all Bank directors. All loans are subject to ratification by the full Board of Directors.

The aggregate amount of loans that the Bank is permitted to make under applicable federal regulations to any one borrower, including related entities, or the aggregate amount that the Bank could have invested in any one real estate project, is based on the Bank’s capital levels. At June 30, 2020, the maximum amount which the Bank could lend to any one borrower and the borrower’s related entities was approximately $69.6 million. At June 30, 2020, the Bank’s ten largest credit relationships, as defined by loan to one borrower limitations, ranged from $29.9 million to $13.7 million, net of participation interests sold. As of June 30, 2020, the majority of these credits were commercial real estate, multi-family real estate, or commercial business loans, and all of these relationships were performing in accordance with their terms.

6

Loan Portfolio Analysis. The following table sets forth the composition of the Bank’s loan portfolio by type of loan and type of security as of the dates indicated.

	At June 30,
	2020				2019				2018				2017				2016
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in thousands)
Type of Loan:
Mortgage Loans:
Residential real estate	$	627,357	29.29	%	$	491,992	26.65	%	$	450,919	28.84	%	$	442,463	31.66	%	$	392,974	34.61	%
Commercial real estate (1)		887,419	41.43			840,777	45.53			704,647	45.07			603,922	43.21			452,052	39.81
Construction		185,924	8.68			123,287	6.68			112,718	7.21			106,782	7.63			77,369	6.82
Total mortgage loans		1,700,700	79.40			1,456,056	78.86			1,268,284	81.12			1,153,167	82.50			922,395	81.24
Other Loans:
Automobile loans		12,084	0.56			11,379	0.62			9,056	0.58			6,378	0.46			6,221	0.55
Commercial business (2)		468,448	21.87			355,874	19.27			281,272	17.99			247,184	17.68			202,045	17.79
Home equity		43,149	2.01			43,369	2.35			39,218	2.51			35,222	2.52			25,146	2.21
Other		25,534	1.20			42,786	2.32			30,297	1.94			22,051	1.58			15,174	1.34
Total other loans		549,215	25.64			453,408	24.56			359,843	23.02			310,835	22.24			248,586	21.89
Total loans		2,249,915	105.04			1,909,464	103.42			1,628,127	104.14			1,464,002	104.74			1,170,981	103.13
Less:
Undisbursed loans in process		78,452	3.66			43,153	2.34			46,533	2.98			50,740	3.63			21,779	1.92
Deferred fees and discounts		4,395	0.21			3	0.00			—	—			(6)	(0.00)			(42)	(0.00)
Allowance for loan losses		25,139	1.17			19,903	1.08			18,214	1.16			15,538	1.11			13,791	1.21
Net loans receivable	$	2,141,929	100.00	%	$	1,846,405	100.00	%	$	1,563,380	100.00	%	$	1,397,730	100.00	%	$	1,135,453	100.00	%
Type of Security:
Residential real estate
One- to four-family	$	482,009	22.50	%	$	395,317	21.41	%	$	414,258	26.50	%	$	352,723	25.24	%	$	326,186	28.73	%
Multi-family		286,654	13.38			172,303	9.33			137,238	8.78			151,585	10.85			128,980	11.36
Commercial real estate		688,145	32.13			647,078	35.05			502,073	32.11			463,890	33.19			329,781	29.04
Land		243,892	11.39			241,360	13.07			214,715	13.73			184,967	13.23			137,448	12.11
Commercial		468,448	21.88			355,874	19.28			281,272	17.99			247,184	17.68			202,045	17.79
Consumer and other		80,767	3.77			97,532	5.28			78,571	5.03			63,653	4.55			46,541	4.10
Total loans		2,249,915	105.04			1,909,464	103.42			1,628,127	104.14			1,464,002	104.74			1,170,981	103.13
Less:
Undisbursed loans in process		78,452	3.66			43,153	2.34			46,533	2.98			50,740	3.63			21,779	1.92
Deferred fees and discounts		4,395	0.21			3	0.00			—	—			(6)	(0.00)			(42)	(0.00)
Allowance for loan losses		25,139	1.17			19,903	1.08			18,214	1.16			15,538	1.11			13,791	1.21
Net loans receivable	$	2,141,929	100.00	%	$	1,846,405	100.00	%	$	1,563,380	100.00	%	$	1,397,730	100.00	%	$	1,135,453	100.00	%

(1) Commercial real estate loan balances included farmland and other agricultural-related real estate loans of $185.3 million, $182.7 million, $160.3 million, $140.0 million, and $102.2 million as of June 30, 2020, 2019, 2018, 2017, and 2016, respectively.

(2) Commercial business loan balances included agricultural equipment and production loans of $100.3 million, $95.5 million, $81.5 million, $85.7 million, and $73.3 million as of June 30, 2020, 2019, 2018, 2017, and 2016, respectively.

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The following table shows the fixed and adjustable rate composition of the Bank’s loan portfolio at the dates indicated.

	At June 30,
	2020				2019				2018				2017				2016
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in thousands)
Type of Loan:
Fixed-Rate Loans:
Residential real estate	$	407,437	19.02	%	$	254,234	13.77	%	$	207,405	13.27	%	$	189,054	13.53	%	$	172,901	15.23	%
Commercial real estate		725,830	33.89			658,874	35.68			557,556	35.66			476,132	34.06			356,613	31.41
Construction		183,214	8.55			116,304	6.30			104,995	6.72			89,542	6.40			58,330	5.14
Consumer		35,139	1.64			51,905	2.81			36,784	2.35			26,305	1.88			21,338	1.88
Commercial business		365,219	17.05			222,290	12.04			151,766	9.71			137,613	9.85			137,426	12.10
Total fixed-rate loans		1,716,839	80.15			1,303,607	70.60			1,058,506	67.71			918,646	65.72			746,608	65.76
Adjustable-Rate Loans:
Residential real estate		219,920	10.27			237,758	12.88			243,514	15.58			253,409	18.13			220,073	19.38
Commercial real estate		161,589	7.54			181,903	9.85			147,091	9.41			127,790	9.14			95,439	8.41
Construction		2,710	0.13			6,983	0.38			7,723	0.49			17,240	1.23			19,039	1.68
Consumer		45,628	2.13			45,629	2.47			41,787	2.67			37,346	2.67			25,203	2.22
Commercial business		103,229	4.82			133,584	7.23			129,506	8.28			109,571	7.85			64,619	5.68
Total adjustable-rate loans		533,076	24.89			605,857	32.81			569,621	36.43			545,356	39.02			424,373	37.37
Total loans		2,249,915	105.04			1,909,464	103.41			1,628,127	104.14			1,464,002	104.74			1,170,981	103.13
Less:
Undisbursed loans in process		78,452	3.66			43,153	2.34			46,533	2.98			50,740	3.63			21,779	1.92
Net deferred loan fees		4,395	0.21			3	0.00			—	—	���		(6)	(0.00)			(42)	(0.00)
Allowance for loan loss		25,139	1.17			19,903	1.07			18,214	1.16			15,538	1.11			13,794	1.21
Net loans receivable	$	2,141,929	100.00	%	$	1,846,405	100.00	%	$	1,563,380	100.00	%	$	1,397,730	100.00	%	$	1,135,453	100.00	%

Residential Mortgage Lending. The Bank actively originates loans for the acquisition or refinance of one- to four-family residences. These loans are originated as a result of customer and real estate agent referrals, existing and walk-in customers and from responses to the Bank’s marketing campaigns. At June 30, 2020, residential loans secured by one- to four-family residences totaled $429.9 million, or 22.0% of net loans receivable.

The Bank currently offers both fixed-rate and adjustable-rate mortgage ("ARM") loans. During the year ended June 30, 2020, the Bank originated $28.0 million of ARM loans and $114.7 million of fixed-rate loans that were secured by one- to four-family residences, for retention in the Bank’s portfolio. An additional $72.2 million in fixed-rate one- to four-family residential loans were originated for sale on the secondary market. Substantially all of the one- to four-family residential mortgage originations in the Bank’s portfolio are secured by property located within the Bank’s market area.

The Bank generally originates one- to four-family residential mortgage loans for retention in its portfolio in amounts up to 90% of the lower of the purchase price or appraised value of residential property. For loans originated in excess of 80% loan-to-value, the Bank generally charges an additional 25-100 basis points, but does not require private mortgage insurance. At June 30, 2020, the outstanding balance of loans originated with a loan-to-value ratio in excess of 80% was $95.8 million. For fiscal years ended June 30, 2020, 2019, 2018, 2017, and 2016, originations of one- to four-family loans in excess of 80% loan-to-value have totaled $45.9 million, $23.3 million, $26.3 million, $25.0 million, and $16.5 million, respectively, totaling $137.0 million. The outstanding balance of those loans at June 30, 2020, was $81.4 million. Originating loans with higher loan-to-value ratios presents additional credit risk to the Bank. Consequently, the Bank limits this product to borrowers with a favorable credit history and a demonstrable ability to service the debt. The majority of new residential mortgage loans originated by the Bank for retention in its portfolio conform to secondary market underwriting standards, however, documentation of loan files may not be adequate to allow for immediate sale. The interest rates charged on these loans are competitively priced based on local market conditions, the availability of funding, and anticipated profit margins. Fixed and ARM loans originated by the Bank are amortized over periods as long as 30 years, but typically are repaid over shorter periods.

Fixed-rate loans secured by one- to four-family residences have contractual maturities up to 30 years, and are generally fully amortizing with payments due monthly. These loans normally remain outstanding for a substantially shorter period of time because of refinancing and other prepayments. A significant change in the interest rate environment can alter the average life of a residential loan portfolio. The one- to four-family fixed-rate loans do not contain prepayment penalties. At June 30, 2020, one- to four-family loans with a fixed rate totaled $257.7 million and had a weighted-average maturity of 156 months.

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The Bank currently originates one- to four-family ARM loans, which adjust annually, after an initial period of one to seven years. Typically, originated ARM loans secured by owner occupied properties reprice at a margin of 2.75% to 3.00% over the weekly average yield on United States Treasury securities adjusted to a constant maturity of one year (“CMT”). Generally, ARM loans secured by non-owner occupied residential properties reprice at a margin of 3.75% over the CMT index. Residential ARM loan originations are subject to annual and lifetime interest rate caps and floors. As a consequence of using interest rate caps, initial rates which may be at a premium or discount, and a "CMT" loan index, the interest earned on the Bank’s ARMs will react differently to changing interest rates than the Bank’s cost of funds. At June 30, 2020, one- to four-family loans tied to the CMT index totaled $134.5 million. One- to four-family loans tied to other indices totaled $39.2 million.

In underwriting one- to four-family residential real estate loans, the Bank evaluates the borrower’s ability to meet debt service requirements at current as well as fully indexed rates for ARM loans, and the value of the property securing the loan. Most properties securing real estate loans made by the Bank during fiscal 2020 had appraisals performed on them by independent fee appraisers approved and qualified by the Board of Directors. The Bank generally requires borrowers to obtain title insurance and fire, property and flood insurance (if indicated) in an amount not less than the amount of the loan. Real estate loans originated by the Bank generally contain a "due on sale" clause allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the security property.

The Bank also originates loans secured by multi-family residential properties that are often located outside the Company’s primary market area, but made to borrowers who operate within the primary market area. At June 30, 2020, the Bank had $197.5 million, or 9.2% of net loans receivable, in multi-family residential real estate. The majority of the multi-family residential loans that are originated by the Bank are amortized over periods generally up to 25 years, with balloon maturities up to ten years. Both fixed and adjustable interest rates are offered and it is typical for the Bank to include an interest rate “floor” and “ceiling” in variable-rate loan agreements. Variable rate loans typically adjust daily, monthly, quarterly or annually based on the Wall Street prime interest rate. Generally, multi-family residential loans do not exceed 85% of the lower of the appraised value or purchase price of the secured property. The Bank generally requires a Board-approved independent certified fee appraiser to be engaged in determining the collateral value. As a general rule, the Bank requires the unlimited guaranty of all individuals (or entities) owning (directly or indirectly) 20% or more of the stock of the borrowing entity.

The primary risk associated with multi-family loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in borrowers having to provide rental rate concessions to achieve adequate occupancy rates. In an effort to reduce these risks, the Bank evaluates the guarantor’s ability to inject personal funds as a tertiary source of repayment.

Commercial Real Estate Lending. The Bank actively originates loans secured by commercial real estate including farmland, single- and multi-tenant retail properties, restaurants, hotels, land (improved and unimproved), nursing homes and other healthcare related facilities, warehouses and distribution centers, convenience stores, automobile dealerships, and other automotive-related services, and other businesses generally located in the Bank’s market area. At June 30, 2020, the Bank had $887.4 million in commercial real estate loans, which represented 41.4% of net loans receivable. Of this amount, $185.3 million were loans secured by agricultural properties. The increase over the last several fiscal years in agricultural lending is the result of an intentional focus by the Bank on that segment of our market, including the hiring of personnel with knowledge of agricultural lending and experience in that type of business development. The Bank expects to continue to grow its agricultural lending portfolio at levels similar to recent fiscal years. The Bank expects to continue to maintain or increase the percentage of commercial real estate loans, inclusive of agricultural properties, in its total portfolio.

Commercial real estate loans originated by the Bank are generally based on amortization schedules of up to 25 years with monthly principal and interest payments. Generally, these loans have fixed interest rates and maturities ranging 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 fixed-rate period up to seven years, based upon the Wall Street prime rate. The Bank typically includes an interest rate "floor" in the loan agreement. The Bank’s fixed-rate commercial real estate portfolio has a weighted average maturity of 57 months. Variable rate commercial real estate originations typically adjust daily, monthly, quarterly or annually based on the Wall Street prime rate. Generally, loans for improved commercial properties 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. Agricultural real estate loans generally require annual, instead of monthly, payments. Before credit is extended, the Bank analyzes the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property and the value of the property itself. Generally, personal guarantees are obtained from the borrower in addition to obtaining the secured property as collateral for such loans. The Bank also generally requires appraisals on properties securing commercial real estate to be performed by a Board-approved independent certified fee appraiser.

9

Generally, loans secured by commercial real estate involve a greater degree of credit risk than one- to four-family residential mortgage loans. These loans typically involve large balances to single borrowers or groups of related borrowers. Because payments on loans secured by commercial real estate are often dependent on the successful operation or management of the secured property, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. See "Asset Quality."

Construction Lending. The Bank originates real estate loans secured by property or land that is under construction or development. At June 30, 2020, the Bank had $185.9 million, or 8.7% of net loans receivable in construction loans outstanding.

Construction loans originated by the Bank are generally secured by mortgage loans for the construction of owner occupied residential real estate or to finance speculative construction secured by residential real estate, land development, or owner-operated or non-owner occupied commercial real estate. At June 30, 2020, $52.1 million of the Bank’s construction loans were secured by one- to four-family residential real estate, $89.2 million were secured by multi-family residential real estate, and $44.6 million were secured by commercial real estate. Included in the one- to four-family residential real estate construction loans were $17.1 million in loans for speculative construction, while the multifamily construction loans included $88.5 million participation loans purchased for developments awarded low income housing tax credits, and for which a firm takeout commitment exists (see “Loan Originations, Sales, and Purchases”). During construction, these loans typically require monthly interest-only payments with single-family residential construction loans maturing in six to twelve months, while multifamily or commercial construction loans typically mature in 12 to 24 months. Once construction is completed, construction loans may be converted to permanent financing, generally with monthly payments using amortization schedules of up to 30 years on residential and up to 25 years on commercial real estate.

Speculative construction and land development lending generally affords the Bank an opportunity to receive higher interest rates and fees with shorter terms to maturity than those obtainable from residential lending. Nevertheless, construction and land development lending is generally considered to involve a higher level of credit risk than one- to four-family residential lending due to (i) the concentration of principal among relatively few borrowers and development projects, (ii) the increased difficulty at the time the loan is made of accurately estimating building or development costs and the selling price of the finished product, (iii) the increased difficulty and costs of monitoring and disbursing funds for the loan,  (iv) the higher degree of sensitivity to increases in market rates of interest and changes in local economic conditions, and (v) the increased difficulty of working out problem loans. Due in part to these risk factors, the Bank may be required from time to time to modify or extend the terms of some of these types of loans. In an effort to reduce these risks, the application process includes a submission to the Bank of accurate plans, specifications and costs of the project to be constructed. These items are also used as a basis to determine the appraised value of the subject property. Loan amounts are generally limited to 80% of the lesser of current appraised value and/or the cost of construction.

Consumer Lending. The Bank offers a variety of secured consumer loans, including: home equity, automobile, second mortgage, mobile home and deposit-secured loans. The Bank originates substantially all of its consumer loans in its primary market area. Generally, consumer loans are originated with fixed rates for terms of up to approximately 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. At June 30, 2020, the Bank’s consumer loan portfolio totaled $80.8 million, or 3.8% of net loans receivable.

Home equity loans represented 53.4% of the Bank’s consumer loan portfolio at June 30, 2020, and totaled $43.1 million, or 2.0% of net loans receivable.

Home equity lines of credit (HELOCs) are secured with a deed of trust and are generally issued for up to 90% of the appraised or assessed value of the property securing the line of credit, less the outstanding balance on the first mortgage. Interest rates on the HELOCs are adjustable and are tied to the current prime interest rate, generally with an interest rate floor in the loan agreement. This rate is obtained from the Wall Street Journal and adjusts on a daily basis. Interest rates are based upon the loan-to-value ratio of the property with better rates given to borrowers with more equity. HELOCs, which are secured by residential properties, are generally secured by stronger collateral than other consumer loans and, because of the adjustable rate structure, present less interest rate risk to the Bank.

Automobile loans represented 15.0% of the Bank’s consumer loan portfolio at June 30, 2020, and totaled $12.1 million, or 0.56% of net loans receivable. Of that total, an immaterial amount was originated by auto dealers. Typically, automobile loans are made for terms of up to 66 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.

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Consumer loan rates and terms vary according to the type of collateral, length of contract and creditworthiness of the borrower, which is evaluated using credit scoring. Consumers with additional qualifying Bank products are eligible for additional pricing discounts. The underwriting standards employed for consumer loans include employment stability, an application, a determination of the applicant’s payment history on other debts, and an assessment of ability to meet existing and proposed obligations. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount.

Consumer loans may entail greater credit risk than do residential mortgage loans, because they are generally unsecured or are secured by rapidly depreciable or mobile assets, such as automobiles. In the event of repossession or default, there may be no secondary source of repayment or the underlying value of the collateral could be insufficient to repay the loan. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. The Bank’s delinquency levels for these types of loans are reflective of these risks. See "Asset Classification."

Commercial Business Lending. The Bank’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. At June 30, 2020, the Bank had $468.4 million in commercial business loans outstanding, or 21.9% of net loans receivable. Of this amount, $100.3 million were loans related to agriculture, including amortizing equipment loans and annual production lines. At June 30, 2020, commercial loan balances included $132.3 million in PPP loans outstanding. The Bank expects the percentage of commercial business loans in its total loan portfolio to decline somewhat in the near term as these borrowers’ loans are forgiven by the SBA, but expects the percentage of the loan portfolio attributable to commercial business loans to remain relatively stable over the long term.

The Bank currently offers both fixed and adjustable rate commercial business loans. At year end, the Bank had $365.2 million in fixed rate and $103.2 million of adjustable rate commercial business loans. The adjustable rate business loans typically reprice daily, monthly, quarterly, or annually, in accordance with the Wall Street prime rate of interest. The Bank typically includes an interest rate "floor" in the loan agreement.

Commercial business loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. 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. The Bank’s commercial business loans are evaluated based on the loan application, a determination of the applicant’s payment history on other debts, business stability and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

11

Contractual Obligations and Commitments, Including Off-Balance Sheet Arrangements. The following table discloses our fixed and determinable contractual obligations and commercial commitments by payment date as of June 30, 2020. Commitments to extend credit totaled $416.2 million at June 30, 2020.

	Less Than						More Than
	1 Year		1-3 Years		4-5 Years		5 Years		Total
	(Dollars in thousands)
Federal Home Loan Bank advances	$	12,467	$	30,223	$	27,000	$	334	$	70,024
Certificates of deposit		499,419		125,606		49,446		—		674,471
Total	$	511,886	$	155,829	$	76,446	$	334	$	744,495

	Less Than						More Than
	1 Year		1-3 Years		4-5 Years		5 Years		Total
	(Dollars in thousands)
Construction loans in process	$	78,452	$	—	$	—	$	—	$	78,452
Other loan commitments		276,680		11,885		11,485		37,652		337,702
	$	355,132	$	11,885	$	11,485	$	37,652	$	416,154

Loan Maturity and Repricing

The following table sets forth certain information at June 30, 2020, regarding the dollar amount of loans maturing or repricing in the Bank’s portfolio based on their contractual terms to maturity or repricing, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Mortgage loans that have adjustable rates are shown as maturing at their next repricing date. Listed loan balances are shown before deductions for undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses.

			After		After
			One Year		5 Years
	Within		Through		Through		After
	One Year		5 Years		10 Years		10 Years		Total
	(Dollars in thousands)
Residential real estate	$	172,454	$	194,580	$	143,188	$	117,135	$	627,357
Commercial real estate		232,304		425,973		221,628		7,514		887,419
Construction		157,755		21,608		5,265		1,296		185,924
Consumer		51,313		26,618		2,767		69		80,767
Commercial business		168,284		268,703		29,322		2,139		468,448
Total loans	$	782,110	$	937,482	$	402,170	$	128,153	$	2,249,915

As of June 30, 2020, loans with a maturity date after June 30, 2021, with fixed interest rates totaled $1.3 billion, and loans with a maturity date after June 30, 2021, with adjustable rates totaled $148.1 million.

Loan Originations, Sales and Purchases

Generally, loans are originated by the Bank’s staff, who are salaried loan officers. All loan officers are eligible for bonuses based on production, market performance, and credit quality. Certain lenders, in particular those originating higher volume of residential loans for sale on the secondary market, may earn a relatively higher percentage of their total compensation through bonuses. Loans are originated both to be held for investment and to be sold into the secondary market. Loan applications are generally taken and processed at each of the Bank’s full-service locations, and the Bank in recent years began processing online applications for single-family residential loans.

While the Bank originates both adjustable-rate and fixed-rate loans, the ability to originate loans is dependent upon the relative customer demand for loans in its market. In fiscal 2020, the Bank originated $848.1 million of loans, compared to $606.3 million and $550.5 million, respectively, in fiscal 2019 and 2018. A substantial portion of the increase in fiscal 2020 is attributable to origination of PPP loans. Of these loans, mortgage loan originations were $570.1 million, $437.6 million, and $397.9 million in fiscal 2020, 2019, and 2018, respectively. Increases in originations over recent periods is attributed primarily to an expanded market area and customer base following recent acquisitions.

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From time to time, the Bank has purchased loan participations consistent with its loan underwriting standards. During fiscal 2020, the Bank committed to purchase $57.8 million of new loan participations. At June 30, 2020, outstanding balances on loan participations purchased totaled $58.2 million, or 2.72% of net loans receivable. An additional $52.1 million is available to be drawn on these purchased participation loans. Approximately 77% of the Bank’s outstanding balance in loan participations purchased are construction loans for multifamily developments awarded low income housing tax credits, and for which a firm takeout commitment exists. Of the available credit on loan participations purchased, approximately 85% are attributable to these construction loans for multifamily development. At June 30, 2020, all of these participations were performing in accordance with their respective terms, although one of these borrowers requested and was granted a short-term payment deferral which is not classified as a TDR as allowed under the CARES Act. This relationship, encompassing two construction loans with a total outstanding balance of $4.4 million and no available credit, was secured by a hotel property and was classified as watch status at June 30, 2020. The Bank evaluates additional loan participations on an ongoing basis, based in part on local loan demand, liquidity, portfolio and capital levels.

The following table shows total loans originated, purchased, sold and repaid during the periods indicated.

	Year Ended June 30,
	2020		2019		2018
	(Dollars in thousands)
Total loans at beginning of period	$	1,909,464	$	1,628,127	$	1,464,002
Loans originated:
One- to four-family residential		214,852		106,113		96,061
Multi-family residential and commercial real estate		252,684		234,075		185,914
Construction loans		102,560		97,442		115,919
Commercial business		253,355		143,776		134,318
Consumer and others		24,643		24,921		18,316
Total loans originated		848,094		606,327		550,528
Loans purchased:
Total loans purchased (1)		77,959		166,112		72,846
Loans sold:
Total loans sold		(95,826)		(50,488)		(64,073)
Principal repayments		(474,057)		(431,898)		(386,912)
Participation principal repayments		(14,407)		(6,438)		(6,098)
Foreclosures		(1,312)		(2,278)		(2,166)
Net loan activity		340,451		281,337		164,125
Total loans at end of period	$	2,249,915	$	1,909,464	$	1,628,127

(1) Amount reported in fiscal 2020 includes the Company’s acquisition of loans from the Central Federal acquisition recorded at a $51.4 million fair value.

(2) Amount reported in fiscal 2019 includes the Company’s acquisition of loans from the Gideon acquisition recorded at a $144.3 million fair value.

(3) Amount reported in fiscal 2018 includes the Company’s acquisition of loans from the Marshfield acquisition recorded at a $68.3 million fair value.

Loan Commitments

The Bank issues commitments for single- and multi-family residential mortgage loans, commercial real estate loans, operating or working capital lines of credit, and standby letters-of-credit. Such commitments may be oral or in writing with specified terms, conditions and at a specified rate of interest. The Bank had outstanding net loan commitments of approximately $416.2 million at June 30, 2020. See Note 15 of Notes to the Consolidated Financial Statements contained in Item 8.

Loan Fees

In addition to interest earned on loans, the Bank receives income from fees in connection with loan originations, loan modifications, late payments and for miscellaneous services related to its loans. Income from these activities varies from period to period depending upon the volume and type of loans made and competitive conditions.

13

Asset Quality

Delinquent Loans. Generally, when a borrower fails to make a required payment, the Bank begins the collection process by mailing a computer generated notice to the customer. If the delinquency is not cured promptly, the customer is contacted again by notice or telephone. After an account secured by real estate becomes over 60 days past due, the Bank will typically send a demand notice to the customer which, if not cured within the time provided or unless satisfactory arrangements have been made, will lead to foreclosure. Foreclosure may not begin until the loan reaches 120 days delinquency in the case of consumer residential loans. For consumer loans, the Missouri Right-To-Cure Statute is followed, which requires issuance of specifically worded notices at specific time intervals prior to repossession or further collection efforts.

The following table sets forth the Bank’s loan delinquencies by type and by amount at June 30, 2020.

	Loans Delinquent For:						Total Loans
							Delinquent 60 Days
	60-89 Days			90 Days and Over			or More
	Numbers	Amounts		Numbers	Amounts		Numbers	Amounts
	(Dollars in thousands)
Residential real estate	8	$	378	14	$	654	22	$	1,032
Commercial real estate	2		327	2		1,073	4		1,400
Construction	—		—	—		—	—		—
Consumer	8		53	10		193	18		246
Commercial Business	9		1,219	11		810	20		2,029
Totals	27	$	1,977	37	$	2,730	64	$	4,707

CARES Act Relief from TDR Classification Requirements for Borrowers Impacted by COVID-19 Pandemic. In March 2020, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was signed into law, providing banking organizations with 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) executed 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. As of June 30, 2020, those loans for which the Company had elected to modify but not consider as TDRs, non-accrual, or adversely classified totaled $380.2 million, and were concentrated primarily in owner-occupied and non-owner-occupied commercial real estate. For further information about these modifications, see discussion included in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (specifically: Financial Condition, Allowance for Loan Losses).

Non-Performing Assets. The table below sets forth the amounts and categories of non-performing assets in the Bank’s loan portfolio. Loans are placed on non-accrual status when the collection of principal and/or interest becomes doubtful, and as a result, previously accrued interest income on the loan is removed from current income. The Bank has no reserves for uncollected interest and does not accrue interest on non-accrual loans. A loan may be transferred back to accrual status once a satisfactory repayment history has been restored. Foreclosed assets held for sale include assets acquired in settlement of loans and are shown net of reserves.

The decrease in nonperforming assets in fiscal 2020 was attributed primarily to the decrease in nonaccrual loans, which, in turn, was attributed primarily to the resolution of certain nonperforming loans acquired in the Gideon Acquisition. In connection with the Gideon Acquisition we acquired nonperforming loans which totaled $10.2 million (at fair value) as of June 30, 2019, and this group of nonperforming loans has declined further to $1.8 million as of June 30, 2020.

For information regarding accrual of interest on impaired loans, see Note 1 of Notes to the Consolidated Financial Statements contained in Item 8.

The Company may treat loans acquired with impaired credit quality as an accruing asset, despite reporting such loans as impaired, because these loans are recorded at acquisition at fair value, which includes an accretable discount which is recorded as interest income over the expected life of the obligation.

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The following table sets forth information with respect to the Bank’s non-performing assets as of the dates indicated.

	At June 30,
	2020			2019			2018			2017			2016
		(Dollars in thousands)
Nonaccruing loans:
Residential real estate	$	4,010		$	6,404		$	5,913		$	1,263		$	2,676
Construction		—			—			25			35			388
Commercial real estate		3,106			10,876			1,962			960			1,797
Consumer		196			309			209			158			160
Commercial business		1,345			3,424			1,063			409			603
Total		8,657			21,013			9,172			2,825			5,624
Loans 90 days past due accruing interest:
Residential real estate		—			—			—			59			—
Construction		—			—			—			—			—
Commercial real estate		—			—			—			—			—
Consumer		—			—			—			13			7
Commercial business		—			—			—			329			31
Total		—			—			—			401			38
Total nonperforming loans		8,657			21,013			9,172			3,226			5,662
Nonperforming investments		—			—			—			—			—
Foreclosed assets held for sale:
Real estate owned		2,561			3,723			3,874			3,014			3,305
Other nonperforming assets		9			29			50			86			61
Total nonperforming assets	$	11,227		$	24,765		$	13,096		$	6,326		$	9,028
Total nonperforming loans to net loans		0.40	%		1.14	%		0.59	%		0.23	%		0.50	%
Total nonperforming loans to total assets		0.34	%		0.95	%		0.49	%		0.19	%		0.40	%
Total nonperforming assets to total assets		0.44	%		1.12	%		0.69	%		0.37	%		0.64	%

At June 30, 2020, troubled debt restructurings (TDRs) totaled $11.2 million, of which $2.6 million was considered nonperforming and was included in the nonaccrual loan total above. The remaining $8.6 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. At June 30, 2019, TDRs totaled $19.0 million, of which $5.8 million was considered nonperforming and was included in the nonaccrual loan total above. In general, these loans were subject to classification as TDRs at June 30, 2020 and 2019, on the basis of guidance under ASU 2011-02 “Receivables: A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, 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.

Real Estate Owned. Real estate properties acquired through foreclosure or by deed in lieu of foreclosure are recorded at the lower of cost or fair value, less estimated disposition costs, which establishes a new cost basis. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged-off to the allowance for loan losses at the time of transfer. Management periodically updates real estate valuations and if the value declines, a specific provision for losses on such property is established by a charge to noninterest expense. At June 30, 2020, the Company’s balance of real estate owned totaled $2.6 million and included $563,000 in residential properties and $2.0 million in non-residential properties.

15

Asset Classification. Applicable regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, regulatory examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. When an insured institution classifies problem assets as loss, it charges off the balance of the assets. Assets which do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses, may be designated as special mention. The Bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the FRB and the Missouri Division of Finance, which can order the establishment of additional loss allowances.

On the basis of management’s review of the assets of the Company, at June 30, 2020, adversely classified assets totaled $27.0 million, or 1.06% of total assets as compared to $32.0 million, or 1.45% of total assets at June 30, 2019. Of the amount adversely classified as of June 30, 2020, $26.1 million was considered substandard, and $888,000 was considered doubtful. Included in adversely classified assets at June 30, 2020, were various loans totaling $24.5 million (see Note 3 of Notes to the Consolidated Financial Statements contained in Item 8 for more information on adversely classified loans) and foreclosed real estate and repossessed assets totaling $2.6 million. Adversely classified loans are so designated due to concerns regarding the borrower’s ability to generate sufficient cash flows to service the debt. Adversely classified loans totaling $6.8 million had been placed on nonaccrual status at June 30, 2020, of which $5.2 million were more than 30 days delinquent. Of the remaining $17.6 million of adversely classified loans, $366,000 were more than 30 days delinquent.

Other Loans of Concern. In addition to the adversely classified assets above, there were also other loans with respect to which management has concerns as to the ability of the borrowers to continue to comply with present loan terms, which may ultimately result in the adverse classification of such assets. These loans continued to perform according to contractual terms as of June 30, 2020, but were identified as having elevated risk due to concerns regarding the borrower’s ability to continue to generate sufficient cash flows to service the debt. At June 30, 2020, these other loans of concern totaled $56.7 million, as compared to $34.5 million at June 30, 2019. The increase was attributable primarily to a limited number of loans secured by hotel properties with combined balances of $27.3 million, including $22.9 million in commercial real estate, and $4.4 million in construction loans. These borrowers requested and received an initial three-month payment deferral due to the impact of the COVID-19 pandemic on their operations, and, at the conclusion of that initial three-month deferral period, requested and received an additional three-month deferral. Other loans of concern attributable to the Gideon Acquisition declined from $13.7 million, at fair value, as of the November 2018 acquisition, to $8.2 million, at fair value, as of June 30, 2020.

Allowance for Loan Losses. The Bank’s allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of loan activity, including those loans which are being specifically monitored. Such evaluation, which includes a review of loans for which full collectability may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in provisioning for loan losses. These provisions for loan losses are charged against earnings in the year they are established. The Bank had an allowance for loan losses at June 30, 2020, of $25.1 million, which represented 224% of nonperforming assets as compared to an allowance of $19.9 million, which represented 80% of nonperforming assets at June 30, 2019.

At June 30, 2020, the Bank also had an allowance for credit losses on off-balance sheet credit exposures of $2.0 million, as compared to $1.3 million at June 30, 2019. This amount is maintained as a separate liability account to cover estimated potential credit losses associated with off-balance sheet credit instruments such as off-balance sheet loan commitments, standby letters of credit, and guarantees.

Although management believes that it uses the best information available to determine the allowance, unforeseen market conditions could result in adjustments and net earnings could be significantly affected if circumstances differ substantially from assumptions used in making the final determination. Future additions to the allowance will likely be the result of periodic loan, property and collateral reviews and thus cannot be predicted with certainty in advance.

16

The following table sets forth an analysis of the Bank’s allowance for loan losses for the periods indicated. Where specific loan loss reserves have been established, any difference between the loss reserve and the amount of loss realized has been charged or credited to current income.

	Year Ended June 30,
	2020			2019			2018			2017			2016
	(Dollars in thousands)
Allowance at beginning of period	$	19,903		$	18,214		$	15,538		$	13,791		$	12,298
Recoveries
Residential real estate		19			23			2			10			5
Construction real estate		—			—			—			1			—
Commercial real estate		15			5			2			20			46
Commercial business		28			2			8			31			15
Consumer		25			16			23			8			8
Total recoveries		87			46			35			70			74
Charge offs:
Residential real estate		379			30			190			211			167
Construction real estate		—			—			9			31			—
Commercial real estate		12			164			56			19			97
Commercial business		273			92			22			337			725
Consumer		189			103			129			65			86
Total charge offs		853			389			406			663			1,075
Net charge offs		(766)			(343)			(371)			(593)			(1,001)
Provision for loan losses		6,002			2,032			3,047			2,340			2,494
Balance at end of period	$	25,139		$	19,903		$	18,214		$	15,538		$	13,791
Ratio of allowance to total loans outstanding at the end of the period		1.16	%		1.07	%		1.15	%		1.10	%		1.20	%
Ratio of net charge offs to average loans outstanding during the period		0.04	%		0.02	%		0.02	%		0.05	%		0.09	%

The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated.

	At June 30,
	2020				2019				2018				2017				2016
			Percent of				Percent of				Percent of				Percent of				Percent of
			Loans in				Loans in				Loans in				Loans in				Loans in
			Each				Each				Each				Each				Each
			Category				Category				Category				Category				Category
			to Total				to Total				to Total				to Total				to Total
	Amount		Loans		Amount		Loans		Amount		Loans		Amount		Loans		Amount		Loans
	(Dollars in thousands)
Residential real estate	$	4,875	27.89	%	$	3,706	25.76	%	$	3,226	27.70	%	$	3,230	30.22	%	$	3,247	33.56	%
Construction		2,010	8.26			1,365	6.46			1,097	6.92			964	7.30			1,091	6.61
Commercial real estate		12,132	39.44			9,399	44.03			8,793	43.28			7,068	41.25			5,711	38.60
Consumer		1,182	3.59			1,046	5.11			902	4.82			757	4.35			738	3.98
Commercial business		4,940	20.82			4,387	18.64			4,196	17.28			3,519	16.88			3,004	17.25
Total allowance for loan losses	$	25,139	100.00	%	$	19,903	100.00	%	$	18,214	100.00	%	$	15,538	100.00	%	$	13,791	100.00	%

17

Investment Activities

General. Under Missouri law, the Bank is permitted to invest in various types of liquid assets, including U.S. Government and State of Missouri obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, banker’s acceptances, repurchase agreements, federal funds, commercial paper, investment grade corporate debt securities and obligations of States and their political sub-divisions. Generally, the investment policy of the Company is to invest funds among various categories of investments and repricing characteristics based upon the Bank’s need for liquidity, to provide collateral for borrowings and public unit deposits, to help reach financial performance targets and to help maintain asset/liability management objectives.

The Company’s investment portfolio is managed in accordance with the Bank’s investment policy which was adopted by the Board of Directors of the Bank and is implemented by members of the asset/liability management committee which consists of the President/Chief Executive Officer, the Chief Financial Officer, the Chief Operations Officer, and five outside directors.

Investment purchases and/or sales must be authorized by the appropriate party, depending on the aggregate size of the investment transaction, prior to any investment transaction. The Board of Directors reviews all investment transactions. All investment purchases are identified as available-for-sale ("AFS") at the time of purchase. The Company has not classified any investment securities as held-to-maturity over the last five years. Securities classified as "AFS" must be reported at fair value with unrealized gains and losses, net of tax, recorded as a separate component of stockholders’ equity. At June 30, 2020, AFS securities totaled $176.5 million (excluding FHLB and Federal Reserve Bank membership stock). For information regarding the amortized cost and market values of the Company’s investments, see Note 2 of Notes to the Consolidated Financial Statements contained in Item 8.

As of June 30, 2020, the Company had no derivative instruments and no outstanding hedging activities. Management has reviewed potential uses for derivative instruments and hedging activities, but has no immediate plans to employ these tools.

Debt and Other Securities. At June 30, 2020, the Company’s debt and other securities portfolio totaled $49.6 million, or 1.95% of total assets as compared to $55.1 million, or 2.49% of total assets at June 30, 2019. During fiscal 2020, the Bank had $17.2 million in maturities and $10.3 million in purchases of these securities. Of the securities that matured, $11.7 million was called for early redemption. At June 30, 2020, the investment securities portfolio included $42.0 million in municipal bonds, of which $36.5 million is subject to early redemption at the option of the issuer. The remaining portfolio consists of $7.6 million in other securities, primarily corporate debt, including pooled trust preferred securities with an estimated fair value of $643,000. Based on projected maturities, the weighted average life of the debt and other securities portfolio at June 30, 2020, was 36 months. Membership stock held in the FHLB of Des Moines, totaling $6.4 million, FHLB of Chicago totaling $215,000, and the Federal Reserve Bank of St. Louis, totaling $4.4 million, along with equity stock of $764,000 in two correspondent (bankers’) banks, was not included in the above totals.

At June 30, 2020, the Company owned two pooled trust preferred securities with an estimated fair value of $643,000 and a book value of $975,000. The June 30, 2020, 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 anticipated at the time the securities were purchased. See Note 2 of Notes to the Consolidated Financial Statements contained in Item 8.

Mortgage-Backed Securities. At June 30, 2020, mortgage-backed securities (“MBS”) totaled $126.9 million, or 5.0%, of total assets, as compared to $110.4 million, or 5.0%, of total assets at June 30, 2019. During fiscal 2020, the Bank had maturities and prepayments of $34.4 million and $45.2 million in purchases of MBS. At June 30, 2020, the MBS portfolio included $83.0 million in fixed-rate MBS, and $43.9 million in fixed rate collateralized mortgage obligations (“CMOs”), all of which passed the Federal Financial Institutions Examination Council’s sensitivity test. MBS securities included $64.0 million in pools backed by residential properties, and $19.0 million in pools backed by commercial properties. Based on projected prepayment rates, the weighted average life of the MBS and CMOs at June 30, 2020, was 41 months. Actual prepayment rates experienced, which often vary due to changes in market interest rates, may cause the anticipated average life of MBS portfolio to extend or shorten as compared to prepayment rates anticipated.

18

Investment Securities Analysis

The following table sets forth the Company’s debt and other securities portfolio, at carrying value, and membership stock, at cost, at the dates indicated.

	At June 30,
	2020				2019				2018
	Fair		Percent of		Fair		Percent of		Fair		Percent of
	Value		Portfolio		Value		Portfolio		Value		Portfolio
	(Dollars in thousands)
U.S. government and government agencies	$	—	—	%	$	7,270	11.07	%	$	9,385	14.13	%
State and political subdivisions		41,988	68.45			42,783	65.15			41,612	62.65
Other securities		7,624	12.43			5,053	7.69			5,152	7.76
FHLB membership stock		6,604	10.76			5,447	8.29			5,875	8.85
Federal Reserve Bank membership stock.		4,363	7.10			4,350	6.62			3,566	5.37
Correspondent (banker’s) bank stock.		775	1.26			775	1.18			826	1.24
Total	$	61,354	100.00	%	$	65,678	100.00	%	$	66,416	100.00	%

The following table sets forth the maturities and weighted average yields of AFS debt securities in the Company’s investment securities portfolio and membership stock at June 30, 2020.

	Available for Sale Securities
	June 30, 2020
	Amortized		Fair		Tax-Equiv.
	Cost		Value		Wtd.-Avg. Yield
	(Dollars in thousands)
State and political subdivisions:
Due within 1 year	$	862	$	868	2.41	%
Due after 1 year but within 5 years		9,875		10,089	2.69
Due after 5 years but within 10 years		9,791		10,132	3.67
Due over 10 years		19,958		20,899	3.06
Total		40,486		41,988	3.10
Other securities:
Due within 1 year		—		—	—	%
Due after 1 year but within 5 years		—		—	—
Due after 5 years but within 10 years		6,021		6,042	4.77
Due over 10 years		1,898		1,582	1.25
Total		7,919		7,624	3.92
No stated maturity:
FHLB/FNBB/MIB membership stock		7,379		7,379	4.05	%
Federal Reserve Bank membership stock		4,363		4,363	6.00
Total		11,742		11,742	4.77
Total debt and other securities	$	60,147	$	61,354	3.54	%

The following table sets forth certain information at June 30, 2020 regarding the dollar amount of MBS and CMOs at amortized cost due, based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. MBS and CMOs that have adjustable rates are shown at amortized cost as maturing at their next repricing date.

	At June 30, 2020
	(Dollars in thousands)
Amounts due:
Within 1 year	$	—
After 1 year through 3 years		3,627
After 3 years through 5 years		29,062
After 5 years		89,686
Total	$	122,375

19

The following table sets forth the dollar amount of all MBS and CMOs at amortized cost due, based on their contractual terms to maturity, one year after June 30, 2020, which have fixed, floating, or adjustable interest rates.

	At June 30, 2020
	(Dollars in thousands)
Interest rate terms on amounts due after 1 year:
Fixed	$	122,375
Adjustable		—
Total	$	122,375

The following table sets forth certain information with respect to each MBS and CMO security at the dates indicated.

	At June 30,
	2020				2019				2018
	Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value
		(Dollars in thousands)
FHLMC certificates	$	29,970	$	30,724	$	16,373	$	16,372	$	16,598	$	16,113
GNMA certificates		7,546		7,618		35		35		38		38
FNMA certificates		42,265		44,662		34,943		35,458		25,800		25,062
Collateralized mortgage obligations issued by government agencies		42,594		43,908		57,946		58,564		50,272		48,963
Total	$	122,375	$	126,912	$	109,297	$	110,429	$	92,708	$	90,176

Deposit Activities and Other Sources of Funds

General. The Company’s primary sources of funds are deposits, borrowings, payments of principal and interest on loans, MBS and CMOs, interest and principal received on investment securities and other short-term investments, and funds provided from operating results. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general market interest rates and overall economic conditions.

Borrowings, including FHLB advances, have been used at times to provide additional liquidity. Borrowings are used on an overnight or short-term basis to compensate for periodic fluctuations in cash flows, and are used on a longer term basis to fund loan growth and to help manage the Company’s sensitivity to fluctuating interest rates.

Deposits. The Bank’s depositors are generally residents and entities located in the States of Missouri, Arkansas, or Illinois. Deposits are attracted from within the Bank’s market area through the offering of a broad selection of deposit instruments, including interest-bearing and noninterest-bearing transaction accounts, money market deposit accounts, saving accounts, certificates of deposit and retirement savings plans. Deposit account terms vary according to the minimum balance required, the time periods the funds may remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, the Bank considers current market interest rates, profitability to the Bank, managing interest rate sensitivity and its customer preferences and concerns. The Bank’s Asset/Liability Committee regularly reviews its deposit mix and pricing.

The Bank will periodically promote a particular deposit product as part of the Bank’s overall marketing plan. Deposit products have been promoted through various mediums, which include digital and social media, radio and newspaper advertisements, as well as “grassroots” marketing techniques, such as sponsorship of – or activity at – community events. The emphasis of these campaigns is to increase consumer awareness and market share of the Bank.

20

The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, and competition. Based on its experience, the Bank believes that its deposits are relatively stable sources of funds. However, the ability of the Bank to attract and maintain money market deposit accounts, passbook savings accounts, and certificates of deposit, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. The following table depicts the composition of the Bank’s deposits as of June 30, 2020:

	As of June 30, 2020
Weighted
Average								Percentage
Interest				Minimum				of Total
Rate		Term	Category	Amount		Balance		Deposits
						(Dollars in
						thousands)
0.00	%	None	Non-interest Bearing	$	100	$	316,048	14.47	%
0.96		None	NOW Accounts		100		781,937	35.79
0.66		None	Savings Accounts		100		181,229	8.29
1.26		None	Money Market Deposit Accounts		1,000		231,162	10.58
			Certificates of Deposit
0.97		6 months or less	Fixed Rate/Term		1,000		57,380	2.63
0.75		6 months or less	IRA Fixed Rate/Term		1,000		3,237	0.15
1.48		7-12 months	Fixed Rate/Term		1,000		225,184	10.31
1.37		7-12 months	IRA Fixed Rate/Term		1,000		25,344	1.16
2.00		13-24 months	Fixed Rate/Term		1,000		160,622	7.35
1.67		13-24 months	IRA Fixed Rate/Term		1,000		17,958	0.82
2.51		25-36 months	Fixed Rate/Term		1,000		56,483	2.59
2.54		25-36 months	IRA Fixed Rate/Term		1,000		12,244	0.56
1.95		48 months and more	Fixed Rate/Term		1,000		92,984	4.26
1.97		48 months and more	IRA Fixed Rate/Term		1,000		23,035	1.04
						$	2,184,847	100.00	%

The following table indicates the amount of the Bank’s jumbo certificates of deposit by time remaining until maturity as of June 30, 2020. Jumbo certificates of deposit require minimum deposits of $100,000 and rates paid on such accounts are generally negotiable.

Maturity Period	Amount
	(Dollars in thousands)
Three months or less	$	88,122
Over three through six months		82,145
Over six through twelve months		135,578
Over 12 months		115,870
Total	$	421,715

Time Deposits by Rates

The following table sets forth the time deposits in the Bank classified by rates at the dates indicated.

	At June 30,
	2020		2019		2018
	(Dollars in thousands)
0.00 - 0.99%	$	72,236	$	2,447	$	77,958
1.00 - 1.99%		393,625		221,409		356,172
2.00 - 2.99%		168,985		398,931		98,842
3.00 - 3.99%		39,191		56,310		479
4.00 - 4.99%		160		162		—
5.00 - 5.99%		—		—		—
6.00 - 6.99%		274		—		—
Total	$	674,471	$	679,259	$	533,451

21

The following table sets forth the amount and maturities of all time deposits at June 30, 2020.

	Amount Due
													Percent
	Less												of Total
	Than One		1-2		2-3		3-4		After				Certificate
	Year		Years		Years		Years		4 Years		Total		Accounts
	(Dollars in thousands)
0.00 – 0.99%	$	66,991	$	4,982	$	213	$	50	$	—	$	72,236	10.72	%
1.00 – 1.99%		291,808		64,423		12,044		2,420		22,930		393,625	58.36
2.00 - 2.99%		110,724		24,901		10,515		3,921		18,924		168,985	25.05
3.00 - 3.99%		29,620		5,285		3,244		1,042		—		39,191	5.81
4.00 - 4.99%		—		—		—		160		—		160	0.02
5.00 - 5.99%		—		—		—		—		—		—	—
6.00 - 6.99%		274		—		—		—		—		274	0.04
Total	$	499,417	$	99,591	$	26,016	$	7,593	$	41,854	$	674,471	100.00	%

Deposit Flow

The following table sets forth the balance of deposits in the various types of accounts offered by the Bank at the dates indicated.

	At June 30,
	2020						2019						2018
			Percent of		Increase				Percent of		Increase				Percent of		Increase
	Amount		Total		(Decrease)		Amount		Total		(Decrease)		Amount		Total		(Decrease)
	(Dollars in thousands)
Noninterest bearing	$	316,048	14.47	%	$	97,159	$	218,889	11.56	%	$	15,372	$	203,517	12.88	%	$	17,314
NOW checking		781,937	35.79			142,718		639,219	33.75			70,214		569,005	36.02			89,517
Savings accounts		181,229	8.29			13,256		167,973	8.87			10,433		157,540	9.97			10,293
Money market deposit		231,162	10.58			42,807		188,355	9.95			71,966		116,389	7.37			10,790
Fixed-rate certificates which mature(1):
Within one year		499,419	22.86			31,743		467,676	24.70			156,236		311,440	19.71			(15,198)
Within three years		125,606	5.75			(65,419)		191,025	10.09			14,231		176,794	11.19			13,984
After three years		49,446	2.26			28,888		20,558	1.08			(24,659)		45,217	2.86			(2,395)
Variable-rate certificates which mature:
Within one year		—	—			—		—	—			—		—	—			—
Within three years		—	—			—		—	—			—		—	—			—
Total	$	2,184,847	100.00	%	$	291,152	$	1,893,695	100.00	%	$	313,793	$	1,579,902	100.00	%	$	124,305

(1) At June 30, 2020, 2019, and 2018, certificates in excess of $100,000 totaled $421.7 million, $427.1 million, and $330.3 million, respectively.

The following table sets forth the deposit activities of the Bank for the periods indicated.

	At June 30,
	2020		2019		2018
	(Dollars in thousands)
Beginning Balance	$	1,893,695	$	1,579,902	$	1,455,597
Net increase before interest credited		267,068		292,585		111,480
Interest credited		24,084		21,208		12,825
Net increase in deposits		291,152		313,793		124,305
Ending balance	$	2,184,847	$	1,893,695	$	1,579,902

In the unlikely event the Bank is liquidated, depositors will be entitled to payment of their deposit accounts prior to any payment being made to the Company as the sole stockholder of the Bank.

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Borrowings. As a member of the FHLB of Des Moines, the Bank has the ability to apply for FHLB advances. These advances are available under various credit programs, each of which has its own maturity, interest rate and repricing characteristics. Additionally, FHLB advances have prepayment penalties as well as limitations on size or term. In order to utilize FHLB advances, the Bank must be a member of the FHLB system, have sufficient collateral to secure the requested advance and own stock in the FHLB equal to 4.45% of the amount borrowed. See "REGULATION – The Bank – Federal Home Loan Bank System."

Although deposits are the Bank’s primary and preferred source of funds, the Bank has actively used FHLB advances. The Bank’s general policy has been to utilize borrowings to meet short-term liquidity needs, or to provide a longer-term source of funding loan growth when other cheaper funding sources are unavailable or to aide in asset/liability management. As of June 30, 2020, the Bank had $70.0 million in FHLB advances, including $69.7 million in fixed-rate long term advances, $338,000 of fixed rate amortizing advances, and no overnight borrowings. In order for the Bank to borrow from the FHLB, it has pledged $768.7 million of its residential and commercial real estate loans to the FHLB (although the actual collateral required for advances taken and letters of credit issued amounts to $147.9 million) and has purchased $6.4 million in membership stock in the FHLB of Des Moines. At June 30, 2020, the Bank had additional borrowing capacity on its pledged residential and commercial real estate loans from the FHLB of $296.6 million, as compared to $320.1 million at June 30, 2019.

Additionally, the Bank is approved to borrow from the Federal Reserve Bank’s discount window on a primary credit basis. Primary credit is available to approved institutions on a generally short-term basis at the “discount rate” set by the FOMC. The Bank has pledged agricultural real estate and other loans to farmers as collateral for any amounts borrowed through the discount window. As of June 30, 2020, the Bank was approved to borrow up to $179.7 million through the discount window, but no balance was outstanding.

Also classified as borrowings are the Bank’s securities sold under agreements to repurchase (“repurchase agreements”). These agreements are typically entered into with local public units or corporations. Generally, the Bank pays interest on these agreements at a rate similar to those available on repurchase agreements with wholesale funding sources. The Bank views repurchase agreements with local entities as a stable funding source. At June 30, 2020, the Bank had no outstanding repurchase agreements, as compared to $4.4 million at June 30, 2019.

Southern Missouri Statutory Trust I, a Delaware business trust subsidiary of the Company, issued $7.0 million in Floating Rate Capital Securities (the "Trust Preferred Securities") with a liquidation value of $1,000 per share in March, 2004. The securities are due in 30 years, were redeemable after five years and bear interest at a floating rate based on LIBOR. At June 30, 2020, the current rate was 3.05%. The securities represent undivided beneficial interests in the trust, which was established by Southern Missouri Bancorp 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 of the sale of the Trust Preferred Securities to purchase Junior Subordinated Debentures of Southern Missouri Bancorp. Southern Missouri Bancorp is using the net proceeds for working capital and investment in its subsidiaries. Trust Preferred Securities currently qualify as Tier I Capital for regulatory purposes. See "Regulation" for further discussion on the treatment of the trust-preferred securities.

In its October 2013 acquisition of Ozarks Legacy, the Company assumed $3.1 million in floating rate junior subordinated debt securities. The securities had been issued in June 2005 by Ozarks Legacy in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, and mature in 2035. At June 30, 2020, the carrying value was $2.7 million, and bore interest at a current coupon rate of 2.76% and an effective rate of 4.21%.

In the Peoples Acquisition, the Company assumed $6.5 million in floating rate junior subordinated debt securities. The debt securities had been issued in 2005 by PBC 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 June 30, 2019, the carrying value was $5.3 million and bore interest at a current coupon rate of 2.11% and an effective rate of 4.01%.

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The following table sets forth certain information regarding short-term borrowings by the Bank at the end of and during the periods indicated:

	Year Ended June 30,
	2020			2019			2018
	(Dollars in thousands)
Year end balances
Short-term FHLB advances	$	—		$	—		$	66,550
Securities sold under agreements to repurchase		—			4,376			3,267
	$	—		$	4,376		$	69,817
Weighted average rate at year end		—	%		0.93	%		1.98	%

The following table sets forth certain information as to the Bank’s borrowings for the periods indicated:

	Year Ended June 30,
	2020			2019			2018
	(Dollars in thousands)
FHLB advances
Daily average balance	$	87,241		$	92,371		$	56,593
Weighted average interest rate		2.21	%		2.57	%		1.84	%
Maximum outstanding at any month end	$	123,452		$	154,100		$	88,538
Securities sold under agreements to repurchase
Daily average balance	$	82		$	3,988		$	5,373
Weighted average interest rate		0.03	%		0.90	%		0.70	%
Maximum outstanding at any month end	$	—		$	4,703		$	9,902
Subordinated Debt
Daily average balance	$	15,093		$	14,994		$	14,897
Weighted average interest rate		5.22	%		6.14	%		5.15	%
Maximum outstanding at month end	$	15,142		$	15,043		$	14,945

Subsidiary Activities

The Bank has four subsidiaries, SMS Financial Services, Inc., which had no assets or liabilities at June 30, 2020, and is currently inactive, and SB Corning, LLC, SB Real Estate Investments, LLC, and Southern Insurance Services, LLC, all active subsidiaries. SB Corning, LLC represents investment in a limited partnership formed for the purpose of generating low income housing tax credits. The initial investment in this subsidiary was $1.5 million, and at June 30, 2020, the carrying value of the investment was $1.0 million. 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 REIT which is majority-owned by the investment subsidiary, but has other preferred shareholders in order to meet the requirements to be a REIT. At June 30, 2020, SB Real Estate Investments, LLC held assets of $763.7 million, while Southern Bank Real Estate Investments, LLC held assets of $751.2 million. Southern Insurance Services, LLC, is an entity acquired in the Gideon Acquisition, and is engaged in the brokerage of commercial and consumer insurance products. Assets held by this subsidiary are immaterial.

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REGULATION

The following is a brief description of certain laws and regulations applicable to the Company and the Bank. Descriptions of laws and regulations here and elsewhere in this prospectus do not purport to be complete and are qualified in their entirety by reference to the actual laws and regulations. Legislation is introduced from time to time in the United States Congress or the Missouri state legislature that may affect the operations of the Company and the Bank. In addition, the regulations governing us may be amended from time to time. Any such legislation or regulatory changes in the future could adversely affect our operations and financial condition.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) imposed various restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions and their holding companies.

Financial Regulatory Reform.

In May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory relief for community banks such as the Bank.

The Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and offers optional, simplified regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single Community Bank Leverage Ratio (“CBLR”) of between 8 and 10 percent. Effective January 1, 2020, the CBLR was 9.0%. However, the CBLR has been temporarily reduced to 8.0% for 2020 and 8.5% for 2021, in response to the COVID-19 pandemic. Any qualifying depository institution or its holding company that exceeds the “community bank leverage ratio” will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” under the prompt corrective action rules. The Act also expands the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” (the “HC Policy Statement”) by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.

The Coronavirus Aid, Relief, and Economic Security Act of 2020. In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. The CARES Act directs federal banking agencies to adopt interim final rules to lower the threshold under the CBLR from 9.0% to 8.0% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal banking agencies issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. As noted above, the second interim final rule provides a transition from the temporary 8.0% CBLR requirement to a 9.0% CBLR requirement. It establishes a minimum CBLR of 8.0% for the second through fourth quarters of 2020, 8.5% for 2021, and 9.0% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement. 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.

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The CARES Act also allows banks to elect to suspend requirements under accounting principles generally accepted in the United States of America (“GAAP”) for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a restructured loan, including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020. Under the CARES Act and related banking agency guidance, banks are not required to designate as a troubled debt restructuring loans that were modified as a result of the COVID-19 pandemic and made on a good faith basis to borrowers who were current. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related banking agency guidance if they were not more than 30 days past due on their contractual payments as of December 31, 2019, or prior to any relief, respectively, and have experienced financial difficulty as a result of COVID-19. For additional information related to loan modifications as a result of the COVID-19 pandemic, see “Item 1- Description of Business” and “Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The CARES Act also authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program called the Paycheck Protection Program, or PPP. The goal of the PPP was to prevent job losses and to encourage small businesses to maintain payrolls. The Company originated almost 1,700 loans totaling $133.7 million through August 31, 2020. The Company has not processed applications by borrowers for forgiveness, anticipating that simplified procedures may be adopted under various legislative improvements proposed in the U.S. Congress.

The Bank

General. As a state-chartered, federally insured trust company with banking powers, the Bank is subject to extensive regulation. Lending activities and other investments must comply with various statutory and regulatory requirements, including prescribed minimum capital standards. The Bank is regularly examined by the FRB and the Missouri Division of Finance and files periodic reports concerning the Bank’s activities and financial condition with its regulators. The Bank’s relationship with depositors and borrowers also is regulated to a great extent by both federal law and the laws of Missouri, especially in such matters as the ownership of deposit accounts and the form and content of mortgage documents.

Federal and state banking laws and regulations govern all areas of the operation of the Bank, including reserves, loans, mortgages, capital, issuance of securities, payment of dividends, and establishment of branches. Federal and state bank regulatory agencies also have the general authority to limit the dividends paid by insured banks and bank holding companies if such payments should be deemed to constitute an unsafe and unsound practice, and in other circumstances. The FRB as the primary federal regulator of the Company and the Bank has authority to impose penalties, initiate civil and administrative actions and take other steps intended to prevent banks from engaging in unsafe or unsound practices.

State Regulation and Supervision. As a state-chartered trust company with banking powers, the Bank is subject to applicable provisions of Missouri law and the regulations of the Missouri Division of Finance. Missouri law and regulations govern the Bank’s ability to take deposits and pay interest thereon, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customers, and to establish branch offices.

Federal Reserve System. The FRB requires all depository institutions to maintain reserves at specified levels against their transaction accounts (checking, NOW and Super NOW checking accounts). These reserves may be in the form of cash or deposits with the institution’s regional Federal Reserve Bank. Effective March 26, 2020, the FRB reduced the reserve requirement ratio to 0% for all account types, eliminating reserve requirements for all depository institutions.

The Bank is authorized to borrow from the Federal Reserve Bank "discount window." The purpose of the discount window is to provide an additional backstop funding option for eligible depository institutions seeking to supplement their funding sources, particularly to meet unexpected short-term funding needs. Depository institutions like the Bank would typically utilize FHLB borrowings before borrowing from the Federal Reserve Bank’s discount window.

Federal Home Loan Bank System. The Bank is a member of the FHLB of Des Moines, which is one of 11 regional FHLBs that provide home financing credit. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System and makes loans or advances to members in accordance with policies and procedures established by the Board of Directors of the FHLB of Des Moines, which are subject to the oversight of the Federal Housing Finance Agency. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. See Business - Deposit Activities and Other Sources of Funds - Borrowings.

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As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines. At June 30, 2020, the Bank had $6.4 million in FHLB stock, which was in compliance with this requirement. The Bank received $337,000 and $345,000 in dividends from the FHLB of Des Moines for the years ended June 30, 2020 and 2019, respectively.

The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank’s FHLB stock may result in a corresponding reduction in the Bank’s capital.

Federal Deposit Insurance Corporation. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC. The general insurance limit is $250,000. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF. The FDIC also has the authority to initiate enforcement actions against a member bank of the FRB after giving the FRB an opportunity to take such action.

In accordance with the Dodd-Frank Act, the FDIC has issued regulations setting insurance premium assessments based on an institution’s total assets minus its Tier 1 capital instead of its deposits. The Bank’s FDIC premiums are based on its supervisory ratings and certain financial ratios. Federal law required that the reserve ratio of the FDIC deposit insurance fund reach at least 1.35% by September 2020, and that depository institutions with consolidated assets of $10 billion or less receive assessment credits for the portion of their assessments that contributed to the growth of the reserve ratio from between 1.15% and 1.35%, to be applied when the reserve ratio is at or above 1.38%. Subsequent rule-making provided that the assessment credits were to be applied so long as the ratio remained above 1.35%. In September 2019, the Deposit Insurance Fund Reserve Ratio reached 1.40%, exceeding the required minimum reserve ratio to provide for receipt of assessment credits. As a result, the FDIC applied credits to the Bank’s assessments due in fiscal 2020, resulting in a reduced expense recognition for the fiscal year. The Bank’s credits have been fully utilized as of June 30, 2020.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of the Bank is not aware of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance.

In addition to the assessment for deposit insurance, institutions were required for many years to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. The final bonds matured in calendar year 2019, and the Bank did not recognize expense related to the Financing Corporation in fiscal 2020.

Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits ("Guidelines"). The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the FRB determines that the Bank fails to meet any standard prescribed by the Guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard.

Guidance on Subprime Mortgage Lending. The federal banking agencies have issued guidance on subprime mortgage lending to address issues related to certain mortgage products marketed to subprime borrowers, particularly adjustable rate mortgage products that can involve "payment shock" and other risky characteristics. Although the guidance focuses on subprime borrowers, the banking agencies note that institutions should look to the principles contained in the guidance when offering such adjustable rate mortgages to non-subprime borrowers. The guidance prohibits predatory lending programs; provides that institutions should underwrite a mortgage loan on the borrower’s ability to repay the debt by its final maturity at the fully-indexed rate, assuming a fully amortizing repayment schedule; encourages reasonable workout arrangements with borrowers who are in default; mandates clear and balanced advertisements and other communications; encourages arrangements for the escrowing of real estate taxes and insurance; and states that institutions should develop strong control and monitoring systems.

The federal banking agencies have announced their intention to carefully review the risk management and consumer compliance processes, policies and procedures of their supervised financial institutions and their intention to take action against institutions that engage in predatory lending practices, violate consumer protection laws or fair lending laws, engage in unfair or deceptive acts or practices, or otherwise engage in unsafe or unsound lending practices.

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Guidance on Commercial Real Estate Concentrations. The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a bank’s commercial real estate lending but to guide banks in developing risk management practices and maintaining capital levels commensurate with the level and nature of real estate concentrations. A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk: total loans for construction, land development, and other land represent 100% or more of the bank’s total capital; or total commercial real estate loans (as defined in the guidance) greater than 300% of the Bank’s total capital and an increase in the bank’s commercial real estate portfolio of 50% or more during the prior 36 months.

Regulatory Capital Requirements. The Bank is required to maintain specified levels of regulatory capital under federal banking regulations. The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.

Effective January 1, 2015, (with some changes transitioned into full effectiveness on January 1, 2019), The Bank became subject to capital regulations which created required minimum ratio for common equity Tier 1 (“CET1”) capital, Tier 1 capital and total capital and the minimum leverage ratio; established risk-weightings for assets and certain off-balance sheet items for purposes of the risk-based capital ratios; required an additional capital conservation buffer over the minimum risk-based capital ratios; and defined what qualifies as capital for purposes of meeting the capital requirements. These regulations implement the regulatory capital reforms required by the Dodd Frank Act and the “Basel III” requirements.

Under applicable capital regulations, the minimum capital ratios are: (1) a CET1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio (the ratio of Tier 1 capital to average total adjusted assets) of 4.0%. CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income (“AOCI”) except in the case of banking organizations that have elected to exclude AOCI from regulatory capital, as discussed below; and certain minority interests; all subject to applicable regulatory adjustments and deductions.

In addition to the capital requirements, there were a number of changes in what constitutes regulatory capital compared to earlier regulations, subject to transition periods. These changes include the phasing-out of certain instruments as qualifying capital. Mortgage servicing and deferred tax assets over designated percentages of CET1 are deducted from capital. In addition, Tier 1 capital includes AOCI, which includes all unrealized gains and losses on available for sale debt and equity securities. Because of our asset size, we had the one-time option of deciding whether to permanently opt-out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in our capital calculations. We made the decision to opt out.

In addition to the minimum CET1, Tier 1 and total capital ratios, the capital regulations require a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based in order to avoid limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. The phase-in of the capital conservation buffer requirement began on January 1, 2016, when a buffer greater than 0.625% of risk-weighted assets was required, which amount increased by 0.625% each year until the buffer requirement was fully implemented on January 1, 2019. At June 30, 2020, the Bank and the Company reported risk-based capital ratios meeting the capital conservation buffer.

Under the prompt corrective action standards of the FRB, in order to be considered well-capitalized, the Bank must have a ratio of CET1 capital to risk-weighted assets of at least 6.5%, a ratio of Tier 1 capital to risk-weighted assets of at least 8%, a ratio of total capital to risk-weighted assets of at least 10%, and a leverage ratio of at least 5%; and in order to be considered adequately capitalized, it must have the minimum capital ratios described above. To be considered well-capitalized a bank holding company must have, on a consolidated basis, at least a Tier 1 risk-based capital ratio of at least 8% and a total risk-based capital ratio of at least 10% and not be subject to a higher enforceable individualized capital requirement. At June 30, 2020, the Bank and the Company were categorized as “well capitalized” under these prompt corrective action standards.

Activities and Investments of Insured State-Chartered Banks. Subject to certain regulatory exceptions, the FDIA and FDIC regulations provide that an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as "principal" in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the Deposit Insurance Fund and that the bank is in compliance with applicable regulatory capital requirements.

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Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met.

Affiliate Transactions. The Company and the Bank are separate and distinct legal entities. Various legal limitations restrict the Bank from lending to or otherwise engaging in transactions with the Company (or any other affiliate), generally limiting such transactions with an affiliate to 10% of the Bank’s capital and surplus and limiting all such transactions with all affiliates to 20% of the Bank’s capital and surplus. Such transactions, including extensions of credit, sales of securities or assets and provision of services, also must be on terms and conditions consistent with safe and sound banking practices, including credit standards, that are substantially the same or at least as favorable to the Bank as those prevailing at the time for transactions with unaffiliated companies.

Federally insured banks are subject, with certain exceptions, to certain additional restrictions (including collateralization) on extensions of credit to their parent holding companies or other affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or securities as collateral from any borrower. In addition, such banks are prohibited from engaging in certain tying arrangements in connection with any extension of credit or the providing of any property or service.

Community Reinvestment Act. Banks are also subject to the provisions of the Community Reinvestment Act of 1977 ("CRA"), which requires the appropriate federal bank regulatory agency, in connection with its regular examination of a bank, to assess the bank’s record in meeting the credit needs of the community serviced by the bank, including low and moderate income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public. Further, such assessment is required of any bank which has applied, among other things, to establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a financial institution. The Bank received a "satisfactory" rating during its most recent CRA examination.

Dividends. Dividends from the Bank constitute the major source of funds for dividends that may be paid by the Company. The amount of dividends payable by the Bank to the Company depends upon the Bank’s earnings and capital position, and is limited by federal and state laws, regulations and policies.

The amount of dividends actually paid by the Bank during any one period will be strongly affected by the Bank’s management policy of maintaining a strong capital position. Dividends can be restricted if the capital conservation buffer is not maintained as described under “Capital Rules” above.

A bank holding company is required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company's consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB. This notification requirement does not apply to any company that meets the well-capitalized standard for bank holding companies, is well-managed, and is not subject to any unresolved supervisory issues.

Under Missouri law, the Bank may pay dividends from certain undivided profits and may not pay dividends if its capital is impaired.

The Company

Federal Securities Law. The stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As such, the Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act.

The Company’s stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period.

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Bank Holding Company Regulation. Bank holding companies are subject to comprehensive regulation by the FRB under the Bank Holding Company Act (“BHCA”). As a bank holding company, the Company is required to file reports with the FRB and such additional information as the FRB may require, and the Company and its non-banking affiliates are subject to examination by the FRB. Under FRB policy, a bank holding company must serve as a source of financial strength for its subsidiary banks. Under this policy the FRB may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized subsidiary bank. Under the Dodd-Frank Act, this policy is codified and rules to implement it are to be established. Under the BHCA, a bank holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.

The Company is subject to the activity limitations imposed on bank holding companies that are not financial holding companies. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain activities which are permitted, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the FRB includes, among other things, operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and United States Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.

TAXATION

Federal Taxation

General. The Company and the Bank report their income on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank’s reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company.

On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, which significantly changed U.S. tax laws, including a reduction in the corporate tax rate from 35 percent to 21 percent, as well as other changes. As a result of enactment of the legislation, the Company incurred additional one-time income tax expense of $998,000 during the second quarter of fiscal 2018, primarily related to the remeasurement of certain deferred tax assets and liabilities.

Bad Debt Reserve. Historically, savings institutions, such as the Bank used to be, which met certain definitional tests primarily related to their assets and the nature of their business ("qualifying thrift"), were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income. The Bank’s deductions with respect to their loans, which are generally loans secured by certain interests in real property, historically has been computed using an amount based on the Bank’s actual loss experience, in accordance with IRC Section 585(B)(2). Due to the Bank’s loss experience, the Bank generally recognized a bad debt deduction equal to their net charge-offs.

The Bank’s average assets for the current year exceeded $500 million, thus classifying it as a large bank for purposes of IRC Section 585. Under IRC Section 585(c)(3), a bank that becomes a large bank must change its method of accounting from the reserve method to a specific charge-off method under IRC Section 166. The Bank’s deductions with respect to their loans are computed under the specific charge-off method. The specific charge-off method has been used in the current year and will be used in all subsequent tax years.

Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 50% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 65% of any dividends received may be deducted.

Missouri Taxation

General. Missouri-based banks, such as the Bank, are subject to a Missouri bank franchise and income tax.

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Bank Franchise Tax. The Missouri bank franchise tax is imposed on (i) the bank’s taxable income at the rate of 7%, less credits for certain Missouri taxes, including income taxes. However, the credits exclude taxes paid for real estate, unemployment taxes, bank tax, and taxes on tangible personal property owned by the Bank and held for lease or rentals to others - income-based calculation; and (ii) the bank’s net assets at a rate of .007%. Net assets are defined as total assets less deposits and the investment in greater than 50% owned subsidiaries - asset-based calculation.

Income Tax. The Bank and its holding company and related subsidiaries are subject to an income tax that is imposed on the consolidated taxable income apportioned to Missouri at the rate of 6.25%. The return is filed on a consolidated basis by all members of the consolidated group including the Bank.

Arkansas Taxation

General. Due to its loan activity and the acquisitions of Arkansas banks in recent periods, the Bank is subject to an Arkansas income tax. The tax is imposed on the Bank’s apportioned taxable income at a rate of 6%.

Illinois Taxation

General. Due to its loan activity and the acquisitions of Illinois banks in recent periods, the Bank is subject to an Illinois income tax. The tax is imposed on the Bank’s apportioned taxable income at a rate of 9.5%.

Audits

The state of Missouri is currently auditing the Company’s Missouri income tax returns. There have been no IRS or other state audits of the Company’s Federal or state income tax returns during the past five years.

For additional information regarding taxation, see Note 12 of Notes to the Consolidated Financial Statements contained in Item 8.

PERSONNEL

As of June 30, 2020, the Company had 456 full-time employees and 36 part-time employees. The Company believes that employees play a vital role in the success of a service company and that the Company’s relationship with its employees is good. The employees are not represented by a collective bargaining unit.

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

Greg A. Steffens, age 53, the Company’s President and Chief Executive Officer, joined our Company in 1998 as Chief Financial Officer, and was appointed President and CEO in 1999. He has over 30 years of experience in the banking industry, including service from 1993 to 1998 as chief financial officer of Sho-Me Financial Corp (Mount Vernon, Missouri), prior to the sale of that company to Union Planters Corporation. Mr. Steffens also served from 1989 to 1993 as an examiner with the Office of Thrift Supervision. Mr. Steffens holds a Bachelor of Science Degree in Business Administration-Accounting and Finance from the University of Central Missouri, Warrensburg, Missouri.

Matthew T. Funke, age 43,the Company’s Chief Financial Officer, joined our Company in 2003. He has more than 21 years of banking and finance experience. Mr. Funke was initially hired to establish an internal audit function for the Company, and served as internal auditor and compliance officer until 2006, when he was named Chief Financial Officer. Previously, Mr. Funke was employed with Central Bancompany, Inc. (Jefferson City, Missouri), where he advanced to the role of internal audit manager, and as a fiscal analyst with the Missouri General Assembly. Mr. Funke holds a Bachelor of Science Degree in Accounting from Missouri State University, Springfield, Missouri, and is a graduate of the Southwest Graduate School of Banking at SMU, Dallas, Texas.

Kimberly A. Capps, age 52, the Company’s Chief Operations Officer, joined our Company in 1994. She has over 27 years of banking experience. Ms. Capps is responsible for the Company’s retail deposit operations, product development and marketing, enterprise data and delivery, and banking applications. Ms. Capps was initially hired by our bank subsidiary as controller, and was named Chief Financial Officer in 2001. In 2006, Ms. Capps was named Chief Operations Officer. Prior to joining the Company, Ms. Capps was employed for more than three years with the accounting firm of Kraft, Miles & Tatum (Poplar Bluff, Missouri), where she specialized in financial institution audits and taxation. She holds a Bachelor of Science Degree in Business Administration-Accounting from Southeast Missouri State University, Cape Girardeau, Missouri.

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Lora L. Daves, age 53, the Company’s Chief Risk Officer, joined our Company in 2006. Ms. Daves is responsible for the oversight of the Company’s internal audit, loan review, BSA, CRA, and compliance functions. Ms. Daves served as our Chief Credit Officer from 2006 through 2016. Ms. Daves has over 31 years of banking and finance experience, including 11 years beginning with Mercantile Bank of Poplar Bluff, which merged with and into US Bank, a subsidiary of U.S. Bancorp (Minneapolis, Minnesota) during her tenure there. Ms. Daves’ responsibilities with US Bank included credit analysis, underwriting, credit presentation, credit approval, monitoring credit quality, and analysis of the allowance for loan losses. She advanced to hold responsibility for regional credit administration, loan review, compliance, and problem credit management. Ms. Daves’ experience also includes four years as Chief Financial Officer of a southeast Missouri healthcare provider which operated a critical access hospital, eight rural health clinics, two retail pharmacies, an ambulatory surgery center, and provided outpatient radiology and physical therapy services; and four years with a national real estate development and management firm, working in their St. Louis-based Midwest regional office as a general accounting manager. Ms. Daves holds a Bachelor of Science Degree in Business Administration-Accounting from Southeast Missouri State University, Cape Girardeau, Missouri.

Justin G. Cox, age 40, is our Regional President for the Bank’s west region, in which role he is responsible for loan production activity in the region, and also provides joint oversight of the deposit-taking operation in the region. Mr. Cox joined our Company in 2010 as a lending officer, as an integral part of the team which established our presence in Springfield, Missouri, through the opening of a loan production office in that market. Mr. Cox has more than 17 years banking experience. He previously worked for Metropolitan National Bank (Springfield, Missouri), and advanced to the role of Vice President of Lending for that institution. Mr. Cox holds a Bachelor of Science Degree in Business Administration-Marketing & Management from Southwest Baptist University, Bolivar, Missouri.

Mark E. Hecker, age 54, the Company’s Chief Credit Officer, joined our Company in January 2017. Mr. Hecker is responsible for administration of the Company’s credit portfolio, including the approval process for proposed new credits and monitoring of the portfolio’s credit quality. Mr. Hecker has over 30 years of banking experience, having most recently served twelve years with BankLiberty (Liberty, Missouri) as its Chief Lending Officer. Prior to that, Mr. Hecker served as a commercial banker for Midland Bank (Lee’s Summit, Missouri) and its successor organization, Commercial Federal Bank (Omaha, Nebraska) for eight years. Mr. Hecker was employed as an examiner with the FDIC for more than six years and is a Commissioned Bank Examiner. Mr. Hecker holds a Bachelor of Science Degree in Business Administration-Accounting from the University of Central Missouri, Warrensburg, Missouri.

Rick A. Windes, age 56, the Company’s Chief Lending Officer, joined our Company in May 2018. Mr. Windes is responsible for the Company’s loan production. Mr. Windes has 27 years’ experience in commercial lending and lending management. Most recently, he served as a regional president in Springfield, Missouri, for Bear State Bank (Little Rock, Arkansas), prior to its merger with Arvest Bank. Previously, he was the senior lender for Metropolitan National Bank (Springfield, Missouri) prior to its acquisition by Bear State Bank. Mr. Windes holds a Bachelor of Science Degree in Business Administration from Truman State University, Kirksville, Missouri, and is a graduate of the Graduate School of Banking at Colorado, Boulder, Colorado.

Brett A. Dorton, age 48, the Company’s Chief Strategies Officer, joined our Company in November 2018, through the Gideon Acquisition. Mr. Dorton had served as President and Director at First Commercial Bank, Gideon’s bank subsidiary. Mr. Dorton was employed by First Commercial Bank for 18 years, including five years as President. Mr. Dorton is responsible for oversight of the Company’s entry into wealth management and commercial and consumer insurance brokerage, will serve a key role in future merger and acquisition activity, and is assisting in continued management of the acquired First Commercial Bank lending portfolio and its transition to appropriate lending officers in various Southern Bank markets. Mr. Dorton has 25 years’ experience in bank management, lending, fixed income portfolio management, and wealth management advisory services. Prior to his employment by First Commercial Bank, he was a loan officer with First Midwest Bank of Dexter. Mr. Dorton holds a Bachelor of Science Degree in Economics and Finance from Union University, Jackson, Tennessee, and is a graduate of the Graduate School of Banking at Louisiana State University, Baton Rouge, Louisiana. He holds Series 7 and 63 securities licenses.

Martin J. Weishaar, age 56, the Company’s Chief Legal Officer, joined our Company in October 2019. Mr. Weishaar is responsible for supervision of the Company’s legal needs and is also charged with oversight of the information technology department. Mr. Weishaar has more than 20 years of experience in the banking industry, having served as General Counsel/Chief Operating Officer for BankLiberty (Liberty, Missouri) from 1999-2019. For 10 years prior to that, he served as a private practice attorney in Kansas and Missouri, advising various clients including financial institutions. Mr. Weishaar holds a Bachelor of Arts Degree in Political Science and a Juris Doctor Degree from the University of Kansas, Lawrence, Kansas.

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INTERNET WEBSITE

We maintain a website with the address of www.bankwithsouthern.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. This Annual Report on Form 10-K and our other reports, proxy statements and other information, including earnings press releases, filed with the SEC are available at http://investors.bankwithsouthern.com. For more information regarding access to these filings on our website, please contact our Corporate Secretary, Southern Missouri Bancorp, Inc., 2991 Oak Grove Road, Poplar Bluff, Missouri, 63901; telephone number (573) 778-1800.

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Item 1A.​ ​    Risk Factors

Risks Relating to Our Business and Operating Environment

An investment in our securities is subject to inherent risks. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. The value or market price of our securities could decline due to any of these identified or other risks, and you could lose all or part of your investment.

The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely impact our financial results and those of our customers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has significantly adversely affected our operations and the way we provide banking services to businesses and individuals, some of whom are currently, and many of whom have recently been under government issued stay-at-home orders. As an essential business, we have continued to provide banking and financial services to our customers, at times with only drive-thru service available our facilities. After re-opening our lobbies, we have again moved to only drive-thru service in some communities due to unavailability of team members complying with quarantine orders from local health authorities. In addition, we have continued to provide access to banking and financial services through online and mobile banking, ATMs and by telephone. If the COVID-19 pandemic worsens, it could limit or disrupt our ability to provide banking and financial services to our customers.

In response to the stay-at-home orders, many of our employees currently are or have been working remotely to enable the Company to continue to provide banking services to our customers. Heightened cybersecurity, information security, and operational risks may result from these remote work-from-home arrangements. Despite the fact that we continue to train employees, examine opportunities to strengthen the security of our IT network, and utilize third party auditors, there can be no guarantee that we will fully eliminate these risks. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic. We also rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

There is a pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the onset of the pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To date, the COVID-19 pandemic has resulted in declines in loan demand and loan originations (other than through government sponsored programs, such as the Payroll Protection Program) and market interest rates, and it has negatively impacted many of our business and consumer borrowers’ ability or willingness to make their loan payments timely. Because the length of the pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including recent reductions in the targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin may be adversely affected in the near term, if not longer. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services. Some businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.

The impact of the pandemic is expected to continue to adversely affect us during the 2021 fiscal year and possibly longer as the ability of many of our customers to make timely loan payments has been significantly affected. Although the Company makes estimates of loan losses related to the pandemic as part of its evaluation of the allowance for loan losses, such estimates involve significant judgment and are made in the context of significant uncertainty as to the impact the pandemic will have on the credit quality of our loan portfolio. It is likely that increased loan delinquencies, adversely classified loans and loan charge-offs will result in the future due to the pandemic. Consistent with guidance provided by banking regulators, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans as the COVID-19 pandemic subsides. Any increases in the allowance for credit losses will result in a decrease in net income, and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.

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The PPP loans made by the Bank are guaranteed by the SBA and, if used by the borrower for authorized purposes, may be fully forgiven. However, in the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from the Bank. In addition, since the commencement of the PPP, several larger banks have been subject to litigation regarding their processing of PPP loan applications. The Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the Bank seeking PPP loans. PPP lenders, including the Bank, may also be subject to the risk of litigation in connection with other aspects of the PPP, including but not limited to borrowers seeking forgiveness of their loans. If any such litigation is filed against the Bank, it may result in significant financial or reputational harm to us.

In accordance with U.S. GAAP, we record assets acquired and liabilities assumed at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. If adverse economic conditions or the recent decrease in our stock price and market capitalization as a result of the pandemic were to be deemed sustained rather than temporary, it may significantly affect the fair value of our goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on our results of operations and financial condition. Goodwill has been evaluated during fiscal year 2020, as well as for triggering events at June 30, 2020, and it was determined that goodwill was not impaired.

Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown, and during which we may experience a recession. As a result, we anticipate our business may be materially and adversely affected during this recovery. To the extent the COVID-19 pandemic adversely impacts our business, financial condition, liquidity, or results of operations, it may also have the effect of heightening many of the other risks described in this section.

We may fail to realize all of the anticipated benefits of our acquisition activities.

The success of our acquisition activities depends on, among other things, our ability to realize anticipated cost savings and to combine the businesses of the companies in a manner that does not materially disrupt the existing customer relationships of the companies or result in decreased revenues from customers. If we are unable to achieve these objectives, the anticipated benefits of the acquisitions may not be realized fully, if at all, or may take longer to realize than expected.

Our allowance for loan losses may be insufficient to absorb losses in our loan portfolio.

Lending money is a substantial part of our business. Every loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to ensure repayment. This risk is affected by, among other things:

● cash flow of the borrower and/or the project being financed;

● in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;

● the credit history of a particular borrower;

● changes in economic and industry conditions; and

● the duration of the loan.

We maintain an allowance for loan losses which we believe is appropriate to provide for potential losses in our loan portfolio. The amount of this allowance is determined by our management through a periodic review and consideration of several factors, including, but not limited to:

● the quality, size and diversity of the loan portfolio;

● evaluation of non-performing loans;

● historical default and loss experience;

● historical recovery experience;

● economic conditions;

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● risk characteristics of the various classifications of loans; and

● the amount and quality of collateral, including guarantees, securing the loans.

If loan losses exceed the allowance for loan losses, our business, financial condition and profitability may suffer.

The Financial Accounting Standards Board (FASB), adopted Accounting Standards Update (ASU), 2016-13 “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” on June 16, 2016, which changed required allowance for loan losses methodology to consider current expected credit losses (CECL). This accounting pronouncement is applicable to us effective for our fiscal year beginning July 1, 2020. The federal banking regulators, including the Federal Reserve have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital.

CECL substantially changes how we calculate our allowance for loan and lease losses. We have adopted CECL and have estimated the impact of adoption on our allowance and capital within our audited financial statements, however we cannot predict how it will affect our results of operations and financial condition over time, including our regulatory capital.

If our nonperforming assets increase, our earnings will be adversely affected.

At June 30, 2020 and June 30, 2019, our nonperforming assets were $11.2 million and $24.8 million, respectively, or 0.44% and 1.12% of total assets, respectively. Our nonperforming assets adversely affect our net income in various ways:

● We do not accrue interest income on nonaccrual loans, nonperforming investment securities, or other real estate owned.

● We must provide for probable loan losses through a current period charge to the provision for loan losses.

● Non-interest expense increases when we must write down the value of properties in our other real estate owned portfolio to reflect changing market values or recognize other-than-temporary impairment on nonperforming investment securities.

● There are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees related to our other real estate owned.

● The resolution of nonperforming assets requires the active involvement of management, which can divert management’s attention from more profitable activities.

If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations. See also “Regulation – Regulatory Capital Requirements.”

Changes in economic conditions, particularly an economic slowdown in southern Missouri or northern Arkansas, could hurt our business.

Our business is directly affected by market conditions, trends in industry and finance, legislative and regulatory changes, and changes in governmental monetary and fiscal policies and inflation, all of which are beyond our control. Future deterioration in economic conditions, particularly within our primary market area in southern Missouri and northern Arkansas, could result in the following consequences, among others, any of which could hurt our business materially:

● loan delinquencies may increase;

● problem assets and foreclosures may increase;

● demand for our products and services may decline;

● loan collateral may decline in value, in turn reducing a customer’s borrowing power and reducing the value of collateral securing our loans; and

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● the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Downturns in the real estate markets in our primary market area could hurt our business.

Our business activities and credit exposure are primarily concentrated in southern Missouri and northern Arkansas. While we did not and do not have a sub-prime lending program, our residential real estate, construction and land loan portfolios, our commercial and multi-family loan portfolios and certain of our other loans could be affected by the downturn in the real estate market. We anticipate that significant declines in the real estate markets in our primary market area would hurt our business and would mean that collateral for our loans would hold less value. As a result, our ability to recover on defaulted loans by selling the underlying real estate would be diminished, and we would be more likely to suffer losses on defaulted loans. The events and conditions described in this risk factor could therefore have a material adverse effect on our business, results of operations and financial condition.

Our construction lending exposes us to significant risk.

Our construction loan portfolio, which totaled $185.9 million, or 8.68% of loans, net, at June 30, 2020, includes residential and non-residential construction and development loans. Construction and development lending, especially non-residential construction and development lending, is generally considered to have more complex credit risks than traditional single-family residential lending because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and sale, leasing, or operation of the related real estate project. Consequently, these loans are often more sensitive to adverse conditions in the real estate market or the general economy than other real estate loans. These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a market decline. Additionally, we may experience significant construction loan losses because independent appraisers or project engineers inaccurately estimate the cost and value of construction loan projects.

Deterioration in our construction portfolio could result in increases in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.

Our loan portfolio possesses increased risk due to our percentage of commercial real estate and commercial business loans.

At June 30, 2020, 63.3% of our loans, net, consisted of commercial real estate and commercial business loans to small and mid-sized businesses, generally located in our primary market area, which are the types of businesses that have a heightened vulnerability to local economic conditions. Over the last ten years, we have increased this type of lending from 52.3% of our portfolio at June 30, 2010, to 63.3% of our portfolio at June 30, 2020, in order to improve the yield on our assets. At June 30, 2020, our loan portfolio included $887.4 million of commercial real estate loans and $468.4 million of commercial business loans compared to $840.8 million and $355.9 million, respectively, at June 30, 2019. The credit risk related to these types of loans is considered to be greater than the risk related to one- to four-family residential loans because the repayment of commercial real estate loans and commercial business loans typically is dependent on the successful operation and income stream of the borrower’s business or the real estate securing the loans as collateral, which can be significantly affected by economic conditions. Additionally, commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. Commercial loans not collateralized by real estate are often secured by collateral that may depreciate over time, be difficult to appraise and fluctuate in value (such as accounts receivable, inventory and equipment). If loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could require us to increase our provision for loan losses and adversely affect our operating results and financial condition.

Several of our commercial borrowers have more than one commercial real estate or business loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to any one- to four-family residential mortgage loan. Finally, if we foreclose on a commercial real estate loan, our holding period for the collateral, if any, typically is longer than for one- to four-family residential property because there are fewer potential purchasers of the collateral. Since we plan to continue to increase our originations of these loans, it may be necessary to increase the level of our allowance for loan losses due to the increased risk characteristics associated with these types of loans. Any increase to our provision for loan losses would adversely affect our operating results and financial condition. Any delinquent payments or the failure to repay these loans would hurt our operating results and financial condition.

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Our loan portfolio possesses risk due to our agricultural lending.

Included in the commercial real estate loans described above are agricultural real estate loans totaling $185.3 million, or 8.7% of our loan portfolio, net, at June 30, 2020. Agricultural real estate lending involves a greater degree of risk and typically involves larger loans to single borrowers than lending on single-family residences. Payments on agricultural real estate loans are dependent on the profitable operation or management of the farm property securing the loan. The success of the farm may be affected by many factors outside the control of the farm borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields (such as hail, drought and floods), loss of livestock due to disease or other factors, declines in market prices for agricultural products (both domestically and internationally) and the impact of government regulations (including changes in price supports, subsidies, and environmental regulations). In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired. The primary agricultural activity in our market areas is livestock, dairy, poultry, rice, timber, soybeans, wheat, melons, corn, and cotton. Accordingly, adverse circumstances affecting these activities could have an adverse effect on our agricultural real estate loan portfolio. Our agricultural real estate lending has grown significantly since June 30, 2010 when these loans totaled $28.3 million, or 6.6% of our loan portfolio, and we intend to continue to grow this portion of our loan portfolio.

Included in the commercial business loans described above are agricultural production and equipment loans. At June 30, 2020, these loans totaled $100.3 million, or 4.7%, of our loan portfolio, net. As with agricultural real estate loans, the repayment of operating loans is dependent on the successful operation or management of the farm property. The same risk applies to agricultural operating loans which are unsecured or secured by rapidly depreciating assets such as farm equipment or assets such as livestock or crops. Any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation to the collateral. Our agricultural operating loans have also grown significantly since June 30, 2010, when such loans totaled $35.9 million, or 8.3% of our loan portfolio.

Presently, various agricultural commodity prices have been negatively impacted by recent actions taken, or which are feared could be taken, by governments in markets where U.S. agricultural products are exported. Declines in the pricing available to U.S. farmers negatively impacts cash flows for these borrowers to service their debts, and negatively affects the value of real estate and equipment which may be pledged as collateral to secure borrowings. In addition to the various risks to farm operations and management noted above, agricultural loans often are structured for annual payments, to coincide with borrower cash flows. As compared to other loan types which generally require monthly payments, an annual payment schedule may increase risk that the Company would not timely identify a borrower experiencing financial difficulties, hindering its ability to work to mitigate losses.

Continued growth of our commercial real estate and commercial business loan portfolios may increase the risk of credit defaults in the future.

Due to our emphasis on commercial real estate and commercial business lending, a substantial amount of the loans in our commercial real estate and commercial business portfolios and our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” A portfolio of older loans will usually behave more predictably than a newer portfolio. Commercial real estate and commercial business loans naturally create portfolio “churn” as loans are originated and repaid. As a result, our portfolio consists of a mix of seasoned and unseasoned loans. We believe that our underwriting practices are sound and based on industry standards and best practices. However, a significant portion of our loan portfolio is relatively new, therefore, the current level of delinquencies and defaults may not be representative of the level that will prevail as the portfolio becomes more seasoned, which may be higher than current levels. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition.

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As we approach thresholds defined in interagency guidance on commercial real estate concentrations, we may incur additional expense or slow the growth of certain categories of commercial real estate lending.

The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending (see “REGULATION – Guidance on Commercial Real Estate Concentrations”). For the purposes of this guidance, “commercial real estate” includes, among other types, multi-family residential loans and non-owner occupied nonresidential loans, two categories which have been a source of loan growth for the Company. A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk: total loans for construction land development and other land representing 100% or more of the bank’s tier 1 regulatory capital plus the allowance for loan losses includable in total regulatory capital; or total commercial real estate loans (as defined in the guidance) that exceed 300% of the bank’s tier 1 regulatory capital plus the allowance for loan losses includable in total regulatory capital and the bank’s commercial real estate portfolio has increased by 50% or more during the prior 36 months.

During fiscal 2017, the Bank exceeded the 300% threshold for non-owner occupied commercial real estate loans (as defined in the guidance) for the first time as a percentage of tier 1 regulatory capital plus the allowance for loan losses includable in total regulatory capital, peaking at 305% at December 31, 2016. Since June 30, 2017, the Bank has been below the 300% threshold, and increased from 264% of tier 1 regulatory capital plus the allowance for loan losses includable in total regulatory capital at June 30, 2019, to 288% at June 30, 2020.

In recent years, the Company’s non-owner occupied commercial real estate loans (as defined in the guidance) as a percent of tier 1 regulatory capital plus the allowance for loan losses includable in total regulatory capital has also approached the 300% threshold, but peaked at 293% at December 31, 2016. The Company reported 280% of tier 1 regulatory capital plus the allowance for loan losses includable in total regulatory capital concentrated in non-owner occupied commercial real estate loans at June 30, 2020, as compared to 255% at June 30, 2019.

The Bank and Company may see its non-owner occupied commercial real estate lending grow as a percentage of total regulatory capital, or it may slow the growth of this type of lending activity. Should we continue to grow this category of our loan portfolio, we may incur additional expense to meet the heightened supervisory expectations related to this lending activity. If we slow the growth of commercial real estate loans generally, or particular concentrations of borrowers or categories of properties within that definition, we may be negatively impacted in terms of our asset growth, net interest margin and earnings, leverage, or other targets.

Changes in interest rates may negatively affect our earnings and the value of our assets.

Our earnings and cash flows depend substantially upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and investment securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are sensitive to many factors that are beyond our control, including general economic conditions, competition and policies of various governmental and regulatory agencies and, in particular, the policies of the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investment securities and the amount of interest we pay on deposits and borrowings, but these changes could also affect: (i) our ability to originate loans and obtain deposits; (ii) the fair value of our financial assets and liabilities, including our securities portfolio; and (iii) the average duration of our interest-earning assets. This also includes the risk that interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rate indices underlying various interest-earning assets and interest-bearing liabilities may not change in the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk), including a prolonged flat or inverted yield curve environment. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or an adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry generally.

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We have pursued a strategy of supplementing internal growth by acquiring other financial companies or their assets and liabilities that we believe will help fulfill our strategic objectives and enhance our earnings. There are risks associated with this strategy, including the following:

● We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be adversely affected;

● Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices we considered acceptable and expect that we will experience this condition in the future;

● The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into us to make the transaction economically successful. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, or at all, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful.

● To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill. We are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition;

● To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing shareholders; and

● We have completed four acquisitions since June 2017 which enhanced our rate of growth. We do not necessarily expect to be able to maintain our past rate of growth, and may not be able to grow at all in the future.

Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. While we anticipate that our capital resources will satisfy our capital requirements for the foreseeable future, we may at some point need to raise additional capital to support our operations or continued growth, both internally and through acquisitions. Any capital we obtain may result in the dilution of the interests of existing holders of our common stock, or otherwise adversely affect your investment.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances of our ability to raise additional capital if needed, or if the terms will be acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our financial condition and liquidity could be materially and adversely affected.

Legislative or regulatory changes or actions, or significant litigation, could adversely impact us or the businesses in which we are engaged.

The financial services industry is extensively regulated. We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds, and not to benefit our shareholders. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Additionally, actions by regulatory agencies or significant litigation against us could require us to devote significant time and resources to defending our business and may lead to penalties that materially affect us and our shareholders.

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Impairment of investment securities, other intangible assets, or deferred tax assets could require charges to earnings, which could negatively impact our results of operations.

In assessing the impairment of investment securities, we consider the length of time and extent to which the fair value of the securities has been less than the cost of the securities, the financial condition and near-term prospects of the issuers, whether the market decline was affected by macroeconomic conditions and whether we have the intent to sell the debt security or will be required to sell the debt security before its anticipated recovery. In fiscal 2009, we incurred charges to recognize the other-than-temporary impairment (OTTI) of available-for-sale investments related to investments in Freddie Mac preferred stock ($304,000 impairment realized in the first quarter of fiscal 2009) and a pooled trust preferred collateralized debt obligation, Trapeza CDO IV, Ltd., class C2 ($375,000 impairment realized in the second quarter of fiscal 2009). We currently hold additional collateralized debt obligations (CDOs) which have not been deemed other-than-temporarily impaired, based on our best judgment using information currently available.

Under current accounting standards, goodwill and certain other intangible assets with indeterminate lives are no longer amortized but, instead, are assessed for impairment periodically or when impairment indicators are present. As of June 30, 2020, we determined that none of our goodwill or other intangible assets was impaired.

Deferred tax assets are only recognized to the extent it is more likely than not they will be realized. Should our management determine it is not more likely than not that the deferred tax assets will be realized, a valuation allowance with a charge to earnings would be reflected in the period. At June 30, 2020, our net deferred tax asset was $3.7 million, none of which was disallowed for regulatory capital purposes. Based on the levels of taxable income in prior years and our expectation of profitability in the current year and future years, management has determined that no valuation allowance was required at June 30, 2020. If we are required in the future to take a valuation allowance with respect to our deferred tax asset, our financial condition, results of operations and regulatory capital levels would be negatively affected.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral we hold cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the loan. We cannot assure you that any such losses would not materially and adversely affect our business, financial condition or results of operations.

Non-compliance with USA Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. Several banking institutions have received large fines for non-compliance with these laws and regulations. Although we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.

We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations, some of which is expected to increase our costs of operations.

We are currently subject to extensive examination, supervision and comprehensive regulation by the FDIC, the Missouri Division of Finance, and the Federal Reserve. The FDIC, the Missouri Division of Finance, and the Federal Reserve govern the activities in which we may engage, primarily for the protection of depositors and the Deposit Insurance Fund. These regulatory authorities have extensive discretion, including the ability to restrict an institution’s operations, require the institution to reclassify assets, determine the adequacy of the institution’s allowance for loan losses and determine the level of deposit insurance premiums assessed. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material adverse impact on our operations. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. See “Regulation.”

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In response to the last financial crisis, Congress took actions that are intended to strengthen confidence and encourage liquidity in financial institutions, and the FDIC has taken actions to increase insurance coverage on deposit accounts. The Dodd-Frank Act created the CFPB.

The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, their service providers and certain non-depository entities such as debt collectors and consumer reporting agencies. In the case of banks, such as the Bank, with total assets of less than $10 billion, this examination and enforcement authority is held by the institution’s primary federal banking regulator (the FDIC, in the case of the Bank). The CFPB has finalized a number of significant rules that could have a significant impact on our business and the financial services industry more generally. In particular, the CFPB has adopted rules impacting nearly every aspect of the lifecycle of a residential mortgage loan.

In the last economic downturn, federal and state banking regulators were active in responding to concerns and trends identified in examinations and have issued many formal enforcement orders requiring capital ratios in excess of regulatory requirements. The Federal Reserve and the Missouri Division of Finance regulate the activities in which the Bank may engage primarily for the protection of depositors and not for the protection or benefit of stockholders. In addition, new laws and regulations may increase our costs of regulatory compliance and of doing business and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge and our ongoing operations, costs and profitability. Regulatory changes regarding card interchange fee income do not currently apply to us but could change in the future. Further, legislative proposals limiting our rights as a creditor could result in credit losses or increased expense in pursuing our remedies as a creditor.

Significant legal actions could subject us to substantial liabilities.

We are from time to time subject to claims related to our operations. These claims and legal actions, including supervisory actions by our regulators, could involve large monetary claims and significant defense costs. As a result, we may be exposed to substantial liabilities, which could adversely affect our results of operations and financial condition.

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.

We face substantial competition in all phases of our operations from a variety of competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. To date, we have grown our business successfully by focusing on our business lines in geographic markets and emphasizing the high level of service and responsiveness desired by our customers. We compete for loans, deposits and other financial services with other commercial banks, thrifts, credit unions, brokerage houses, mutual funds, insurance companies and specialized finance companies. Many of our competitors offer products and services that we do not offer, and many have substantially greater resources and lending limits, name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, and smaller newer competitors may also be more aggressive in terms of pricing loan and deposit products than we are in order to obtain a share of the market. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies, federally insured state-chartered banks, national banks and federal savings banks. As a result, these nonbank competitors have certain advantages over us in accessing funding and in providing various services.

We are subject to security and operational risks relating to our use of technology that could damage our reputation and business.

Security breaches in our mobile and internet banking activities could expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures, which could damage our reputation and business.

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We face significant operational risks because the financial services business involves a high volume of transactions and increased reliance on technology, including risk of loss related to cyber-security breaches.

We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions and to collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others and concerning our own business, operations, plans and strategies. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of operational deficiencies or as a result of non-compliance with applicable regulatory standards or customer attrition due to potential negative publicity. In addition, we outsource some of our data processing to certain third-party providers. If these third-party providers encounter difficulties, including as a result of cyber-attacks or information security breaches, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected.

The financial services industry has noted recent increases in electronic fraudulent activity, attempted security breaches, and cyber-attacks, including attempts to initiate fraudulent activity through consumer, commercial, and public unit accounts. We are regularly the target of attempted cyber and other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. Insider or employee cyber and security threats are increasingly a concern for companies, including ours. We are not aware that we have experienced any material misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a cybersecurity breach or other act, however, some of our clients may have been affected by these breaches, which could increase their risks of identity theft, credit card fraud and other fraudulent activity that could involve their accounts with us.

In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, or a breach of our security systems, including if confidential or proprietary information were to be mishandled, misused or lost, we could suffer financial loss, face regulatory action, civil litigation and/or suffer damage to our reputation.

Our information technology systems may be subject to failure, interruption or security breaches.

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities investments, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions and security breaches, including privacy breaches and cyber-attacks, but such events may still occur or may not be adequately addressed if they do occur.

There have been increasing efforts by third parties to breach data security at financial institutions. There have been a number of instances involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data. Although we take protective measures, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have an impact on information security. Because the techniques used to cause security breaches change frequently, we may be unable to proactively address these techniques or to implement adequate preventative measures.

Information security risks continue to increase due to new technologies, the increasing use of the Internet and telecommunication technologies (including mobile devices) to conduct financial and other business transactions, and the increasing sophistication and activities of organized crime, perpetrators of fraud, hackers, and others. The Company makes significant investments in various technology to identify and prevent intrusions into its information system. The Company also has policies and procedures designed to prevent or limit the effect of failure, interruption or security breach of its information systems and performs regular audits using both internal and outside resources. However, there can be no assurances that any such failures, interruptions or security breaches will not occur, or if they do occur, that they will be adequately addressed. In addition to unauthorized access, denial-of-service attacks, or other operational disruptions could overwhelm Company websites and prevent the Company from adequately serving customers. Should any of the Company’s systems become compromised or customer information be obtained by unauthorized parties, the reputation of the Company could be damaged, relationships with existing customers may be impaired, and the Company could be subject to lawsuits, all of which could result in a material adverse effect on the Company’s business, financial condition and results of operations.

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The Company’s operations rely on certain external vendors.

The Company relies on third-party vendors to provide products and services necessary to maintain day-to-day operations. For example, the Company outsources a portion of its information systems, communication, data management, and transaction processing to third parties. Accordingly, the Company is exposed to the risk that these vendors might not perform in accordance with the contracted arrangements or service level agreements for a number of reasons, including, but not limited to, changes in the vendor’s organizational structure, financial condition, support for existing products and services, or strategic focus. Such failure to perform could be disruptive to the Company’s operations, which could have a materially adverse impact on its business, results of operations and financial condition. These third parties are also sources of risk associated with operational errors, system interruptions or breaches and unauthorized disclosure of confidential information. If the vendors encounter any of these issues, the Company could be exposed to disruption of service, damage to reputation and litigation. Because the Company is an issuer of debit cards, it is periodically exposed to losses related to security breaches which occur at retailers that are unaffiliated with the Company (e.g., customer card data being compromised at retail stores). These losses include, but are not limited to, costs and expenses for card reissuance as well as losses resulting from fraudulent card transactions.

The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business, subject us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

The Company continually encounters technological change.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services, including the entrance of financial technology companies offering new financial service products. The Company regularly upgrades or replaces core technological systems. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may encounter significant problems or may not be able to effectively implement new technology-driven products, including the core deposit system, and services, or be successful in marketing the new products and services to its customers. These problems might include significant time delays, cost overruns, loss of key people, and technological system failures. Failure to successfully keep pace with technological change affecting the financial services industry or failure to successfully complete the replacement of the core deposit system, or another core technological system, could have a material adverse effect on the Company’s business, financial condition and results of operations.

Our earnings could be adversely impacted by incidences of fraud and compliance failure.

Financial institutions are inherently exposed to fraud risk. A fraud can be perpetrated by a customer of our bank subsidiary, an employee, a vendor, or members of the general public. We are most subject to fraud and compliance risk in connection with the origination of loans, ACH transactions, wire transactions, ATM transactions, and checking transactions. Our largest fraud risk, associated with the origination of loans, includes the intentional misstatement of information in property appraisals or other underwriting documentation provided to us by third parties. Compliance risk is the risk that loans are not originated in compliance with applicable laws and regulations and our standards. There can be no assurance that we can prevent or detect acts of fraud or violation of law or our compliance standards by the third parties that we deal with. Repeated incidences of fraud or compliance failures would adversely impact the performance of our loan portfolio

Risks Relating to Our Common Stock

The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell our common stock when you want or at prices you find attractive.

We cannot predict how our common stock will trade in the future. The market value of our common stock will likely continue to fluctuate in response to a number of factors including the following, most of which are beyond our control, as well as the other factors described in this “Risk Factors” section:

● actual or anticipated quarterly fluctuations in our operating and financial results;

● developments related to investigations, proceedings or litigation;

● changes in financial estimates and recommendations by financial analysts;

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● dispositions, acquisitions and financings;

● actions of our current shareholders, including sales of common stock by existing shareholders and our directors and executive officers;

● fluctuations in the stock prices and operating results of our competitors;

● regulatory developments; and

● other developments in the financial services industry.

The market value of our common stock may also be affected by conditions affecting the financial markets in general, including price and trading fluctuations. These conditions may result in (i) volatility in the level of, and fluctuations in, the market prices of stocks generally and, in turn, our common stock and (ii) sales of substantial amounts of our common stock in the market, in each case that could be unrelated or disproportionate to changes in our operating performance. These broad market fluctuations may adversely affect the market value of our common stock. Currently, market prices of stocks issued by financial institutions have been negatively impacted by interest rates which are at historic lows and anticipated to remain there, and market expectations regarding elevated future credit losses resulting from the economic effects of the pandemic.

There may be future sales of additional common stock or other dilution of our shareholders’ equity, which may adversely affect the market price of our common stock.

We are not restricted from issuing additional common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or similar securities in the market or the perception that such sales could occur.

We may issue debt and equity securities that are senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock.

In the future, we may increase our capital resources by entering into debt or debt-like financing or issuing debt or equity securities, which could include issuances of senior notes, subordinated notes, preferred stock or common stock. In the event of the liquidation of Southern Missouri Bancorp, Inc., its lenders and holders of its debt or preferred securities would receive a distribution of the available assets of Southern Missouri Bancorp, Inc., before distributions to the holders of our common stock. Our decision to incur debt and issue other securities in future offerings may depend on market conditions and other factors beyond our control. We cannot predict or estimate the amount, timing or nature of our future offerings and debt financings. Future offerings could reduce the value of our common stock and dilute the interests of our shareholders.

Regulatory and contractual restrictions may limit or prevent us from paying dividends on and repurchasing our common stock.

Southern Missouri Bancorp, Inc., is an entity separate and distinct from its subsidiary bank, and derives substantially all of its revenue in the form of dividends from the Bank. Accordingly, the Company is and will be dependent upon dividends from its subsidiary bank to pay the principal of and interest on its indebtedness, to satisfy its other cash needs and to pay dividends on its common and preferred stock. The Bank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event the subsidiary bank is unable to pay dividends to the Company, the Company may not be able to pay dividends on its common or preferred stock. Also, the Company’s right to participate in a distribution of assets upon the subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In addition, holders of our common stock are entitled to receive dividends only when, as and if declared by our board of directors. Although we have historically paid cash dividends on our common stock, we are not required to do so and our board of directors could reduce, suspend or eliminate our common stock cash dividend in the future.

If we defer interest payments on our outstanding junior subordinated debt securities or if certain defaults relating to those debt securities occur, we will be prohibited from declaring or paying dividends or distributions on, and from making liquidation payments with respect to, our common stock.

As of June 30, 2020, we had outstanding $16.8 million aggregate principal amount of junior subordinated debt securities issued in connection with the sale of trust preferred securities by subsidiaries of ours that are statutory business trusts. As of that date, those debt securities were carried at a book value of $15.1 million.

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We guarantee the trust preferred securities described above. The indentures under which the junior subordinated debt securities were issued, together with the guarantee, prohibit us, subject to limited exceptions, from declaring or paying any dividends or distributions on, or redeeming, repurchasing, acquiring or making any liquidation payments with respect to, any of our capital stock at any time when (i) there shall have occurred and be continuing an event of default under the indenture; (ii) we are in default with respect to payment of any obligations under the guarantee; or (iii) we have elected to defer payment of interest on the junior subordinated debt securities. In that regard, we are entitled, at our option but subject to certain conditions, to defer payments of interest on the junior subordinated debt securities from time to time for up to five years.

Events of default under the indentures generally consist of our failure to pay interest on the junior subordinated debt securities under certain circumstances, our failure to pay any principal of or premium on such junior subordinated debt securities when due, our failure to comply with certain covenants under the indenture, and certain events of bankruptcy, insolvency or liquidation relating to us.

As a result of these provisions, if we were to elect to defer payments of interest on the junior subordinated debt securities, or if any of the other events described in clause (i) or (ii) of the second paragraph of this risk factor were to occur, we would be prohibited from declaring or paying any dividends on our common stock, from redeeming, repurchasing or otherwise acquiring any of our common stock, and from making any payments to holders of our common stock in the event of our liquidation, which would likely have a material adverse effect on the market value of our common stock. Moreover, without notice to or consent from the holders of our common stock, we may issue additional series of junior subordinated debt securities in the future with terms similar to those of our existing junior subordinated debt securities or enter into other financing agreements that limit our ability to purchase or to pay dividends or distributions on our capital stock, including our common stock.

Anti-takeover provisions could negatively impact our shareholders.

Provisions of our articles of incorporation and bylaws, Missouri law and various other factors may make it more difficult for companies or persons to acquire control of us without the consent of our board of directors. These provisions include limitations on voting rights of beneficial owners of more than 10% of our common stock, the election of directors to staggered terms of three years and not permitting cumulative voting in the election of directors. Our bylaws also contain provisions regarding the timing and content of shareholder proposals and nominations for service on the Board of Directors.

Item 1B.  Unresolved Staff Comments

None.

Item 2.    Description of Properties

At June 30, 2020, the Bank operated from its headquarters, 45 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 43 of its branch offices. The remaining four branch offices are either leased or partially owned.

For additional information regarding our properties, see "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 5 – Premises and Equipment".

Management believes that our current facilities are adequate to meet our present and immediately foreseeable needs. However, we will continue to monitor customer growth and expand our branching network, if necessary, to serve our customers’ needs.

Item 3.    Legal Proceedings

In the opinion of management, the Bank is not a party to any pending claims or lawsuits that are expected to have a material effect on the Bank’s financial condition or operations. Periodically, there have been various claims and lawsuits involving the Bank mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Bank 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 Bank’s ordinary business, the Bank is not a party to any material pending legal proceedings that would have a material effect on the financial condition or operations of the Bank.

Item 4.    Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The common stock of Southern Missouri Bancorp, Inc., is traded under the symbol “SMBC” on the Nasdaq Global Market. At June 30, 2020, there were 9,127,390 shares of common stock outstanding and approximately 251 common stockholders of record.

Our cash dividend payout policy is continually reviewed by management and the Board of Directors. The Company intends to continue its policy of paying quarterly dividends; however, future dividend payments will depend upon a number of factors, including capital requirements, regulatory limitations (See “Item 1. Description of Business – Regulation”), the Company’s financial condition, results of operations and the Bank’s ability to pay dividends to the Company. The Company relies significantly upon such dividends originating from the Bank to accumulate earnings for payment of cash dividends to stockholders. See “Item 1A. Risk Factors – Risks Relating to our Common Stock – Regulatory and Contractual Restrictions may limit or prevent us from paying dividends on and repurchasing our common stock.”

Information regarding our equity compensation plans is included in Part II, Item 11 of this Form 10-K.

On January 2, 2015, the Company declared a two-for-one common stock split in the form of 100% common stock dividend payable on January 30, 2015, to shareholders of record on January 16, 2015. All references to stock prices and per share information throughout this annual report on Form 10-K, reflect this split for all periods.

The following table summarizes the Company’s stock repurchase activity for each month during the three months ended June 30, 2020.

				Total # of Shares
		Average		Purchased as Part of a	Maximum Number
	Total #	Price		Publicly	of Shares That
	of Shares	Paid Per		Announced	May Yet Be
	Purchased	Share		Program	Purchased(1)
06/01/20 - 06/30/20 period	—	$	—	—	232,051
05/01/20 - 05/31/20 period	—		—	—	232,051
04/01/20 - 04/30/20 period	—		—	—	232,051

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

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The following graph shows a comparison of stockholder return on the common stock of Southern Missouri Bancorp, Inc., to the cumulative total returns for the indices shown below. The graph was compiled by S&P Global Market Intelligence, a division of S&P Global, Inc. The graph assumes an initial investment of $100 and reinvestment of dividends. The graph is historical only and may not be indicative of possible future performance.

	Period Ending
Index	06/30/15	06/30/16	06/30/17	06/30/18	06/30/19	06/30/20
Southern Missouri Bancorp, Inc.	100.00	126.85	176.34	216.02	195.69	139.32
SNL All Financial Institutions Index	100.00	90.53	124.65	136.77	140.47	121.83
SNL Bank NASDAQ Index	100.00	94.99	135.81	151.22	138.04	99.18
SNL Bank $1B-$5B Index	100.00	104.42	152.50	176.24	155.97	120.85
SNL Midwest Bank Index	100.00	94.05	132.78	141.77	138.17	103.48

Item 6.    Selected Financial Data

The summary information presented below under “Selected Financial Condition Data” and “Selected Operations Data” for the years ended June 30, 2020, 2019 and 2018 are derived in part from the audited consolidated financial statements that appear in this annual report. The following information is only a summary and you should read it in conjunction with “Management’s Discussion and

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Analysis of Financial Condition and Results of Operations” under Item 7 of this report and “Financial Statements and Supplementary Data” under Item 8 of this report below.

(Dollars in thousands)	At June 30,
Financial Condition Data:	2020		2019		2018		2017		2016
Total assets	$	2,542,157	$	2,214,402	$	1,886,115	$	1,707,712	$	1,403,910
Loans receivable, net		2,141,929		1,846,405		1,563,380		1,397,730		1,135,453
Mortgage-backed securities		126,912		110,429		90,176		78,275		71,231
Cash, interest-bearing deposits and investment securities		104,831		91,475		84,428		97,674		81,270
Deposits		2,184,847		1,893,695		1,579,902		1,455,597		1,120,693
Borrowings		70,024		52,284		82,919		56,849		137,301
Subordinated debt		15,142		15,043		14,945		14,848		14,753
Stockholder's equity		258,347		238,392		200,694		173,083		125,966

(Dollars in thousands, except per share data)	For the Year Ended June 30,
Operating Data:	2020		2019		2018		2017		2016
Interest income	$	107,052	$	97,482	$	77,174	$	61,488	$	56,317
Interest expense		26,916		24,700		14,791		10,366		9,365
Net interest income		80,136		72,782		62,383		51,122		46,952
Provision for loan losses		6,002		2,032		3,047		2,340		2,494
Net interest income after provision for loan losses		74,134		70,750		59,336		48,782		44,458
Noninterest income		14,750		13,093		12,369		10,011		8,898
Noninterest expense		54,452		47,892		42,973		37,179		31,826
Income before income taxes		34,432		35,951		28,732		21,614		21,530
Income taxes		6,887		7,047		7,803		6,062		6,682
Net Income		27,545		28,904		20,929		15,552		14,848
Less: effective dividend on preferred stock		—		—		—		—		85
Net income available to common stockholders	$	27,545	$	28,904	$	20,929	$	15,552	$	14,763
Basic earnings per share available to common stockholders(2)	$	3.00	$	3.14	$	2.40	$	2.08	$	1.99
Diluted earnings per share available to common stockholders(2)	$	2.99	$	3.14	$	2.39	$	2.07	$	1.98
Dividends per share(2)	$	0.60	$	0.52	$	0.44	$	0.40	$	0.36

	At June 30,
Other Data:	2020	2019	2018	2017	2016
Number of:
Real Estate Loans	8,127	7,695	7,241	6,800	5,554
Deposit Accounts	96,813	91,086	79,762	72,186	60,839
Full service offices	46	45	38	39	33
Limited service offices	2	2	3	3	3

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	At or for the year ended June 30,
Key Operating Ratios:	2020		2019		2018		2017		2016
Return on assets (net income divided by average assets)	1.18	%	1.38	%	1.17	%	1.05	%	1.11	%
Return on average common equity (net income available to common stockholders divided by average common equity)	11.11		13.13		11.30		11.70		12.34
Average equity to average assets	10.60		10.49		10.31		8.96		9.40
Interest rate spread (spread between weighted average rate on all interest-earning assets and all interest-bearing liabilities)	3.50		3.56		3.62		3.64		3.69
Net interest margin (net interest income as a percentage of average interest-earning assets	3.72		3.78		3.78		3.74		3.80
Noninterest expense to average assets	2.33		2.28		2.39		2.51		2.38
Average interest-earning assets to average interest-bearing liabilities	117.63		116.89		117.15		113.13		114.38
Allowance for loan losses to gross loans(1)	1.16		1.07		1.15		1.10		1.20
Allowance for loan losses to nonperforming loans(1)	290.38		94.72		198.58		481.65		243.66
Net charge-offs (recoveries) to average outstanding loans during the period	0.04		0.02		0.02		0.05		0.09
Ratio of nonperforming assets to total assets(1)	0.44		1.12		0.69		0.37		0.64
Common shareholder dividend payout ratio (common dividends as a percentage of earnings available to common shareholders	20.02		16.48		18.29		19.14		18.12

(1) At end of period.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and notes thereto, which are included in Item 8 of this Form 10-K. You should read the information in this section in conjunction with the business and financial information regarding us as provided in this Form 10-K.

OVERVIEW

Southern Missouri Bancorp, Inc., is a Missouri corporation originally organized for the principal purpose of becoming the holding company of Southern Bank. The principal business of Southern Bank consists of attracting deposits from the communities it serves and investing those funds in loans secured by residential and commercial real estate, as well as commercial business and consumer loans. These funds have also been used to purchase investment securities, mortgage-backed securities (MBS), U.S. government and federal agency obligations and other permissible securities.

Southern Bank’s results of operations are primarily dependent on the levels of its net interest margin and noninterest income, and its ability to control operating expenses. Net interest margin is dependent primarily on the difference or spread between the average yield earned on interest-earning assets (including loans, mortgage-related securities, and investments) and the average rate paid on interest-bearing liabilities (including deposits, securities sold under agreements to repurchase, and borrowings), as well as the relative amounts of these assets and liabilities. Southern Bank is subject to interest rate risk to the degree that its interest-earning assets mature or reprice at different times, or on a varying basis, from its interest-bearing liabilities.

Southern Bank’s noninterest income consists primarily of fees charged on transaction and loan accounts, interchange income from customer debit and ATM card use, gains on sales of loans originated for sale on the secondary market, and increased cash surrender value of bank owned life insurance (“BOLI”). Southern Bank’s operating expenses include: employee compensation and benefits, occupancy and data processing expenses, legal and professional fees, federal deposit insurance premiums, amortization of intangible assets, and other general and administrative expenses.

Southern Bank’s operations are significantly influenced by general economic conditions including monetary and fiscal policies of the U.S. government and the Federal Reserve Board. Additionally, Southern Bank is subject to policies and regulations issued by financial institution regulatory agencies including the Federal Reserve, the Missouri Division of Finance, and the Federal Deposit Insurance Corporation. Each of these factors may influence interest rates, loan demand, prepayment rates and deposit flows. Interest rates available on competing investments as well as general market interest rates influence the Bank’s cost of funds. Lending activities are affected by the demand for real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered. Lending activities are funded through the attraction of deposit accounts consisting of checking accounts, passbook and statement savings accounts, money market deposit accounts, certificate of deposit accounts with terms of 60 months or less, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank of Des Moines, and, to a lesser extent, brokered deposits. The Bank intends to continue to focus on its lending programs for one- to four-family residential real estate, commercial real estate, commercial business and consumer financing on loans secured by properties or collateral located primarily in Missouri and Arkansas.

CRITICAL ACCOUNTING POLICIES

The Company has established various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in Item 8 under the Notes to the Consolidated Financial Statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

The allowance for losses on loans represents management’s best estimate of probable losses in the existing loan portfolio. The allowance for losses on loans is increased by the provision for losses on loans charged to expense and reduced by loans charged off, net of recoveries.

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The provision for losses on loans is determined based on management’s assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experience, the level of classified and nonperforming loans and the results of regulatory examinations.

Integral to the methodology for determining the adequacy of the allowance for loan losses is portfolio segmentation and impairment measurement. Under the Company’s methodology, loans are 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 are 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. The loans subject to credit classification represent the portion of the portfolio subject to the greatest credit risk and where adjustments to the allowance for losses on loans as a result of provisions and charge-offs are most likely to have a significant impact on operations.

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 risk management personnel. This review is supplemented with periodic examinations of both selected credits and the credit review process by 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 represents a probable loss or risk that should be recognized.

Loans are considered impaired if, based on current information and events, it is probable that Southern Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the fair value of the collateral for collateral-dependent loans. If the loan is not collateral-dependent, the measurement of impairment is 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. In measuring the fair value of the collateral, management uses the assumptions (i.e., discount rates) and methodologies (i.e., comparison to the recent selling price of similar assets) consistent with those that would be utilized by unrelated third parties. Impairment identified through this evaluation process is a component of the allowance for loan losses. If a loan is not considered impaired, it is grouped together with loans having similar characteristics (i.e., the same risk grade), and an allowance for loan losses is based upon a quantitative factor (historical average charge-offs for similar loans over the past one to five years), 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. For portfolio loans that are evaluated for impairment as part of homogenous pools, an allowance is maintained based upon similar quantitative and qualitative factors. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the conditions of the various markets in which collateral may be sold may all affect the required level of the allowance for losses on loans and the associated provision for losses on loans.

FINANCIAL CONDITION

General. The Company experienced balance sheet growth in fiscal 2020, with total assets of $2.5 billion at June 30, 2020, reflecting an increase of $327.8 million, or 14.8%, as compared to June 30, 2019. Asset growth was comprised mainly of increases in loans, cash and cash equivalents, and available-for-sale (“AFS”) securities, and was attributable in part to loans made by the Company under the Small Business Administration’s Paycheck Protection Program (PPP), to other internally-generated growth in loans, and to the Central Federal Acquisition.

Cash and equivalents. Cash and cash equivalents were $54.2 million at June 30, 2020, an increase of $18.8 million, or 53.2%, as compared to June 30, 2019. Interest-bearing time deposits were $974,000 at June 30, 2020, an increase of $5,000, or 0.5%, as compared to June 30, 2019.

Investments. Available-for-sale (AFS) securities were $176.5 million at June 30, 2020, an increase of $11.0 million, or 6.6%, as compared to June 30, 2019. The Company increased holdings of residential and commercial mortgage backed securities (MBS) and other securities, while holdings of collateralized mortgage obligations (CMOs) issued by government-sponsored entities, government-sponsored agency bonds declined, and municipal securities declined.

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Loans. Loans, net of the allowance for loan losses, were $2.1 billion at June 30, 2020, an increase of $295.5 million, or 16.0%, as compared to June 30, 2019. This growth was inclusive of the Central Federal acquisition, which added loans totaling $51.4 million at fair value, as of the acquisition date. The portfolio primarily saw growth in residential real estate loans, commercial loans, commercial real estate loans, and funded balances in construction loans, partially offset by declines in consumer loans. Commercial loans were higher as a result of the PPP loans, which totaled $132.3 million at June 30, 2020. Residential real estate loan balances were higher as the Company saw increases in loans secured by both 1-to-4 family and multifamily real estate. Commercial real estate loans increased primarily due to loans secured by nonresidential properties, combined with a small increase in loans secured by agricultural real estate. Construction loan balances were increased as a result of both draws on existing construction loans and new loan originations, primarily secured by multifamily, 1-4 family, and non-owner occupied commercial properties. Reductions in consumer loans consisted primarily of loans secured by deposits, partially offset by a modest increase in other consumer loans.

Nonperforming loans were $8.7 million, or 0.40% of gross loans, at June 30, 2020, as compared to $21.0 million, or 1.13% of gross loans at June 30, 2019. The decrease in nonperforming loans over the fiscal year was attributed primarily to the resolution of certain nonperforming loans acquired in the Gideon Acquisition. In connection with the Gideon Acquisition, we acquired nonperforming loans which totaled $10.2 million (at fair value) as of June 30, 2019, and this group of nonperforming loans has declined to $1.8 million as of June 30, 2020.

Allowance for Loan Losses. The allowance for loan losses was $25.1 million at June 30, 2020, an increase of $5.2 million, or 26.3%, as compared to June 30, 2019. The allowance represented 1.16% of gross loans receivable at June 30, 2020, as compared to 1.07% of gross loans receivable at June 30, 2019. The increase in the allowance as a percentage of gross loans receivable was due in part to 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 Federal Reserve to respond to the pandemic and its economic impact. Management considered the potential 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. Further, the increase was due to a decline in the proportion of the Company’s loan portfolio resulting from acquired loans which are subject to purchase accounting, which the Company carries at fair value instead of establishing an allowance for loan losses. While acquired loans were added to the portfolio during the fiscal year in the Central Federal acquisition, more acquired loans from previous acquisitions repaid or refinanced and were no longer treated as acquired loans. These factors were partially offset by the $132.3 million in 100% SBA-guaranteed PPP loans outstanding at June 30, 2020. See also, Provision for Loan Losses, under Comparison of Operating Results for the Years Ended June 30, 2020 and 2019.

In its quarterly evaluation of the adequacy of its allowance for loan losses, the Company employs historical data, including past due percentages, charge offs, and recoveries for the previous one to five years for each loan category. Average net charge offs are calculated as net charge offs for the period by portfolio type as a percentage of the average balance of the respective portfolio type over the same period. The Company believes that it is prudent to emphasize more recent historical factors in the allowance evaluation.

The following table sets forth the Company’s historical net charge offs as of June 30, 2020:

	Net charge offs -		Net charge offs -
Portfolio segment	1-year historical		5-year historical
Real estate loans:
Residential	0.06	%	0.04	%
Construction	—		0.01
Commercial	—		0.01
Consumer loans	0.18		0.18
Commercial loans	0.04		0.09

Additionally, in its quarterly evaluation of the adequacy of the allowance for loan losses, the Company evaluates changes in the financial condition of individual borrowers; changes in local, regional, and national economic conditions; the Company’s historical loss experience; and changes in market conditions for property pledged to the Company as collateral. The Company has identified specific qualitative factors that address these issues and subjectively assigns a percentage to each factor. Qualitative factors are reviewed quarterly and may be adjusted as necessary to reflect improving or declining trends. At June 30, 2020, these qualitative factors included:

● Changes in lending policies

● National, regional, and local economic conditions

● Changes in mix and volume of portfolio

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● 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

● Regulatory risk

The qualitative factors are applied to the allowance for loan losses based upon the following percentages by loan type:

	Qualitative factor		Qualitative factor
	applied at		applied at
Portfolio segment	June 30, 2020		June 30, 2019
Real estate loans:
Residential	0.67	%	0.66	%
Construction	1.76		1.69
Commercial	1.22		1.14
Consumer loans	1.41		1.40
Commercial loans	1.38		1.28

At June 30, 2020, the amount of our allowance for loan losses attributable to these qualitative factors increased to approximately $19.7 million, as compared to $17.1 million at June 30, 2019, due in part to the increase in loan balances, as well as the increased economic uncertainty triggered by the COVID-19 pandemic.

At June 30, 2020, following regulatory guidance encouraging financial institutions to work with borrowers affected by the COVID-19 pandemic, the Company had granted payment deferrals or interest-only modifications for approximately 900 loans totaling $380.2 million. These are 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. Generally, deferrals were granted for three-month periods, while interest-only modifications were for six-month periods. These deferrals and modifications were made in compliance with provisions of the CARES Act that allows financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings (TDRs), and the Company has not accounted for these loans as TDRs. At August 31, 220, the balance of loans for which payment deferrals or interest-only modifications were in place had declined to approximately 600 loans with balances of $305.6 million.

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The table below provides detailed information about the outstanding balance of loans with payment deferrals or interest-only modifications in place at August 31, 2020, and at June 30, 2020, which are not considered TDRs as provided for under the CARES Act.

	As of August 31, 2020						As of June 30, 2020
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	$	436,172	$	2,147	$	21,041	$	13,385	$	21,194
Multifamily residential loans		197,182		—		28,041		1,912		28,101
Total residential loans		633,354		2,147		49,082		15,297		49,295
1- to 4-family owner-occupied construction loans		25,306		—		—		—		—
1- to 4-family speculative construction loans		12,325		—		—		—		—
Multifamily construction loans		35,504		—		—		—		31
Other construction loans		26,823		4,367		292		4,367		290
Total construction loan balances drawn		99,958		4,367		292		4,367		321
Agricultural real estate loans		183,223		2,165		5,092		2,803		5,537
Loans for vacant land - developed, undeveloped, and other purposes		57,353		—		4,183		106		4,196
Owner-occupied commercial real estate loans to:
Churches and nonprofits		18,996		—		4,210		—		4,213
Non-professional services		16,486		—		2,988		333		3,160
Retail		25,495		—		5,711		3,285		3,960
Automobile dealerships		21,602		—		3,972		—		3,977
Healthcare providers		7,920		—		333		—		334
Restaurants		45,965		—		21,598		22,988		10,745
Convenience stores		22,588		—		14,817		—		14,817
Automotive services		7,531		—		1,509		—		1,509
Manufacturing		18,624		—		7,262		4,938		3,140
Professional services		14,706		248		714		248		719
Warehouse/distribution		4,548		—		—		485		—
Grocery		5,570		—		26		—		26
Other		15,516		—		2,368		—		2,417
Total owner-occupied commercial real estate loans		225,547		248		65,508		32,277		49,017

	As of August 31, 2020						As of June 30, 2020
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		32,756		—		15,943		—		15,943
Non-professional services		14,804		—		3,864		—		3,864
Retail		33,182		545		1,535		3,125		1,537
Healthcare providers		22,412		—		1,489		—		1,489
Restaurants		47,991		1,262		9,084		17,418		5,839
Convenience stores		9,015		—		—		—		1,285
Automotive services		7,018		—		—		—		—
Hotels		80,726		21,027		40,316		39,622		26,092
Manufacturing		5,229		—		2,011		—		2,011
Storage units		14,444		—		3,711		—		3,711
Professional services		11,699		—		722		—		723
Multi-tenant retail		77,635		—		38,658		21,817		35,791
Warehouse/distribution		26,198		—		3,809		141		3,809
Other		31,500		—		7,563		—		8,055
Total non-owner-occupied commercial real estate loans		414,609		22,834		128,705		82,123		110,149
Total commercial real estate		880,732		25,247		203,488		117,309		168,899

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	As of August 31, 2020						As of June 30, 2020
Loan portfolio balances and CARES Act modifications	Balance		Payment		Interest-only		Payment		Interest-only
(continued, dollars in thousands)	Outstanding		Deferrals		Modifications		Deferrals		Modifications
Home equity lines of credit		42,980		—		—		91		—
Deposit-secured loans		4,825		—		1		45		1
All other consumer loans		33,227		178		195		1,319		199
Total consumer loans		81,032		178		196		1,455		200
Agricultural production and equipment loans		113,980		351		566		400		586
Loans to municipalities or other public units		10,326		—		—		—		—
Commercial and industrial loans to:		—		—		—
Forestry, fishing, and hunting		14,546		—		490		50		612
Construction		28,876		23		113		125		148
Finance and insurance		50,001		—		20		—		20
Real estate rental and leasing		25,581		—		1,267		—		1,299
Healthcare and social assistance		38,425		—		1,576		—		1,576
Accomodations and food services		32,635		175		2,580		175		2,595
Manufacturing		15,973		—		3,191		—		3,271
Retail trade		48,675		—		1,511		1,189		1,512
Transportation and warehousing		37,406		—		5,618		194		5,636
Professional services		8,440		—		12		—		12
Administrative support and waste management		10,270		—		1,962		—		1,962
Arts, entertainment, and recreation		4,014		474		27		732		27
Other commercial loans		37,811		—		635		179		741
Total commercial and industrial loans		352,653		672		19,002		2,644		19,411
Total commercial loans		476,959		1,023		19,568		3,044		19,997
Total gross loans receivable, excluding deferred loan fees	$	2,172,035	$	32,962	$	272,626	$	141,472	$	238,712

Premises and Equipment. Premises and equipment increased to $65.1 million, up $2.4 million, or 3.8%, as compared to June 30, 2019. The increase was due to construction of a new facility for a re-located bank branch, leasehold improvements for a de novo bank branch, a branch added through the Central Federal Acquisition, and other acquisitions of equipment, partially offset by depreciation.

BOLI. The Bank has purchased “key person” life insurance policies (BOLI) on employees at various times since fiscal 2003, and has acquired additional BOLI in connection with certain acquisitions. At June 30, 2020, the cash surrender value of all such policies was $43.4 million, up $5.0 million, or 13.1%, as compared to June 30, 2019, due primarily to additional BOLI purchases during the fiscal year.

Intangible Assets. The July 2009 acquisition of the Southern Bank of Commerce resulted in goodwill of $126,000. The October 2013 acquisition of Ozarks Legacy Community Financial, Inc., resulted in goodwill of $1.5 million and a $1.4 million core deposit intangible, which was amortized over a five-year period using the straight-line method and was fully amortized as of June 30, 2020. The February 2014 acquisition of Citizens State Bankshares, Inc., resulted in a $624,000 core deposit intangible, which was amortized over a five-year period using the straight-line method and was fully amortized as of June 30, 2020. The August 2014 acquisition of Peoples Service Company, Inc., and its subsidiary, Peoples Bank of the Ozarks (the “Peoples Acquisition”) resulted in goodwill of $3.0 million and a $3.0 million core deposit intangible, which is being amortized over a six-year period using the straight-line method. The June 2017 acquisition of Tammcorp, Inc., and its subsidiary, Capaha Bank (the “Capaha Acquisition”) resulted in goodwill of $4.1 million and a $3.4 million core deposit intangible, which is being amortized over a seven-year period using the straight-line method. The SMB-Marshfield Acquisition resulted in goodwill of $4.4 million and a $1.3 million core deposit intangible, which is being amortized over a seven-year period using the straight-line method. The Gideon Acquisition resulted in goodwill of $1.0 million and a $4.1 million core deposit intangible, which is being amortized over a seven-year period using the straight-line method. The May 2020 Central Federal Acquisition resulted in a bargain purchase gain of $123,000 and a $540,000 core deposit intangible, which is being amortized over a six-year period using the straight-line method. Goodwill from these acquisitions is not being amortized, but is tested for impairment at least annually.

Deposits. Deposits were $2.2 billion at June 30, 2020, an increase of $291.2 million, or 15.4%, as compared to June 30, 2019. The increase was attributable in part to the Central Federal Acquisition, which included deposits assumed at a fair value of $46.7 million. Since June 30, 2019, the Company’s public unit deposits increased by $38.4 million, to total $305.3 million at June 30, 2020, with the increase primarily resulting from higher nonmaturity balances held by our existing customer base; public unit deposits

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assumed in the Central Federal Acquisition were minimal. Since June 30, 2019, brokered certificates of deposit decreased by $21.6 million, to total $23.3 million at June 30, 2020, while brokered nonmaturity deposits increased by $11.7 million, to total $20.0 million at June 30, 2020. No brokered funding was assumed in the Central Federal Acquisition. The Company decreased brokered funding during the fiscal year as better core liquidity in the second half of the fiscal year reduced the Company’s need for wholesale funding. Our discussion of brokered deposits excludes those deposits originated through reciprocal arrangements, as our reciprocal deposits are primarily originated by our public unit depositors and utilized as an alternative to pledging securities against those deposits. Recently updated regulatory guidance, adopted following the May 2018 enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act (Senate Bill 2155), has generally exempted deposits originated through such reciprocal arrangements from classification as brokered deposits for regulatory purposes, subject to some limitations. We continued to utilize reciprocal deposit programs, and at fiscal year end, we had placed deposits of $231.9 million through reciprocal programs, up from $186.1 million a year earlier. At June 30, 2020, $138.1 million reflected deposits we had placed on behalf of our public unit depositors, up from $119.9 million a year ago. Inclusive of the Central Federal Acquisition, deposit balances saw growth primarily in interest-bearing transaction accounts, noninterest-bearing transaction accounts, money market deposit accounts, and savings accounts, partially offset by declines in certificates of deposit. The average loan-to-deposit ratio for the fourth quarter of fiscal 2020 was 98.9%, as compared to 97.6% for the same period of the prior fiscal year.

Borrowings. FHLB advances were $70.0 million at June 30, 2020, an increase of $25.1 million, or 55.9%, as compared to June 30, 2019, with the increase primarily attributable to the Company’s use of this funding source to fund increases in loans, cash balances, and securities in excess of our increases in deposits and retained earnings. The Company held no overnight advances at June 30, 2019, or June 30, 2020, but did utilize overnight borrowings during the fiscal year; average overnight borrowings were at their highest level in the first and second quarters of the fiscal year, before declining seasonally in the third quarter, and further declining in the fourth quarter with increased liquidity in the industry as the COVID-19 pandemic developed. In June 2017, the Company entered into a revolving, reducing line of credit with a three-year term, providing available credit of $15.0 million. At June 30, 2020, the Company had repaid the balance outstanding, and the line of credit had matured; at June 30, 2019, the Company had a drawn balance of $3.0 million. Over the past several years, the Company has worked to move public unit and business customers from a swept repurchase agreement product, which required the use of the Company’s AFS securities portfolio to collateralize those borrowings, to a reciprocal deposit product. During the first quarter of fiscal 2020, the final customers utilizing the sweep product were migrated, and the Company saw a reduction of $4.4 million in this funding source as compared to June 30, 2019.

Subordinated Debt. In March 2004, $7.0 million of Floating Rate Capital Securities of Southern Missouri Statutory Trust I, with a liquidation value of $1,000 per share were issued. The securities bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2034. In connection with its October 2013 acquisition of Ozarks Legacy, the Company assumed $3.1 million in floating rate junior subordinated debt securities. The debt securities had been issued in June 2005 by Ozarks Legacy in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. The carrying value of these debt securities was approximately $2.7 million at June 30, 2020, as compared to $2.6 million at June 30, 2019. In connection with the Peoples Acquisition, the Company assumed $6.5 million in floating rate junior subordinated debt securities. The debt securities had been issued in 2005 by Peoples, in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. The carrying value of these debt securities was approximately $5.3 million at June 30, 2020, as compared to $5.2 million at June 30, 2019.

Stockholders’ Equity. The Company’s stockholders’ equity was $258.3 million at June 30, 2020, an increase of $20.0 million, or 8.4%, as compared to June 30, 2019. The increase was attributable to the retention of net income and an increase in accumulated other comprehensive income, which was due to a decrease in market interest rates, partially offset by cash dividends paid and stock repurchase activity totaling 182,598 shares acquired for $5.8 million, at an average price of $31.61 per share. As the Company noted in its current report on Form 8-K filed March 23, 2020, activity under the repurchase program was temporarily suspended effective after the close of the market on Thursday, March 26, 2020.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2020 AND 2019

Net Income. The Company’s net income available for the fiscal year ended June 30, 2020, was $27.5 million, a decrease of $1.4 million, or 4.7%, as compared to the prior fiscal year.

Net Interest Income. Net interest income for fiscal 2020 was $80.1 million, an increase of $7.4 million, or 10.1%, when compared to the prior fiscal year. The increase, as compared to the prior fiscal year, was attributable to an 11.8% increase in the average balance of interest-earning assets, partially offset by a decline in the net interest margin, from 3.78% to 3.72%. Average earning asset balance growth was due in part to the full-year effect of the mid-fiscal 2019 Gideon Acquisition and organic growth, a portion of which was attributable to the PPP loans originated in the fourth quarter of the fiscal year. The late fiscal 2020 Central Federal Acquisition contributed a relatively small amount to average earning asset growth for the fiscal year. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Peoples Acquisition was $300,000 in fiscal

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2020, as compared to $765,000 in fiscal 2019. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Capaha Acquisition was $238,000 in fiscal 2020, as compared to $1.1 million in fiscal 2019. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the SMB-Marshfield Acquisition was $192,000 in fiscal 2020, as compared to $274,000 in fiscal 2019. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Gideon Acquisition was $1.1 million in fiscal 2020, as compared to $808,000 in fiscal 2019 , due to the mid-fiscal 2019 timing of the acquisition, as compared to the full-year effect in fiscal 2020. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Central Federal Acquisition was $23,000 in fiscal 2020, with no comparable contribution in fiscal 2019. In total, these components of net interest income contributed an additional eight basis points to the net interest margin in fiscal 2020, as compared to a contribution of 15 basis points in fiscal 2019. The Company expects the impact of fair value discount accretion related to most acquisitions to decline in fiscal 2021, while discount accretion recognized over the course of a full fiscal year related to the Central Acquisition will partially offset that decrease, but due to the relative size of the acquisition, the impact will be limited. Partially offsetting the decline in the accretion of fair value discount on acquired loans, the Company saw material benefits from the resolution of a limited number of nonperforming loans, at $767,000, while there was no comparable material item in the prior fiscal year, contributing an additional four basis points to the net interest margin in fiscal 2020.

Interest Income. Interest income for fiscal 2020 was $107.1 million, an increase of $9.6 million, or 9.8%, when compared to the prior fiscal year. The increase was due to an increase of $227.9 million, or 11.8%, in the average balance of interest-earning assets, partially offset by a nine basis point decrease in the average yield earned on interest-earning assets, from 5.06% in fiscal 2019, to 4.97% in fiscal 2020.

Interest income on loans receivable for fiscal 2020 was $102.1 million, an increase of $9.8 million, or 10.6%, when compared to the prior fiscal year. The increase was due to a $220.1 million increase in the average balance of loans receivable, partially offset by a nine basis point decrease in the average yield earned on loans receivable. The decrease in the average yield was attributed primarily to origination and repricing of loans and borrower refinancing as market interest rates declined somewhat early in the fiscal year, followed by more significant declines later in the fiscal year as the economy was impacted by the COVID-19 pandemic. Additionally, a reduction in discount accretion on acquired loan portfolios, from $3.0 million in fiscal 2019 to $1.9 million in fiscal 2020, reduced the average yield on loans by eight basis points, while interest income of $767,000 attributable to resolution of a limited number of nonperforming loans in fiscal 2020, with no comparable material items in fiscal 2019, increased the average yield on loans by four basis points.

Interest income on the investment portfolio and other interest-earning assets was $4.9 million for fiscal 2020, a decrease of $232,000, or 4.5%, when compared to the prior fiscal year. The decrease was due to a 23 basis point decrease in the average yield earned on these assets, partially offset by a $7.8 million increase in the average balance of these assets.

Interest Expense. Interest expense was $26.9 million for fiscal 2020, an increase of $2.2 million, or 9.0%, when compared to the prior fiscal year. The increase was due to an increase of $183.3 million, or 11.1%, in the average balance of interest-bearing liabilities, partially offset by a three basis point decrease in the average rate paid on interest-bearing liabilities, from 1.50% in fiscal 2019, to 1.47% in fiscal 2020.

Interest expense on deposits was $24.1 million for fiscal 2020, an increase of $2.9 million, or 13.6%, when compared to the prior fiscal year. The increase was due primarily to the $193.0 million increase in the average balance of those deposits, combined with a two basis point increase in the average rate paid on interest-bearing deposits. The increase in the average rate paid on deposits was attributable primarily to market increases in rates paid to depositors over prior periods, especially through the third quarter of fiscal 2019. The pace of increases in average deposit rates began to slow in the first quarter of fiscal 2020, followed by a modest decline in the second quarter, and more substantial declines in the third and fourth quarters of fiscal 2020.

Interest expense on FHLB advances was $1.9 million for fiscal 2020, a decrease of $445,000, or 18.7%, when compared to the prior fiscal year. The decrease was due to a 36 basis point decrease in the average rate paid on FHLB advances, combined with a $5.1 million decrease in the average balance of these advances. The decrease in the average rate paid was attributable primarily to market declines in borrowing rates available on average during the fiscal year, as compared to the prior year.

Provision for Loan Losses. A provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level considered adequate by management to provide for probable loan losses based on prior loss experience, type and amount of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. Management also considers other factors relating to the collectability of the loan portfolio.

The provision for loan losses was $6.0 million for fiscal 2020, an increase of $4.0 million, or 195.4%, as compared to the prior fiscal year. The increase in provision was attributed primarily to uncertainty regarding the economic environment resulting from

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the COVID-19 pandemic and the potential impact on the Company’s borrowers, a related increase in the level of watch status loans, and a modest increase in net charge offs. These factors were partially offset by a reduction in adversely classified, nonperforming (See: Financial Condition – Loans), and delinquent loans, and by slower loan growth as compared to the prior fiscal year, exclusive of the 100% SBA-guaranteed PPP loans and acquired loans subject to purchase accounting. In fiscal 2020, net charge offs were $766,000, or 0.04% as a percentage of average loans outstanding, as compared to $343,000, or 0.02% as a percentage of average loans outstanding, for the prior fiscal year. At June 30, 2020, classified loans totaled $24.5 million, or 1.13% of gross loans, as compared to $28.3 million, or 1.51% of gross loans, at June 30, 2019, with the decrease primarily the result of the resolution of classified loans acquired in the Gideon Acquisition, which included classified loans carried at a fair value of $9.1 million at June 30, 2020, as compared to $13.5 million at June 30, 2019. Classified loans were comprised primarily of commercial real estate, residential real estate, and commercial operating loans. All loans so designated were classified due to concerns as to the borrowers’ ability to continue to generate sufficient cash flows to service the debt.

The above provision was made based on management’s analysis of the various factors which affect the loan portfolio and management’s desire to maintain the allowance at a level considered adequate. Management performed a detailed analysis of the loan portfolio, including types of loans, the charge-off history, and an analysis of the allowance for loan losses. Management also considered the continued origination of loans secured by commercial and agricultural real estate, and commercial and agricultural operating loans, which bear an inherently higher level of credit risk. Management believes the allowance for loan losses at June 30, 2020, is adequate to cover all losses inherent in the portfolio; however, 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 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.

Noninterest Income. Noninterest income was $14.8 million for fiscal 2020, an increase of $1.7 million, or 12.7%, when compared to the prior fiscal year. The increase was attributable in part to the full year impact of the mid-fiscal 2019 Gideon Acquisition, and consisted primarily of higher bank card interchange income, gains realized on the sale of residential real estate loans originated for that purpose, and deposit account service charges. These increases were partially offset by lower earnings on bank owned life insurance (BOLI), which decreased in part due to the inclusion in the prior period’s results of a $346,000 nonrecurring benefit, gains on the sale of available-for-sale securities, loan servicing fees, and other loan fees. Bank card interchange income increased on higher activity levels and benefits under a new affiliation contract. Gains realized on the sale of residential real estate loans originated for that purpose increased primarily due to refinancing activity, and the Company saw increases in the dollar amount of loans serviced. However, the fair value of mortgage servicing rights was impaired due to the lower rate environment, and charges to recognize that impairment resulted in lower noninterest income. Deposit account service charges increased for the full fiscal year as compared to the prior fiscal year, but were notably weak in the fourth quarter of the current fiscal year, reflecting reduced consumer behavior and reduced NSF charges as account balances were higher.

Noninterest Expense. Noninterest expense was $54.5 million for fiscal 2020, an increase of $6.6 million, or 13.7%, when compared to the prior fiscal year. The increase in noninterest expense was attributable in part to the full year impact of the mid-fiscal 2019 Gideon Acquisition, and resulted primarily from higher compensation expense, occupancy and data processing expenses, amortization of core deposit intangibles, advertising, and other operating expenses, including expenses related to and losses on the disposition of foreclosed real estate and provision for off-balance sheet credit exposure. These increases were partially offset by decreases in FDIC deposit insurance assessments, as the Company benefitted from the FDIC’s application of credits against the deposit insurance assessments due from smaller banks, such as the Company’s subsidiary, resulting in no deposit insurance premium expense for the Company for much of the current fiscal year. The credits were exhausted, and the expense will return to a normalized level for the fiscal year that will end June 30, 2021. In total, fiscal 2020 results included $1.2 million in merger-related charges, as compared to $829,000 in comparable expenses for the prior fiscal year.

Provision for Income Taxes. The Company recorded an income tax provision of $6.9 million for fiscal 2020, a decrease of $160,000, or 2.3%, as compared to the prior fiscal year, attributable to lower pre-tax income, partially offset by an increase in the Company’s effective tax rate, to 20.0% for fiscal 2020, as compared to 19.6% for fiscal 2019. The higher effective tax rate was attributable primarily to reduced tax-advantaged investments.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2019 AND 2018

Net Income. The Company’s net income for the fiscal year ended June 30, 2019, was $28.9 million, an increase of $8.0 million, or 38.1%, as compared to the prior fiscal year.

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Net Interest Income. Net interest income for fiscal 2019 was $72.8 million, an increase of $10.4 million, or 16.7%, when compared to the prior fiscal year. The increase, as compared to the prior fiscal year, was attributable to a 16.6% increase in the average balance of interest-earning assets, while the net interest margin was unchanged at 3.78%. Average earning asset balance growth was due in part to the mid-fiscal 2019 Gideon Acquisition and the full-year effect of the mid-2018 SMB Marshfield Acquisition. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Peoples Acquisition was $765,000 in fiscal 2019, as compared to $1.0 million in fiscal 2018. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Capaha Acquisition was $1.1 million in fiscal 2019, as compared to $1.1 million in fiscal 2018. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the SMB-Marshfield Acquisition was $274,000 in fiscal 2019, as compared to $127,000 in fiscal 2018. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Gideon Acquisition was $808,000 in fiscal 2019, with no comparable contributions in fiscal 2018. In total, these components of net interest income contributed an additional 15 basis points to the net interest margin in fiscal 2019, as compared to a contribution of 14 basis points in fiscal 2018.

Interest Income. Interest income for fiscal 2019 was $97.5 million, an increase of $20.3 million, or 26.3%, when compared to the prior fiscal year. The increase was due to an increase of $274.7 million, or 16.6%, in the average balance of interest-earning assets, combined with a 39 basis point increase in the average yield earned on interest-earning assets, from 4.67% in fiscal 2018, to 5.06% in fiscal 2019.

Interest income on loans receivable for fiscal 2019 was $92.3 million, an increase of $19.2 million, or 26.3%, when compared to the prior fiscal year. The increase was due to a $251.4 million increase in the average balance of loans receivable, combined with a 39 basis point increase in the average yield earned on loans receivable. The increase in the average yield was attributed primarily to origination and repricing of loans and borrower refinancing as market interest rates increased during the largest part of fiscal 2019 as compared to recent fiscal years, as well as an increase in the accretion of fair value discount on loans attributable to the Peoples, Capaha, SMB-Marshfield, and Gideon acquisitions, which increased to $3.0 million in fiscal 2019, as compared to $2.2 million in fiscal 2018.

Interest income on the investment portfolio and other interest-earning assets was $5.2 million for fiscal 2019, an increase of $1.1 million, or 27.2%, when compared to the prior fiscal year. The increase was due to a $23.2 million increase in the average balance of these assets, combined with a 28 basis point increase in the average yield earned on these assets.

Interest Expense. Interest expense was $24.7 million for fiscal 2019, an increase of $9.9 million, or 67.0%, when compared to the prior fiscal year. The increase was due to a 45 basis point increase in the average rate paid on interest-bearing liabilities, from 1.05% in fiscal 2018 to 1.50% in fiscal 2019, combined with the $238.2 million increase in the average balance of interest-bearing liabilities.

Interest expense on deposits was $21.2 million for fiscal 2019, an increase of $8.4 million, or 65.4%, when compared to the prior fiscal year. The increase was due primarily to a 42 basis point increase in the average rate paid on interest-bearing deposits, combined with the $203.4 million increase in the average balance of those deposits.

Interest expense on FHLB advances was $2.4 million for fiscal 2019, an increase of $1.3 million, or 128.3%, when compared to the prior fiscal year. The increase was due to a $35.8 million increase in the average balance of FHLB advances, combined with a 73 basis point increase in the average rate paid on those advances. The increase in the average rate paid was attributable primarily to market increases in borrowing rates available on average during the fiscal year, as compared to the prior year.

Provision for Loan Losses. The provision for loan losses was $2.0 million for fiscal 2019, a decrease of $1.0 million, or 33.3%, as compared to the prior fiscal year. The decrease in provision was attributed primarily to continued low levels of net charge offs and a stable outlook regarding the credit quality of the Company’s legacy loan portfolio. In fiscal 2019, net charge offs were $343,000, as compared to $371,000 for the prior fiscal year. At June 30, 2019, classified loans totaled $28.3 million, or 1.51% of gross loans, as compared to $14.2 million, or 0.90% of gross loans, at June 30, 2018, with the increase primarily the result of the Gideon Acquisition, which included classified loans carried at a fair value of $13.5 million at June 30, 2019. Classified loans were comprised primarily of commercial real estate, residential real estate, and commercial operating loans. All loans so designated were classified due to concerns as to the borrowers’ ability to continue to generate sufficient cash flows to service the debt.

The above provision was made based on management’s analysis of the various factors which affect the loan portfolio and management’s desire to maintain the allowance at a level considered adequate. Management performed a detailed analysis of the loan portfolio, including types of loans, the charge-off history, and an analysis of the allowance for loan losses. Management also considered the continued origination of loans secured by commercial and agricultural real estate, and commercial and agricultural operating loans, which bear an inherently higher level of credit risk. While management believes the allowance for loan losses at

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June 30, 2019, is adequate to cover all losses inherent in the portfolio, there can be no assurance that, in the future, increases in the allowance will not be necessary, or that actual losses will not exceed the allowance.

Noninterest Income. Noninterest income was $13.1 million for fiscal 2019, an increase of $724,000, or 5.9%, when compared to the prior fiscal year. The increase was attributable in part to the mid-fiscal 2019 Gideon Acquisition and the mid-fiscal 2018 SMB-Marshfield Acquisition, and consisted of higher bank card interchange income, deposit account service charges, and earnings on bank owned life insurance (BOLI), which increased in part due to a $346,000 nonrecurring benefit. These increases were partially offset by lower loan servicing fees, loan origination and other loan fees, and gains on the sale of available-for-sale securities.

Noninterest Expense. Noninterest expense was $47.9 million for fiscal 2019, an increase of $4.9 million, or 11.4%, when compared to the prior fiscal year. The increase in noninterest expense was attributable in part to the mid-fiscal 2019 Gideon Acquisition and the mid-fiscal 2018 SMB-Marshfield Acquisition, and resulted primarily from higher compensation expense, occupancy expense, amortization of core deposit intangibles, deposit insurance premiums, and other operating expenses, including expenses related to and losses on the disposition of foreclosed real estate, provision for off-balance sheet credit exposure, and expenses to provide rewards checking products and electronic banking services. These increases were partially offset by decreases in legal and professional fees, as the Company incurred less legal expense related to acquisition activity during the period. In total, fiscal 2019 results included $829,000 in merger-related charges, as compared to $925,000 in comparable expenses for the prior fiscal year.

Provision for Income Taxes. The Company recorded an income tax provision of $7.0 million for fiscal 2019, a decrease of $756,000, or 9.7%, as compared to the prior fiscal year, as the Company realized a decline in its effective tax rate, to 19.6% for fiscal 2019, as compared to 27.2% for fiscal 2018, partially offset by increased earnings before tax. The lower effective tax rate was attributable primarily to the December 2017 enactment of a reduction in the federal corporate income tax rate, the benefits of which were not fully realized by the Company until the tax and fiscal year beginning July 1, 2018, at which point the annual effective federal corporate income tax rate to which the Company was administratively subject declined from 28.1% to 21.0%. Additionally, the December 2017 enactment of the reduction in the federal corporate income tax rate required a revaluation of the Company’s deferred tax asset, which was recognized through income tax provision during the fiscal year ended June 30, 2018, and which offset much of the impact of the reduction, from 35% to 28.1%, in the annual effective federal income tax rate to which the Company was subject for that fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Southern Missouri’s primary potential sources of funds include deposit growth, FHLB advances, amortization and prepayment of loan principal, investment maturities and sales, and capital generated from ongoing operations. While scheduled repayments on loans and securities as well as the maturity of short-term investments are a relatively predictable source of funding, deposit flows, FHLB advance redemptions and loan and security prepayment rates are significantly influenced by factors outside of the Bank’s control, including general economic conditions and market competition. The Bank has relied on FHLB advances as a source for funding cash or liquidity needs.

Southern Missouri uses its liquid assets as well as other funding sources to meet ongoing commitments, to fund loan demand, to repay maturing certificates of deposit and FHLB advances, to make investments, to fund other deposit withdrawals and to meet operating expenses. At June 30, 2020, the Bank had outstanding commitments to extend credit of $416.2 million (including $285.3 million in unused lines of credit). Total commitments to originate fixed-rate loans with terms in excess of one year were $94.3 million at rates ranging from 2.38% to 5.75%, with a weighted-average rate of 4.62%. Management anticipates that current funding sources will be adequate to meet foreseeable liquidity needs.

For the fiscal year ended June 30, 2020, Southern Missouri increased deposits by $291.2 million, while securities sold under agreements to repurchase declined by $4.4 million. No securities sold under agreements to repurchase were outstanding at June 30, 2020, and the product is no longer offered. The Company increased FHLB advances by $25.1 million. During the prior fiscal year, Southern Missouri increased deposits and securities sold under agreement to repurchase by $313.8 million and $1.1 million, respectively, and reduced FHLB advances by $31.7 million. At June 30, 2020, the Bank had pledged $768.7 million of its single-family residential and commercial real estate loan portfolios to the FHLB for available credit of approximately $367.0 million, of which $70.4 million was advanced, while none was utilized for the issuance of letters of credit to secure public unit deposits. The Bank had also pledged $258.2 million of its agricultural real estate and agricultural operating and equipment loans to the Federal Reserve’s discount window for available credit of approximately $179.7 million, as of June 30, 2020, none of which was advanced. In addition, the Bank has the ability to pledge several of its other loan portfolios, including, for example, its multi-family residential real estate, home equity, or commercial business loans. In total, FHLB borrowings are limited to 45% of Bank assets, or approximately $1.1 billion as most recently reported by the FHLB on June 30, 2020, which means that an amount up to $992 million may still be eligible to be borrowed from the FHLB, subject to available collateral. Along with the ability to borrow from the FHLB and Federal Reserve, management believes its liquid resources will be sufficient to meet the Company’s liquidity needs.

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Liquidity management is an ongoing responsibility of the Bank’s management. The Bank adjusts its investment in liquid assets based upon a variety of factors including (i) expected loan demand and deposit flows, (ii) anticipated investment and FHLB advance maturities, (iii) the impact on profitability, and (iv) asset/liability management objectives.

At June 30, 2020, the Bank had $499.4 million in CDs maturing within one year and $1.5 billion in other deposits without a specified maturity, as compared to comparable figures for June 30, 2019, of $467.7 million in CDs maturing within one year and $1.2 billion in other deposits and securities sold under agreements to repurchase without a specified maturity. Management believes that most maturing interest-bearing liabilities will be retained or replaced by new interest-bearing liabilities. Also, at June 30, 2020, the Bank had no overnight advances from the FHLB, $12.5 million in term FHLB advances maturing within one year, and $57.5 million in FHLB advances with a maturity date in excess of one year. Of the advances with maturity dates in excess of one year, $5.0 million was eligible for early redemption by the lender within one year.

REGULATORY CAPITAL

Federally insured financial institutions are required to maintain minimum levels of regulatory capital. Federal Reserve regulations establish capital requirements, including a tier 1 leverage (or core capital) requirement and risk-based capital requirements. The Federal Reserve is also authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.

At June 30, 2020, the Bank exceeded regulatory capital requirements with tier 1 leverage, total risk-based capital, and tangible common equity capital of $244.8 million, $271.1 million and $244.8 million, respectively. The Bank’s tier 1 capital represented 9.66% of total adjusted assets and 11.63% of total risk-weighted assets, while total risk-based capital was 12.88% of total risk-weighted assets, and tangible common equity capital was 11.63% of total risk-weighted assets. To be considered adequately capitalized, the Bank must maintain tier 1 leverage capital levels of at least 4.0% of adjusted total assets and 6.0% of risk-weighted assets, total risk-based capital of 8.0% of risk-weighted assets, and tangible common equity capital of 4.5%. To be considered well capitalized, the Bank must maintain tier 1 leverage capital levels of at least 5.0% of adjusted total assets and 8.0% of risk-weighted assets, total risk-based capital of 10.0% of risk-weighted assets, and tangible common equity capital of 6.5%.

At June 30, 2020, the Company exceeded regulatory capital requirements with tier 1 leverage, total risk-based capital, and tangible common equity capital of $252.6 million, $278.9 million and $237.5 million, respectively. The Company’s tier 1 capital represented 9.95% of total adjusted assets and 11.92% of total risk-weighted assets, while total risk-based capital was 13.17% of total risk-weighted assets, and tangible common equity capital was 11.21% of total risk-weighted assets. To be considered adequately capitalized, the Company must maintain tier 1 leverage capital levels of at least 4.0% of adjusted total assets and 6.0% of risk-weighted assets, total risk-based capital of 8.0% of risk-weighted assets, and tangible common equity capital of 4.5%.

See Item 1 – Business – Regulation, and Note 14 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K for additional detail on the Company’s capital requirements.

IMPACT OF INFLATION

The consolidated financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates generally have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. In the current interest rate environment, liquidity and maturity structure of the Company’s assets and liabilities are critical to the maintenance of acceptable performance levels.

AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES

The following table sets forth certain information relating to the Company’s average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and the average cost of liabilities for the periods indicated. These yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the years indicated. Nonaccrual loans are included with other noninterest-earning assets.

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The table also presents information with respect to the difference between the weighted-average yield earned on interest-earning assets and the weighted-average rate paid on interest-bearing liabilities, or interest rate spread, which financial institutions have traditionally used as an indicator of profitability. Another indicator of an institution’s net interest income is its net yield (or net interest margin) on interest-earning assets, which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.

	Years Ended June 30,
	2020							2019							2018
				Interest							Interest							Interest
	Average			and		Yield/		Average			and		Yield/		Average			and		Yield/
(Dollars in thousands)	Balance			Dividends		Cost		Balance			Dividends		Cost		Balance			Dividends		Cost
Interest-earning assets:
Mortgage loans (1)	$	1,506,098		$	77,906	5.17	%	$	1,346,952		$	69,911	5.19	%	$	1,183,961		$	57,294	4.84	%
Other loans (1)		455,562			24,223	5.32			394,625			22,417	5.68			306,169			15,828	5.17
Total net loans		1,961,660			102,129	5.21			1,741,577			92,328	5.30			1,490,130			73,122	4.91
Mortgage-backed securities		121,079			2,802	2.31			102,500			2,704	2.64			81,326			1,817	2.23
Investment securities (2)		62,985			1,992	3.16			77,305			2,323	3.01			76,077			2,166	2.85
Other interest-earning assets		7,767			129	1.66			4,209			127	3.02			3,378			69	2.02
TOTAL INTEREST- EARNING ASSETS (1)		2,153,491			107,052	4.97			1,925,591			97,482	5.06			1,650,911			77,174	4.67
Other noninterest-earning assets (3)		186,019			—	—			172,440			—	—			144,838			—	—
TOTAL ASSETS	$	2,339,510			107,052	—		$	2,098,031			97,482	—		$	1,795,749			77,174	—
Interest-bearing liabilities:
Savings accounts	$	167,458			1,099	0.66		$	161,379			1,179	0.73		$	149,252			756	0.51
NOW accounts		679,277			6,529	0.96			585,077			5,920	1.01			536,510			4,421	0.82
Money market accounts		211,059			2,654	1.26			155,263			2,146	1.38			114,393			804	0.70
Certificates of deposit		667,987			13,802	2.07			631,110			11,963	1.90			529,238			6,844	1.29
TOTAL INTEREST- BEARING DEPOSITS		1,725,781			24,084	1.40			1,532,829			21,208	1.38			1,329,393			12,825	0.96
Borrowings:
Securities sold under agreements to repurchase		82			—	0.03			3,988			36	0.90			5,373			37	0.70
FHLB advances		87,241			1,932	2.21			92,371			2,377	2.57			56,593			1,041	1.84
Note payable		2,547			112	4.39			3,239			158	4.88			3,000			121	4.02
Junior subordinated debt		15,093			788	5.22			14,994			921	6.14			14,897			767	5.15
TOTAL INTEREST- BEARING LIABILITIES		1,830,744			26,916	1.47			1,647,421			24,700	1.50			1,409,256			14,791	1.05
Noninterest-bearing demand deposits		244,090			—	—			220,368			—	—			193,178			—	—
Other liabilities		16,780			—	—			10,128			—	—			8,152			—	—
TOTAL LIABILITIES		2,091,614			26,916	—			1,877,917			24,700	—			1,610,586			14,491	—
Stockholders’ equity		247,896			—	—			220,114			—	—			185,163			—	—
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,339,510			26,916	—		$	2,098,031			24,700	—		$	1,795,749			14,791	—
Net interest income				$	80,136						$	72,782						$	62,383
Interest rate spread (4)						3.50	%						3.56	%						3.62	%
Net interest margin (5)						3.72	%						3.78	%						3.78	%
Ratio of average interest-earning assets to average interest- bearing liabilities		117.63	%						116.89	%						117.15	%

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

(2) Includes FHLB membership stock, Federal Reserve membership stock, and related cash dividends.

(3) Includes equity securities and related cash dividends.

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

(5) Represents net interest income divided by average interest-earning assets.

63

YIELDS EARNED AND RATES PAID

The following table sets forth for the periods and at the date indicated, the weighted average yields earned on the Company’s assets, the weighted average interest rates paid on the Company’s liabilities, together with the net yield on interest-earning assets.

	At June 30,		For The Year Ended June 30,
	2020		2020		2019		2018
Weighted-average yield on loan portfolio	4.62	%	5.21	%	5.30	%	4.91	%
Weighted-average yield on mortgage-backed securities	1.95		2.31		2.64		2.23
Weighted-average yield on investment securities (1)	3.18		3.16		3.01		2.85
Weighted-average yield on other interest-earning assets	0.71		1.66		3.02		2.02
Weighted-average yield on all interest-earning assets	4.42		4.97		5.06		4.67
Weighted-average rate paid on interest-bearing deposits	1.02		1.40		1.38		0.96
Weighted-average rate paid on securities sold under agreements to repurchase	—		0.03		0.90		0.70
Weighted-average rate paid on FHLB advances	2.01		2.21		2.57		1.84
Weighted-average rate paid on note payable	—		4.39		4.88		4.02
Weighted-average rate paid on subordinated debt	3.59		5.22		6.14		5.15
Weighted-average rate paid on all interest-bearing liabilities	1.08		1.47		1.50		1.05
Interest rate spread (spread between weighted average rate on all interest-earning assets and all interest- bearing liabilities)	3.34		3.50		3.56		3.62
Net interest margin (net interest income as a percentage of average interest-earning assets)	3.54		3.72		3.78		3.78

(1) Includes Federal Home Loan Bank, Federal Reserve Bank stock.

RATE/VOLUME ANALYSIS

The following table sets forth the effects of changing rates and volumes on net interest income of the Company. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) changes in rate/volume (change in rate multiplied by change in volume).

	Years Ended June 30,								Years Ended June 30,
	2020 Compared to 2019								2019 Compared to 2018
	Increase (Decrease) Due to								Increase (Decrease) Due to
(Dollars in thousands)	Rate		Volume		Rate/ Volume		Net		Rate		Volume		Rate/ Volume		Net
Interest-earning assets:
Loans receivable (1)	$	(1,671)	$	11,722	$	(250)	$	9,801	$	5,721	$	12,460	$	1,025	$	19,206
Mortgage-backed securities		(332)		490		(60)		98		328		473		86		887
Investment securities (2)		120		(431)		(21)		(332)		121		35		1		157
Other interest-earning deposits		(58)		108		(48)		2		34		17		7		58
Total net change in income on interest-earning assets		(1,941)		11,889		(379)		9,569		6,204		12,985		1,119		20,308
Interest-bearing liabilities:
Deposits		509		2,466		(101)		2,874		5,307		2,065		1,011		8,383
Securities sold under agreements to repurchase		(35)		(35)		34		(36)		11		(10)		(2)		(1)
FHLB advances		(332)		(132)		19		(445)		416		658		262		1,336
Note payable		(16)		(34)		4		(46)		26		10		1		37
Subordinated debt		(139)		6		—		(133)		148		5		1		154
Total net change in expense on interest-bearing liabilities		(13)		2,271		(44)		2,214		5,908		2,728		1,273		9,909
Net change in net interest income	$	(1,928)	$	9,618	$	(355)	$	7,355	$	296	$	10,257	$	(154)	$	10,399

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

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

64

Item 7A    Quantitative and Qualitative Disclosures About 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 Company 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 repricing 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 increase its interest rate risk position in order to maintain its net interest margin.

In an effort to manage the interest rate risk resulting from fixed rate lending, the Company has at times utilized longer term (up to 10 year maturities), fixed-rate FHLB advances, which may be subject to early redemption, to offset interest rate risk. Other elements of the Company’s current asset/liability strategy include: (i) increasing originations of commercial real estate, commercial business loans, agricultural real estate, and agricultural operating lines, which typically provide higher yields and shorter repricing periods, but inherently increase credit risk, (ii) limiting the price volatility of the investment portfolio by maintaining a relatively short weighted average maturity, (iii) actively soliciting less rate-sensitive nonmaturity deposits, and (iv) 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 generate long-term, fixed-rate residential loans. During the fiscal year ended June 30, 2020, fixed rate residential loan originations totaled 186.9 million (of which $72.2 million was originated for sale into the secondary market), compared to $70.2 million during the prior year (of which $30.8 million was originated for sale into the secondary market). At June 30, 2020, the fixed-rate residential loan portfolio totaled $257.7 million, with a weighted average maturity of 156 months, compared to $169.8 million with a weighted average maturity of 95 months at June 30, 2019. The Company originated $28.0 million in adjustable rate residential loans during the fiscal year ended June 30, 2020, compared to $35.9 million during the prior fiscal year. At June 30, 2020, fixed rate loans with remaining maturities in excess of 10 years totaled $128.4 million, or 6.0%, of loans receivable, compared to $35.0 million, or 1.9%, of loans receivable, at June 30, 2019. The Company originated $472.2 million in fixed rate commercial and commercial real estate loans during the year ended June 30, 2020, compared to $304.2 million during the prior fiscal year. The Company also originated $33.9 million in adjustable rate commercial and commercial real estate loans during the fiscal year ended June 30, 2020, compared to $73.6 million during the prior fiscal year. At June 30, 2020, adjustable-rate home equity lines of credit totaled $43.2 million, compared to $43.4 million as of June 30, 2019. At June 30, 2020, the Company’s weighted average life of its investment portfolio was 3.3 years, compared to 3.8 years at June 30, 2019. At June 30, 2020, CDs with original terms of two years or more totaled $252.3 million, compared to $234.6 million at June 30, 2019.

INTEREST RATE SENSITIVITY ANALYSIS

The following table sets forth as of June 30, 2020 and 2019, management’s estimates of the projected changes in net portfolio value in the event of 100, 200, and 300 basis point, instantaneous and permanent increases or decreases in market interest rates.

Computations in the table below are based on prospective effects of hypothetical changes in interest rates and are based on an internally generated model using the actual maturity and repricing schedules for Southern Bank’s loans and deposits, adjusted by management’s assumptions for prepayment rates and deposit runoff. Further, the computations do not consider any reactions that the Bank may undertake in response to changes in interest rates. These projected changes should not be relied upon as indicative of actual results in any of the aforementioned interest rate changes.

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Management cannot accurately predict future interest rates or their effect on the Company’s NPV and net interest income in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV and net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Additionally, most of Southern Bank’s loans have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the foregoing table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase.

	June 30, 2020
						NPV as Percentage of
	Net Portfolio					PV of Assets
Change in Rates	Value		Change		% Change	NPV Ratio	Change
	(Dollars in thousands)					(%)	(basis points)
+300 bp	$	238,832	$	(16,824)	(7)	9.99	(7)
+200 bp		251,461		(4,196)	(2)	10.31	25
+100 bp		262,302		6,645	3	10.53	47
0 bp		255,657		—	—	10.06	—
-100 bp		268,902		13,245	5	10.49	43
-200 bp		277,452		21,795	9	10.79	73
-300 bp		283,773		28,116	11	11.01	95

	June 30, 2019
						NPV as Percentage of
	Net Portfolio					PV of Assets
Change in Rates	Value		Change		% Change	NPV Ratio	Change
	(Dollars in thousands)					(%)	(basis points)
+300 bp	$	173,144	$	(44,041)	(20)	8.35	(159)
+200 bp		187,179		(30,006)	(14)	8.88	(107)
+100 bp		203,703		(13,483)	(6)	9.49	(46)
0 bp		217,185		—	—	9.94	—
-100 bp		229,783		12,589	6	10.37	43
-200 bp		251,078		33,893	16	11.19	125
-300 bp		261,720		44,535	21	11.63	169

The Company has worked to limit its exposure to rising rates in the current historically low rate environment by (a) increasing the share of funding on its balance sheet obtained from non-maturity transaction accounts, (b) limiting FHLB borrowings and (c) limiting the duration of its available-for-sale investment portfolio.

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Item 8.    Financial Statements and Supplementary Information

Report of Independent Registered Public Accounting Firm

Stockholders, Board of Directors

and Audit Committee

Southern Missouri Bancorp, Inc.

Poplar Bluff, Missouri

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Southern Missouri Bancorp, Inc. (“Company”) as of June 30, 2020 and 2019 and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended June 30, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three year period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2020 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated September 14, 2020, expressed an unqualified opinion.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ BKD, LLP

We have served as the Company’s auditor since 2002.

Decatur, Illinois

September 14, 2020

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> CONSOLIDATED BALANCE SHEETS <

JUNE 30, 2020 AND 2019

Southern Missouri Bancorp, Inc.

(dollars in thousands)	2020		2019
Assets
Cash and cash equivalents	$	54,245	$	35,400
Interest-bearing time deposits		974		969
Available for sale securities (Note 2)		176,524		165,535
Stock in FHLB of Des Moines		6,390		5,233
Stock in Federal Reserve Bank of St. Louis		4,363		4,350
Loans receivable, net of allowance for loan losses of $25,139 and $19,903 at June 30, 2020 and June 30, 2019, respectively (Notes 3 and 4)		2,141,929		1,846,405
Accrued interest receivable		12,116		10,189
Premises and equipment, net (Note 5)		65,106		62,727
Bank owned life insurance – cash surrender value		43,363		38,337
Goodwill		14,089		14,089
Other intangible assets, net		7,700		9,239
Prepaid expenses and other assets		15,358		21,929
TOTAL ASSETS	$	2,542,157	$	2,214,402
Liabilities and Stockholders' Equity
Deposits (Note 6)	$	2,184,847	$	1,893,695
Securities sold under agreements to repurchase (Note 7)		—		4,376
Advances from FHLB (Note 8)		70,024		44,908
Note payable (Note 9)		—		3,000
Accounts payable and other liabilities		12,151		12,889
Accrued interest payable		1,646		2,099
Subordinated debt (Note 10)		15,142		15,043
TOTAL LIABILITIES		2,283,810		1,976,010
Commitments and contingencies (Note 15)
Common stock, $.01 par value; 25,000,000 shares authorized; 9,345,339 and 9,324,659 shares issued, respectively, at June 30, 2020 and June 30, 2019		93		93
Additional paid-in capital		95,035		94,541
Retained earnings		165,709		143,677
Treasury stock of 217,949 and 35,351 shares at June 30, 2020 and June 30, 2019, respectively, at cost		(6,937)		(1,166)
Accumulated other comprehensive income		4,447		1,247
TOTAL STOCKHOLDERS' EQUITY		258,347		238,392
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,542,157	$	2,214,402

See accompanying notes to consolidated financial statements.

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> CONSOLIDATED STATEMENTS OF INCOME <

YEARS ENDED JUNE 30, 2020, 2019 AND 2018

Southern Missouri Bancorp, Inc.

(dollars in thousands except per share data)	2020		2019		2018
Interest Income:
Loans	$	102,129	$	92,328	$	73,122
Investment securities		1,992		2,323		2,166
Mortgage-backed securities		2,802		2,704		1,817
Other interest-earning assets		129		127		69
TOTAL INTEREST INCOME		107,052		97,482		77,174
Interest Expense:
Deposits		24,084		21,208		12,825
Securities sold under agreements to repurchase		—		36		37
Advances from FHLB		1,932		2,377		1,041
Note payable		112		158		121
Subordinated debt		788		921		767
TOTAL INTEREST EXPENSE		26,916		24,700		14,791
NET INTEREST INCOME		80,136		72,782		62,383
Provision for loan losses (Note 3)		6,002		2,032		3,047
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		74,134		70,750		59,336
Noninterest income:
Deposit account charges and related fees		5,680		5,005		4,584
Bank card interchange income		3,073		2,581		2,273
Loan late charges		573		463		432
Loan servicing fees		196		376		801
Other loan fees		1,258		1,360		1,467
Net realized gains on sale of loans		1,630		771		804
Net realized gains on sale of AFS securities		—		244		334
Earnings on bank owned life insurance		1,021		1,329		947
Other income		1,319		964		727
TOTAL NONINTEREST INCOME		14,750		13,093		12,369
Noninterest expense:
Compensation and benefits		29,336		26,379		23,302
Occupancy and equipment, net		7,288		6,586		6,356
Data processing expense		5,173		3,545		2,963
Telecommunications expense		1,263		1,137		950
Deposit insurance premiums		155		661		517
Legal and professional fees		969		965		1,178
Advertising		1,227		1,161		1,197
Postage and office supplies		804		772		729
Intangible amortization		1,771		1,672		1,457
Foreclosed property expenses/losses		992		442		186
Provision for off balance sheet credit exposure		648		149		58
Other operating expense		4,826		4,423		4,080
TOTAL NONINTEREST EXPENSE		54,452		47,892		42,973
INCOME BEFORE INCOME TAXES		34,432		35,951		28,732
Income Taxes (Note 12)
Current		6,890		6,972		8,333
Deferred		(3)		75		(530)
		6,887		7,047		7,803
NET INCOME	$	27,545	$	28,904	$	20,929
Basic earnings per share	$	3.00	$	3.14	$	2.40
Diluted earnings per share	$	2.99	$	3.14	$	2.39
Dividends paid	$	0.60	$	0.52	$	0.44

See accompanying notes to consolidated financial statements.

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> CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME <

YEARS ENDED JUNE 30, 2020, 2019 AND 2018

Southern Missouri Bancorp, Inc.

(dollars in thousands)	2020		2019		2018
NET INCOME	$	27,545	$	28,904	$	20,929
Other comprehensive income:
Unrealized gains (losses) on securities available-for-sale		4,095		4,940		(3,314)
Less: reclassification adjustment for realized gains included in net income		—		244		334
Unrealized losses on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income		—		—		(213)
Defined benefit pension plan net gain (loss)		6		(10)		(44)
Tax benefit (expense)		(901)		(1,094)		1,033
Total other comprehensive income (loss)		3,200		3,592		(2,872)
COMPREHENSIVE INCOME	$	30,745	$	32,496	$	18,057

See accompanying notes to consolidated financial statements.

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> CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY <

YEARS ENDED JUNE 30, 2020, 2019 AND 2018

Southern Missouri Bancorp, Inc.

			Additional						Accumulated Other		Total
	Common		Paid-In		Retained		Treasury		Comprehensive		Stockholders'
(dollars in thousands)	Stock		Capital		Earnings		Stock		Income (Loss)		Equity
BALANCE AS OF JUNE 30, 2017	$	86	$	70,101	$	102,369	$	—	$	527	$	173,083
Net Income						20,929						20,929
Change in unrealized gain on available for sale securities, net						65				(2,828)		(2,763)
Defined benefit pension plan net loss										(44)		(44)
Dividends paid on common stock ($.44 per share)						(3,827)						(3,827)
Stock option expense				22								22
Stock grant expense				171								171
Exercise of stock options				172								172
Common stock issued		4		12,947								12,951
BALANCE AS OF JUNE 30, 2018	$	90	$	83,413	$	119,536	$	—	$	(2,345)	$	200,694
Net Income						28,904						28,904
Change in unrealized gain on available for sale securities, net										3,602		3,602
Defined benefit pension plan net loss										(10)		(10)
Dividends paid on common stock ($.52 per share)						(4,763)						(4,763)
Stock option expense				51								51
Stock grant expense				323								323
Common stock issued		3		10,754								10,757
Treasury stock purchased								(1,166)				(1,166)
BALANCE AS OF JUNE 30, 2019	$	93	$	94,541	$	143,677	$	(1,166)	$	1,247	$	238,392
Net Income						27,545						27,545
Change in unrealized gain on available for sale securities, net										3,194		3,194
Defined benefit pension plan net gain										6		6
Dividends paid on common stock ($.60 per share)						(5,513)						(5,513)
Stock option expense				74								74
Stock grant expense				356								356
Exercise of stock options				64								64
Treasury stock purchased								(5,771)				(5,771)
BALANCE AS OF JUNE 30, 2020	$	93	$	95,035	$	165,709	$	(6,937)	$	4,447	$	258,347

See accompanying notes to consolidated financial statements.

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> CONSOLIDATED STATEMENTS OF CASH FLOWS <

YEARS ENDED JUNE 30, 2020, 2019 AND 2018

Southern Missouri Bancorp, Inc.

(dollars in thousands)	2020		2019		2018
Cash Flows From Operating Activities:
NET INCOME	$	27,545	$	28,904	$	20,929
Items not requiring (providing) cash:
Depreciation		3,783		3,402		3,119
Loss (gain) on disposal of fixed assets		482		29		(206)
Stock option and stock grant expense		430		374		230
Loss on sale/write-down of REO		802		267		(45)
Amortization of intangible assets		1,771		1,672		1,457
Accretion of purchase accounting adjustments		(1,403)		(2,886)		(1,694)
Increase in cash surrender value of bank owned life insurance (BOLI)		(1,022)		(1,329)		(947)
Provision for loan losses		6,002		2,032		3,047
Gains realized on sale of AFS securities		—		(244)		(334)
Net amortization of premiums and discounts on securities		1,295		846		994
Bargain purchase gain		(123)		—		—
Originations of loans held for sale		(72,165)		(30,768)		(29,749)
Proceeds from sales of loans held for sale		70,929		30,633		29,410
Gain on sales of loans held for sale		(1,630)		(771)		(804)
Changes in:
Accrued interest receivable		(1,758)		(459)		(797)
Prepaid expenses and other assets		4,566		56		7,852
Accounts payable and other liabilities		1,224		5,973		(309)
Deferred income taxes		26		75		(1,774)
Accrued interest payable		(453)		795		265
NET CASH PROVIDED BY OPERATING ACTIVITIES		40,301		38,601		30,644
Cash flows from investing activities:
Net increase in loans		(246,930)		(139,056)		(99,510)
Net change in interest-bearing deposits		(2)		983		249
Proceeds from maturities of available for sale securities		51,649		29,971		24,981
Proceeds from sales of available for sale securities		—		40,985		18,198
Net (purchases) redemptions of Federal Home Loan Bank stock		(1,072)		1,489		(1,756)
Net purchases of Federal Reserve Bank of St. Louis stock		(13)		(785)		(1,209)
Purchases of available-for-sale securities		(55,486)		(31,207)		(44,051)
Purchases of premises and equipment		(4,304)		(7,696)		(2,138)
Purchases of BOLI		(4,000)		—		—
Net cash paid for acquisition		(9,080)		(8,377)		(1,501)
Investments in state & federal tax credits		(5,103)		(2,192)		(5,086)
Proceeds from sale of fixed assets		349		32		1,970
Proceeds from sale of foreclosed assets		1,632		2,317		1,374
Proceeds from BOLI claim		—		544		—
NET CASH USED IN INVESTING ACTIVITIES		(272,360)		(112,992)		(108,479)
Cash flows from financing activities:
Net increase in demand deposits and savings accounts		249,285		40,664		82,567
Net (decrease) increase in certificates of deposits		(4,788)		102,551		(26,392)
Net (decrease) increase in securities sold under agreements to repurchase		(4,376)		1,109		(6,945)
Proceeds from Federal Home Loan Bank advances		640,900		591,500		1,518,930
Repayments of Federal Home Loan Bank advances		(615,897)		(642,030)		(1,491,130)
Repayments of long term debt		(3,000)		(4,400)		—
Exercise of stock options		64		—		172
Purchase of treasury stock		(5,771)		(1,166)		—
Dividends paid on common stock		(5,513)		(4,763)		(3,827)
NET CASH PROVIDED BY FINANCING ACTIVITIES		250,904		83,465		73,375
Increase (decrease) in cash and cash equivalents		18,845		9,074		(4,460)
Cash and cash equivalents at beginning of period		35,400		26,326		30,786
Cash and cash equivalents at end of period	$	54,245	$	35,400	$	26,326

See accompanying notes to consolidated financial statements.

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> CONSOLIDATED STATEMENTS OF CASH FLOWS <

YEARS ENDED JUNE 30, 2020, 2019 AND 2018

Southern Missouri Bancorp, Inc.

(dollars in thousands)	2020		2019		2018
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Conversion of loans to foreclosed real estate	$	1,057	$	2,134	$	1,905
Conversion of foreclosed real estate to loans		—		51		112
Conversion of loans to repossessed assets		210		66		54
Right of use assets obtained in exchange for lease obligations: Operating Leases		1,965		—
The Company purchased all of the capital stock of Central Federal for $21,942 on May 22, 2020.
The Company purchased all of the capital stock of Gideon for $22,028 on November 21, 2018.
The Company purchased all of the capital stock of Bancshares for $16,815 on February 23, 2018.
In conjunction with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired		70,570		216,772		90,992
Less: common stock issued		—		10,757		12,955
Cash paid for the capital stock		21,942		11,271		3,860
Liabilities assumed		48,504		194,744		74,177
Cash paid during the period for:
Interest (net of interest credited)	$	3,813	$	4,325	$	3,021
Income taxes		2,437		2,856		1,589

See accompanying notes to consolidated financial statements.

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NOTE 1: 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 investment subsidiary, and has other preferred shareholders in order to meet the requirements to be a REIT. At June 30, 2020, assets of the REIT were approximately $751 million, and consisted primarily of 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 subsidiary, the Bank. 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.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, and estimated fair values of purchased 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 $6.9 million and $6.9 million at June 30, 2020 and 2019, respectively. The deposits are held in various commercial banks with a total of $319,000 exceeding the FDIC’s deposit insurance limits, 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, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses, net of tax, are reported in accumulated other comprehensive income (loss), a component of stockholders’ equity. All securities have been classified as available for sale.

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

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

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When the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, the Company recognizes the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive income (loss). As a result of this guidance, the Company’s consolidated balance sheets for the dates presented reflect the full impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale debt securities 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.

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

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

Interest on loans is accrued based upon the principal amount outstanding. The accrual of interest on loans is discontinued when, in management’s judgment, the collectability of interest or principal in the normal course of business is doubtful. The Company complies with regulatory guidance which indicates that loans should be placed in nonaccrual status when 90 days past due, unless the loan is both well-secured and in the process of collection. A loan that is “in the process of collection” may be subject to legal action or, in appropriate circumstances, through other collection efforts reasonably expected to result in repayment or restoration to current status in the near future. A loan is considered delinquent when a payment has not been made by the contractual due date. At June 30, 2020, 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. See further disclosure in Note 3: Loans and Allowance for Loan 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 allowance for losses on loans represents management’s best estimate of losses probable in the existing loan portfolio. The allowance for losses on loans 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. The provision for losses on loans is determined based on management’s assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experience, the level of classified and nonperforming loans, and the results of regulatory examinations.

Loans are considered impaired if, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Depending on a particular loan’s circumstances, the Company measures impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. Valuation allowances are established for collateral-dependent impaired loans for the difference between the loan amount and fair value of collateral less estimated selling costs. For impaired loans that are not collateral dependent, a valuation allowance is established for the difference between the loan amount and the present value of expected future cash flows discounted at the historical effective interest rate or the observable market price of the loan. Impairment losses are recognized through an increase in the required allowance for loan losses. Cash receipts on loans deemed impaired are recorded based on the loan’s separate status as a nonaccrual loan or an accrual status loan.

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Some loans are accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. For these loans (“purchased credit impaired loans”), the Company recorded a fair value discount and began carrying them at book value less their face amount (see Note 4). For these loans, we determined the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”), and estimated the amount and timing of undiscounted expected principal and interest payments, including expected prepayments (the “undiscounted expected cash flows”). Under acquired impaired loan accounting, the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference is an estimate of the loss exposure of principal and interest related to the purchased credit impaired loans, and the amount is subject to change over time based on the performance of the loans. The carrying value of purchased credit impaired loans is initially determined as the discounted expected cash flows. The excess of expected cash flows at acquisition over the initial fair value of the purchased credit impaired loans is referred to as the “accretable yield” and is recorded as interest income over the estimated life of the acquired loans using the level-yield method, if the timing and amount of the future cash flows is reasonably estimable. The carrying value of purchased credit impaired loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income. Subsequent to acquisition, the Company evaluates the purchased credit impaired loans on a quarterly basis. Increases in expected cash flows compared to those previously estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in expected cash flows compared to those previously estimated decrease the accretable yield and may result in the establishment of an allowance for loan losses and a provision for loan losses. Purchased credit impaired loans are generally considered accruing and performing loans, as the loans accrete interest income over the estimated life of the loan when expected cash flows are reasonably estimable. Accordingly, purchased credit impaired loans that are contractually past due are still considered to be accruing and performing as long as there is an expectation that the estimated cash flows will be received. If the timing and amount of cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans.

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.

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.

Intangible Assets. The Company’s intangible assets at June 30, 2020 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. At June 30, 2019, the Company’s intangible assets included gross core deposit intangibles of $14.7 million with $6.9 million accumulated amortization, gross other identifiable intangibles of $3.8 million with accumulated amortization of $3.8 million, and mortgage servicing rights of $1.4 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 $1.4 million in fiscal 2021, $1.4 million in fiscal 2022, $1.4 million in fiscal 2023, $1.4 million in fiscal 2024, $807,000 in fiscal 2025, and $328,000 thereafter. As of June 30, 2020, and June 30, 2019, there was no impairment indicated.

76

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, and June 30, 2019, 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.

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 the 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 subsidiary.

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.

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) outstanding during each year.

Comprehensive Income. Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized appreciation (depreciation) on available-for-sale securities, unrealized appreciation (depreciation) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income, and changes in the funded status of defined benefit pension plans.

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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.

Revisions. Certain immaterial revisions have been made to the 2019 and 2018 consolidated financial statements for netting interchange expenses with interchange revenues to apply the recognition on an agency versus principal basis. These revisions did not have a significant impact on the financial statement line items impacted. have been reclassified to conform to the 2020 presentation. These reclassifications had no effect on net income or retained earnings.

The following paragraphs summarize the impact of 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, and is not expected to 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). The Update amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates 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. For public companies, the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is available beginning after December 15, 2018, including interim periods within those fiscal years. Adoption will be applied on a modified retrospective basis, through a cumulative-effect adjustment to retained earnings.

The Company formed a working group of key personnel responsible for the allowance for loan losses estimate and initiated its evaluation of the data and systems requirements of adoption of the Update. The group determined that purchasing third party software would be the most effective method to comply with the requirements, evaluated several outside vendors, and made a vendor recommendation that was approved by the Board. Model validation and data testing using existing ALLL methodology have been completed. Parallel testing of the new methodology compared to the current methodology has been ongoing in the second half of fiscal year 2020. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, which for the Company will be the three-month period ending September 30, 2020.

Based on its initial analysis, the Company estimates that the allowance for credit losses (ACL) will increase by 27 to 35 percent as compared to the June 30, 2020, allowance for loan losses. This would result in an ACL of approximately 1.48% to 1.57% of gross loans upon adoption in the first quarter of fiscal 2021. This estimate is based upon the Company’s current analysis of economic conditions and forecasts, and the estimate is subject to change based on continuing review and challenge of the model and our methodologies and judgments as we work to finalize implementation. The adoption of ASU 2016-13 in fiscal 2021 could also impact the Company’s future earnings, perhaps materially. In March 2020, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was signed into law, providing banking organizations required to adopt ASU 2016-13 during calendar year 2020 temporary relief from compliance with the standard until the earlier of the termination date of the national emergency declared by the President on March 13, 2020, concerning the COVID-19 pandemic (the National Emergency), or December 31, 2020.

In February 2016, the FASB issued ASU 2016-02, “Leases,” to revise the accounting related to lease accounting. Under the new guidance, a lessee is required to record a right-of-use (ROU) asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The Update was effective for the Company July 1, 2019. Adoption of the standard allows the use of a modified retrospective transition approach for all periods presented at the time of adoption. Based on the Company’s leases outstanding at June 30, 2020, which included five leased properties and numerous office equipment leases, the adoption of the new standard did not have a material impact on the Company’s consolidated statements of financial condition or consolidated statements of income, although an increase to assets and liabilities occurred at the time of adoption. In the first quarter of 2020, the Company recognized a ROU asset and corresponding lease liability for all leases of approximately $2.0 million based on the lease portfolio at that time. The Company’s new leases, lease terminations, and lease modifications and renewals will impact the amount of ROU asset and corresponding lease liability recognized. The Company’s leases are all currently “operating leases” as defined in the Update; therefore, no material change in the income statement presentation of lease expense is anticipated.

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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) executed 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.

NOTE 2: Available for Sale Securities

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

	June 30, 2020
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Debt and equity securities:
Obligations of states and political subdivisions	$	40,486	$	1,502	$	—	$	41,988
Other securities		7,919		48		(343)		7,624
TOTAL DEBT AND EQUITY SECURITIES		48,405		1,550		(343)		49,612
Mortgage-backed securities:
FHLMC certificates		29,970		756		(2)		30,724
GNMA certificates		7,546		72		—		7,618
FNMA certificates		42,265		2,402		(5)		44,662
CMOs issues by government agencies		42,594		1,346		(32)		43,908
TOTAL MORTGAGE-BACKED SECURITIES		122,375		4,576		(39)		126,912
TOTAL	$	170,780	$	6,126	$	(382)	$	176,524

	June 30, 2019
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Debt and equity securities:
U.S. government and Federal agency obligations	$	7,284	$	1	$	(15)	$	7,270
Obligations of states and political subdivisions		42,123		728		(68)		42,783
Other securities		5,176		75		(198)		5,053
TOTAL DEBT AND EQUITY SECURITIES		54,583		804		(281)		55,106
Mortgage-backed securities:
FHLMC certificates		16,373		64		(65)		16,372
GNMA certificates		35		—		—		35
FNMA certificates		34,943		610		(95)		35,458
CMOs issues by government agencies		57,946		775		(157)		58,564
TOTAL MORTGAGE-BACKED SECURITIES		109,297		1,449		(317)		110,429
TOTAL	$	163,880	$	2,253	$	(598)	$	165,535

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The amortized cost and fair value of available-for-sale 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 call or prepayment penalties.

	June 30, 2020
	Amortized		Estimated
(dollars in thousands)	Cost		Fair Value
Within one year	$	862	$	868
After one year but less than five years		9,875		10,089
After five years but less than ten years		15,812		16,174
After ten years		21,856		22,481
Total investment securities		48,405		49,612
Mortgage-backed securities		122,375		126,912
Total investments and mortgage-backed securities	$	170,780	$	176,524

The carrying value of investment and mortgage-backed securities pledged as collateral to secure public deposits and securities sold under agreements to repurchase amounted to $156.1 million and $143.7 million at June 30, 2020 and 2019, respectively. The securities pledged consist of marketable securities, including $0 and $5.6 million of U.S. Government and Federal Agency Obligations, $82.0 million and $47.3 million of Mortgage-Backed Securities, $41.9 million and $55.7 million of Collateralized Mortgage Obligations, $32.0 million and $34.9 million of State and Political Subdivisions Obligations, and $200,000 and $300,000 of Other Securities at June 30, 2020 and 2019, respectively.

There were no gains or losses recognized from sales of available-for-sale securities in fiscal 2020. Gains of $265,450 and losses of $21,576 were recognized from sales of available-for-sale securities in fiscal 2019.

The Company did not hold any securities of a single issuer, payable from and secured by the same source of revenue or taxing authority, the book value of which exceeded 10% of stockholders’ equity at June 30, 2020.

Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2020, was $10.7 million, which is approximately 6.0% of the Company’s available for sale investment portfolio, as compared to $51.8 million or approximately 31.3% of the Company’s available for sale investment portfolio at June 30, 2019. Except as discussed below, management believes the declines in fair value for these securities to be temporary.

The tables below 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 at June 30, 2020 and 2019.

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

	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
For the year ended June 30, 2019	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
(dollars in thousands)
U.S. government-sponsored enterprises (GSEs)	$	—	$	—	$	6,969	$	15	$	6,969	$	15
Obligations of state and political subdivisions		—		—		8,531		68		8,531		68
Other securities		—		—		985		198		985		198
Mortgage-backed securities		1,175		1		34,148		316		35,323		317
Total investments and mortgage-backed securities	$	1,175	$	1	$	50,633	$	597	$	51,808	$	598

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The unrealized losses on the Company’s investments in mortgage-backed securities were caused by increases in market interest rates. The contractual terms of these instruments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2020.

Other securities. At June 30, 2020, there were 2 pooled trust preferred securities with an estimated fair value of $643,000 and unrealized losses of $333,000 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 June 30, 2020, 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 1.6 percent, annually, annual defaults averaging 50 basis points, and a recovery rate averaging 10 percent of gross defaults, lagged two years.

One of these two securities has continued to receive cash interest payments in full since initial 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. Our cash flow analysis indicates that cash interest payments are expected to continue for the securities. Because the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2020.

The Company does not believe any other individual unrealized loss as of June 30, 2020, represents OTTI. However, the Company could be required to recognize OTTI losses in future periods with respect to its available for sale investment securities portfolio. The amount and timing of any required OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in the period the OTTI is identified.

Credit losses recognized on investments. During fiscal 2009, the Company adopted ASC 820, formerly FASB Staff Position 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” There were no trust preferred securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income (loss) for the years ended June 30, 2020 and 2019.

NOTE 3: Loans and Allowance for Loan Losses

Classes of loans are summarized as follows:

(dollars in thousands)	June 30, 2020		June 30, 2019
Real Estate Loans:
Residential	$	627,357	$	491,992
Construction		185,924		123,287
Commercial		887,419		840,777
Consumer loans		80,767		97,534
Commercial loans		468,448		355,874
		2,249,915		1,909,464
Loans in process		(78,452)		(43,153)
Deferred loan fees, net		(4,395)		(3)
Allowance for loan losses		(25,139)		(19,903)
Total loans	$	2,141,929	$	1,846,405

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 June 30, 2020, the Bank had purchased participations in 23 loans totaling $58.2 million.

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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.

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 Bank 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.

Commercial Real Estate Lending. The Company actively originates loans secured by commercial real estate including farmland, single- and multi-tenant retail properties, restaurants, hotels, land (improved and unimproved), nursing homes and other healthcare-related 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. Approximately $281.4 million of the Company’s $887.4 million in commercial real estate loans are secured by properties located outside our primary lending area.

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 secured by mortgage loans for the construction of owner occupied residential real estate or to finance speculative construction secured by 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.

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 June 30, 2020, construction loans outstanding included 77 loans, totaling $48.8 million, for which a modification had been agreed to. At June 30, 2019, construction loans outstanding included 59 loans, totaling $27.2 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. As these modifications were not executed due to financial difficulty on the part of the borrower, they were not accounted for as TDRs. 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 June 30, 2020, included drawn balances of $4.7 million in construction loans which were modified at the borrower’s request due to the current situation of heightened economic uncertainty triggered by the pandemic.

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

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approximately 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.

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 66 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.

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.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans (excluding loans in process and deferred loan fees) based on portfolio segment and impairment methods as of June 30, 2020 and 2019, and activity in the allowance for loan losses for the fiscal years ended June 30, 2020, 2019, and 2018.

(dollars in thousands)	Residential		Construction		Commercial
June 30, 2020	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		1,529		645		2,730		300		798		6,002
Losses charged off		(379)		—		(12)		(189)		(273)		(853)
Recoveries		19		—		15		25		28		87
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

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(dollars in thousands)	Residential		Construction		Commercial
June 30, 2019	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for loan losses:
Balance, beginning of period	$	3,226	$	1,097	$	8,793	$	902	$	4,196	$	18,214
Provision charged to expense		487		268		765		231		281		2,032
Losses charged off		(30)		—		(164)		(103)		(92)		(389)
Recoveries		23		—		5		16		2		46
Balance, end of period	$	3,706	$	1,365	$	9,399	$	1,046	$	4,387	$	19,903
Ending Balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Ending Balance: collectively evaluated for impairment	$	3,706	$	1,365	$	9,399	$	1,046	$	4,387	$	19,903
Ending Balance: loans acquired with deteriorated credit quality	$	—	$	—	$	—	$	—	$	—	$	—
Loans:
Ending Balance: individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Ending Balance: collectively evaluated for impairment	$	490,307	$	78,826	$	821,415	$	97,534	$	349,681	$	1,837,763
Ending Balance: loans acquired with deteriorated credit quality	$	1,685	$	1,308	$	19,362	$	—	$	6,193	$	28,548

(dollars in thousands)	Residential		Construction		Commercial
June 30, 2018	Real Estate		Real Estate		Real Estate		Consumer		Commercial		Total
Allowance for loan losses:
Balance, beginning of period	$	3,230	$	964	$	7,068	$	757	$	3,519	$	15,538
Provision charged to expense		184		142		1,779		251		691		3,047
Losses charged off		(190)		(9)		(56)		(129)		(22)		(406)
Recoveries		2		—		2		23		8		35
Balance, end of period	$	3,226	$	1,097	$	8,793	$	902	$	4,196	$	18,214

Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to cover probable credit losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when an amount is determined to be uncollectible, based on management’s analysis of expected cash flow (for non-collateral dependent loans) or collateral value (for collateral-dependent loans). Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

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Under the Company’s allowance methodology, loans are 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 are 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. The loans subject to credit classification represent the portion of the portfolio subject to the greatest credit risk and where adjustments to the allowance for losses on loans as a result of provisions and charge offs are most likely to have a significant impact on operations.

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 risk management 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 represents a probable loss or risk that should be recognized.

The Company considers, as the primary quantitative factor in its allowance methodology, average net charge offs over the most recent twelve-month period. The Company also reviews average net charge offs over the most recent five-year period.

A loan is considered impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest will not be able to be collected when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. 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. Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, individual consumer and residential loans are not separately identified for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The general component covers non-classified loans and is based on historical charge-off experience and expected loss given the internal risk rating process. The loan portfolio is stratified into homogeneous groups of loans that possess similar loss characteristics and an appropriate loss ratio adjusted for other qualitative factors is applied to the homogeneous pools of loans to estimate the incurred losses in the loan portfolio.

Included in the Company’s loan portfolio are certain loans accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans were written down at acquisition to an amount estimated to be collectible. As a result, certain 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 current credit quality to prior periods. The ratios particularly affected by accounting under ASC 310-30 include the allowance for loan losses as a percentage of loans, nonaccrual loans, and nonperforming assets, and nonaccrual loans and nonperforming loans as a percentage of total loans.

The following tables present 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 and 2019. These tables include purchased credit impaired loans, which are reported according to risk categorization after acquisition based on the Company’s standards for such classification:

(dollars in thousands)	Residential		Construction		Commercial
June 30, 2020	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

85

(dollars in thousands)	Residential		Construction		Commercial
June 30, 2019	Real Estate		Real Estate		Real Estate		Consumer		Commercial
Pass	$	482,869	$	80,134	$	802,479	$	97,012	$	341,069
Watch		1,236		—		21,693		170		7,802
Special Mention		103		—		3,463		26		—
Substandard		7,784		—		13,142		291		7,003
Doubtful		—		—		—		35		—
Total	$	491,992	$	80,134	$	840,777	$	97,534	$	355,874

The above amounts include purchased credit impaired loans. At June 30, 2020, purchased credit impaired loans comprised $5.9 million of credits rated “Pass”; $10.3 million of credits rated “Watch”, NaN rated “Special Mention”, $5.6 million of credits rated “Substandard” and NaN rated “Doubtful”. At June 30, 2019, purchased credit impaired loans comprised $6.9 million of credits rated “Pass”; $10.4 million of credits rated “Watch”, NaN rated “Special Mention”; $11.2 million of credits rated “Substandard”; and NaN rated “Doubtful”.

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

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

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

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

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

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

The following tables present the Company’s loan portfolio aging analysis (excluding loans in process and deferred loan fees) as of June 30, 2020 and 2019. These tables include purchased credit impaired loans, which are reported according to aging analysis after acquisition based on the Company’s standards for such classification:

					Greater Than									Greater Than 90
(dollars in thousands)	30-59 Days		60-89 Days		90 Days		Total				Total Loans			Days Past Due
June 30, 2020	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		$	—

86

					Greater Than								Greater Than 90
(dollars in thousands)	30-59 Days		60-89 Days		90 Days		Total				Total Loans		Days Past Due
June 30, 2019	Past Due		Past Due		Past Due		Past Due		Current		Receivable		and Accruing
Real Estate Loans:
Residential	$	227	$	1,054	$	1,714	$	2,995	$	488,997	$	491,992	$	—
Construction		—		—		—		—		80,134		80,134		—
Commercial		296		1		5,617		5,914		834,863		840,777		—
Consumer loans		128		46		176		350		97,184		97,534		—
Commercial loans		424		25		1,902		2,351		353,523		355,874		—
Total loans	$	1,075	$	1,126	$	9,409	$	11,610	$	1,854,701	$	1,866,311	$	—

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 June 30, 2020, included $380.1 million in loans reported as current in the above table. 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 as of June 30, 2020.

At June 30, 2020 there were 0 purchased credit impaired loans that were greater than 90 days past due. At June 30, 2019 there was 1 purchased credit impaired loan with net fair value of $3.1 million that was greater than 90 days past due.

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans but also include loans modified in troubled debt restructurings (TDRs) where concessions have been 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 following tables present impaired loans (excluding loans in process and deferred loan fees) as of June 30, 2020 and 2019. These tables include purchased credit impaired loans. Purchased credit impaired loans are those 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 determines it is probable, for a specific loan, that cash flows received will 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, will continue to be reported as impaired loans. In an instance where, subsequent to the acquisition, the Company determines it is probable that, for a specific loan, that cash flows received will be less than the amount previously expected, the Company will allocate a specific allowance under the terms of ASC 310-10-35.

(dollars in thousands)	Recorded		Unpaid Principal		Specific
June 30, 2020	Balance		Balance		Allowance
Loans without a specific valuation allowance:
Residential real estate	$	3,811	$	4,047	$	—
Construction real estate		1,278		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	$	1,278	$	1,312	$	—
Commercial real estate	$	19,271	$	23,676	$	—
Consumer loans	$	—	$	—	$	—
Commercial loans	$	5,040	$	6,065	$	—

87

(dollars in thousands)	Recorded		Unpaid Principal		Specific
June 30, 2019	Balance		Balance		Allowance
Loans without a specific valuation allowance:
Residential real estate	$	5,104	$	5,341	$	0
Construction real estate		1,330		1,419		0
Commercial real estate		26,410		31,717		0
Consumer loans		8		8		0
Commercial loans		6,999		9,187		0
Loans with a specific valuation allowance:
Residential real estate	$	0	$	0	$	0
Construction real estate		0		0		0
Commercial real estate		0		0		0
Consumer loans		0		0		0
Commercial loans		0		0		0
Total:
Residential real estate	$	5,104	$	5,341	$	0
Construction real estate	$	1,330	$	1,419	$	0
Commercial real estate	$	26,410	$	31,717	$	0
Consumer loans	$	8	$	8	$	0
Commercial loans	$	6,999	$	9,187	$	0

The above amounts include purchased credit impaired loans. At June 30, 2020, purchased credit impaired loans comprised $21.8 million of impaired loans without a specific valuation allowance. At June 30, 2019, purchased credit impaired loans comprised $28.5 million of impaired loans without a specific valuation allowance.

88

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

	Fiscal 2020
	Average
	Investment in		Interest Income
(dollars in thousands)	Impaired Loans		Recognized
Residential Real Estate	$	1,440	$	89
Construction Real Estate		1,295		134
Commercial Real Estate		16,175		1,276
Consumer Loans		—		—
Commercial Loans		5,597		419
Total Loans	$	24,507	$	1,918

	Fiscal 2019
	Average
	Investment in		Interest Income
(dollars in thousands)	Impaired Loans		Recognized
Residential Real Estate	$	2,081	$	112
Construction Real Estate		1,297		246
Commercial Real Estate		14,547		1,570
Consumer Loans		—		—
Commercial Loans		4,212		926
Total Loans	$	22,137	$	2,854

	Fiscal 2018
	Average
	Investment in		Interest Income
(dollars in thousands)	Impaired Loans		Recognized
Residential Real Estate	$	3,358	$	219
Construction Real Estate		1,317		165
Commercial Real Estate		9,446		1,163
Consumer Loans		—		—
Commercial Loans		3,152		199
Total Loans	$	17,273	$	1,746

Interest income on impaired loans recognized on a cash basis in the fiscal years ended June 30, 2020, 2019, and 2018 was immaterial.

For the fiscal years ended June 30, 2020, 2019, and 2018, the amount of interest income recorded for impaired loans that represents a change in the present value of future cash flows attributable to the passage of time was approximately $236,000, $1.3 million, and $683,000, respectively.

The following table presents the Company’s nonaccrual loans at June 30, 2020 and 2019. Purchased credit impaired loans are placed on nonaccrual status in the event the Company cannot reasonably estimate cash flows expected to be collected. The table excludes performing TDRs.

	June 30,
(dollars in thousands)	2020		2019
Residential real estate	$	4,010	$	6,404
Construction real estate		—		—
Commercial real estate		3,106		10,876
Consumer loans		196		309
Commercial loans		1,345		3,424
Total loans	$	8,657	$	21,013

The above amounts include purchased credit impaired loans. At June 30, 2020 there were 0 purchased impaired loans on nonaccrual. At June 30, 2019, purchased credit impaired loans comprised $4.1 million of nonaccrual loans.

89

Included in certain loan categories in the impaired loans are TDRs, where economic concessions have been granted to borrowers who have experienced financial difficulties. 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. 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.

When loans and leases are modified into a TDR, the Company evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, and uses the current fair value of the collateral, less selling costs, for collateral dependent loans. If the Company determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the allowance.

At June 30, 2020, and June 30, 2019, the Company had $4.5 million and $6.5 million, respectively, of commercial real estate loans, $791,000 and $1.1 million, respectively, of residential real estate loans, and $3.2 million and $5.6 million, respectively, of commercial loans, respectively, that were modified in TDRs and impaired. All loans classified as TDRs at June 30, 2020 and June 30, 2019, were so classified due to interest rate concessions. During fiscal 2020, there were no loans modified as TDRs. When loans modified as TDRs have subsequent payment defaults, the defaults are factored into the determination of the allowance for loan losses to ensure specific valuation allowances reflect amounts considered uncollectible.

Performing loans classified as TDRs at June 30, 2020 and June 30, 2019 segregated by class, are shown in the table below. Nonperforming TDRs are shown in nonaccrual loans.

	June 30, 2020			June 30, 2019
	Number of	Recorded		Number of	Recorded
(dollars in thousands)	modifications	Investment		modifications	Investment
Residential real estate	3	$	791	10	$	1,130
Construction real estate	—		—	—		—
Commercial real estate	10		4,544	20		6,529
Consumer loans	—		—	—		—
Commercial loans	7		3,245	10		5,630
Total	20	$	8,580	40	$	13,289

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 June 30, 2020 and June 30, 2019, the carrying value of foreclosed residential real estate properties as a result of obtaining physical possession was $563,000 and $752,000, respectively. In addition, as of June 30, 2020 and June 30, 2019, the Company had residential mortgage loans and home equity loans with a carrying value of $435,000 and $493,000, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process.

Following is a summary of loans to executive officers, directors, significant shareholders and their affiliates held by the Company at June 30, 2020 and 2019, respectively:

	June 30,
(dollars in thousands)	2020		2019
Beginning Balance	$	9,132	$	8,995
Additions		5,179		7,238
Repayments		(5,708)		(7,134)
Change in related party		—		33
Ending Balance	$	8,603	$	9,132

NOTE 4: Accounting for Certain Acquired Loans

During the fiscal years ended June 30, 2011, 2015, 2017, and 2019, the Company acquired certain loans which evidenced deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected.

90

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

The carrying amount of those loans is included in the balance sheet amounts of loans receivable at June 30, 2020 and June 30, 2019. The amount of these loans is shown below:

	June 30,
(dollars in thousands)	2020		2019
Residential real estate	$	1,508	$	1,921
Construction real estate		1,312		1,397
Commercial real estate		19,108		24,669
Consumer loans		—		—
Commercial loans		5,571		8,381
Outstanding balance	$	27,499	$	36,368
Carrying amount, net of fair value adjustment of $5,700 and $7,821 at June 30, 2020 and 2019, respectively	$	21,799	$	28,547

Accretable yield, or income expected to be collected, is as follows:

	June 30,
(dollars in thousands)	2020		2019		2018
Balance at beginning of period	$	220	$	589	$	609
Additions		0		102		0
Accretion		(236)		(1,342)		(683)
Reclassification from nonaccretable difference		256		1,075		663
Disposals		0		(204)		0
Balance at end of period	$	240	$	220	$	589

During the fiscal years ended June 30, 2020 and 2019, the Company did not increase or reverse the allowance for loan losses related to these purchased credit impaired loans.

NOTE 5: Premises and Equipment

Following is a summary of premises and equipment:

	June 30,
(dollars in thousands)	2020		2019
Land	$	12,585	$	12,414
Buildings and improvements		56,039		54,304
Construction in progress		435		466
Furniture, fixtures, equipment and software		18,109		16,514
Automobiles		120		107
Operating leases ROU asset		1,965		—
		89,253		83,805
Less accumulated depreciation		24,147		21,078
	$	65,106	$	62,727

91

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 (“ROU”) asset and lease liabilities that arise from short-term leases (leases with terms of twelve months or less). The Company has 5 leased properties and numerous office equipment lease agreements in which it is the lessee, with lease terms exceeding twelve months. Adoption of this ASU resulted in the Company recognizing a ROU asset and corresponding lease liability of $437,000, while entry into a new operating lease agreement in September, 2019, resulted in the recognition of a ROU asset and corresponding lease liability of $1.6 million.

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.

	At or For the
	Twelve Months Ended
	June 30, 2020
Consolidated Balance Sheet
Operating leases right of use asset	$	1,965
Operating leases liability	$	1,965
Consolidated Statement of Income
Operating lease costs classified as occupancy and equipment expense	$	214
(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	$	174
ROU assets obtained in exchange for operating lease obligations:	$	2,004

For the years ended June 30, 2020 and 2019, lease expense was $214,000 and $213,000, respectively. At June 30, 2020, future expected lease payments for leases with terms exceeding one year were as follows:

(dollars in thousands)
2021	$	269
2022		243
2023		243
2024		243
2025		243
Thereafter		2,181
Future lease payments expected	$	3,422

92

NOTE 6: Deposits

Deposits are summarized as follows:

	June 30,
(dollars in thousands)	2020		2019
Non-interest bearing accounts	$	316,048	$	218,889
NOW accounts		781,937		639,219
Money market deposit accounts		231,162		188,355
Savings accounts		181,229		167,973
TOTAL NON-MATURITY DEPOSITS		1,510,376		1,214,436
Certificates
0.00-.99%		72,236		2,447
1.00-1.99%		393,625		221,409
2.00-2.99%		168,985		398,931
3.00-3.99%		39,191		56,310
4.00-4.99%		160		162
5.00-5.99%		0		0
6.00-6.99%		274		0
TOTAL CERTIFICATES		674,471		679,259
TOTAL DEPOSITS	$	2,184,847	$	1,893,695

The aggregate amount of deposits with a minimum denomination of $250,000 was $611.4 million and $519.3 million at June 30, 2020 and 2019, respectively.

Certificate maturities are summarized as follows:

(dollars in thousands)
July 1, 2020 to June 30, 2021	$	499,419
July 1, 2021 to June 30, 2022		99,591
July 1, 2022 to June 30, 2023		26,015
July 1, 2023 to June 30, 2024		7,593
July 1, 2024 to June 30, 2025		41,853
TOTAL	$	674,471

Brokered certificates totaled $23.3 million and $44.9 million at June 30, 2020 and 2019, respectively. Deposits from executive officers, directors, significant shareholders and their affiliates (related parties) held by the Company at June 30, 2020 and 2019 totaled approximately $4.2 million and $3.8 million, respectively.

NOTE 7:  Securities Sold Under Agreements to Repurchase

The Company had 0 securities sold under agreements to repurchase as of June 30, 2020. The carrying value of securities sold under agreement to repurchase at June 30, 2019 amounted to $4.4 million. The securities underlying the agreements at June 30, 2019 consisted of marketable securities, including $5.8 million of Mortgage-Backed Securities. The right of offset for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default. The collateral is held by the Company in a segregated custodial account. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained.

The following table presents balance and interest rate information on the securities sold under agreements to repurchase.

	June 30,
(dollars in thousands)	2020			2019
Year-end balance	$	0		$	4,376
Average balance during the year		82			3,988
Maximum month-end balance during the year		0			4,703
Average interest during the year		0.03	%		0.90	%
Year-end interest rate		0.00	%		0.93	%

93

NOTE 8:  Advances from Federal Home Loan Bank

Advances from Federal Home Loan Bank are summarized as follows:

			June 30,
	Interest		2020			2019
Maturity	Rate		(dollars in thousands)
08/19/19	1.52	%	$	0		$	200
11/22/19	1.91	%		0			1,741
12/30/19	1.92	%		0			249
01/14/20	1.76	%		0			249
03/31/20	1.49	%		0			248
06/10/20	1.26	%		0			247
09/09/20	2.02	%		4,982			4,929
11/23/20	2.13	%		1,741			1,725
01/14/21	1.92	%		249			247
03/31/21	1.68	%		248			246
05/17/21	2.43	%		5,000			5,000
06/10/21	1.42	%		247			244
09/07/21	2.81	%		9,000			9,000
09/09/21	2.28	%		1,977			1,960
10/01/21	2.53	%		5,000			5,000
11/16/21	2.43	%		5,000			5,000
03/07/22	0.95	%		3,000			0
03/31/22	1.91	%		246			244
08/15/22	1.89	%		3,000			0
03/06/23	0.99	%		3,000			0
03/06/24	0.95	%		3,000			0
03/28/24	2.56	%		8,000			8,000
08/13/24	1.88	%		3,000			0
02/21/25	1.28	%		5,000			0
02/21/25	1.53	%		5,000			0
03/06/25	1.01	%		3,000			0
12/14/26	2.65	%		334			379
	TOTAL		$	70,024		$	44,908
Weighted-average rate				2.01	%		2.42	%

Of the advances outstanding at June 30, 2020, two advances totaling $10.0 million are callable by the FHLB prior to maturity. In addition to the above advances, the Bank had additional available credit amounting to $296.6 million and $320.1 million with the FHLB at June 30, 2020 and 2019, respectively.

Advances from FHLB of Des Moines are secured by FHLB stock and commercial real estate and one- to four-family mortgage loans pledged. To secure outstanding advances and the Bank’s line of credit, loans totaling $768.7 million and $754.4 million were pledged to the FHLB at June 30, 2020 and 2019, respectively. The principal maturities of FHLB advances at June 30, 2020, are below:

	June 30, 2020
FHLB Advance Maturities	(dollars in thousands)
July 1, 2020 to June 30, 2021	$	12,467
July 1, 2021 to June 30, 2022		24,223
July 1, 2022 to June 30, 2023		6,000
July 1, 2023 to June 30, 2024		11,000
July 1, 2024 to June 30, 2025		16,000
July 1, 2025 to thereafter		334
TOTAL	$	70,024

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NOTE 9: Note Payable

In June 2017, the Company entered into a revolving, reducing line of credit with a five-year term, initially providing available credit of $15.0 million. Available credit under the line was reduced by $3.0 million on each anniversary date of the line of credit. At June 30, 2020, the balance of the line was fully repaid and the line was terminated. At June 30, 2019, the balance of the line was $3.0 million, with remaining available credit of $6.0 million. The line of credit bore interest at a floating rate based on LIBOR, which was due and payable monthly, and was secured by the stock of the Bank. The proceeds from this line of credit were used, in part, to fund the cash portion of the Tammcorp merger.

NOTE 10: Subordinated Debt

Southern Missouri Statutory Trust I issued $7.0 million of Floating Rate Capital Securities (the “Trust Preferred Securities”) with a liquidation value of $1,000 per share in March 2004. The securities are due in 30 years, redeemable after five years and bear interest at a floating rate based on LIBOR. At June 30, 2020, the current rate was 3.05%. 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 of the Company. 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 June 30, 2020, the current rate was 2.76%. The carrying value of the debt securities was approximately $2.7 million and $2.6 million at June 30, 2020, and June 30, 2019, respectively.

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 June 30, 2020, the current rate was 2.11%. The carrying value of the debt securities was approximately $5.3 million at June 30, 2020, and $5.2 million at June 30, 2019.

NOTE 11: Employee Benefits

401(k) Retirement Plan. The Bank has a 401(k) retirement plan that covers substantially all eligible employees. The Bank makes “safe harbor” matching contributions of up to 4% of eligible compensation, depending upon the percentage of eligible pay deferred into the plan by the employee. Additional profit-sharing contributions of 5% of eligible salary have been accrued for the plan year ended June 30, 2020, which the board of directors authorizes based on management recommendations and financial performance for fiscal 2020. Total 401(k) expense for fiscal 2020, 2019, and 2018 was $1.5 million, $1.3 million, and $1.3 million, respectively. At June 30, 2020, 401(k) plan participants held approximately 389,000 shares of the Company’s stock in the plan. Employee deferrals and safe harbor contributions are fully vested. Profit-sharing or other contributions vest over a period of five years.

2008 Equity Incentive Plan. The Company adopted an Equity Incentive Plan (the EIP) in 2008, reserving for award 132,000 shares (split-adjusted). EIP shares were available for award to directors, officers, and employees of the Company and its affiliates by a committee of outside directors. The committee held the power to set vesting requirements for each award under the EIP. At the 2017 annual meeting, shareholders approved the 2017 Omnibus Incentive Plan, which provided that no further awards would be made under the EIP. From fiscal 2012 through fiscal 2017, the Company awarded 122,803 shares, and 0 awards were made under the plan since fiscal 2017. All EIP awards were in the form of either restricted stock vesting at the rate of 20% of such shares per year, or performance-based restricted stock vesting at up to of 20% of such shares per year, contingent on the achievement of specified profitability targets over a three-year period. During fiscal 2020, 2019, and 2018, there were 2,825, 7,100, and 5,400, EIP shares (split-adjusted) vested each year, respectively. Compensation expense, in the amount of the fair market value of the common stock at the date of grant, is recognized pro-rata over the five years during which the shares vest. The EIP expense for fiscal 2020, 2019, and 2018 was $88,000, $141,000, and $165,000, respectively. At June 30, 2020, unvested compensation expense related to the EIP was approximately $136,000.

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2003 Stock Option Plan. The Company adopted a stock option plan in October 2003 (the 2003 Plan). Under the plan, the Company granted options to purchase 242,000 shares (split-adjusted) to employees and directors, of which, options to purchase 187,000 shares (split-adjusted) have been exercised, options to purchase 45,000 shares (split-adjusted) have been forfeited, and 10,000 remain outstanding. Under the 2003 Plan, exercised options may be issued from either authorized but unissued shares, or treasury shares. At the 2017 annual meeting, shareholders approved the 2017 Omnibus Incentive Plan, which provided that no further awards would be made under the 2003 Plan.

As of June 30, 2020, there was 0 remaining unrecognized compensation expense related to unvested stock options under the 2003 Plan. The aggregate intrinsic value of stock options outstanding, all of which were exercisable, at June 30, 2020, was $68,000. During fiscal 2020, options to purchase 10,000 shares were exercised. The intrinsic value of options vested in fiscal 2020, 2019, and 2018 was $14,000, $35,000, and $43,000, respectively.

2017 Omnibus Incentive Plan. The Company adopted an equity-based incentive plan in October 2017 (the 2017 Plan). Under the 2017 plan, the Company reserved for issuance 500,000 shares of common stock for awards to employees and directors, against which full value awards (stock-based awards other than stock options and stock appreciation rights) are to be counted on a 2.5-for-1 basis. The 2017 Plan authorized awards to be made to employees, officers, and directors by a committee of outside directors. The committee held the power to set vesting requirements for each award under the 2017 Plan. Under the 2017 Plan, stock awards and shares issued pursuant to exercised options may be issued from either authorized but unissued shares, or treasury shares.

Under the 2017 Plan, options to purchase 50,500 shares have been issued to employees, of which NaN have been exercised or forfeited, and 50,500 remain outstanding. As of June 30, 2020, there was $335,000 in remaining unrecognized compensation expense related to unvested stock options under the 2017 Plan, which will be recognized over the remaining weighted average vesting period. All stock options outstanding under the 2017 Plan at June 30, 2020, were at a strike price in excess of the market price. NaN in-the-money options were vested in fiscal 2020 or 2019, and 0 options vested during fiscal 2018.

Full value awards totaling 15,525, 15,000 and 22,000 shares, respectively, were issued to employees and directors in fiscal 2020, 2019, and 2018. All full value awards were in the form of either restricted stock vesting at the rate of 20% of such shares per year, or performance-based restricted stock vesting at up to 20% of such shares per year, contingent on the achievement of specified profitability targets over a three-year period. During fiscal 2020 and 2019, full value awards of 7,080 and 4,200 shares were vested, respectively, while 0 full value awards vested in fiscal 2018. Compensation expense, in the amount of the fair market value of the common stock at the date of grant, is recognized pro-rata over the five years during which the shares vest. Compensation expense for full value awards under the 2017 Plan for fiscal 2020, 2019, and 2018 was $293,000, $189,000, and $60,000, respectively. At June 30, 2020, unvested compensation expense related to full value awards under the 2017 Plan was approximately $1.3 million.

Changes in options outstanding under the 2003 Plan and the 2017 Plan were as follows:

	2020			2019			2018
	Weighted			Weighted			Weighted
	Average			Average			Average
	Price		Number	Price		Number	Price		Number
Outstanding at beginning of year	$	26.35	51,000	$	22.18	33,500	$	9.35	44,000
Granted		37.40	19,500		34.35	17,500		37.31	13,500
Exercised		6.38	(10,000)		—	—		7.18	(24,000)
Forfeited		—	—		—	—		—	—
Outstanding at year-end	$	33.22	60,500	$	26.35	51,000	$	22.18	33,500
Options exercisable at year-end	$	26.31	18,900	$	14.73	20,700	$	10.57	16,000

The following is a summary of the assumptions used in the Black-Scholes pricing model in determining the fair values of options granted during fiscal years 2020, 2019, and 2018:

	2020			2019			2018
Assumptions:
Expected dividend yield		1.60	%		1.51	%		1.18	%
Expected volatility		22.55	%		20.39	%		20.42	%
Risk-free interest rate		1.55	%		2.67	%		2.54	%
Weighted-average expected life (years)		10.00			10.00			10.00
Weighted-average fair value of options granted during the year	$	8.81		$	8.78		$	10.14

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The table below summarizes information about stock options outstanding under the 2003 Plan and 2017 Plan at June 30, 2020:

Weighted	Options Outstanding			Options Exercisable
Average		Weighted			Weighted
Remaining		Average			Average
Contractual	Number	Exercise		Number	Exercise
Life	Outstanding	Price		Exercisable	Price
50.2 mo.	10,000	$	17.55	10,000	$	17.55
90.6 mo.	13,500		37.31	5,400		37.31
102.2 mo.	17,500		34.35	3,500		34.35
115.7 mo.	19,500		37.40	—		37.40

NOTE 12: Income Taxes

The Company and its subsidiary files income tax returns in the U.S. Federal jurisdiction and various states. The Company is no longer subject to U.S. federal and state tax examinations by tax authorities for tax years ending June 30, 2016 and before. The Company recognized 0 interest or penalties related to income taxes.

The components of net deferred tax assets are summarized as follows:

(dollars in thousands)	June 30, 2020		June 30, 2019
Deferred tax assets:
Provision for losses on loans	$	5,802	$	4,601
Accrued compensation and benefits		825		692
NOL carry forwards acquired		149		199
Minimum Tax Credit		130		130
Unrealized loss on other real estate		257		134
Purchase accounting adjustments		—		255
Losses and credits from LLC's		—		1,206
Other		26		—
Total deferred tax assets		7,189		7,218
Deferred tax liabilities:
Purchase accounting adjustments		64		—
Depreciation		1,665		1,749
FHLB stock dividends		120		120
Prepaid expenses		259		313
Unrealized gain on available for sale securities		1,265		364
Other		104		61
Total deferred tax liabilities		3,477		2,607
Net deferred tax asset	$	3,712	$	4,611

As of June 30, 2020, the Company had approximately $675,000 and $119,000 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., the August 2014 acquisition of Peoples Service Company, and the June 2017 acquisition of Tammcorp, Inc. 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 year ended June 30
(dollars in thousands)	2020		2019		2018
Tax at statutory rate	$	7,231	$	7,550	$	8,074
Increase (reduction) in taxes resulting from:
Nontaxable municipal income		(444)		(400)		(441)
State tax, net of Federal benefit		299		487		553
Cash surrender value of Bank-owned life insurance		(214)		(279)		(266)
Tax credit benefits		(48)		(270)		(871)
Adjustment of deferred tax asset for enacted changes in tax laws		—		—		1,124
Other, net		63		(41)		(370)
Actual provision	$	6,887	$	7,047	$	7,803

For the years ended June 30, 2020 and 2019, income tax expense at the statutory rate was calculated using a 21% annual effective tax rate (AETR), compared to 28.1% for the year ended June 30, 2018, as a result of the Tax Cuts and Jobs Act ("Tax Act") signed into law December 22, 2017. The Tax Act ultimately reduced the corporate Federal income tax rate for the Company from 35% to 21%, and for the fiscal year ending June 30, 2018, the Company was administratively subject to a 28.1% AETR. U. S. GAAP requires that the impact of the provisions of the Tax Act be accounted for in the period of enactment and the income tax effects of the Tax Act were recognized in the Company’s financial statements for the quarter ended December 31, 2017, and for the twelve months ended June 30, 2018. The Tax Act is complex and requires significant detailed analysis. During the preparation of the Company’s income tax returns for June 30, 2018 and 2019, no significant adjustments related to enactment of the Tax Act were identified.

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

NOTE 13: Accumulated Other Comprehensive Income (AOCI)

The components of AOCI, included in stockholders’ equity, are as follows:

	June 30,
(dollars in thousands)	2020		2019
Net unrealized gain on securities available-for-sale	$	5,744	$	1,655
Net unrealized gain on securities available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income		(1)		(1)
Unrealized gain from defined benefit pension plan		(32)		(39)
		5,711		1,615
Tax effect		(1,264)		(368)
Net of tax amount	$	4,447	$	1,247

Amounts reclassified from AOCI and the affected line items in the statements of income during the years ended June 30, 2020 and 2019, were as follows:

	Amounts Reclassified From AOCI
(dollars in thousands)					Affected Line Item in the Condensed
	2020		2019		Consolidated Statements of Income
Unrealized gain on securities available-for-sale	$	—	$	244	Net realized gains on sale of AFS securities
Amortization of defined benefit pension items:		6		(10)	Compensation and benefits (included in computation of net periodic pension costs)
Total reclassified amount before tax		6		234
Tax benefit		1		49	Provision for Income Tax
Total reclassification out of AOCI	$	5	$	185	Net Income

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NOTE 14: Stockholders’ Equity and 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 and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Furthermore, the Company and Bank’s regulators could require adjustments to regulatory capital not reflected in the 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). Management believes, as of June 30, 2020 and 2019, that the Company and the Bank met all capital adequacy requirements to which they are subject.

In July 2013, the Federal banking agencies announced their approval of the final rule to implement the Basel III regulatory reforms, among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The approved rule included a new minimum ratio of common equity Tier 1 (CET1) capital of 4.5%, raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, and included a minimum leverage ratio of 4.0% for all banking institutions. Additionally, the rule created a capital conservation buffer of 2.5% of risk-weighted assets, and prohibited banking organizations from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative, if the capital conservation buffer is not maintained. This new capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and increasing each year until being fully implemented in January 2019. The enhanced capital requirements for banking organizations such as the Company and the Bank began January 1, 2015. Other changes included revised risk-weighting of some assets, stricter limitations on mortgage servicing assets and deferred tax assets, and replacement of the ratings-based approach to risk weight securities.

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, effective immediately, to provide temporary relief to community banking organizations. Under the interim final rules, the CBLR requirement is a minimum of 8% for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% 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.

As of June 30, 2020, 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 and Bank’s actual and required regulatory capital:

									To Be Well Capitalized Under
									Prompt Corrective Action
	Actual				For Capital Adequacy Purposes				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	%

									To Be Well Capitalized Under
									Prompt Corrective Action
	Actual				For Capital Adequacy Purposes				Provisions
As of June 30, 2019	Amount		Ratio		Amount		Ratio		Amount	Ratio
(dollars in thousands)
Total Capital (to Risk-Weighted Assets)
Consolidated	$	256,982	13.22	%	$	155,536	8.00	%	n/a	n/a
Southern Bank		247,199	12.81	%		154,364	8.00	%	192,954	10.00	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated		235,768	12.13	%		116,652	6.00	%	n/a	n/a
Southern Bank		225,985	11.71	%		115,773	6.00	%	154,364	8.00	%
Tier I Capital (to Average Assets)
Consolidated		235,768	10.81	%		87,231	4.00	%	n/a	n/a
Southern Bank		225,985	10.38	%		87,077	4.00	%	108,846	5.00	%
Common Equity Tier I Capital (to Risk-Weighted Assets)
Consolidated		220,725	11.35	%		87,489	4.50	%	n/a	n/a
Southern Bank		225,985	11.71	%		86,829	4.50	%	125,420	6.50	%

The Bank’s ability to pay dividends on its common stock to the Company is restricted to maintain adequate capital as shown in the above tables. Additionally, prior regulatory approval is required for the declaration of any dividends generally in excess of the sum of net income for that calendar year and retained net income for the preceding two calendar years. At June 30, 2020, approximately $11.2 million of the equity of the Bank was available for distribution as dividends to the Company without prior regulatory approval.

NOTE 15: Commitments and Credit Risk

Standby Letters of Credit. In the normal course of business, the Company issues various financial standby, performance standby, and commercial letters of credit for its customers. As consideration for the letters of credit, the institution charges letter of credit fees based on the face amount of the letters and the creditworthiness of the counterparties. These letters of credit are stand­alone agreements, and are unrelated to any obligation the depositor has to the Company.

Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.

100

The Company had total outstanding standby letters of credit amounting to $3.2 million at June 30, 2020, and $2.6 million at June 30, 2019, with terms ranging from 12 to 24 months. At June 30, 2020, the Company’s deferred revenue under standby letters of credit agreements was nominal.

Off-balance-sheet and Credit Risk. The Company’s Consolidated Financial Statements do not reflect various financial instruments to extend credit to meet the financing needs of its customers.

These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on balance sheet instruments.

The Company had $416.2 million in commitments to extend credit at June 30, 2020, and $317.4 million at June 30, 2019.

At June 30, 2020, total commitments to originate fixed-rate loans with terms in excess of one year were $94.3 million at rates ranging from 2.38% to 5.75%, with a weighted-average rate of 4.62%. Commitments to extend credit and standby letters of credit include exposure to some credit loss in the event of nonperformance of the customer. The Company’s policies for credit commitments and financial guarantees are the same as those for extension of credit that are recorded in the balance sheet. The commitments extend over varying periods of time with the majority being disbursed within a thirty-day period.

The Company originates collateralized commercial, real estate, and consumer loans to customers in Missouri, Arkansas, and Illinois. Although the Company has a diversified portfolio, loans aggregating $663.0 million at June 30, 2020, are secured by single and multi-family residential real estate generally located in the Company’s primary lending area.

NOTE 16: Earnings Per Share

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

	Year Ended June 30,
(dollars in thousands except per share data)	2020		2019		2018
Net income	$	27,545	$	28,904	$	20,929
Denominator for basic earnings per share -
Weighted-average shares outstanding		9,189,876		9,193,235		8,734,334
Effect of dilutive securities stock options or awards		9,293		10,674		11,188
Denominator for diluted earnings per share		9,199,169		9,203,909		8,745,522
Basic earnings per share available to common stockholders	$	3.00	$	3.14	$	2.40
Diluted earnings per share available to common stockholders	$	2.99	$	3.14	$	2.39

Options outstanding at June 30, 2020, 2019, and 2018, to purchase 50,500, 31,000, and 13,500 shares of common stock, respectively, were not included in the computation of diluted earnings per common share for each year periods because the exercise prices of such options were greater than the average market prices of the common stock for the respective fiscal year.

NOTE 17: Acquisitions

On May 22, 2020 the Company completed its acquisition of Central Federal Bancshares, Inc. (“Central”), and its wholly owned subsidiary, Central Federal Savings and Loan Association (“Central Federal”), in an all-cash transaction valued at approximately $21.9 million. Net cash paid for the acquisition totaled approximately $9.1 million. The conversion of data systems took place on June 7, 2020. Through June 30, 2020, the Company incurred $1.2 million of third-party acquisition-related costs with $1.2 million being included in noninterest expense in the Company’s consolidated statement of income for the year ended June 30, 2020.

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

Central Federal Bancshares
Fair Value of Consideration Transferred
(dollars in thousands)
Cash	$	21,942
Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	$	12,862
Investment securities		4,355
Loans		51,449
Premises and equipment		723
Identifiable intangible assets		540
Miscellaneous other assets		639
Deposits		(46,720)
Miscellaneous other liabilities		(1,783)
Total identifiable net assets		22,065
Bargain Purchase Gain	$	(123)

Of the total purchase price of $21.9 million, $540,000 has been allocated to core deposit intangible. NaN of the purchase price was allocated to goodwill, as the acquisition resulted in a bargain purchase gain of $123,000. The core deposit intangible will be amortized over six years on a straight line basis.

The Company acquired the $52.1 million loan portfolio at an estimated fair value discount of $662,000. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-30. Management identified no purchased credit-impaired loans associated with the Central acquisition (ASC 310-30).

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On November 21, 2018, the Company completed its acquisition of Gideon Bancshares Company (“Gideon”), and its wholly owned subsidiary, First Commercial Bank (“First Commercial”), in a stock and cash transaction. Upon completion of the Merger, each share of Gideon common stock was converted into the right to receive $72.48 in cash, as well as 2.04 shares of Southern Missouri common stock, with cash payable in lieu of fractional Southern Missouri shares (the “Merger Consideration”). The Company issued an aggregate of 317,225 shares of common stock for the stock portion of the Merger Consideration and paid an aggregate of approximately $11.3 million for the cash portion of the Merger Consideration. The conversion of data systems took place on December 8, 2018. The Company acquired First Commercial primarily for the purpose of conducting commercial banking activities in markets where it believes the Company’s business model will perform well, and for the long-term value of its core deposit franchise. Through June 30, 2020, the Company incurred $871,000 of third-party acquisition-related costs with $14,000 being included in noninterest expense in the Company’s consolidated statement of income for the year ended June 30, 2020, $783,000 for the year ended June 30, 2019, and $75,000 for the year ended June 30, 2018.

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

Gideon Bancshares Company
Fair Value of Consideration Transferred
(dollars in thousands)
Cash	$	11,271
Common stock, at fair value		10,757
Total consideration	$	22,028
Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	$	2,894
Investment securities		54,866
Loans		144,286
Premises and equipment		3,663
Identifiable intangible assets		4,125
Miscellaneous other assets		5,926
Deposits		(170,687)
FHLB Advances		(18,701)
Note Payable		(4,400)
Miscellaneous other liabilities		(956)
Total identifiable net assets		21,016
Goodwill	$	1,012

Of the total purchase price of $22.0 million, $4.1 million has been allocated to core deposit intangible. Additionally, $1.0 million has been allocated to goodwill and none of the purchase price is deductible. Goodwill is attributable to synergies and economies of scale expected from combining the operations of the Bank and First Commercial. Total goodwill was assigned to the acquisition of First Commercial. The core deposit intangible will be amortized over seven years on a straight line basis.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and non-accrual status, our assessment of the ability of the borrower to service the debt, and recent loan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to $25.5 million of purchased credit impaired loans was not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using individual analysis of each purchased credit impaired loan.

The Company acquired the $154.0 million loan portfolio at an estimated fair value discount of $9.7 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-30.

103

The acquired business contributed revenues of $4.1 million and earnings of $565,000 for the period from November 21, 2018 through June 30, 2019. The following unaudited pro forma summaries present consolidated information of the Company as if the business combination had occurred on the first day of each period:

	Pro Forma
	Twelve months ended
	June 30,
	2019		2018
Revenue	$	90,954	$	84,981
Earnings		29,583		22,791

NOTE 18: 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 and significant to the fair value of the assets or liabilities

Recurring Measurements. The following table presents the fair value measurements of assets 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 June 30, 2020 and 2019:

	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		—

	Fair Value Measurements at June 30, 2019, 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)
U.S. government sponsored enterprises (GSEs)	$	7,270	$	—	$	7,270	$	—
State and political subdivisions		42,783		—		42,783		—
Other securities		5,053		—		5,053		—
Mortgage-backed GSE residential		110,429		—		110,429		—

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. There have been no significant changes in the valuation techniques during the year ended June 30, 2020.

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, our 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.

104

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 June 30, 2020 and 2019:

	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

	Fair Value Measurements at June 30, 2019, 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	$	2,430	$	—	$	—	$	2,430

The following table presents losses recognized on assets measured on a non-recurring basis for the years ended June 30, 2020 and 2019:

(dollars in thousands)	2020		2019
Foreclosed and repossessed assets held for sale	$	(1,009)	$	(353)
Total losses on assets measured on a non-recurring basis	$	(1,009)	$	(353)

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 pursuant to the valuation hierarch. For assets classified within Level 3 of fair value hierarchy, the process used to develop the reported fair value process is described below.

Impaired Loans (Collateral Dependent). A collateral dependent loan is considered to be impaired when it is probable that all of the principal and interest due may not be collected according to its contractual terms. Generally, when a collateral dependent loan is considered impaired, the amount of reserve required is measured based on the fair value of the underlying collateral. The Company makes such measurements on all material collateral dependent loans deemed impaired using the fair value of the collateral for collateral dependent loans. The fair value of collateral used by the Company is determined by obtaining an observable market price or by obtaining an appraised value from an independent, licensed or certified appraiser, using observable market data. This data includes information such as selling price of similar properties and capitalization rates of similar properties sold within the market, expected future cash flows or earnings of the subject property based on current market expectations, and other relevant factors. In addition, management applies selling and other discounts to the underlying collateral value to determine the fair value. If an appraised value is not available, the fair value of the collateral dependent impaired loan is determined by an adjusted appraised value including unobservable cash flows.

On a quarterly basis, loans classified as special mention, substandard, doubtful, or loss are evaluated including the loan officer’s review of the collateral and its current condition, the Company’s knowledge of the current economic environment in the market where the collateral is located, and the Company’s recent experience with real estate in the area. The date of the appraisal is also considered in conjunction with the economic environment and any decline in the real estate market since the appraisal was obtained. For all loan types, updated appraisals are obtained if considered necessary. In instances where the economic environment has worsened and/or the real estate market declined since the last appraisal, a higher distressed sale discount would be applied to the appraised value.

The Company records collateral dependent impaired loans based on nonrecurring Level 3 inputs. If a collateral dependent loan’s fair value, as estimated by the Company, is less than its carrying value, the Company either records a charge-off of the portion of the loan that exceeds the fair value or establishes a specific reserve as part of the allowance for loan losses.

105

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

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

	Fair value at		Valuation	Unobservable	Range of		Weighted-average
(dollars in thousands)	June 30, 2020		technique	inputs	inputs applied		inputs applied
Nonrecurring Measurements
Foreclosed and repossessed assets	$	2,211	Third party appraisal	Marketability discount	8.0% - 56.9	%	15.7	%

	Fair value at		Valuation	Unobservable	Range of		Weighted-average
(dollars in thousands)	June 30, 2019		technique	inputs	inputs applied		inputs applied
Nonrecurring Measurements
Foreclosed and repossessed assets	$	2,430	Third party appraisal	Marketability discount	5.1% - 77.0	%	35.2	%

Fair Value of Financial Instruments. The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fell at June 30, 2020 and 2019:

	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		—		—		—		—

106

	June 30, 2019
			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	$	35,400	$	35,400	$	—	$	—
Interest-bearing time deposits		969		—		969		—
Stock in FHLB		5,233		—		5,233		—
Stock in Federal Reserve Bank of St. Louis		4,350		—		4,350		—
Loans receivable, net		1,846,405		—		—		1,823,040
Accrued interest receivable		10,189		—		10,189		—
Financial liabilities
Deposits		1,893,695		1,214,606		—		678,301
Securities sold under agreements to repurchase		4,376		—		4,376		—
Advances from FHLB		44,908		—		45,547		—
Note payable		3,000		—		—		3,000
Accrued interest payable		2,099		—		2,099		—
Subordinated debt		15,043		—		—		15,267
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—

NOTE 19: Significant Estimates

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are described in Note 1.

NOTE 20: Condensed Parent Company Only Financial Statements

The following condensed balance sheets, statements of income and comprehensive income and cash flows for Southern Missouri Bancorp, Inc. should be read in conjunction with the consolidated financial statements and the notes thereto:

		June 30,
Condensed Balance Sheets	(dollars in thousands)	2020		2019
Assets
Cash and cash equivalents		$	4,576	$	8,149
Other assets			13,823		13,438
Investment in common stock of Bank			255,601		234,716
	TOTAL ASSETS	$	274,000	$	256,303
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities		$	511	$	2,868
Subordinated debt			15,142		15,043
	TOTAL LIABILITIES		15,653		17,911
Stockholders' equity			258,347		238,392
	TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	274,000	$	256,303

107

		Year ended June 30,
Condensed Statements of Income	(dollars in thousands)	2020		2019		2018
Interest income		$	27	$	25	$	20
Interest expense			899		1,079		887
Net interest expense			(872)		(1,054)		(867)
Dividends from Bank			34,000		23,000		6,000
Bargain purchase gain			123		—		—
Operating expenses			1,529		827		940
Income before income taxes and equity in undistributed income of the Bank			31,722		21,119		4,193
Income tax benefit			292		358		437
Income before equity in undistributed income of the Bank			32,014		21,477		4,630
Equity in undistributed income of the Bank			(4,469)		7,427		16,299
	NET INCOME	$	27,545	$	28,904	$	20,929
	COMPREHENSIVE INCOME	$	30,745	$	32,496	$	18,057

		Year ended June 30,
Condensed Statements of Cash Flow	(dollars in thousands)	2020		2019		2018
Cash Flows from operating activities:
Net income		$	27,545	$	28,904	$	20,929
Changes in:
Equity in undistributed income of the Bank			4,469		(7,427)		(16,299)
Other adjustments, net			(904)		(635)		40
	NET CASH PROVIDED BY OPERATING ACTIVITES		31,110		20,842		4,670
Investments in Bank subsidiaries			(20,463)		(10,747)		(3,488)
	NET CASH USED IN INVESTING ACTIVITIES		(20,463)		(10,747)		(3,488)
Cash flows from financing activities:
Dividends on common stock			(5,513)		(4,763)		(3,827)
Exercise of stock options			64		—		172
Payments to acquire treasury stock			(5,771)		(1,166)		—
Repayments of long term debt			(3,000)		(4,400)		—
	NET CASH USED IN FINANCING ACTIVITIES		(14,220)		(10,329)		(3,655)
Net decrease in cash and cash equivalents			(3,573)		(234)		(2,473)
Cash and cash equivalents at beginning of year			8,149		8,383		10,856
	CASH AND CASH EQUIVALENTS AT END OF YEAR	$	4,576	$	8,149	$	8,383

108

NOTE 21: Quarterly Financial Data (Unaudited)

Quarterly operating data is summarized as follows (in thousands):

	June 30, 2020
	First		Second		Third		Fourth
(dollars in thousands)	Quarter		Quarter		Quarter		Quarter
Interest income	$	26,922	$	26,646	$	26,220	$	27,264
Interest expense		7,362		7,269		6,802		5,483
Net interest income		19,560		19,377		19,418		21,781
Provision for loan losses		896		388		2,850		1,868
Noninterest income		3,489		3,674		3,229		4,358
Noninterest expense		12,349		13,025		13,569		15,509
Income before income taxes		9,804		9,638		6,228		8,762
Income tax expense		1,976		1,921		1,129		1,861
NET INCOME	$	7,828	$	7,717	$	5,099	$	6,901

	June 30, 2019
(dollars in thousands)	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Interest income	$	22,042	$	24,207	$	25,186	$	26,047
Interest expense		4,875		6,139		6,632		7,054
Net interest income		17,167		18,068		18,554		18,993
Provision for loan losses		682		314		491		545
Noninterest income		2,944		3,568		3,423		3,158
Noninterest expense		10,963		12,066		12,667		12,196
Income before income taxes		8,466		9,256		8,819		9,410
Income tax expense		1,666		1,802		1,725		1,854
NET INCOME	$	6,800	$	7,454	$	7,094	$	7,556

	June 30, 2018
(dollars in thousands)	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Interest income	$	18,411	$	19,231	$	19,385	$	20,147
Interest expense		3,308		3,528		3,710		4,245
Net interest income		15,103		15,703		15,675		15,902
Provision for loan losses		868		642		550		987
Noninterest income		2,918		2,811		3,506		3,134
Noninterest expense		10,402		10,156		11,563		10,852
Income before income taxes		6,751		7,716		7,068		7,197
Income tax expense		1,889		2,546		1,810		1,558
NET INCOME	$	4,862	$	5,170	$	5,258	$	5,639

109

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of June 30, 2020, was carried out under the supervision and with the participation of our Chief Executive Officer, our Chief Financial Officer, and several other members of our senior management. Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2020, in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief 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. We intend to continually review and evaluate the design and effectiveness of the Company’s disclosure controls and procedures and to improve the Company’s controls and procedures over time and to correct any deficiencies that we may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company’s business. While we believe the present design of the disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. 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 year ended June 30, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error 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 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.

Management’s Report on Internal Control Over Financial Reporting

The management of Southern Missouri Bancorp, Inc., is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

110

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2020. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on our assessment, we believe that, as of June 30, 2020, the Company’s internal control over financial reporting was effective based on those criteria.

Date: September 14, 2020	By:	/s/ Greg A. Steffens
		Greg A. Steffens
		President and Chief Executive Officer
		(Principal Executive Officer)
		/s/ Matthew T. Funke
		Matthew T. Funke
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

111

Report of Independent Registered Public Accounting Firm

Stockholders, Board of Directors

and Audit Committee

Southern Missouri Bancorp, Inc.

Poplar Bluff, Missouri

Opinion on the Internal Control over Financial Reporting

We have audited Southern Missouri Bancorp, Inc.’s (the “Company”) internal control over financial reporting as of June 30, 2020 based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2020 based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company and our report dated September 14, 2020 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definitions and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

/s/ BKD, LLP

Decatur, Illinois

September 14, 2020

112

Changes in Internal Controls

There were no changes in our internal control over financial reporting (as defined in SEC Rule 13a-15(f) under the Exchange Act) that occurred during the June 30, 2020, fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.   Other Information

None.

PART III

Item 10.  Directors, Executive Officers, and Corporate Governance

Directors

Information concerning the directors of the Company required by this item is incorporated herein by reference from the definitive proxy statement for the annual meeting of shareholder to be held in October 2020, a copy of which will be filed not later than 120 days after the close of the fiscal year.

Executive Officers

Information concerning the executive officers of the Company required by this item is contained in Part I of this Annual Report on Form 10-K under the heading “Information about our Executive Officers,” and is incorporated herein by reference.

Audit Committee Matters and Audit Committee Financial Expert

The Board of Directors of the Company has a standing Audit/Compliance Committee, which has been established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of that committee are Directors Love (Chairman), Bagby, Black, Schalk, Brooks, Hensley, Robison, and Tooley, all of whom are considered independent under applicable Nasdaq listing standards. The Board of Directors has determined that Mr. Love is an "audit committee financial expert" as defined in applicable SEC rules. Additional information concerning the audit committee of the Company’s Board of Directors is incorporated herein by reference from the Company’s definitive proxy statement for its Annual Meeting of Stockholders to be held in October 2020, except for information contained under the heading "Report of the Audit Committee of the Board of Directors", a copy of which will be filed not later than 120 days after the close of the fiscal year.

Code of Ethics

The Company has adopted a written Code of Conduct and Ethics (the "Code") based upon the standards set forth under Item 406 of the Securities Exchange Act. The Code applies to all of the Company’s directors, officers and employees. The Code may be reviewed at the Company’s website, www.bankwithsouthern.com , by following the "investor relations" and "corporate governance" links.

Nomination Procedures

There have been no material changes to the procedures by which stockholders may recommend nominees to the Company’s Board of Directors since last disclosed to shareholders.

Item 11.    Executive Compensation

The information required by this item is incorporated herein by reference from the definitive proxy statement for the annual meeting of shareholders to be held in October 2020, a copy of which will be filed not later than 120 days after the close of the fiscal year.

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Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information concerning security ownership of certain beneficial owners and management required by this item is incorporated herein by reference from the definitive proxy statement for the annual meeting of shareholders to be held in October 2020, a copy of which will be filed not later than 120 days after the close of the fiscal year.

Management is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.

The following table sets forth information as of June 30, 2020, with respect to compensation plans under which shares of common stock may be issued.

Equity Compensation Plan Information

	Number of securities to	Weighted-average		Number of Securities
	be issued upon exercise	exercise price of		remaining available for
	of outstanding options	outstanding options		future issuance under
Plan Category	warrants and rights	warrants and rights		equity compensation plans
Equity Compensation Plans Approved By Security Holders	60,500	$	33.22	324,437	(1)​

(1) Under the terms of the 2017 Omnibus Incentive Plan, the total number of shares available for awards under that plan is 500,000, against which limit, full value shares are to be counted on a 2.5-for-1 basis. The 324,437 shares remaining available for future awards under the plan, as of June 30, 2012, reflects the 500,000 shares originally available under the shares authorization, less awards of 50,500 option shares and 53,025 full value shares (counted on a 2.5-for-1 basis, or 132,563), plus forfeitures of 3,000 full value shares (counted on a 2.5-for-1 basis, or 7,500 shares).

Item 13.    Certain Relationships, Related Transactions, and Director Independence

Information concerning certain relationships and related transactions required by this item is incorporated herein by reference from the definitive proxy statement for the annual meeting of shareholders to be held in October 2020, a copy of which will be filed not later than 120 days after the close of the fiscal year.

Item 14.    Principal Accountant Fees and Services

Information concerning fees and services by our principal accountants required by this item is incorporated herein by reference from our definitive Proxy Statement for the 2020 Annual Meeting of Stockholders, a copy of which will be filed not later than 120 days after the close of the fiscal year.

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PART IV

Item 15.​ ​Exhibits and Financial Statement Schedules

(a)(1)Financial Statements:

The following are contained in Part II, Item 8 of this Form 10-K:

(a)(2)Financial Statement Schedules:

All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable.

(a)(3)Exhibits:

Regulation S-K
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.	1994 Stock Option and Incentive Plan (attached to the Registrant’s definitive proxy statement filed on October 21, 1994 and incorporated herein by reference)
	5.	Management Recognition and Development Plan (attached to the Registrant’s definitive proxy statement filed on October 21, 1994 and incorporated herein by reference)
	6.	Employment Agreements
		(i)	Employment Agreement with Greg A. Steffens (filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the year ended June 30, 1999)
		(ii)	Amended and Restated Employment Agreement with Greg A. Steffens (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, and incorporated herein by reference)
	7.	Director’s Retirement Agreements
		(i)	Director’s Retirement Agreement with Sammy A. Schalk (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 2000 and incorporated herein by reference)
		(ii)	Director’s Retirement Agreement with 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)

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		(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)
		(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, 2014 and incorporated herein by reference)
	8.	Tax Sharing Agreement (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 and incorporated herein by reference)
	9.	Change-in-Control Agreements
		(i)	Change-in -Control Agreement with Kimberly Capps (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(ii)	Change-in -Control Agreement with Matthew Funke (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(iii)	Change-in -Control Agreement with Lora Daves (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(iv)	Change-in -Control Agreement with Justin Cox (filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference)
		(v)	Change-in -Control Agreement with Mark 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)
		(vi)	Change-in -Control Agreement with Rick 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)
10.2	Director Fee Arrangements for 2019
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)
21	Subsidiaries of the Registrant
23	Consent of Auditors
31.1	Rule 13a-14(a)/15-d14(a) Certifications
31.2	Rule 13a-14(a)/15-d14(a) Certifications
32	Section 1350 Certifications

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Item 16.​ ​Form 10-K Summary

None.

SIGNATURES

Pursuant to the requirements of section 13 or 15(d) 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.
Date:	September 14, 2020	By:	/s/ Greg A. Steffens
			Greg A. Steffens
			President and Chief Executive Officer
			(Duly Authorized Representative)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:	/s/ Greg A. Steffens	September 14, 2020
	Greg A. Steffens
	President and Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ L. Douglas Bagby	September 14, 2020
	L. Douglas Bagby
	Chairman and Director
By:	/s/ Ronnie D. Black	September 14, 2020
	Ronnie D. Black
	Secretary and Director
By:	/s/ Sammy A. Schalk	September 14, 2020
	Sammy A. Schalk
	Vice Chairman and Director
By:	/s/ Rebecca McLane Brooks	September 14, 2020
	Rebecca McLane Brooks
	Director
By:	/s/ Charles R. Love	September 14, 2020
	Charles R. Love
	Director
By:	/s/ Dennis C. Robison	September 14, 2020
	Dennis C. Robison
	Director
By:	/s/ David J. Tooley	September 14, 2020
	David J. Tooley
	Director
By:	/s/ Todd E. Hensley	September 14, 2020
	Todd E. Hensley
	Director
By:	/s/ Matthew T. Funke	September 14, 2020
	Matthew T. Funke
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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Index to Exhibits

Regulation S-K
Exhibit Number	Document
4	Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
10.1	Named Executive Officer Salary and Bonus Agreement for fiscal 2020
10.2	Director Fee Arrangements
21	Subsidiaries of the Registrant
23	Consent of Auditors
31.1	Rule 13a-14(a)/15d-14(a) Certifications Rule 13a-14(a)/15d-14(a) Certifications
31.2	Rule 13a-14(a)/15d-14(a) Certifications Rule 13a-14(a)/15d-14(a) Certifications
32	Section 1350 Certifications

118