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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2020

 

OR

 

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

 

For the transition period from                to                

 

Commission file number   0-23406

 

SOUTHERN MISSOURI BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Missouri

 

43-1665523

(State or 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)

 

(573) 778-1800

Registrant's telephone number, including area code

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common

SMBC

NASDAQ Global Market

 

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

Yes

X

No

 

 

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

Yes

X

No

 

 

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

 

Large accelerated filer /  /

Accelerated filer /X/

Emerging growth company [  ]

Non-accelerated filer /  /

Smaller reporting company ☐

 

 

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

 

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

Yes

No

[X]



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

Class

 

Outstanding at November 6, 2020

Common Stock, Par Value $0.01

 

9,119,154 Shares

 



 

SOUTHERN MISSOURI BANCORP, INC.

FORM 10-Q

 

INDEX

 

 

PART I.

Financial Information

PAGE NO.

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

 

 

 

 

-      Condensed Consolidated Balance Sheets

3

 

 

 

 

-      Condensed Consolidated Statements of Income  

4

 

 

 

 

-      Condensed Consolidated Statements of Comprehensive Income  

5

 

 

-      Condensed Consolidated Statements of Stockholders’ Equity  

 

 

6

 

-      Condensed Consolidated Statements of Cash Flows

7

 

 

 

 

-      Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of

  Operations

35

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

45

 

 

 

Item 4.

Controls and Procedures

47

 

 

 

PART II.

OTHER INFORMATION

48

 

 

 

Item 1.

Legal Proceedings

48

 

 

 

Item 1a.

Risk Factors

48

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

 

Item 3.

Defaults upon Senior Securities

48

 

 

 

Item 4.

Mine Safety Disclosures

48

 

 

 

Item 5.

Other Information

48

 

 

 

Item 6.

Exhibits

49

 

 

 

 

-     Signature Page

50

 

 

 

 

-     Certifications

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 




PART I: Item 1:  Condensed Consolidated Financial Statements

 

SOUTHERN MISSOURI BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2020 AND JUNE 30, 2020

 

(dollars in thousands)

September 30, 2020

June 30, 2020

 

(unaudited)

 

Assets

 

 

Cash and cash equivalents

$                    41,875

$                    54,245

Interest-bearing time deposits

                           975

                           974

Available for sale securities

                    175,528

                    176,524

Stock in FHLB of Des Moines

                        6,939

                        6,390

Stock in Federal Reserve Bank of St. Louis

                        5,017

                        4,363

Loans receivable, net of allowance for credit losses of
    $35,084 and $25,139 at September 30, 2020 and
    June 30, 2020, respectively

                 2,150,463

                 2,141,929

Accrued interest receivable

                      13,766

                      12,116

Premises and equipment, net

                      64,430

                      65,106

Bank owned life insurance – cash surrender value

                      43,644

                      43,363

Goodwill

                      14,089

                      14,089

Other intangible assets, net

                        7,493

                        7,700

Prepaid expenses and other assets

                      16,515

                      15,358

    Total assets

$               2,540,734

$               2,542,157

 

 

 

Liabilities and Stockholders' Equity

 

 

Deposits

$               2,168,074

$               2,184,847

Advances from FHLB

                      85,637

                      70,024

Accounts payable and other liabilities

                      10,478

                      12,151

Accrued interest payable

                        1,402

                        1,646

Subordinated debt

                      15,168

                      15,142

    Total liabilities

                 2,280,759

                 2,283,810

 

 

 

Common stock, $0.01 par value; 25,000,000 shares authorized;
    9,344,574 and 9,345,339 shares issued at September 30, 2020 and June 30, 2020, respectively

                             93

                             93

Additional paid-in capital

                      95,058

                      95,035

Retained earnings

                    167,175

                    165,709

Treasury Stock of 217,949 shares at September 30, 2020
    and June 30, 2020, at cost

                      (6,937)

                      (6,937)

Accumulated other comprehensive income

                        4,586

                        4,447

    Total stockholders' equity

                    259,975

                    258,347

    Total liabilities and stockholders' equity

$               2,540,734

$               2,542,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements


-3-



SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019 (Unaudited)

 

 

Three months ended

 

September 30,

(dollars in thousands except per share data)

2020

2019

INTEREST INCOME:

 

 

     Loans

$        25,907

$        25,640

     Investment securities

               490

               520

     Mortgage-backed securities

               534

               716

     Other interest-earning assets

                 41

                 46

                  Total interest income

          26,972

          26,922

INTEREST EXPENSE:

 

 

     Deposits

            4,390

            6,578

     Advances from FHLB

               380

               522

     Note payable

                    -

                 37

     Subordinated debt

               138

               225

                  Total interest expense

            4,908

            7,362

NET INTEREST INCOME

          22,064

          19,560

PROVISION FOR CREDIT LOSSES

               774

               896

NET INTEREST INCOME AFTER

   PROVISION FOR CREDIT LOSSES

          21,290

          18,664

NONINTEREST INCOME:

 

 

    Deposit account charges and related fees

            1,339

            1,423

    Bank card interchange income

               830

               751

    Loan late charges

               141

               146

    Loan servicing fees

               310

               130

    Other loan fees

               327

               243

    Net realized gains on sale of loans

            1,206

               273

    Earnings on bank owned life insurance

               280

               254

    Other income

               508

               270

                  Total noninterest income

            4,941

            3,490

NONINTEREST EXPENSE:

 

 

    Compensation and benefits

            7,720

            7,125

    Occupancy and equipment, net

            1,970

            1,852

    Data processing expense

            1,062

               885

    Telecommunications expense

               315

               320

    Deposit insurance premiums

               201

                    -

    Legal and professional fees

               198

               184

    Advertising

               230

               309

    Postage and office supplies

               193

               183

    Intangible amortization

               380

               441

    Foreclosed property expenses/losses

                 50

                 48

    Provision (credit) for off balance sheet credit exposure

               226

             (146)

    Other operating expense

               953

            1,149

                  Total noninterest expense

          13,498

          12,350

INCOME BEFORE INCOME TAXES

          12,733

            9,804

INCOME TAXES

            2,747

            1,976

NET INCOME

$          9,986

$          7,828

 

 

 

Basic earnings per common share

$            1.09

$            0.85

Diluted earnings per common share

$            1.09

$            0.85

Dividends per common share

$            0.15

$            0.15

 

 

 

 

See Notes to Condensed Consolidated Financial Statements


-4-



SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019 (Unaudited)

 

 

 

Three months ended

 

September 30,

(dollars in thousands)

2020

2019

Net income

$          9,986

$          7,828

     Other comprehensive income:

 

 

           Unrealized gains on securities available-for-sale

               179

               263

           Tax expense

               (40)

               (56)

     Total other comprehensive income

               139

               207

Comprehensive income

$        10,125

$          8,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements


-5-



SOUTHERN MISSOURI BANCORP, INC

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019 (Unaudited)

 

 

 

For the three- month period ended September 30, 2020

 

 

Additional

 

 

Accumulated Other

Total

 

Common

Paid-In   

Retained

Treasury

Comprehensive

Stockholders'

(dollars in thousands)

Stock

Capital

Earnings

Stock

Income

Equity

BALANCE AS OF JUNE 30, 2020

$           93

$      95,035

$    165,709

$ (6,937)

$        4,447

$   258,347

 

 

 

 

 

 

 

Impact of ASU 2016-13 adoption

 

 

        (7,151)

 

 

       (7,151)

Net Income  

 

 

          9,986

 

 

         9,986

Change in unrealized gain on available for sale securities

 

 

 

             139

            139

Dividends paid on common stock ($.15 per share)

 

 

        (1,369)

 

 

       (1,369)

Stock option expense

 

               23

 

 

 

              23

BALANCE AS OF SEPTEMBER 30, 2020

$           93

$      95,058

$    167,175

$ (6,937)

$        4,586

$   259,975

 

 

For the three- month period ended September 30, 2019

 

 

Additional

 

 

Accumulated Other

Total

 

Common

Paid-In   

Retained

Treasury

Comprehensive

Stockholders'

(dollars in thousands)

Stock

Capital

Earnings

Stock

Income  

Equity

BALANCE AS OF JUNE 30, 2019

$           93

$      94,541

$    143,677

$ (1,166)

$        1,247

$   238,392

 

 

 

 

 

 

 

Net Income  

 

 

          7,828

 

 

         7,828

Change in unrealized gain on available for sale securities

 

 

 

             207

            207

Dividends paid on common stock ($.15 per share)

 

 

        (1,382)

 

 

       (1,382)

Stock option expense

 

               17

 

 

 

              17

Stock grant expense

 

               14

 

 

 

              14

Treasury stock purchased

 

 

 

     (2,814)

 

       (2,814)

BALANCE AS OF SEPTEMBER 30, 2019

$           93

$      94,572

$    150,123

$ (3,980)

$        1,454

$   242,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements


-6-



SOUTHERN MISSOURI BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019 (Unaudited)

 

Three months ended

 

September 30,

(dollars in thousands)

2020

2019

Cash Flows From Operating Activities:

 

 

Net Income

$          9,986

$          7,828

   Items not requiring (providing) cash:

 

 

     Depreciation

1,011

920

     Loss (gain) on disposal of fixed assets

26

(2)

     Stock option and stock grant expense

23

31

     Loss on sale/write-down of REO

36

10

     Amortization of intangible assets

380

441

     Accretion of purchase accounting adjustments

(281)

(492)

     Increase in cash surrender value of bank owned life insurance (BOLI)

(281)

(254)

     Provision for credit losses

774

896

     Net amortization of premiums and discounts on securities

452

264

     Originations of loans held for sale

(47,888)

(10,132)

     Proceeds from sales of loans held for sale

45,300

9,986

     Gain on sales of loans held for sale

(1,206)

(273)

   Changes in:

 

 

     Accrued interest receivable

(1,650)

(1,459)

     Prepaid expenses and other assets

849

(2,638)

     Accounts payable and other liabilities

(1,392)

276

     Deferred income taxes

14

6

     Accrued interest payable

(245)

(199)

           Net cash provided by operating activities

5,908

5,209

Cash flows from investing activities:

 

 

     Net increase in loans

(14,163)

(28,472)

     Net change in interest-bearing deposits

(2)

(1)

     Proceeds from maturities of available for sale securities

15,715

11,041

     Net purchases of Federal Home Loan Bank stock

(335)

-

     Net purchases of Federal Reserve Bank of St. Louis stock

(654)

(2,500)

     Purchases of available-for-sale securities

(14,992)

(16,512)

     Purchases of premises and equipment

(453)

(1,687)

     Investments in state & federal tax credits

(1,051)

(10)

     Proceeds from sale of fixed assets

71

13

     Proceeds from sale of foreclosed assets

129

275

           Net cash used in investing activities

(15,735)

(37,853)

Cash flows from financing activities:

 

 

     Net increase (decrease) in demand deposits and savings accounts

10,311

(8,949)

     Net decrease in certificates of deposits

(27,073)

(12,200)

     Net decrease in securities sold under agreements to repurchase

-

(4,376)

     Proceeds from Federal Home Loan Bank advances

34,800

147,550

     Repayments of Federal Home Loan Bank advances

(19,212)

(89,162)

     Purchase of treasury stock

-

(2,814)

     Dividends paid on common stock

(1,369)

(1,382)

           Net cash (used in) provided by financing activities

(2,543)

28,667

Decrease in cash and cash equivalents

(12,370)

(3,977)

Cash and cash equivalents at beginning of period

54,245

35,400

Cash and cash equivalents at end of period

$        41,875

$        31,423

Supplemental disclosures of cash flow information:

 

 

Noncash investing and financing activities:

 

 

Conversion of loans to foreclosed real estate

$               69

$             365

Conversion of loans to repossessed assets

                  -   

                 59

Right of use assets obtained in exchange for lease obligations: Operating Leases

                 22

            1,996

Cash paid during the period for:

 

 

Interest (net of interest credited)

$             678

$             964

Income taxes

            1,793

            2,856

 

See Notes to Condensed Consolidated Financial Statements


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SOUTHERN MISSOURI BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1:  Basis of Presentation

 

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

 

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

 

 

Note 2:  Organization and Summary of Significant Accounting Policies

 

Organization. Southern Missouri Bancorp, Inc., a Missouri corporation (the Company) was organized in 1994 and is the parent company of Southern Bank (the Bank). Substantially all of the Company’s consolidated revenues are derived from the operations of the Bank, and the Bank represents substantially all of the Company’s consolidated assets and liabilities.  SB Real Estate Investments, LLC is a wholly-owned subsidiary of the Bank formed to hold Southern Bank Real Estate Investments, LLC.  Southern Bank Real Estate Investments, LLC is a real estate investment trust (REIT) which is controlled by the investment subsidiary, and has other preferred shareholders in order to meet the requirements to be a REIT.  At September 30, 2020, assets of the REIT were approximately $877 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.

 


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

 

Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash equivalents includes cash, due from depository institutions and interest-bearing deposits in other depository institutions with original maturities of three months or less. Interest-bearing deposits in other depository institutions were $4.2 million and $6.9 million at September 30 and June 30, 2020, respectively. The deposits are held in various commercial banks with a total of $303,000 and $319,000 exceeding the FDIC’s deposit insurance limits at September 30 and June 30, 2020, respectively, as well as at the Federal Reserve and the Federal Home Loan Bank of Des Moines and Chicago.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 


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Loans. Interest on loans is accrued based upon the principal amount outstanding. The accrual of interest on loans is discontinued when, in management’s judgment, the collectability of interest or principal in the normal course of business is doubtful. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of ACL.  The Company complies with regulatory guidance which indicates that loans should be placed on nonaccrual status when 90 days past due, unless the loan is both well-secured and in the process of collection. A loan that is “in the process of collection” may be subject to legal action or, in appropriate circumstances, through other collection efforts reasonably expected to result in repayment or restoration to current status in the near future. A loan is considered delinquent when a payment has not been made by the contractual due date. At September 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 September 30, 2020. See further disclosure in Note 4: Loans and Allowance for Credit Losses. Interest income previously accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. Cash receipts on a nonaccrual loan are applied to principal and interest in accordance with its contractual terms unless full payment of principal is not expected, in which case cash receipts, whether designated as principal or interest, are applied as a reduction of the carrying value of the loan. A nonaccrual loan is generally returned to accrual status when principal and interest payments are current, full collectability of principal and interest is reasonably assured, and a consistent record of performance has been demonstrated.

 

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

 

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

 

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

 


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

 

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

 

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

 

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

 

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

 

Off-Balance Sheet Credit Exposures.   Off-balance sheet credit instruments include commitments to make loans, and commercial letters of credit, issued to meet customer financing needs. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for off-balance sheet loan commitments is


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represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.  The ACL on off-balance sheet credit exposures is estimated by loan pool on a quarterly basis under the current CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur and is included in other liabilities on the Company’s consolidated balance sheets.  The Company records an ACL on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to credit loss expense for off-balance sheet credit exposures included in other non-interest expense in the Company’s consolidated statements of income.

 

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.

 

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

 

Intangible Assets.  The Company’s intangible assets at September 30, 2020 included gross core deposit intangibles of $15.3 million with $9.0 million accumulated amortization, gross other identifiable intangibles of $3.8 million with accumulated amortization of $3.8 million, and mortgage servicing rights of $1.3 million.  At June 30, 2020, the Company’s intangible assets included gross core deposit intangibles of $15.3 million with $8.7 million accumulated amortization, gross other identifiable intangibles of $3.8 million with accumulated amortization of $3.8 million, and mortgage servicing rights of $1.1 million.  The Company’s core deposit intangible assets are being amortized using the straight line method, over periods ranging from five to seven years, with amortization expense expected to be approximately $1.0 million in the remainder of fiscal 2021, $1.4 million in fiscal 2022 through fiscal 2024, and $807,000 million in fiscal 2025, and $328,000 thereafter. As of June 30, 2020, there was no impairment indicated, and the Company believes there continues to be no impairment of other intangible assets at September 30, 2020.

 

Income Taxes. The Company accounts for income taxes in accordance with income tax accounting guidance (ASC


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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 and restricted stock grants) outstanding during each period.

 

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

 

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

 


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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.  Adoption of this standard did not have a significant impact on the Company’s consolidated financial statements.

 

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

 

 

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

 

 

July 1, 2020

 

As reported

As reported

Impact of

 

under

prior to

adoption

(dollars in thousands)

ASU 2016-13

ASU 2016-13

ASU 2016-13

Loans receivable

$              2,142,363

$              2,141,929

$                         434

Allowance for credit losses on loans:

 

 

 

Real Estate Loans:

 

 

 

     Residential

                      8,396

                      4,875

                      3,521

     Construction

                        1,889

                        2,010

                         (121)

     Commercial

                      15,988

                      12,132

                        3,856

Consumer loans

                        2,247

                        1,182

                        1,065

Commercial loans

                        5,952

                        4,940

                        1,012

Total allowance for credit losses on loans

$                    34,472

$                    25,139

$                      9,333

 

 

 

 

Total allowance for credit losses on
    off-balance sheet credit exposures

$                      2,227

$                      1,959

$                         268

 

 

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

 

In March 2020, the CARES Act was signed into law, creating a forbearance program for federally backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the National Emergency, and provides financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings (TDR) for a limited period of time to account for the effects of COVID-19. The Company has elected to not apply ASC Subtopic 310-40 for loans eligible under the CARES Act, based on the modification’s (1) relation to COVID-19, (2) execution for a loan that was not more than 30-days past due as of


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December 31, 2019, and (3) execution between March 1, 2020, and the earlier of the date that falls 60 days following the termination of the declared National Emergency, or December 31, 2020.

 

 

Note 3:  Securities

 

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

 

 

September 30, 2020

 

 

Gross

Gross

Allowance

Estimated

 

Amortized

Unrealized

Unrealized

for

Fair

(dollars in thousands)

Cost

Gains

Losses

Credit Losses

Value

Investment and mortgage backed securities:

 

 

 

 

 

 State and political subdivisions

$             42,880

$               1,608

$                    (1)

$                      -

$             44,487

 Other securities

                 9,358

                    169

                  (327)

                        -

                 9,200

 Mortgage-backed GSE residential

             117,366

                 4,518

                    (43)

                        -

             121,841

    Total investment and mortgage-backed securities

$           169,604

$               6,295

$                (371)

$                      -

$           175,528

 

 

June 30, 2020

 

 

Gross

Gross

Estimated

 

Amortized

Unrealized

Unrealized

Fair

(dollars in thousands)

Cost

Gains

Losses

Value

Investment and mortgage backed securities:

 

 

 

 

 State and political subdivisions

$             40,486

$               1,502

$                      -

$             41,988

 Other securities

                 7,919

                      48

                  (343)

                 7,624

 Mortgage-backed GSE residential

             122,375

                 4,576

                    (39)

             126,912

    Total investment and mortgage-backed securities

$           170,780

$               6,126

$                (382)

$           176,524

 

 

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

 

 

 

September 30, 2020

 

Amortized

Estimated

(dollars in thousands)

Cost

Fair Value

  Within one year

$                     1,370

$           1,398

  After one year but less than five years

                     10,341

           10,525

  After five years but less than ten years

                     17,180

           17,689

  After ten years

                     23,347

           24,075

     Total investment securities

                     52,238

           53,687

  Mortgage-backed securities

                   117,366

         121,841

    Total investment and mortgage-backed securities

$                 169,604

$       175,528

 

 

The carrying value of investment and mortgage-backed securities pledged as collateral to secure public deposits amounted to $146.2 million at September 30, 2020 and $156.1 million at June 30, 2020.  The securities pledged consist of marketable securities, including $77.3 million and $82.0 million of Mortgage-Backed Securities, $34.9 million and $41.9 million of Collateralized Mortgage Obligations, $33.0 million and $32.0 million of State and Political Subdivisions Obligations, and $1.0 million and $200,000 of Other Securities at September 30 and June 30, 2020, respectively.

 


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

 

 

September 30, 2020

 

Less than 12 months

12 months or more

Total

 

 

Unrealized

 

Unrealized

 

Unrealized

(dollars in thousands)

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

 Obligations of state and political subdivisions

$        531

$            1

$             -

$             -

$        531

$            1

 Other securities

               -

               -

          839

          327

          839

          327

 Mortgage-backed securities

       8,368

            43

               -

               -

       8,368

            43

   Total investments and mortgage-backed securities

$     8,899

$          44

$        839

$        327

$     9,738

$        371

 

 

June 30, 2020

 

Less than 12 months

12 months or more

Total

 

 

Unrealized

 

Unrealized

 

Unrealized

(dollars in thousands)

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

 Other securities

$        995

$            5

$        643

$        338

$     1,638

$        343

 Mortgage-backed securities

       9,037

            39

               -

               -

       9,037

            39

   Total investments and mortgage-backed securities

$   10,032

$          44

$        643

$        338

$   10,675

$        382

 

 

Mortgage-backed securities. The unrealized losses on the Company’s investments in mortgage-backed securities were caused by variations in market interest rates since purchase or acquisition. The securities are of high credit quality (AA or higher). Because the Company does not intend to sell these securities and it likely that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

 

Other securities.  At September 30, 2020 there were two pooled trust preferred securities with an estimated fair value of $654,000 and unrealized losses of $322,000 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 September 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 the Company’s purchase; the other security received principal-in-kind (PIK), in lieu of cash interest, for a period of time following the recession and financial crisis which began in 2008, but resumed cash interest payments during fiscal 2014. Our cash flow analysis indicates that cash interest payments are expected to continue for both securities. Because the Company does not intend to sell these securities and it is likely that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.

 

The Company does not believe any other individual unrealized loss as of September 30, 2020, is the result of a credit loss. However, the Company could be required to recognize an ACL in future periods with respect to its available for sale investment securities portfolio.


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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 credit losses recognized in income and other losses or recorded in other comprehensive income for the three-month periods ended September 30, 2020 and 2019.

 

 

Note 4:  Loans and Allowance for Credit Losses

 

Classes of loans are summarized as follows:

 

(dollars in thousands)

September 30, 2020

June 30, 2020

Real Estate Loans:

 

 

     Residential

$                      635,718

$               627,357

     Construction

                        207,737

                 185,924

     Commercial

                        884,835

                 887,419

Consumer loans

                          80,906

                   80,767

Commercial loans

                        481,582

                 468,448

                     2,290,778

              2,249,915

Loans in process

                      (101,392)

                  (78,452)

Deferred loan fees, net

                          (3,839)

                    (4,395)

Allowance for credit losses

                        (35,084)

                  (25,139)

     Total loans

$                   2,150,463

$            2,141,929

 

The Company’s lending activities consist of origination of loans secured by mortgages on one- to four-family residences and commercial and agricultural real estate, construction loans on residential and commercial properties, commercial and agricultural business loans and consumer loans. At September 30, 2020, the Bank had purchased participations in 22 loans totaling $55.7 million, as compared to 23 loans totaling $58.2 million at June 30, 2020.

 

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

 

The Company also originates loans secured by multi-family residential properties that are often located outside the Company’s primary lending area but made to borrowers who operate within our primary market area.  The majority of the multi-family residential loans that are originated by the 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. General risks related to multi-family residential lending include rental demand, rental rates, and vacancies, as well as collateral values and borrower leverage.

 

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


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

 

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

 

While the Company typically utilizes relatively short maturity periods to closely monitor the inherent risks associated with construction loans for these loans, weather conditions, change orders, availability of materials and/or labor, and other factors may contribute to the lengthening of a project, thus necessitating the need to renew the construction loan at the balloon maturity. Such extensions are typically executed in incremental three month periods to facilitate project completion. The Company’s average term of construction loans is approximately eight months. During construction, loans typically require monthly interest only payments which may allow the Company an opportunity to monitor for early signs of financial difficulty should the borrower fail to make a required monthly payment. Additionally, during the construction phase, the Company typically performs interim inspections which further allow the Company opportunity to assess risk. At September 30, 2020, construction loans outstanding included 78 loans, totaling $36.1 million, for which a modification had been agreed to. At June 30, 2020, construction loans outstanding included 77 loans, totaling $48.8 million, for which a modification had been agreed to. In general, these modifications were solely for the purpose of extending the maturity date due to conditions described above.  As these modifications were not executed due to financial difficulty on the part of the borrower, they were not accounted for as troubled debt restructurings (TDRs).  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 September 30, 2020, included drawn balances of $4.4 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 five years, with the exception of home equity lines of credit, which are variable, tied to the prime rate of interest and are for a period of ten years.

 

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

 

Automobile loans originated by the Company include both direct loans and a smaller amount of loans originated by auto dealers. The Company generally pays a negotiated fee back to the dealer for indirect loans. Typically, automobile loans are made for terms of up to 60 months for new and used vehicles. Loans secured by automobiles


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have fixed rates and are generally made in amounts up to 100% of the purchase price of the vehicle. Risks to automobile and other consumer lending generally include the stability of borrower income and borrower willingness to repay.

 

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

 

Allowance for Credit Losses. The provision for credit losses for the three-month period ended September 30, 2020, was $774,000, relatively low as compared to earlier quarters in calendar year 2020, or as compared to the same period of the prior fiscal year. The charge was based on the estimated required ACL, reflecting management’s estimate of the current expected credit losses in the Company’s loan portfolio at September 30, 2020, and as of that date the Company’s ACL was $35.1 million. The relatively low provision was attributable primarily to the current quarter’s relatively low loan growth and stable credit quality indicators quarter-over-quarter. While uncertainty remains regarding the economic environment resulting from the COVID-19 pandemic and the potential impact on the Company’s borrowers, the Company assesses that the economic outlook is little changed as compared to June 30, 2020. 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 the Federal Reserve to respond to the pandemic and its economic impact. Management considered the impact of the pandemic on its consumer and business borrowers, particularly those business borrowers most affected by efforts to contain the pandemic, including our borrowers in the retail and multi-tenant retail industry, restaurants, and hotels. To date, various relief efforts, notably including the availability of forgivable Paycheck Protection Program (PPP) loans to borrowers and deferrals or modifications available as encouraged by banking regulatory authorities and the CARES Act, have resulted in limited impact on the Company’s credit quality indicators, as is true of the industry generally. It is possible that the ongoing adverse effects of the pandemic may not be somewhat offset by future relief efforts, which could cause the outlook for economic conditions and levels and trends of past-due loans to significantly worsen, and require additions to the ACL.

 

The following tables present the balance in the ACL and the recorded investment in loans (excluding loans in process and deferred loan fees) based on portfolio segment as of September 30 and June 30, 2020, and activity in the ACL and ALLL for the three-month periods ended September 30, 2020 and 2019:

 

 

 

 

 

At period end and for the three months ended September 30, 2020

 

Residential

Construction

Commercial

 

 

 

(dollars in thousands)

Real Estate

Real Estate

Real Estate

Consumer

Commercial

Total

Allowance for credit losses:

 

 

 

 

 

 

     Balance, beginning of period
          prior to adoption of CECL

$               4,875

$               2,010

$             12,132

$               1,182

$               4,940

$             25,139

     Impact of CECL adoption

                 3,521

                  (121)

                 3,856

               1,065

                   1,012

                 9,333

     Provision charged to expense

                    252

                        3

                      61

                      61

                    397

                    774

     Losses charged off

                    (19)

                        -

                        -

                      (6)

                  (145)

                  (170)

     Recoveries

                        -

                        -

                        1

                        3

                        4

                        8

     Balance, end of period

$            8,629

$               1,892

$             16,050

$               2,305

$               6,208

$             35,084

 


-19-



 

 

At period end and for the three months ended September 30, 2019

 

Residential

Construction

Commercial

 

 

 

(dollars in thousands)

Real Estate

Real Estate

Real Estate

Consumer

Commercial

Total

Allowance for loan losses:

 

 

 

 

 

 

     Balance, beginning of period

$               3,706

$               1,365

$               9,399

$               1,046

$               4,387

$             19,903

     Provision charged to expense

                  (134)

                    174

                    376

                      96

                    384

                    896

     Losses charged off

                        -

                        -

                        -

                    (72)

                    (35)

                  (107)

     Recoveries

                        -

                        -

                      14

                        4

                        -

                      18

     Balance, end of period

$               3,572

$               1,539

$               9,789

$               1,074

$               4,736

$             20,710

     Ending Balance: individually
           evaluated for impairment

$                      -

$                      -

$                      -

$                      -

$                      -

$                      -

     Ending Balance: collectively
           evaluated for impairment

$               3,572

$               1,539

$               9,789

$               1,074

$               4,736

$             20,710

     Ending Balance: loans acquired
           with deteriorated credit quality

$                      -

$                      -

$                      -

$                      -

$                      -

$                      -

 

 

At June 30, 2020

 

Residential

Construction

Commercial

 

 

 

(dollars in thousands)

Real Estate

Real Estate

Real Estate

Consumer

Commercial

Total

Allowance for loan losses:

 

 

 

 

 

 

     Balance, end of period

$               4,875

$               2,010

$             12,132

$               1,182

$               4,940

$             25,139

     Ending Balance: individually
           evaluated for impairment

$                      -

$                      -

$                      -

$                      -

$                      -

$                      -

     Ending Balance: collectively
           evaluated for impairment

$               4,875

$               2,010

$             12,132

$               1,182

$               4,940

$             25,139

     Ending Balance: loans acquired
           with deteriorated credit quality

$                      -

$                      -

$                      -

$                      -

$                      -

$                      -

Loans:

 

 

 

 

 

 

     Ending Balance: individually
           evaluated for impairment

$                      -

$                      -

$                      -

$                      -

$                      -

$                      -

     Ending Balance: collectively
           evaluated for impairment

$           626,085

$           106,194

$           872,716

$             80,767

$           463,902

$        2,149,664

     Ending Balance: loans acquired
           with deteriorated credit quality

$               1,272

$               1,278

$             14,703

$                      -

$               4,546

$             21,799

 

 

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

 

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


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single-family residential real estate loans) are subject to an independent loan review annually, in order to verify risk ratings. The Company uses the following definitions for risk ratings:

 

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

 

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

 

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

 

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

 

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

 

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

 


-21-



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

 

 

 

 

 

 

 

 

 

Revolving

 

2021

2020

2019

2018

2017

Prior

loans

Total

Residential Real Estate

 

 

 

 

 

 

 

 

Pass

$ 123,469

$ 225,522

$   65,243

$   53,150

$   38,183

$ 117,755

$     5,416

$    628,738

Watch

          125

          122

          419

               -

            98

          876

               -

          1,640

Special Mention

               -

               -

               -

            14

               -

            24

               -

               38

Substandard

          145

          1,007

          227

            73

               -

       3,818

               -

          5,270

Doubtful

               -

               -

               -

               -

               -

            32

               -

               32

Total Residential Real Estate

$ 123,739

$ 226,651

$   65,889

$   53,237

$   38,281

$ 122,505

$     5,416

$    635,718

 

 

 

 

 

 

 

 

 

Construction Real Estate

 

 

 

 

 

 

 

 

Pass

$   42,502

$   52,358

$     6,914

$             -

$             -

$             -

$        205

$    101,979

Watch

               -

               -

          417

       3,949

               -

               -

               -

          4,366

Special Mention

               -

               -

               -

               -

               -

               -

               -

                  -

Substandard

               -

               -

               -

               -

               -

               -

               -

                  -

Doubtful

               -

               -

               -

               -

               -

               -

               -

                  -

Total Construction Real Estate

$   42,502

$   52,358

$     7,331

$     3,949

$             -

$             -

$        205

$    106,345

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

Pass

$   64,829

$ 222,926

$ 151,121

$ 158,268

$   87,699

$ 117,612

$   27,117

$    829,572

Watch

          508

       9,348

     10,611

       4,956

     14,252

       1,493

          904

        42,072

Special Mention

               -

               -

               -

               -

               -

               -

               -

                  -

Substandard

       1,222

       6,149

          560

          285

       2,718

       1,369

               -

        12,303

Doubtful

               -

               -

          888

               -

               -

               -

               -

             888

Total Commercial Real Estate

$   66,559

$ 238,423

$ 163,180

$ 163,509

$ 104,669

$ 120,474

$   28,021

$    884,835

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

Pass

$     7,540

$   17,077

$     7,148

$     2,512

$     1,289

$        788

$   44,316

$      80,670

Watch

               -

               -

               -

               -

               -

               -

               -

                  -

Special Mention

               -

               -

               -

               -

               -

               -

               -

                  -

Substandard

               -

            42

            15

            41

            25

            42

            71

             236

Doubtful

               -

               -

               -

               -

               -

               -

               -

                  -

Total Consumer

$     7,540

$   17,119

$     7,163

$     2,553

$     1,314

$        830

$   44,387

$      80,906

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

Pass

$   27,116

$ 232,331

$   37,049

$   21,354

$   10,050

$   13,662

$ 130,547

$    472,109

Watch

       1,009

          162

            64

              8

            12

               -

       1,725

          2,980

Special Mention

               -

               -

               -

               -

               -

               -

               -

                  -

Substandard

            35

       1,584

       1,640

          462

          180

              8

       2,584

          6,493

Doubtful

               -

               -

               -

               -

               -

               -

               -

                  -

Total Commercial

$   28,160

$ 234,077

$   38,753

$   21,824

$   10,242

$   13,670

$ 134,856

$    481,582

 

 

 

 

 

 

 

 

Total Loans

 

 

 

 

 

 

 

 

Pass

$ 265,456

$ 750,214

$ 267,475

$ 235,284

$ 137,221

$ 249,817

$ 207,601

$ 2,113,068

Watch

       1,642

       9,632

     11,511

       8,913

     14,362

       2,369

       2,629

        51,058

Special Mention

               -

               -

               -

            14

               -

            24

               -

               38

Substandard

       1,402

       8,782

       2,442

          861

       2,923

       5,237

       2,655

        24,302

Doubtful

               -

               -

          888

               -

               -

            32

               -

             920

Total

$ 268,500

$ 768,628

$ 282,316

$ 245,072

$ 154,506

$ 257,479

$ 212,885

$ 2,189,386

 

 

 

At September 30, 2020, PCD loans comprised $5.6 million of credits rated “Pass”; $10.1 million of credits rated “Watch”; none rated “Special Mention”; $5.7 million of credits rated “Substandard”; and none rated “Doubtful”.

 


-22-



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

 

 

June 30, 2020

 

Residential

Construction

Commercial

 

 

(dollars in thousands)

Real Estate

Real Estate

Real Estate

Consumer

Commercial

Pass

$                   620,004

$           103,105

$                  829,276

$             80,517

$           457,385

Watch

                         1,900

                 4,367

                      45,262

                      45

                 4,708

Special Mention

                               -   

                      -   

                           403

                      25

                      -   

Substandard

                         5,453

                      -   

                      11,590

                    180

                 6,355

Doubtful

                               -   

                      -   

                           888

                      -   

                      -   

     Total

$                   627,357

$           107,472

$                  887,419

$             80,767

$           468,448

 

 

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

 

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

 

 

September 30, 2020

 

 

 

Greater Than

 

 

 

Greater Than 90

 

30-59 Days

60-89 Days

90 Days

Total

 

Total Loans

Days Past Due

(dollars in thousands)

Past Due

Past Due

Past Due

Past Due

Current

Receivable

and Accruing

Real Estate Loans:

 

 

 

 

 

 

 

     Residential

$                  974

$                    37

$               1,343

$               2,354

$           633,364

$           635,718

$                     -

     Construction

                    200

                        -

                        -

                    200

             106,145

             106,345

                       -

     Commercial

                 1,008

                        9

                    760

                 1,777

             883,058

             884,835

                       -

Consumer loans

                    761

                      78

                    248

                 1,087

               79,819

               80,906

                       -

Commercial loans

                    756

                    243

                    490

                 1,489

             480,093

             481,582

                       -

     Total loans

$               3,699

$                  367

$               2,841

$               6,907

$        2,182,479

$        2,189,386

$                     -

 

 

June 30, 2020

 

 

 

Greater Than

 

 

 

Greater Than 90

 

30-59 Days

60-89 Days

90 Days

Total

 

Total Loans

Days Past Due

(dollars in thousands)

Past Due

Past Due

Past Due

Past Due

Current

Receivable

and Accruing

Real Estate Loans:

 

 

 

 

 

 

 

     Residential

$                  772

$                  378

$                  654

$               1,804

$           625,553

$           627,357

$                     -

     Construction

                        -

                        -

                        -

                        -

             107,472

             107,472

                       -

     Commercial

                    641

                    327

                 1,073

                 2,041

             885,378

             887,419

                       -

Consumer loans

                    180

                      53

                    193

                    426

               80,341

               80,767

                       -

Commercial loans

                      93

                 1,219

                    810

                 2,122

             466,326

             468,448

                       -

     Total loans

$               1,686

$               1,977

$               2,730

$               6,393

$        2,165,070

$        2,171,463

$                     -

 

 

Under the CARES Act, financial institutions have the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Loans with such modifications in effect at September 30, 2020, included $93.6 million in loans reported as current in the above table, none of which were past due.  Loans with such modifications in effect at June 30, 2020, included $380.1 million in loans reported as current in the above table, while an additional $29,000 of consumer loans and $1,000 in residential real estate loans with such modifications were reported as 30-59 days past due, and $66,000 of commercial loans with such modifications were reported as 60-89 days past due.

 

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

 


-23-



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

 

Collateral-dependent Loans. At September 30, 2020, there were no collateral-dependent loans that were individually evaluated to determine expected credit losses.

 

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

 

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

 

 

June 30, 2020

 

Recorded

Unpaid Principal

Specific

(dollars in thousands)

Balance

Balance

Allowance

Loans without a specific valuation allowance:

 

     Residential real estate

$               3,811

$               4,047

$                      -

     Construction real estate

                 1,277

                 1,312

                        -

     Commercial real estate

               19,271

               23,676

                        -

     Consumer loans

                        -

                        -

                        -

     Commercial loans

                 5,040

                 6,065

                        -

Loans with a specific valuation allowance:

 

 

 

     Residential real estate

$                      -

$                      -

$                      -

     Construction real estate

                        -

                        -

                        -

     Commercial real estate

                        -

                        -

                        -

     Consumer loans

                        -

                        -

                        -

     Commercial loans

                        -

                        -

                        -

Total:

 

 

 

     Residential real estate

$               3,811

$               4,047

$                      -

     Construction real estate

$               1,277

$               1,312

$                      -

     Commercial real estate

$             19,271

$             23,676

$                      -

     Consumer loans

$                      -

$                      -

$                      -

     Commercial loans

$               5,040

$               6,065

$                      -

 

 

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


-24-



The following table presents information regarding interest income recognized on impaired loans:

 

 

For the three-month period ended

 

September 30, 2019

 

Average

 

(dollars in thousands)

Investment in

Interest Income

Impaired Loans

Recognized

Residential Real Estate

$                   1,677

$                         23

Construction Real Estate

                     1,306

                           48

Commercial Real Estate

                   17,721

                         335

Consumer Loans

                             -

                              -

Commercial Loans

                     5,812

                           93

   Total Loans

$                 26,516

$                       499

 

 

Interest income on impaired loans recognized on a cash basis in the three-month period ended September 30, 2019, was immaterial. For the three-month period ended September 30, 2019, the amount of interest income recorded for impaired loans that represented a change in the present value of cash flows attributable to the passage of time was approximately $83,000.

 

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

 

(dollars in thousands)

September 30, 2020

June 30, 2020

Residential real estate

$               4,339

$               4,010

Construction real estate

                      -   

                      -   

Commercial real estate

                 3,052

                 3,106

Consumer loans

                    255

                    196

Commercial loans

                 1,129

                 1,345

     Total loans

$               8,775

$               8,657

 

 

At September 30, 2020, there were no nonaccrual loans individually evaluated for which no ACL was recorded. Interest income recognized on nonaccrual loans in the three-month periods ended September 30, 2019 and 2020, was immaterial.

 

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

 


-25-



During the three-month periods ended September 30, 2020 and 2019, certain loans modified were classified as TDRs. They are shown, segregated by class, in the table below:

 

 

 

 

For the three-month periods ended

 

 

September 30, 2020

September 30, 2019

 

 

Number of

Recorded

Number of

Recorded

(dollars in thousands)

 

modifications

Investment

modifications

Investment

     Residential real estate

 

1

$                 98

-

$                          -

     Construction real estate

 

-

                      -

-

                            -

     Commercial real estate

 

2

              1,840

-

                            -

     Consumer loans

 

-

                      -

-

                            -

     Commercial loans

 

1

                   36

-

                            -

           Total

 

4

$            1,974

-

$                          -

 

 

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

 

 

 

September 30, 2020

June 30, 2020

 

 

Number of

Recorded

Number of

Recorded

(dollars in thousands)

 

modifications

Investment

modifications

Investment

     Residential real estate

 

3

$               1,015

3

$                     791

     Construction real estate

 

-

                      -

-

                            -

     Commercial real estate

 

7

              3,904

10

                    4,544

     Consumer loans

 

-

                      -

-

                            -

     Commercial loans

 

8

              3,229

7

                    3,245

           Total

 

18

$            8,148

20

$                  8,580

 

 

Residential Real Estate Foreclosures. The Company may obtain physical possession of real estate collateralizing a residential mortgage loan or home equity loan via foreclosure or in-substance repossession. As of September 30, and June 30, 2020, the carrying value of foreclosed residential real estate properties as a result of obtaining physical possession was $565,000 and $563,000, respectively. In addition, as of September 30 and June 30, 2020, the Company had residential mortgage loans and home equity loans with a carrying value of $329,000 and $435,000, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process.

 

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

 

The carrying amount of $21.8 million in PCI loans was included in the balance sheet amount of loans receivable at June 30, 2020, with no associated ACL. In accordance with ASU 2016-13, the Company did not reassess whether the PCI loans met the criteria of PCD loans as of the adoption date. The amortized cost of the PCD loans were adjusted to reflect the addition of $434,000 to the ACL. PCD loans receivable, net of ACL, totaling $20.9 million were included in the balance sheet amount of loans receivable at September 30, 2020.

 

During the three-month periods ended September 30, 2019 and 2020, the Company did not increase or reverse ALLL or ACL related to PCI or PCD loans.

 


-26-



Note 5:  Premises and Equipment

 

Following is a summary of premises and equipment:

 

(dollars in thousands)

September 30, 2020

June 30, 2020

Land

$                    12,514

$                    12,585

Buildings and improvements

                      56,675

                      56,039

Construction in progress

                             35

                           435

Furniture, fixtures, equipment and software

                      18,276

                      18,109

Automobiles

                           120

                           120

Operating leases ROU asset

                        1,944

                        1,965

                      89,564

                      89,253

Less accumulated depreciation

                      25,134

                      24,147

$                    64,430

$                    65,106

 

 

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

 

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

 

ASU 2016-02 also requires certain other accounting elections.  The Company elected the short-term lease recognition exemption for all leases that qualify, meaning those with terms under twelve months.  ROU assets or lease liabilities are not to be recognized for short-term leases. The calculated amount of the ROU assets and lease liabilities in the table below are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease


-27-



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.   

 

September 30, 2020

June 30, 2020

Consolidated Balance Sheet

 

 

Operating leases right of use asset

$                      1,944

$                      1,965

Operating leases liability

$                      1,944

$                      1,965

 

 

Three Months Ended September 30,

2020

2019

Consolidated Statement of Income

 

 

Operating lease costs classified as occupancy and equipment expense

$                           72

$                           57

    (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

$                           67

$                           39

ROU assets obtained in exchange for operating lease obligations:

$                           -   

$                      2,004

 

 

 

For the three months ended September 30, 2020 and 2019, lease expense was $72,000 and $57,000, respectively. At September 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

                    242

Thereafter

                 2,134

Future lease payments expected

$               3,374

 

 

The Company leases facilities it owns or portions of facilities it owns to other third parties. The Company has determined that all of these lease agreements, in terms of being the lessor, are classified as operating leases.   For the three month periods ended September 30, 2020 and 2019, income recognized from these lessor agreements was $75,000 and $82,000, respectively, and was included in net occupancy and equipment expense.

 

 

Note 6:  Deposits

 

Deposits are summarized as follows:

 

 

 

 

(dollars in thousands)

September 30, 2020

June 30, 2020

Non-interest bearing accounts

$                  307,023

$                  316,048

NOW accounts

                    789,486

                    781,937

Money market deposit accounts

                    234,948

                    231,162

Savings accounts

                    189,218

                    181,229

Certificates

                    647,399

                    674,471

    Total Deposit Accounts

$               2,168,074

$               2,184,847

 

 


-28-



Note 7:  Earnings Per Share

 

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

 

 

Three months ended

 

September 30,

 

2020

2019

(dollars in thousands except per share data)

 

 

Net income

$                 9,986

$                 7,828

  Less: distributed earnings allocated to participating securities

                        (4)

                           -

  Less: undistributed earnings allocated to participating securities

                      (26)

                           -

Net income available to common shareholders

                   9,956

                   7,828

 

 

 

Weighted-average common shares outstanding, including participating securities

            9,126,866

            9,232,257

  Less: weighted-average participating securities outstanding (restricted shares)

               (27,260)

                         -   

Weighted-average basic common shares outstanding

            9,099,606

            9,232,257

  Add: effect of dilutive securities, stock options, and awards

                   2,191

                 11,891

Denominator for diluted earnings per share

$          9,101,797

$          9,244,148

 

 

 

Basic earnings per share available to common stockholders

$                   1.09

$                   0.85

Diluted earnings per share available to common stockholders

$                   1.09

$                   0.85

 

 

Options outstanding at September 30, 2020 and 2019, to purchase 50,500, and 15,500 shares of common stock, respectively, were not included in the computation of diluted earnings per common share for each of the three month periods because the exercise prices of such options were greater than the average market prices of the common stock for the three months ended September 30, 2020 and 2019, respectively.

 

 

Note 8: 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 federal and state examinations by tax authorities for tax years ending June 30, 2015 and before.  The Company recognized no interest or penalties related to income taxes.

 

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

 

 

For the three-month periods ended

(dollars in thousands)

09/30/2020

September 30, 2019

Income taxes

 

 

     Current

$                      4,750

$                      1,970

     Deferred

                      (2,003)

                               6

Total income tax provision

$                      2,747

$                      1,976

 

 


-29-



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

 

(dollars in thousands)

September 30, 2020

June 30, 2020

Deferred tax assets:

     Provision for losses on loans

$                      8,023

$                      5,802

     Accrued compensation and benefits

                           539

                           825

     NOL carry forwards acquired

                           136

                           149

     Minimum Tax Credit

                           130

                           130

     Unrealized loss on other real estate

                           187

                           257

    Other

                           120

                             26

Total deferred tax assets

                        9,135

                        7,189

 

 

 

Deferred tax liabilities:

 

 

     Purchase accounting adjustments

                             42

                             64

     Depreciation

                        1,785

                        1,665

     FHLB stock dividends

                           120

                           120

     Prepaid expenses

                           208

                           259

     Unrealized gain on available for sale securities

                        1,304

                        1,265

     Other

                             -   

                           104

Total deferred tax liabilities

                        3,459

                        3,477

 

 

 

     Net deferred tax asset

$                      5,676

$                      3,712

 

 

As of September 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.

 

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

 

 

For the three-month periods ended

(dollars in thousands)

September 30, 2020

September 30, 2019

Tax at statutory rate

$                      2,674

$                      2,059

Increase (reduction) in taxes
     resulting from:

 

 

           Nontaxable municipal income

                         (103)

                         (113)

           State tax, net of Federal benefit

                           241

                           109

           Cash surrender value of
                 Bank-owned life insurance

                           (59)

                           (53)

           Tax credit benefits

                             26

                             -   

           Other, net

                           (32)

                           (26)

Actual provision

$                      2,747

$                      1,976

 

For the three month periods ended September 30, 2020 and 2019, income tax expense at the statutory rate was calculated using a 21% annual effective tax rate (AETR).  

 

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

 


-30-



Note 9:  401(k) Retirement Plan

 

The Bank has a 401(k) retirement plan that covers substantially all eligible employees.  The Bank made a “safe harbor” matching contribution to the Plan of up to 4% of eligible compensation, depending upon the percentage of eligible pay deferred into the plan by the employee, and also made additional, discretionary profit-sharing contributions for fiscal 2020; for fiscal 2021, the Company has maintained the safe harbor matching contribution of up to 4%, and expects to continue to make additional, discretionary profit-sharing contributions.   During the three-month period ended September 30, 2020, retirement plan expenses recognized for the Plan totaled approximately $457,000, as compared to $381,000 for the same period of the prior fiscal year.  Employee deferrals and safe harbor contributions are fully vested.  Profit-sharing or other contributions vest over a period of five years.

 

Note 10:  Subordinated Debt

 

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 September 30, 2020, the current rate was 3.00%. 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 September 30, 2020, the current rate was 2.70%. The carrying value of the debt securities was approximately $2.7 million at September 30 and June 30, 2020.

 

In connection with its August 2014 acquisition of Peoples Service Company, Inc. (PSC), the Company assumed $6.5 million in floating rate junior subordinated debt securities. The debt securities had been issued in 2005 by PSC’s subsidiary bank holding company, Peoples Banking Company, in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. At September 30, 2020, the current rate was 2.05%.  The carrying value of the debt securities was approximately $5.3 million at September 30, and June 30, 2020.

 

 

Note 11:  Fair Value Measurements

 

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

 

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

 

Level 2Observable 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 3Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or liabilities 


-31-



 

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

 

 

Fair Value Measurements at September 30, 2020, Using:

 

 

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

(dollars in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)

State and political subdivisions

$                   44,487

$                  -

$        44,487

$                  -

Other securities

                       9,200

                    -

            9,200

                    -

Mortgage-backed GSE residential

                   121,841

                    -

        121,841

                    -

 

 

Fair Value Measurements at June 30, 2020, Using:

 

 

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

(dollars in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)

State and political subdivisions

$                   41,988

$                  -

$        41,988

$                  -

Other securities

                       7,624

                    -

            7,624

                    -

Mortgage-backed GSE residential

                   126,912

                    -

        126,912

                    -

 

 

 

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

 

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

 


-32-



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 September 30 and June 30, 2020:

 

 

 

Fair Value Measurements at September 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

$                     166

$                          -

$                  -

$             166

 

 

 

Fair Value Measurements at June 30, 2020, Using:

 

 

 

Quoted Prices in

 

 

 

 

 

Active Markets for

Significant Other

Significant

 

 

 

Identical Assets

Observable Inputs

Unobservable Inputs

(dollars in thousands)

 

Fair Value

(Level 1)

(Level 2)

(Level 3)

 

 

 

 

 

 

Foreclosed and repossessed assets held for sale

$                  2,211

$                          -

$                  -

$          2,211

 

 

The following table presents losses recognized on assets measured on a non-recurring basis for the three-month periods ended September 30, 2020 and 2019:

 

 

 

 

For the three months ended

(dollars in thousands)

 

 

September 30, 2020

September 30, 2019

Foreclosed and repossessed assets held for sale

$                      (36)

$               (1)

     Total losses on assets measured on a non-recurring basis

$                      (36)

$               (1)

 

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

 

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

 

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

 

(dollars in thousands)

 

Fair value at
September 30, 2020

Valuation
technique

Unobservable
inputs

Range of
inputs applied

Weighted-average
inputs applied

Nonrecurring Measurements

 

 

 

 

 

 

Foreclosed and repossessed assets

$                     166

Third party appraisal

Marketability discount

24.5% - 60.4%

41.3%

 

 

 

 

 

 

 

(dollars in thousands)

 

Fair value at
June 30, 2020

Valuation
technique

Unobservable
inputs

Range of
inputs applied

Weighted-average
inputs applied

Nonrecurring Measurements

 

 

 

 

 

 

Foreclosed and repossessed assets

$                  2,211

Third party appraisal

Marketability discount

8.0% - 56.9%

15.7%

 

 


-33-



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

 

 

 

September 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

 

$                41,875

$                41,875

$                  -

$                  -

     Interest-bearing time deposits

 

                       975

                            -

               975

                    -

     Stock in FHLB

 

                    6,939

                            -

            6,939

                    -

     Stock in Federal Reserve Bank of St. Louis

 

                    5,017

                            -

            5,017

                    -

     Loans receivable, net

 

             2,150,463

                            -

                    -

     2,167,748

     Accrued interest receivable

 

                  13,766

                            -

          13,766

                    -

Financial liabilities

 

 

 

 

 

     Deposits

 

             2,168,074

             1,520,675

                    -

        651,528

     Advances from FHLB

 

                  85,637

                            -

          87,514

                    -

     Accrued interest payable

 

                    1,402

                            -

            1,402

                    -

     Subordinated debt

 

                  15,168

                            -

                    -

          13,455

Unrecognized financial instruments (net of contract amount)

 

 

 

 

 

     Commitments to originate loans

 

                            -

                            -

                    -

                    -

     Letters of credit

 

                            -

                            -

                    -

                    -

     Lines of credit

 

                            -

                            -

                    -

                    -

 

 

 

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

 

                            -

                            -

                    -

                    -

 

 


-34-



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

 

SOUTHERN MISSOURI BANCORP, INC.

 

General

 

Southern Missouri Bancorp, Inc. (Southern Missouri or Company) is a Missouri corporation and owns all of the outstanding stock of Southern Bank (the Bank). The Company’s earnings are primarily dependent on the operations of the Bank. As a result, the following discussion relates primarily to the operations of the Bank. The Bank’s deposit accounts are generally insured up to a maximum of $250,000 by the Deposit Insurance Fund (DIF), which is administered by the Federal Deposit Insurance Corporation (FDIC). At September 30, 2020, the Bank operated from its headquarters, 46 full-service branch offices, and two limited-service branch offices.  The Bank owns the office building and related land in which its headquarters are located, and 44 of its other branch offices.  The remaining four branches are either leased or partially owned.

 

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

 

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

 

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and accompanying notes. The following discussion reviews the Company’s condensed consolidated financial condition at September 30, 2020, and results of operations for the three-month periods ended September 30, 2020 and 2019.

 

Forward Looking Statements

 

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

 

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

 

·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; 


-35-



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

 

·fluctuations in interest rates and in real estate values; 

 

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

 

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

 

·our ability to access cost-effective funding; 

 

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

 

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

 

·demand for loans and deposits in our market area; 

 

·legislative or regulatory changes that adversely affect our business; 

 

·changes in accounting principles, policies, or guidelines; 

 

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

 

·the impact of technological changes; and 

 

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

 

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

 

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

 

Critical Accounting Policies

 

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

 

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


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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 on an ongoing basis as the number of cases and hospitalizations in our region increased over the summer months, the Company has worked to increase our telework capabilities, and we have had as many as 20% of our team members working remotely during the month of October 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.

 

SBA Paycheck Protection Program Lending. The Company originated approximately 1,700 loans totaling $138.6 million under the Small Business Administration’s Paycheck Protection Program (PPP) through September 30, 2020. A limited number were repaid by the borrower shortly after origination. At September 30, 2020, balances outstanding were $133.7 million. Through October 31, 2020, approximately 170 applications by borrowers for forgiveness totaling $11.4 million have been submitted by the Company to the SBA, but only 15 applications totaling $3.0 million have been approved by the SBA.

 

Deferrals and modifications. As of October 31, 2020, following regulatory guidance, the Company has agreements in place with borrowers to defer or modify payment arrangements for approximately 59 loans totaling $37.2 million, a level that is significantly reduced since June 30, 2020. These are loans that were otherwise current and performing, but anticipated difficulties in the coming months due to the pandemic response. Generally, the deferrals were initially granted for three-month periods, while interest-only modifications were for six-month periods. For more information regarding these deferrals and modifications, see discussion included at “Allowance for Credit Loss Activity.”

 

Executive Summary  

 

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

 

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

 

During the first three months of fiscal 2021, total assets decreased by $1.4 million. The decrease was primarily attributable to reduced cash and cash equivalent balances, and a modest decrease in available-for-sale (AFS) securities, partially offset by a modest increase in loans, net of the allowance for credit losses (ACL), and an increase in accrued interest receivable. Cash equivalents and time deposits decreased by a combined $12.4 million; AFS securities decreased $1.0 million; loans, net of the ACL, increased $8.5 million; and accrued interest receivable increased $1.7 million. The impact of the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), increased the ACL by $9.3 million, of which $434,000 related to the transition from PCI to PCD methodology, and reduced retained earnings by $6.9 million, net of deferred taxes, through a one-time cumulative effect adjustment.


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Additionally, due to adoption of ASU 2016-13, the Company revised its analysis of its unused lines of credit and recorded a one-time cumulative effect adjustment to the allowance for off-balance sheet exposures totaling $268,000, offset by a reduction to retained earnings, net of deferred taxes, of $209,000.  Deposits decreased $16.8 million and advances from the Federal Home Loan Bank (FHLB) increased $15.6 million, primarily attributable to the Company’s use of this funding source to fund loan growth in what is typically a seasonally slow quarter for deposit growth. Equity increased $1.6 million, attributable primarily to retention of net income, partially offset by cash dividends paid and the one-time cumulative effect adjustment on adoption of ASU 2016-13.

 

Net income for the first three months of fiscal 2021 was $10.0 million, an increase of $2.2 million, or 27.6% as compared to the same period of the prior fiscal year. Compared to the year-ago period, the Company’s increase in net income was the result of increases in net interest income and noninterest income, and a reduction in provision for credit losses, partially offset by increases in noninterest expense and provision for income taxes. Diluted net income available to common shareholders was $1.09 per share for the first three months of fiscal 2021, as compared to $.85 per share for the same period of the prior fiscal year. For the first three months of fiscal 2021, net interest income increased $2.5 million, or 12.8%; noninterest income increased $1.5 million, or 41.6%; provision for credit losses decreased $122,000, or 13.6%; noninterest expense increased $1.1 million, or 9.3%; and provision for income taxes increased $771,000, or 39.0%, as compared to the same period of the prior fiscal year. For more information see “Results of Operations.”

 

Interest rates during the first three months of fiscal 2021 were relatively unchanged. At September 30, 2020, as compared to June 30, 2020, the yield on two-year treasuries dropped from 0.16% to 0.13%; the yield on five-year treasuries dropped from 0.29% to 0.28%; the yield on ten-year treasuries increased from 0.66% to 0.69%; and the yield on 30-year treasuries increased from 1.41% to 1.46%. The spread between two- and ten-year treasuries was as low as 41 basis points and as high as 60 basis points, much higher than the range noted during the same quarter a year ago. The spread between three-month and 10-year treasuries was similar, and represented even more improvement than that noted between two- and ten-year treasuries. As compared to the first three months of the prior fiscal year, our average yield on earning assets decreased by 69 basis points, reflecting loans (including PPP loans) originated and renewed at lower market yields, adjustable-rate loans which re-priced at lower rates, and reduced discount accretion on acquired assets recorded at fair value. Our cost of interest-bearing liabilities decreased by 66 basis points, as our cost of wholesale funding moved lower with market rates, and the Company reduced rates offered on certificates of deposit and nonmaturity accounts. Lower market rates reflected decreases by the Federal Reserve’s Open Market Committee (FOMC), which began at a measured pace in the quarter ended September 30, 2019, and was followed by sharp reductions in March 2020, as the FOMC reacted to reduced economic activity at the outset of the COVID-19 pandemic (see “Results of Operations: Comparison of the three-month periods ended September 30, 2020 and 2019 – Net Interest Income”). While the improved slope of the yield curve is encouraging in terms of the Company’s net interest margin, the overall low level of market interest rates is concerning, as our asset yields are expected to continue to decrease, while the Company’s ability to significantly reduce its cost of funds further may be limited.

 

Net interest income increased $2.5 million, or 12.8%, as the Company saw an increase of 15.2% in average interest earning assets, partially offset by a decline in the net interest margin. Our net interest margin decreased eight basis points when comparing the first three months of fiscal 2021 to the same period of the prior fiscal year. The decrease was attributable primarily to reduced benefits from the accretion of the discounts on acquired loans carried at fair value, as well as a reduction in interest income that resulted from the resolution of particular nonperforming loans during the current period. Benefits attributable to accretion of discounts on acquired loans (partially offset by the accretion of discounts on assumed time deposits) contributed six basis points to the net interest margin, a decrease from a contribution of 10 basis points in the year-ago period. The dollar impact of this component of net interest income has generally been declining each sequential quarter as assets mature or prepay, although the May 2020 acquisition of Central Federal Bancshares, Inc., (the “Central Federal Acquisition”), partially offsets that decline, as there was no comparable item in the same period a year ago, although the impact is limited due to the relative size of the acquired portfolio. The Company generally expects this component of net interest income to decline over time. Resolution of particular nonperforming loans during the quarter ended September 30, 2019, contributed another eight basis points to the net interest margin in that period, without material comparable items in the current period.

 

The Company’s net income is also affected by the level of its noninterest income and noninterest expenses. Non-interest income generally consists primarily of deposit account service charges, bank card interchange income, loan-related fees, earnings on bank-owned life insurance, gains on sales of loans, and other general operating income.


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Noninterest expenses consist primarily of compensation and employee benefits, occupancy-related expenses, deposit insurance assessments, professional fees, advertising, postage and office expenses, insurance, the amortization of intangible assets, and other general operating expenses. During the three-month period ended September 30, 2020, noninterest income increased $1.5 million, or 41.6%, as compared to the same period of the prior fiscal year, attributable primarily to gains realized on sales of residential loans originated for that purpose, other income, loan servicing fees, other loan fees, and bank card interchange income, partially offset by decreases in deposit account service charges. Noninterest expense for the three-month period ended September 30, 2020, increased $1.1 million, or 9.3%, as compared to the same period of the prior fiscal year. The increase was attributable primarily to increases in compensation and benefits, provisioning for off-balance sheet credit exposure, deposit insurance premiums, data processing expenses, and occupancy, partially offset by decreases in other expenses.

 

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

 

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

 

Comparison of Financial Condition at September 30 and June 30, 2020  

 

The Company’s consolidated balance sheet contracted slightly in the first three months of fiscal 2021, with total assets of $2.5 billion at September 30, 2020, reflecting a decrease of $1.4 million, or 0.1%, as compared to June 30, 2020. Growth in net loan balances, accrued interest receivable, and other assets was offset by reductions in cash and cash equivalents, and AFS securities.

 

Cash equivalents and time deposits were a combined $42.9 million at September 30, 2020, a decrease of $12.4 million, or 22.4%, as compared to June 30, 2020. AFS securities were $175.5 million at September 30, 2020, a decrease of $1.0 million, or 0.6%, as compared to June 30, 2020.

 

Loans, net of the ACL, were $2.2 billion at September 30, 2020, an increase of $8.5 million, or 0.4%, as compared to June 30, 2020. Gross loans increased by $18.5 million, or 0.9%, during the first three months of the fiscal year, while the ACL at September 30, 2020, reflected an increase of $9.9 million, as compared to the balance of our allowance for loan and lease losses (ALLL) at June 30, 2020. The Company adopted ASU 2016-13, Financial Instruments – Credit Losses, also known as the current expected credit loss (“CECL”) standard, effective as of July 1, 2020, the beginning of our 2021 fiscal year. Adoption resulted in an increase to the ACL of $8.9 million, related to the transition from the incurred loss model to the CECL ACL model, and an increase of $434,000 related to the transition from PCI to PCD methodology, relative to the ALLL as of June 30, 2020, while provisioning in excess of net charge offs during the first quarter of fiscal 2021 increased the ACL by an additional $612,000, as compared to July 1, 2020. The increase in loan balances in the portfolio was primarily attributable to commercial loans and residential real estate loans, partially offset by modest declines in commercial real estate loans and drawn construction loan balances. Residential real estate loans increased on growth in 1- to 4-family residential lending, partially offset by a modest decline in multifamily real estate loans. Commercial loan balances increased primarily as a result of seasonal agricultural loan draws, partially offset by a reduction in commercial and industrial loan types, and in total, commercial loan balances remained relatively high compared to recent periods as a result of the Small Business Administration’s Paycheck Protection Program (PPP) loans, which totaled $133.7 million at September 30, 2020, as compared to $132.3 million at June 30, 2020. In early October, the Company began submitting applications to the SBA for forgiveness of the loans originated under the PPP program but, to date, relatively few have been submitted, and only a small percentage of those submitted have been processed by the SBA. Loans anticipated to fund in the next 90 days stood at $122.7 million at September 30, 2020, as compared to $86.6 million at June 30, 2020, and $101.7 million at September 30, 2019.

 

Deposits were $2.2 billion at September 30, 2020, a decrease of $16.8 million, or 0.8%, as compared to June 30, 2020. The decrease reflected a decrease in time deposits, partially offset by an increase in nonmaturity deposits, and was inclusive of decreases of $16.9 million in public unit funds and $2.3 million in brokered time deposits. Public unit


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balances were $288.3 million at September 30, 2020, as public unit depositors partially reversed growth noted over recent quarters. Brokered time deposits were $21.0 million, and brokered money market deposits were $20.0 million, at September 30, 2020. In total, deposit balances saw decreases in certificates of deposit and non-interest bearing transaction accounts, partially offset by increases in savings accounts, interest-bearing transaction accounts, and money market deposit accounts. The average loan-to-deposit ratio for the first quarter of fiscal 2021 was 99.1%, as compared to 99.2% for the same period of the prior fiscal year.

 

FHLB advances were $85.6 million at September 30, 2020, an increase of $15.6 million, or 22.3%, as compared to June 30, 2020, with the increase primarily attributable to the Company’s use of overnight borrowings to partially fund increases in loans and outflows in deposits.

 

The Company’s stockholders’ equity was $260.0 million at September 30, 2020, an increase of $1.6 million, or 0.6%, as compared to June 30, 2020. The increase was attributable primarily to earnings retained after $1.4 million in cash dividends paid, partially offset by the $7.2 million one-time negative adjustment to retained earnings resulting from the adoption of the CECL standard.


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

September 30, 2020 and 2019

 

The table below presents certain information regarding our financial condition and net interest income for the three-month periods ended September 30, 2020 and 2019. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. Yields on tax-exempt obligations were not computed on a tax equivalent basis.

 

Three-month period ended

Three-month period ended

 

September 30, 2020

September 30, 2019

(dollars in thousands)

Average
Balance

Interest and Dividends

Yield/
Cost (%)

Average
Balance

Interest and Dividends

Yield/
Cost (%)

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

  Mortgage loans (1)

$   1,623,073

$        20,392

     5.03

$   1,420,538

$        19,067

     5.37

  Other loans (1)

        539,052

            5,515

     4.09

        444,806

            6,573

     5.91

      Total net loans

     2,162,125

          25,907

     4.79

     1,865,344

          25,640

     5.50

  Mortgage-backed securities

        119,029

               534

     1.79

        113,614

               716

     2.52

  Investment securities (2)

          62,506

               490

     3.14

          66,009

               520

     3.15

  Other interest earning assets

          19,768

                 41

     0.83

            7,001

                 46

     2.62

        Total interest earning assets (1)

     2,363,428

          26,972

     4.56

     2,051,968

          26,922

     5.25

Other noninterest earning assets (3)

        174,574

                    -

 

        184,415

                    -

 

            Total assets

$   2,538,002

$        26,972

 

$   2,236,383

$        26,922

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

   Savings accounts

$      185,278

               146

     0.32

$      167,202

               346

     0.83

   NOW accounts

        784,444

            1,248

     0.64

        623,895

            1,706

     1.09

   Money market deposit accounts

        233,476

               263

     0.45

        196,737

               803

     1.63

   Certificates of deposit

        662,438

            2,733

     1.65

        673,160

            3,723

     2.21

      Total interest bearing deposits  

     1,865,636

            4,390

     0.94

     1,660,994

            6,578

     1.58

Borrowings:

 

 

 

 

 

 

   Securities sold under agreements
     to repurchase

                    -

                    -

-

               329

                    -

     0.03

   FHLB advances

          70,272

               380

     2.16

          82,192

               522

     2.54

   Note Payable

                    -

                    -

-

            3,000

                 37

     4.88

   Subordinated debt

          15,155

               138

     3.63

          15,055

               225

     5.99

      Total interest bearing liabilities

     1,951,063

            4,908

     1.01

     1,761,570

            7,362

     1.67

Noninterest bearing demand deposits

        316,996

                    -

 

        218,755

                    -

 

Other noninterest bearing liabilities

          14,673

                    -

 

          16,014

                    -

 

      Total liabilities

     2,282,732

            4,908

 

     1,996,339

            7,362

 

Stockholders’ equity

        255,270

                    -

 

        240,044

                    -

 

            Total liabilities and
              stockholders' equity

$   2,538,002

$          4,908

 

$   2,236,383

$          7,362

 

 

 

 

 

 

 

 

Net interest income  

 

$        22,064

 

 

$        19,560

 

 

 

 

 

 

 

 

Interest rate spread (4)

 

 

3.55%

 

 

3.58%

Net interest margin (5)

 

 

3.73%

 

 

3.81%

 

 

 

 

 

 

 

Ratio of average interest-earning assets
to average interest-bearing liabilities

121.14%

 

 

116.49%

 

 

 

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

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

(3)Includes average balances for fixed assets and BOLI of $65.1 million and $43.5 million, respectively, for the three-month period ended September 30, 2020, as compared to $63.1 million and $38.4 million, respectively, for the same period of the prior fiscal year. 

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


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

 

 

Rate/Volume Analysis

 

The following table sets forth the effects of changing rates and volumes on the Company’s net interest income for the three-month period ended September 30, 2020, compared to the three-month period ended September 30, 2019. Information is provided with respect to (i) effects on interest income and expense attributable to changes in volume (changes in volume multiplied by the prior rate), (ii) effects on interest income and expense attributable to change in rate (changes in rate multiplied by prior volume), and (iii) changes in rate/volume (change in rate multiplied by change in volume).

 

 

 

Three-month period ended September 30, 2020

Compared to three-month period ended September 30, 2019

Increase (Decrease) Due to

(dollars in thousands)

 

Rate

Volume

Rate/

Net

 

 

Volume

 

Interest-earnings assets:

 

 

 

 

 

  Loans receivable (1)

 

$               (3,289)

$                 4,079

$                  (523)

$                    267

  Mortgage-backed securities

 

                    (207)

                        34

                        (9)

                    (182)

  Investment securities (2)

 

                        (3)

                      (28)

                          1

                      (30)

  Other interest-earning deposits

                      (31)

                        84

                      (58)

                        (5)

Total net change in income on

 

 

 

 

  interest-earning assets

 

                 (3,530)

                   4,169

                    (589)

                        50

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

  Deposits

 

                 (2,454)

                      567

                    (301)

                 (2,188)

  FHLB advances

 

                      (77)

                      (76)

                        11

                    (142)

  Note Payable

 

                      (37)

                      (37)

                        37

                      (37)

  Subordinated Debt

 

                      (89)

                          1

                          1

                      (87)

Total net change in expense on

 

 

 

 

  interest-bearing liabilities

 

                 (2,657)

                      455

                    (252)

                 (2,454)

Net change in net interest income

$                  (873)

$                 3,714

$                  (337)

$                 2,504

 

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

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

 

 

Results of Operations – Comparison of the three-month periods ended September 30, 2020 and 2019

 

General. Net income for the three-month period ended September 30, 2020, was $10.0 million, an increase of $2.2 million, or 27.6%, as compared to the same period of the prior fiscal year. The increase was attributable to increases in net interest income and noninterest income, and a decrease in provision for loan losses, partially offset by increases in noninterest expense and provision for income taxes.

 

For the three-month period ended September 30, 2020, basic and fully-diluted net income per share available to common shareholders was $1.09 under both measures, as compared to $0.85 under both measures for the same period of the prior fiscal year, which represented an increase of $0.24, or 28.2%. Our annualized return on average assets for the three-month period ended September 30, 2020, was 1.57%, as compared to 1.40% for the same period of the prior fiscal year. Our return on average common stockholders’ equity for the three-month period ended September 30, 2020, was 15.6%, as compared to 13.0% in the same period of the prior fiscal year.

 

Net Interest Income. Net interest income for the three-month period ended September 30, 2020, was $22.1 million, an increase of $2.5 million, or 12.8%, as compared to the same period of the prior fiscal year. The increase was attributable to a 15.2% increase in the average balance of interest-earning assets, partially offset by a decrease in net interest margin to 3.73% in the current three-month period, from 3.81% in the three-month period a year ago.

 

Loan discount accretion and deposit premium amortization related to the Company’s August 2014 acquisition of Peoples Bank of the Ozarks, the June 2017 acquisition of Capaha Bank, the February 2018 acquisition of Southern


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Missouri Bank of Marshfield, the November 2018 acquisition of Gideon Bancshares Company (the “Gideon Acquisition”), and the Central Federal Acquisition resulted in $339,000 in net interest income for the three-month period ended September 30, 2020, as compared to $508,000 in net interest income for the same period a year ago. The decline is attributable to expected reductions in discount accretion as additional time has elapsed since the loan portfolios were acquired and balances have declined, partially offset by the recent Central Federal Acquisition, although the acquired loans and resulting discount accretion from that acquisition is relatively small. The Company generally expects this component of net interest income will continue to decline over time, although volatility may occur to the extent we have periodic resolutions of specific credit impaired loans. Combined, these components of net interest income contributed six basis points to net interest margin in the three-month period ended September 30, 2020, as compared to a contribution of 10 basis points in the same period of the prior fiscal year, and as compared to the six basis point contribution in the linked quarter, ended June 30, 2020, when net interest margin was 3.75%. Additionally, in the year-ago and linked periods, the Company recognized additional interest income as a result of the resolution of a limited number of nonperforming loans, with no material contribution from similar resolutions in the current period. This recognition of $414,000 in interest income in the year-ago period, and $159,000 in the linked period, contributed eight and three basis points, respectively, to net interest margin in the year-ago and linked periods.

 

For the three-month period ended September 30, 2020, our net interest rate spread was 3.55%, as compared to 3.58% in the year-ago period. The decrease in net interest rate spread, compared to the same period a year ago, resulted from a 69 basis point decrease in the average yield on interest-earning assets, partially offset by a 66 basis point decrease in the average cost of interest-bearing liabilities.

 

Interest Income. Total interest income for the three-month period ended September 30, 2020, was $27.0 million, an increase of $50,000, or 0.2%, as compared to the same period of the prior fiscal year. The increase was attributed to a 15.2% increase in the average balance of interest-earning assets, offset by a 69 basis point decrease in the average yield earned on interest-earning assets, as compared to the same period of the prior fiscal year. Increased average interest-earning balances were attributable primarily to growth in the loan portfolio, inclusive of the Central Federal Acquisition and PPP loans originated, while interest-earning cash equivalents and investment balances increased by smaller amounts. The decrease in the average yield on interest-earning assets was attributable to loans (including PPP loans) originated and renewed at lower market yields, adjustable-rate loans which re-priced at lower rates, and reduced discount accretion on acquired assets recorded at fair value.

 

Interest Expense. Total interest expense for the three-month period ended September 30, 2020, was $4.9 million, a decrease of $2.5 million, or 33.3%, as compared to the same period of the prior fiscal year. The decrease was attributable to a 66 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a 10.8% increase in the average balance of interest-bearing liabilities, as compared to the same period of the prior fiscal year. The decrease in the average cost of interest-bearing liabilities was attributable primarily to a lower cost of wholesale funding as a result of lower market rates, and the Company offering of reduced rates on certificates of deposit and nonmaturity accounts. Increased average interest-bearing balances were attributable primarily to increases in interest-bearing transaction accounts, money market deposit accounts, and savings accounts, partially offset by lower FHLB balances, certificate of deposit balances, and other borrowings.

 

Provision for Credit Losses. The provision for credit losses for the three-month period ended September 30, 2020, was $774,000, as compared to $896,000 in the same period of the prior fiscal year. The decrease as compared to the same quarter a year ago was attributable primarily to the current quarter’s relatively low loan growth and stable credit quality indicators quarter-over-quarter. While uncertainty remains regarding the economic environment resulting from the COVID-19 pandemic and the potential impact on the Company’s borrowers, the Company assesses that the outlook is little changed as compared to the year ended June 30, 2020. As a percentage of average loans outstanding, the provision for credit losses in the current three-month period represented a charge of 0.14% (annualized), while the Company recorded net charge offs during the period of 0.03% (annualized). During the same period of the prior fiscal year, the provision for credit losses as a percentage of average loans outstanding represented a charge of 0.19% (annualized), while the Company recorded net charge offs of 0.02% (annualized). (See “Critical Accounting Policies”, “Allowance for Credit Loss Activity” and “Nonperforming Assets”).

 

Noninterest Income. The Company’s noninterest income for the three-month period ended September 30, 2020, was $4.9 million, an increase of $1.5 million, or 41.6%, as compared to the same period of the prior fiscal year. In the current period, increases in gains realized on the sale of residential real estate loans originated for that purpose, other income, loan servicing fees, other loans fees, and bank card interchange income were partially offset by


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decreases in deposit account service charges. Gains realized on the sale of residential real estate loans originated for that purpose increased as originations of these loans more than tripled, remaining consistent with the linked quarter, while pricing improved slightly. As we generally retain servicing of residential real estate loans originated for sale, our portfolio of serviced loans increased by 16% during the quarter, which increased servicing income through fees received and the recognition of mortgage servicing rights at origination. Other income included a $187,000 non-recurring benefit related to a broker-dealer agreement to provide wealth management services in a new market area, with no comparable item in the year-ago period. Bank card interchange income increased as a result of an 8% increase in the number of bank card transactions and a 17% increase in bank card dollar volume.

 

Noninterest Expense. Noninterest expense for the three-month period ended September 30, 2020, was $13.5 million, an increase of $1.1 million, or 9.3%, as compared to the same period of the prior fiscal year. The increase was attributable primarily to increases in compensation and benefits, provisioning for off-balance sheet credit exposure, deposit insurance premiums, data processing expenses, and occupancy, partially offset by a reduction in other expenses, which included a variety of relatively small items that trended lower, including the costs of providing rewards checking products, employee travel expenses, and customer entertainment. Included in compensation expense was $150,000 in non-recurring expense related to the hiring of an investment representative for the Company’s wealth management group; otherwise, the increase over the prior year primarily reflected standard increases in compensation and an increase in employee headcount over the prior year, due in part to the Central Federal Acquisition, as well as a de novo branch opened early in the quarter. Data processing and occupancy expenses also increased in part due to the new facilities, while data processing expenses have also been higher since the implementation of a new data processing environment in the first half of fiscal 2020. Deposit insurance premiums reflected a return to a normalized level of premiums after the Company benefited from one-time assessment credits for much of the prior fiscal year. The efficiency ratio for the three-month period ended September 30, 2020, was 50.0%, as compared to 53.6% in the same period of the prior fiscal year, with the improvement attributable primarily to the current period’s increase in noninterest income.

 

Income Taxes. The income tax provision for the three-month period ended September 30, 2020, was $2.7 million, an increase of 39.0% as compared to the same period of the prior fiscal year, as higher pre-tax income combined with an increase in the effective tax rate, to 21.6%, as compared to 20.2% in the same period a year ago. While the Company generated higher levels of pre-tax income, investments in tax-advantaged assets were modestly reduced, resulting in a higher effective tax rate.

 

Allowance for Credit Loss Activity  

 

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

 

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


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The following table summarizes changes in the ACL over the three-month periods ended September 30, 2020 and 2019:

 

 

For the three months ended

 

September 30,

(dollars in thousands)

2020

2019

 

 

Balance, beginning of period

$                  25,139

$             19,903

Impact of CECL adoption

                      9,333

                        -

Loans charged off:

 

 

     Residential real estate

                         (19)

                        -

     Construction

                             -

                        -

     Commercial business

                       (145)

                        -

     Commercial real estate

                             -

                    (72)

     Consumer

                           (6)

                    (35)

     Gross charged off loans

                       (170)

                  (107)

Recoveries of loans previously charged off:

 

 

     Residential real estate

                             -

                        -

     Construction

                             -

                        -

     Commercial business

                             4

                      14

     Commercial real estate

                             1

                        4

     Consumer

                             3

                        -

      Gross recoveries of charged off loans

                             8

                      18

Net charge offs

                       (162)

                    (89)

Provision charged to expense

                         774

                    896

Balance, end of period

$                  35,084

$             20,710

 

 

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

 

Changes in lending policies and/or loan review system 

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

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

Experience, ability, and depth of lending management and staff 

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

Concentrations of credit 

Changes in collateral values 

Agricultural economic conditions 

Risks from regulatory, legal, or competitive factors 

 

At our June 30, 2020, fiscal year end, prior to the adoption of ASU 2016-13, the Company’s ALLL was $25.1 million. Upon adoption of the standard, effective July 1, 2020, the Company increased the ACL by $8.9 million, related to the transition from the incurred loss model to the CECL ACL model, increased the ACL by $434,000 related to the transition from PCI to PCD methodology, and reduced retained earnings by $6.9 million, net of deferred taxes, through a one-time cumulative effect adjustment.  For the three-month period ended September 30, 2020, the ACL increased by an additional $612,000, reflecting a charge to provision for credit losses of $774,000, and net charge offs of $162,000. The charge was based on the estimated required ACL, reflecting management’s estimate of the current expected credit losses in the Company’s loan portfolio at September 30, 2020, and as of that date the Company’s ACL was $35.1 million. While the Company’s management believes the ACL at September 30, 2020, is adequate, based on that estimate, there remains significant uncertainty regarding the possible length of the COVID-19 pandemic and the aggregate impact that it will have on global and regional economies, including uncertainty regarding the effectiveness of recent efforts by the U.S. government and the Federal Reserve to respond to the pandemic and its economic impact. Management considered the impact of the pandemic on its consumer and business borrowers, particularly those business borrowers most affected by efforts to contain the pandemic, including our borrowers in the retail and multi-tenant retail industry, restaurants, and hotels.


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

 

 

 

ACL as of

% of total

ALLL as of

% of total

 

 

September 30, 2020

ACL

June 30, 2020

ALLL

Real Estate Loans:

 

 

 

 

 

     Residential

 

$                  8,629

24.6%

$                  4,875

19.4%

     Construction

 

                    1,892

5.4%

                    2,010

8.0%

     Commercial

 

                  16,050

45.7%

                  12,132

48.3%

Consumer loans

 

                    2,305

6.6%

                    1,182

4.7%

Commercial loans

 

                    6,208

17.7%

                    4,940

19.6%

 

 

$                35,084

100.0%

$                25,139

100.0%

 

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

 

In recent months, following regulatory guidance encouraging financial institutions to work with borrowers affected by the COVID-19 pandemic, the Company has granted payment deferrals or interest-only modifications for borrowers. For loans that were otherwise current and performing prior to the COVID-19 pandemic, but for which borrowers anticipated difficulties in the coming months due to impact of the pandemic, the Company elected to not apply requirements of U.S. GAAP related to TDRs, as provided in the CARES Act. At September 30, 2020, such deferrals and modifications were in effect for approximately 250 loans totaling $93.6 million, as compared to approximately 900 loans totaling $380.2 million at June 30, 2020. Generally, deferrals were granted for three-month periods, while interest-only modifications were for six-month periods. Some loans were granted additional deferrals or modifications, and these loans were generally reviewed for potential adverse credit classification. At October 31, 2020, the balance of loans for which payment deferrals or interest-only modifications were in place had declined to approximately 59 loans with balances of $37.2 million. The table below illustrates the amount of such deferrals and modifications in relation to our loan portfolio by loan type and collateral or industry.

 

 

As of October 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

$              440,935

 

$                   221

 

$                   521

 

$               1,171

 

$               8,805

Multifamily residential loans

                196,324

 

                       -   

 

                 9,823

 

                        -   

 

               12,278

     Total residential loans

                637,259

 

                     221

 

               10,344

 

                 1,171

 

               21,083

1- to 4-family owner-occupied construction loans

                   24,761

 

                       -   

 

                       -   

 

                        -   

 

                       -   

1- to 4-family speculative construction loans

                   12,468

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Multifamily construction loans

                   42,134

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Other construction loans

                   34,037

 

                       -   

 

                 4,367

 

                 4,367

 

                       -   

     Total construction loan balances drawn

                113,400

 

                       -   

 

                 4,367

 

                 4,367

 

                       -   

Agricultural real estate loans

                183,636

 

                 1,772

 

                       -   

 

                 1,967

 

                 1,415

Loans for vacant land - developed, undeveloped,

          and other purposes

                   57,580

 

                       -   

 

                       -   

 

                        -   

 

                 1,203

Owner-occupied commercial real estate loans to:

 

 

 

 

 

 

 

 

 

Churches and nonprofits

                   19,232

 

                       -   

 

                       13

 

                        -   

 

                 1,449

Non-professional services

                   16,732

 

                       -   

 

                       -   

 

                        -   

 

                 2,106

Retail

                   25,079

 

                       -   

 

                       -   

 

                        -   

 

                 1,257

Automobile dealerships

                   21,828

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Healthcare providers

                     7,823

 

                       -   

 

                       -   

 

                        -   

 

                     330

Restaurants

                   47,697

 

                       -   

 

                 8,409

 

                        -   

 

                 5,694

Convenience stores

                   22,444

 

                       -   

 

                       -   

 

                        -   

 

                 1,303

Automotive services

                     9,587

 

                       -   

 

                       -   

 

                        -   

 

                     244

Manufacturing

                   18,653

 

                       -   

 

                 5,304

 

                        -   

 

                 7,262

Professional services

                   14,382

 

                       -   

 

                       -   

 

                        -   

 

                     354

Warehouse/distribution

                     4,865

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Grocery

                     5,522

 

                       -   

 

                       -   

 

                        -   

 

                       26

Other

                   22,902

 

                       -   

 

                       -   

 

                        -   

 

                     551

Total owner-occupied

       commercial real estate loans

                236,746

 

                       -   

 

               13,726

 

                        -   

 

               20,576


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As of October 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

                   33,466

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Non-professional services

                   14,387

 

                       -   

 

                       -   

 

                        -   

 

                 3,864

Retail

                   33,054

 

                     545

 

                       -   

 

                     545

 

                     525

Healthcare providers

                   33,474

 

                       -   

 

                       -   

 

                        -   

 

                     442

Restaurants

                   46,936

 

                       -   

 

                     412

 

                        -   

 

                     413

Convenience stores

                     8,945

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Automotive services

                     7,401

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Hotels

                   80,133

 

                       -   

 

                 1,470

 

                        -   

 

                 3,495

Manufacturing

                     5,046

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Storage units

                   14,357

 

                       -   

 

                     404

 

                        -   

 

                     404

Professional services

                   11,289

 

                       -   

 

                     460

 

                        -   

 

                     460

Multi-tenant retail

                   77,171

 

                       -   

 

                 1,985

 

                        -   

 

               14,872

Warehouse/distribution

                   26,075

 

                       -   

 

                       -   

 

                        -   

 

                 2,953

Other

                   30,840

 

                       -   

 

                       -   

 

                        -   

 

                 4,218

Total non-owner-occupied

       commercial real estate loans

                422,574

 

                     545

 

                 4,731

 

                     545

 

               31,646

     Total commercial real estate

                900,536

 

                 2,317

 

               18,457

 

                 2,512

 

               54,840

Home equity lines of credit

                   41,744

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Deposit-secured loans

                     4,738

 

                       -   

 

                       -   

 

                        -   

 

                         1

All other consumer loans

                   33,481

 

                     100

 

                       -   

 

                       83

 

                       92

     Total consumer loans

                   79,963

 

                     100

 

                       -   

 

                       83

 

                       93

Agricultural production and equipment loans

                114,260

 

                     351

 

                       -   

 

                     351

 

                       84

Loans to municipalities or other public units

                   10,066

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Commercial and industrial loans to:

                            -   

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Forestry, fishing, and hunting

                   14,992

 

                       -   

 

                       -   

 

                        -   

 

                     364

Construction

                   30,408

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Finance and insurance

                   49,404

 

                       -   

 

                       -   

 

                        -   

 

                       20

Real estate rental and leasing

                   26,882

 

                       -   

 

                       -   

 

                        -   

 

                       54

Healthcare and social assistance

                   38,080

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Accommodations and food services

                   31,806

 

                       -   

 

                       -   

 

                        -   

 

                     707

Manufacturing

                   15,945

 

                       -   

 

                     710

 

                        -   

 

                 3,097

Retail trade

                   47,852

 

                       -   

 

                       28

 

                        -   

 

                     874

Transportation and warehousing

                   37,612

 

                       -   

 

                     181

 

                        -   

 

                 3,071

Professional services

                     8,643

 

                       -   

 

                       -   

 

                        -   

 

                       12

Administrative support and waste management

                   10,203

 

                       -   

 

                       -   

 

                        -   

 

                       -   

Arts, entertainment, and recreation

                     4,255

 

                       -   

 

                       27

 

                     585

 

                       27

Other commercial loans

                   40,919

 

                       -   

 

                       79

 

                          8

 </