SOUTHERN MISSOURI BANCORP, INC. filed 10-K

SOUTHERN MISSOURI BANCORP, INC. files 10-K in a filing on September 13, 2019.

Residential Mortgage Lending. The Bank actively originates loans for the acquisition or refinance of one- to four-family residences. These loans are originated as a result of customer and real estate agent referrals, existing and walk-in customers and from responses to the Bank’s marketing campaigns. At June 30, 2019, residential loans secured by one- to four-family residences totaled $351.0 million, or 20.4% of net loans receivable.

The Bank generally originates one- to four-family residential mortgage loans for retention in its portfolio in amounts up to 90% of the lower of the purchase price or appraised value of residential property. For loans originated in excess of 80% loan-to-value, the Bank generally charges an additional 50-100 basis points, but does not require private mortgage insurance. At June 30, 2019, the outstanding balance of loans originated with a loan-to-value ratio in excess of 80% was $76.0 million. For fiscal years ended June 30, 2019, 2018, 2017, 2016, and 2015, originations of one- to four-family loans in excess of 80% loan-to-value have totaled $23.3 million, $26.3 million, $25.0 million, $16.5 million, and $24.3 million, respectively, totaling $115.4 million. The outstanding balance of those loans at June 30, 2019, was $61.2 million. Originating loans with higher loan-to-value ratios presents additional credit risk to the Bank. Consequently, the Bank limits this product to borrowers with a favorable credit history and a demonstrable ability to service the debt. The majority of new residential mortgage loans originated by the Bank for retention in its portfolio conform to secondary market underwriting standards, however, documentation of loan files may not be adequate to allow for immediate sale. The interest rates charged on these loans are competitively priced based on local market conditions, the availability of funding, and anticipated profit margins. Fixed and ARM loans originated by the Bank are amortized over periods as long as 30 years, but typically are repaid over shorter periods.

The Bank currently originates one- to four-family adjustable rate mortgage (‘ARM’) loans, which adjust annually, after an initial period of one to seven years. Typically, originated ARM loans secured by owner occupied properties reprice at a margin of 2.75% to 3.00% over the weekly average yield on United States Treasury securities adjusted to a constant maturity of one year (‘CMT’). Generally, ARM loans secured by non-owner occupied residential properties reprice at a margin of 3.75% over the CMT index. Current residential ARM loan originations are subject to annual and lifetime interest rate caps and floors. As a consequence of using interest rate caps, initial rates which may be at a premium or discount, and a “CMT” loan index, the interest earned on the Bank’s ARMs will react differently to changing interest rates than the Bank’s cost of funds. At June 30, 2019, one- to four-family loans tied to the CMT index totaled $144.8 million. One- to four-family loans tied to other indices totaled $37.7 million.

typically adjust daily, monthly, quarterly or annually based on the Wall Street prime interest rate. Generally, multi-family residential loans do not exceed 85% of the lower of the appraised value or purchase price of the secured property. The Bank generally requires a Board-approved independent certified fee appraiser to be engaged in determining the collateral value. As a general rule, the Bank requires the unlimited guaranty of all individuals (or entities) owning (directly or indirectly) 20% or more of the stock of the borrowing entity.

Commercial Real Estate Lending. The Bank actively originates loans secured by commercial real estate including land (improved and unimproved), shopping centers, retail establishments, nursing homes and other healthcare related facilities, and other businesses generally located in the Bank’s market area. At June 30, 2019, the Bank had $840.8 million in commercial real estate loans, which represented 45.5% of net loans receivable. Of this amount, $182.7 million were loans secured by agricultural properties. The increase over the last several fiscal years in agricultural lending is the result of an intentional focus by the Bank on that segment of our market, including the hiring of personnel with knowledge of agricultural lending and experience in that type of business development. The Bank expects to continue to grow its agricultural lending portfolio, but expects that the rate of growth experienced over the last several fiscal years is unlikely to be maintained. The Bank expects to continue to maintain or increase the percentage of commercial real estate loans, inclusive of agricultural properties, in its total portfolio.

Commercial real estate loans originated by the Bank are generally based on amortization schedules of up to 25 years with monthly principal and interest payments. Generally, these loans have fixed interest rates and maturities ranging up to seven 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 five years, based upon the Wall Street prime rate. The Bank typically includes an interest rate “floor” in the loan agreement. The Bank’s fixed-rate commercial real estate portfolio has a weighted average maturity of 49 months. Variable rate commercial real estate originations typically adjust daily, monthly, quarterly or annually based on the Wall Street prime rate. Generally, loans for improved commercial properties do not exceed 80% of the lower of the appraised value or the purchase price of the secured property. Agricultural real estate terms offered differ slightly, with amortization schedules of up to 25 years with an 80% loan-to-value ratio, or 30 years with a 75% loan-to-value ratio. Agricultural real estate loans generally require annual, instead of monthly, payments. Before credit is extended, the Bank analyzes the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property and the value of the property itself. Generally, personal guarantees are obtained from the borrower in addition to obtaining the secured property as collateral for such loans. The Bank also generally requires appraisals on properties securing commercial real estate to be performed by a Board-approved independent certified fee appraiser.

Construction Lending. The Bank originates real estate loans secured by property or land that is under construction or development. At June 30, 2019, the Bank had $123.3 million, or 6.7% of net loans receivable in construction loans outstanding.

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

Consumer Lending. The Bank offers a variety of secured consumer loans, including: home equity, direct and indirect automobile, second mortgage, mobile home and deposit-secured loans. The Bank originates substantially all of its consumer loans in its primary market 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. At June 30, 2019, the Bank’s consumer loan portfolio totaled $97.5 million, or 5.3% of net loans receivable.

Home equity loans represented 44.5% of the Bank’s consumer loan portfolio at June 30, 2019, and totaled $43.4 million, or 2.3% of net loans receivable.

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

Automobile loans represented 11.7% of the Bank’s consumer loan portfolio at June 30, 2019, and totaled $11.4 million, or 0.62% of net loans receivable. Of that total, an immaterial amount was originated by auto dealers. Typically, automobile loans are made for terms of up to 60 months for new and used vehicles. Loans secured by automobiles have fixed rates and are generally made in amounts up to 100% of the purchase price of the vehicle.

Commercial Business Lending. The Bank’s commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance accounts receivable, inventory, equipment and operating lines of credit. At June 30, 2019, the Bank had $355.9 million in commercial business loans outstanding, or 19.3% of net loans receivable. Of this amount, $95.5 million were loans related to agriculture, including amortizing equipment loans and annual production lines. The Bank expects to continue to maintain the current percentage of commercial business loans in its total loan portfolio.

From time to time, the Bank has purchased loan participations consistent with its loan underwriting standards. During fiscal 2019, the Bank committed to purchase $21.5 million of new loan participations. At June 30, 2019, loan participations totaled $31.9 million, or 1.73% of net loans receivable. At June 30, 2019, all of these participations were performing in accordance with their respective terms. The Bank evaluates additional loan participations on an ongoing basis, based in part on local loan demand, liquidity, portfolio and capital levels.

On the basis of management’s review of the assets of the Company, at June 30, 2019, adversely classified assets totaled $32.0 million, or 1.45% of total assets as compared to $18.2 million, or 0.96% of total assets at June 30, 2018. Of the amount adversely classified as of June 30, 2019, $32.0 million was considered substandard, and $35,000 was considered doubtful. Included in adversely classified assets at June 30, 2019, were various loans totaling $28.3 million (see Note 3 of Notes to the Consolidated Financial Statements contained in Item 8 for more information on adversely classified loans) and foreclosed real estate and repossessed assets totaling $3.8 million. The Company acquired adversely classified loans recorded at an acquisition date fair value of $17.5 million in the Gideon Acquisition. At June 30, 2019, the fair value of those acquired loans was $13.4 million. Adversely classified loans are so designated due to concerns regarding the borrower’s ability to generate sufficient cash flows to service the debt. Adversely classified loans totaling $14.6 million had been placed on nonaccrual status at June 30, 2019, of which $4.2 million were more than 30 days delinquent. Of the remaining $13.6 million of adversely classified loans, $10,000 were more than 30 days delinquent.

Allowance for Loan Losses. The Bank’s allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of loan activity, including those loans which are being specifically monitored. Such evaluation, which includes a review of loans for which full collectability may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in provisioning for loan losses. These provisions for loan losses are charged against earnings in the year they are established. The Bank had an allowance for loan losses at June 30, 2019, of $19.9 million, which represented 80% of nonperforming assets as compared to an allowance of $18.2 million, which represented 139% of nonperforming assets at June 30, 2018.

Debt and Other Securities. At June 30, 2019, the Company’s debt and other securities portfolio totaled $55.1 million, or 2.49% of total assets as compared to $56.2 million, or 2.98% of total assets at June 30, 2018. During fiscal 2019, the Bank had $14.1 million in maturities and $2.8 million in securities purchases. Of the securities that matured, $3.6 million was called for early redemption. At June 30, 2019, the investment securities portfolio included $7.3 million in U.S. government and government agency bonds, of which $4.5 million is subject to early redemption at the option of the issuer, and $42.8 million in municipal bonds, of which $36.7 million is subject to early redemption at the option of the issuer. The remaining portfolio consists of $5.1 million in other securities, including pooled trust preferred securities with an estimated fair value of $779,000. Based on projected maturities, the weighted average life of the debt and other securities portfolio at June 30, 2019, was 33 months. Membership stock held in the FHLB of Des Moines, totaling $5.2 million, FHLB of Chicago totaling $215,000, and the Federal Reserve Bank of St. Louis, totaling $4.4 million, along with equity stock of $775,000 in three correspondent (banker’s) banks, was not included in the above totals.

Mortgage-Backed Securities. At June 30, 2019, mortgage-backed securities (‘MBS’) totaled $110.4 million, or 5.0%, of total assets, as compared to $90.2 million, or 4.8%, of total assets at June 30, 2018. During fiscal 2019, the Bank had maturities and prepayments of $15.9 million and $28.4 million in purchases of MBS. At June 30, 2019, the MBS portfolio included $51.9 million in fixed-rate MBS, and $58.6 million in fixed rate collateralized mortgage obligations (‘CMOs’), all of which passed the Federal Financial Institutions Examination Council’s sensitivity test. Based on projected prepayment rates, the weighted average life of the MBS and CMOs at June 30, 2019, was 51 months. Actual prepayment rates experienced, which often vary due to changes in market interest rates, may cause the anticipated average life of MBS portfolio to extend or shorten as compared to prepayment rates anticipated.

Southern Missouri Statutory Trust I, a Delaware business trust subsidiary of the Company, issued $7.0 million in Floating Rate Capital Securities (the “Trust Preferred Securities”) with a liquidation value of $1,000 per share in March, 2004. The securities are due in 30 years, were redeemable after five years and bear interest at a floating rate based on LIBOR. At June 30, 2019, the current rate was 5.16%. The securities represent undivided beneficial interests in the trust, which was established by Southern Missouri Bancorp for the purpose of issuing the securities. The Trust Preferred Securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended (the “Act”) and have not been registered under the Act. The securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

In its October 2013 acquisition of Ozarks Legacy, the Company assumed $3.1 million in floating rate junior subordinated debt securities. The securities had been issued in June 2005 by Ozarks Legacy in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, and mature in 2035. At June 30, 2019, the carrying value was $2.6 million, and bore interest at a current coupon rate of 4.86% and an effective rate of 6.70%.

In the Peoples Acquisition, the Company assumed $6.5 million in floating rate junior subordinated debt securities. The debt securities had been issued in 2005 by PBC in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. At June 30, 2019, the carrying value was $5.2 million and bore interest at a current coupon rate of 4.21% and an effective rate of 6.68%.

In accordance with the Dodd-Frank Act, the FDIC has issued regulations setting insurance premium assessments based on an institution’s total assets minus its Tier 1 capital instead of its deposits.  The Bank’s FDIC premiums are based on its supervisory ratings and certain financial ratios.  Federal law required that the reserve ratio of the FDIC deposit insurance fund reach at least 1.35% by September 2020, and that depository institutions with consolidated assets of $10 billion or less receive assessment credits for the portion of their assessments that contributed to the growth of the reserve ratio from between 1.15% and 1.35%, to be applied when the reserve ratio is at or above 1.38%. In August 2019, the FDIC issued a notice of proposed rulemaking that would allow the assessment credits to be applied so long as the ratio remains above 1.35%. In September 2019, the Deposit Insurance Fund Reserve Ratio reached 1.40%, exceeding the required minimum reserve ratio to provide for receipt of assessment credits.

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

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

The capital regulations changed in the risk-weighting of certain assets in an effort to better reflect credit risk and other risk exposure compared to earlier regulations. These changes include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (set at 0%); and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital.

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

Under the prompt corrective action standards of the FRB, in order to be considered well-capitalized, the Bank must have a ratio of CET1 capital to risk-weighted assets of at least 6.5%, a ratio of Tier 1 capital to risk-weighted assets of at least 8%, a ratio of total capital to risk-weighted assets of at least 10%, and a leverage ratio of at least 5%; and in order to be considered adequately capitalized, it must have the minimum capital ratios described above. To be considered well-capitalized a bank holding company must have, on a consolidated basis, at least a Tier 1 risk-based capital ratio of at least 8% and a total risk-based capital ratio of at least 10% and not be subject to a higher enforceable individualized capital requirement. At June 30, 2019, the Bank and the Company were categorized as ‘well capitalized’ under these prompt corrective action standards.

Section 201 of the Act requires the Federal banking agencies to promulgate a rule establishing a new ‘Community Bank Leverage Ratio’ of 8%-10% for depository institutions and depository institution holding companies, with less than $10 billion in total consolidated assets. If such a depository institution or holding company maintains tangible equity in excess of this leverage ratio, it would be deemed to be in compliance with (1) the leverage and risk-based capital requirements promulgated by the Federal banking agencies; (2) in the case of a depository institution, the capital ratio requirements to be considered ‘well capitalized’ under the Federal banking agencies’ ‘prompt corrective action’ regime; and (3) ‘any other capital or leverage requirements to which the depository institution or holding company is subject, in each case unless the appropriate Federal banking agency determines otherwise based on the particular institution’s risk profile. In carrying out these requirements, the Federal banking agencies are required to consult with State banking regulators and notify the applicable State banking regulator of any qualifying community bank that exceeds or no longer exceeds the Community Bank Leverage Ratio. Regulations to implement the Community Bank Leverage Ratio have been proposed but not yet adopted in final form.

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

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

the past, a holding company to contribute additional capital to an undercapitalized subsidiary bank. Under the Dodd-Frank Act, this policy is codified and rules to implement it are to be established. Under the BHCA, a bank holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.

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

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

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

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

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

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

Our construction loan portfolio, which totaled $123.3 million, or 6.68% of loans, net, at June 30, 2019, includes residential and non-residential construction and development loans. Construction and development lending, especially non-residential construction and development lending, is generally considered to have more complex credit risks than traditional single-family residential lending because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and sale, leasing, or operation of the related real estate project. Consequently, these loans are often more sensitive to adverse conditions in the real estate market or the general economy than other real estate loans. These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a market decline. Additionally, we may experience significant construction loan losses because independent appraisers or project engineers inaccurately estimate the cost and value of construction loan projects.

At June 30, 2019, 64.8% of our loans, net, consisted of commercial real estate and commercial business loans to small and mid-sized businesses, generally located in our primary market area, which are the types of businesses that have a heightened vulnerability to local economic conditions. Over the last ten years, we have increased this type of lending from 47.9% of our portfolio at June 30, 2009, in order to improve the yield on our assets. At June 30, 2019, our loan portfolio included $840.8 million of commercial real estate loans and $355.9 million of commercial business loans compared to $704.6 million and $281.3 million, respectively, at June 30, 2018. The credit risk related to these types of loans is considered to be greater than the risk related to one- to four-family residential loans because the repayment of commercial real estate loans and commercial business loans typically is dependent on the successful operation and income stream of the borrower’s business or the real estate securing the loans as collateral, which can be significantly affected by economic conditions. Additionally, commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. Commercial loans not collateralized by real estate are often secured by collateral that may depreciate over time, be difficult to appraise and fluctuate in value (such as accounts receivable, inventory and equipment). If loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could require us to increase our provision for loan losses and adversely affect our operating results and financial condition.

changes in price supports, subsidies, and environmental regulations). In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired. The primary agricultural activity in our market areas is livestock, dairy, poultry, rice, timber, soybeans, wheat, melons, corn, and cotton. Accordingly, adverse circumstances affecting these activities could have an adverse effect on our agricultural real estate loan portfolio. Our agricultural real estate lending has grown significantly since June 30, 2009, when these loans totaled $21.3 million, or 5.5% of our loan portfolio.

Included in the commercial business loans described above are agricultural production and equipment loans. At June 30, 2019, these loans totaled $95.5 million, or 5.2%, of our loan portfolio, net. As with agricultural real estate loans, the repayment of operating loans is dependent on the successful operation or management of the farm property. The same risk applies to agricultural operating loans which are unsecured or secured by rapidly depreciating assets such as farm equipment or assets such as livestock or crops. Any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation to the collateral. Our agricultural operating loans have also grown significantly since June 30, 2009, when such loans totaled $27.5 million, or 7.1% of our loan portfolio.

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

During fiscal 2017, the Bank exceeded the 300% threshold for non-owner occupied commercial real estate loans (as defined in the guidance) as a percentage of total regulatory capital for the first time. The Bank’s highest level of concentration during fiscal 2017 was 303% of total regulatory capital at December 31, 2016. During fiscal 2018, the Bank remained below the 300% threshold throughout the fiscal year, and the highest level of concentration was 267% of total regulatory capital at September 30, 2017. During fiscal 2019, the Bank again remained below the 300% threshold throughout the fiscal year, and the highest level of concentration was 270% at December 31, 2018. The Bank reported 264% of total regulatory capital concentrated in non-owner occupied commercial real estate loans at June 30, 2019, as compared to 241% of the Bank’s total regulatory capital at June 30, 2018.

In recent years, the Company’s non-owner occupied commercial real estate loans (as defined in the guidance) has also approached the 300% of total regulatory capital threshold, but peaked at 293% of total regulatory capital at December 31, 2016. The Company reported 255% of total regulatory capital concentrated in non-owner occupied commercial real estate loans at June 30, 2019, as compared to 233% of total regulatory capital at June 30, 2018.

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

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

(1) At end of period. (2) All share and per share amounts have been adjusted for the two-for-one common stock split in the form of a 100% common stock dividend paid January 30, 2015.

All share and per share amounts have been adjusted for the two-for-one common stock split in the form of a 100% common stock dividend paid January 30, 2015.

All share amounts and per share amounts discussed below have been adjusted for the two-for-one common stock split in the form of a 100% common stock dividend paid January 30, 2015.

General. The Company experienced balance sheet growth in fiscal 2019, with total assets of $2.2 billion at June 30, 2019, reflecting an increase of $328.3 million, or 17.4%, as compared to June 30, 2018. Asset growth was comprised mainly of increases in loans, available-for-sale (‘AFS’) securities, cash equivalents and time deposits, and premises and equipment, and was attributable in large part to the Gideon Acquisition closed in November 2018.

Cash and equivalents. Cash and cash equivalents were $35.4 million at June 30, 2019, an increase of $9.1 million, or 34.5%, as compared to June 30, 2018. Interest-bearing time deposits were $969,000 at June 30, 2019, a decrease of $984,000, or 50.4%, as compared to June 30, 2018.

Investments. Available-for-sale (AFS) securities were $165.5 million at June 30, 2019, an increase of $19.2 million, or 13.1%, as compared to June 30, 2018. The increase was primarily the result of the acquisition an investment portfolio through the Gideon Acquisition, partially offset by sales and maturities in excess of purchases. By category, the Company increased holdings of mortgage backed securities (MBS) and collateralized mortgage obligations (CMOs) issued by government-sponsored entities, along with a small increase in municipal securities, while holdings of government-sponsored agency bonds declined.

Loans. Loans, net of the allowance for loan losses, were $1.8 billion at June 30, 2019, up $283.0 million, or 18.1%, as compared to June 30, 2018. The increase was attributable in large part to the Gideon Acquisition, which included loans recorded at a fair value of $144.3 million at the acquisition date. Inclusive of the Gideon Acquisition, the loan portfolio primarily saw growth in loans secured by commercial real estate, commercial loans, and residential real estate loans. Commercial real estate loans increased due mostly to growth in loans secured by nonresidential properties, accompanied by smaller increases in loans secured by agricultural real estate and unimproved land. The increase in commercial loan balances was attributable primarily to growth in commercial & industrial loan balances, accompanied by smaller increases in agricultural operating and equipment loans. Growth in residential real estate loans was attributable primarily to loans secured by multi-family real estate, accompanied by a smaller increase in loans secured by one- to four-family real estate.

Allowance for Loan Losses. The allowance for loan losses was $19.9 million at June 30, 2019, an increase of $1.7 million, or 9.3%, as compared to June 30, 2018. The allowance represented 1.07% of gross loans receivable at June 30, 2019, as compared to 1.15% of gross loans receivable at June 30, 2018. The decrease in the allowance as a percentage of gross loans receivable was primarily the result of the Gideon Acquisition, in which loans subject to purchase accounting, which the Company carries at fair value instead of establishing an allowance for loan losses, were added to the portfolio during the fiscal year. See also, Provision for Loan Losses, under Comparison of Operating Results for the Years Ended June 30, 2019 and 2018.

Premises and Equipment. Premises and equipment increased to $62.7 million, up $7.9 million, or 14.4%, as compared to June 30, 2018. The increase was due to facilities added through the Gideon Acquisition, the purchase of a previously leased facility, and other acquisitions of premises and equipment, partially offset by depreciation.

BOLI. The Bank has purchased ‘key person’ life insurance policies (BOLI) on employees at various times since fiscal 2003, and has acquired additional BOLI in connection with certain acquisitions. At June 30, 2019, the cash surrender value of all such policies had increased to $38.3 million, up $790,000, or 2.1%, as compared to June 30, 2018.

following the May 2018 enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act (Senate Bill 2155), has generally exempted deposits originated through such reciprocal arrangements from classification as brokered deposits for regulatory purposes, subject to some limitations. The average loan-to-deposit ratio for the fourth quarter of fiscal 2019 was 97.6%, as compared to 98.5% for the same period of the prior fiscal year.

Borrowings. FHLB advances were $44.9 million at June 30, 2019, a decrease of $31.7 million, or 41.4%, as compared to June 30, 2018, with the decrease attributable primarily to the Company’s use of brokered funding and sales of AFS securities (primarily those acquired in the Gideon Acquisition), as discussed above. The Company held no overnight advances at June 30, 2019, declining from a balance of $66.6 million at June 30, 2018, while term advances increased to $44.9 million at June 30, 2019, from $10.1 million a year earlier, partially as a result of term advances assumed in the Gideon Acquisition. In June 2017, the Company entered into a revolving, reducing line of credit with a five-year term, providing available credit of $15.0 million. The line of credit bears interest at a floating rate based on LIBOR, and available credit will be reduced by $3.0 million on each anniversary date of the line of credit. At June 30, 2019, the Company had a drawn balance of $3.0 million, and remaining availability of $6.0 million on the line of credit.

Stockholders’ Equity. The Company’s stockholders’ equity was $238.4 million at June 30, 2019, an increase of $37.7 million, or 18.8%, as compared to June 30, 2018. The increase was attributable to the retention of net income, the issuance of common shares in the Gideon Acquisition, and a decrease in accumulated other comprehensive loss, which was due to a decrease in market interest rates, partially offset by payment of dividends on common stock and modest repurchase activity totaling 35,351 shares acquired at an average price of $31.58 per share.

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

Net Interest Income. Net interest income for fiscal 2019 was $72.8 million, an increase of $10.4 million, or 16.7%, when compared to the prior fiscal year. The increase, as compared to the prior fiscal year, was attributable to a 16.6% increase in the average balance of interest-earning assets, while the net interest margin was unchanged at 3.78%. Average earning asset balance growth was due in part to the mid-fiscal 2019 Gideon Acquisition and the full-year effect of the mid-2018 SMB Marshfield Acquisition. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Peoples Acquisition was $765,000 in fiscal 2019, as compared to $1.0 million in fiscal 2018. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Capaha Acquisition was $1.1 million in fiscal 2019, as compared to $1.1 million in fiscal 2018. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the SMB-Marshfield Acquisition was $274,000 in fiscal 2019, as compared to $127,000 in fiscal 2018. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Gideon Acquisition was $808,000 in fiscal 2019, with no comparable contributions in fiscal 2018. In total, these components of net interest income contributed an additional 15 basis points to the net interest margin in fiscal 2019, as compared to a contribution of 14 basis points in fiscal 2018. The Company expects the impact of fair value discount accretion related to most acquisitions to decline in fiscal 2020, though discount accretion recognized over the course of a full fiscal year related to the Gideon Acquisition will partially offset that decrease.

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

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

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

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

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

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

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

Noninterest Income. Noninterest income was $15.2 million for fiscal 2019, an increase of $1.3 million, or 9.4%, when compared to the prior fiscal year. The increase was attributable in part to the mid-fiscal 2019 Gideon Acquisition and the mid-fiscal 2018 SMB-Marshfield Acquisition, and consisted of higher bank card interchange income, deposit account service charges, and earnings on bank owned life insurance (BOLI), which increased in part due to a $346,000 nonrecurring benefit. These increases were partially offset by lower loan servicing fees, loan origination and other loan fees, and gains on the sale of available-for-sale securities.

Noninterest Expense. Noninterest expense was $50.0 million for fiscal 2019, an increase of $5.5 million, or 12.4%, when compared to the prior fiscal year. The increase in noninterest expense was attributable in part to the mid-fiscal 2019 Gideon Acquisition and the mid-fiscal 2018 SMB-Marshfield Acquisition, and resulted primarily from higher compensation expense, occupancy expense, bank card network expense, amortization of core deposit intangibles, deposit insurance premiums, and other operating expenses, including expenses related to and losses on the disposition of foreclosed real estate, provision for off-balance sheet credit exposure, and expenses to provide rewards checking products and electronic banking services. These increases were partially offset by decreases in legal and professional fees, as the Company incurred less legal expense related to acquisition activity during the period. In total, fiscal 2019 results included $829,000 in merger-related charges, as compared to $925,000 in comparable expenses for the prior fiscal year.

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

Net Income. The Company’s net income available to common stockholders for the fiscal year ended June 30, 2018, was $20.9 million, an increase of $5.4 million, or 34.6%, as compared to the prior fiscal year.

Net Interest Income. Net interest income for fiscal 2018 was $62.4 million, an increase of $11.3 million, or 22.0%, when compared to the prior fiscal year. The increase, as compared to the prior fiscal year, was attributable to a 20.9% increase in the average balance of interest-earning assets, combined with an increase in the net interest margin, from 3.74% to 3.78%. Average earning asset balance growth was due in part to the late-fiscal 2017 Capaha Acquisition and the mid-2018 SMB Marshfield Acquisition. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Peoples Acquisition was $1.0 million in fiscal 2018, as compared to $1.5 million in fiscal 2017. Accretion of fair value discount on loans and amortization of fair value premiums on time deposits related to the Capaha Acquisition and the SMB-Marshfield Acquisition was $1.1 million and $127,000, respectively, in fiscal 2018, with no comparable contributions in fiscal 2017. In total, these components of net interest income contributed an additional 14 basis points to the net interest margin in fiscal 2018, as compared to a contribution of 11 basis points in fiscal 2017. The Company expects the impact of fair value discount accretion related to the Peoples Acquisition and the Capaha Acquisition to decline substantially in fiscal 2018, though discount accretion recognized over the course of a full fiscal year related to the SMB-Marshfield Acquisition will offset that decrease to a smaller degree.

Interest Income. Interest income for fiscal 2018 was $77.2 million, an increase of $15.7 million, or 25.5%, when compared to the prior fiscal year. The increase was due to an increase of $285.8 million, or 20.9%, in the average balance of interest-earning assets, combined with a 17 basis point increase in the average yield earned on interest-earning assets, from 4.50% in fiscal 2017, to 4.67% in fiscal 2018.

Interest income on loans receivable for fiscal 2018 was $73.1 million, an increase of $15.1 million, or 26.1%, when compared to the prior fiscal year. The increase was due to a $268.1 million increase in the average balance of loans receivable, combined with a 16 basis point increase in the average yield earned on loans receivable. The increase in the average yield was attributed primarily to origination and repricing of loans and borrower refinancing as market interest rates have increased over the last two years, as well as an increase in the accretion of fair value discount on loans attributable to the Peoples, Capaha, and SMB-Marshfield acquisitions, which increased to $2.2 million in fiscal 2018, as compared to $1.3 million in fiscal 2017.

Interest income on the investment portfolio and other interest-earning assets was $4.1 million for fiscal 2018, an increase of $552,000, or 15.8%, when compared to the prior fiscal year. The increase was due to a seven basis point increase in the average yield earned on these assets, combined with a $17.7 million increase in the average balance of these assets.

Interest Expense. Interest expense was $14.8 million for fiscal 2018, an increase of $4.4 million, or 42.7%, when compared to the prior fiscal year. The increase was due to the $202.6 million increase in the average balance of interest-bearing liabilities, combined with a 19 basis point increase in the average rate paid on interest-bearing liabilities, from 0.86% in fiscal 2017 to 1.05% in fiscal 2018.

Interest expense on deposits was $12.8 million for fiscal 2018, an increase of $4.4 million, or 51.4%, when compared to the prior fiscal year. The increase was due primarily to the $256.2 million increase in the average balance of interest-bearing deposits, combined with a 17 basis point increase in the average rate paid on those deposits.

Interest expense on FHLB advances was $1.0 million for fiscal 2017, a decrease of $97,000, or 8.5%, when compared to the prior fiscal year. The decrease was due to a $39.5 million decrease in the average balance of FHLB advances, partially offset by a 66 basis point increase in the average rate paid on those advances. The increase in the average rate paid was attributable primarily to the continuing increases in the overnight borrowing rate.

The provision for loan losses was $3.0 million for fiscal 2018, an increase of $707,000, or 30.2%, as compared to the prior fiscal year. The increase in provision was attributed primarily to stronger organic loan growth. The provision also increased, in part, due to an increase in nonperforming loans. In fiscal 2018, net charge offs were $371,000, as compared to $593,000 for the prior fiscal year. At June 30, 2018, classified loans totaled $14.2 million, or 0.90% of gross loans, as compared to $13.3 million, or 0.94% of gross loans, at June 30, 2017. Classified loans were comprised primarily of commercial real estate, residential real estate, and commercial operating loans. All loans so designated were classified due to concerns as to the borrowers’ ability to continue to generate sufficient cash flows to service the debt.

Noninterest Income. Noninterest income was $13.9 million for fiscal 2018, an increase of $2.8 million, or 25.1%, when compared to the prior fiscal year. The increase was attributable in part to the late-fiscal 2017 Capaha Acquisition and the mid-2018 SMB-Marshfield Acquisition, and consisted of higher bank card interchange income, deposit account service charges, loan servicing fees, gains on the sale of available-for-sale securities, and loan origination and other loan fees, partially offset by reduced earnings on bank-owned life insurance (BOLI).

Noninterest Expense. Noninterest expense was $44.5 million for fiscal 2018, an increase of $6.2 million, or 16.3%, when compared to the prior fiscal year. The increase in noninterest expense was attributable primarily to increased compensation expense, occupancy expense, amortization of core deposit intangibles, and bank card network expense, partially offset by inclusion in the prior period’s results of charges to recognize the impairment of fixed assets and expenses attributable to the prepayment of FHLB advances. Fiscal 2018 results included $925,000 in merger-related charges, as compared to $710,000 in comparable expenses for the prior fiscal year.

Provision for Income Taxes. The Company recorded an income tax provision of $7.8 million for fiscal 2018, an increase of $1.7 million, or 28.7%, as compared to the prior fiscal year, as the Company saw increased earnings before tax, but the effective tax rate for fiscal 2018 was lower, at 27.2%, as compared to 28.0% for fiscal 2017. The decrease in the effective tax rate was attributable primarily to the December 2017 enactment of a reduction in the federal corporate income tax (FCIT) rate, partially offset by the required revaluation of the Company’s deferred tax asset (DTA), which increased our provision for income taxes by approximately $1.1 million, and our effective tax rate by approximately 3.9 percentage points. Due to the Company’s fiscal and tax year end of June 30, it did not achieve the full benefit of the reduced FCIT rate in fiscal 2018, but utilized a statutory tax rate that approximates the mid-point of the old FCIT rate of 35% and the new FCIT rate of 21%.

Southern Missouri uses its liquid assets as well as other funding sources to meet ongoing commitments, to fund loan demand, to repay maturing certificates of deposit and FHLB advances, to make investments, to fund other deposit withdrawals and to meet operating expenses. At June 30, 2019, the Bank had outstanding commitments to extend credit of $317.4 million (including $224.6 million in unused lines of credit). Total commitments to originate fixed-rate loans with terms in excess of one year were $42.6 million at rates ranging from 3.35% to 15.00%, with a weighted-average rate of 5.43%. Management anticipates that current funding sources will be adequate to meet foreseeable liquidity needs.

For the fiscal year ended June 30, 2019, Southern Missouri increased deposits and securities sold under agreements to repurchase, by $313.8 million, and $1.1 million, respectively, and reduced FHLB advances by $31.7 million.  During the prior fiscal year, Southern Missouri increased deposits and FHLB advances by $124.3 million and $33.0 million, respectively, and reduced securities sold under agreements to repurchase by $6.9 million. At June 30, 2019, the Bank had pledged $754.4 million of its single-family residential and commercial real estate loan portfolios to the FHLB for available credit of approximately $365.5 million, of which $45.3 million was advanced, while none was utilized for the issuance of letters of credit to secure public unit deposits. The Bank had also pledged $246.9 million of its agricultural real estate and agricultural operating and equipment loans to the Federal Reserve’s discount window for available credit of approximately $181.7 million, as of June 30, 2019, none of which was advanced. In addition, the Bank has the ability to pledge several of its other loan portfolios, including, for example, its multi-family residential real estate, home equity, or commercial business loans. In total, FHLB borrowings are limited to 45% of Bank assets, or approximately $975.9 million as most recently reported by the FHLB on June 30, 2019, which means that an amount up to $930.5 million may still be eligible to be borrowed from the FHLB, subject to available collateral. Along with the ability to borrow from the FHLB and Federal Reserve, management believes its liquid resources will be sufficient to meet the Company’s liquidity needs.

At June 30, 2019, the Bank exceeded regulatory capital requirements with tier 1 leverage, total risk-based capital, and tangible common equity capital of $226.0 million, $247.2 million and $226.0 million, respectively. The Bank’s tier 1 capital represented 10.38% of total adjusted assets and 11.71% of total risk-weighted assets, while total risk-based capital was 12.81% of total risk-weighted assets, and tangible common equity capital was 11.71% of total risk-weighted assets. To be considered adequately capitalized, the Bank must maintain tier 1 leverage capital levels of at least 4.0% of adjusted total assets and 6.0% of risk-weighted assets, total risk-based capital of 8.0% of risk-weighted assets, and tangible common equity capital of 4.5%. To be considered well capitalized, the Bank must maintain tier 1 leverage capital levels of at least 5.0% of adjusted total assets and 8.0% of risk-weighted assets, total risk-based capital of 10.0% of risk-weighted assets, and tangible common equity capital of 6.5%.

At June 30, 2019, the Company exceeded regulatory capital requirements with tier 1 leverage, total risk-based capital, and tangible common equity capital of $235.8 million, $257.0 million and $220.7 million, respectively. The Company’s tier 1 capital represented 10.81% of total adjusted assets and 12.13% of total risk-weighted assets, while total risk-based capital was 13.22% of total risk-weighted assets, and tangible common equity capital was 11.35% of total risk-weighted assets. To be considered adequately capitalized, the Company must maintain tier 1 leverage capital levels of at least 4.0% of adjusted total assets and 6.0% of risk-weighted assets, total risk-based capital of 8.0% of risk-weighted assets, and tangible common equity capital of 4.5%.

The Company continues to generate long-term, fixed-rate residential loans. During the fiscal year ended June 30, 2019, fixed rate residential loan originations totaled $70.2 million (of which $30.8 million was originated for sale into the secondary market), compared to $60.4 million during the prior year (of which $29.8 million was originated for sale into the secondary market). At June 30, 2019, the fixed-rate residential loan portfolio totaled $169.8 million, with a weighted average maturity of 95 months, compared to $161.2 million with a weighted average maturity of 100 months at June 30, 2018. The Company originated $35.9 million in adjustable rate residential loans during the fiscal year ended June 30, 2019, compared to $35.7 million during the prior fiscal year. At June 30, 2019, fixed rate loans with remaining maturities in excess of 10 years totaled $35.0 million, or 1.9%, of loans receivable, compared to $38.6 million, or 2.5%, of loans receivable, at June 30, 2018. The Company originated $304.2 million in fixed rate commercial and commercial real estate loans during the year ended June 30, 2019, compared to $246.1 million during the prior fiscal year. The Company also originated $73.6 million in adjustable rate commercial and commercial real estate loans during the fiscal year ended June 30, 2019, compared to $74.1 million during the prior fiscal year. At June 30, 2019, adjustable-rate home equity lines of credit totaled $43.4 million, compared to $39.3 million as of June 30, 2018. At June 30, 2019, the Company’s weighted average life of its investment portfolio was 3.8 years, compared to 4.3 years at June 30, 2018. At June 30, 2019, CDs with original terms of two years or more totaled $234.6 million, compared to $220.4 million at June 30, 2018.

The Company did not hold any securities of a single issuer, payable from and secured by the same source of revenue or taxing authority, the book value of which exceeded 10% of stockholders’ equity at June 30, 2019.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2019, was $51.8 million, which is approximately 31.3% of the Company’s available for sale investment portfolio, as compared to $124.9 million or approximately 85.4% of the Company’s available for sale investment portfolio at June 30, 2018.   Except as discussed below, management believes the declines in fair value for these securities to be temporary.

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

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

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 seven 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.

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

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

Southern Missouri Statutory Trust I issued $7.0 million of Floating Rate Capital Securities (the ‘Trust Preferred Securities’) with a liquidation value of $1,000 per share in March 2004. The securities are due in 30 years, redeemable after five years and bear interest at a floating rate based on LIBOR. At June 30, 2019, the current rate was 5.16%. 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.

In connection with its October 2013 acquisition of Ozarks Legacy Community Financial, Inc. (OLCF), the Company assumed $3.1 million in floating rate junior subordinated debt securities. The debt securities had been issued in June 2005 by OLCF in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. At June 30, 2019, the current rate was 4.86%. The carrying value of the debt securities was approximately $2.6 million at June 30, 2019, and June 30, 2018.

In connection with its August 2014 acquisition of Peoples Service Company, Inc. (PSC), the Company assumed $6.5 million in floating rate junior subordinated debt securities. The debt securities had been issued in 2005 by PSC’s subsidiary bank holding company, Peoples Banking Company, in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. At June 30, 2019, the current rate was 4.21%.  The carrying value of the debt securities was approximately $5.2 million at June 30, 2019, and $5.1 million at June 30, 2018.

401(k) Retirement Plan. The Bank has a 401(k) retirement plan that covers substantially all eligible employees. The Bank makes ‘safe harbor’ matching contributions of up to 4% of eligible compensation, depending upon the percentage of eligible pay deferred into the plan by the employee. Additional profit-sharing contributions of 5% of eligible salary have been accrued for the plan year ended June 30, 2019, which the board of directors authorizes based on management recommendations and financial performance for fiscal 2019. Total 401(k) expense for fiscal 2019, 2018, and 2017 was $1.3 million, $1.3 million, and $877,000, respectively. At June 30, 2019, 401(k) plan participants held approximately 366,000 shares of the Company’s stock in the plan. Employee deferrals and safe harbor contributions are fully vested. Profit-sharing or other contributions vest over a period of five years.

Management Recognition Plans (MRPs). The Bank adopted an MRP for the benefit of non-employee directors and two MRPs for officers and key employees (who may also be directors) in April 1994. During fiscal 2012, the Bank granted 6,072 MRP shares (split-adjusted) to employees. The shares granted were in the form of restricted stock vested at the rate of 20% of such shares per year. For fiscal 2017, there were 1,214 shares vested; no shares vested in fiscal 2019 or 2018. Compensation expense, in the amount of the fair market value of the common stock at the date of grant, was recognized pro-rata over the five years during which the shares vest. The MRP expense for fiscal 2017 was $13,000; there was no expense attributable to the plan in fiscal 2019 or 2018. At June 30, 2019, there was no unvested compensation expense related to the MRP, and no shares remained available for award.

Full value awards totaling 15,000 and 22,000 shares, respectively, were issued to employees and directors in fiscal 2019 and 2018. All full value awards were in the form of either restricted stock vesting at the rate of 20% of such shares per year, or performance-based restricted stock vesting at up to 20% of such shares per year, contingent on the achievement of specified profitability targets over a three-year period. During fiscal 2019, full value awards of 4,200 shares were vested, while no full value awards vested in fiscal 2018 or 2017. Compensation expense, in the amount of the fair market value of the common stock at the date of grant, is recognized pro-rata over the five years during which the shares vest. Compensation expense for full value awards under the 2017 Plan for fiscal 2019, 2018, and 2017 was $189,000, $60,000, and $0, respectively. At June 30, 2019, unvested compensation expense related to full value awards under the 2017 Plan was approximately $1.0 million.

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

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

At June 30, 2019, total commitments to originate fixed-rate loans with terms in excess of one year were $42.6 million at rates ranging from 3.35% to 15.00%, with a weighted-average rate of 5.43%. Commitments to extend credit and standby letters of credit include exposure to some credit loss in the event of nonperformance of the customer. The Company’s policies for credit commitments and financial guarantees are the same as those for extension of credit that are recorded in the balance sheet. The commitments extend over varying periods of time with the majority being disbursed within a thirty-day period.

Receive News & Ratings Via Email - Enter your email address below to receive a concise daily summary of the latest news and analysts' ratings with our FREE daily email newsletter.