What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-08-07 compared with 2020-05-08 · 342 added, 132 removed, 896 unchanged (35% of the section changed)

8 unchanged sentences

Mortgage loans held for sale

Loans receivable, net of allowance for loan losses of $ 43,928 – March 2020;

Loans receivable, net of allowance for loan losses of $ 49,801 – June 2020;

$ 40,294 - December 2019

20 unchanged sentences

authorized 1,000,000 shares;

and outstanding March 2020 and December 2019 - - 0 - shares

and outstanding June 2020 and December 2019 - - 0 - shares

Common stock, $ 0.01 par value;

authorized 20,000,000 shares;

issued and outstanding March 2020 – 14,083,820 shares;

issued and outstanding June 2020 – 14,084,420 shares;

December 2019 - 14,261,052 shares

47 unchanged sentences

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

SIX MONTHS ENDED

INTEREST INCOME

Investment securities and other

TOTAL INTEREST INCOME

INTEREST EXPENSE

Short-term borrowings and repurchase agreements

Subordinated debentures issued to capital trust

Subordinated notes

TOTAL INTEREST EXPENSE

NET INTEREST INCOME

PROVISION FOR LOAN LOSSES

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

NON-INTEREST INCOME

Service charges and ATM fees

Net gains on loan sales

Net realized gains on sales of available-for-sale securities

Late charges and fees on loans

Loss on derivative interest rate products

TOTAL NON-INTEREST INCOME

NON-INTEREST EXPENSE

Salaries and employee benefits

Net occupancy and equipment expense

Office supplies and printing

Legal, audit and other professional fees

Expense on other real estate and repossessions

Partnership tax credit investment amortization

Acquired deposit intangible asset amortization

Other operating expenses

TOTAL NON-INTEREST EXPENSE

INCOME BEFORE INCOME TAXES

PROVISION FOR INCOME TAXES

NET INCOME AND NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

Basic Earnings Per Common Share

Diluted Earnings Per Common Share

Dividends Declared Per Common Share

See Notes to Consolidated Financial Statements

GREAT SOUTHERN BANCORP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

1 unchanged sentence

THREE MONTHS ENDED

Unrealized appreciation on available-for-sale securities, net of taxes of $ 3,411 and $ 879 , for 2020 and 2019, respectively

Reclassification adjustment for gains included in net income, net of taxes of $ 0 and $ 2 ,for 2020 and 2019, respectively

Change in fair value of cash flow hedge, net of taxes of $ 3,519 and $ 1,712 , for 2020 and 2019, respectively

Amortization of realized gain on termination of cash flow hedge, net of taxes (credit) of $( 147 ) and $ 0 for 2020 and 2019, respectively

Unrealized appreciation on available-for-sale securities, net of taxes of $ 1,602

and $ 1,540 , for 2020 and 2019, respectively

Reclassification adjustment for gains included in net income, net of taxes

of $ 18 and $ 0 , for 2020 and 2019, respectively

Change in fair value of cash flow hedge, net of taxes of $ 0 and $ 2,519 , for

2020 and 2019, respectively

Amortization of realized gain on termination of cash flow hedge, net of taxes

(credit) of $( 461 ) and $ 0 for 2020 and 2019, respectively

Comprehensive Income

SIX MONTHS ENDED

Unrealized appreciation on available-for-sale securities, net of taxes of $ 5,013

and $ 2,419 , for 2020 and 2019, respectively

Reclassification adjustment for gains included in net income, net of taxes of

$ 18 and $ 2 , for 2020 and 2019, respectively

Change in fair value of cash flow hedge, net of taxes of $ 3,519 and $ 4,231 , for

2020 and 2019, respectively

Amortization of realized gain on termination of cash flow hedge, net of taxes

(credit) of $( 608 ) and $ 0 for 2020 and 2019, respectively

Comprehensive Income

See Notes to Consolidated Financial Statements

3 unchanged sentences

(In thousands, except per share data)

THREE MONTHS ENDED MARCH 31, 2019

THREE MONTHS ENDED JUNE 30, 2019

Comprehensive

1 unchanged sentence

Income (Loss)

Balance, March 31, 2019

Stock issued under Stock Option

Common dividends declared,

$0.32 per share

Other comprehensive gain

Reclassification of treasury stock

per Maryland law

Balance, June 30, 2019

THREE MONTHS ENDED JUNE 30, 2020

Comprehensive

Paid-in Capital

Income (Loss)

Balance, March 31, 2020

Stock issued under Stock Option

Common dividends declared,

$0.34 per share

Other comprehensive gain

Reclassification of treasury stock

per Maryland law

Balance, June 30, 2020

See Notes to Consolidated Financial Statements

GREAT SOUTHERN BANCORP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except per share data)

SIX MONTHS ENDED JUNE 30, 2019

Comprehensive

Paid-in Capital

Income (Loss)

Balance, January 1, 2019

6 unchanged sentences

per Maryland law

Balance, March 31, 2019

THREE MONTHS ENDED MARCH 31, 2020

Balance, June 30, 2019

SIX MONTHS ENDED JUNE 30, 2020

Comprehensive

9 unchanged sentences

per Maryland law

Balance, March 31, 2020

Balance, June 30, 2020

See Notes to Consolidated Financial Statements

3 unchanged sentences

(In thousands)

THREE MONTHS ENDED

SIX MONTHS ENDED

CASH FLOWS FROM OPERATING ACTIVITIES

31 unchanged sentences

CASH FLOWS FROM FINANCING ACTIVITIES

Net increase in certificates of deposit

Net increase (decrease) in certificates of deposit

Net increase in checking and savings deposits

1 unchanged sentence

Advances from borrowers for taxes and insurance

Proceeds from issuance of subordinated notes

Dividends paid

2 unchanged sentences

Net cash provided by financing activities

INCREASES IN CASH AND CASH EQUIVALENTS

INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

10 unchanged sentences

Those adjustments consist only of normal recurring adjustments.

Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year.

Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the full year.

The consolidated statement of financial condition of the Company as of December 31, 2019, has been derived from the audited consolidated statement of financial condition of the Company as of that date.

2 unchanged sentences

Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for 2019 filed with the Securities and Exchange Commission.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission.

NATURE OF OPERATIONS AND OPERATING SEGMENTS

18 unchanged sentences

Accounting Standards Board (the “FASB”), we elected to delay adoption of the new accounting standard related to accounting for credit losses (“CECL”).

Our first quarter financial statements are prepared under the existing incurred loss methodology standard for accounting for loan losses.

Our second quarter and year-to-date financial statements are prepared under the existing incurred loss methodology standard for accounting for loan losses.

The adoption of the CECL model will require us to recognize a one-time cumulative adjustment to our allowance for loan losses and a liability for potential losses related to the unfunded portion of our loans and commitments in order to fully transition from the incurred loss model to the CECL model.

1 unchanged sentence

The after-tax effect of this is expected to result in a decrease in our retained earnings of $14 million to $18 million.

Further, we have analyzed the impact on our financial statements at and for the three months ended March 31, 2020 as if we had adopted the CECL accounting standard on January 1, 2020.

In addition to the impact from the initial adoption above, under CECL we would expect to increase the balance of our allowance for credit losses in a range of $7 million to $12 million through a corresponding increase in provision for credit losses during the three months ended March 31, 2020.

The liability for potential losses related to the unfunded portion of our loans and commitments would be expected to increase in a range of $1 million to $2 million through a corresponding increase in non-interest expense during the three months ended March 31, 2020.

Further, we have analyzed the impact on our financial statements at and for the six months ended June 30, 2020 as if we had adopted the CECL accounting standard on January 1, 2020.

In addition to the impact from the initial adoption above, under CECL we would expect to further increase the balance of our allowance for credit losses in a range of $3 million to $7 million through a corresponding increase in provision for credit losses during the six months ended June 30, 2020.

This is in addition to the $9.9 million of provision expense already recorded under the incurred loss method during the six months ended June 30, 2020.

The liability for potential losses related to the unfunded portion of our loans and commitments would be expected to have no material change during the six months ended June 30, 2020.

These estimates are subject to change as material assumptions are refined and model validations are completed.

9 unchanged sentences

The impact of adopting this new guidance during the quarter ended March 31, 2020 did not have a material impact on the Company’s consolidated financial statements.

At March 31, 2020, the Company evaluated the current circumstances brought about by the COVID-19 pandemic and its effect on the valuation of the Company and other bank holding companies and determined that no triggering event had occurred requiring an evaluation of goodwill or other intangible asset impairment.

At June 30, 2020, the Company evaluated the current circumstances brought about by the COVID-19 pandemic and its effect on the valuation of the Company and other bank holding companies and determined that no triggering event had occurred requiring an evaluation of goodwill or other intangible asset impairment.

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.

4 unchanged sentences

EARNINGS PER SHARE

Three Months Ended March 31,

Three Months Ended June 30,

(In Thousands, Except Per Share Data)

8 unchanged sentences

Per common share amount

Options outstanding at March 31, 2020 and 2019, to purchase 568,551 and 413,719 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 March 31, 2020 and 2019, respectively.

Six Months Ended June 30,

(In Thousands, Except Per Share Data)

Average common shares outstanding

Net income and net income available to common stockholders

Per common share amount

Average common shares outstanding

Net effect of dilutive stock options – based on the treasury

stock method using average market price

Diluted common shares

Net income and net income available to common stockholders

Per common share amount

Options outstanding at June 30, 2020 and 2019, to purchase 653,794 and 309,000 shares of common stock, respectively, were not included in the computation of diluted earnings per common share for 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 June 30, 2020 and 2019, respectively.

Options outstanding at June 30, 2020 and 2019, to purchase 565,401 and 309,000 shares of common stock, respectively, were not included in the computation of diluted earnings per common share for the six month periods because the exercise prices of such options were greater than the average market prices of the common stock for the six months ended June 30, 2020 and 2019, respectively.

INVESTMENT SECURITIES

The amortized cost and fair values of securities classified as available-for-sale were as follows:

March 31, 2020

June 30, 2020

(In Thousands)

11 unchanged sentences

Small Business Administration securities

The amortized cost and fair value of available-for-sale securities at March 31, 2020, by contractual maturity, are shown below.

The amortized cost and fair value of available-for-sale securities at June 30, 2020, by contractual maturity, are shown below.

Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

5 unchanged sentences

Securities not due on a single maturity date

There were no securities classified as held to maturity at March 31, 2020 or December 31, 2019.

There were no securities classified as held to maturity at June 30, 2020 or December 31, 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 March 31, 2020 and December 31, 2019, was approximately $ 9.7 million and $ 116.2 million, respectively, which is approximately 2.5 % and 31.1 % of the Company’s available-for-sale investment portfolio, respectively.

Total fair value of these investments at June 30, 2020 and December 31, 2019, was approximately $ 504 ,000 and $ 116.2 million, respectively, which is approximately 0.1 % and 31.1 % of the Company’s available-for-sale investment portfolio, respectively.

Based on an evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary.

The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2020 and December 31, 2019:

March 31, 2020

June 30, 2020

Less than 12 Months

2 unchanged sentences

(In Thousands)

Agency collateralized mortgage

States and political subdivisions

December 31, 2019

4 unchanged sentences

Agency mortgage-backed securities

Agency collateralized mortgage

Small Business Administration

There were no sales of available-for-sale securities during the three months ended March 31, 2020.

Gross gains of $ 226 ,000 and gross losses of $ 216 ,000 resulting from sales of available-for-sale securities were realized during the three months ended March 31, 2019.

Agency collateralized mortgage obligations

Small Business Administration securities

Gross gains of $ 78 ,000 resulting from sales of available-for-sale securities were realized during the three and six months ended June 30, 2020.

No gains or losses from sales of available-for-sale securities were realized during the three months ended June 30, 2019.

Gross gains of $ 226 ,000 and gross losses of $ 216 ,000 resulting from sales of available-for-sale securities were realized during the six months ended June 30, 2019.

Gains and losses on sales of securities are determined on the specific-identification method.

2 unchanged sentences

The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities.

For securities where the security is a beneficial interest in securitized financial assets, the Company uses

the beneficial interests in securitized financial asset impairment model.

For securities where the security is a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model.

For securities where the security is not a beneficial interest in securitized financial assets, the Company uses the debt and equity securities impairment model.

3 unchanged sentences

If certain criteria are met, the Company performs additional review and evaluation using observable market values or various inputs in economic models to determine if an unrealized loss is other-than-temporary.

The Company uses quoted market prices for marketable equity securities and uses broker pricing quotes based on observable inputs for equity investments that are not traded on a stock exchange.

The Company uses quoted market prices for marketable equity securities and uses broker

pricing quotes based on observable inputs for equity investments that are not traded on a stock exchange.

For non-agency collateralized mortgage obligations, to determine if the unrealized loss is other than temporary, the Company projects total estimated defaults of the underlying assets (mortgages) and multiplies that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss.

1 unchanged sentence

If the Company determines that a given security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings.

During the three months ended March 31, 2020, no securities were determined to have impairment that had become other-than-temporary.

During the three and six months ended June 30, 2020, no securities were determined to have impairment that had become other-than-temporary.

Credit Losses Recognized on Investments.

During the three months ended March 31, 2020 and 2019, respectively, there were no debt securities that had experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired.

During the three and six months ended June 30, 2020 and 2019, respectively, there were no debt securities that had experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired.

LOANS AND ALLOWANCE FOR LOAN LOSSES

Classes of loans at March 31, 2020 and December 31, 2019 were as follows:

Classes of loans at June 30, 2020 and December 31, 2019 were as follows:

(In Thousands)

18 unchanged sentences

Classes of loans by aging were as follows:

March 31, 2020

June 30, 2020

Still Accruing

62 unchanged sentences

Home equity lines of credit

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2020.

Also presented are the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2020:

The following table presents the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2020.

Also presented are the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2020:

One- to Four-

2 unchanged sentences

Allowance for loan losses

Balance, April 1, 2020

Provision (benefit) charged to

Losses charged off

Balance, June 30, 2020

Allowance for loan losses

Balance, January 1, 2020

1 unchanged sentence

Losses charged off

Balance, March 31, 2020

Balance, June 30, 2020

Ending balance:

7 unchanged sentences

for under ASC310-30

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019.

The following table presents the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2019.

One- to Four-

2 unchanged sentences

Allowance for loan losses

Balance April 1, 2019

Provision (benefit) charged to

Losses charged off

Balance June 30, 2019

Balance January 1, 2019

1 unchanged sentence

Losses charged off

Balance March 31, 2019

Balance June 30, 2019

The following table presents the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2019:

25 unchanged sentences

Impaired loans (excluding FDIC-assisted loans, net of discount), are summarized as follows:

At or for the Three Months Ended March 31, 2020

June 30, 2020

(In Thousands)

12 unchanged sentences

Home equity lines of credit

Three Months Ended

June 30, 2020

Six Months Ended

June 30, 2020

(In Thousands)

One- to four-family residential construction

Subdivision construction

Land development

Commercial construction

Owner occupied one- to four-family residential

Non-owner occupied one- to four-family residential

Commercial real estate

Other residential

Commercial business

Industrial revenue bonds

Consumer auto

Consumer other

Home equity lines of credit

At or for the Year Ended December 31, 2019

13 unchanged sentences

Home equity lines of credit

At or For the Three Months Ended March 31, 2019

June 30, 2019

(In Thousands)

12 unchanged sentences

Home equity lines of credit

At March 31, 2020, $ 4.9 million of impaired loans had specific valuation allowances totaling $ 890 ,000.

Three Months Ended

June 30, 2019

Six Months Ended

June 30, 2019

(In Thousands)

One- to four-family residential construction

Subdivision construction

Land development

Commercial construction

Owner occupied one- to four-family residential

Non-owner occupied one- to four-family residential

Commercial real estate

Other residential

Commercial business

Industrial revenue bonds

Consumer auto

Consumer other

Home equity lines of credit

At June 30, 2020, $ 4.2 million of impaired loans had specific valuation allowances totaling $ 711 ,000.

At December 31, 2019, $ 5.2 million of impaired loans had specific valuation allowances totaling $ 929 ,000.

3 unchanged sentences

The types of concessions made are factored into the estimation of the allowance for loan losses for troubled debt restructurings primarily using a discounted cash flow or collateral adequacy approach.

The following tables present newly restructured loans, which were considered troubled debt restructurings, during the three months ended March 31, 2020 and, respectively, by type of modification:

Three Months Ended March 31, 2020

The following tables present newly restructured loans, which were considered troubled debt restructurings, during the three and six months ended June 30, 2020 and, respectively, by type of modification:

Three Months Ended June 30, 2020

Interest Only

(In Thousands)

Three Months Ended June 30, 2019

Interest Only

(In Thousands)

Six Months Ended June 30, 2020

Interest Only

(In Thousands)

One- to four-family residential

Three Months Ended March 31, 2019

Six Months Ended June 30, 2019

Interest Only

(In Thousands)

At March 31, 2020, the Company had $ 2.0 million of loans that were modified in troubled debt restructurings and impaired, as follows:

$ 246 ,000 of construction and land development loans, $ 885 ,000 of one- to four-family and other residential mortgage loans, $ 405 ,000 of commercial real estate loans, $ 139 ,000 of commercial business loans and $ 341 ,000 of consumer loans.

Of the total troubled debt restructurings at March 31, 2020, $ 1.3 million were accruing interest and $ 677 ,000 were non-accrual assets and classified as substandard using the Company’s internal grading system, which is described below.

The Company had no troubled debt restructurings which were modified in the previous 12 months and subsequently defaulted during the three months ended March 31, 2020.

At June 30, 2020, the Company had $ 861 ,000 of loans that were modified in troubled debt restructurings and impaired, as follows:

$ 24 ,000 of construction and land development loans, $ 404 ,000 of one- to four-family residential mortgage loans, $ 97 ,000 of commercial real estate loans, $ 128 ,000 of commercial business loans and $ 208 ,000 of consumer loans.

Of the total troubled debt restructurings at June 30, 2020, $ 216 ,000 were accruing interest and $ 645 ,000 were non-accrual assets.

Of the $861,000 in troubled debt restructurings, $ 670 ,000 were classified as substandard using the Company’s internal grading system, which is described below.

The Company had no troubled debt restructurings which were modified in the previous 12 months and subsequently defaulted during the six months ended June 30, 2020.

When loans modified as troubled debt restructurings have subsequent payment defaults, the defaults are factored into the determination of the allowance for loan losses to ensure specific valuation allowances reflect amounts considered uncollectible.

3 unchanged sentences

The Company had no troubled debt restructurings which were modified in the previous 12 months and subsequently defaulted during the year ended December 31, 2019.

During the three months ended March 31, 2020, there were no loans designated as troubled debt restructurings that met the criteria for placement back on accrual status.

During the three and six months ended June 30, 2020, there were no loans designated as troubled debt restructurings that met the criteria for placement back on accrual status.

The criteria are generally a minimum of six months of consistent and timely payment performance under original or modified terms.

During the three months ended March 31, 2019, $ 49 ,000 of loans, all of which consisted of consumer loans, designated as troubled debt restructurings met the criteria for placement back on accrual status.

As of March 31, 2020, we had modified 747 loans with a total principal balance outstanding of $ 359.2 million.

During the three and six months ended June 30, 2019, $ 14 ,000 and $ 63 ,000 of loans, respectively, all of which consisted of consumer loans, designated as troubled debt restructurings met the criteria for placement back on accrual status.

As of June 30, 2020, we had modified 2,133 loans with a total principal balance outstanding of $ 1.0 billion, in response to the COVID-19 pandemic.

These loan modifications were made as provided for under Section 4013 of the CARES Act and within the guidance provided by the federal banking regulatory agencies, the SEC and the FASB;

3 unchanged sentences

Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if certain deficiencies are not corrected.

Doubtful loans are those having all the weaknesses inherent to those classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

facts, conditions and values, highly questionable and improbable.

Loans not meeting any of the criteria previously described are considered satisfactory.

1 unchanged sentence

These loans are accounted for in pools.

Minimal adverse classification in these acquired loan pools was identified as of March 31, 2020 and December 31, 2019, respectively.

Minimal adverse classification in these acquired loan pools was identified as of June 30, 2020 and December 31, 2019, respectively.

See Note 7 for further discussion of the acquired loan pools and the termination of the loss sharing agreements.

3 unchanged sentences

In early 2018, we expanded our loan risk rating system to allow for further segregation of satisfactory credits.

No significant changes were made to the allowance for loan loss methodology during the year ended December 31, 2019 or the three months ended March 31, 2020.

However, the deterioration of economic conditions that occurred in the three months ended March 31, 2020 and was expected to continue thereafter was a significant factor in the determination of the allowance for loan losses.

No significant changes were made to the allowance for loan loss methodology during the year ended December 31, 2019 or the six months ended June 30, 2020.

However, the deterioration of economic conditions that occurred in the six months ended June 30, 2020 and was expected to continue thereafter was a significant factor in the determination of the allowance for loan losses.

The loan grading system is presented by loan class below:

March 31, 2020

June 30, 2020

(In Thousands)

53 unchanged sentences

Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.

The following table presents the balances of the acquired loans related to the various FDIC-assisted transactions at March 31, 2020 and December 31, 2019.

The following table presents the balances of the acquired loans related to the various FDIC-assisted transactions at June 30, 2020 and December 31, 2019.

(In Thousands)

March 31, 2020

June 30, 2020

Gross loans receivable

20 unchanged sentences

Increases in the Company’s cash flow expectations are recognized as increases to the accretable yield while decreases are recognized as impairments through the allowance for loan losses.

During the three months ended March 31, 2020 and 2019, improvements in expected cash flows (reclassification of discounts from non-accretable to accretable) related to the acquired loan portfolios resulted in adjustments of $ 0 and $ 1.7 million, respectively, to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis.

During the three months ended June 30, 2020 and 2019, improvements in expected cash flows (reclassification of discounts from non-accretable to accretable) related to the acquired loan portfolios resulted in adjustments of $ 0 and $ 3.7 million, respectively, to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis.

During the six months ended June 30, 2020 and 2019, improvements in expected cash flows (reclassification of discounts from non-accretable to accretable) related to the acquired loan portfolios resulted in adjustments of $ 0 and $ 5.3 million, respectively, to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis.

Because the balance of these adjustments to accretable yield will be recognized generally over the remaining lives of the loan pools, they will impact future periods as well.

As of March 31, 2020, the remaining accretable yield adjustment that will affect interest income is $ 5.7 million.

As of June 30, 2020, the remaining accretable yield adjustment that will affect interest income is $ 4.2 million.

Of the remaining adjustments affecting interest income, we expect to recognize $ 2.2 million of interest income during the remainder of 2020.

2 unchanged sentences

Three Months Ended

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

(In Thousands, Except Per Share Data and Basis Points Data)

4 unchanged sentences

Impact to diluted earnings per share

Changes in the accretable yield for acquired loan pools were as follows for the three months ended March 31, 2020 and 2019:

Six Months Ended

June 30, 2020

June 30, 2019

(In Thousands, Except Per Share Data and Basis Points Data)

Impact on net interest income/

net interest margin (in basis points)

Net impact to pre-tax income

Net impact net of taxes

Impact to diluted earnings per share

Changes in the accretable yield for acquired loan pools were as follows for the three and six months ended June 30, 2020 and 2019:

(In Thousands)

Balance, April 1, 2020

Change in expected accretable yield (1)

Balance, June 30, 2020

Balance, April 1, 2019

Change in expected accretable yield (1)

Balance, June 30, 2019

Represents increases (decreases) in estimated cash flows expected to be received from the acquired loan pools, partially due to lower estimated credit losses.

The amounts also include changes in expected accretion of the loan pools for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the three months ended June 30, 2020, totaling $(46,000), $57,000, $(121,000), $752,000 and $344,000, respectively, and for the three months ended June 30, 2019, totaling $68,000, $186,000, $(336,000), $468,000 and $839,000, respectively.

(In Thousands)

Balance, January 1, 2020

Change in expectedaccretable yield (1)

Balance, March 31, 2020

Change in expected accretable yield (1)

Balance, June 30, 2020

Balance, January 1, 2019

Change in expectedaccretable yield (1)

Balance, March 31, 2019

Change in expected accretable yield (1)

Balance, June 30, 2019

Represents increases (decreases) in estimated cash flows expected to be received from the acquired loan pools, partially due to lower estimated credit losses.

The amounts also include changes in expected accretion of the loan pools for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the three months ended March 31, 2020, totaling $46,000, $193,000, $658,000, $186,000 and $940,000, respectively, and for the three months ended March 31, 2019, totaling $477,000, $88,000, $583,000, $4.1 million and $1.3 million, respectively.

The amounts also include changes in expected accretion of the loan pools for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the six months ended June 30, 2020, totaling $0, $251,000, $537,000, $938,000 and $1.3 million, respectively, and for the six months ended June 30, 2019, totaling $546,000, $273,000, $247,000, $4.6 million and $2.2 million, respectively.

OTHER REAL ESTATE OWNED AND REPOSSESSIONS

15 unchanged sentences

Other real estate owned and repossessions

At both March 31, 2020 and December 31, 2019, other real estate owned not acquired through foreclosure included six properties, all of which were branch locations that were closed and are held for sale.

At March 31, 2020, residential mortgage loans totaling $ 938 ,000 were in the process of foreclosure, $ 886 ,000 of which were acquired loans.

At both June 30, 2020 and December 31, 2019, other real estate owned not acquired through foreclosure included six properties, all of which were branch locations that were closed and are held for sale.

At June 30, 2020, residential mortgage loans totaling $ 751 ,000 were in the process of foreclosure, $ 650 ,000 of which were acquired loans.

This does not include one loan totaling $ 57 ,000 that is in the process of foreclosure that is owned by Fannie Mae and serviced by the Bank.

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Under this provision, no mortgage servicer of any federally-backed mortgage loan is permitted to initiate any foreclosure process, whether judicial or non-judicial, move for a foreclosure judgment or order of sale, or execute a foreclosure- related eviction or foreclosure sale for a 60-day period, beginning March 18, 2020.

This provision was subsequently extended through August 31, 2020.

At December 31, 2019, residential mortgage loans totaling $ 1.6 million were in the process of foreclosure, $ 1.4 million of which were acquired loans.

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Operating expenses, net of rental income

Six Months Ended

(In Thousands)

Net gains on sales of other real estate owned and repossessions

Valuation write-downs

Operating expenses, net of rental income

PREMISES AND EQUIPMENT

6 unchanged sentences

The Company adopted ASU 2016-02, Leases (Topic 842) , on January 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 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).

Adoption of this ASU resulted in the Company initially recognizing a right of use asset and corresponding lease liability of $ 9.5 million during the three months ended March 31, 2019.

The amount of the right of use asset and corresponding lease liability will fluctuate based on the Company’s lease terminations, new leases and lease modifications and renewals.

As of March 31, 2020, the lease right to use asset value was $ 8.4 million and the corresponding lease liability was $ 8.5 million.

As of June 30, 2020, the lease right to use asset value was $ 9.0 million and the corresponding lease liability was $ 9.1 million.

All of our leases are classified as operating leases (as they were prior to January 1, 2019), and therefore were previously not recognized on the Company’s consolidated statements of financial condition.

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The Company’s short-term leases related to offsite ATMs have both fixed and variable lease payment components, based on the number of transactions at the various ATMs.

The variable portion of these lease payments is not material and the total lease expense related to ATMs for the three months ended March 31, 2020 was $ 62 ,000.

The variable portion of these lease payments is not material and the total lease expense related to ATMs for the three months ended June 30, 2020 and 2019 was $ 65 ,000 and $ 76 ,000, respectively.

The total lease expense related to ATMs for the six months ended June 30, 2020 and 2019, was $ 126 ,000 and $ 149 ,000, respectively.

The calculated amounts of the right of use 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.

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The discount rate utilized was the FHLBank borrowing rate for the term corresponding to the expected term of the lease.

The expected lease terms range from 2.3 years to 18.9 years with a weighted-average lease term of 10.6 years .

The remaining expected lease terms range from 2.8 years to 18.4 years with a weighted-average lease term of 9.5 years .

The weighted-average discount rate was 3.24 %.

At or For the

Three Months Ended

March 31, 2020

March 31, 2019

At or For the Three Months Ended

June 30, 2020

June 30, 2019

(In Thousands)

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Operating cash flows from operating leases

At or For the Six Months Ended

June 30, 2020

June 30, 2019

(In Thousands)

Statement of Financial Condition

Operating leases right of use asset

Operating leases liability

Statement of Income

Operating lease costs classified as occupancy and equipment expense

(includes short-term lease costs and amortization of right of use asset)

Supplemental Cash Flow Information

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

Right of use assets obtained in exchange for lease obligations:

Operating leases

For the three months ended March 31, 2020 and 2019, lease expense was $ 385 ,000 and $ 376 ,000, respectively.

At March 31, 2020, future expected lease payments for leases with terms exceeding one year were as follows (In Thousands):

For the three months ended June 30, 2020 and 2019, lease expense was $ 400 ,000 and $ 371 ,000, respectively.

For the six months ended June 30, 2020 and 2019, lease expense was $ 785 ,000 and $ 747 ,000, respectively.

At June 30, 2020, future expected lease payments for leases with terms exceeding one year were as follows (In Thousands):

Future lease payments expected

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In terms of being the lessor in these circumstances, all of these lease agreements are classified as operating leases.

In the three months ended March 31, 2020 and 2019, income recognized from these lessor agreements was $ 299 ,000 and $ 276 ,000, respectively, and was included in occupancy and equipment expense.

In the three months ended June 30, 2020 and 2019, income recognized from these lessor agreements was $ 271 ,000 and $ 285 ,000, respectively, and was included in occupancy and equipment expense.

In the six months ended June 30, 2020 and

2019, income recognized from these lessor agreements was $ 570 ,000 and $ 561 ,000, respectively, and was included in occupancy and equipment expense.

(In Thousands)

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ADVANCES FROM FEDERAL HOME LOAN BANK

At March 31, 2020 and December 31, 2019, there were no outstanding term advances from the Federal Home Loan Bank of Des Moines (FHLBank advances).

At June 30, 2020 and December 31, 2019, there were no outstanding term advances from the Federal Home Loan Bank of Des Moines (FHLBank advances).

There were overnight funds from the Federal Home Loan Bank of Des Moines as of December 31, 2019, which are included below in Note 12 .

SECURITIES SOLD UNDER REVERSE REPURCHASE AGREEMENTS AND SHORT-TERM BORROWINGS

March 31, 2020

December 31, 2019

(In Thousands)

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The following table represents the Company’s securities sold under reverse repurchase agreements, by collateral type and remaining contractual maturity.

March 31, 2020

June 30, 2020

December 31, 2019

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Total debt issuance costs of approximately $ 1.5 million were deferred and are being amortized over the expected life of the notes, which is five years.

Amortization of the debt issuance costs during the three months ended March 31, 2020 and 2019, each totaled $ 110 ,000, and is included in interest expense on subordinated notes in the consolidated statements of income, resulting in an imputed interest rate of 5.88 %.

At March 31, 2020 and December 31, 2019, subordinated notes are summarized as follows:

March 31, 2020

On June 10, 2020, the Company completed the public offering and sale of $75.0 million of its subordinated notes.

The notes are due June 15, 2030, and have a fixed interest rate of 5.50% until June 15, 2025, at which time the rate becomes floating at a rate expected to be equal to three-month term Secured Overnight Financing Rate (SOFR) plus 5.325%.

The Company may call the notes at par beginning on June 15, 2025, and on any scheduled interest payment date thereafter.

The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions, legal, accounting and other professional fees, of approximately $ 73.5 million.

Total debt issuance costs of approximately $ 1.5 million were deferred and are being amortized over the expected life of the notes, which is five years.

Amortization of the debt issuance costs during the three and six months ended June 30, 2020, totaled $ 134 ,000 and $ 242 ,000, respectively.

Amortization of the debt issuance costs during the three and six months ended June 30, 2019, totaled $ 108 ,000 and $ 217 ,000, respectively.

Amortization of the debt issuance costs is included in interest expense on subordinated notes in the consolidated statements of income, resulting in an imputed interest rate of 5.99 %.

At June 30, 2020 and December 31, 2019, subordinated notes are summarized as follows:

June 30, 2020

December 31, 2019

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Reconciliations of the Company’s effective tax rates to the statutory corporate tax rates were as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Tax at statutory rate

Nontaxable interest and dividends

Six Months Ended June 30,

Tax at statutory rate

Nontaxable interest and dividends

The Company and its consolidated subsidiaries have not been audited recently by the Internal Revenue Service (IRS), except as described here.

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Inputs that reflect assumptions of a source independent of the reporting entity or the reporting entity's own assumptions that are supported by little or no market activity or observable inputs.

Financial instruments are broken down as follows by recurring or nonrecurring measurement status.

Financial instruments are broken down by recurring or nonrecurring measurement status.

Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date.

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The Company considers transfers between the levels of the hierarchy to be recognized at the end of related reporting periods.

From December 31, 2019 to March 31, 2020, no assets for which fair value is measured on a recurring basis transferred between any levels of the hierarchy.

From December 31, 2019 to June 30, 2020, no assets for which fair value is measured on a recurring basis transferred between any levels of the hierarchy.

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying statements of financial condition measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at March 31, 2020 and December 31, 2019:

Fair value measurements using

2 unchanged sentences

(In Thousands)

March 31, 2020

June 30, 2020

Agency mortgage-backed securities

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Interest rate derivative liability

The following is a description of inputs and valuation methodologies used for assets recorded at fair value on a recurring basis and recognized in the accompanying statements of financial condition at March 31, 2020 and December 31, 2019, as well as the general classification of such assets pursuant to the valuation hierarchy.

There have been no significant changes in the valuation techniques during the three-month period ended March 31, 2020.

The following is a description of inputs and valuation methodologies used for assets recorded at fair value on a recurring basis and recognized in the accompanying statements of financial condition at June 30, 2020 and December 31, 2019, as well as the general classification of such assets pursuant to the valuation hierarchy.

There have been no significant changes in the valuation techniques during the six-month period ended June 30, 2020.

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

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Additional inputs include indicative values derived from the independent pricing service’s proprietary computerized models.

There were no recurring Level 3 securities at March 31, 2020 or December 31, 2019.

There were no recurring Level 3 securities at June 30, 2020 or December 31, 2019.

Interest Rate Derivatives.

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Nonrecurring Measurements

The following tables present the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2020 and December 31, 2019:

Fair Value Measurements Using

2 unchanged sentences

(In Thousands)

March 31, 2020

June 30, 2020

Impaired loans

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The Company typically does not have commercial loans held for sale.

At March 31, 2020 and December 31, 2019, the aggregate fair value of mortgage loans held for sale exceeded their cost.

At June 30, 2020 and December 31, 2019, the aggregate fair value of mortgage loans held for sale exceeded their cost.

Accordingly, no mortgage loans held for sale were marked down and reported at fair value.

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At times, the Company measures the fair value of collateral dependent impaired loans using appraisals with dates more than one year prior to the date of review.

These appraisals are discounted by applying

current, observable market data about similar property types such as sales contracts, estimations of value by individuals familiar with the market, other appraisals, sales or collateral assessments based on current market activity until updated appraisals are obtained.

These appraisals are discounted by applying current, observable market data about similar property types such as sales contracts, estimations of value by individuals familiar with the market, other appraisals, sales or collateral assessments based on current market activity until updated appraisals are obtained.

Depending on the length of time since an appraisal was performed and the data provided through our reviews, these appraisals are typically discounted 10-40%.

2 unchanged sentences

If a loan’s fair value as estimated by the Company is less than its carrying value, the Company either records a charge-off of the portion of the loan that exceeds the fair value or establishes a reserve within the allowance for loan losses specific to the loan.

Loans for which such charge-offs or reserves were recorded during the three months ended March 31, 2020 or the year ended December 31, 2019, are shown in the table above (net of reserves).

Loans for which such charge-offs or reserves were recorded during the six months ended June 30, 2020 or the year ended December 31, 2019, are shown in the table above (net of reserves).

Foreclosed Assets Held for Sale.

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Foreclosed assets held for sale are classified within Level 3 of the fair value hierarchy.

The foreclosed assets represented in the table above have been re-measured during the three months ended March 31, 2020 or the year ended December 31, 2019, subsequent to their initial transfer to foreclosed assets.

The foreclosed assets represented in the table above have been re-measured during the six months ended June 30, 2020 or the year ended December 31, 2019, subsequent to their initial transfer to foreclosed assets.

Fair Value of Financial Instruments

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Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

March 31, 2020

June 30, 2020

December 31, 2019

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The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies.

Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.

transactions.

As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

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Five of the seven acquired loans with interest rate swaps have paid off.

The aggregate notional amount of the two remaining Valley swaps was $657,000 at March 31, 2020.

At March 31, 2020, excluding the Valley Bank swaps, the Company had 18 interest rate swaps totaling $119.6 million in notional amount with commercial customers, and 18 interest rate swaps with the same aggregate notional amount with third parties related to its program.

The aggregate notional amount of the two remaining Valley swaps was $633,000 at June 30, 2020.

At June 30, 2020, excluding the Valley Bank swaps, the Company had 20 interest rate swaps totaling $148.6 million in notional amount with commercial customers, and 20 interest rate swaps with the same aggregate notional amount with third parties related to its program.

In addition, the Company has four participation loans purchased totaling $27.9 million, in which the lead institution has an interest rate swap with its customer and the economics of the counterparty swap are passed along to the Company through the loan participation.

At December 31, 2019, excluding the Valley Bank swaps, the Company had 19 interest rate swaps totaling $96.0 million in notional amount with commercial customers, and 19 interest rate swaps with the same notional amount with third parties related to its program.

During the three months ended March 31, 2020 and 2019, the Company recognized net losses of $407,000 and $25,000, respectively, in noninterest income related to changes in the fair value of these swaps.

During the three months ended June 30, 2020 and 2019, the Company recognized net losses of $106,000 and $44,000, respectively, in noninterest income related to changes in the fair value of these swaps.

During the six months ended June 30, 2020 and 2019, the Company recognized net losses of $514,000 and $68,000, respectively, in noninterest income related to changes in the fair value of these swaps.

Cash Flow Hedges

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If USD-LIBOR exceeded the fixed rate of interest in future periods, the Company was required to pay net settlements to the counterparty and recorded those net payments as a reduction of interest income on loans.

The Company recorded loan interest income of $ 1.6 million and $ 513 ,000 on this interest rate swap during the three months ended March 31, 2020 and 2019, respectively.

The Company recorded loan interest income of $ 2.0 million and $ 568 ,000 on this interest rate swap during the three months ended June 30, 2020 and 2019, respectively.

The Company recorded loan interest income of $ 3.6 million and $ 1.1 million on this interest rate swap during the six months ended June 30, 2020 and 2019, respectively.

The effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affected earnings.

Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

During each of the three months ended March 31, 2020 and 2019, the Company recognized $ 0 in noninterest income related to changes in the fair value of this derivative.

During each of the three and six months ended June 30, 2020 and 2019, the Company recognized no noninterest income related to changes in the fair value of this derivative.

On March 2, 2020, the Company and its swap counterparty mutually agreed to terminate the swap, effective immediately.

1 unchanged sentence

This $45.9 million, less the accrued interest portion and net of deferred income taxes, is reflected in the Company’s stockholders’ equity as Accumulated Other Comprehensive Income and a portion of it will be accreted to interest income on loans monthly through the original contractual termination date of October 6, 2025.

This will have the effect of reducing Accumulated Other Comprehensive

Income and increasing Net Interest Income and Retained Earnings over the period.

In future quarterly periods, the Company expects to record loan interest income related to this swap transaction of approximately $2.0 million, based on the termination value of the swap.

This will have the effect of reducing Accumulated Other Comprehensive Income and increasing Net Interest Income and Retained Earnings over the period.

In each quarterly period, commencing with the quarter ended June 30, 2020, until the original contract termination date, the Company expects to record loan interest income related to this swap transaction of approximately $2.0 million, based on the termination value of the swap.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition:

5 unchanged sentences

Prepaid expenses and other assets

Total derivatives designated as hedging

Total derivatives designated as hedging instruments

Derivatives not designated as hedging instruments

2 unchanged sentences

Prepaid expenses and other assets

Total derivatives not designated as hedging

Total derivatives not designated as hedging instruments

Liability Derivatives

1 unchanged sentence

Accrued expenses and other liabilities

Total derivatives not designated as hedging

Total derivatives not designated as hedging instruments

The following table presents the effect of cash flow hedge accounting on the statements of comprehensive income:

1 unchanged sentence

Recognized in AOCI

Three Months Ended March 31,

Three Months Ended June 30,

Cash Flow Hedges

1 unchanged sentence

Interest rate swap, net of income taxes

Amount of Gain (Loss)

Recognized in AOCI

Six Months Ended June 30,

Cash Flow Hedges

(In Thousands)

Interest rate swap, net of income taxes

The following table presents the effect of cash flow hedge accounting on the statements of income:

Three Months Ended June 30,

Cash Flow Hedges

Three Months Ended March 31,

(In Thousands)

Interest rate swap

Six Months Ended June 30,

Cash Flow Hedges

(In Thousands)

Interest rate swap

Agreements with Derivative Counterparties

3 unchanged sentences

Similarly, the Company could be required to settle its obligations under certain of its agreements if certain regulatory events occurred, such as the issuance of a formal directive, or if the Company’s credit rating is downgraded below a specified level.

At March 31, 2020, the termination value of derivatives with our derivative dealer counterparties (related to loan level swaps with commercial lending customers) in a net liability position, which included accrued interest but excluded any adjustment for nonperformance risk, related to these agreements was $ 5.8 million.

At June 30, 2020, the termination value of derivatives with our derivative dealer counterparties (related to loan level swaps with commercial lending customers) in a net liability position, which included accrued interest but excluded any adjustment for nonperformance risk, related to these agreements was $ 7.3 million.

The Company has minimum collateral posting thresholds with its derivative dealer counterparties.

At March 31, 2020, the Company’s activity with two of its derivative counterparties met the level at which the minimum collateral posting thresholds take effect (collateral to be given by the Company) and the Company had posted collateral totaling $ 5.7 million to the derivative counterparties to satisfy the loan level agreements.

If the Company had breached any of these provisions at March 31, 2020 or December 31, 2019, it could have been required to settle its obligations under the agreements at the termination value.

At June 30, 2020, the Company’s activity with two of its derivative counterparties met the level at which the minimum collateral posting thresholds take effect (collateral to be given by the Company) and the Company had posted collateral totaling $ 7.0 million to the derivative counterparties to satisfy the loan level agreements.

If the Company had breached any of these provisions at June 30, 2020 or December 31, 2019, it could have been required to settle its obligations under the agreements at the termination value.

At December 31, 2019, the termination value of derivatives with our derivative dealer counterparties (related to loan level swaps with commercial lending customers) in a net liability position, which included accrued interest but excluded any adjustment for nonperformance risk, related to these agreements was $ 1.1 million.

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements